Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Headquartered in Arden Hills, Minnesota, IntriCon Corporation (formerly Selas Corporation of America) (referred to as the Company or we, us or our) designs, develops, engineers and manufactures microminiaturized medical and electronic products. The Company supplies microminiaturized components, systems and molded plastic parts, primarily to the hearing instrument manufacturing industry, as well as the computer, electronics, telecommunications and medical equipment industries. In addition to its Arden Hills headquarters, the Company has facilities in California, Maine, Singapore and Germany.
Basis of Presentation
A portion of the Companys former Heat Technology segment, operating through a wholly-owned subsidiary located in France, filed insolvency in 2003. The Company has reclassified the historical financial data related to this operation into discontinued operations. In the fourth quarter of 2003, the Company initiated its plan to dispose of the remaining Heat Technology segment. This segment consists of the operating assets of Selas Corporation of America in Dresher, Pa., and subsidiaries located in Tokyo, Japan and Ratingen, Germany. The Company has accounted for the plan to dispose of the subsidiaries as a discontinued operation and, accordingly, has reclassified the historical financial data. Consequently, the financial statements reflect in continuing operations the business previously known as its Precision Miniature Medical and Electronics
segment. See further information in Note 2.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company owns 90 percent of its Germany subsidiary, with the remaining 10 percent owned by the general manager. All material intercompany transactions and balances have been eliminated in consolidation.
Segment Disclosures
The Company has reviewed the Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about Segments of an Enterprise and Related Information, and has determined that the Company meets the aggregation criteria as its various operations do not have discrete assets and are managed as one business.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the recording of reported amounts of revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates.
Revenue Recognition
The Companys continuing operations recognize revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Under contractual terms shipments are generally FOB shipment point.
Customers have 30 days to notify the Company if the product is damaged or defective. Beyond that, there are no significant obligations that remain after shipping other than warranty obligations. Contracts with customers do not include product return rights, however, the Company may elect in certain circumstances to accept returns for product. The Company records revenue for product sales net of returns. Net sales also include amounts billed to customers for shipping and handling, if applicable. The corresponding shipping and handling costs are included in the cost of sales.
In general, the Company warrants its products to be free from defects in material and workmanship and will fully conform to and perform to specifications for a period of one year. While the Companys warranty costs have historically been within its expectations, the Company cannot guarantee that it will continue to experience the same warranty return rates or repair costs that it has experienced in the past.
Shipping and Handling Costs
In accordance with Emerging Issues Task Force (ETIF) Issue 00-10, Accounting for Shipping and Handling Fees and Costs, the Company is including shipping and handling revenues in sales and shipping and handling costs in cost of sales.
Fair Value of Financial Instruments
The carrying value of cash, short-term accounts and notes receivable, notes payable, trade accounts payables, and other accrued expenses approximate fair value because of the short maturity of those instruments. The fair values of the Companys long-term debt and interest rate swap agreement approximate their carrying values based upon current market rates of interest.
38
Table of Contents
Concentration of Cash
The Company deposits its cash in what management believes are high credit quality financial institutions. The balance, at times, may exceed federally insured limits.
Restricted Cash
Restricted cash consists of cash deposits required to secure a credit facility at our Singapore location.
Accounts Receivable
The Company reviews customers credit history before extending unsecured credit and established an allowance for uncollectible accounts based upon factors surrounding the credit risk of specific customers and other information. Invoices are generally due 30 days after presentation. Accounts receivable over 30 days are considered past due. The Company does not accrue interest on past due accounts receivables. Receivables are written off once all collection attempts have failed and are based on individual credit evaluation and specific circumstances of the customer. Accounts receivable are shown net of allowance for uncollectible accounts of $259,000 and $246,000 at December 31, 2007 and 2006, respectively.
Inventories
Inventories are stated at the lower of cost or market. The cost of the inventories was determined by the average cost and first-in, first-out methods.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is computed by straight-line and accelerated methods using estimated useful lives of 5 to 40 years for buildings and improvements, and 3 to 12 years for machinery and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Improvements are capitalized and expenditures for maintenance, repairs and minor renewals are charged to expense when incurred. At the time assets are retired or sold, the costs and accumulated depreciation are eliminated and the resulting gain or loss, if any, is reflected in the consolidated statement of operations. Depreciation expense was $2,128,000, $1,849,000, and $1,967,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of
The Company reviews its long-lived assets, certain identifiable intangibles, and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The test for goodwill impairment is a two-step process, and is performed at least annually. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities.
Other amortizable intangible assets are otherwise expensed over the expected life of the asset. Amortization expense was $65,000 for the year ended December 31, 2007. Remaining amortization expense related to other amortizable intangible assets is as follows: 2008 - $111,000, 2009 - $111,000, 2010 - $111,000, 2011 - $111,000, 2012 - $65,000, thereafter - $19,000.
Investment in Equity Instruments
On December 27, 2006, the Company purchased a membership interest in the Hearing Instrument Manufacturers Patent Partnership (HIMPP). Members of the partnership include the largest six hearing aid manufacturers as well as several other smaller manufacturers. The purchase price of $1,800,000 included a 9% equity interest in K/S HIMPP as well as a license agreement that will grant the Company access to over 45 US registered patents. The Company accounted for the K/S HIMPP investment using the equity method of accounting for common stock, as the equity interest is deemed to be more than minor as defined in AICPA Statement of Position 78-9 Accounting for Investments in Real Estate Ventures. The investment required a $260,000 payment made at the time of closing. The unpaid balance of $1,280,000 at December 31, 2007 will
be paid in four annual installments of $260,000 in 2008 through 2011, with a final installment of $240,000 in 2012. The unpaid balance is unsecured and bears interest at an annual rate of 4%, which is payable annually with each installment. The investment in the partnership exceeded underlying net assets by approximately $1,475,000. Based on the final assessment of the partnership, the Company has determined that approximately $345,000 of the excess of the investment over the underlying partnership assets relates to underlying patents. The remaining $1,130,000 of the excess of the investment over the underlying partnership assets has been assigned to the non-exclusive patent license agreement and is included in investment in partnerships on the balance sheet. The Company has recorded a $332,500 decrease in the carrying amount of the investment, reflecting amortization of the patents, patent license agreement and the Companys portion of the partnerships operating results
for the twelve months ended December 31, 2007. Remaining annual amortization expense related to partnership intangibles is $147,500 through 2016.
39
Table of Contents
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation reserves are established to the extent the future benefit from the deferred tax assets realization is uncertain. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes accrued interest and penalties
related to uncertain tax positions in income tax expense. At January 1, 2007, the Company had accrued zero for the payment of tax related interest and there was no tax interest or penalties recognized in the statements of operations. The Companys federal and state tax returns are potentially open to examinations for fiscal years 2003-2006. The Company does not expect any reasonably possible material changes to the estimated amounts associated with its uncertain tax positions and related accruals for interest and penalties through December 31, 2008.
Employee Benefit Obligations
The Company provides pension and health care insurance for certain domestic retirees and employees of its discontinued operations. These obligations have been included in continuing operations as the Company expects to retain these obligations. The Company also provides retirement related benefits for certain foreign employees. The Company measures the costs of its obligation based on actuarial determinations. The net periodic costs are recognized as employees render the services necessary to earn the post-retirement benefit.
Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. Assumptions about the discount rate, the expected rate of return on plan assets and the future rate of compensation increases are determined by the Company. Note 10 includes disclosure of these rates on a weighted-average basis, encompassing the plans. The actuarial models also use assumptions on demographic factors such as retirement, mortality and turnover. The Company believes the assumptions are within accepted guidelines and ranges. However, these actuarial assumptions could vary materially from actual results due to economic events and different rates of retirement, mortality and withdrawal.
Stock Option Plan
Under the various Company stock-based compensation plans, executives, employees and outside directors receive awards of options to purchase common stock. Under all awards, the terms are fixed at the grant date. Generally, the exercise price equals the market price of the Companys stock on the date of the grant. Options under the plans generally vest from one to five years, and the options maximum term is 10 years. Options issued to directors vest from one to three years. One plan also permits the granting of stock awards, stock appreciation rights, restricted stock units and other equity based awards.
