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Hearing
instruments, which fit behind or in a persons ear to amplify and process sound
for a hearing impaired person, generally are composed of four basic parts and
several supplemental components for control or fitting purposes. The four basic
parts are microphones, amplifier circuits, miniature receivers/speakers and
batteries, all of which IntriCon manufactures, with the exception of the
battery. IntriCons hybrid amplifiers are a type of amplifier circuit.
Supplemental components include volume controls, trimmer potentiometers, which
shape sound frequencies to respond to the particular nature of a persons
hearing loss, and switches used to turn the instrument on and off and to go
from telephone to normal speech modes. Faceplates and an ear shell, molded to
fit the users ear, often serve as housing for hearing instruments. IntriCon
manufactures its components on a short lead-time basis in order to supply
just-in-time delivery to its customers and, consequently, order backlog amounts
are not meaningful.
Using our ULP
BodyNet family technology, specifically nanoDSP and our new wireless
nanoLink and physioLink technologies, IntriCon is building a new generation
of affordable, high-quality hearing aids and similar amplifier devices under
contracts for OEMs. DSP devices have better clarity, attractive pricing points
and an improved ability to filter out background noise. During 2009, we
introduced our Scenic DSP amplifier with acoustic scene analysis, our new
high-performance adaptive DSP hearing instrument amplifier. In our view, Scenic
advanced capabilities are ideally suited for the hearing health market. We
believe the introduction of Scenic solidifies our position as a leader of
high-performance adaptive DSP hearing instrument amplifiers. Furthermore, we
believe our strategic alliance with Dynamic Hearing will allow us to develop
new body-worn applications and further expand both our hearing health and
professional audio product portfolio.
Overall, we
believe the hearing health market holds significant opportunities for the
Company. In the United States, Europe and Japan, the 65-year-old-plus age
demographic is the fastest growing segment of the population, and many of those
individuals could, at some point, benefit from a hearing device that uses IntriCons
proprietary technology.
While it
harbors great potential, the hearing health market is experiencing slowness due
to macroeconomic conditions. In general, the U.S. market does not provide
insurance reimbursement for hearing aid purchases. People can defer their
hearing aid purchase. We believe the sporadic buying patterns will continue
into 2010. Reimbursement trends in Europe are more favorable, with insurers and
the governments covering more devices.
Professional Audio Communications
IntriCon entered the high-quality audio communication
device market in 2001, and now has a line of miniature, professional audio
headset products used by customers focusing on homeland security and emergency
response needs. The line includes several communication devices that are
extremely portable and perform well in noisy or hazardous environments. These
products are well suited for applications in the fire, law enforcement, safety,
aviation and military markets. In addition, the Company has a line of miniature
ear- and head-worn devices used by performers and support staff in the music
and stage performance markets. Our May 2007 acquisition of Tibbetts Industries
provided the Company access to homeland security agencies in this market. We
believe performance in difficult listening environments and wireless operations
will continue to improve as these products increasingly include our proprietary
nanoDSP, wireless nanoLink and physioLink technologies.
In 2010, we
plan to introduce a line of situational listening devices (SLDs) intended to
help hearing impaired people hear in noisy environments like restaurants and
automobiles, and to listen to television and music by direct wireless
connection. Such devices are intended to be supplements to their conventional
hearing aids, which do not handle those situations well. The product line
consists of an earpiece, TV transmitter, companion microphone, iPod/iPhone
transmitter, and USB transmitter.
For
information concerning our net sales, net income and assets, see the consolidated
financial statements in Item 8 of this Annual Report on Form 10-K.
Marketing and
Competition.
IntriCon sells its hearing instrument
components directly to domestic hearing instrument manufacturers through an
internal sales force. Sales of medical and professional audio communications
products are also made primarily through an internal sales force. In recent
years, five companies have accounted for a substantial portion of the Companys
sales in this segment.
In 2009, one
customer accounted for 22 percent of the Companys body-worn device net sales.
During 2009, the top five customers accounted for approximately $23.8 million
or 46 percent of the Companys body-worn device net sales. See note 4 to the
consolidated financial statements for a discussion of net sales and long-lived
assets by geographic area and segment.
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Internationally, sales representatives employed by IntriCon GmbH
(GmbH), a German company of which the Company owns 90% of its capital stock,
solicit sales from European hearing instrument manufacturers on behalf of
IntriCon.
IntriCon believes that it is the largest supplier worldwide of
micro-miniature electromechanical components to hearing instrument
manufacturers and that its full product line and automated manufacturing
process allow it to compete effectively with other manufacturers within this market.
In the market of hybrid amplifiers and molded plastic faceplates, IntriCons
primary competition is from the hearing instrument manufacturers themselves.
The hearing instrument manufacturers produce a substantial portion of their
internal needs for these components.
IntriCon markets its high performance microphone products to the radio
communication and professional audio industries and has several larger
competitors who have greater financial resources. IntriCon holds a small market
share in the global market for microphone capsules and other related products.
Employees.
As of December 31, 2009, our body-worn device segment had a total of 515 full
time equivalent employees, of whom 34 are executive and administrative
personnel, 17 are sales personnel and 464 are engineering and operations
personnel. The Company considers its relations with its employees to be
satisfactory. None of the Companys employees are represented by a union.
As a supplier of parts for consumer and medical products, IntriCon is
subject to claims for personal injuries allegedly caused by its products. The
Company maintains what it believes to be adequate insurance coverage.
Research and
Development.
IntriCon conducts research and
development activities primarily to improve its existing products and
proprietary technology. The Company is committed to increasing its investment
in the research and development of proprietary technologies, such as the ULP
nanoDSP and Bodynet technologies. The Company believes the continued development
of key proprietary technologies will be the catalyst for long-term revenues and
margin growth. Research and development expenditures were $3,345,000,
$3,248,000, and $3,089,000 in 2009, 2008 and 2007, respectively. These amounts
are net of customer reimbursed research and development. See note 1 to the
consolidated financial statements for information regarding customer funded
research and development projects.
IntriCon owns a number of United States patents which cover a number of
product designs and processes. The Company believes that, although these
patents collectively add some value to the Company, no one patent or group of
patents is of material importance to its business as a whole.
Regulation.
The
health care industry is highly regulated, and there can be no guarantee that
the regulatory environment in which we operation will not change significantly
and adversely to us in the future. We believe that the health care legislation,
rules, regulations and interpretations will change, and we will monitor our
agreements and operations from time to time to adhere to such changes in the
health care regulatory environment.
Certain of our products are regulated by the U.S. Food and Drug
Administration (the FDA) as medical devices under the Federal Food, Drug, and
Cosmetic Act. Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA including any of the following
sanctions: fines injunctions and civil penalties; recall or seizure of medical
devices incorporating our products and intellectual property; operating
restrictions, partial suspension or total shutdown of production; withdrawal of
clearance; and criminal prosecution.
Discontinued Operations Electronic Products
Our electronic products segment business is conducted by RTI
Electronics, Inc. (RTIE), a wholly owned subsidiary of the Company. RTIE
designs and manufactures thermistor, film capacitor and magnetic products to
industrial, commercial and military customers. The Company approved a plan to
divest this business segment in the fourth quarter of 2009 and has accounted
for it as discontinued operations as further described in note 2 in the
accompanying consolidated financial statements in Item 8.
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Products and
Industries Serviced
. RTIE manufactures and sells
thermistors and thermistor assemblies, which are solid state devices that
produce precise changes in electrical resistance as a function of any change in
absolute body temperature. RTIE sells through its Surge-Gard product line, an
inrush current limiting device used primarily in computer power supplies. The
balance of sales represents various industrial, commercial and military sales
for other thermistor, film capacitor and magnetic products to domestic and
international markets. RTIEs principal raw materials are plastics, polymers,
metals, various metal oxide powders and silver paste, for which it believes
there are multiple sources of supply.
Marketing and
Competition.
RTIE sells its thermistors, film
capacitors and magnetic products through a combination of independent sales
representatives and internal sales force. This business has many competitors,
both domestic and foreign, that sell various thermistors, film capacitors and
magnetics and some of these competitors are larger and have greater financial
resources. In addition, RTIE holds a relatively small market share in the
world-market of thermistor and film capacitor products.
In 2009, one customer accounted for 12 percent of the RTIEs electronic
products net sales. During 2009, the top five customers accounted for
approximately $1.8 million or 32 percent of RTIEs electronic products net
sales.
Employees.
As of December 31, 2009, RTIE had a total of 57 full time equivalent employees,
of whom 6 are executive and administrative personnel, 3 are sales personnel and
48 are operations personnel. RTIE considers its relations with its employees to
be satisfactory. None of the RTIEs employees are represented by a union.
As a supplier of parts for consumer products, RTIE is subject to claims
for personal injuries allegedly caused by its products. The Company maintains
what it believes to be adequate insurance coverage.
Forward-Looking Statements
Certain statements included or incorporated by reference in this Annual
Report on Form 10-K or the Companys other public filings and releases, which
are not historical facts, or that include forward-looking terminology such as
may, will, believe, expect, should, optimistic or continue or the
negative thereof or other variations thereof, are forward-looking statements
(as such term is defined in Section 21E of the Securities Exchange Act of 1934
and Section 27A of the Securities Act of 1933, and the regulations thereunder),
which are intended to be covered by the safe harbors created thereby. These
statements may include, but are not limited to:
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statements in Business, Legal Proceedings and Risk
Factors, such as the Companys ability to focus on the body-worn device
segment, the ability to compete, statements concerning the Datrix and
Tibbetts acquisitions, the divestiture of its electronic products segment,
strategic alliances and their benefits, the adequacy of insurance coverage,
and potential increase in demand for the Companys products; and
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statements in Managements Discussion and Analysis of Financial
Condition and Results of Operations and Notes to the Consolidated Financial
Statements, such as the net operating loss carryforwards, the ability to
meet cash requirements for operating needs, the ability to meet liquidity
needs, assumptions used to calculate future level of funding of employee
benefit plans, the adequacy of insurance coverage, the impact of new
accounting pronouncements and litigation.
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Forward-looking statements also include, without limitation, statements
as to the Companys expected future results of operations and growth, the
Companys ability to meet working capital requirements, the Companys business
strategy, the expected increases in operating efficiencies, anticipated trends
in the Companys body-worn device markets, the effect of compliance with
environmental protection laws, estimates of goodwill impairments and
amortization expense of other intangible assets, estimates of asset impairment,
the effects of changes in accounting pronouncements, the effects of litigation
and the amount of insurance coverage, and statements as to trends or the
Companys or managements beliefs, expectations and opinions. Forward-looking
statements are subject to risks and uncertainties and may be affected by
various risks, uncertainties and other factors that can cause actual results
and developments to be materially different from those expressed or implied by
such forward-looking statements, including, without limitation, the risk
factors discussed in Item 1A of this Annual Report on Form 10-K.
The Company does not undertake to update any forward-looking statement
that may be made from time to time by or on behalf of the Company.
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Available Information
The Company files or furnishes its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements
and other information with the SEC. You may read and copy any reports,
statements and other information that the Company files with the SEC at the
SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The Companys filings are also available on the
SECs Internet site as part of the EDGAR database (http://www.sec.gov).
The Company maintains an internet web site at www.IntriCon.com. The
Company maintains a link to the SECs website by which you may review its
annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.
The information on the website listed above, is not and should not be
considered part of this annual report on Form 10-K and is not incorporated by
reference in this document. This website is and is only intended to be an
inactive textual reference.
In addition, we will provide, at no cost (other than for exhibits),
paper or electronic copies of our reports and other filings made with the SEC.
Requests should be directed to:
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Corporate
Secretary
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IntriCon
Corporation
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1260 Red Fox
Road
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Arden Hills,
MN 55112
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You should carefully consider the risks described below. If any of the
risks actually occur, our business, financial condition or results of future
operations could be materially adversely affected. This Annual Report on Form
10-K contains forward-looking statements that involve risk and uncertainties.
Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of many factors, including the risks
faced by us described below and elsewhere in this Annual Report on Form 10-K.
We have experienced and expect to continue to
experience fluctuations in our results of operations, which could adversely
affect us.
Factors that affect our results of operations include, but are not
limited to, the volume and timing of orders received, changes in the global
economy and financial markets, changes in the mix of products sold, market
acceptance of our products and our customers products, competitive pricing
pressures, global currency valuations, the availability of electronic components
that we purchase from suppliers, our ability to meet demand, our ability to
introduce new products on a timely basis, the timing of new product
announcements and introductions by our or our competitors, changing customer
requirements, delays in new product qualifications, and the timing and extent
of research and development expenses. These factors have caused and may
continue to cause us to experience fluctuations in operating results on a
quarterly and/or annual basis. These fluctuations could materially adversely
affect our business, financial condition and results of operations, which in
turn, could adversely affect the price of our common stock.
The loss of one or more of our major
customers could adversely affect our results of operations.
We are dependent on a small number of customers for a large portion of
our revenues. In fiscal year 2009, our largest customer accounted for 22% of
our net sales and our five largest customers accounted for 46% of our net
sales. A significant decrease in the sales to or loss of any of our major
customers could have a material adverse effect on our business and results of
operations. Our revenues are largely dependent upon the ability of customers to
develop and sell products that incorporate our products. No assurance can be
given that our major customers will not experience financial, technical or
other difficulties that could adversely affect their operations and, in turn,
our results of operations.
We may not be able to collect outstanding
accounts receivable from our customers.
Some of our customers purchase our products on credit, which may cause
a concentration of accounts receivable among some of our customers. As of
December 31, 2009, we had accounts receivable, less allowance for doubtful
accounts, of $7,084,000, which represented approximately 40.5 percent of our
shareholders equity as of that date. As of that date, two customers accounted
for approximately 16 and 11 percent of our accounts receivable, respectively.
Our financial condition and profitability may be harmed if one or more of our
customers are unable or unwilling to pay these accounts receivable when due.
The current domestic economic downturn could
cause a severe disruption in our operations.
Our business has been negatively impacted by the current domestic
economic downturn. If this downturn is prolonged or worsens, there could be
several severely negative implications to our business that may exacerbate many
of the risk factors we identified including, but not limited to, the following:
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Liquidity:
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The domestic economic downturn and the associated credit crisis could
continue or worsen and reduce liquidity and this could have a negative impact
on financial institutions and the countrys financial system, which could, in
turn, have a negative impact on our business.
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We may not be able to borrow additional funds under our existing
credit facility and may not be able to expand our existing facility if our
lender becomes insolvent or its liquidity is limited or impaired or if we
fail to meet covenant levels going forward. In addition, we may not be able
to renew our existing credit facility at the conclusion of its current term
or renew it on terms that are favorable to us.
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Demand:
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The current recession has resulted in lower sales by our customers.
Additionally, our customers may not have access to sufficient cash or
short-term credit to obtain our product or services.
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Prices:
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Certain markets have experienced and may continue to experience
deflation, which would negatively impact our average prices and reduce our
margins.
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If we are unable to continue to develop new
products that are inexpensive to manufacture, our results of operations could
be adversely affected.
We may not be able to continue to achieve our historical profit margins
in our body-worn device segment due to advancements in technology. The ability
to continue our profit margins is dependent upon our ability to stay
competitive by developing products that are technologically advanced and
inexpensive to manufacture.
Our need for continued investment in research
and development may increase expenses and reduce our profitability.
Our industry is characterized by the need for continued investment in
research and development. If we fail to invest sufficiently in research and
development, our products could become less attractive to potential customers
and our business and financial condition could be materially and adversely
affected. As a result of the need to maintain or increase spending levels in
this area and the difficulty in reducing costs associated with research and
development, our operating results could be materially harmed if our research
and development efforts fail to result in new products or if revenues fall
below expectations. In addition, as a result of our commitment to invest in
research and development, management expects that research and development
expenses as a percentage of revenues could increase in the future.
We operate in a highly competitive business
and if we are unable to be competitive, our financial condition could be
adversely affected.
Several of our competitors have been able to offer more standardized
and less technologically advanced hearing products at lower prices. Price competition
has had an adverse effect on our sales and margins. There can be no assurance
that we will be able to maintain or enhance our technical capabilities or
compete successfully with our existing and future competitors.
Merger and acquisition activity in our
hearing health market has resulted in a smaller customer base. Reliance on
fewer customers may have an adverse effect on us.
Several of our customers in the hearing health market have undergone
mergers or acquisitions, resulting in a smaller customer base with larger
customers. If we are unable to maintain satisfactory relationships with the
reduced customer base, it may adversely affect our operating profits and
revenue.
Unfavorable legislation in the hearing health
market may decrease the demand for our products, and may negatively impact our
financial condition.
In some of our foreign markets, government subsidies cover a portion of
the cost of hearing aids. A change in legislation that would reduce or
eliminate these subsidies could decrease the demand for our hearing health
products. This could result in an adverse effect on our operating results. We
are unable to predict the likelihood of any such legislation.
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Implementation of our growth strategy may not
be successful, which could affect our ability to increase revenues.
Our growth strategy includes developing new products and entering new
markets, as well as identifying and integrating acquisitions. Our ability to
compete in new markets will depend upon a number of factors including, among
others:
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our ability
to create demand for products in new markets;
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our
ability to manage growth effectively;
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our ability
to successfully identify, complete and integrate acquisitions;
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our ability to respond to changes in our customers businesses by
updating existing products and introducing, in a timely fashion, new products
which meet the needs of our customers;
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the quality of our new products; and
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our ability to respond rapidly to technological change.
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The failure to do any of the foregoing could have a material adverse
effect on our business, financial condition and results of operations. In
addition, we may face competition in these new markets from various companies
that may have substantially greater research and development resources,
marketing and financial resources, manufacturing capability and customer
support organizations.
We operate in Singapore and Germany, and
various factors relating to our international operations could affect our
results of operations.
In 2009, we operated in Singapore and Germany. Approximately 18 percent
of our revenues were derived from our facilities in these countries in 2009. As
of December 31, 2009 approximately 17 percent of our long-lived assets are
located in these countries. Political or economic instability in these
countries could have an adverse impact on our results of operations due to
diminished revenues in these countries. Our future revenues, costs of
operations and profit results could be affected by a number of factors related
to our international operations, including changes in foreign currency exchange
rates, changes in economic conditions from country to country, changes in a
countrys political condition, trade protection measures, licensing and other
legal requirements and local tax issues. Unanticipated currency fluctuations in
the Euro could lead to lower reported consolidated revenues due to the
translation of these currencies into U.S. dollars when we consolidate our
revenues.
We may explore acquisitions that complement
or expand our business. We may not be able to complete these transactions and
these transactions, if executed, pose significant risks and may materially
adversely affect our business, financial condition and operating results.
We intend to
explore opportunities to buy other businesses or technologies that could
complement, enhance or expand our current business or product lines or that
might otherwise offer us growth opportunities. We may have difficulty finding
these opportunities or, if we do identify these opportunities, we may not be
able to complete the transactions for various reasons, including a failure to
secure financing. Any transactions that we are able to identify and complete
may involve a number of risks, including: the diversion of our managements
attention from our existing business to integrate the operations and personnel
of the acquired or combined business or joint venture; possible adverse effects
on our operating results during the integration process; unanticipated
liabilities; and our possible inability to achieve the intended objectives of
the transaction. In addition, we may not be able to successfully or profitably
integrate, operate, maintain and manage our newly acquired operations or
employees. In addition, future acquisitions may result in dilutive issuances of
equity securities or the incurrence of additional debt.
We may experience difficulty in paying our
debt when it comes due, which could limit our ability to obtain financing.
As of December 31, 2009, we had bank indebtedness of $8,378,000 and
additional indebtedness of $1,983,000, including $1,050,000 payable to the
former shareholder of Datrix and $760,000 payable to HIMPP. Our ability to pay
the principal and interest on our indebtedness as it comes due will depend upon
our current and future performance. Our performance is affected by general
economic conditions and by financial, competitive, political, business and
other factors. Many of these factors are beyond our control. We believe that
availability under our existing credit facility combined with funds expected to
be generated from operations and control of capital spending will be sufficient
to meet our anticipated cash requirements for operating needs for at least the
next 12 months. If, however, we are unable to renew these facilities or obtain
waivers (see Liquidity and Capital Resources) in the future or do not generate
sufficient cash or complete such financings on a timely basis, we may be
required to seek additional financing or sell equity on terms which may not be
as favorable as we could have otherwise obtained. No assurance can be given
that any refinancing, additional borrowing or sale of equity will be possible
when needed or that we will be able to negotiate acceptable terms. In addition,
our access to capital is affected by prevailing conditions in the financial and
equity capital markets, as well as our own financial condition.
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If we fail to meet our financial and other
covenants under our loan agreement with our lender, absent a waiver, we will be
in default of the loan agreement and The PrivateBank and Trust Company can take
actions that would adversely affect our business.
There can be no assurances that we will be able to maintain compliance
with the financial and other covenants in our loan agreement. In the event we
are unable to comply with these covenants during future periods, it is
uncertain whether our lender will grant waivers for our non-compliance. If
there is an event of default by us under the loan agreement, our lender has the
option to, among other things, accelerate any and all of our obligations under
the loan agreement which would have a material adverse effect on our business,
financial condition and results of operations.
