Table of Contents
P
ART I
Company Overview
IntriCon Corporation (together with its subsidiaries referred herein as
the Company, or IntriCon, we, us or our) is an international company
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 products,
microelectronics, micro-mechanical assemblies and complete assemblies, primarily
for bio-telemetry devices, hearing instruments and professional audio
communication devices. The Company, headquartered in Arden Hills, Minnesota,
has facilities in Minnesota, California, Maine, Singapore, Indonesia and
Germany, and operates through subsidiaries. The Company is a Pennsylvania
corporation formed in 1930. The Company has gone through several
transformations since its formation. The Companys core business of body-worn
devices was established in 1993 through the acquisition of Resistance Technologies
Inc., now known as IntriCon, Inc. The majority of IntriCons current management
came to the Company with the Resistance Technologies Inc. acquisition,
including IntriCons President and CEO, who was a co-founder of Resistance
Technologies Inc.
Currently, the Company operates in one operating segment, the body-worn
device segment. In 2009, the Company decided to exit its non-core electronic
products segment, to allow for greater focus on its body-worn device segment.
On May 28, 2010, the Company completed the sale of substantially all of the
assets of its electronics business to an affiliate of Shackleton Equity
Partners (Shackleton). For all periods presented, the Company has classified
its former electronics products segment as discontinued operations. Unless
otherwise indicated, the following description of our business refers only to
our continuing operations.
Information contained in this Annual Report on Form 10-K and expressed
in U.S. dollars or number of shares are presented in thousands (000s), except
for per share data and as otherwise noted.
Business Highlights
Major Events in 2011
In October 2011, the Company announced it entered into a manufacturing
agreement to become a supplier of hearing aids to hi HealthInnovations, a
UnitedHealth Group company. hi HealthInnovations launched a suite of high-tech,
lower-cost hearing devices for the estimated 36 million Americans with hearing
loss. An estimated 75 percent of people in the United States who can benefit
from hearing devices do not use them, largely due to the high cost. hi
HealthInnovations is offering consumers technically advanced hearing aids,
including those based on IntriCons new APT Open in-the-canal (ITC) hearing
aid platform. The Company devoted a considerable amount of time, resources and
capital during 2011 to securing the agreement and preparing for the programs
launch.
During the second quarter of 2011, IntriCon established a subsidiary in
Indonesia. During the third quarter of 2011, the Company signed a lease
agreement for a manufacturing facility in Batam, Indonesia. The purpose of the
expansion is to increase the Companys low cost manufacturing presence in Asia.
The Company is transferring labor intensive product assembly to the facility.
The Company commenced manufacturing at the facility in October 2011.
In August 2011, the Company amended its credit facilities with The
PrivateBank and Trust Company. Terms of the amendment included, among other
things, extending the term of the $8,000 revolving credit facility, with a subfacility
for letters of credit, to mature in August 2014 and increasing the Companys
term loan facility to $4,000, amortized in quarterly principal installments of
$250, and an extension of the maturity to August 2014. The $12,000 in credit
facilities includes London Interbank Offered Rate (LIBOR) interest rate options
at varying rates based on funded debt to EBITDA levels. In addition, the
amendment reset certain financial covenants. The Company is using the
facilities to fund current growth opportunities, expand low-cost manufacturing
footprint and meet anticipated working capital requirements. The credit
facilities are further described in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Major Events in 2010
On
May 28, 2010 the Company completed the sale of substantially all of the assets
of its electronics business to an affiliate of Shackleton, pursuant to an Asset
Purchase Agreement dated May 28, 2010. Shackleton paid $850 cash at closing for
the assets and assumed certain operating liabilities of IntriCons electronics
business, subject to an accounts receivable adjustment. As part of the sale,
the Company recognized a gain, net of taxes, of $35.
The
Company relocated its Singapore facility during the 2010 fiscal year, as
required by the Singapore government, which is redeveloping the land where the
former Singapore facility was located. In connection with the relocation, the
Company entered into a lease agreement for a new facility in Singapore.
4
Table of Contents
Major Events in 2009
On December 29, 2009, the Company decided to exit the 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 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 severance costs and recorded the following:
(i) an impairment charge of $685 relating to goodwill, (ii) a reduction to
realizable value of $720 to tangible assets, and (iii) $275 in employee
termination costs for the year ended December 31, 2009. An additional $200 in
termination costs were recorded in 2010.
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 cardiac diagnostic monitoring (CDM) market.
The purchase price included a closing cash payment of $1,225, issuance
of 75 shares of restricted common stock of the Company and the issuance of a
promissory note in the amount of $1,050 bearing annual interest at 6%. In
addition, the Company paid off Datrixs outstanding line of credit with Wells
Fargo of $130 at closing.
The principal amount of the promissory note is payable in three
installments of $350 on August 13, 2010, August 13, 2011 and August 13, 2012.
The note bears annual interest at 6% and is payable with each principal payment
as set forth above.