The Company adopted SFAS 123R on January 1, 2006 using the modified prospective approach. SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased, cancelled or unvested. The Company expenses the grant-date fair values of stock options and awards ratably over the vesting period of the related share-based award. Please see Note 12 for additional information.
Product Warranty
The Company offers a warranty on various products and services. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. Factors that affect the Companys warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assessed the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount of the reserve recorded is equal to the costs to repair or otherwise satisfy the claim. The following table presents changes in the Companys warranty liability as of December 31, 2007, 2006 and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
Beginning of the year balance
|
|
$
|
104,500
|
|
$
|
124,483
|
|
$
|
92,317
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty expense
|
|
|
79,900
|
|
|
52,558
|
|
|
197,417
|
|
Closed warranty claims
|
|
|
(48,400
|
)
|
|
(72,541
|
)
|
|
(165,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
End of the year balance
|
|
$
|
136,000
|
|
$
|
104,500
|
|
$
|
124,483
|
|
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were $118,000, $133,000, and $101,000, for the years ended December 31, 2007, 2006, and 2005, respectively, and are included in selling expense in the consolidated statements of operations.
Research and Development Costs
Research and development costs, net of customer funding amounted to $3.1 million, $2.1 million, and $1.8 million in 2007, 2006 and 2005, respectively. Such costs are charged to expense when incurred.
40
Table of Contents
The following table sets forth development costs associated with customer funding:
|
|
Year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Total cost incurred
|
|
$
|
362,000
|
|
$
|
876,000
|
|
$
|
359,000
|
|
Amount funded by customers
|
|
|
(281,000
|
)
|
|
(762,000
|
)
|
|
(183,000
|
)
|
Net expense
|
|
$
|
81,000
|
|
$
|
114,000
|
|
$
|
176,000
|
|
Income Per Share
Basic income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted income per common share reflects the potential dilution of securities that could share in the earnings. The Company uses the treasury stock method for calculating the dilutive effect of stock options.
Comprehensive Income
Comprehensive income consists of net income, change in fair value of derivative instruments, foreign currency translation adjustments, and minimum pension liability adjustments and is presented in the consolidated statements of shareholders equity and comprehensive income.
New Accounting Pronouncements
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) in February 2007. This statement expands the use of fair value measurement by permitting entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective beginning with the first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have a material impact on its consolidated financial statements.
On December 4, 2007, the FASB issued FASB Statement No. 141 (Revised 2007), Business Combinations. FAS 141(R) will significantly change the accounting for business combinations. Under Statement 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS 141R will change the accounting treatment for certain specific items, including:
|
|
Acquisition costs will be generally expensed as incurred;
|
|
|
Noncontrolling interests (formerly known as minority interests will be valued at fair value at the acquisition date);
|
|
|
Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;
|
|
|
In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
|
|
|
Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and
|
|
|
Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.
|
FAS 141(R) also includes a substantial number of new disclosure requirements. The statement applies to the Company prospectively for business combinations for which the acquisition date is on or after January 1, 2009. Earlier adoption is prohibited.
On December 4, 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51. Statement 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parents equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Statement 160 clarifies that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires
that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Statement 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest.
Statement 160 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning with the year ended December 31, 2009. Earlier adoption is prohibited.
41
Table of Contents
2. DISCONTINUED OPERATIONS
The Company has embarked on a strategy to focus on its Precision Miniature Medical and Electronics Products markets for future growth.
Consistent with this strategy, in 2003, the Company initiated its plan to sell the remainder of its Heat Technology segment and classified it as a discontinued operation. This segment consisted of the operating assets of Selas Corporation of America located in Dresher, Pennsylvania, Nippon Selas located in Tokyo, Japan and Selas Waermetechnik in Ratingen, Germany. In the third quarter of 2004, Selas Corporation of America reacquired Selas Waermetechnik GmbH, which was previously part of Selas SAS. Selas SAS filed insolvency in August of 2003. Since the Selas SAS insolvency filing, Selas Wäermetechnik GmbH had been under the control of a French court administrator. The Company owned the rights to the Selas name and the technology for the European market. In the first quarter of 2005, the Company sold the remainder of its Heat Technology segment, including the stock of Nippon Selas and Selas
Waermetechnik GmbH. The total purchase price was approximately $3.5 million, of which approximately $2.7 million was paid in cash and $800,000 was paid in the form of a unsecured subordinated promissory note. The note is payable in twelve quarterly installments commencing on April 1, 2006 and bears 8 percent per annum on the outstanding principal balance. The principal balance outstanding on the note was $300,000 and $600,000 at December 31, 2007 and 2006, respectively. The Company has set-up an allowance for the note of $225,000 at December 31, 2007 and 2006, respectively.
The following table shows the results of operations of the Companys Heat Technology segment:
|
|
Year ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Sales, net
|
|
$
|
|
|
$
|
2,128
|
|
Operating costs and expenses
|
|
|
(78
|
)
|
|
1,648
|
|
Operating income (loss)
|
|
|
(78
|
)
|
|
480
|
|
Other expense, net (including loss on abandonment)
|
|
|
|
|
|
218
|
|
Income (loss) from operations before income tax (benefit)
|
|
|
(78
|
)
|
|
698
|
|
Income tax expense (benefit)
|
|
|
|
|
|
(69
|
)
|
Net income (loss) from discontinued operations
|
|
$
|
(78
|
)
|
$
|
767
|
|
3. ACQUISITIONS
On May 22, 2007, the Company completed the acquisition of substantially all of the assets, other than real estate, of Tibbetts Industries, Inc. (Tibbetts), a privately held designer and manufacturer of components used in hearing aids and medical devices, based in Camden, Maine. The acquisition expanded the Companys component technology and customer base.
Pursuant to an asset purchase agreement, dated as of April 19, 2007, by and among the Company and Tibbetts and certain of the principal shareholders of Tibbetts, the Company purchased substantially all of the assets of Tibbetts, other than real estate, for cash of $4,500,000, subject to a closing adjustment, and the assumption of certain liabilities (total purchase price of $5,569,000 including acquisition costs of $228,000). Certain escrow amounts will be distributed to the seller at the conclusion of the respective escrow periods. The acquisition was financed with borrowings under the Companys new credit facility, as further described in Note 7.
In addition, the Company entered into a five year lease and a ten year lease, for Tibbetts two facilities in Camden, Maine, in each case with an option to renew for two additional periods of five years each.
The Company has accounted for the Tibbetts acquisition, utilizing the generally accepted accounting principles of SFAS Nos. 141, Business Combinations, and 142, Goodwill and Other Intangible Assets. Under the purchase method of accounting, the assets and liabilities of Tibbetts were recorded as of the acquisition date, at their respective fair values, and consolidated with those of the Company. Likewise, the results of operations of the Tibbetts operations since May 22, 2007 have been included in the accompanying consolidated statements of operations. The preliminary allocation of the net purchase price of the acquisition resulted in goodwill of approximately $2,288,000. The goodwill represents operating and market synergies that we expect to be realized as a result of the acquisition and future opportunities and is also deductible for tax purposes based on a 15 year
amortization schedule. The purchase price allocation is based on estimates of fair values of assets acquired and liabilities assumed. The valuation requires the use of significant assumptions and estimates. These estimates were based on assumptions the Company believes to be reasonable. However, actual results may differ from these estimates.