If the Company is unable to liquidate the
assets it has marked as discontinued operations, its results of operations maybe
adversely affected.
The Company may not be successful in liquidating the assets of its
non-core electronic products business in 2010, which is shown as a discontinued
operation. There can be no assurance that the customers of this business will
continue to purchase product until the inventory is liquidated. If the
remaining electronics business losses its competitiveness, it may be difficult
to sell the assets at a price favorable to the Company or at all. In connection
with any liquidation or sale, the Company may be required to take additional
charges to earnings which could adversely affect the market price of our stock.
Our success depends on our senior management
team and if we are not able to retain them, it could have a materially adverse
effect on us.
We are highly dependent upon the continued services and experience of
our senior management team, including Mark S. Gorder, our President, Chief
Executive Officer and director. We depend on the services of Mr. Gorder and the
other members of our senior management team to, among other things, continue
the development and implementation of our business strategies and maintain and
develop our client relationships.
Our future success depends in part on the
continued service of our engineering and technical personnel and our ability to
identify, hire and retain additional personnel.
There is intense competition for qualified personnel in our markets. We
may not be able to continue to attract and retain engineers or other qualified
personnel necessary for the development and growth of our business or to
replace engineers or other qualified personnel who may leave our employ in the
future. The failure to retain and recruit key technical personnel could cause
additional expense, potentially reduce the efficiency of our operations and
could harm our business.
We and/or our customers may be unable to
protect our and their proprietary technology and intellectual property rights
or keep up with that of competitors.
Our ability to compete effectively against other companies in our
markets depends, in part, on our ability and the ability of our customers to
protect our and their current and future proprietary technology under patent,
copyright, trademark, trade secret and unfair competition laws. We cannot assure
that our means of protecting our proprietary rights in the United States or
abroad will be adequate, or that others will not develop technologies similar
or superior to our technology or design around the proprietary rights we own or
license. In addition, we may incur substantial costs in attempting to protect
our proprietary rights.
Also, despite the steps taken by us to protect our proprietary rights,
it may be possible for unauthorized third parties to copy or reverse-engineer
aspects of our and our customers products, develop similar technology
independently or otherwise obtain and use information that we or our customers
regard as proprietary. We and our customers may be unable to successfully
identify or prosecute unauthorized uses of our or our customers technology.
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If we become subject to material intellectual
property infringement claims, we could incur significant expenses and could be
prevented from selling specific products.
We may become subject to material claims that we infringe the
intellectual property rights of others in the future. We cannot assure that, if
made, these claims will not be successful. Any claim of infringement could
cause us to incur substantial costs defending against the claim even if the
claim is invalid, and could distract management from other business. Any
judgment against us could require substantial payment in damages and could also
include an injunction or other court order that could prevent us from offering
certain products.
Environmental liability and compliance
obligations may affect our operations and results.
Our manufacturing operations are subject to a variety of environmental
laws and regulations as well as internal programs and policies governing:
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air
emissions;
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wastewater
discharges;
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the storage,
use, handling, disposal and remediation of hazardous substances, wastes and
chemicals; and
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employee
health and safety.
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If violations of environmental laws occur, we could be held liable for
damages, penalties, fines and remedial actions. Our operations and results
could be adversely affected by any material obligations arising from existing
laws, as well as any required material modifications arising from new
regulations that may be enacted in the future. We may also be held liable for
past disposal of hazardous substances generated by our business or former
businesses or businesses we acquire. In addition, it is possible that we may be
held liable for contamination discovered at our present or former facilities.
We are subject to numerous asbestos-related
lawsuits, which could adversely affect our financial position, results of
operations or liquidity.
We are a defendant along with a number of other parties in
approximately 122 lawsuits as of December 31, 2009, (approximately 122 lawsuits
as of December 31, 2008) 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 we sold in
March 2005. 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. Because 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. If our insurance
policies do not cover the costs and any awards for the asbestos-related
lawsuits, we will have to use our cash or obtain additional financing to pay
the asbestos-related obligations and settlement costs. There is no assurance
that we will have the cash or be able to obtain additional financings on
favorable terms to pay asbestos related obligations or settlements should they
occur. The ultimate outcome of any legal matter cannot be predicted with
certainty. In light of the significant uncertainty associated with asbestos
lawsuits, there is no guarantee that these lawsuits will not materially
adversely affect our financial position, results of operations or liquidity.
15
Table of Contents
The market price of our common stock has been
and is likely to continue to be volatile, which may make it difficult for
shareholders to resell common stock when they want to and at prices they find
attractive.
The market price of our common stock has been and is likely to be
highly volatile, and there has been limited trading volume in the common stock.
The common stock market price could be subject to wide fluctuations in response
to a variety of factors, including the following:
|
|
|
|
|
announcements
of fluctuations in our or our competitors operating results;
|
|
|
the timing
and announcement of sales or acquisitions of assets by us or our competitors;
|
|
|
changes in
estimates or recommendations by securities analysts;
|
|
|
adverse or
unfavorable publicity about our services or us;
|
|
|
the
commencement of material litigation, or an unfavorable verdict, against us;
|
|
|
terrorist
attacks, war and threats of attacks and war;
|
|
|
additions or
departures of key personnel; and
|
|
|
sales of
common stock.
|
In addition, the stock market in recent years has experienced
significant price and volume fluctuations. Such volatility and decline has
affected many companies irrespective of, or disproportionately to, the
operating performance of these companies. These broad fluctuations and limited
trading volume may materially adversely affect the market price of our common
stock, and your ability to sell our common stock.
Most of our outstanding shares are available for resale in the public
market without restriction. The sale of a large number of these shares could
adversely affect the share price and could impair our ability to raise capital
through the sale of equity securities or make acquisitions for common stock.
Anti-takeover provisions may make it more
difficult for a third party to acquire control of us, even if the change in
control would be beneficial to shareholders.
We are a Pennsylvania corporation. Anti-takeover provisions in
Pennsylvania law and our charter and bylaws could make it more difficult for a
third party to acquire control of us. These provisions could adversely affect
the market price of the common stock and could reduce the amount that
shareholders might receive if we are sold. For example, our charter provides
that the board of directors may issue preferred stock without shareholder
approval. In addition, our bylaws provide for a classified board, with each
board member serving a staggered three-year term. Directors may be removed by
shareholders only with the approval of the holders of at least two-thirds of all
of the shares outstanding and entitled to vote.
If we fail to maintain an effective system of
internal controls, we may not be able to accurately report our financial
results or prevent fraud. As a result, current and potential shareholders and
customers could lose confidence in our financial reporting, which could harm
our business, the trading price of our stock and our ability to retain our
current customers or obtain new customers.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to
as Section 404, we are required to include in our Annual Reports on Form 10-K,
our managements report on internal control over financial reporting and,
beginning with our Annual Report on Form 10-K for 2010, our registered public
accounting firms attestation report on internal control over financial
reporting. While we have reported no material weaknesses in the Form 10-K for
the fiscal year ended December 31, 2009, we cannot guarantee that we will not
have material weaknesses reported by our management or our independent
registered public accounting firm in the future. Compliance with the
requirements of Section 404 is expensive and time-consuming. If in the future
we fail to complete this evaluation in a timely manner, or if our independent
registered public accounting firm cannot timely attest to our internal
controls, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal control over financial reporting. In addition, any
failure to establish an effective system of disclosure controls and procedures
could cause our current and potential investors and customers to lose
confidence in our financial reporting and disclosure required under the
Securities Exchange Act of 1934, which could adversely affect our business and
the market price of our common stock.
16
Table of Contents
|
|
I
TEM
1B.
|
Unresolved Staff Comments.
|
Not
Applicable.
The Company
leases eight facilities, six domestically and two internationally, as follows:
|
|
|
|
|
a 47,000 sq. ft. manufacturing facility in Arden Hills, Minnesota,
which also serves as the Companys headquarters, from a partnership
consisting of two former officers of IntriCon Inc. and Mark S. Gorder who
serves as the president and CEO of the Company and IntriCon Inc. and on the
Companys Board of Directors. At this facility, the Company manufactures
body-worn devices, other than plastic component parts. Annual base rent
expense, including real estate taxes and other charges, is approximately
$477,000. The Company believes the terms of the lease agreement are
comparable to those which could be obtained from unaffiliated third parties.
The lease expires in October 2011.
|
|
|
a 46,000 sq. ft. building in Vadnais Heights, Minnesota at which
IntriCon produces plastic component parts for body-worn devices. Annual base
rent expense, including real estate taxes and other charges, is approximately
$382,000. The lease expires in June 2016.
|
|
|
two buildings in Camden, Maine, which contain Tibbetts manufacturing
facilities and offices and consist of a total of 32,000 square feet. Annual
base rent expense on the 25,000 square foot facility, including real estate
taxes and other charges, is approximately $104,000. This lease expires in
June 2012. Annual base rent expense on the 7,000 square foot facility,
including real estate taxes and other charges, is approximately $62,000. This
lease expires in June 2017.
|
|
|
a 4,000 square foot building in Escondido, California, which houses
assembly operations and administrative offices relating to our cardiac
monitoring business. Annual base rent expense, including real estate taxes
and other charges, is approximately $48,000. This lease expires in April
2010.
|
|
|
a 21,000 square foot building in Singapore which houses production
facilities and administrative offices. Annual base rent expense, including
real estate taxes and other charges, is approximately $208,000. This lease
expires in May 2010.
|
|
|
a 2,000 square foot facility in Germany which houses sales and
administrative offices. Annual base rent expense, including real estate taxes
and other charges, is approximately $48,000. This lease expires in June 2012.
|
|
|
a building in Anaheim, California, which contains RTIEs electronics
products manufacturing facilities and offices and consists of a total of
50,000 square feet. Annual base rent expense, including real estate taxes and
other charges, is approximately $404,000. This facility houses our non-core
electronic products business, which is classified as a discontinued
operation. The lease is month to month.
|
All of the foregoing facilities are used in the Companys body-worn
device segment, other than the Anaheim, California facility which is used in
the electronic products segment and has now been classified as discontinued
operations. See notes 15 and 16 to the Companys consolidated financial
statements in Item 8 of the Annual Report on Form 10-K.
|
|
I
TEM
3.
|
Legal Proceedings
|
The Company is a defendant along with a number of other parties in
approximately 122 lawsuits as of December 31, 2009, (approximately 122 lawsuits
as of December 31, 2008) 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. Due to the noninformative nature of the complaints, the Company
does not know whether any of the complaints state valid claims against the
Company. Certain insurance carriers have informed the Company 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. The Company has
requested that the carriers substantiate this situation. The Company believes
it has additional policies available for other years which have been ignored by
the carriers. Because settlement payments are applied to all years a litigant
was deemed to have been exposed to asbestos, the Company believes when
settlement payments are applied to these additional policies, the Company will
have availability under the years deemed exhausted. The Company does 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 the Company, make the ultimate disposition of these lawsuits not
material to the Companys consolidated financial position or results of
operations.
17
Table of Contents
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.
The Company is also involved in other lawsuits arising in the normal
course of business, as further described in Note 14 to the consolidated financial
statements in Item 8. 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 the Companys consolidated
financial position, liquidity, or results of operations.
|
|
I
TEM 4.
|
(Removed and Reserved)
|
|
|
I
TEM 4A.
|
Executive Officers of the Registrant
|
The names,
ages and offices (as of February 28, 2010) of the Companys executive officers
were as follows:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Mark S.
Gorder
|
|
63
|
|
President,
Chief Executive Officer and Director of the Company; President of IntriCon,
Inc.
|
Scott
Longval
|
|
33
|
|
Chief
Financial Officer and Treasurer of the Company
|
Christopher
D. Conger
|
|
49
|
|
Vice
President, Research and Development
|
Michael P.
Geraci
|
|
51
|
|
Vice
President, Sales and Marketing
|
Dennis L.
Gonsior
|
|
51
|
|
Vice
President, Operations
|
Steve M.
Binnix
|
|
60
|
|
Vice
President and General Manager, RTI Electronics, Inc.
|
Greg
Gruenhagen
|
|
56
|
|
Vice
President, Corporate Quality and Regulatory Affairs
|
Mr. Gorder joined the Company in October 1993 when IntriCon Inc. was
acquired by the Company. Mr. Gorder received a Bachelor of Arts degree in
Mathematics from the St. Olaf College, a Bachelor of Science degree in
Electrical Engineering from the University of Minnesota and a Master of
Business Administration from the University of Minnesota. Prior to the
acquisition, Mr. Gorder was President and one of the founders of IntriCon Inc.,
which began operations in 1977. Mr. Gorder was promoted to Vice President of
the Company and elected to the Board of Directors in April 1996. In December
2000, he was elected President and Chief Operating Officer and in April 2001,
Mr. Gorder assumed the role of Chief Executive Officer.
Mr. Longval has served as the Companys Chief Financial Officer since
July 2006. Mr. Longval received a Bachelor of Science degree in Accounting from
the University of St. Thomas. Prior to being appointed as CFO, Mr. Longval
served as the Companys Corporate Controller since September 2005. Prior to
joining the Company, Mr. Longval was Principal Project Analyst at ADC
Telecommunications, Inc., a provider of innovative network infrastructure
products and services, from March 2005 until September 2005. From May 2002 until
March 2005 he was employed by Accellent, Inc., formerly MedSource Technologies,
a provider of outsourcing solutions to the medical device industry, most
recently as Manager of Financial Planning and Analysis. From September 1998
until April 2002, he was employed by Arthur Andersen, most recently as
experienced audit senior.
Mr. Conger joined the Company in September 1997. Mr. Conger received a
Bachelor of Science degree in Electrical Engineering from the University of
Missouri and a Master of Science degree in Electrical Engineering from the
University of Minnesota. He has served as the Companys Vice President of
Research and Development since February 2005. Prior to that, Mr. Conger served
as Director of Research and Development since 1997. Before joining IntriCon,
Mr. Conger served in various positions in the hearing health industry including
3M Company and Siemens.
18
Table of Contents
Mr. Geraci joined the Company in October 1983. Mr. Geraci received a
Bachelor of Science degree in Electrical Engineering from Bradley University
and a Master of Business Administration from the University of Minnesota
Carlson School of Business. He has served as the Companys Vice President of
Sales and Marketing since January 1995.
Mr. Gonsior joined the Company in February 1982. Mr. Gonsior received a
Bachelor of Science degree from Saint Cloud State University. He has served as
the Companys Vice President of Operations since January 1996.
Mr. Binnix joined the Company in January 1989. Mr. Binnix is a
Certified Manufacturing Engineer and received his Bachelor of Science degree
from the University of LaVerne, California. He has served as the Companys Vice
President of RTI Electronics, Inc. since April 2006 and as General Manager
since 1993.
Mr. Gruenhagen joined the Company in November 1984. Mr. Gruenhagen
received a Bachelor of Science degree from Iowa State University. He has served
as the Companys Vice President of Corporate Quality and Regulatory Affairs
since December 2007. Prior to that, Mr. Gruenhagen served as Director of
Corporate Quality since 2004 and Director of Project Management since 2000.
19
Table of Contents
P
ART II
|
|
I
TEM 5.
|
Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Since January 2, 2008, the Companys common shares have been listed on
the NASDAQ Global Market under the ticker symbol IIN. From April 4, 2005
through January 1, 2008 the Companys common shares were listed on the American
Stock Exchange under the ticker symbol IIN.
Market and Dividend Information
The high and
low sale prices of the Companys common stock during each quarterly period
during the past two years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
Market
|
|
Market
|
|
|
|
Price Range
|
|
Price Range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
|
|
$
|
5.01
|
|
$
|
2.83
|
|
$
|
13.30
|
|
$
|
5.71
|
|
Second
|
|
|
3.35
|
|
|
2.56
|
|
|
10.07
|
|
|
7.10
|
|
Third
|
|
|
4.11
|
|
|
2.60
|
|
|
9.00
|
|
|
3.01
|
|
Fourth
|
|
|
3.76
|
|
|
2.80
|
|
|
6.50
|
|
|
3.12
|
|
The closing sale price of the Companys common stock on March 11, 2010,
was $3.05 per share.
At March 1, 2010 the Company had 388 shareholders of record of common
stock. Such number of records does not reflect shareholders who beneficially
own common stock in nominee or street name.
The Company ceased paying quarterly cash dividends in the fourth
quarter of 2001 and has no intention of paying cash dividends in the
foreseeable future. Any payment of future dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Companys earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of
dividends, and other factors that the Board of Directors deems relevant. Terms
of the Companys banking agreements prohibit the payment of cash dividends
without prior bank approval.
See ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters Equity Compensation Plans of this
Annual Report on Form 10-K for disclosure regarding our equity compensation
plans.
20
Table of Contents
Stock Performance Graph
The following graph shows the cumulative total return for the last five
years, calculated as of December 31 of each such year, for the Common Shares,
the Standard & Poors 500 Index, and the Russell 2000 Index (RUT). The
graph assumes that the value of the investment in each of three was $100 at
December 31, 2004 and that all dividends were reinvested.
Source: Yahoo
Finance
Note: Stock price performance shown in this Performance Graph for our
common stock is historical and not necessarily indicative of future price
performance. The information contained in this Performance Graph is not
soliciting material and has not been filed with the Securities and Exchange
Commission. This Performance Graph will not be incorporated by reference into
any of our future filings under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
21
Table of Contents
|
|
I
TEM 6.
|
Selected Financial Data
|
Five-Year Summary of Operations*
(In thousands, except for per share and share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
2009(d)
|
|
2008
|
|
2007(a)
|
|
2006
|
|
2005(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
51,676
|
|
$
|
57,908
|
|
$
|
59,669
|
|
$
|
41,438
|
|
$
|
36,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,051
|
|
|
14,657
|
|
|
15,425
|
|
|
10,320
|
|
|
9,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
11,681
|
|
|
12,360
|
|
|
12,360
|
|
|
8,638
|
|
|
8,679
|
|
Interest expense
|
|
|
837
|
|
|
679
|
|
|
942
|
|
|
438
|
|
|
409
|
|
Equity in loss (earnings) of partnerships
|
|
|
149
|
|
|
3
|
|
|
158
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
|
220
|
|
|
36
|
|
|
79
|
|
|
54
|
|
|
(161
|
)
|
Income (loss) from continuing operations
before income taxes and discontinued operations
|
|
|
(1,836
|
)
|
|
1,579
|
|
|
1,886
|
|
|
1,190
|
|
|
624
|
|
Income tax expense (benefit)
|
|
|
(34
|
)
|
|
265
|
|
|
173
|
|
|
168
|
|
|
395
|
|
Income (loss) from continuing operations
before discontinued operations
|
|
|
(1,802
|
)
|
|
1,314
|
|
|
1,713
|
|
|
1,022
|
|
|
229
|
|
Income (loss) from discontinued operations,
net of income taxes
|
|
|
(2,119
|
)
|
|
(276
|
)
|
|
154
|
|
|
141
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,921
|
)
|
$
|
1,038
|
|
$
|
1,867
|
|
$
|
1,163
|
|
$
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.34
|
)
|
$
|
.25
|
|
$
|
.33
|
|
$
|
.20
|
|
$
|
.05
|
|
Discontinued operations
|
|
|
(.39
|
)
|
|
(.05
|
)
|
|
.03
|
|
|
.03
|
|
|
.25
|
|
Net income (loss)
|
|
$
|
(.73
|
)
|
$
|
.20
|
|
$
|
.36
|
|
$
|
.23
|
|
$
|
.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.34
|
)
|
$
|
.24
|
|
$
|
.31
|
|
$
|
.19
|
|
$
|
.04
|
|
Discontinued operations
|
|
|
(.39
|
)
|
|
(.05
|
)
|
|
.03
|
|
|
.03
|
|
|
.25
|
|
Net income (loss)
|
|
$
|
(.73
|
)
|
$
|
.19
|
|
$
|
.34
|
|
$
|
.22
|
|
$
|
.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,394,125
|
|
|
5,314,387
|
|
|
5,209,567
|
|
|
5,159,216
|
|
|
5,135,348
|
|
Diluted
|
|
|
5,394,125
|
|
|
5,539,456
|
|
|
5,519,780
|
|
|
5,319,802
|
|
|
5,261,491
|
|
22
Table of Contents
Other Financial Highlights*
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
2009(d)
|
|
2008
|
|
2007(a)
|
|
2006
|
|
2005(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (c)
|
|
$
|
8,504
|
|
$
|
10,602
|
|
$
|
9,365
|
|
$
|
8,445
|
|
$
|
8,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
37,363
|
|
$
|
39,462
|
|
$
|
39,732
|
|
$
|
34,143
|
|
$
|
29,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
7,730
|
|
$
|
6,188
|
|
$
|
6,963
|
|
$
|
3,830
|
|
$
|
5,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity:
|
|
$
|
17,489
|
|
$
|
20,312
|
|
$
|
18,597
|
|
$
|
15,607
|
|
$
|
14,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
2,226
|
|
$
|
1,966
|
|
$
|
1,785
|
|
$
|
1,511
|
|
$
|
1,763
|
|
|
|
|
|
(a)
|
Included in the 2007 results and balances at December 31, 2007, are
net sales of $4.5 million, total assets of $6.4 million, long-term debt of
$4.3 million, and depreciation and amortization of $100,000 from the acquisition
of Tibbetts Industries. Because the 2007 results and balances at December 31,
2007 include amounts from the acquisition of Tibbetts Industries, the
financial statements for 2007 may not be comparable to our prior historical
results.
|
|
(b)
|
For 2005, the Company reclassified the remaining portion of its Heat
Technology business, which consisted of the burners and components portion of
that business, as discontinued operations. The Company sold this portion of
the business in the first quarter of 2005.
|
|
(c)
|
Working capital is equal to current assets less current liabilities.
|
|
(d)
|
In 2009, the Company reclassified its Electronic Products business,
which consisted of the thermistor, film capacitor and magnetic products, as
discontinued operations.
|
23
Table of Contents
|
|
I
TEM 7.
|
Managements Discussion and Analysis of Financial Condition and
Results of Operations
|
Company Overview
IntriCon Corporation, (the Company or IntriCon, we, us or
our) is an international firm engaged in the designing, developing,
engineering and manufacturing of body-worn devices. The Company serves the
body-worn device market by designing, developing, engineering and manufacturing
micro-miniature injection-molded plastics, microelectronics, micro-mechanical
assemblies and complete assemblies, primarily for bio-telemetry devices,
medical equipment, hearing instruments, professional audio and
telecommunications devices.