Core Technologies
Overview:
IntriCon serves the body-worn device market by designing, developing,
engineering and manufacturing micro-miniature products, microelectronics,
micro-mechanical assemblies and complete assemblies, primarily for
bio-telemetry devices, hearing instruments and professional audio communication
devices. Over the past five years, the Company has increased investments in the
continued development of four critical core technologies: Ultra-Low-Power (ULP)
Digital Signal Processing (DSP), Ultra-Low-Power Wireless, Microminiaturization,
and Miniature Transducers. These four core technologies serve as the foundation
of current and future product platform development, designed to meet the rising
demand for smaller, portable more advanced devices. The continued advancements
in this area have allowed the Company to further enhance the mobility and
effectiveness of miniature body-worn devices.
Ultra-Low-Power Digital Signal Processing
DSP converts real-world analog signals into a digital
format. Through its nanoDSP
technology, IntriCon offers an extensive range of ULP DSP amplifiers for
hearing, medical and professional audio applications. Our proprietary nanoDSP
incorporates advanced ultra-miniature hardware with sophisticated signal
processing algorithms to produce devices that are smaller and more effective.
The Company has recently made improvements on its Reliant CLEAR feedback canceller, offering
increased added stable gain and faster reaction time. The Company also
introduced its patent pending AcousTAP
Switch, allowing the user to change programs when the ear is patted, which
eliminates the physical push button, saving size and cost.
Ultra-Low-Power Wireless
Wireless connectivity is fast becoming a required
technology, and wireless capabilities are especially critical in new body-worn
devices. IntriCons BodyNet ULP
technology, including the nanoLink and
PhysioLink wireless systems,
offers solutions for measuring and transmitting the bodys activities to
caregivers, and wireless audio links for professional communications and
surveillance products. Potential BodyNet applications include electrocardiogram
(ECG) diagnostics and monitoring, diabetes monitoring, sleep apnea studies and
audio streaming for hearing aids.
IntriCon is in the final stages of commercializing its PhysioLink
wireless technology, which will be incorporated into product platforms serving
the medical, hearing health and professional audio communication markets. This
system is based on 2.4GHz proprietary digital radio protocol in the
industrial-scientific-medical (ISM) frequency band and enables audio and data
streaming to ear-worn and body-worn applications over distances of up to five
meters.
Microminiaturization
At IntriCon, we are experts in miniaturization. We
began honing our microminiaturization skills over 30 years ago, supplying
components to the hearing health industry. Our core miniaturization technology
allows us to make devices for our markets that are one cubic inch and
smaller. We also are specialists in devices that run on very low power, as
evidenced by our ULP wireless and DSP. Less power means a smaller battery,
which enables us to reduce size even further, and develop devices that fit into
the palm of ones hand.
5
Table of Contents
Miniature Transducers
IntriCons advanced microphone and receiver technology
has been pushing the limits of size and performance for over a decade. In 2007,
we increased our product portfolio and expertise in miniature transducers
through the acquisition of Tibbetts Industries, Inc. Our miniature
transducers, which have been incorporated into various product platforms,
enhance the reliability, sensitivity, supply voltage, and output level in
body-worn devices. These enhancements allow us to make devices that are
extremely portable and perform well in noisy or hazardous environments. We
recently introduced our 151Hi SPL microphone which provides the latest advances
in microphone technology. These small devices are well-suited for applications
in the aviation, fire, law enforcement, safety and military markets. Our
technology also is used for technical surveillance by law enforcement and
security agencies, and by performers and production staff in the music and
stage performance markets. Also included in our transducer line are medical
coils and micro coils used in pacemaker programming and interventional catheter
positioning applications.
Market Overview:
Our core technologies expertise is focused on three main markets:
medical, hearing health and professional audio communications.
|
Medical
|
In the medical market, the Company is focused on sales of multiple
bio-telemetry devices from life-critical diagnostic monitoring devices to
drug-delivery systems. Using our nanoDSP and ULP nanoLink technology, the
Company manufactures microelectronics, micro-mechanical assemblies,
high-precision injection-molded plastic components and complete bio-telemetry
devices for emerging and leading medical device manufacturers. Targeted
customers include medical product manufacturers of portable and lightweight
battery powered devices.
|
The medical industry is faced with pressures to reduce the cost of
healthcare. IntriCon currently serves this market by offering medical
manufacturers the capabilities to design, develop and manufacture components
for medical devices that are easier to use, are more miniature, use less power,
and are lighter. These devices measure with greater accuracy and provide more
functions while reducing the costs to manufacture these devices. The
industry-wide trend toward further miniaturization and ambulatory operation
enabled by wireless connectivity is commonly referred to as bio-telemetry.
Through the further development of our ULP BodyNet family, we believe the
bio-telemetry offers a significant future opportunity. Increasingly, the
medical industry is looking for wireless, low-power capabilities in their
devices. We believe our strategic partnership with Advanced Medical Electronics
Corp. (AME) will allow us to develop new bio-telemetry devices that better
connect patients and care givers, providing critical information and feedback.