42
Table of Contents
The purchase price was as follows (amounts in thousands):
Cash
|
|
$
|
4,500
|
|
Liabilities assumed
|
|
|
841
|
|
Acquisition costs
|
|
|
228
|
|
Total purchase price
|
|
$
|
5,569
|
|
The following table summarizes the purchase price allocation for the Tibbetts acquisition (amounts in thousands):
Cash
|
|
$
|
130
|
|
Other current assets
|
|
|
1,993
|
|
Intangible assets subject to amortization (through 2022)
|
|
|
108
|
|
Goodwill
|
|
|
2,288
|
|
Other long-term assets
|
|
|
1,050
|
|
Current liabilities
|
|
|
(841
|
)
|
Total purchase price allocation, net of liabilities assumed
|
|
$
|
4,728
|
|
The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisition of Tibbetts had occurred at January 1, 2006. All amounts presented are in thousands. The historical consolidated financial information has been adjusted to give effect to pro forma events that are directly attributable to the acquisition and are factually supportable, including the increase in interest expense related to the borrowings used to fund the acquisition and the increase in depreciation expense of Tibbetts related to the step-up of fixed assets to fair value. The unaudited pro forma condensed consolidated financial information is presented for informational purposes only. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisition been completed on the dates
indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project the future financial position or operating results of the Company after completion of the acquisition.
(amounts in thousands)
|
|
Twelve months ended
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
Net sales
|
|
$
|
71,433
|
|
$
|
58,940
|
|
Cost of sales
|
|
|
53,826
|
|
|
44,521
|
|
S, G & A
|
|
|
14,614
|
|
|
12,061
|
|
Interest expense
|
|
|
1,255
|
|
|
824
|
|
Other expense
|
|
|
249
|
|
|
98
|
|
Income from continuing operations before income taxes
|
|
$
|
1,489
|
|
$
|
1,436
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
0.27
|
|
$
|
0.23
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
5,210
|
|
|
5,159
|
|
Diluted
|
|
|
5,520
|
|
|
5,320
|
|
The pro forma income from continuing operations for each period presented includes the increase in interest expense related to the borrowings used to fund the acquisition and the increase in depreciation expense of Tibbetts related to the step-up of fixed assets to fair value.
On October 6, 2005, our subsidiary, RTI Electronics, Inc., acquired the assets of Amecon Inc. Amecon is primarily engaged in the research, development, manufacture, marketing and sale of toroidal power and low voltage instrument transformers, current sense transformers and filter inductors, magnetic amplifiers, AC/DC load sensors. The purchase price for the assets was $1,275,000 (after adjustment pursuant to the asset purchase agreement) and required a $10,000 initial deposit and $240,000 payment made at the time of closing. The unpaid balance of $512,720 at December 31, 2007 will be paid in two equal annual installments beginning on October 6, 2008. The unpaid balance is unsecured and bears interest at an annual rate of 5%, which shall be payable annually with each principal payment. The assets acquired included $228,000 of inventory, $516,000 of fixed assets, and $663,000 of goodwill based on fair value
at the date of purchase and direct and out-of-pocket acquisition costs. The goodwill is deductible for tax purposes. The Company accounted for the Amecon acquisition using the purchase method of accounting which requires that the assets acquired and any liabilities assumed to be recorded at the date of acquisition at their respective fair values. The consolidated financial statements and results of operations reflect Amecon Inc. after the acquisition. The cost to acquire the business was allocated to the underlying assets acquired. The acquisition expanded the business of the Company with manufacturing of toroidal power and low voltage instrument transformers, current sense transformers and filter inductor, magnetic amplifiers, AD/DC load sensors. The excess of the purchase price over identifiable assets was recorded as goodwill.
43
Table of Contents
4. GEOGRAPHIC INFORMATION
The geographical distribution of long-lived assets and net sales to geographical areas as of and for the years ended December 31, 2007, 2006 and 2005 are set forth below:
Long-lived Assets
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
18,737,623
|
|
$
|
14,398,571
|
|
$
|
12,075,118
|
|
Other
|
|
|
1,092,816
|
|
|
1,097,221
|
|
|
550,516
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
19,830,439
|
|
$
|
15,495,792
|
|
$
|
12,625,634
|
|
Long-lived assets consist primarily of property and equipment, investment in partnerships and goodwill. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These assets are periodically reviewed to assure the net realizable value from the estimated future production based on forecasted sales exceeds the carrying value of the assets.
Net Sales to Geographical Areas
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
49,102,782
|
|
$
|
35,429,666
|
|
$
|
30,550,130
|
|
Germany
|
|
|
3,476,768
|
|
|
2,293,875
|
|
|
3,338,149
|
|
China
|
|
|
2,488,852
|
|
|
2,232,405
|
|
|
1,310,064
|
|
Switzerland
|
|
|
2,200,781
|
|
|
1,653,803
|
|
|
1,157,116
|
|
Singapore
|
|
|
1,580,854
|
|
|
1,786,344
|
|
|
1,294,019
|
|
Japan
|
|
|
1,280,774
|
|
|
1,919,659
|
|
|
1,502,430
|
|
France
|
|
|
939,847
|
|
|
405,713
|
|
|
259,790
|
|
United Kingdom
|
|
|
698,703
|
|
|
736,670
|
|
|
793,079
|
|
Turkey
|
|
|
488,539
|
|
|
194,561
|
|
|
85,860
|
|
Canada
|
|
|
445,198
|
|
|
502,203
|
|
|
835,732
|
|
All other countries
|
|
|
6,280,282
|
|
|
4,571,053
|
|
|
3,328,882
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
68,983,380
|
|
$
|
51,725,952
|
|
$
|
44,455,251
|
|
Geographic net sales are allocated based on the location of the customer. All other countries include net sales primarily to various countries in Europe and in the Asian Pacific.
In 2007, one customer accounted for 11 percent of the Companys consolidated net sales. In 2006 and 2005, no one customer accounted for more than 10 percent of the Companys consolidated net sales. During 2007, the top five customers accounted for approximately $26 million or 38 percent of the Companys consolidated net sales. During 2006, the top five customers accounted for approximately $16 million or 30 percent of the Companys consolidated net sales. During 2005, the top five customers accounted for approximately $15 million or 35 percent of the Companys consolidated net sales.
At December 31, 2007 one customer accounted for 14 percent of the Companys consolidated accounts receivable. At December 31, 2006 one customer accounted for 10 percent of the Companys consolidated accounts receivable.
44
Table of Contents
5. GOODWILL
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which sets forth new financial and reporting standards for the acquisition of intangible assets, other than those acquired in a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized but tested for impairment on a periodic basis.
In conjunction with the acquisitions of Tibbetts on May 22, 2007 and Amecon on October 6, 2005 approximately $2,288,000 and $663,000 of goodwill were recognized, respectively (see Note 3).
The Company performed the required goodwill impairment test during the years ended December 31, 2007, 2006, and 2005. As part of compliance with this standard, the Company completed or obtained an analysis to assess the fair value of its business units to determine whether goodwill carried on its books was impaired and the extent of such impairment, if any for the years ended December 31, 2007, 2006, and 2005. For each year, the analysis used the discounted future returns method; future benefits over a period of time are estimated and then discounted back to present value. Based upon this analysis, the Company determined that its current goodwill balances were not impaired as of December 31, 2007 and 2006.