As discussed below, the Company currently has one operating segment -
its body-worn device segment. Our expertise in body-worn devices is focused on
three main markets within this segment: medical, hearing health, and
professional audio communications. Within these chosen markets, we combine
ultra-miniature mechanical and electronics capabilities with proprietary technology
that enhances the performance of body-worn devices.
Business Highlights
On August 13, 2009, the Company purchased all of the outstanding stock
of Jon Barron, Inc. doing business as Datrix (Datrix), a privately held
developer, manufacturer, tester and marketer of medical devices and related
software products, based in Escondido, California. The acquisition provides the
Company entry into the ambulatory electrocardiograph (AECG) and event recording
markets.
To finance a portion of the Datrix acquisition and replace the
Companys existing credit facilities with Bank of America, including capital
leases, the Company and its domestic subsidiaries entered into a new three year
credit facility with The PrivateBank and Trust Company on August 13, 2009. The
credit facility provides for:
|
|
|
|
§
|
an $8,000,000 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 the Companys eligible trade
receivables, eligible inventory, and eligible equipment less a reserve; and
|
|
|
|
|
§
|
a $3,500,000 term loan.
|
On December 29, 2009, the Company decided to exit the non-core
electronics products segment operated by its wholly-owned subsidiary, RTI
Electronics, and divest the assets used in the business. The decision to exit
the electronics business was made to allow the Company to focus on its core
body-worn device segment and an effort to improve the Companys overall margins
and profitability. The Company expects the divestiture to be completed in
mid-2010.
ForwardLooking Statements
The following discussion and analysis of our financial condition and
results of operations should be read together with the selected consolidated
financial data and our financial statements and the related notes appearing in
Item 6. and Item 8. of this report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not
limited to those under the heading Risk Factors in Item 1A of this Annual
Report on Form 10-K.
24
Table of Contents
Results of Operations: 2009 Compared with
2008
Consolidated Net
Sales
Consolidated
net sales for 2009 and 2008 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
2008
|
|
Dollars
|
|
Percent
|
|
Consolidated
net sales
|
|
$
|
51,676
|
|
$
|
57,908
|
|
$
|
(6,232
|
)
|
(10.8%)
|
|
Our net sales are comprised of three main markets: medical, hearing
health, and professional audio - collectively our body-worn device segment.
Below is a recap of our sales by main markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
2008
|
|
Dollars
|
|
Percent
|
|
Medical
|
|
$
|
23,005
|
|
$
|
20,133
|
|
$
|
2,872
|
|
14.3%
|
|
Hearing
Health
|
|
$
|
18,432
|
|
$
|
23,768
|
|
$
|
(5,336
|
)
|
(22.5%)
|
|
Professional
Audio Communications
|
|
$
|
10,239
|
|
$
|
14,007
|
|
$
|
(3,768
|
)
|
(26.9%)
|
|
We experienced an increase of 14 percent in net sales in the medical
equipment market in 2009 as a direct result of increased sales to existing
original equipment manufacturer, or OEM, customers. We believe there is an
industry-wide trend toward further miniaturization and ambulatory operation
enabled by wireless connectivity, referred to as bio-telemetry, which resulted
in further growth in our medical business. We have experienced solid growth in
our most advanced bio-telemetry device, a continuous wireless glucose monitor,
which we manufacture for a major medical OEM. We are also working with our
strategic partner, Advanced Medical Electronics, on proprietary bio-telemetry
technologies that will enable us to develop new devices that connect patients
and care givers, providing critical information and feedback. In 2009, we also
entered the cardiac diagnostic monitoring (CDM) market, with our acquisition of
Datrix, a supplier of patient monitoring devices. We are leveraging Datrixs
cardiac monitoring capabilities by incorporating IntriCons core competencies
to develop and launch a new line of CDM devices.
Net sales in our hearing health business declined 23 percent from 2008
primarily due to lower demand from our customers in this market and the
completion of a one-time hearing health project in the 2008 first and second
quarters (sales of $1.0 million in the first and second quarters of 2008),
which the customer took in-house in mid-2008. We expect the sporadic buying
patterns to continue into 2010. Despite the anticipated short-term softness, we
believe our longer term prospects in our hearing health business remain strong
as we continue to develop advanced technologies, such as our nanoLink and
physioLink, which will enhance the performance of hearing devices. In
addition, we believe the market indicators in the hearing health industry,
including the aging world population, suggest long-term industry growth.
Net sales to the professional audio communications market declined 27
percent over the prior year, primarily due to the challenging economic
environment. Our professional audio communication business serves customers in
need of high-performance portable communication devices. For customers focusing
on homeland security needs, the line includes several communication devices
that are more portable and perform well in noisy or hazardous environments.
These products are also well suited for applications in the fire, law
enforcement, safety, aviation and military markets.
25
Table of Contents
Gross Profit
Gross profit,
both in dollars and as a percent of sales, for 2009 and 2008, were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Yr-over-Yr
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
11,051
|
|
|
21.4%
|
|
$
|
14,657
|
|
|
25.3%
|
|
|
($3,606
|
)
|
|
(3.9%)
|
|
In 2009, gross profit dollars decreased primarily due to lower sales
volume which caused under absorption of manufacturing overhead during 2009 and
general softness in hearing health and professional audio communications
markets. We have various activities underway to increase our gross margins, such
as transferring our microphone and receiver production from our Maine operation
to our lower cost Singapore facility, increasing the percentage of IntriCon
proprietary content in the devices we manufacture and working to introduce Six
Sigma lean manufacturing methods into key medical device product lines.
Selling, General and
Administrative Expenses
Selling, general and administrative expenses for the years ended
December 31, 2009 and 2008 were (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Yr-over-Yr
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
$
|
2,962
|
|
5.7
|
%
|
|
$
|
3,262
|
|
5.6
|
%
|
|
($
|
300
|
)
|
|
0.1%
|
|
General and
administrative
|
|
|
5,374
|
|
10.4
|
%
|
|
|
5,850
|
|
10.1
|
%
|
|
($
|
476
|
)
|
|
0.3%
|
|
Research and
development
|
|
|
3,345
|
|
6.5
|
%
|
|
|
3,248
|
|
5.6
|
%
|
|
$
|
97
|
|
|
0.9%
|
|
The decreased selling expenses for 2009 as compared to the prior year
were primarily driven by decreases in royalties and commissions as a result of
lower revenues. The decrease in general and administrative expenses were driven
by a cost reduction program implemented in the first quarter by the Company in
conjunction with the revenue decreases, as well as lower professional and legal
fees compared to the prior year. The increased research and development
expenses as compared to the prior year were due to our continued emphasis on
investing in research and development projects to develop new products and
technology to further enhance our product portfolio.
Interest Expense
Interest expense for 2009 was $837,000, an increase of $158,000 from
$679,000 in 2008. The increase in interest expense was due primarily to charges
related to the refinancing of the credit facility that were incurred in 2009 in
connection with our new credit facility obtained in connection with our Datrix
acquisition and higher interest rates in effect on greater outstanding debt in
2009.
Equity in Earnings
(Losses) of Partnerships
The equity in
losses of partnerships for 2009 was $149,000 compared to $4,000 in 2008.
The Company recorded a $210,000 decrease in the carrying amount of its
investment in the Hearing Instrument Manufacturers Patent Partnership (HIMPP)
for 2009, reflecting amortization of the patents and other intangibles and the
Companys portion of the partnerships operating results for the year ended
December 31, 2009, compared to a $145,000 decrease in the carrying amount of
the investment in 2008 for the amortization of the patents and other
intangibles and the Companys portion of the partnerships operating results
for the year ended December 31, 2008. The Company recorded a $61,000 and $141,000 increase in the carrying
amount of Tibbetts investment in a joint venture, reflecting the Companys
portion of the joint ventures operating results for year ended December 31,
2009 and 2008, respectively.
26
Table of Contents
Other Expenses
In 2009, other expense was $220,000 compared to $36,000 in 2008. The
other expense for 2009 primarily related to the costs associated with the
acquisition of Datrix. The 2008 expense primarily related to the losses on
foreign currency exchange as a result of the exchange rate changes in the
Singapore dollar and Euro.
Income Taxes
Income taxes
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Income tax
expense (benefit)
|
|
$
|
(34
|
)
|
$
|
265
|
|
Percentage
of pre-tax income
|
|
|
(1.9
|
%)
|
|
16.7
|
%
|
The expense (benefit) in 2009 and 2008 was primarily due to foreign
taxes on German and Singapore operations. The Company is in a net operating
loss position (NOL) for US federal income tax purposes and, consequently,
minimal income tax expense from the current period domestic operations was
recognized. Our deferred tax asset related to the NOL carryforwards has been
offset by a full valuation allowance. We estimate we have approximately $15.1
million of NOL carryforwards available to offset future federal income taxes
that begin to expire in 2022.
Discontinued
Operations
We recorded a
loss from discontinued operations (electronics business segment) as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Loss from
discontinued Electronics Products Segment
|
|
$
|
(2,119
|
)
|
$
|
(277
|
)
|
The 2009 net loss of $(2,119,000), or $(0.39) per diluted share, was
primarily due to an impairment charge associated with challenges in the current
economic environment and industry conditions resulting in the decision to not
commit to future investments, including research and development, in the
Electronics Products segment, and ultimately divest the segment. The 2008 net
loss of $(277,000), or $(0.05) per diluted share, was primarily due to loss in
operations.
Results of Operations: 2008 Compared with
2007
Consolidated Net
Sales
Consolidated
net sales for 2008 and 2007 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
Dollars
|
|
Percent
|
|
Consolidated
net sales
|
|
$
|
57,908
|
|
$
|
59,669
|
|
$
|
(1,761
|
)
|
|
(3.0%)
|
|
27
Table of Contents
Our net sales
are comprised of three main markets: medical, hearing health, and professional
audio - collectively our body-worn device segment. Below is a recap of our
sales by main markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
Dollars
|
|
Percent
|
|
Medical
|
|
$
|
20,133
|
|
$
|
18,765
|
|
$
|
1,368
|
|
|
7.3
|
%
|
Hearing
Health
|
|
$
|
23,768
|
|
$
|
29,297
|
|
$
|
(5,529
|
)
|
|
(18.9
|
%)
|
Professional
Audio Communications
|
|
$
|
14,007
|
|
$
|
11,606
|
|
$
|
2,401
|
|
|
20.7
|
%
|
We experienced
an increase of 7 percent in net sales in the medical equipment market in 2008
as a direct result of increased sales to existing OEM customers. Net sales in
our hearing health business declined 19 percent from 2007 primarily due to
lower demand from our customers in this market..
Net sales to
the professional audio communications market grew 21 percent over the prior
year fueled by a full year of revenue from our May 2007 acquisition of Tibbetts
and higher demand for communication devices from new and existing customers.
Gross Profit
Gross profit,
both in dollars and as a percent of sales, for 2008 and 2007, were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Yr-over-Yr Percent
|
|
Gross profit
|
|
$
|
14,657
|
|
|
25.3
|
%
|
$
|
15,425
|
|
|
25.9
|
%
|
$
|
(768
|
)
|
|
(0.6%
|
)
|
In 2008, gross
profit dollars decreased primarily due to lower sales volume; gross profit as a
percentage of sales decreased primarily as a result of the wind-down of the
one-time hearing health program in 2007 and general softness in hearing health.
Selling, General and
Administrative Expenses
Selling,
general and administrative expenses for the years ended December 31, 2008 and
2007 were (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
Dollars
|
|
Percent of Sales
|
|
Dollars
|
|
Percent of Sales
|
|
Dollars
|
|
Yr-over-Yr
Percent
|
|
Selling
|
|
$
|
3,262
|
|
|
5.6
|
%
|
$
|
3,398
|
|
|
5.7
|
%
|
$
|
(136
|
)
|
|
(0.1
|
%)
|
General and
administrative
|
|
|
5,850
|
|
|
10.1
|
%
|
|
5,873
|
|
|
9.8
|
%
|
$
|
(23
|
)
|
|
0.3
|
%
|
Research and
development
|
|
|
3,248
|
|
|
5.6
|
%
|
|
3,089
|
|
|
5.2
|
%
|
$
|
159
|
|
|
0.4
|
%
|
The decreased
selling expenses for 2008 as compared to the prior year were primarily driven
by decreases in royalties and commissions as a result of lower revenues. The
decrease in general and administrative expenses were driven by cost control
measures taken by the Company in conjunction with the revenue decreases, as
well as lower professional and legal fees compared to the prior year offset, in
part by a $246,000 increase in stock based compensation expense. The 2007
expenses included significant costs related to the Energy Transportation Group,
Inc. litigation and our acquisition of Tibbetts. The increased research and
development expenses as compared to the prior year were due to our continued
emphasis on investing in research and development projects to develop new
products and technology to further enhance our product portfolio.
28
Table of Contents
Interest Expense
Interest
expense for 2008 was $679,000, a decrease of $260,000 from $942,000 in 2007.
The decrease in interest expense was due primarily to charges related to the
refinancing of the credit facility that were incurred in 2007 in connection
with the ITC acquisition and lower interest rates in effect on lower
outstanding debt in 2008, offset in part by decreased interest income as a
result of the lower balance of the note receivable.
Equity in Earnings
of Partnerships
The equity in
earnings of partnerships for 2008 was $4,000.
The Company
recorded a $145,000 decrease in the carrying amount of its investment in the
HIMPP for 2008, reflecting amortization of the patents and other intangibles
and the Companys portion of the partnerships operating results for the year
ended December 31, 2008.
The Company
recorded a $141,000 increase in the carrying amount of Tibbetts investment in
a joint venture, reflecting the Companys portion of the joint ventures
operating results for year ended December 31, 2008.
Other Expenses
In 2008, other
expense was $36,000 compared to $80,000 in 2007. The other expense for 2008 and
2007 primarily related to the loss on foreign currency exchange.
Income Taxes
Income taxes
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Income tax
expense
|
|
$
|
265
|
|
$
|
174
|
|
Percentage
of pre-tax income
|
|
|
16.8
|
%
|
|
9.2
|
%
|
The expense in
2008 and 2007 was primarily due to foreign taxes on German and Singapore
operations. On February 22, 2007, the Company received approval from the
Singapore Ministry of Trade and Industry to lower the effective tax rate in
Singapore from 20% to 13%. This change was retroactive to September 2003. As
such a $106,000 benefit was recognized in the first quarter of 2007.
Discontinued
Operations
We recorded a
loss from discontinued operations (electronic business segment) as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Income
(loss) from discontinued Electronics Business Segment
|
|
$
|
(277
|
)
|
$
|
155
|
|
The 2008 net
loss of $(277,000), or $(0.05) per diluted share, was primarily due to loss in
operations. The 2007 net income of $155,000, or $0.03 per diluted share, was
primarily due to a gain in operations.
Liquidity and Capital
Resources
Our primary sources of cash have been cash flows from operations, bank
borrowings, and other financing transactions such as capital leases. For the
last three years, cash has been used for repayments of bank borrowings, the
Datrix and Tibbetts acquisitions, purchases of equipment, and working capital
to support research and development.
29
Table of Contents
As of December 31, 2009, we had approximately $0.4 million of cash on
hand. Sources of our cash for the year ended December 31, 2009 have been from
our operations, as described below.
Consolidated
net working capital decreased to $8.5 million at December 31, 2009 from $10.6
million at December 31, 2008. Our cash flows from operating, investing and
financing activities, as reflected in the statement of cash flows at December
31, are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Cash provided (used) by:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1,845
|
|
$
|
2,452
|
|
$
|
3,534
|
|
Investing activities
|
|
|
(2,484
|
)
|
|
(98
|
)
|
|
(7,060
|
)
|
Financing activities
|
|
|
783
|
|
|
(2,480
|
)
|
|
3,740
|
|
Effect of exchange rate changes on cash
|
|
|
(8
|
)
|
|
(6
|
)
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
122
|
|
$
|
(132
|
)
|
$
|
221
|
|
Operating Activities
.
The most significant items that contributed to the $1.8 million of cash
provided by continuing operations were depreciation and amortization of $2.5
million, goodwill write-off of $0.7, stock option expense of $0.6 million and
changes in operating assets and liabilities of $1.7 million, partially offset
by a net loss of $3.9 million. The change in operating assets and liabilities
was primarily due to decreases in accounts receivable and inventories and an
increase in accounts payable, partially offset by decreases in accrued
expenses.
Investing Activities
.
The $2.5 million of cash used by investing activities primarily consisted of
the $1.3 million associated with the acquisition of Datrix and $1.5 million for
the purchases of property, plant and equipment.
Financing Activities
.
Net cash provided by financing activities of $0.8 million primarily relates to
proceeds received under our PrivateBank credit facility, partially offset by
subsequent payments made against the term note and domestic revolver.
Cash generated
from operations may be affected by a number of factors. See Forward Looking
Statements and Item 1A: Risk Factors contained in this Form 10-K for a
discussion of some of the factors that can negatively impact the amount of cash
we generate from our operations.
We had the
following bank arrangements at December 31, (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Total
availability under existing facilities
|
|
$
|
12,376
|
|
$
|
13,243
|
|
|
|
|
|
|
|
|
|
Borrowings
and commitments:
|
|
|
|
|
|
|
|
Domestic
credit facility
|
|
|
4,450
|
|
|
3,000
|
|
Domestic
term loans
|
|
|
3,250
|
|
|
2,756
|
|
Foreign
overdraft and letter of credit facility
|
|
|
678
|
|
|
605
|
|
Capital
leases
|
|
|
|
|
|
1,330
|
|
Total borrowings and commitments
|
|
|
8,378
|
|
|
7,691
|
|
Remaining
availability under existing facilities
|
|
$
|
3,998
|
|
$
|
5,552
|
|
Domestic Credit
Facilities
The Company and its domestic
subsidiaries entered into a new three year credit facility with The PrivateBank
and Trust Company on August 13, 2009 to finance a portion of the Datrix
acquisition and to replace the prior credit facilities with Bank of America,
including capital leases. The new credit facility provides for:
|
|
|
|
§
|
an
$8,000,000 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 the Companys
eligible trade receivables, eligible inventory, and eligible equipment less a
reserve; and
|
|
|
|
|
§
|
a $3,500,000
term loan.
|
30
Table of Contents
Loans under the credit
facility are secured by a security interest in substantially all of the assets
of the Company and its domestic subsidiaries, including a pledge of the stock
of its domestic subsidiaries. Loans under the credit facility bear interest at
varying rates based on predefined levels of the Companys leverage ratio, at
the option of the Company, at:
|
|
|
|
§
|
the London
InterBank Offered Rate (LIBOR) plus 3.00% - 4.00% depending on the
Companys leverage ratio, 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%, plus 0.25% - 1.25% depending on the Companys leverage ratio.
|
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.
IntriCon is also required to pay 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.
Weighted average interest on
our domestic credit facilities (including prior facilities) was 4.07%, 5.51%
and 7.82% for 2009, 2008 and 2007, respectively.
The outstanding principal
balance of the term loan is payable in quarterly installments of varying
amounts ranging from $168,750 to $187,500. Any remaining principal and accrued
interest is payable on August 13, 2012. IntriCon is also required to use 100%
of the net cash proceeds of certain asset sales (excluding inventory and
certain other dispositions), sale of capital securities or issuance of debt to
pay down the term loan.