Current examples of IntriCon bio-telemetry products used by medical device manufacturers
include wireless continuous glucose monitors that measure glucose levels and
provide real-time blood glucose trend information and CDM devices.
During the second quarter of 2011, IntriCon submitted the Centauri, its
first generation CDM device, for 510(k) approval with the Food and Drug
Administration (FDA). The Company received FDA approval in August of 2011. The
features of the Centauri ECG monitor are event recording combined with wireless
transmission of the patient data to a remote service center, which then
forwards the information to the doctor.
The Sirona, a CDM device which incorporates PhysioLink technology, was
submitted for 510(k) approval in the third quarter of 2011. The Company
received FDA approval in November of 2011. The Sirona electrocardiogram (ECG)
platform is essentially two products in one design since it can be used as an
event recorder and a holter monitor.. This platform is very small,
rechargeable, and water spray proof. The Company is working to incorporate both
the Centauri and Sirona devices into the customized software packages of future
customers and believes the devices will drive further gains in latter 2012.
In addition, IntriCon manufactures and supplies bubble sensors and flow
restrictors that monitor and control the flow of fluid in an intravenous
infusion system. IntriCon also manufactures a family of safety needle products
for an original equipment manufacturing (OEM) customer that utilizes IntriCons
insert and straight molding capabilities. These products are assembled using
full automation, including built-in quality checks within the production lines.
|
Hearing Health
|
IntriCon manufactures hybrid amplifiers and integrated circuit
components (hybrid amplifiers), along with faceplates for in-the-ear and
in-the-canal hearing instruments. IntriCon is a leading manufacturer and
supplier of microminiature electromechanical components to hearing instrument
manufacturers. These components consist of volume controls, microphones,
receivers, trimmer potentiometers and switches. Components are offered in a
variety of sizes, colors and capacities in order to accommodate a hearing
instrument manufacturers individualized specifications.
|
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.
6
Table of Contents
Based on our investments in core technologies, specifically nanoDSP and
our new wireless 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 2010 we
introduced the Overtus DSP amplifier. The Overtus DSP amplifier is designed to
optimize open in the canal (ITC) type fittings. The amplifier algorithm
contains two patented features, an advanced adaptive feedback canceller,
Reliant CLEAR, optimized for open ITC fittings and an acoustic switch,
AcousTAP, eliminating the need for a mechanical switch and allowing for further
miniaturization. Further, with the Overtus technology, we have developed our
own complete hearing device, the all-new, patent-pending APT Open ITC. The APT
is powered by the Overtus which includes our Reliant CLEAR adaptive feedback
canceller and the AcousTAP acoustic push button. In addition, the APT utilizes
the patent pending Concha Lock System technology that allows for the suspension
of an open in-the-ear device in the ear canal. These features create stable and
effective amplification, occlusion-free comfort and easy integration into
existing fitting systems. Our OEM customers now have the option of using
Overtus in their own devices, or purchasing our complete APT device. We believe
the introductions of the APT and Lumen devices and the Overtus amplifier will
solidify 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.
In
October 2011, the Company announced it has entered into a manufacturing
agreement to become a manufacturer of hearing aids to hi HealthInnovations, a
UnitedHealth Group company. hi HealthInnovations launched a suite of high-tech,
lower-cost hearing devices for the estimated 36 million Americans with hearing
loss. An estimated 75 percent of people who can benefit from hearing devices do
not use them, largely due to the high cost. hi HealthInnovations will offer
consumers technically advanced hearing aids, including those based on the APT
hearing aid platform.
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 one of the fastest growing segments of the
population, and many of those individuals could, at some point, benefit from a
hearing device that uses IntriCons proprietary technology.
|
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. The Company also serves 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.
|
During 2012, we will be marketing our line of situational listening
devices (SLDs) intended to help people hear in noisy environments like
restaurants and automobiles, and listen to television, music, and direct
broadcast by wireless connection. Such devices are intended to be supplements
to conventional hearing aids, which do not handle those situations well. The
SLDs will be based on our ULP wireless nanoLink technology and our PhysioLink
technology, which were recently demonstrated at the annual convention of the
American Academy of Audiology. 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 and
distributors 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 2011, one customer accounted for approximately 22 percent of the
Companys net sales. During 2011, the top five customers accounted for
approximately $25,000, or 44 percent, of the Companys net sales. See note 4 to
the consolidated financial statements for a discussion of net sales and
long-lived assets by geographic area.
Internationally, sales representatives employed by IntriCon GmbH
(GmbH), a wholly owned German subsidiary, solicit sales from European hearing
instrument manufacturers.
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,
hearing instrument manufacturers produce a substantial portion of their
internal needs for these components.