The changes in the carrying amount of goodwill for the years presented are as follows:
Carrying amount at December 31, 2005
|
|
$
|
5,754,219
|
|
Goodwill acquired during the year
|
|
|
172,962
|
|
Carrying amount at December 31, 2006
|
|
|
5,927,181
|
|
Goodwill acquired during the year
|
|
|
2,310,839
|
|
Carrying amount at December 31, 2007
|
|
$
|
8,238,020
|
|
6. INVENTORIES
Inventories consisted of the following:
|
|
Raw materials
|
|
Work-in process
|
|
Finished products
and components
|
|
Total
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
3,710,360
|
|
$
|
1,779,539
|
|
$
|
1,598,241
|
|
$
|
7,088,140
|
|
Foreign
|
|
|
1,226,589
|
|
|
1,043,245
|
|
|
477,086
|
|
|
2,746,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,936,949
|
|
$
|
2,822,784
|
|
$
|
2,075,327
|
|
$
|
9,835,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
3,608,967
|
|
$
|
1,497,706
|
|
$
|
1,756,046
|
|
$
|
6,862,719
|
|
Foreign
|
|
|
1,162,716
|
|
|
876,277
|
|
|
128,903
|
|
|
2,167,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,771,683
|
|
$
|
2,373,983
|
|
$
|
1,884,949
|
|
$
|
9,030,615
|
|
7. SHORT AND LONG-TERM DEBT
Short and long term debt at December 31, 2007 and 2006 were as follows:
|
|
2007
|
|
2006
|
|
Domestic Asset-Based Revolving Credit Facility
|
|
$
|
3,000,000
|
|
$
|
3,569,349
|
|
Foreign Overdraft and Letter of Credit Facility
|
|
|
1,071,009
|
|
|
1,044,791
|
|
Domestic Term Loan
|
|
|
4,275,000
|
|
|
|
|
Domestic Capital Equipment Leases
|
|
|
94,066
|
|
|
169,051
|
|
Total Debt
|
|
|
8,440,075
|
|
|
4,783,191
|
|
Less: Current maturities
|
|
|
(1,476,665
|
)
|
|
(952,730
|
)
|
Total Long Term Debt
|
|
$
|
6,963,410
|
|
$
|
3,830,461
|
|
45
Table of Contents
Payments Due by Period
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
Domestic credit facility
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3,000,000
|
|
$
|
|
|
$
|
3,000,000
|
|
Domestic term loan
|
|
|
506,250
|
|
|
731,250
|
|
|
1,068,750
|
|
|
1,293,750
|
|
|
675,000
|
|
|
|
|
|
4,275,000
|
|
Foreign overdraft and letter of credit facility
|
|
|
928,537
|
|
|
142,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,071,009
|
|
Capital leases
|
|
|
41,878
|
|
|
41,344
|
|
|
10,844
|
|
|
|
|
|
|
|
|
|
|
|
94,066
|
|
Total debt
|
|
$
|
1,476,665
|
|
$
|
915,066
|
|
$
|
1,079,594
|
|
$
|
1,293,750
|
|
$
|
3,675,000
|
|
$
|
|
|
$
|
8,440,075
|
|
The Company and its subsidiaries, Resistance Technology, Inc., RTI Electronics, Inc. and IntriCon Tibbetts Corporation, referred to as the borrowers, entered into a credit facility with LaSalle Bank, National Association, referred to as the lender, on May 22, 2007 replacing the prior credit facilities with M & I Business Credit (formerly known as Diversified Business Credit, Inc.). The credit facility provides for:
|
|
a $10,000,000 revolving credit facility, with a $200,000 subfacility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of our eligible trade receivables and eligible inventory, less a reserve.
|
|
|
a $4,500,000 term loan, which was used to fund the Tibbetts acquisition.
|
Loans under the new credit facility are secured by a security interest in substantially all of the assets of the borrowers including a pledge of the stock of the subsidiaries. All of the borrowers are jointly and severally liable for all borrowings under the new credit facility.
Proceeds from the new facility were used to repay amounts owed under the prior credit facilities of approximately $5.0 million and the $4.5 million purchase price to complete the Tibbetts asset acquisition.
Loans under the new credit facility bear interest, at the option of the Company, at:
|
|
the London InterBank Offered Rate (LIBOR) plus 1.90%, in the case of revolving line of credit loans, or LIBOR plus 2.15%, in the case of the term loan, or
|
|
|
the base rate, which is the higher of (a) the rate publicly announced from time to time by the lender as its prime rate and (b) the Federal Funds Rate plus 0.5%.
|
Interest is payable monthly in arrears, except that interest on LIBOR based loans is payable at the end of the one, two or three month interest periods applicable to LIBOR based loans, or every three months in the case of LIBOR based loans with a six month interest period.
Weighted average interest on the domestic asset-based revolving credit facilities (including the prior credit facility) was 7.82% and 8.17% for 2007 and 2006, respectively.
The new credit facility will expire and all outstanding loans will become due and payable on June 30, 2012. The term loan requires quarterly principal payments, commencing on September 30, 2007, based on an increasing installment schedule, with any balance due on June 30, 2012. The principal balance of the term loan was $4,275,000 at December 31, 2007.
The outstanding balance of the revolving credit facilities was $3,000,000 and $3,569,349 at December 31, 2007 and 2006, respectively. The total remaining availability on the revolving credit facility was $4,442,950 at December 31, 2007.
The revolving facility carries a non-use fee equal to 0.25% per year of the unused portion of the revolving line of credit facility, payable quarterly in arrears.
The Company is subject to various covenants under the credit facility, including financial covenants relating to tangible net worth, funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization, fixed charge coverage ratio and capital expenditures. Under the credit facility, except as otherwise permitted, the borrowers may not, among other things, incur or permit to exist any indebtedness; grant or permit to exist any liens or security interests on their assets or pledge the stock of any subsidiary; make investments; be a party to any merger or consolidation, or purchase of all or substantially all of the assets or equity of any other entity; sell, transfer, convey or lease all or any substantial part of its assets or capital securities; sell or assign, with or without recourse, any receivables; issue any capital securities; make any distribution or dividend (other than stock dividends), whether in
46
Table of Contents
cash or otherwise, to any of its equityholders; purchase or redeem any of its equity interests or any warrants, options or other rights in respect thereof; enter into any transaction with any of its affiliates or with any director, officer or employee of any borrower; be a party to any unconditional purchase obligations; cancel any claim or debt owing to it; enter into any agreement inconsistent with the provisions of the credit facility or other agreements and documents entered into in connection with the credit facility; engage in any line of business other than the businesses engaged in on the date of the credit facility and businesses reasonably related thereto; or permit its charter, bylaws or other organizational documents to be amended or modified in any way which could reasonably be expected to materially adversely affect the interests of the lender. Effective as of September 30, 2007, the credit
facility was amended to change the tangible net worth covenant. As of December 31, 2007, the Company was in compliance with all financial covenants under the credit facility, as amended.
Upon the occurrence and during the continuance of an event of default (as defined in the credit facility), the lender may, among other things: terminate its commitments to the borrowers (including terminating or suspending its obligation to make loans and advances); declare all outstanding loans, interest and fees to be immediately due and payable; take possession of and sell any pledged assets and other collateral; and exercise any and all rights and remedies available to it under the Uniform Commercial Code or other applicable law. In the event of the insolvency or bankruptcy of any borrower, all commitments of the lender will automatically terminate and all outstanding loans, interest and fees will be immediately due and payable. Events of default include, among other things: failure to pay any amounts when due; material misrepresentation; default in the performance of any covenant, condition or
agreement to be performed that is not cured within 20 days after notice from the lender; default in the payment of other indebtedness or other obligation with an outstanding principal balance of more than $50,000, or of any other term, condition or covenant contained in the agreement under which such obligation is created, the effect of which is to allow the other party to accelerate such payment or to terminate the agreements; the insolvency or bankruptcy of any borrower; the entrance of any judgment against any borrower in excess of $50,000, which is not fully covered by insurance; the occurrence of a change in control (as defined in the credit facility); certain collateral impairments; and a contribution failure with respect to any employee benefit plan that gives rise to a lien under ERISA.
The prior credit facility provided for:
|
|
a $5,500,000 domestic revolving credit facility, bearing interest at an annual rate equal to the greater of 5.25%, or 0.5% over prime. Under the revolving credit facility, the availability of funds depended on a borrowing base composed of stated percentages of our eligible trade receivables and eligible inventory, less a reserve.
|
|
|
a $1,000,000 domestic equipment term loan, bearing interest at an annual rate equal to the greater of 5.25%, or 0.75% over the prime rate.
|
The revolving facility carried a commitment fee of 0.25% per year, payable on the unborrowed portion of the line. Additionally, the credit facility required an annual fee of $27,500 due on August 31, 2007, and 2008. Upon termination of the credit facility by us prior to maturity, the Company was required to pay a termination fee equal to 2% of the total of the maximum amount available under the revolving credit facility, equal to $110,000, which is included in interest expense, plus the amounts then outstanding under the term loan.