The total remaining
availability on the domestic revolving credit facility was approximately $2,821,000
at December 31, 2009. The principal balance of the term loan was $3,250,000 at
December 31, 2009.
Upon termination of the Bank
of America credit facility, the Company was required to settle the outstanding
obligations of $121,000 for the liability related to its interest rate swap
agreement with Bank of America and recognize the corresponding charge of
$121,000 in interest expense which was previously included in other
comprehensive income. In addition the Company expensed the remaining deferred
financing costs of $86,000 related to the Bank of America facility, which is
included in interest expense.
The borrowers
are subject to various covenants under the credit facility, including financial
covenants relating to minimum EBITDA, funded debt to EBITDA, fixed charge
coverage ratio and capital expenditure financial covenants. 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 cash or otherwise, to any of its
equityholders; purchase or redeem any of its equity interests or any warrants,
options or other rights to equity; 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; make payment on or changes to any subordinated debt; 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. In March 2010, the Company entered into an amended
agreement with The PrivateBank to waive certain covenant violations at December
31, 2009 and January 31, 2010 and reset certain covenant thresholds defined in
the original agreement.
31
Table of Contents
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 performance of obligations under certain
subordinated debt, which includes the Companys note payable to the former
shareholder of Datrix (including actual or attempted termination of a
subordination agreement with the former shareholder of Datrix); 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; a breach by a borrower under certain material agreements, the
result of which breach is the suspension of the counterpartys performance
thereunder, delivery of a notice of acceleration or termination of such
agreement; 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; any divestiture of assets or stock of a subsidiary constituting a
substantial portion of borrowers assets; the occurrence of a change in control
(as defined in the credit facility); certain collateral impairments; a
contribution failure with respect to any employee benefit plan that gives rise
to a lien under ERISA; and the occurrence of any event which lender determines
could be reasonably expected to have a material adverse effect (as defined in
the credit facility).
The prior Bank of America credit facility provided 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 depended 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 Companys May,
2007 acquisition of Tibbetts.
|
Loans under the prior credit facility were 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 were jointly and
severally liable for all borrowings under the credit facility.
The outstanding principal balance of the Bank of America term loan was
$2,756,000 at December 31, 2008. In 2008, we used proceeds of $1,013,000 from
the equipment sale-leaseback described below to pay down the term loan.
The outstanding principal balance of the Bank of America revolving
credit facility was $3,000,000 at December 31, 2008. The total remaining
availability on the revolving credit facility was approximately $4,349,000 at
December 31, 2008.
In June 2008, the Company completed a sale-leaseback of machinery and
equipment with Bank of America. The transaction generated proceeds of
$1,098,000, of which $1,013,000 was used to pay down the domestic term loan.
The facility was repaid on August 13, 2009 with proceeds borrowed under the new
PrivateBank facility.
Foreign Credit Facility
In addition to its domestic credit facilities, the Companys
wholly-owned subsidiary, IntriCon, 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 5.31%, 5.84% and
6.36% for 2009, 2008 and 2007, respectively. The outstanding balance was
$678,000 and $605,000 at December 31, 2009 and 2008, respectively. The total
remaining availability on the international senior secured credit agreement was
approximately $1,177,000 and $1,203,000 at December 31, 2009 and 2008,
respectively.
32
Table of Contents
Datrix Note
As discussed above, in connection with the Companys acquisition of Datrix,
the Company issued a subordinated, non-negotiable promissory note dated August
13, 2009 to the former shareholder of Datrix, in the principal amount of $1.05
million. The Datrix note bears interest at an annual rate of 6%, provided,
however, that upon the occurrence and during the continuance of an event of
default (as defined in the Datrix note), at the holders option, the
outstanding principal amount under the Datrix note will bear interest at an
annual rate of 10%. The principal amount of the Datrix note is due and payable
in three equal annual installments of $350,000 beginning on August 13, 2010
plus accrued and unpaid interest. Amounts outstanding under the Datrix note
will automatically become immediately due and payable upon the sale of assets of
the Company attributable to 90% or more of the Companys consolidated sales
volume or upon the direct or indirect acquisition of beneficial ownership of
50% or more of the combined voting power of the Companys then-outstanding
voting securities. Amounts owed under the Datrix note are unsecured and
subordinated to the Companys obligations pursuant to the credit facility
discussed above.
The Company has the right to withhold and set off against amounts due
under the Datrix note for certain claims for indemnification pursuant to the
agreement governing the Companys acquisition of Datrix. Upon the occurrence
and during the continuance of an event of default, the holder may, among other
things, declare the entire unpaid principal balance of the Datrix note,
together with all accrued interest, immediately due and payable. Immediate
acceleration of such amounts will occur automatically in the event of the
Companys insolvency or bankruptcy. Events of default include, among other
things, the Companys failure to pay amounts due under the Datrix note and such
failure continues for 10 days; the insolvency or bankruptcy of the Company; the
Companys liquidation, winding up, dissolution, or suspension of operations in
excess of 90 days; and the occurrence and continuation of an event of default
as set forth in the Companys credit facility.
We believe that funds expected to be generated from operations, the
available borrowing capacity through our revolving credit loan facilities and
the control of capital spending will be sufficient to meet our anticipated cash
requirements for operating needs for at least the next 12 months. If, however,
we do not generate sufficient cash from operations, or if we incur additional
unanticipated liabilities, we may be required to seek additional financing or
sell equity or debt on terms which may not be as favorable as we could have
otherwise obtained. No assurance can be given that any refinancing, additional
borrowing or sale of equity or debt will be possible when needed or that we
will be able to negotiate acceptable terms. In addition, our access to capital
is affected by prevailing conditions in the financial and equity capital
markets, as well as our own financial condition. While management believes that
we will be able to meet our liquidity needs for at least the next 12 months, no
assurance can be given that we will be able to do so.
Contractual Obligations
The following table represents our contractual obligations and
commercial commitments, excluding interest expense, as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Period
|
|
Contractual
Obligations
|
|
Total
|
|
Less
than
1 Year
|
|
1-3
Years
|
|
4-5
Years
|
|
More
than
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic credit facility
|
|
$
|
4,450,000
|
|
$
|
|
|
|
4,450,000
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic term loan
|
|
|
3,250,000
|
|
|
687,000
|
|
|
2,563,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Note Payable
|
|
|
1,050,000
|
|
|
350,000
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign overdraft and
letter of credit facility
|
|
|
678,000
|
|
|
678,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership payable
|
|
|
760,000
|
|
|
260,000
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dynamic Hearing license
payments
|
|
|
525,000
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension other post
retirement benefit obligations
|
|
|
1,523,000
|
|
|
223,000
|
|
|
452,000
|
|
|
456,000
|
|
|
392,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
11,000
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4,078,000
|
|
|
1,148,000
|
|
|
1,469,000
|
|
|
796,000
|
|
|
665,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations
|
|
$
|
16,325,000
|
|
$
|
3,882,000
|
|
$
|
10,134,000
|
|
$
|
1,252,000
|
|
$
|
1,057,000
|
|
33
Table of Contents
There are certain provisions in the underlying contracts that could
accelerate our contractual obligations as noted above.
Foreign Currency Fluctuation
Generally, the effect of changes in foreign currencies on our results
of operations is partially or wholly offset by our ability to make
corresponding price changes in the local currency. From time to time, the
impact of fluctuations in foreign currencies may have a material effect on the
financial results of the Company. Foreign currency transaction amounts included
in the statements of operation include losses of $13,000, $77,000 and $112,000
in 2009, 2008 and 2007, respectively. See Note 11 to the Companys consolidated
financial statements included herein.
Off-Balance Sheet Obligations
We had no material off-balance sheet obligations as of December 31,
2009.
Related Party Transactions
For a discussion of related party transactions, see Note 15 to the
Companys consolidated financial statements included herein.
Litigation
For a discussion of litigation, see Item 3. Legal Proceedings and
Note 14 to the Companys consolidated financial statements included herein.
New Accounting Pronouncements
See New Accounting Pronouncements set forth in Note 1 of the Notes to
the Consolidated Financial Statements under Item 8 of this Annual Report on
Form 10-K, for information pertaining to recently adopted accounting standards
or accounting standards to be adopted in the future.
Critical Accounting Policies and Estimates
The significant accounting policies of the Company are described in
Note 1 to the consolidated financial statements and have been reviewed with the
audit committee of our Board of Directors. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period.
Certain accounting estimates and assumptions are particularly sensitive
because of their importance to the consolidated financial statements and
possibility that future events affecting them may differ markedly. The
accounting policies of the Company with significant estimates and assumptions
are described below.
Revenue Recognition
Our 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, we may elect in certain circumstances
to accept returns for product. We record 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.
34
Table of Contents
In general, we warrant our 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 our warranty costs have historically been within our
expectations, we cannot guarantee that we will continue to experience the same
warranty return rates or repair costs that we have experienced in the past.
Accounts Receivable
Reserves
This reserve is an estimate of the amount of accounts receivable that
are uncollectible. The reserve is based on a combination of specific customer
knowledge, general economic conditions and historical trends. Management
believes the results could be materially different if economic conditions
change for our customers.
Inventory Valuation
Inventory is recorded at the lower of our cost or market value. Market
value is an estimate of the future net realizable value of our inventory. It is
based on historical trends, product life cycles, forecast of future inventory
needs and on-hand inventory levels. Management believes reserve levels could be
materially affected by changes in technology, our customer base, customer
needs, general economic conditions and the success of certain Company sales
programs.
Discontinued
Operations
Included in discontinued operations is the Companys non-core
electronics segment. On December 29, 2009, the Companys board of directors
approved a plan to divest the assets of the non-core electronics segment and
eliminate personnel and support costs associated with this segment. The Company
concluded the segment is being held for sale at December 31, 2009 and,
accordingly, the Company has restated the previously reported financial results
of the non-core electronics segment to report the net results as a separate
line in the consolidated statements of operations as income (loss) from
discontinued operations, net for all periods presented, and the assets and
liabilities of this segment on consolidated balance sheets have separately
classified as Assets/Liabilities of discontinued operations. The Company
elected to not allocate consolidated interest expense to the discontinued operations
where the debt is not directly attributed to or related to the discontinued
operations. All of the financial information in the consolidated financial
statements and notes to the consolidated financial statements has been revised
to reflect only the results of continuing operations.
Goodwill and
Intangible Assets
Considerable management judgment is necessary in estimating future cash
flows and other factors affecting the valuation of goodwill and intangible
assets, including the operating and macroeconomic factors that may affect them.
The Company uses historical financial information, internal plans and
projections and industry information in making such estimates. The Company did
not recognize any impairment charges for goodwill or intangible assets during
fiscal 2009, 2008 or 2007. Although the Company had an operating loss for
fiscal 2009, management believes that based on cost reduction actions and
estimated revenue growth and margin improvement initiatives, that the Company
will have cash flows that support the value of goodwill and intangible assets.
While the Company currently believes the expected cash flows from these assets
exceeds the carrying amount, materially different assumptions regarding future
performance and discount rates could result in future impairment losses. In
particular, if the Company no longer believes it will achieve its long-term
projected sales or operating expenses, the Company may conclude in connection
with any future impairment tests that the estimated fair value of its goodwill,
including intangible assets, are less than the book value and recognize an
impairment charge. Such impairment would adversely affect the Companys
earnings.
35
Table of Contents
Long-lived Assets
The carrying value of long-lived assets is periodically assessed to
insure their carrying value does not exceed their estimated net realizable
future value. This assessment includes certain assumptions related to future
needs for the asset to help generate future cash flow. Changes in those
assessments, future economic conditions or technological changes could have a
material adverse impact on the carrying value of these assets.
Deferred Taxes
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 and projected future taxable income in making this
assessment. Actual future operating results, as well as changes in our future
performance, could have a material adverse impact on the valuation reserves.
Employee Benefit
Obligations
We provide retirement and health care insurance for certain domestic
retirees and employees. We measure the costs of our obligation based on our
best estimate. 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. We determine assumptions about the discount
rate, the expected rate of return on plan assets and the future rate of
compensation increases. The actuarial models also use assumptions on
demographic factors such as retirement, mortality and turnover. Changes in
actuarial assumptions could vary materially from actual results due to economic
events and different rates of retirement, mortality and withdrawal.
|
|
ITEM 7A.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
Our consolidated cash flows and earnings are subject to fluctuations
due to changes in foreign currency exchange rates and interest rates.
Foreign Currency Risk
We attempt to limit our exposure to changing foreign currency exchange
rates through operational and financial market actions. We do not hold
derivatives for trading purposes.
We manufacture and sell our products in a number of locations around
the world, resulting in a diversified revenue and cost base that is exposed to
fluctuations in European and Asian currencies. This diverse base of foreign
currency revenues and costs serves to create a hedge that limits our net
exposure to fluctuations in these foreign currencies.
Short-term exposures to changing foreign currency exchange rates are
occasionally managed by financial market transactions, principally through the
purchase of forward foreign exchange contracts (with maturities of six months
or less) to offset the earnings and cash flow impact of the nonfunctional
currency denominated receivables and payables relating to select contracts. The
decision by management to hedge any such transaction is made on a case-by-case
basis. Foreign exchange forward contracts are denominated in the same currency
as the receivable or payable being covered, and the term and amount of the
forward foreign exchange contract substantially mirrors the term and amount of
the underlying receivable or payable. The receivables and payables being
covered arise from bank debt, trade and intercompany transactions of and among
our foreign subsidiaries. At December 31, 2009, we did not have any forward
foreign exchange contracts outstanding. We cannot assure you that foreign
currency fluctuations will not have a material adverse impact on our financial
condition and results of operations.
36
Table of Contents
All assets and
liabilities of foreign operations with foreign functional currency 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 losses of $13,000, $77,000 and $112,000 in 2009, 2008 and 2007,
respectively. Based on our 2009 results of operations, if foreign currency
exchange rates were to strengthen/weaken by 25% against the U.S. dollar, we
would expect a resulting pre-tax loss/gain of approximately $1.6 million.
For more
information regarding foreign currency risks, see Foreign Currency Fluctuation
Item 7 on page 32 of this Annual Report on Form 10-K.
Interest Rate Risk
At December
31, 2009, we had $8.4 million in outstanding variable rate borrowings. A
material change in interest rates could adversely affect our operating results
and cash flows. A 100 basis-point increase in interest rates would increase our
annual interest expense by $10,000 for each $1.0 million of variable debt
outstanding for the entire year. Based on our average variable rate borrowings
outstanding in 2009, a 100 basis-point increase in interest rates would have
resulted in additional interest expense of $84,000.
The Company
uses derivative financial instruments in the form of interest rate swaps 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.
Upon
termination of the Bank of America credit facility, the Company was required to
settle the outstanding obligations of $121,000 for the liability related to its
interest rate swap agreement with Bank of America and recognize the
corresponding charge of $121,000 in interest expense which was previously
included in other comprehensive income.
In conjunction
with the new credit facility the Company entered into an interest rate swap
agreement with The Private Bank and Trust Company. At December 31, 2009 the
Company had a United States Dollar denominated interest rate swap outstanding
which effectively fixed the interest rate on floating rate debt, exclusive of
lender spreads, at 2.75% for a notional principal amount of $4,000,000 through
December 2009. The derivative net loss on this contract recorded in accumulated
other comprehensive loss at December 31, 2009 was $35,000.
37
Table of Contents
|
|
ITEM 8.
|
Financial Statements and
Supplementary Data
|
Managements Report on Internal Control over
Financial Reporting
Management of IntriCon Corporation and its subsidiaries (the Company)
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) of the
Securities Exchange Act of 1934. The Companys internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. The
Companys internal control over financial reporting includes those policies and
procedures that (1) pertain to maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of the effectiveness of internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys
internal control over financial reporting as of December 31, 2009, using
criteria set forth in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, the Companys management believes that, as of December 31, 2009,
the Companys internal control over financial reporting was effective based on
those criteria.
This annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the
Companys registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
There were no changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the most recent fiscal quarter covered by this report that would
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
38
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the
Shareholders, Audit Committee and Board of Directors
IntriCon Corporation and Subsidiaries
Arden Hills, Minnesota
We have audited the accompanying consolidated balance sheets of
IntriCon Corporation and Subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders equity and
comprehensive income (loss) and cash flows for each of the years in the three-year
period ended December 31, 2009. These consolidated financial statements are the
responsibility of the companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included
consideration of its internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IntriCon
Corporation and Subsidiaries as of December 31, 2009 and 2008 and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
|
/s/ Baker
Tilly Virchow Krause, LLP
|
|
Minneapolis,
Minnesota
|
March 15,
2010
|
39
Table of Contents
IntriCon
Corporation
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
51,675,653
|
|
$
|
57,908,096
|
|
$
|
59,669,342
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales
|
|
|
40,624,599
|
|
|
43,250,704
|
|
|
44,244,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,051,054
|
|
|
14,657,392
|
|
|
15,425,213
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
2,961,720
|
|
|
3,262,441
|
|
|
3,397,891
|
|
General and administrative expense
|
|
|
5,374,126
|
|
|
5,849,735
|
|
|
5,872,932
|
|
Research and development expense
|
|
|
3,344,939
|
|
|
3,247,767
|
|
|
3,088,770
|
|
Total operating expenses
|
|
|
11,680,785
|
|
|
12,359,943
|
|
|
12,359,593
|
|
Operating income (expense)
|
|
|
(629,731
|
)
|
|
2,297,449
|
|
|
3,065,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(836,592
|
)
|
|
(678,567
|
)
|
|
(942,033
|
)
|
Equity in earnings (loss) of partnerships
|
|
|
(149,596
|
)
|
|
(3,652
|
)
|
|
(157,500
|
)
|
Other expense, net
|
|
|
(219,883
|
)
|
|
(36,097
|
)
|
|
(79,764
|
)
|
Income (loss) from continuing operations before income taxes and
discontinued operations
|
|
|
(1,835,802
|
)
|
|
1,579,133
|
|
|
1,886,323
|
|
Income tax (expense) benefit
|
|
|
33,819
|
|
|
(264,762
|
)
|
|
(173,849
|
)
|
Income (loss) before discontinued operations
|
|
|
(1,801,983
|
)
|
|
1,314,371
|
|
|
1,712,474
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
|
(2,118,538
|
)
|
|
(276,770
|
)
|
|
154,764
|
|
Net income (loss)
|
|
$
|
(3,920,521
|
)
|
$
|
1,037,601
|
|
$
|
1,867,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.34
|
)
|
$
|
.25
|
|
$
|
.33
|
|
Discontinued operations
|
|
|
(.39
|
)
|
|
(.05
|
)
|
|
.03
|
|
Net income (loss)
|
|
$
|
(.73
|
)
|
$
|
.20
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.34
|
)
|
$
|
.24
|
|
$
|
.31
|
|
Discontinued operations
|
|
|
(.39
|
)
|
|
(.05
|
)
|
|
.03
|
|
Net income (loss)
|
|
$
|
(.73
|
)
|
$
|
.19
|
|
$
|
.34
|
|
See accompanying notes to the consolidated financial statements.
40
Table of Contents
Consolidated Balance Sheets
At December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
385,055
|
|
$
|
249,396
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
405,745
|
|
|
385,916
|
|
|
|
|
|
|
|
|
|
Accounts receivable, less allowance for doubtful accounts of $226,000
at December 31, 2009 and $332,000 at December 31, 2008
|
|
|
7,083,694
|
|
|
8,611,636
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
8,220,996
|
|
|
8,012,988
|
|
|
|
|
|
|
|
|
|
Refundable income taxes
|
|
|
63,676
|
|
|
27,645
|
|
|
|
|
|
|
|
|
|
Note receivable from sale of discontinued operations
|
|
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
815,742
|
|
|
610,531
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
|
1,139,813
|
|
|
1,899,809
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,114,721
|
|
|
20,022,921
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
35,516,164
|
|
|
34,360,449
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
28,725,359
|
|
|
26,992,023
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
6,790,805
|
|
|
7,368,426
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
9,716,841
|
|
|
7,581,107
|
|
|
|
|
|
|
|
|
|
Investment in partnerships
|
|
|
1,237,178
|
|
|
1,386,774
|
|
|
|
|
|
|
|
|
|
Other assets of discontinued operations
|
|
|
141,877
|
|
|
1,256,141
|
|
|
|
|
|
|
|
|
|
Other assets, net
|
|
|
1,361,355
|
|
|
1,846,448
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,362,777
|
|
$
|
39,461,817
|
|
See accompanying notes to the consolidated financial statements.