7
Table of Contents
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, 2011, the Company had a total of 599 full time equivalent
employees, of whom 32 are executive and administrative personnel, 17 are sales
personnel and 550 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 ULP wireless 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 $4,876,
$4,485, and $3,345 in 2011, 2010 and 2009, respectively. These amounts are net
of customer and grant reimbursed research and development.
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 value to the Company, the costs associated with the
submission of patent applications are expensed as incurred given the uncertainty
of the patents providing future economic benefit to the Company.
Regulation.
A
large portion of our business operates in a marketplace subject to extensive
and rigorous regulation by the FDA and by comparable agencies in foreign
countries. In the United States, the FDA regulates the design control,
development, manufacturing, labeling, record keeping, and surveillance
procedures for medical devices.
United States Food and Drug Administration
FDA regulations classify medical devices based on perceived risk to
public health as either Class I, II or III devices.
Class I devices are subject to general controls, Class II devices
are subject to special controls and Class III devices are subject to
pre-market approval (PMA) requirements. While most Class I devices are
exempt from pre-market submission, it is necessary for most Class II
devices to be cleared by a 510(k) pre-market notification prior to marketing.
510(k) establishes that the device is substantially equivalent to a legally
marketed predicate device which was legally marketed prior to May 28, 1976 or
which itself has been found to be substantially equivalent, through the
510(k) process, after May 28, 1976. It is substantially equivalent if it
has the same intended use and the same technological characteristics as the
predicate. The 510(k) pre-market notification must be supported by data
establishing the claim of substantial equivalence to the satisfaction of the
FDA. The process of obtaining a 510(k) clearance typically can take several
months to a year or longer. If the product is notably new or different and
substantial equivalence cannot be established, the FDA will require the
manufacturer to submit a PMA application for a Class III device that
must be reviewed and approved by the FDA prior to sale and marketing of the
device in the United States. The process of obtaining PMA approval can be
expensive, uncertain, lengthy and frequently requires anywhere from one to
several years from the date of FDA submission, if approval is obtained at all.
The FDA controls the indicated uses for which a product may be marketed and
strictly prohibits the marketing of medical devices for unapproved uses. The
FDA can withdraw products from the market for failure to comply with laws or
the occurrence of safety risks.
Our hearing aid devices are Class I medical devices, exempt from
the 510(k) submission process. They are typically marketed to FDA approved
manufacturers with IntriCon assisting in the design, development and
production. Our ECG Recorder devices are classified as Class II medical
devices and have received 510(k) marketing clearance from the FDA. Our
manufacturing operations are subject to periodic inspections by the FDA, whose
primary purpose is to audit the Companys compliance with the Quality System
Regulations published by the FDA and other applicable government standards.
Strict regulatory action may be initiated in response to audit deficiencies or
to product performance problems. We believe that our manufacturing and quality
control procedures are in compliance with the requirements of the FDA
regulations and this has been substantiated with no findings cited during our
most recent FDA audit in April of 2010.
Recent concerns have been raised by the public, internal FDA staff and Congress as to
whether the current FDA 510(k) program achieves its goals of making safe and effective devices available to the public while
also fostering innovation. In August 2010, the FDA Center for Devices and Radiological Health (CDRH) released
two major FDA reports recommending changes to be taken by CDRH. The first report provides recommendations on how to
strengthen the 510(k) program and the second report provided recommendations on how to incorporate new scientific information
into regulatory decision making. The recommendations were adopted in 2011 and are not anticipated to have a significant
impact on the Company. In addition, the FDA has requested that the Institute of Medicine conduct an independent study of the 510(k)
program on whether legislative, regulatory or administrative changes are needed.
|
International Regulation
|
International regulatory bodies have established varying regulations
governing product standards, packaging and labeling requirements, import
restrictions, tariff regulations, duties and tax. Many of these regulations
are similar to those of the FDA. We believe we are in compliance with the
regulatory requirements in the foreign countries in which our medical devices
are marketed.
|
8
Table of Contents
The registration system for our medical devices in the EU requires that
our quality system conform to international quality standards and that our
medical devices conform to essential requirements set forth by the Medical
Device Directive (MDD). Manufacturing facilities and processes under which
our ECG recorder devices are produced are inspected and audited by our
International Organization for Standardization (ISO) registrar British
Standards Institute (BSI). These devices are tested and certified by NEMKO
(Norges Elektriske Material Kontroll) an independent Norwegian company. Our
authorized representative, CE Partner 4U, maintains our technical file and
registers our products with competent authorities in all EU member states.