The credit facility originally included a real estate loan with an original principal balance of $1,500,000, which was associated with our Vadnais Heights manufacturing facility. In June 2006, the Company completed a sale-leaseback of the Vadnais Heights manufacturing facility. The transaction generated proceeds of $2,650,000, of which $1,388,000 was used to repay the associated real estate loan and the remainder to pay down our domestic revolver. The remaining gain on the sale of $935,715 is being recognized over the initial 10-year lease term as the renewal options in the lease are not assured and a penalty does not exist if we do not exercise the renewal options.
In addition to its domestic credit facilities, on August 15, 2005, the Companys wholly-owned subsidiary, RTI Tech, PTE LTD., entered into an international senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for a $1.8 million line of credit. Borrowings bear interest at a rate of .75% to 2.5% over the lenders prevailing prime lending rate. Weighted average interest on the international credit facilities was 6.36% and 6.47% for 2007 and 2006, respectively. The outstanding balance was $1,071,009 and $1,044,791 at December 31, 2007 and 2006, respectively. The total remaining availability on the international senior secured credit agreement was $739,576 at December 31, 2007.
During 2005, the Company entered into several capital lease agreements to fund the acquisition of machinery and equipment. For 2005, the total principal amount of these leases was $314,000 with effective interest rates ranging from 6.7% to 8.0%. These agreements range from 3 to 5 years. The outstanding balance under these capital lease agreements at December 31, 2007 and 2006 was $94,000 and $169,000, respectively. The accumulated amortization on leased equipment was $118,975 and $74,129 at December 31, 2007 and 2006, respectively. The amortization of capital leases is included in depreciation expense for 2007, 2006 and 2005.
47
Table of Contents
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 2007, and 2006 were as follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Salaries, wages and commissions
|
|
$
|
2,496,610
|
|
$
|
1,583,452
|
|
Taxes, including payroll withholdings and excluding income taxes
|
|
|
101,617
|
|
|
58,011
|
|
Accrued severance benefits
|
|
|
100,000
|
|
|
|
|
Accrued professional fees
|
|
|
161,736
|
|
|
178,662
|
|
Current portion of note payable
|
|
|
256,360
|
|
|
253,360
|
|
Deferred revenue
|
|
|
113,618
|
|
|
152,147
|
|
Other
|
|
|
962,752
|
|
|
795,569
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,192,693
|
|
$
|
3,021,201
|
|
9. DOMESTIC AND FOREIGN INCOME TAXES
Domestic and foreign income taxes (benefits) from continuing operations were comprised as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
223,028
|
|
State
|
|
|
(11,978
|
)
|
|
21,654
|
|
|
6,396
|
|
Foreign
|
|
|
182,651
|
|
|
111,258
|
|
|
286,176
|
|
|
|
|
170,673
|
|
|
132,912
|
|
|
515,600
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
(106,177
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
10,000
|
|
|
41,548
|
|
|
|
|
|
|
|
10,000
|
|
|
41,548
|
|
|
(106,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
180,673
|
|
$
|
174,460
|
|
$
|
409,423
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
1,088,951
|
|
|
1,492,092
|
|
|
1,166,891
|
|
Domestic
|
|
|
958,960
|
|
|
(77,130
|
)
|
|
3,989
|
|
|
|
$
|
2,047,911
|
|
$
|
1,414,962
|
|
$
|
1,170,880
|
|
The following is a reconciliation of the statutory federal income tax rate to the effective tax rate based on income (loss):
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Tax provision at statutory rate
|
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
Change in valuation allowance
|
|
(20.9
|
)
|
0.5
|
|
(24.0
|
)
|
Effect of foreign tax rates
|
|
(8.7
|
)
|
(25.1
|
)
|
20.0
|
|
State taxes net of federal benefit
|
|
1.4
|
|
1.5
|
|
0.6
|
|
Tax benefits related to export sales
|
|
|
|
(2.0
|
)
|
(1.0
|
)
|
Other
|
|
3.1
|
|
3.4
|
|
5.4
|
|
|
|
|
|
|
|
|
|
Domestic and foreign income tax rate
|
|
8.8
|
%
|
12.3
|
%
|
35.0
|
%
|
48
Table of Contents
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007, and 2006 are presented below:
|
|
2007
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
5,299,146
|
|
$
|
5,748,385
|
|
Post-retirement benefit obligations
|
|
|
475,859
|
|
|
537,729
|
|
Goodwill amortization
|
|
|
269,948
|
|
|
399,091
|
|
State income taxes
|
|
|
483,594
|
|
|
605,554
|
|
Inventory reserves
|
|
|
901,720
|
|
|
843,445
|
|
Guarantee obligations and estimated future costs of service accruals
|
|
|
35,700
|
|
|
25,500
|
|
Compensated absences, principally due to accrual for financial reporting purposes
|
|
|
225,041
|
|
|
198,700
|
|
Other
|
|
|
442,827
|
|
|
204,045
|
|
Total gross deferred tax assets
|
|
|
8,133,835
|
|
|
8,562,449
|
|
Less: valuation allowance
|
|
|
8,133,835
|
|
|
8,562,449
|
|
Net deferred tax assets
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Plant and equipment, principally due to differences in depreciation and capitalized interest
|
|
|
(89,273
|
)
|
|
(79,273
|
)
|
Total gross deferred tax liabilities
|
|
|
(89,273
|
)
|
|
(79,273
|
)
|
Net deferred tax liabilities
|
|
$
|
(89,273
|
)
|
$
|
(79,273
|
)
|
Domestic and foreign deferred taxes were comprised as follows:
December 31, 2007
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred asset
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Non-current deferred liability
|
|
|
|
|
|
|
|
|
(89,273
|
)
|
|
(89,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
$
|
|
|
$
|
(89,273
|
)
|
$
|
(89,273
|
)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred asset
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Non-current deferred liability
|
|
|
|
|
|
|
|
|
(79,273
|
)
|
|
(79,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
$
|
|
|
$
|
(79,273
|
)
|
$
|
(79,273
|
)
|
The valuation allowance is maintained against deferred tax assets which the Company has determined are not likely to be realized. In addition, the Company has net operating loss carryforwards for Federal tax purposes of approximately $15.6 million that begin to expire in 2022. Subsequently recognized tax benefits, if any, relating to the valuation allowance for deferred tax assets or realization of net operating loss carryforwards will be reported in the consolidated statements of operations.
The Company has not recognized a deferred tax liability relating to cumulative undistributed earnings of controlled foreign subsidiaries that are essentially permanent in duration. If some or all of the undistributed earnings of the controlled foreign subsidiaries are remitted to the Company in the future, income taxes, if any, after the application of foreign tax credits will be provided at that time.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, historical taxable income including available net operating loss carryforwards to offset taxable income, and projected future taxable income in making this assessment.
49
Table of Contents
10. EMPLOYEE BENEFIT PLANS
The Company has defined contribution plans for most of its domestic employees. Under these plans, eligible employees may contribute amounts through payroll deductions supplemented by employer contributions for investment in various investments specified in the plans. The Company contribution to these plans for 2007, 2006, and 2005 was $360,070, $288,726, and $253,568, respectively.
The Company provides post-retirement medical benefits to certain domestic full-time employees who meet minimum age and service requirements. In 1999, a plan amendment was instituted which limits the liability for post-retirement benefits beginning January 1, 2000 for certain employees who retire after that date. This plan amendment resulted in a $1.1 million unrecognized prior service cost reduction which will be recognized as employees render the services necessary to earn the post-retirement benefit. The Companys policy is to pay the cost of these post-retirement benefits when required on a cash basis. The Company also has provided certain foreign employees with retirement related benefits.