41
Table of Contents
At December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checks written in excess of cash
|
|
$
|
101,416
|
|
$
|
199,189
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
1,708,839
|
|
|
1,503,762
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
3,637,329
|
|
|
2,797,616
|
|
|
|
|
|
|
|
|
|
Deferred gains
|
|
|
110,084
|
|
|
120,478
|
|
|
|
|
|
|
|
|
|
Partnership payable
|
|
|
260,000
|
|
|
260,000
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
926,409
|
|
|
763,968
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
2,866,584
|
|
|
3,775,684
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,610,661
|
|
|
9,420,697
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
7,729,797
|
|
|
6,187,923
|
|
|
|
|
|
|
|
|
|
Other post-retirement benefit obligations
|
|
|
756,000
|
|
|
760,608
|
|
|
|
|
|
|
|
|
|
Partnership payable
|
|
|
500,000
|
|
|
760,000
|
|
|
|
|
|
|
|
|
|
Dynamic Hearing license agreement payable
|
|
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
128,753
|
|
|
155,273
|
|
|
|
|
|
|
|
|
|
Accrued pension liability
|
|
|
543,194
|
|
|
578,388
|
|
|
|
|
|
|
|
|
|
Deferred gains
|
|
|
605,463
|
|
|
761,456
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
19,873,868
|
|
|
19,149,345
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (notes 7 and 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
Common
shares, $1.00 par value per share; 20,000,000 shares
authorized; 5,985,862 and 5,858,006 shares issued; 5,470,108 and 5,342,252
outstanding at December 31, 2009 and 2008, respectively
|
|
|
5,985,862
|
|
|
5,858,006
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
14,986,840
|
|
|
14,121,772
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit)
|
|
|
(2,005,187
|
)
|
|
1,915,334
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(213,528
|
)
|
|
(317,562
|
)
|
|
|
|
|
|
|
|
|
Less: 515,754 common shares held in treasury, at cost
|
|
|
(1,265,078
|
)
|
|
(1,265,078
|
)
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
17,488,909
|
|
|
20,312,472
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,362,277
|
|
$
|
39,461,817
|
|
See accompanying notes to the consolidated financial statements.
42
Table of Contents
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,920,521
|
)
|
$
|
1,037,601
|
|
|
1,867,238
|
|
Adjustments to
reconcile net income to net cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Loss on
impairment of long lived assets and goodwill
|
|
|
910,331
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
2,470,156
|
|
|
2,425,704
|
|
|
2,127,568
|
|
Stock-based
compensation
|
|
|
560,571
|
|
|
525,972
|
|
|
280,376
|
|
Gains on sale of
property and equipment
|
|
|
(51,386
|
)
|
|
(1,900
|
)
|
|
(3,858
|
)
|
Deferred taxes
|
|
|
(26,520
|
)
|
|
66,000
|
|
|
10,000
|
|
Change in
deferred gain
|
|
|
(166,387
|
)
|
|
(110,084
|
)
|
|
(110,084
|
)
|
Allowance for
doubtful accounts
|
|
|
9,131
|
|
|
130,134
|
|
|
(11,670
|
)
|
Allowance for
note receivable
|
|
|
|
|
|
(225,000
|
)
|
|
|
|
Equity in
earnings of partnerships including impact of amortization expense
|
|
|
149,596
|
|
|
3,652
|
|
|
157,500
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,762,565
|
|
|
(1,247,981
|
)
|
|
1,242,457
|
|
Inventories
|
|
|
729,219
|
|
|
949,367
|
|
|
(4,607
|
)
|
Other assets
|
|
|
201,025
|
|
|
507,371
|
|
|
(476,464
|
)
|
Accounts payable
|
|
|
743,456
|
|
|
(822,795
|
)
|
|
(1,966,327
|
)
|
Accrued expenses
|
|
|
(1,508,988
|
)
|
|
(553,654
|
)
|
|
445,586
|
|
Customers
advance payments on contracts
|
|
|
|
|
|
(190,062
|
)
|
|
10,229
|
|
Other
liabilities
|
|
|
(17,494
|
)
|
|
(42,498
|
)
|
|
(34,631
|
)
|
Net cash
provided by continuing operations
|
|
|
1,844,754
|
|
|
2,451,827
|
|
|
3,533,313
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of
property, plant and equipment
|
|
|
(1,466,700
|
)
|
|
(1,473,563
|
)
|
|
(2,763,217
|
)
|
Cash paid for
acquisitions, net of cash received
|
|
|
(1,342,171
|
)
|
|
|
|
|
(4,606,251
|
)
|
Proceeds from
dividend received from joint venture
|
|
|
|
|
|
200,000
|
|
|
|
|
Proceeds from
sales of property, plant and equipment
|
|
|
100,000
|
|
|
1,100,091
|
|
|
9,169
|
|
Proceeds from
note receivable
|
|
|
225,000
|
|
|
75,000
|
|
|
300,000
|
|
Net cash used by
investing activities
|
|
|
(2,483,961
|
)
|
|
(98,472
|
)
|
|
(7,060,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
stock purchases and exercise of stock options
|
|
|
151,946
|
|
|
236,633
|
|
|
872,221
|
|
Repayments of
short-term borrowings
|
|
|
|
|
|
(370,760
|
)
|
|
|
|
Proceeds from
long term borrowings
|
|
|
17,813,248
|
|
|
14,752,253
|
|
|
9,483,583
|
|
Repayments of
long-term debt
|
|
|
(17,179,618
|
)
|
|
(16,664,066
|
)
|
|
(6,093,137
|
)
|
Payments of
partnership payable
|
|
|
|
|
|
(260,000
|
)
|
|
(260,000
|
)
|
Change in
restricted cash
|
|
|
(8,598
|
)
|
|
(2,710
|
)
|
|
(4,983
|
)
|
Change in checks
written in excess of cash
|
|
|
6,334
|
|
|
(170,945
|
)
|
|
(257,842
|
)
|
Net cash
provided (used) by financing activities
|
|
|
783,312
|
|
|
(2,479,595
|
)
|
|
3,739,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash
|
|
|
(8,536
|
)
|
|
(5,611
|
)
|
|
8,461
|
|
Increase
(decrease) in cash
|
|
|
135,659
|
|
|
(131,851
|
)
|
|
221,317
|
|
Cash beginning
of year
|
|
|
249,396
|
|
|
381,247
|
|
|
159,930
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of year
|
|
$
|
385,055
|
|
$
|
249,396
|
|
$
|
381,247
|
|
See accompanying notes to the consolidated financial statements.
43
Table of Contents
Consolidated
Statements of Shareholders Equity and Comprehensive Income (Loss)
Years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Number
of
Shares
|
|
Common
Stock
$
Amount
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Comprehensive
Income
(loss)
|
|
Treasury
Stock
|
|
Total
Shareholders
Equity
|
|
Balance December 31, 2006
|
|
|
5,706,235
|
|
$
|
5,706,235
|
|
$
|
12,339,988
|
|
$
|
(989,505
|
)
|
$
|
(184,674
|
)
|
|
|
|
$
|
(1,265,078
|
)
|
$
|
15,606,966
|
|
Exercise of stock options
|
|
|
106,502
|
|
|
106,502
|
|
|
765,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
872,221
|
|
Shares issued in lieu of cash for services
|
|
|
754
|
|
|
754
|
|
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,120
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
280,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280,376
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
1,867,238
|
|
|
|
|
$
|
1,867,238
|
|
|
|
|
|
1,867,238
|
|
Change in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,215
|
)
|
|
(79,215
|
)
|
|
|
|
|
(79,215
|
)
|
Translation gain, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,489
|
|
|
43,489
|
|
|
|
|
|
43,489
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,831,512
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
5,813,491
|
|
|
5,813,491
|
|
|
13,391,449
|
|
|
877,733
|
|
|
(220,400
|
)
|
|
|
|
|
(1,265,078
|
)
|
|
18,597,195
|
|
Exercise of stock options
|
|
|
3,400
|
|
|
3,400
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,300
|
|
Shares issued under the Employee Stock Purchase Plan
|
|
|
34,213
|
|
|
34,213
|
|
|
172,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,083
|
|
Shares issued in lieu of cash for services
|
|
|
1,902
|
|
|
1,902
|
|
|
10,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,233
|
|
Shares issued under the Non-employee Director and Exec. Officer Stock
Purchase Program
|
|
|
5,000
|
|
|
5,000
|
|
|
16,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,250
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
525,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525,972
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
1,037,601
|
|
|
|
|
$
|
1,037,601
|
|
|
|
|
|
1,037,601
|
|
Change in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,033
|
)
|
|
(57,033
|
)
|
|
|
|
|
(57,033
|
)
|
Translation gain, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,129
|
)
|
|
(40,129
|
)
|
|
|
|
|
(40,129
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
940,439
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
5,858,006
|
|
$
|
5,858,006
|
|
$
|
14,121,772
|
|
$
|
1,915,334
|
|
$
|
(317,562
|
)
|
|
|
|
$
|
(1,265,078
|
)
|
$
|
20,312,472
|
|
Shares issued for the purchase of Datrix
|
|
|
75,000
|
|
|
75,000
|
|
|
195,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,000
|
|
Shares issued under the Employee Stock Purchase Plan
|
|
|
29,516
|
|
|
29,516
|
|
|
60,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,946
|
|
Shares issued in lieu of cash for services
|
|
|
3,340
|
|
|
3,340
|
|
|
7,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,407
|
|
Shares issued under the Non-employee Director and Exec. Officer Stock
Purchase Program
|
|
|
20,000
|
|
|
20,000
|
|
|
42,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,000
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
560,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560,571
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(3,920,521
|
)
|
|
|
|
$
|
(3,920,521
|
)
|
|
|
|
|
(3,920,521
|
)
|
Change in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,648
|
|
|
101,648
|
|
|
|
|
|
101,648
|
|
Translation gain, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,386
|
|
|
2,386
|
|
|
|
|
|
2,386
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,816,487
|
)
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
|
5,985,862
|
|
$
|
5,985,862
|
|
$
|
14,986,840
|
|
$
|
(2,005,187
|
)
|
$
|
(213,528
|
)
|
|
|
|
$
|
(1,265,078
|
)
|
$
|
17,488,909
|
|
See accompanying
notes to the consolidated financial statements.
44
Table of Contents
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, we, us or our) is an international firm
engaged in designing, developing, engineering and manufacturing body-worn
devices. The Company serves the body-worn device market by designing,
developing, engineering and manufacturing micro-miniature injection-molded
plastics, microelectronics, micro-mechanical assemblies and complete
assemblies, primarily for bio-telemetry devices, medical equipment, hearing
instruments, electronics, professional audio and telecommunications devices and
computers. In addition to its operations in Minnesota, the Company has
facilities in California, Maine, Singapore, and Germany.
Basis of Presentation
In the fourth quarter of 2009, the Company
initiated its plan to divest its non-core electronics segment. This segment
consisted of the operating assets of the wholly-owned subsidiary, RTI
Electronics, located in Anaheim, California. The Company has accounted for the
plan to dispose of the subsidiaries as a discontinued operation and,
accordingly, has reclassified all of its historical financial data.
Consequently, the financial statements and footnote disclosures reflected in
continuing operations the body-worn device segment only. See further
information in Note 2.
Discontinued Operations
- Included in discontinued operations is the
Companys non-core electronics segment. On December 29, 2009, the Companys
board of directors approved a plan to divest the assets of the non-core
electronics segment and eliminate personnel and support costs associated with
this segment. The Company concluded the segment is being held for sale at
December 31, 2009 and, accordingly, the Company has restated the previously
reported financial results of the non-core electronics segment to report the
net results as a separate line in the consolidated statements of operations as
income (loss) from discontinued operations, net for all periods presented,
and the assets and liabilities of this segment on consolidated balance sheets
have separately classified as Assets/Liabilities of discontinued operations.
The Company elected to not allocate consolidated interest expense to the
discontinued operations where the debt is not directly attributed to or related
to the discontinued operations. All of the financial information in the
consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing
operations.
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. On January 1, 2010, the Company purchased the remaining 10
percent minority interest of its German subsidiary for approximately $18,000.
The non-controlling interest was immaterial for all periods presented.
Segment Disclosures
A business segment is a distinguishable component of an enterprise
that is engaged in providing an individual product or service or a group of
related products or services and that is subject to risks and returns that are
different from those of other business segments. The Companys segments have
similar economic characteristics and are similar in the nature of the products
sold, type of customers, methods used to distribute the Companys products and
regulatory environment. Management believes that the Company meets the criteria
for aggregating its operating segments of its continuing operations into a
single reporting segment.
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. Considerable management judgment is
necessary in estimating future cash flows and other factors affecting the
valuation of goodwill and intangible assets, including the operating and
macroeconomic factors that may affect them. The Company uses historical
financial information, internal plans and projections and industry information
in making such estimates. The Company did not recognize any impairment charges
for goodwill or intangible assets during fiscal 2009, 2008 or 2007. Although
the Company had an operating loss for fiscal 2009, management believes that
based on cost reduction actions and estimated revenue growth and margin
improvement initiatives, that the Company will have cash flows that supports
the value of goodwill and intangible assets. While the Company currently
believes the expected cash flows from these assets exceeds the carrying amount,
materially different assumptions regarding future performance and discount
rates could result in future impairment losses. In particular, if the Company
no longer believes it will achieve its long-term projected sales or operating
expenses, the Company may conclude in connection with any future impairment tests
that the estimated fair value of its goodwill, including intangible assets, are
less than the book value and recognize an impairment charge. Such impairment
would adversely affect the Companys earnings.
45
Table of Contents
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. Sales and use tax are reported on a net basis, excluding them
from sale and 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
The Company included 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.
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 deposits required to secure a credit facility at our Singapore
location and deposits required to fund retirement related benefits for certain
employees of foreign subsidiaries.
Accounts Receivable
The Company reviews customers credit history before extending
unsecured credit and establishes 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 $226,000 and $332,000 at December
31, 2009 and 2008, 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
from continuing operations was $1,967,000, $1,838,000, and $1,720,000 for the
years ended December 31, 2009, 2008, and 2007, respectively.
46
Table of Contents
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 Company
assesses the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. The
Company will record impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets carrying
amount. The amount of impairment loss recorded will be measured as the amount
by which the carrying value of the assets exceeds the fair value of the assets.
To date, the Company has determined that no impairment of long-lived assets
from continuing operations exists.
The
test for goodwill impairment is a two-step process, and is performed at least
annually during the Companys fourth quarter. 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 assets net
- The principal amounts included in other assets, net are a prepaid
technology fee, debt issuance costs, and a technology fee. The debt issuance
costs are being amortized over the related term of the debt on a straight-line
basis (which approximates the interest method) and are included in interest
expense and the other assets are being amortized over their estimated useful
life on a straight-line basis. Amortization expense was $260,000, $128,000, and
$65,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The
estimated amortization expense for the years ending December 31, 2010 to 2014
is as follows: 2010 - $292,000, 2011 - $223,000, 2012 - $137000, 2013 -
$74,000, 2014 - $0.
Investments in Partnerships
- Certain of the Companys investment in
equity securities are long-tem, strategic investments in companies. The Company
accounts for these investments under the equity method of accounting and
records the investment at the amount the Company paid for its initial
investment and adjusts for the Companys share of the investees income or loss
and dividends paid. The Companys investments include an investment in Hearing
Instrument Manufacturers Patent Partnership (K/S HIMPP) and a 50% interest in a
joint venture with a Swiss company as more fully described in Note 18. Equity
method of accounting partnership interests are reviewed quarterly for changes
in circumstances or the occurrence of events that suggest the Companys
investment may not be recoverable. To date there have been no impairment losses
recognized.
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 more likely than not
to be realized. 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, 2008, 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 2006-2009 and state tax returns for the fiscal year 2005-2009. 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, 2010.
47
Table of Contents
Employee Benefit Obligations
The Company provides pension and health
care insurance for certain domestic retirees and employees of its operations
discontinued in 2005. 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 and are recorded on the consolidated balance
sheet as accrued pension liability.
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 expenses the grant-date fair values of stock options
and awards ratably over the vesting period of the related share-based award.
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 for the
years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Beginning of the year
balance
|
|
$
|
100,200
|
|
$
|
136,000
|
|
$
|
104,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty expense
|
|
|
47,600
|
|
|
44,900
|
|
|
79,900
|
|
Closed warranty claims
|
|
|
(77,100
|
)
|
|
(80,700
|
)
|
|
(48,400
|
)
|
Change in estimate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of the year balance
|
|
$
|
70,700
|
|
$
|
100,200
|
|
$
|
136,000
|
|
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising
costs were $15,000, $5,000, and $47,000, for the years ended December 31, 2009,
2008, and 2007, 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 $3.3 million, $3.2 million, and $3.1 million in
2009, 2008 and 2007, respectively, are charged to expense when incurred.
The
following table sets forth development costs associated with customer funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Total cost incurred
|
|
$
|
784,000
|
|
$
|
679,000
|
|
$
|
362,000
|
|
Amount funded by customers
|
|
|
(784,000
|
)
|
|
(645,000
|
)
|
|
(281,000
|
)
|
Net expense
|
|
$
|
|
|
$
|
34,000
|
|
$
|
81,000
|
|
48
Table of Contents
Income (loss) Per Share
Basic income (loss) per share is computed
by dividing net (loss) income by the weighted average number of shares of
common stock outstanding during the year. Diluted income (loss) 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 (Loss)
Comprehensive income (loss) consists of
net income (loss), change in fair value of derivative instruments and foreign
currency translation adjustments and is presented in the consolidated statements
of shareholders equity and comprehensive income (loss).
Foreign Currency Translation and Transactions
-The Companys German subsidiary accounted for
its transactions in its functional currency, the Euro. Foreign assets and
liabilities are translated into United States dollars using the year-end
exchange rates. Equity is translated at average historical exchange rates.
Results of operations are translated using the average exchange rates
throughout the year. Translation gains or losses are accumulated as a separate
component of shareholders equity.
Derivative Financial Instruments
Information regarding our derivative
financial instruments is found in Note 17. We do not use derivative financial
instruments for speculative or trading purposes. All derivative transactions
must be linked to an existing balance sheet item or firm commitment, and the
notional amount cannot exceed the value of the exposure being hedged.
We
recognize all derivative financial instruments in the consolidated financial
statements at fair value regardless of the purpose or intent for holding the
instrument. Changes in the fair value of derivative financial instruments are
recognized periodically in shareholders equity as a component of accumulated
other comprehensive loss. Generally, changes in fair values of derivatives
accounted for as cash flow hedges, to the extent they are effective as hedges,
are recorded in accumulated other comprehensive loss, net of tax. We present
amounts used to settle cash flow hedges as financing activities in our
consolidated statements of cash flows.
New Accounting Pronouncements
In
September 2006, the FASB issued ASC 820, Fair Value Measurements and
Disclosures. This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement applies to accounting
pronouncements that require or permit fair value measurements, except for
share-based compensation transactions. This Statement was effective for
financial statements issued for fiscal years beginning after November 15, 2007,
except for non-financial assets and liabilities for which this Statement was
effective for years beginning after November 15, 2008. The adoption of this
statement was not material to the Company.
In
June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 168,
the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
.
This statement, which was adopted by the Company during fiscal 2009, modified
the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing
only two levels of GAAP, authoritative and non-authoritative accounting
literature. The FASB Accounting Standards Codification (FASB ASC), also known
collectively as the Codification, is considered the single source of
authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases by the SEC. In accordance with
this statement, all accounting references in these financial statements have
been updated, replacing SFAS references with FASB ASC references.
During
May 2009, FASB ASC 855,
Subsequent Events
was
issued. This statement requires all entities to evaluate subsequent events
through the date that the financial statements are available to be issued and
disclose in the notes the date through which the Company has evaluated
subsequent events and whether the financial statements were issued or were available
to be issued on the disclosed date. FASB ASC 855 defines two types of
subsequent events. The first type consists of events or transactions that
provide additional evidence about conditions that existed at the date of the
balance sheet and the second type consists of events that provide evidence
about conditions that did not exist at the date of the balance sheet but arose
after that date. FASB ASC 855 was adopted in the third quarter of fiscal 2009
and did not have a material impact on the Companys consolidated financial
statements. The Company determined there were no subsequent events requiring
recording or disclosure in the financial statements.
49
Table of Contents
In December 2007, the Financial Accounting Standards Board issued new
accounting guidance on business combinations and non-controlling interests in
consolidated financial statements. The new guidance revises the method of
accounting for a number of aspects of business combinations and noncontrolling
interests, including acquisition costs, contingencies (including contingent
assets, contingent liabilities and contingent purchase price), the impacts of
partial and step-acquisitions (including the valuation of net assets
attributable to non-acquired minority interests) and post-acquisition exit
activities of acquired businesses. The new guidance was effective for the
Company during our fiscal year beginning January1, 2009. The adoption of the
new guidance impacted the results of operations due to the requirement to
expense acquisition costs as incurred
On January 1, 2009, we adopted new accounting guidance on disclosures
about derivative instruments and hedging activities. The new guidance impacts
disclosures only and requires additional qualitative and quantitative
information on the use of derivatives and their impact on an entitys financial
position, results of operations and cash flows. Refer to Note 17 for additional
information regarding hedging activities.