Manufacturing facilities and processes under which all of our other medical
devices are produced are inspected and audited by the BSI. These audits verify
our compliance with the essential requirements of the MDD. These certifying
bodies verify that our quality system conforms to the international quality
standard ISO 13485:2003 and that our products conform to the essential
requirements and supplementary requirements set forth by the MDD for the
class of medical devices we produce. These certifying bodies also certify our
conformity with both the quality standards and the MDD requirements, entitling
us to place the CE mark on all of our ECG recorder devices. Our Hearing Aid
devices typically bear the CE mark of our customers who assume regulatory
responsibilities for those devices.
|
Third Party Reimbursement
|
The availability and level of reimbursement from third-party payers
for procedures utilizing our products is significant to our business. Our
products are purchased primarily by OEM customers who sell into clinics,
hospitals and other end-users, who in turn bill various third party payers
for the services provided to the patients. These payers, which include
Medicare, Medicaid, private health insurance plans and managed care
organizations, reimburse all or part of the costs and fees associated with
the procedures utilizing our products.
|
In response to the national focus on rising health care costs, a number
of changes to reduce costs have been proposed or have begun to emerge. There
have been, and may continue to be, proposals by legislators, regulators and
third party payers to curb these costs. The development or increased use of
more cost effective treatments for diseases could cause such payers to decrease
or deny reimbursement for surgeries or devices to favor alternatives that do
not utilize our products. A significant number of Americans enroll in some form
of managed care plan. Higher managed care utilization typically drives down the
payments for health care procedures, which in turn places pressure on medical
supply prices. This causes hospitals to implement tighter vendor selection and
certification processes, by reducing the number of vendors used, purchasing
more products from fewer vendors and trading discounts on price for guaranteed
higher volumes to vendors. Hospitals have also sought to control and reduce
costs over the last decade by joining group purchasing organizations or
purchasing alliances. We cannot predict what continuing or future impact these
practices, the existing or proposed legislation, or such third-party payer
measures within a constantly changing healthcare landscape may have on our
future business, financial condition or results of operations.
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, anticipate, 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:
|
|
|
|
|
statements in Business, Legal Proceedings and Risk Factors,
such as the Companys 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, government regulation, and potential increase in demand for the
Companys products; and
|
|
|
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 levels of funding of employee
benefit plans, the adequacy of insurance coverage, the impact of new
accounting pronouncements and litigation.
|
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 and other government regulations, 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.
9
Table of Contents
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:
Corporate Secretary
IntriCon Corporation
1260 Red Fox Road
Arden Hills, MN 55112
|
10
Table of Contents
I
TEM 1A.
Risk Factors
You should carefully consider the risks described below. If any of the
risks events 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 us 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 2011, our largest customer accounted for
approximately 22 percent of our net sales and our five largest customers
accounted for approximately 44 percent 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, 2011, we had accounts receivable, less allowance for doubtful
accounts, of $8,545, which represented approximately 49 percent of our
shareholders equity as of that date. As of that date, one customer accounted
for approximately 12 percent of our accounts receivable. 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.
There
are risks under our manufacturing agreement with hi HealthInnovations.
In 2011, we entered into a manufacturing agreement with hi
HealthInnovations, a UnitedHealth Group company, to supply hearing aids. Under
the agreement, we are required to establish and maintain a certain level of
manufacturing, supply chain and delivery capacity. We devoted considerable
time, resources and capital during 2011 to securing the agreement and preparing
for the programs launch. hi HealthInnovations is not required to purchase any
minimum amount under the manufacturing agreement and may cease purchases at any
time. We also agreed that during the term of the agreement, we would not sell
hearing aids or accessories to another health insurer or directly to consumers.
For more information, see our Current Report on Form 8-K filed with the SEC on
November 14, 2011.
Despite
signs of improvement in economic conditions, the current domestic economic
environment could cause a severe disruption in our operations.
Our business has been negatively impacted by the current domestic
economic environment. If this environment 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:
Liquidity:
|
|
|
|
|
The domestic economic environment 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.
|
|
|
|
|
|
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.
|
11
Table of Contents
Demand:
|
|
|
|
|
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 products or services.
|
Prices:
|
|
|
|
|
Certain markets have experienced and may continue to experience
deflation, which would negatively impact our average prices and reduce our
margins.
|
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
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 believes 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 and professional audio communication
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.
Our
failure to obtain required governmental approvals and maintain regulatory
compliance for our required products would impact our ability to generate
revenue from those products.
The markets in which our business operates
are subject to extensive and rigorous regulation by the FDA and by comparable
agencies in foreign countries. In the United States, the FDA regulates the
design control, development, manufacturing, labeling, record keeping, and
surveillance procedures for our medical devices.
The process of obtaining marketing clearance
or approvals from the FDA for new products and new applications for existing
products can be time-consuming and expensive, and there is no assurance that
such clearance/approvals will be granted, or that the FDA review will not
involve delays that would adversely affect our ability to commercialize
additional products or additional applications for existing products. Some of
our products in the research and development stage may be subject to a lengthy
and expensive pre-market approval process with the FDA. The FDA has the
authority to control the indicated uses of a device. Products can also be
withdrawn from the market due to failure to comply with regulatory standards or
the occurrence of unforeseen problems. The FDA regulations depend heavily on
administrative interpretation, and there can be no assurance that future
interpretations made by the FDA or other regulatory bodies, with possible retroactive
effect, will not adversely affect us.