The following table presents the amounts recognized in the Companys consolidated balance sheet at December 31, 2007 and 2006 for post-retirement medical benefits:
|
|
2007
|
|
2006
|
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
Projected benefit obligation at January 1
|
|
$
|
1,243,744
|
|
$
|
1,490,749
|
|
|
|
|
|
|
|
|
|
Service cost (excluding administrative expenses)
|
|
|
629
|
|
|
5,029
|
|
Interest cost
|
|
|
69,225
|
|
|
71,175
|
|
Actuarial (gain)
|
|
|
(132,066
|
)
|
|
(108,605
|
)
|
Participant contributions
|
|
|
115,000
|
|
|
115,702
|
|
Benefits paid
|
|
|
(295,000
|
)
|
|
(330,306
|
)
|
|
|
|
|
|
|
|
|
Projected benefit obligation at December 31
|
|
|
1,001,532
|
|
|
1,243,744
|
|
|
|
|
|
|
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
180,000
|
|
|
214,604
|
|
Participant contributions
|
|
|
115,000
|
|
|
115,702
|
|
Benefits paid
|
|
|
(295,000
|
)
|
|
(330,306
|
)
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(1,001,532
|
)
|
|
(1,243,744
|
)
|
|
|
|
|
|
|
|
|
Amount recognized in statement of financial position
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
185,000
|
|
|
180,000
|
|
Noncurrent liabilities
|
|
|
816,532
|
|
|
1,063,744
|
|
Net amount
|
|
$
|
1,001,532
|
|
$
|
1,243,744
|
|
|
|
|
|
|
|
|
|
Amount recognized in other comprehensive income
|
|
|
|
|
|
|
|
Unrecognized net actuarial gain (loss)
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
Accrued post-retirement medical benefit costs are classified as other post-retirement benefit obligations as of December 31, 2007 and 2006.
Net periodic post-retirement medical benefit costs for 2007, 2006 and 2005 included the following components:
|
|
2007
|
|
2006
|
|
2005
|
|
Service cost
|
|
$
|
629
|
|
$
|
5,029
|
|
$
|
8,899
|
|
Interest cost
|
|
|
69,225
|
|
|
71,175
|
|
|
91,948
|
|
Amortization of unrecognized prior service cost
|
|
|
|
|
|
|
|
|
(24,857
|
)
|
Amortization of unrecognized actuarial gain (loss)
|
|
|
|
|
|
(5,908
|
)
|
|
|
|
Curtailment
|
|
|
|
|
|
|
|
|
(1,090,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic post-retirement medical benefit cost
|
|
$
|
69,854
|
|
$
|
70,296
|
|
$
|
(1,014,756
|
)
|
50
Table of Contents
The $1.1 million curtailment primarily related to the sale of our Heat Technology business. As part of the March 31, 2005 asset purchase agreement, the Company was required to maintain the post retirement medical plan for all retired eligible participants, but was able to eliminate from the plan those employees not participating at the time of the asset purchase. This charge was included in discontinued operations.
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 2007; the rate was assumed to decrease gradually to 5% by the year 2011 and remain at that level thereafter. The health care cost trend rate assumption may have a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement medical benefit obligation as of December 31, 2007 by $12,806 and the aggregate of the service and interest cost components of net periodic post-retirement medical benefit cost for the year ended December 31, 2007 by $825. Employer contributions for 2008 are expected to be approximately the same as in prior years.
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Annual increase in cost of benefits
|
|
9.00
|
%
|
10.00
|
%
|
10.00
|
%
|
|
|
|
|
|
|
|
|
Discount rate used to determine year-end obligations
|
|
6.00
|
%
|
6.00
|
%
|
5.75
|
%
|
|
|
|
|
|
|
|
|
Discount rate used to determine year-end expense
|
|
6.00
|
%
|
6.00
|
%
|
5.75
|
%
|
The assumptions used years ended December 31 were as follows:
The following benefit payments, which reflect expected future service, are expected to be paid:
2008
|
|
$
|
180,000
|
|
2009
|
|
$
|
185,000
|
|
2010
|
|
$
|
185,000
|
|
2011
|
|
$
|
190,000
|
|
2012
|
|
$
|
190,000
|
|
Years 2013 2017
|
|
$
|
935,000
|
|
The Company provides retirement related benefits to former executive employees and to certain employees of foreign subsidiaries. The liabilities established for these benefits at December 31, 2007 and 2006 are illustrated below.
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
90,656
|
|
$
|
90,656
|
|
Long term portion
|
|
|
624,517
|
|
|
628,569
|
|
|
|
|
|
|
|
|
|
Total liability at December 31
|
|
$
|
715,173
|
|
$
|
719,225
|
|
11. CURRENCY TRANSLATION ADJUSTMENTS
All assets and liabilities of foreign operations in which the functional currency is foreign are translated into U.S. dollars at prevailing rates of exchange in effect at the balance sheet date. Revenues and expenses are translated using average rates of exchange for the year. The functional currency of the Companys German operations is the European euro. As of January 1, 2006, the functional currency of the Companys Singapore operations changed from the Singapore dollar to the U.S. dollar. Adjustments resulting from the process of translating the financial statements of foreign subsidiaries into U.S. dollars are reported as a separate component of shareholders equity, net of tax, where appropriate. Foreign currency transaction amounts included in the statements of operation include a loss of $112,000 in 2007, a loss of $100,000 in 2006, and a gain of $3,000 in 2005.
51
Table of Contents
12. COMMON STOCK AND STOCK OPTIONS
The Company applies the provisions of SFAS 123R, which establishes the accounting for stock based awards.
The Company has a 1994 stock option plan, a 2001 stock option plan, a non-employee directors stock option plan and a 2006 equity incentive plan. The time for granting options under the 1994 plan has expired, however certain option grants under this plan remain exercisable as of December 31, 2007. As a result of the approval of the 2006 equity incentive plan by the shareholders at the 2006 annual meeting of shareholders, no further grants will be made pursuant to the non-employee directors and 2001 stock option plans. The aggregate number of shares of common stock for which awards may be granted under the 2006 equity incentive plan is 698,500 shares. Additionally, as outstanding options under the 2001 stock option plan and non-employee directors stock option plan expire, the shares of the Companys common stock subject to the expired options will become available for issuance under the
2006 equity incentive plan.
Under the various plans, executives, employees and outside directors receive awards of options to purchase common stock. Under the 2006 equity incentive plan, the Company may also grant stock awards, stock appreciation rights, restricted stock units and other equity-based awards, although no such awards had been granted as of December 31, 2007.
Under all awards, the terms are fixed at the grant date. Generally for stock options, the exercise price equals the market price of the Companys stock on the date of the grant. Options under the plans generally vest from one to five years, and the options maximum term is 10 years. Options issued to directors vest from one to three years.
Stock option activity during the periods indicated is as follows:
|
|
Number
of Shares
|
|
Weighted-average
Exercise Price
|
|
Aggregate Intrinsic
Value
|
|
Outstanding at December 31, 2004
|
|
660,900
|
|
$
|
4.40
|
|
|
|
|
Options forfeited
|
|
(107,900
|
|
|
3.53
|
|
|
|
|
Options expired
|
|
(30,000
|
|
|
5.35
|
|
|
|
|
Options granted
|
|
227,500
|
|
|
2.75
|
|
|
|
|
Options exercised
|
|
(20,600
|
)
|
|
2.35
|
|
|
|
|
Outstanding at December 31, 2005
|
|
729,900
|
|
$
|
3.98
|
|
|
|
|
Options forfeited
|
|
(51,500
|
)
|
|
1.96
|
|
|
|
|
Options granted
|
|
160,000
|
|
|
5.68
|
|
|
|
|
Options exercised
|
|
(40,667
|
)
|
|
2.79
|
|
|
|
|
Outstanding at December 31, 2006
|
|
797,733
|
|
$
|
4.51
|
|
|
|
|
Options forfeited
|
|
(2,000
|
)
|
|
4.60
|
|
|
|
|
Options granted
|
|
165,000
|
|
|
13.72
|
|
|
|
|
Options exercised
|
|
(106,502
|
)
|
|
8.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
854,231
|
|
$
|
5.83
|
|
$
|
5,680,636
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
465,900
|
|
$
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
524,397
|
|
$
|
3.70
|
|
$
|
4,604,206
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at January 1, 2007
|
|
588,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at December 31, 2007
|
|
425,500
|
|
|
|
|
|
|
|
The number of shares available for future grant at December 31, 2007, does not include a total of up to 417,200 shares subject to options outstanding under the 2001 stock option plan and non-employee directors stock option plan which will become available for grant under the 2006 Equity Incentive Plan in the event of the expiration of said options.