2. DISCONTINUED OPERATIONS
In December 2009, the Companys Board of Directors authorized
management to exit the non-core electronics products segment operated by its
wholly-owned subsidiary, RTI Electronics, and divest the assets used in the
business. The decision to exit the electronics products segment was made to
allow the Company to focus on its core body-worn device segment and expected to
improve the Companys overall margins and profitability. In connection with its
decision to divest the electronics business, the Company evaluated assets for
impairment and costs of terminating employees and recorded the following: (i)
an impairment charge of $685,000 relating to goodwill, (ii) a reduction to
realizable value of $720,000 to tangible assets, and (iii) $275,000 in employee
termination costs for the year ended December 31, 2009. Additional employee
termination costs are expected to be approximately $185,000 in 2010. The
Company expects the divesture to be completed by mid-2010.
The following
table shows the results of operations of the Companys electronic products
segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
5,382
|
|
$
|
7,647
|
|
$
|
9,314
|
|
Operating
costs and expenses
|
|
|
(5,653
|
)
|
|
(7,901
|
)
|
|
(9,116
|
)
|
Loss on
impairment of long lived asset and goodwill
|
|
|
(910
|
)
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(1,181
|
)
|
|
(254
|
)
|
|
198
|
|
Other
expense, net
|
|
|
(923
|
)
|
|
(24
|
)
|
|
(36
|
)
|
Income
(loss) from operations before income tax benefit
|
|
|
(2,104
|
)
|
|
(278
|
)
|
|
162
|
|
Income tax
expense (benefit)
|
|
|
15
|
|
|
(1
|
)
|
|
7
|
|
Net income
(loss) from discontinued operations
|
|
$
|
(2,119
|
)
|
$
|
(277
|
)
|
$
|
155
|
|
50
Table of Contents
The following table shows the assets and liabilities of the electronic
products segment at December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5
|
|
$
|
|
|
Accounts receivable, net
|
|
|
757
|
|
|
913
|
|
Inventory, net
|
|
|
332
|
|
|
839
|
|
Other current assets
|
|
|
46
|
|
|
148
|
|
Current assets of discontinued operations
|
|
|
1,140
|
|
|
1,900
|
|
Property and equipment, net
|
|
|
116
|
|
|
544
|
|
Other assets of discontinued operations,
including goodwill of $685 as of December 31, 2008
|
|
|
26
|
|
|
712
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
351
|
|
|
352
|
|
Accrued compensation and other liabilities
|
|
|
575
|
|
|
412
|
|
Current
liabilities of discontinued operations
|
|
$
|
926
|
|
$
|
764
|
|
Information
regarding the nonrecurring fair value measurement completed in each period was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (in
thousands):
|
|
Fair Value as of
measurement
date
|
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Impairment
Charge
|
|
|
Long-lived assets and goodwill of discontinued
operations
|
|
$
|
116
|
|
$
|
|
|
$
|
|
|
$
|
116
|
|
$
|
910
|
|
3. ACQUISITION
On August 13, 2009, the Company acquired all of the outstanding stock
of Jon Barron, Inc. doing business as Datrix (Datrix), a privately held
developer, manufacturer, tester and marketer of medical devices and related
software products, based in Escondido, California. The acquisition provides the
Company entry into the ambulatory electrocardiograph (AECG) and event recording
markets.
The purchase price included a closing cash payment of $1,225,000,
issuance of 75,000 shares of common stock of the Company, valued at $270,000
based on the fair value of the common stock on August 13, 2009, and the
issuance of a promissory note in the amount of $1,050,000 bearing annual
interest at 6%. In addition, the Company paid off Datrixs outstanding line of
credit with Wells Fargo of $130,000 at closing.
The principal amount of the promissory note is payable in three
installments of $350,000 on August 13, 2010, August 13, 2011 and August 13,
2012. The note bears annual interest at 6% and is payable with each principal
as set forth above.
The assets and liabilities of Datrix 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 Datrix operations since
August 13, 2009 have been included in the accompanying consolidated statements
of operations. The allocation of the net purchase price of the acquisition
resulted in goodwill of approximately $2,136,000. The goodwill represents
operating and market synergies that the Company expects to be realized as a
result of the acquisition and future opportunities and is not tax deductible.
The purchase price allocation is based on estimates of fair values of assets
acquired and liabilities assumed. The valuation required the use of significant
assumptions and estimates. These estimates were based on assumptions the
Company believed to be reasonable.
51
Table of Contents
The purchase
price was as follows as of August 13, 2009 (amounts in thousands):
|
|
|
|
|
Cash paid to
seller at closing
|
|
$
|
1,225
|
|
Cash paid to
Wells Fargo at closing
|
|
|
130
|
|
Stock
consideration
|
|
|
270
|
|
Seller note
at close
|
|
|
1,050
|
|
Total
purchase price
|
|
$
|
2,675
|
|
The following
table summarizes the purchase price allocation for the Datrix acquisition
(amounts in thousands):
|
|
|
|
|
Cash
|
|
$
|
13
|
|
Other
current assets
|
|
|
514
|
|
Intangible
assets (weighted average life of 2.4 years)
|
|
|
125
|
|
Goodwill
Body-Worn Segment
|
|
|
2,136
|
|
Current
liabilities
|
|
|
(113
|
)
|
Total
preliminary purchase price allocation
|
|
$
|
2,675
|
|
Results from operations of Datrix are not considered material to the
financial statements for 2009. Proforma results are also not considered
material for 2009 and 2008. Acquisition costs of $277,000 were incurred during
the year ended December 31, 2009 and are included in other expenses, net in the
Consolidated Statement of Operations.
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.
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, 2007. 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, except per share amounts)
|
|
Year ended
December 31, 2007
(unaudited)
|
|
|
|
|
|
|
Net sales
|
|
$
|
61,205
|
|
|
|
|
|
|
Cost of sales
|
|
|
45,577
|
|
|
|
|
|
|
S, G & A
|
|
|
12,873
|
|
|
|
|
|
|
Interest expense
|
|
|
1,050
|
|
|
|
|
|
|
Other expense
|
|
|
242
|
|
|
|
|
|
|
Income from continuing
operations before income taxes
|
|
$
|
1,463
|
|
|
|
|
|
|
Income per share:
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
0.27
|
|
|
|
|
|
|
Weighted average number of
shares outstanding:
|
|
|
|
|
Basic
|
|
|
5,210
|
|
Diluted
|
|
|
5,520
|
|
52
Table of Contents
The pro forma income from continuing operations for the 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.
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, 2009and 2008 are
set forth below:
Long-lived Assets
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
5,893,000
|
|
$
|
6,281,000
|
|
Other
primarily Singapore
|
|
|
1,229,000
|
|
|
1,425,000
|
|
Consolidated
|
|
$
|
7,122,000
|
|
$
|
7,706,000
|
|
Long-lived assets consist primarily of property and equipment. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
36,587,193
|
|
|
41,037,167
|
|
$
|
44,248,197
|
|
Germany
|
|
|
3,335,249
|
|
|
3,749,265
|
|
|
3,413,579
|
|
China
|
|
|
2,716,100
|
|
|
2,579,948
|
|
|
2,373,276
|
|
Switzerland
|
|
|
561,004
|
|
|
994,551
|
|
|
953,982
|
|
Singapore
|
|
|
891,671
|
|
|
1,416,444
|
|
|
1,525,659
|
|
France
|
|
|
1,428,005
|
|
|
1,461,847
|
|
|
939,073
|
|
Japan
|
|
|
1,740,476
|
|
|
1,157,372
|
|
|
1,280,774
|
|
United
Kingdom
|
|
|
528,413
|
|
|
762,819
|
|
|
439,699
|
|
Turkey
|
|
|
297,664
|
|
|
446,362
|
|
|
488,539
|
|
Hong Kong
|
|
|
365,044
|
|
|
283,869
|
|
|
123,961
|
|
All other
countries
|
|
|
3,224,834
|
|
|
4,018,452
|
|
|
3,882,603
|
|
Consolidated
|
|
$
|
51,675,653
|
|
$
|
57,908,096
|
|
$
|
59,669,342
|
|
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.
One customer accounted for 22 percent, 15 percent and 13 percent of the
Companys consolidated net sales in 2009, 2008 and 2007, respectively. A second
customer accounted for 11 percent of the Companys consolidated net sales in
2009. During 2009, the top five customers accounted for approximately $24
million or 46 percent of the Companys consolidated net sales. During 2008, the
top five customers accounted for approximately $23 million or 40 percent of the
Companys consolidated net sales. During 2007, the top five customers accounted
for approximately $26 million or 44 percent of the Companys consolidated net
sales.
At December 31, 2009, two customers accounted for 16 percent and 11
percent of the Companys consolidated accounts receivable, respectively. Two
customers accounted for 13 percent and 12 percent of the Companys consolidated
accounts receivable at December 31, 2008.
53
Table of Contents
5. GOODWILL
The Company performed the required goodwill impairment test during the
years ended December 31, 2009, 2008, and 2007. 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, 2009, 2008, and 2007.
For each year, the analysis used the discounted cash flow analysis; 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 associated with the body-worn device segment were not
impaired as of December 31, 2009, 2008 and 2007.
A two-step approach is used in evaluating goodwill for impairment.
First, we compare the fair value of the reporting unit to which the goodwill is
assigned to the carrying amount of its net assets. In calculating fair value,
we use the income approach. The income approach is a valuation technique under
which we estimate future cash flows using the reporting units financial
forecast from the perspective of an unrelated market participant. Future
estimated cash flows are discounted to their present value to calculate fair
value. The discount rate used is the value-weighted average of our estimated
cost of capital derived using both known and estimated customary market
metrics. In determining the fair value of our reporting units we are required
to estimate a number of factors, including projected future operating results,
terminal growth rates, economic conditions, anticipated future cash flows, the
discount rate and the allocation of shared or corporate items. For
reasonableness, the summation of our reporting units fair values is compared to
our consolidated fair value as indicated by our market capitalization plus an
appropriate control premium. If the carrying amount of a reporting units net
assets exceeds its estimated fair value, the second step of the goodwill
impairment analysis requires us to measure the amount of the impairment loss.
An impairment loss is calculated by comparing the implied fair value of the
goodwill to its carrying amount. In calculating the implied fair value of the
goodwill, we measure the fair value of the reporting units assets and
liabilities, excluding goodwill. The excess of the fair value of the reporting
unit over the amount assigned to its assets and liabilities, excluding
goodwill, are the implied fair value of the reporting units goodwill.
The changes in the carrying amount of goodwill for the years presented
are as follows:
|
|
|
|
|
Carrying
amount at December 31, 2006
|
|
$
|
5,264,585
|
|
Goodwill
acquired during the year
|
|
|
2,288,104
|
|
Carrying
amount at December 31, 2007
|
|
|
7,552,689
|
|
Revision to prior
year purchase price allocation
|
|
|
28,418
|
|
Carrying
amount at December 31, 2008
|
|
|
7,581,107
|
|
Goodwill
acquired during the year (Note 3)
|
|
|
2,135,734
|
|
Carrying
amount at December 31, 2009
|
|
$
|
9,716,841
|
|
6. INVENTORIES
Inventories
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
Raw materials
|
|
Work-in process
|
|
Finished products
and components
|
|
Total
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
3,650,572
|
|
$
|
1,679,985
|
|
$
|
934,554
|
|
$
|
6,265,111
|
|
Foreign
|
|
|
1,515,502
|
|
|
216,577
|
|
|
223,806
|
|
|
1,955,885
|
|
Total
|
|
$
|
5,166,074
|
|
$
|
1,896,562
|
|
$
|
1,158,360
|
|
$
|
8,220,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
3,128,429
|
|
$
|
1,549,238
|
|
$
|
1,118,685
|
|
$
|
5,796,352
|
|
Foreign
|
|
|
1,609,392
|
|
|
326,874
|
|
|
280,370
|
|
|
2,216,636
|
|
Total
|
|
$
|
4,737,821
|
|
$
|
1,876,112
|
|
$
|
1,399,055
|
|
$
|
8,012,988
|
|
54
Table of Contents
7. SHORT AND LONG-TERM DEBT
Short and long term debt at December 31were as follows:
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Domestic
Asset-Based Revolving Credit Facility
|
|
$
|
4,450,000
|
|
$
|
3,000,000
|
|
Foreign
Overdraft and Letter of Credit Facility
|
|
|
678,000
|
|
|
606,000
|
|
Domestic
Term Loan
|
|
|
3,250,000
|
|
|
2,756,000
|
|
Domestic
Capital Equipment Leases
|
|
|
11,000
|
|
|
1,330,000
|
|
Note Payable
Datrix Purchase
|
|
|
1,050,000
|
|
|
|
|
Total Debt
|
|
|
9,439,000
|
|
|
7,692,000
|
|
Less:
Current maturities
|
|
|
(1,709,000
|
)
|
|
(1,504,000
|
)
|
Total Long
Term Debt
|
|
$
|
7,730,000
|
|
$
|
6,188,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Thereafter
|
|
Total
|
|
Domestic credit facility
|
|
$
|
|
|
$
|
|
|
$
|
4,450,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
4,450,000
|
|
Domestic term loan
|
|
|
688,000
|
|
|
712,000
|
|
|
1,850,000
|
|
|
|
|
|
|
|
|
|
|
|
3,250,000
|
|
Domestic Note Payable
|
|
|
350,000
|
|
|
350,000
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
1,050,000
|
|
Foreign overdraft and letter of credit facility
|
|
|
660,000
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678,000
|
|
Capital leases
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,000
|
|
Total debt
|
|
$
|
1,709,000
|
|
$
|
1,080,000
|
|
$
|
6,650,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
9,439,000
|
|
|
|
The
Company and its domestic subsidiaries entered into a new three year credit
facility with The PrivateBank and Trust Company on August 13, 2009, to
finance a portion of the Datrix acquisition and replacing the prior credit
facilities with Bank of America, including capital leases. The credit
facility provides for:
|
|
|
▪
|
an $8,000,000 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 the
Companys eligible trade receivables and eligible inventory, and eligible equipment
less a reserve; and
|
|
|
▪
|
a $3,500,000 term loan.
|
|
|
Loans
under the credit facility are secured by a security interest in substantially
all of the assets of the Company and its domestic subsidiaries including a
pledge of the stock of its domestic subsidiaries. Loans under the credit
facility bear interest at varying rates based on predefined levels of Funded
Debt / EBITDA, at the option of the Company, at:
|
|
|
▪
|
the London InterBank Offered Rate (LIBOR) plus 3.00% - 4.00%, or
|
|
|
▪
|
the base rate, which is the higher of (a) prime rate or the
Federal Funds Rate plus 0.5%, plus 0.25% - 1.25%.
|
|
|
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. IntriCon is also required to pay 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.
|
|
|
Weighted
average interest on our domestic credit facilities (including prior facilities)
was 4.07%, 5.51% and 7.82% for 2009, 2008 and 2007, respectively.
|
55
Table of Contents
The
outstanding principal balance of the term loan is payable in quarterly
installments of varying amounts ranging from $168,750 to $187,500. Any
remaining principal and accrued interest is payable on August 13, 2012.
IntriCon is also required to use 100% of the net cash proceeds of certain asset
sales (excluding inventory and certain other dispositions), sale of capital
securities or issuance of debt to pay down the term loan.
Upon
termination of the Bank of America credit facility (which was available in
2007, 2008 and through August 13, 2009), the Company was required to settle the
outstanding obligations of $121,000 for the liability related to its interest
rate swap agreement with Bank of America and recognize the corresponding
expense of $121,000 in interest expense which was previously included in other
comprehensive income. In addition the Company expensed the remaining deferred
financing costs of $86,000 related to the Bank of America facility, which is
included in interest expense.
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 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. In March 2010, the Company entered into an amendment
with The PrivateBank to waive certain covenant violations at December 31, 2009
and January 31, 2010 and reset certain covenant thresholds defined in the
original agreement.
The prior credit facility
with Bank of America provided 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 depended 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 Companys May,
2007 acquisition of Tibbetts Industries, Inc.
|
Loans
under the prior credit facility were 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 were jointly and severally
liable for all borrowings under the credit facility.
The
principal balance of the Bank of America term loan was $2,756,250 at December
31, 2008. In 2008, we used proceeds of $1,013,000 from an equipment
sale-leaseback described below to pay down the term loan.
The
outstanding balance of the Bank of America revolving credit facility was
$3,000,000 at December 31, 2008. The total remaining availability on the
revolving credit facility was approximately $4,349,000 at December 31, 2008.
In
June 2008, the Company completed a sale-leaseback of machinery and equipment
with Bank of America. The transaction generated proceeds of $1,098,000, of
which $1,013,000 was used to pay down the domestic term loan. The facility was
repaid on August 13, 2009 with proceeds borrowed under the new PrivateBank
facility.
56
Table of Contents
In
addition to its domestic credit facilities, the Companys wholly-owned
subsidiary, IntriCon, 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 through 2009. 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 5.31%, 5.84% and
6.36% for 2009, 2008 and 2007, respectively. The outstanding balance was
$678,000 and $605,000 at December 31, 2009 and 2008, respectively.
The
total remaining availability on the domestic and international revolving credit
facility was approximately $3,998,000 at December 31, 2009. The principal
balance of the term loan was $3,250,000 at December 31, 2009.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 2009, and 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages and commissions
|
|
|
|
|
$
|
1,231,026
|
|
$
|
1,826,990
|
|
Taxes,
including payroll withholdings and excluding income taxes
|
|
|
|
|
|
40,547
|
|
|
51,835
|
|
Accrued
severance benefits
|
|
|
|
|
|
|
|
|
61,639
|
|
Accrued
professional fees
|
|
|
|
|
|
314,351
|
|
|
361,580
|
|
Accrued
Dynamic Hearing strategic alliance payments
|
|
|
|
|
|
525,000
|
|
|
475,000
|
|
Other
|
|
|
|
|
|
755,660
|
|
|
998,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,866,584
|
|
$
|
3,775,684
|
|
Accrued severance benefits recorded at December 31, 2008 were paid in 2009.
9. DOMESTIC AND FOREIGN INCOME TAXES
Domestic and foreign income taxes (benefits) from continuing operations were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State
|
|
|
|
|
|
94,014
|
|
|
(18,802
|
)
|
Foreign
|
|
|
(7,299
|
)
|
|
104,748
|
|
|
182,651
|
|
|
|
|
(7,299
|
)
|
|
198,762
|
|
|
163,849
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(26,520
|
)
|
|
66,000
|
|
|
10,000
|
|
|
|
|
(26,520
|
)
|
|
66,000
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
(benefit)
|
|
$
|
(33,819
|
)
|
$
|
264,762
|
|
$
|
173,849
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
12,118
|
|
|
597,234
|
|
|
1,088,951
|
|
Domestic
|
|
|
(1,847,920
|
)
|
|
981,899
|
|
|
797,372
|
|
|
|
$
|
(1,835,802
|
)
|
$
|
1,579,133
|
|
$
|
1,886,323
|
|
57
Table of Contents
The following is a reconciliation of the statutory federal income tax
rate to the effective tax rate based on income (loss) from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Tax provision at statutory rate
|
|
|
(34.0
|
)%
|
|
34.0
|
%
|
|
34.0
|
%
|
Change in valuation allowance
|
|
|
31.2
|
|
|
(29.1
|
)
|
|
(20.9
|
)
|
Impact of permanent items, including stock
based compensation expense
|
|
|
3.0
|
|
|
14.6
|
|
|
|
|
Effect of foreign tax rates
|
|
|
(0.0
|
)
|
|
(2.4
|
)
|
|
(8.7
|
)
|
State taxes net of federal benefit
|
|
|
(0.4
|
)
|
|
3.2
|
|
|
1.4
|
|
Other
|
|
|
(1.6
|
)
|
|
(3.5
|
)
|
|
3.5
|
|
Domestic and foreign income tax rate
|
|
|
(1.8
|
)%
|
|
16.8
|
%
|
|
9.2
|
%
|
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2009, and 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carry forwards and
credits United States
|
|
$
|
5,404,789
|
|
$
|
4,738,108
|
|
Depreciation and amortization
|
|
|
578,012
|
|
|
300,650
|
|
Inventory related timing differences
|
|
|
1,057,992
|
|
|
821,884
|
|
Compensation accruals
|
|
|
675,692
|
|
|
435,123
|
|
Accruals and reserves
|
|
|
588,028
|
|
|
590,862
|
|
Other
|
|
|
455,721
|
|
|
380,508
|
|
Total deferred tax assets
|
|
|
8,760,234
|
|
|
7,267,135
|
|
Less: valuation allowance
|
|
|
8,760,234
|
|
|
7,267,135
|
|
Deferred tax assets net of valuation
allowance
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Plant and equipment, due to differences in
depreciation and capitalized interest
|
|
$
|
(128,753
|
)
|
$
|
(155,273
|
)
|
Total deferred tax liabilities
|
|
|
(128,753
|
)
|
|
(155,273
|
)
|
Net deferred tax liabilities
|
|
$
|
(128,753
|
)
|
$
|
(155,273
|
)
|
Domestic and
foreign deferred taxes were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Current
deferred asset
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Non-current
deferred liability
|
|
|
|
|
|
|
|
|
(128,753
|
)
|
|
(128,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred
tax liability
|
|
$
|
|
|
$
|
|
|
$
|
(128,753
|
)
|
$
|
(128,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
deferred asset
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Non-current
deferred liability
|
|
|
|
|
|
|
|
|
(155,273
|
)
|
|
(155,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred
tax liability
|
|
$
|
|
|
$
|
|
|
$
|
(155,273
|
)
|
$
|
(155,273
|
)
|
58
Table of Contents
The valuation allowance is maintained against deferred tax assets which
the Company has determined are not likely to be realized. The change in
valuation allowance was $1,493,000, $(867,000) and $(429,000) for the years
ended December 31, 2009, 2008 and 2007, respectively. In addition, the Company
has net operating loss carryforwards for Federal tax purposes of approximately
$15.1 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. If substantial changes in the Companys
ownership occur, there could be an annual limitation on the amount of the
carryforwards that are available to be utilized. The Company analyzes ownership
changes on a consistent basis.