12
Table of Contents
The
registration system for our medical devices in the EU requires that our quality
system conform to international quality standards. Manufacturing facilities and
processes under which our ECG recorder devices are produced are inspected and
audited by various certifying bodies. These audits verify our compliance with
applicable requirements and standards. Further, the FDA, various state agencies and
foreign regulatory agencies inspect our facilities to determine whether we are
in compliance with various regulations relating to quality systems, such as
manufacturing practices, validation, testing, quality control, product labeling
and product surveillance. A determination that we are in violation of such
regulations could lead to imposition of civil penalties, including fines,
product recalls or product seizures, suspensions or shutdown of production and,
in extreme cases, criminal sanctions, depending on the nature of the violation.
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:
|
|
|
|
|
our ability
to create demand for products in new markets;
|
|
|
our ability
to manage growth effectively;
|
|
|
our ability
to successfully identify, complete and integrate acquisitions;
|
|
|
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;
|
|
|
the quality
of our new products; and
|
|
|
our ability
to respond rapidly to technological change.
|
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 have foreign
operations in Singapore, Indonesia and Germany, and various factors relating to
our international operations could affect our results of operations.
In 2011, we operated in Singapore, Indonesia and Germany. Approximately
19 percent of our revenues were derived from our facilities in these countries
in 2011. As of December 31, 2011 approximately 27 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 and other currencies could lead to lower reported consolidated
revenues due to the translation of this currency into U.S. dollars when we
consolidate our revenues and results from operations.
The recent recessions
in Europe and the debt crisis in certain countries in the European Union could
negatively affect our ability to conduct business in those geographies.
The continuing debt crisis in certain European countries could cause
the value of the euro to deteriorate, reducing the purchasing power of our
European customers. Financial difficulties experienced by our suppliers and
customers, including distributors, could result in product delays and inventory
issues; risks to accounts receivable could also include delays in collection
and greater bad debt expense. Also, the effect of the debt crisis in certain
European countries could have an adverse affect on the capital markets
generally, specifically impacting our ability and the ability of our customers
to finance our and their respective businesses on acceptable terms, if at all,
the availability of materials and supplies and demand for our products.
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.
13
Table of Contents
We
may experience difficulty in paying our debt when it comes due, which could limit
our ability to obtain financing.
As of December 31, 2011, we had bank indebtedness of $10,750 and
additional indebtedness of $350 payable to the former shareholder of Datrix.
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 and performance.
If
we fail to meet our financial and other covenants under our loan agreements
with our lenders, absent a waiver, we will be in default of the loan agreements
and our lenders 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 agreements. In the event we
are unable to comply with these covenants during future periods, it is
uncertain whether our lenders will grant waivers for our non-compliance. If
there is an event of default by us under our loan agreements, our lenders have
the option to, among other things, accelerate any and all of our obligations
under the loan agreements which would have a material adverse effect on our
business, financial condition and results of operations.
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. We do not maintain key-man life insurance for
any members of our senior management team.
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.
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.
14
Table of Contents
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:
|
|
|
|
|
air emissions;
|
|
|
wastewater
discharges;
|
|
|
the storage,
use, handling, disposal and remediation of hazardous substances, wastes and
chemicals; and
|
|
|
employee
health and safety.
|
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 lawsuits
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.
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 our 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 products, technologies 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.
15
Table of Contents
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.
Further, under an agreement that we entered into with hi
HealthInnovations, a UnitedHealth Group company, in connection with our
manufacturing agreement, we are required to, among other things, offer to
United Healthcare Services, Inc. the right to complete the acquisition of our
company by a health insurer on the same terms and conditions and the right to
participate in certain other sales of our company, all of which may have an
anti-takeover effect. For more information, see our Current Report on Form 8-K
filed with the SEC on November 14, 2011.
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.
Currently, we are not required to include a report of our independent
registered public accounting firm on our internal controls because we are a
smaller reporting company under SEC rules; therefore, shareholders do not
have the benefit of an independent review of our internal controls. While we
have reported no material weaknesses in the Form 10-K for the fiscal year
ended December 31, 2011, we cannot guarantee that we will not have material
weaknesses reported by our management 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 we determine that
we have a material weakness, 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.
I
TEM 2.