The weighted-average remaining contractual term of options exercisable at December 31, 2007, was 7.1 years. The total intrinsic value of options exercised during fiscal 2007, 2006, and 2005, was $475,090, $111,874 and $69,910, respectively.
The weighted-average per share fair value of options granted was $5.13, $2.77, and $1.77, in 2007, 2006, and 2005, respectively, using the Black-Scholes option-pricing model.
52
Table of Contents
For disclosure purposes, the fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
2007
|
|
2006
|
|
2005
|
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Expected volatility
|
|
43.0
|
%
|
57.5
|
%
|
66.2
|
%
|
Risk-free interest rate
|
|
3.5
|
%
|
4.6
|
%
|
4.1
|
%
|
Expected life (years)
|
|
4.0
|
|
4.0
|
|
6.1
|
|
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected stock price volatility. Because the Companys options have characteristics different from those of traded options, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options.
The Company calculates expected volatility for stock options and awards using both historical volatility as well as the average volatility of our peer competitors. The reason historical volatility was not strictly used is the material changes in the Companys operations as a result of the sales of business segments that occurred in 2004 and 2005 (see Note 2). The expected term for stock options and awards is calculated based on the simplified method as defined by SAB No. 107.
The Company currently estimates a nine percent forfeiture rate for stock options but will continue to review this estimate in future periods.
The risk-free rates for the expected terms of the stock options and awards and the employee stock purchase plan is based on the U.S. Treasury yield curve in effect at the time of grant.
The following summarizes information about the Companys stock options outstanding at December 31, 2007:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
|
Number
Outstanding
At 12/31/07
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
At 12/31/07
|
|
Weighted
Average
Exercise
Price
|
|
$0.00 3.00
|
|
342,200
|
|
6.87
|
|
$
|
2.45
|
|
293,033
|
|
$
|
2.45
|
|
$3.01 4.40
|
|
113,400
|
|
3.04
|
|
$
|
3.25
|
|
113,400
|
|
$
|
3.25
|
|
$4.41 6.75
|
|
208,500
|
|
8.90
|
|
$
|
5.75
|
|
72,833
|
|
$
|
5.64
|
|
$8.60 20.00
|
|
190,131
|
|
6.83
|
|
$
|
13.54
|
|
45,131
|
|
$
|
9.82
|
|
|
|
854,231
|
|
7.08
|
|
$
|
5.83
|
|
524,397
|
|
$
|
3.70
|
|
As of December 31, 2007, there was $1,014,588 of total unrecognized compensation costs related to non-vested awards that is expected to be recognized over a weighted-average period of 2.5 years.
The following table illustrates the effect on net income and income per share for the year ended December 31, 2005 if the Company had applied the fair value recognition of SFAS 123:
|
|
Year Ended
December 31,
2005
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
1,528,687
|
|
Deduct: total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects
|
|
|
(129,103
|
)
|
Pro forma net income
|
|
$
|
1,399,584
|
|
Income per share:
|
|
|
|
|
Basic-as reported
|
|
$
|
.30
|
|
Basic-pro forma
|
|
$
|
.27
|
|
|
|
|
|
|
Income per share:
|
|
|
|
|
Diluted-as reported
|
|
$
|
.29
|
|
Diluted-pro forma
|
|
$
|
.27
|
|
At the 2007 annual meeting of shareholders, the shareholders approved the IntriCon Corporation 2007 Employee Stock Purchase Plan (the Purchase Plan). A maximum of 100,000 shares may be sold under the Purchase Plan. There were no employee stock purchases under the plan as of December 31, 2007.
53
Table of Contents
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of unaudited quarterly results of operations (in thousands, except for per share data).
|
|
2007
|
|
2006
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
14,579
|
|
$
|
16,938
|
|
$
|
18,442
|
|
$
|
19,025
|
|
$
|
11,836
|
|
$
|
13,208
|
|
$
|
12,488
|
|
$
|
14,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,996
|
|
|
4,207
|
|
|
5,126
|
|
|
4,916
|
|
|
2,766
|
|
|
3,519
|
|
|
2,874
|
|
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations net of tax
|
|
|
28
|
|
|
527
|
|
|
650
|
|
|
662
|
|
|
(141
|
)
|
|
448
|
|
|
453
|
|
|
479
|
|
Income (loss) from discontinued operations net of tax (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
(15
|
)
|
|
(35
|
)
|
Net income (loss)
|
|
|
28
|
|
|
527
|
|
|
650
|
|
|
662
|
|
|
(141
|
)
|
|
422
|
|
|
438
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.01
|
|
$
|
.10
|
|
$
|
.13
|
|
$
|
.13
|
|
$
|
(.03
|
)
|
$
|
.09
|
|
$
|
.09
|
|
$
|
.09
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.01
|
)
|
|
(.01
|
)
|
|
(.01
|
)
|
Net income (loss)
|
|
$
|
.01
|
|
$
|
.10
|
|
$
|
.13
|
|
$
|
.13
|
|
$
|
(.03
|
)
|
$
|
.08
|
|
$
|
.08
|
|
$
|
.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.01
|
|
$
|
.10
|
|
$
|
.12
|
|
$
|
.12
|
|
$
|
(.03
|
)
|
$
|
.08
|
|
$
|
.08
|
|
$
|
.09
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.00
|
)
|
|
(.00
|
)
|
|
(.01
|
)
|
Net income (loss)
|
|
$
|
.01
|
|
$
|
.10
|
|
$
|
.12
|
|
$
|
.12
|
|
$
|
(.03
|
)
|
$
|
.08
|
|
$
|
.08
|
|
$
|
.08
|
|
|
a)
|
The Company reclassified its Heat Technology business, as discontinued operations in the fourth quarter of 2004; this includes the burners and components portion of the business which the Company sold in the first quarter of 2005. Accordingly, the historical financial information has been reclassified. See note 2 to the consolidated financial statements.
|
|
b)
|
Per share amounts for the quarters have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period. Additionally, in regard to diluted per share amounts only, quarterly amounts may not add to the annual amounts.
|
14. INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income (loss) per share:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Income
Numer-
ator
|
|
Shares
Denomin-
ator
|
|
Per Share
Amount
|
|
Income
Numer-
ator
|
|
Shares
Denomin-
ator
|
|
Per Share
Amount
|
|
Loss
Numer-
ator
|
|
Shares
Denomin-
ator
|
|
Per Share
Amount
|
|
Basic income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$
|
1,867,238
|
|
5,209,567
|
|
$
|
.36
|
|
$
|
1,162,512
|
|
5,159,216
|
|
$
|
.23
|
|
$
|
1,528,687
|
|
5,135,348
|
|
$
|
.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
310,213
|
|
|
|
|
|
|
|
160,586
|
|
|
|
|
|
|
|
126,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
1,867,238
|
|
5,519,780
|
|
$
|
.34
|
|
$
|
1,162,512
|
|
5,319,802
|
|
$
|
.22
|
|
$
|
1,528,687
|
|
5,261,491
|
|
$
|
.29
|
|
The Company excluded stock options of 190,131, 196,000, and 153,500, in 2007, 2006, and 2005, respectively, from the computation of the diluted income per share as their effect would be anti-dilutive. For additional disclosures regarding the stock options, see Note 12.