The Company has not recognized a deferred tax liability relating to
cumulative undistributed earnings of controlled foreign subsidiaries in Germany
and Singapore 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. Determination of the amount
of unrecognized tax liability related to undistributed earnings in foreign
subsidiaries is not currently practical.
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 Company regularly assesses the
likelihood that the deferred tax assets will be recovered from future taxable
income. The Company considers projected future taxable income and ongoing tax
planning strategies, then records a valuation allowance to reduce the carrying
value of the net deferred taxes to an amount that is more likely than not to be
realized. Based upon the Companys assessment of all available evidence,
including the previous three years of United States based taxable income and
loss after permanent items, estimates of future profitability, and the
Companys overall prospects of future business, the Company determined that it
is more likely than not that the Company will not be able to realize a portion
of the deferred tax assets in the future. The Company will continue to assess
the potential realization of deferred tax assets on an annual basis, or an
interim basis if circumstances warrant. If the Companys actual results and
updated projections vary significantly from the projections used as a basis for
this determination, the Company may need to change the valuation allowance
against the gross deferred tax assets.
The Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant taxing authority.
The Company determined all tax positions for which the statute of limitations
remained open. As a result of the implementation, the Company did not record
any adjustment to the liability for unrecognized income tax benefits or
retained earnings. The Company does not have any unrecognized tax benefits as
of December 31, 2009 and 2008.
The Company is subject to income taxes in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. Tax regulations
within each jurisdiction are subject to the interpretation of the related tax
laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal and local, or
non-U.S. income tax examinations by tax authorities for the years starting
before 2006 and state for the years starting before 2005. There are no other
on-going or pending IRS, state, or foreign examinations.
The Company recognizes penalties and interest accrued related to
unrecognized tax benefits in income tax expense for all periods presented.
During the tax years ended December 31, 2009, 2008, and 2007 the Company has no
amounts accrued for the payment of interest and penalties.
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. In the second quarter of 2009, the
Company elected to suspend employer contributions into the defined contribution
plans. The Company contribution to these plans for 2009, 2008, and 2007 was
$74,000, $301,000, and $225,000, 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.
59
Table of Contents
The following table presents the amounts recognized in the Companys
consolidated balance sheet at December 31, 2009 and 2008 for post-retirement
medical benefits:
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Change in
Projected Benefit Obligation
|
|
|
|
|
|
|
|
Projected
benefit obligation at January 1
|
|
$
|
905,608
|
|
$
|
1,001,532
|
|
Service cost
(excluding administrative expenses)
|
|
|
|
|
|
|
|
Interest
cost
|
|
|
58,318
|
|
|
55,292
|
|
Actuarial
loss/(gain)
|
|
|
90,348
|
|
|
8,784
|
|
Participant
contributions
|
|
|
87,500
|
|
|
85,000
|
|
Benefits
paid
|
|
|
(252,500
|
)
|
|
(245,000
|
)
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at December 31
|
|
|
889,274
|
|
|
905,608
|
|
|
|
|
|
|
|
|
|
Change in
fair value of plan assets
|
|
|
|
|
|
|
|
Employer
contributions
|
|
|
165,000
|
|
|
160,000
|
|
Participant
contributions
|
|
|
87,500
|
|
|
85,000
|
|
Benefits
paid
|
|
|
(252,500
|
)
|
|
(245,000
|
)
|
|
|
|
|
|
|
|
|
Fair value
of plan assets at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
(889,274
|
)
|
|
(905,608
|
)
|
|
|
|
|
|
|
|
|
Amount
recognized in balance sheet
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
133,274
|
|
|
145,000
|
|
Noncurrent
liabilities
|
|
|
756,000
|
|
|
760,608
|
|
Net amount
|
|
$
|
889,274
|
|
$
|
905,608
|
|
|
|
|
|
|
|
|
|
Amount
recognized in other comprehensive income
|
|
|
|
|
|
|
|
Unrecognized
net actuarial gain
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
Accrued post-retirement medical benefit costs are classified as other
post-retirement benefit obligations as of December 31, 2009 and 2008.
Net periodic post-retirement medical benefit costs for 2009, 2008 and
2007 included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Service cost
|
|
$
|
|
|
$
|
|
|
$
|
629
|
|
Interest
cost
|
|
|
58,318
|
|
|
55,292
|
|
|
69,225
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
post-retirement medical benefit cost
|
|
$
|
58,318
|
|
$
|
55,292
|
|
$
|
69,854
|
|
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 2010; the rate was assumed to decrease gradually to 5% by the year 2013 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, 2009 by $11,129 and the aggregate of the service and interest cost
components of net periodic post-retirement medical benefit cost for the year
ended December 31, 2009 by $819. Employer contributions for 2010 are expected
to be approximately $145,000.
60
Table of Contents
The
assumptions used years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
increase in cost of benefits
|
|
|
9.00
|
%
|
|
9.00
|
%
|
|
9.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate used to determine year-end obligations
|
|
|
6.00
|
%
|
|
7.00
|
%
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate used to determine year-end expense
|
|
|
7.00
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
The following employer benefit payments, which reflect expected future
service, are expected to be paid:
|
|
|
|
|
2010
|
|
$
|
145,000
|
|
2011
|
|
$
|
145,000
|
|
2012
|
|
$
|
145,000
|
|
2013
|
|
$
|
145,000
|
|
2014
|
|
$
|
140,000
|
|
Years 2015
2019
|
|
$
|
685,000
|
|
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, 2009 and 2008 are illustrated
below.
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Current
portion
|
|
$
|
90,656
|
|
$
|
90,656
|
|
Long term
portion
|
|
|
543,194
|
|
|
578,388
|
|
|
|
|
|
|
|
|
|
Total
liability at December 31
|
|
$
|
633,850
|
|
$
|
669,044
|
|
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. 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
$13,000 in 2009, a loss of $77,000 in 2008, and a loss of $112,000 in 2007.
12. COMMON
STOCK AND STOCK OPTIONS
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. New
grants may not be made under the 1994, the 2001 and the non-employee directors
stock option plans; however certain option grants under these plans remain
exercisable as of December 31, 2009. The aggregate number of shares of common
stock for which awards could be granted under the 2006 equity incentive plan as
of the date of adoption was 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, other than awards under the director program and management purchase
program described below, had been granted as of December 31, 2009. Under all
awards, the terms are fixed on 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 over three years, and have a maximum
term of 10 years.
61
Table of Contents
Additionally, the board has established the non-employee directors
stock fee election program, referred to as the director program, as an award
under the 2006 equity incentive plan. The director program gives each
non-employee director the right under the 2006 equity incentive plan to elect
to have some or all of his quarterly director fees paid in common shares rather
than cash. There were 3,340 and 1,902 shares issued in lieu of cash for
director fees under the director program for the years ended December 31, 2009
and 2008, respectively.
On July 23, 2008, the Compensation Committee of the Board of Directors
approved the non-employee director and executive officer stock purchase
program, referred to as the management purchase program, as an award under the
2006 Plan. The purpose of the management purchase program is to permit the
Companys non-employee directors and executive officers to purchase shares of
the Companys Common Stock directly from the Company. Pursuant to the
management purchase program, as amended, participants may elect to purchase
shares of Common Stock from the Company not exceeding an aggregate of $100,000
during any fiscal year. Participants may make such election one time during
each twenty business day period following the public release of the Companys
earnings announcement, referred to as a window period, and only if such participant
is not in possession of material, non-public information concerning the Company
and subject to the discretion of the Board to prohibit any transactions in
Common Stock by directors and executive officers during a window period. There
were 20,000 and 5,000 shares purchased under the management purchase program
during the years ended December 31, 2009 and 2008, respectively.
Stock
option activity during the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
|
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
|
|
|
|
|
Options forfeited
|
|
|
(45,131
|
)
|
|
9.82
|
|
|
|
|
Options granted
|
|
|
175,950
|
|
|
7.35
|
|
|
|
|
Options exercised
|
|
|
(3,400
|
)
|
|
2.44
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
981,650
|
|
|
5.93
|
|
|
|
|
Options forfeited
|
|
|
(10,850
|
)
|
|
10.69
|
|
|
|
|
Options granted
|
|
|
83,000
|
|
|
3.29
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
1,053,800
|
|
$
|
5.67
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2008
|
|
|
642,866
|
|
$
|
4.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
|
808,067
|
|
$
|
5.16
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for future grant at January 1, 2009
|
|
|
256,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for future grant at December 31, 2009
|
|
|
161,404
|
|
|
|
|
|
|
|
The number of shares available for future grant at December 31, 2009,
does not include a total of up to 399,200 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. Based on the Companys stock price
at December 31, 2009, the aggregate intrinsic value of outstanding and
exercisable options was $0.
62
Table of Contents
The weighted-average remaining contractual term of options exercisable
at December 31, 2009, was 5.6 years. The total intrinsic value of options
exercised during fiscal 2009, 2008, and 2007, was $0, $19,000, and $475,000,
respectively.
The weighted-average per share fair value of options granted was $1.71,
$2.85, and $5.13, in 2009, 2008, and 2007, respectively, using the
Black-Scholes option-pricing model.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
volatility
|
|
|
58.8 62.4
|
%
|
|
42.3 - 53.5
|
%
|
|
43.0
|
%
|
Risk-free
interest rate
|
|
|
1.27 - 2.58
|
%
|
|
1.4 - 2.8
|
%
|
|
3.5
|
%
|
Expected
life (years)
|
|
|
4.0
|
|
|
4.0
|
|
|
4.0
|
|
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. The expected term for stock
options and awards is calculated based on the Companys estimate of future
exercise at the time of grant.
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 Company recorded $561,000, $526,000 and $280,000 of non-cash stock
option expense for the years ended December 31, 2009, 2008 and 2007, respectively.
As of December 31, 2009, there was $550,000 of total unrecognized compensation
costs related to non-vested awards that is expected to be recognized over a
weighted-average period of 1.3 years.
At the 2008 annual meeting of shareholders, the shareholders approved
the IntriCon Corporation 2008 Employee Stock Purchase Plan (the Purchase
Plan). A maximum of 100,000 shares may be sold under the Purchase Plan. There
were 29,516 and 30,172 shares purchased under the plan for the years ended
December 31, 2009 and 2008, respectively.
63
Table of Contents
13. INCOME
(LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Income
Numerator
|
|
Shares
Denominator
|
|
Per
Share
Amount
|
|
Income
Numerator
|
|
Shares
Denominator
|
|
Per
Share
Amount
|
|
Loss
Numerator
|
|
Shares
Denominator
|
|
Per
Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,920,521
|
)
|
|
5,394,125
|
|
$
|
(.73
|
)
|
$
|
1,037,601
|
|
|
5,314,387
|
|
$
|
.20
|
|
$
|
1,867,238
|
|
|
5,209,567
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,069
|
|
|
|
|
|
|
|
|
310,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income
(loss) per share
|
|
$
|
(3,920,521
|
)
|
|
5,394,125
|
|
$
|
(.73
|
)
|
$
|
1,037,601
|
|
|
5,539,456
|
|
$
|
.19
|
|
$
|
1,867,238
|
|
|
5,519,780
|
|
$
|
.34
|
The
Company excluded stock options of 492,700, 231,950, and 190,131, in 2009, 2008,
and 2007, 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.
14.
CONTINGENCIES AND COMMITMENTS
The Company is a defendant along with a number of other parties in
approximately 122 lawsuits as of December 31, 2009, (approximately 122 lawsuits
as of December 31, 2008) 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. 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. Because 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 our 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
us, 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 2009, 2008, and 2007 under leases pertaining
primarily to engineering, manufacturing, sales and administrative facilities,
with an initial term of one year or more, aggregated $1,211,000, $1,179,000,
and $1,042,000, respectively. Remaining rentals payable under such leases,
including equipment leases are as follows: 2010 - $1,148,000; 2011 - $984,000;
2012 - $485,000; 2013 - $406,000; 2014 - $390,000 and thereafter - $665,000,
which includes two leased facilities in Minnesota that expire in 2011 and 2016,
two leased facilities in Maine that expire in 2012 and 2017 respectively, one
leased facility in California that expires in 2013, one leased facility in
Singapore that expires in 2010 and one leased facility in Germany that expires
in 2013. Certain leases contain renewal options as defined in the lease
agreements.
64
Table of Contents
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.
On July 20, 2008, the Company entered into a strategic alliance
agreement with Dynamic Hearing Pty Ltd (Dynamic Hearing). Effective October
1, 2008, Dynamic Hearing granted a license to the Company to use certain of
Dynamic Hearings technology. The initial term of the agreement is five years
from the date of execution and may be extended upon agreement of the parties
within two months of the expiration of the initial term; however, either party
may terminate the agreement after the second year of the term upon three months
notice. The Company agreed to pay Dynamic Hearing: (i) an annual fee for access
to the technology licensed pursuant to the agreement and (ii) an additional
second component fee to maintain exclusive rights granted to the Company with
respect to hearing health products. Additionally, IntriCon agreed to make
royalty payments on products that incorporate Dynamic Hearings technology, and
Dynamic Hearing has also agreed to provide the Company with engineering and
other services in connection with the licensed technology. No royalty payments
were made for the years ended December 31, 2009 and 2008. The Company has recorded
$1,000,000 payable to Dynamic Hearing for the first two years of exclusive
license fees described above. The Company has $539,000 and $331,000 of
short-term and $99,000 and $691,000 of long-term assets, respectively, at
December 31, 2009 and 2008 respectively which will be amortized through
September 2010 as it pertains to exclusive rights and engineering and other
services. The technology access fee will be amortized through September 2013,
the life of the agreement.
15.
RELATED-PARTY TRANSACTIONS
One of the Companys subsidiaries leases office and factory space from
a partnership consisting of three present or former officers of the subsidiary,
including Mark Gorder, a member of the Companys Board of Directors and the
President and Chief Executive Officer of the Company. The subsidiary is
required to pay all real estate taxes and operating expenses. The total base
rent expense, real estate taxes and other charges incurred under the lease was
approximately $477,000 for each of 2009 and 2008 and $481,000 in 2007. Annual
lease commitments, which include base rent expense, real estate taxes and other
charges 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 $345,000, $235,000, and $466,000 for
legal services and costs in 2009, 2008, and 2007, respectively. The Chairman of
our Board of Directors is considered independent under applicable Nasdaq and
SEC rules because (i) no payments were made to the Chairman or the partner
directly in exchange for the services provided by the law firm and (ii) the
amounts paid to the law firm did not exceed the thresholds contained in the
Nasdaq standards. Furthermore, the aforementioned partner does not provide any
legal services to the Company and is not involved in billing matters.
65
Table of Contents
16. STATEMENTS OF CASH FLOWS
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Interest
received
|
|
$
|
3,000
|
|
$
|
31,000
|
|
$
|
79,000
|
|
Interest
paid
|
|
|
628,000
|
|
|
574,000
|
|
|
703,000
|
|
Income taxes
paid
|
|
|
35,000
|
|
|
222,000
|
|
|
188,000
|
|
Equipment
purchased through capital lease obligation
|
|
|
|
|
|
1,278,000
|
|
|
|
|
Shares
issued for services
|
|
|
10,000
|
|
|
12,000
|
|
|
6,000
|
|
License
agreement financed through licensor
|
|
|
|
|
|
1,000,000
|
|
|
|
|
Fair value
of assets acquired
|
|
|
2,788,000
|
|
|
|
|
|
|
|
Issuance of
stock consideration
|
|
|
(270,000
|
)
|
|
|
|
|
|
|
Note payable
issued for acquisition of Datrix
|
|
|
(1,050,000
|
)
|
|
|
|
|
|
|
Liabilities
assumed
|
|
|
(113,000
|
)
|
|
|
|
|
|
|
17. 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, the Company entered into interest rate swaps accounted for
as derivatives designated as hedges. Upon termination of the Bank of America
credit facility, the Company was required to settle the outstanding obligations
of $121,000 for the liability related to its interest rate swap agreement with
Bank of America and recognize a corresponding charge of $121,000 in interest
expense, which was previously included in other comprehensive income.
During 2009, the company entered into an interest rate swaps accounted
for as effective cash flow hedges. The interest rate swap had a notional amount
of $2,000,000. The interest rate swaps fix the companys one month LIBOR
interest rate on the notional amounts at rates ranging from 3.25% - 4.10%. The
interest rate swaps expire on October 31, 2011. The estimated net amount of
cumulative loss as of December 31, 2009 expected to be reclassified into
earnings from these interest rate swap agreements within the next twelve months
is $35,000.
Interest rate swaps, which are considered derivative instruments, of
$35,000 and $136,000 are reported in the balance sheets at fair value in other
current liabilities at December 31, 2009 and 2008, respectively.
66
Table of Contents
Accounting standards define fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In determining
fair value, the Company uses various valuation methods. The assumptions used in
the application of these valuation methods are developed from the perspective
of market participants pricing the asset or liability. Inputs used in the
valuation methods can be either readily observable, market corroborated, or
generally unobservable inputs. Whenever possible the Company attempts to
utilize valuation methods that maximize the use of observable inputs and
minimizes the use of unobservable inputs. Based on the observability of the
inputs used in the valuation methods, the Company is required to provide the
following information according to the fair value hierarchy. The fair value
hierarchy ranks the quality and reliability of the information used to
determine fair values. Assets and liabilities measured, reported and/or
disclosed at fair value will be classified and disclosed in one of the
following three categories:
|
|
|
Level 1:
Quoted market prices in active markets for identical assets or liabilities.
|
|
Level 2:
Observable market based inputs or unobservable inputs that are corroborated
by market data.
|
|
Level 3:
Unobservable inputs that are not corroborated by market data.
|
The LIBOR swap rates are observable at commonly quoted intervals for
the full terms of the interest rate swaps and therefore are considered Level 2
items.
18. INVESTMENT IN PARTNERSHIPS
In December 2006, the Company joined the Hearing Instrument
Manufacturers Patent Partnership (K/S 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 grants 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. The unpaid balance of
$760,000 at December 31, 2009 will be paid in two annual principal installments
of $260,000 in 2010 and 2011, with a final principal 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 net assets relates to underlying patents (amortized on a
straight-line basis over ten years). The remaining $1,130,000 of the excess of
the investment over the underlying partnership net assets was assigned to the
non-exclusive patent license agreement (amortized on a straight-line basis over
ten years). The Company recorded a $202,000, $145,000 and $333,000 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 years ended December 31, 2009, 2008 and 2007,
respectively. The carrying amount of the K/S HIMPP partnership is $1,121,000
and $1,323,000 at December 31, 2009 and 2008, respectively. The remaining
amount to amortize at December 31, 2009 is $147,600, for each of the years
ending December 31, 2010 through 2014, respectively. The difference of $207,000
in the carrying value of the investment at December 31, 2009 is the Companys
remaining investment in partnership net assets.
The Company 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 (which was acquired in May 2007). The Company recorded a $53,000
increase in the carrying amount of the investment, reflecting the Companys
portion of the joint ventures operating results for the year ended December
31, 2009. The Company has recorded a total decrease of approximately $59,000 in
the carrying amount of the investment for the year ended December 31, 2008,
consisting of an approximately $141,000 increase for the Companys portion of
the joint ventures operating results for the year ended December 31, 2008
offset by a decrease of $200,000 for dividends received from the joint venture
during the year ended December 31, 2008. The carrying amount of the investment
was $117,000 and $64,000 at December 31, 2009 and 2008, respectively.