Properties
The Company leases eight facilities, five domestically and three
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 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 $481. The Company believes
the terms of the lease agreement are comparable to those which could be
obtained from unaffiliated third parties. As amended, this lease expires in
October 2013.
|
|
|
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. This lease expires in June 2016.
|
|
|
two buildings in Camden, Maine, which contain 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. This lease expires in June
2012. Subsequent to December 31, 2011, the lease was amended to extend the
term to June 2014 with annual base rent of approximately $109. Annual base
rent expense on the 7,000 square foot facility, including real estate taxes
and other charges, is approximately $62. 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. This lease expires in April 2012.
|
|
|
a 28,000 square foot building in Singapore which houses production
facilities and administrative offices. Annual base rent expense, including
real estate taxes and other charges, of the 24,000 square foot portion of the
building is approximately $340. This lease expires in October 2015. Annual
base rent expense on the remaining 4,000 square foot portion is approximately
$57. This lease expires in August 2013.
|
|
|
A 15,000 square foot facility in Indonesia which houses production
facilities. Annual base rent expense, including real estate taxes and other
charges is approximately $4. This lease expires in July 2016.
|
|
|
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. This lease expires in June 2012.
|
See notes 14 and 15 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
lawsuits 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.
The Companys former 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.
17
Table of Contents
I
TEM 4.
Mine Safety
Disclosures
Not
applicable.
I
TEM 4A.
Executive Officers
of the Registrant
The names, ages and offices (as of February 29, 2012) of the Companys
executive officers were as follows:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Mark S.
Gorder
|
|
65
|
|
President,
Chief Executive Officer and Director of the Company
|
Scott
Longval
|
|
35
|
|
Chief
Financial Officer and Treasurer of the Company
|
Christopher
D. Conger
|
|
51
|
|
Vice
President, Research and Development
|
Michael P.
Geraci
|
|
53
|
|
Vice President,
Sales and Marketing
|
Dennis L.
Gonsior
|
|
53
|
|
Vice
President, Operations
|
Greg
Gruenhagen
|
|
58
|
|
Vice
President, Corporate Quality and Regulatory Affairs
|
Mr. Gorder joined the Company in October 1993 when Resistance
Technology, Inc. (RTI) (now known as 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 RTI, 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.
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. 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.
18
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
Market
|
|
Market
|
|
|
|
Price Range
|
|
Price Range
|
|
|
Quarter
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First
|
|
$
|
4.27
|
|
$
|
3.75
|
|
$
|
4.10
|
|
$
|
2.84
|
|
Second
|
|
|
5.12
|
|
|
3.66
|
|
|
6.12
|
|
|
3.57
|
|
Third
|
|
|
4.60
|
|
|
2.84
|
|
|
6.30
|
|
|
3.51
|
|
Fourth
|
|
|
7.22
|
|
|
3.20
|
|
|
4.59
|
|
|
3.51
|
|
The closing sale price of the Companys common stock on March 1, 2012,
was $6.00 per share.
At March 1, 2012 the Company had 304 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.
19
Table of Contents
I
TEM 6.
Selected Financial Data
Five-Year Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
2011
|
|
2010
|
|
2009 (c)
|
|
2008
|
|
2007(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
56,058
|
|
$
|
58,697
|
|
$
|
51,676
|
|
$
|
57,908
|
|
$
|
59,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,666
|
|
|
15,013
|
|
|
11,051
|
|
|
14,657
|
|
|
15,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
13,858
|
|
|
13,419
|
|
|
11,681
|
|
|
12,360
|
|
|
12,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(609
|
)
|
|
(655
|
)
|
|
(836
|
)
|
|
(678
|
)
|
|
(942
|
)
|
Equity in income (loss) of partnerships
|
|
|
174
|
|
|
(135
|
)
|
|
(150
|
)
|
|
(4
|
)
|
|
(158
|
)
|
Other income (expense), net
|
|
|
42
|
|
|
(4
|
)
|
|
(220
|
)
|
|
(36
|
)
|
|
(79
|
)
|
Income (loss) from continuing
operations before income taxes and
discontinued operations
|
|
|
(1,585
|
)
|
|
800
|
|
|
(1,836
|
)
|
|
1,579
|
|
|
1,886
|
|
Income tax (expense) benefit
|
|
|
160
|
|
|
(145
|
)
|
|
34
|
|
|
(265
|
)
|
|
(173
|
)
|
Income (loss) from continuing operations
before discontinued operations
|
|
|
(1,425
|
)
|
|
655
|
|
|
(1,802
|
)
|
|
1,314
|
|
|
1,713
|
|
Gain on sale of discontinued operations,
net of income taxes
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations,
net of income taxes
|
|
|
|
|
|
(329
|
)
|
|
(2,119
|
)
|
|
(276
|
)
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,425
|
)
|
$
|
361
|
|
$
|
(3,921
|
)
|
$
|
1,038
|
|
$
|
1,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.25
|
)
|
$
|
.12
|
|
$
|
(.34
|
)
|
$
|
.25
|
|
$
|
.33
|
|
Discontinued operations
|
|
|
|
|
|
(.05
|
)
|
|
(.39
|
)
|
|
(.05
|
)
|
|
.03
|
|
Net income (loss)
|
|
$
|
(.25
|
)
|
$
|
.07
|
|
$
|
(.73
|
)
|
$
|
.20
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.25
|
)
|
$
|
.12
|
|
$
|
(.34
|
)
|
$
|
.24
|
|