54
Table of Contents
15. CONTINGENCIES AND COMMITMENTS
We are a defendant along with a number of other parties in approximately 122 lawsuits as of December 31, 2007, (approximately 122 lawsuits as of December 31, 2006) alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. These lawsuits relate to the discontinued Heat Technologies segment which was sold in March 2005 and is now classified as discontinued operations. Due to the noninformative nature of the complaints, we do not know whether any of the complaints state valid claims against us. Certain insurance carriers have informed us that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. We have requested that the carriers substantiate this situation. We believe we have
additional policies available for other years which have been ignored by the carriers. As settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, we believe when settlement payments are applied to these additional policies, we will have availability under the years deemed exhausted. We do not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits, to which these insurance carriers are insuring we, make the ultimate disposition of these lawsuits not material to our consolidated financial position or results of operations.
The Companys wholly owned French subsidiary, Selas SAS, filed for insolvency in France and is being managed by a court appointed judiciary administrator. The Company may be subject to additional litigation or liabilities as a result of the French insolvency proceeding.
We are also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect our consolidated financial position, liquidity or results of operations.
Total rent expense for 2007, 2006 and 2005 under leases pertaining primarily to engineering, manufacturing, sales and administrative facilities, with an initial term of one year or more, aggregated $1,440,000, $1,082,000, and $1,035,000, respectively. Remaining rentals payable under such leases are as follows: 2008 - $1,505,000; 2009 - $1,164,000; 2010 - $1,072,000; 2011 - $927,000; 2012 - $457,000 and thereafter - $1,442,000, which includes two leased facilities in Minnesota that expire in 2011 and 2016 respectively, one leased facility in California that expires in 2008, two leased facilities in Maine that expire in 2012 and 2017 respectively, one leased facility in Singapore that expires in 2010 and one leased facility in Germany that expires in 2012.
On October 5, 2007, the Company entered into employment agreements with its executive officers. The agreements call for payments ranging from three months to two years base salary and unpaid bonus, if any, to the executives should there be a change of control as defined in the agreement and the executives are not retained for a period of at least one year following such change of control. Under the agreements, all stock options granted to the executives would vest immediately and be exercisable in accordance with the terms of such stock options. The Company also agreed that if it enters into an agreement to sell substantially all of its assets, it will obligate the buyer to fulfill its obligations pursuant to the agreements. The agreements terminate, except to the extent that any obligation remains unpaid, upon the earlier of termination of the executives employment prior to a change of control or
asset sale for any reason or the termination of the executive after a change of control for any reason other than by involuntary termination as defined in the agreements.
16. RELATED-PARTY TRANSACTIONS
One of the Companys subsidiaries leases office and factory space from a partnership consisting of two former officers of RTI and Mark S. Gorder who serves as the president and CEO of the Company and RTI and on the Companys Board of Directors. The subsidiary is required to pay all real estate taxes and operating expenses. The Company believes the terms of the lease agreement are comparable to those which could be obtained from unaffiliated third parties. The total base rent expense, real estate taxes and other charges incurred under the lease was approximately $481,000 for each of 2007 and 2006, and $368,000 for 2005. Annual lease commitments approximate $475,000 through October 2011.
The Company uses the law firm of Blank Rome LLP for legal services. A partner of that firm is the son-in-law of the Chairman of our Board of Directors. We paid that firm approximately $466,000, $282,000 and $336,000 for legal services and costs in 2007, 2006 and 2005, respectively.
55
Table of Contents
17. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest received
|
|
$
|
78,896
|
|
$
|
33,674
|
|
$
|
50,832
|
|
Interest paid
|
|
|
741,930
|
|
|
380,159
|
|
|
408,133
|
|
Income taxes paid
|
|
|
194,502
|
|
|
205,565
|
|
|
91,403
|
|
Deferred gain recorded on sale of manufacturing facility
|
|
|
|
|
|
1,045,799
|
|
|
|
|
Acquisition of assets of Amecon, Inc:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
172,962
|
|
|
489,634
|
|
Inventories
|
|
|
|
|
|
|
|
|
272,575
|
|
Property and equipment
|
|
|
|
|
|
53,522
|
|
|
478,195
|
|
Equipment purchased through capital lease obligation
|
|
|
|
|
|
|
|
|
313,919
|
|
The 2006 adjustments to the assets of Amecon, Inc., which were acquired in October 2005, was due to the final adjustment to the working capital requirement pursuant to the asset purchase agreement.
18. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments in the form of interest rate swaps are used by the Company in managing its interest rate exposure. The Company does not hold or issue derivative financial instruments for trading purposes. When entered into, the Company formally designates the derivative financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at inception and at least quarterly thereafter, whether the derivative financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because of the high correlation between the derivative financial instrument and the underlying exposure being hedged, fluctuations in the value of the derivative
financial instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. Any ineffective portion of a derivative financial instruments change in fair value would be immediately recognized in earnings.
The swaps are designated as cash flow hedges with the changes in fair value recorded in accumulated other comprehensive loss and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or accounts receivable and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. During 2007, approximately $2,000 of said adjustments were recorded to interest expense. During 2007, ineffectiveness from such hedges was $0.
At December 31, 2007, the Company had a United States Dollar (USD) denominated interest rate swap outstanding which effectively fixed the interest rate on floating rate debt, exclusive of lender spreads, at 5.36% for a notional principal amount of $2,000,000 through December 2010. The derivative net loss on this contract recorded in accumulated other comprehensive loss at December 31, 2007 was $79,215, which is expected to be reclassified from Accumulated other comprehensive loss into earnings over the next 12 months.
19. INVESTMENT IN EQUITY INSTRUMENTS
On December 27, 2006, the Company joined the Hearing Instrument Manufacturers Patent Partnership (HIMPP). Members of the partnership include the largest six hearing aid manufacturers as well as several other smaller manufacturers. The purchase price of $1,800,000 included a 9% equity interest in K/S HIMPP as well as a license agreement that will grant the Company access to over 45 US registered patents. The Company accounted for the K/S HIMPP investment using the equity method of accounting for common stock, as the equity interest is deemed to be more than minor as defined in AICPA Statement of Position 78-9 Accounting for Investments in Real Estate Ventures. The investment required a $260,000 payment made at the time of closing. The unpaid balance of $1,280,000 at December 31, 2007 will be paid in four annual installments of $260,000 in 2008 through 2011, with a final installment
of $240,000 in 2012. The unpaid balance is unsecured and bears interest at an annual rate of 4%, which is payable annually with each installment. The investment in the partnership exceeded underlying net assets by approximately $1,475,000. Based on the final assessment of the partnership, the Company has determined that approximately $345,000 of the excess of the investment over the underlying partnership assets relates to underlying patents. The remaining $1,130,000 of the excess of the investment over the underlying partnership assets has been assigned to the non-exclusive patent license agreement. The Company has recorded a $332,500 decrease in the carrying amount of the investment, reflecting amortization of the patents, patent license agreement and the Companys portion of the partnerships operating results for the twelve months ended December 31, 2007.
56
Table of Contents
The Companys subsidiary, IntriCon Tibbetts Corporation, owns a 50% interest in a joint venture with a Swiss company to market, design, manufacture, and sell audio coils to the hearing health industry. The Company has recorded a $175,000 increase in the carrying amount of the investment, reflecting the Companys portion of the joint ventures operating results for the period ended December 31, 2007.
Condensed financial information of the joint venture at and for the year ended December 31, 2007 is as follows (in thousands):
|
|
2007
|
|
Balance sheet:
|
|
|
|
|
Current assets
|
|
$
|
1,013
|
|
Non-currrent assets
|
|
|
273
|
|
|
|
|
|
|
Total assets
|
|
|
1,286
|
|
|
|
|
|
|
Current liabilities
|
|
|
889
|
|
Non-current liabilities
|
|
|
353
|
|
Stockholders equity
|
|
|
44
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,286
|
|
|
|
|
|
|
Income statement:
|
|
|
|
|
Net revenues
|
|
$
|
2,820
|
|
|
|
|
|
|
Net income
|
|
$
|
400
|
|
The 2007 joint venture results include amounts prior to the Companys acquisition of Tibbetts Industries.
57
Table of Contents