67
Table of Contents
Condensed financial information of the joint venture at and for the
years ended December 31, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
833
|
|
$
|
642
|
|
Non-current assets
|
|
|
224
|
|
|
196
|
|
Total assets
|
|
$
|
1,057
|
|
$
|
838
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
604
|
|
|
312
|
|
Stockholders equity
|
|
|
453
|
|
|
526
|
|
Total liabilities and stockholders equity
|
|
$
|
1,057
|
|
$
|
838
|
|
|
|
|
|
|
|
|
|
Income
Statement:
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,192
|
|
$
|
2,750
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
105
|
|
$
|
282
|
|
19. REVENUE BY MARKET
The following tables set forth, for the periods indicated, net revenue
by market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Body-Worn
Device Segment
|
|
|
|
|
|
|
|
|
|
|
Hearing
Health
|
|
$
|
18,432
|
|
$
|
23,768
|
|
$
|
29,298
|
|
Medical
|
|
|
23,005
|
|
|
20,133
|
|
|
18,765
|
|
Professional
Audio Communications
|
|
|
10,239
|
|
|
14,007
|
|
|
11,606
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net
Sales
|
|
$
|
51,676
|
|
$
|
57,908
|
|
$
|
59,669
|
|
68
Table of Contents
|
|
ITEM
9.
|
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
|
|
ITEM 9A(T).
|
Controls and
Procedures
|
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this
report (the Evaluation Date), the Company carried out an evaluation, under
the supervision and with the participation of management, including the Chief
Executive Officer (principal executive officer) and the Chief Financial Officer
(principal financial officer), of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) of the Exchange Act). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
our disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in applicable rules
and forms, and (ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
Managements Annual Report on Internal Control Over Financial
Reporting.
The
report of management required under this Item 9A is contained in
Item 8 of this Annual Report on Form 10-K under the caption Managements
Report on Internal Control Over Financial Reporting.
Changes in Internal Controls over Financial Reporting.
There were no changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter
covered by this report that would have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been detected. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
|
|
ITEM 9B.
|
Other Information
|
Executive Compensation
In
December 2009 and February 2010, the Compensation Committee of the Board of
Directors made determinations with respect to the bonuses and stock options to
be awarded to the executive officers for services in 2009 and salaries to be
paid in 2010. For further information, see Exhibit 10.13 which is incorporated
herein by reference.
In February 2010, the Compensation Committee of the Board of Directors
adopted the 2010 Annual Incentive Plan for Executives and Key Employees for
Fiscal Year 2010. For further information, see Exhibit 10.13 which is
incorporated herein by reference.
Amendment of Loan and Security Agreement.
On
March 12, 2010, the Company and its domestic subsidiaries entered into a First
Amendment and Waiver to the Loan and Security Agreement dated as of August 13,
2009 with The PrivateBank and Trust Company. The amendment:
|
|
|
|
|
waived any non-compliance by the borrowers with the minimum EBITDA,
leverage ratio and fixed charge coverage ratio financial covenants as of the
December 31, 2009 and January 31, 2010 measurement dates;
|
|
|
|
|
|
waived the prohibition on the sale or liquidation of RTIE;
|
|
|
|
|
|
amended the definition of EBITDA to exclude all items of income,
gain, expense and loss attributable to discontinued operations; and
|
|
|
|
|
|
modified the Companys minimum EBITDA and fixed charge coverage ratio
financial covenants.
|
The foregoing description of the amendment does not purport to be
complete and is qualified in its entirety by reference to such document.
69
Table of Contents
PART III
|
|
ITEM
10.
|
Directors, Executive Officers and Corporate Governance
|
The information called for by Item 10 is incorporated by reference from
the Companys definitive proxy statement relating to its 2010 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2010
proxy statement entitled Proposal 1 Election of Directors and Section
16(a) Beneficial Ownership Reporting Compliance.
The information concerning executive officers contained in Item 4A
hereof is incorporated by reference into this Item 10.
Code of Ethics
The Company has adopted a code of ethics that applies to its directors,
officers and employees, including its principal executive officer, principal
financial and accounting officer, controller and persons performing similar
functions. Copies of the Companys code of ethics are available without charge
upon written request directed to Cari Sather, Director of Human Resources,
IntriCon Corporation, 1260 Red Fox Road, Arden Hills, MN 55112. The Company
intends to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding any future amendments to a provision of its code of ethics by posting
such information on the Companys website: www.intricon.com.
|
|
ITEM 11.
|
Executive Compensation
|
The information called for by Item 11 is incorporated by reference from
the Companys definitive proxy statement relating to its 2010 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2010
proxy statement entitled Director Compensation for 2009, and Executive
Compensation.
|
|
ITEM 12.
|
Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information called for by Item 12 is incorporated by reference from
the Companys definitive proxy statement relating to its 2010 annual meeting of
shareholders, including but not necessarily limited to the section of the 2010
proxy statement entitled Share Ownership of Certain Beneficial Owners,
Directors and Certain Officers.
Equity Compensation
Plan Information
The following table details information regarding the Companys
existing equity compensation plans as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Plan
Category
|
|
(a)
Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
|
|
(b)
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
|
|
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
|
|
Equity compensation plans approved by
security holders
|
|
|
871,300
|
|
$
|
6.25
|
|
|
161,404
|
|
(1)
|
Equity compensation plans not approved by
security holders(2)
|
|
|
182,500
|
|
$
|
3.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,053,800
|
|
$
|
5.67
|
|
|
161,404
|
|
|
70
Table of Contents
(1) The amount shown in column (c) represents shares issuable under the
Companys 2006 Equity Incentive Plan (the 2006 Plan). Under the terms of the
2006 Plan, as outstanding options under the Companys 2001 Stock Option Plan
and Non-Employee Directors Stock Option Plan expire, the shares of common
stock subject to the expired options will become available for issuance under
the 2006 Plan. As of December 31, 2009, 399,200 shares of common stock were
subject to outstanding options under the 2001 Stock Option Plan and
Non-Employee Directors Stock Option Plan. Accordingly, if any of these options
expire, the shares of common stock subject to expired options also will be
available for issuance under the 2006 Plan.
(2) Represents shares issuable under the Non-Employee Directors Stock
Option Plan, the (Non-Employee Directors Plan), pursuant to which directors
who are not employees of the Company or any of its subsidiaries were eligible
to receive options. The exercise price of the option was the fair market value
of the stock on the date of grant. Options become exercisable in equal
one-third annual installments beginning one year from the date of grant, except
that the vesting schedule for discretionary grants is determined by the
Compensation Committee. As a result of the approval of the 2006 Plan by the
shareholders at the 2006 annual meeting of shareholders, no further grants will
be made pursuant to the Non-Employee Directors Plan.
|
|
ITEM 13.
|
Certain Relationships and Related
Transactions, and Director Independence
|
The information called for by Item 13 is incorporated by reference from
the Companys definitive proxy statement relating to its 2010 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2010
proxy statement entitled Certain Relationships and Related Party Transactions
and Independence of the Board of Directors.
|
|
ITEM 14.
|
Principal Accounting Fees and Services
|
The information called for by Item 14 is incorporated by reference from
the Companys definitive proxy statement relating to its 2010 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2010
proxy statement entitled Independent Registered Public Accounting Fee
Information.
PART IV
|
|
ITEM 15.
|
Exhibits, Financial Statement Schedules
|
|
|
(a)
|
The following documents are filed as a part of this report:
|
|
|
1)
|
Financial Statements
The consolidated
financial statements of the Registrant are set forth in Item 8 of Part II of
this report.
|
|
|
|
Consolidated Statements of Operations for the years ended December
31, 2009, 2008 and 2007.
|
|
|
|
Consolidated Balance Sheets at December 31, 2009 and 2008.
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December
31, 2009, 2008 and 2007.
|
|
|
|
Consolidated Statements of Shareholders Equity and Comprehensive
Income for the years ended December 31, 2009, 2008 and 2007.
|
|
|
|
Notes to Consolidated Financial Statements.
|
|
|
2)
|
Financial Statement Schedules
|
71
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON
SUPPLEMENTARY INFORMATION
To the
Shareholders, Audit Committee and Board of Directors
IntriCon Corporation and Subsidiaries
Minneapolis, Minnesota
Our audits were made for the purpose of forming an opinion on the basic
2009, 2008, and 2007 consolidated financial statements of IntriCon Corporation
and Subsidiaries taken as a whole. The consolidated supplemental schedule II is
presented for purposes of complying the Securities Exchange Commissions rules
and is not a part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in our audits of the
2009, 2008 and 2007 basic consolidated financial statements and, in our
opinion, is fairly stated in all materials respects in relation to the basic
consolidated financial statements taken as a whole.
Baker Tilly
Virchow Krause, LLP
Minneapolis, Minnesota
March 15, 2010
Schedule II - Valuation and Qualifying
Accounts
INTRICON CORPORATION AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
beginning
of Year
|
|
Addition
charged to
costs and
expense
|
|
Less
deductions
|
|
Balance
at end
of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
331,630
|
|
$
|
66,952
|
|
$
|
173,078
|
(a)
|
$
|
225,504
|
|
Deferred tax asset
valuation allowance
|
|
$
|
7,267,135
|
|
$
|
1,493,099
|
|
$
|
|
|
$
|
8,760,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
228,873
|
|
$
|
103,638
|
|
$
|
881
|
(a)
|
$
|
331,630
|
|
Allowance for note
receivable
|
|
$
|
225,000
|
|
$
|
|
|
$
|
225,000
|
|
$
|
|
|
Deferred tax asset
valuation allowance
|
|
$
|
8,133,835
|
|
$
|
|
|
$
|
866,700
|
|
$
|
7,267,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
199,658
|
|
$
|
95,271
|
|
$
|
66,056
|
(a)
|
$
|
228,873
|
|
Allowance for note
receivable
|
|
$
|
225,000
|
|
$
|
|
|
$
|
|
|
$
|
225,000
|
|
Deferred tax asset
valuation allowance
|
|
$
|
8,562,449
|
|
$
|
|
|
$
|
428,614
|
|
$
|
8,133,835
|
|
|
|
|
|
a)
|
Uncollectible
accounts written off.
|
|
b)
|
Continuing operations net operating loss utilized to offset tax
impact of operating income from discontinued operations.
|
|
|
|
|
All other schedules are omitted because they are not applicable, or
because the required information is included in the consolidated financial
statements or notes thereto.
|
72
Table of Contents
|
|
2.1
|
Asset purchase agreement dated March 31, 2005 among the Company and
Selas Heat Technology, LLP (Schedules and exhibits are omitted pursuant to
Regulation S-K, Item 601(b)(2); IntriCon Corporation agrees to furnish a copy
of such schedules and/or exhibits to the Securities and Exchange Commission
upon request) (Incorporated by reference from the Companys quarterly report
on Form 10-Q for the quarter ended March 31, 2005.)
|
|
|
2.2
|
Asset Purchase Agreement by and among IntriCon Corporation, TI
Acquisition Corporation, Tibbetts Industries, Inc. and certain shareholders
of Tibbetts Industries, Inc. dated April 19, 2007. (Incorporated by reference
from the Companys current report on Form 8-K filed with the Commission on
April 23, 2007.)
|
|
|
3.1
|
The Companys Amended and Restated Articles of Incorporation, as
amended. (Incorporated by reference from the Companys current report on Form
8-K filed with the Commission on April 24, 2008.)
|
|
|
3.2
|
The Companys Amended and Restated By-Laws. (Incorporated by
reference from the Companys annual report on Form 8-K filed with the
Commission October 12, 2007.)
|
|
|
+ 10.1.1
|
Amended and Restated 1994 Stock Option Plan. (Incorporated by
reference from the Companys annual report on Form 10-K for the year ended
December 31, 1997.)
|
|
|
+ 10.1.2
|
Form of Stock Option Agreements granted under the Amended and
Restated 1994 Stock Option Plan. (Incorporated by reference from the
Companys annual report on Form 10-K for the year ended December 31, 1995.)
|
|
|
+ 10.2.1
|
2001 Stock Option Plan. (Incorporated by reference from the Companys
annual report on Form 10-K for the year ended December 31, 2000.)
|
|
|
10.2.2
|
Form of Stock Option Agreement issued to executive officers pursuant
to the 2001 Stock Option Plan. (Incorporated by reference from the Companys
current report on Form 8-K filed with the Commission on April 26, 2005.)
|
|
|
+ 10.3
|
Supplemental Retirement Plan (amended and restated effective January
1, 1995). (Incorporated by reference from the Companys annual report on Form
10-K for the year ended December 31, 1995.).
|
|
|
10.4
|
Amended and Restated Office/Warehouse Lease, between Resistance
Technology, Inc. and Arden Partners I. L.L.P. (of which Mark S. Gorder is one
of the principal owners) dated November 1, 1996. (Incorporated by reference
from the Companys annual report on Form 10-K for the year ended December 31,
1996.)
|
|
|
+ 10.5.1
|
Amended and Restated Non-Employee Directors Stock Option Plan.
(Incorporated by reference from the Companys annual report on Form 10-K for
the year ended December 31, 2001.)
|
|
|
+10.5.2
|
Form of Non-employee director Option Agreement for options issued
pursuant to the Amended and Restated Non-Employee Directors Stock Option
Plan. (Incorporated by reference from the Companys current report on Form
8-K filed with the Commission on October 3, 2005.)
|
|
|
+ 10.6*
|
Summary sheet for director fees.
|
|
|
+ 10.7*
|
Summary sheet for executive officer compensation.
|
|
|
+ 10.8
|
2006 Equity Incentive Plan. (Incorporated by reference from the
Companys proxy statement filed with the SEC on March 17, 2006.)
|
73
Table of Contents
|
|
+ 10.9
|
Form of Stock Option Agreement issued to executive officers pursuant
to the 2006 Equity Incentive Plan. (Incorporated by reference from the
Companys quarterly report on Form 10-Q for the quarter ended March 31,
2006.)
|
|
|
+ 10.10
|
Form of Stock Option Agreement issued to directors pursuant to the
2006 Equity Incentive Plan. (Incorporated by reference from the Companys
quarterly report on Form 10-Q for the quarter ended March 31, 2006.)
|
|
|
+ 10.11
|
Non-Employee Directors Stock Fee Election Program. (Incorporated by
reference from the Companys annual report on Form 10-K for the year ended
December 31, 2006.)
|
|
|
+10.12
|
Non-Employee Director and Executive Officer Stock Purchase Program,
as amended. (Incorporated by reference from the Companys quarterly report on
Form 10-Q filed with the Commission on November 14, 2008.)
|
|
|
+ 10.13
|
Deferred Compensation Plan. (Incorporated by reference from the
Companys current report on Form 8-K filed with the Commission on May 17,
2006.)
|
|
|
10.14
|
Purchase Agreement between Resistance Technology, Inc. and MDSC
Partners, LLP dated May 5, 2006. (Incorporated by reference from the
Companys current report on Form 8-K filed with the Commission on June 21,
2006.)
|
|
|
10.15
|
Land and Building Lease Agreement between Resistance Technology, Inc.
and MDSC Partners, LLP dated June 15, 2006. (Incorporated by reference from
the Companys current report on Form 8-K filed with the Commission on June
21, 2006.)
|
|
|
10.16
|
Agreement by and between K/S HIMPP and IntriCon Corporation dated
December 1, 2006 and the schedules thereto. (Incorporated by reference from
the Companys annual report on Form 10-K for the year ended December 31,
2006.)
|
|
|
+ 10.17
|
Employment Agreement with Mark S. Gorder. (Incorporated by reference
from the Companys annual report on Form 8-K filed with the Commission
October 12, 2007.)
|
|
|
+ 10.18
|
Form of Employment Agreement with executive officers. (Incorporated
by reference from the Companys annual report on Form 8-K filed with the
Commission October 12, 2007.)
|
|
|
10.20
|
Loan and Security Agreement dated as of May 22, 2007, by and among
IntriCon, Resistance Technology, Inc., RTI Electronics, Inc. and IntriCon
Tibbetts Corporation and LaSalle Bank National Association. (Incorporated by
reference from the Companys current report on Form 8-K filed with the
Commission on May 25, 2007.)
|
|
|
10.21
|
First Amendment to Loan and Security Agreement dated as of September
30, 2007, by and among IntriCon, Resistance Technology, Inc., RTI
Electronics, Inc. and IntriCon Tibbetts Corporation and LaSalle Bank National
Association. (Incorporated by reference from the Companys current report on
Form 8-K filed with the Commission October 12, 2007.)
|
|
|
10.22
|
Second Amendment to Loan and Security Agreement dated as of June 30,
2008, by and among IntriCon, Resistance Technology, Inc., RTI Electronics,
Inc., IntriCon Tibbetts Corporation and LaSalle Bank National Association.
(Incorporated by reference from the Companys current report on Form 8-K
filed with the Commission July 7, 2008.)
|
|
|
10.23
|
Third Amendment to Loan and Security Agreement dated as of December
31, 2008, by and among IntriCon, IntriCon, Inc., RTI Electronics, Inc.,
IntriCon Tibbetts Corporation and LaSalle Bank National Association.
(Incorporated by reference from the Companys annual report on Form 10-K for
the year ended December 31, 2008.)
|
74
Table of Contents
|
|
10.24
|
Trademark Security Agreement dated as of May 22, 2007, by IntriCon in
favor of LaSalle Bank National Association. (Incorporated by reference from
the Companys current report on Form 8-K filed with the Commission on May 25,
2007.)
|
|
|
10.25
|
Trademark Security Agreement dated as of May 22, 2007, by Resistance
Technology, Inc. in favor of LaSalle Bank National Association. (Incorporated
by reference from the Companys current report on Form 8-K filed with the
Commission on May 25, 2007.)
|
|
|
10.26
|
Strategic Alliance Agreement among IntriCon Corporation and Dynamic
Hearing Pty Ltd effective as of October 1, 2008. (Incorporated by reference
from the Companys annual report on Form 10-K for the year ended December 31,
2008.)
|
|
|
+ 10.27
|
Annual Incentive Plan for Executives and Key Employees for Fiscal
Year 2009 (management contract, compensatory plan or arrangement).
Confidential treatment obtained for certain portions of this Exhibit, which
portions are omitted and filed separately with the SEC. (Incorporated by
reference from the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009 filed with the Commission on May 11, 2009.)
|
|
|
10.28
|
Loan and Security Agreement dated as of August 13, 2009 by and among
IntriCon Corporation, RTI Electronics, Inc., IntriCon Tibbetts Corporation,
IntriCon Datrix Corporation (f/k/a Jon Barron, Inc.) and The PrivateBank and
Trust Company (Incorporated by reference from the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2009 filed with the
Commission on November 16, 2009.)
|
|
|
10.29
|
Revolving Credit Note issued to The PrivateBank and Trust Company
dated August 13, 2009 (Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2009 filed with the
Commission on November 16, 2009.)
|
|
|
10.30
|
Term Note issued to The PrivateBank and Trust Company dated August
13, 2009 (Incorporated by reference from the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009 filed with the Commission
on November 16, 2009.)
|
|
|
10. 21
|
Subordinated Non-Negotiable Promissory Note issued to Jon V. Barron
dated August 13, 2009 (Incorporated by reference from the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2009 filed with the
Commission on November 16, 2009.)
|
|
|
21.1*
|
List of significant subsidiaries of the Company.
|
|
|
23.1*
|
Consent of Independent Registered Public Accounting Firm (Baker Tilly
Virchow Krause, LLP).
|
|
|
31.1*
|
Certification of principal executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
|
31.2*
|
Certification of principal financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
|
32.1*
|
Certification of principal executive officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2*
|
Certification of principal financial officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
*
|
Filed
herewith.
|
+
|
Denotes
management contract, compensatory plan or arrangement.
|
75
Table of Contents
SIGNATURES
Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
INTRICON CORPORATION
(Registrant)
|
|
|
By:
|
/s/ Scott
Longval
|
|
|
|
Scott Longval
|
|
|
Chief Financial Officer,
|
|
|
Treasurer and Secretary
|
Dated: March
15, 2010
Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
/s/ Mark S.
Gorder
|
|
|
|
Mark S.
Gorder
|
President
and Chief Executive
|
Officer and
Director (principal executive officer)
|
March 15, 2010
|
|
/s/
Scott
Longval
|
|
|
|
Scott
Longval
|
Chief
Financial Officer
|
Treasurer
and Secretary
|
(principal
accounting and financial officer)
|
March 15, 2010
|
|
/s/Nicholas
A. Giordano
|
|
|
|
Nicholas A.
Giordano
|
Director
|
March 15, 2010
|
|
/s/Robert N.
Masucci
|
|
|
|
Robert N.
Masucci
|
Director
|
March 15, 2010
|
|
/s/ Michael
J. McKenna
|
|
|
|
Michael J.
McKenna
|
Director
|
March 15, 2010
|
|
/s/ Philip
N. Seamon
|
|
|
|
Philip N.
Seamon
|
Director
|
March 15, 2010
|
76
Table of Contents
EXHIBIT
INDEX
|
|
EXHIBITS:
|
|
|
10.6
|
Summary sheet for director fees.
|
|
|
10.7
|
Summary sheet for executive officer compensation.
|
|
|
21.1
|
List of significant subsidiaries of the Company.
|
|
|
23.1
|
Consent of Independent Registered Public Accounting Firm (Baker Tilly Virchow Krause, LLP).
|
|
|
31.1
|
Certification of principal executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of principal financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.
|
|
|
32.2
|
Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.
|
77
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