$
|
.31
|
|
Discontinued operations
|
|
|
|
|
|
(.05
|
)
|
|
(.39
|
)
|
|
(.05
|
)
|
|
.03
|
|
Net income (loss)
|
|
$
|
(.25
|
)
|
$
|
.07
|
|
$
|
(.73
|
)
|
$
|
.19
|
|
$
|
.34
|
|
|
Weighted average number of shares
outstanding during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,599
|
|
|
5,484
|
|
|
5,394
|
|
|
5,314
|
|
|
5,210
|
|
Diluted
|
|
|
5,599
|
|
|
5,535
|
|
|
5,394
|
|
|
5,539
|
|
|
5,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
Other Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
2011
|
|
2010
|
|
2009(c)
|
|
2008
|
|
2007(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
(b)
|
|
$
|
8,207
|
|
$
|
8,615
|
|
$
|
8,504
|
|
$
|
10,602
|
|
$
|
9,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
40,730
|
|
$
|
36,267
|
|
$
|
37,363
|
|
$
|
39,462
|
|
$
|
39,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
8,217
|
|
$
|
6,465
|
|
$
|
7,730
|
|
$
|
6,188
|
|
$
|
6,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
$
|
17,446
|
|
$
|
18,571
|
|
$
|
17,489
|
|
$
|
20,312
|
|
$
|
18,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
2,258
|
|
$
|
2,601
|
|
$
|
2,470
|
|
$
|
2,426
|
|
$
|
1,785
|
|
|
|
(a)
|
Included in the 2007 results and balances at December 31, 2007, are
net sales of $4,500, total assets of $6,400, long-term debt of $4,300, and
depreciation and amortization of $100 from the acquisition of Tibbetts
Industries. Because the 2007 results include only a portion of a year and
balances at December 31, 2007 include amounts from the acquisition of
Tibbetts Industries, the financial statements for 2007 may not be comparable
to other years presented.
|
(b)
|
Working capital is equal to current assets less current liabilities.
|
(c)
|
In 2009, the Company exited the Electronic Products business, which
consisted of the thermistor, film capacitor and magnetic products, and
reclassified it as discontinued operations, including all previously reported
amounts. Subsequently, in 2010 the Company completed the sale of the assets
of the Electronic Products business.
|
21
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 products, microelectronics, micro-mechanical assemblies and
complete assemblies, primarily for bio-telemetry devices, hearing instruments
and professional audio communication devices.
As discussed below, the Company has one operating segment - its
body-worn device segment. Our expertise in this segment is focused on three
main markets: medical, hearing health and professional audio communications.
Within these chosen markets, we combine ultra-miniature mechanical and
electronics capabilities with proprietary technology including ultra low
power (ULP) wireless and digital signal processing (DSP) capabilities that
enhances the performance of body-worn devices.
Business Highlights
In October 2011, the Company announced it entered into a manufacturing
agreement to become a supplier of hearing aids to hi HealthInnovations, a
UnitedHealth Group company. hi HealthInnovations launched a suite of high-tech,
lower-cost hearing devices for the estimated 36 million Americans with hearing
loss. An estimated 75 percent of people in the United States who can benefit
from hearing devices do not use them, largely due to the high cost. hi
HealthInnovations is offering consumers technically advanced hearing aids,
including those based on IntriCons new APT Open in-the-canal (ITC) hearing
aid platform. The Company devoted a considerable amount of time, resources and
capital during 2011 to securing the agreement and preparing for the programs
launch.
During the second quarter of 2011, IntriCon established a subsidiary in
Indonesia. During the third quarter of 2011, the Company signed a lease
agreement for a manufacturing facility in Batam, Indonesia. The purpose of the
expansion is to increase the Companys low cost manufacturing presence in Asia.
The Company is transferring labor intensive product assembly to the facility.
The Company commenced manufacturing at the facility in October 2011.
In August 2011, the Company amended its credit facilities with The
PrivateBank and Trust Company. Terms of the amendment included, among other
things, extending the term of the $8,000 revolving credit facility, with a
subfacility for letters of credit, to mature in August 2014 and increasing the
Companys term loan facility to $4,000, amortized in quarterly principal
installments of $250, and an extension of the maturity to August 2014. The
$12,000 in credit facilities includes London Interbank Offered Rate (LIBOR)
interest rate options at varying rates based on funded debt to EBITDA levels.
In addition, the amendment reset certain financial covenants. The Company is
using the facilities to fund current growth opportunities, expand low-cost
manufacturing footprint and meet anticipated working capital requirements.
ForwardLooking Statements
The following discussion and analysis of our financial condition and
results of operations should be read together with our financial statements and
the related notes appearing in 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. See also Item 1. BusinessForward-Looking
Statements for more information.
22
Table of Contents
Results of Operations: 2011 Compared with
2010
Consolidated
Net Sales
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 for the years ended December 31,
2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2011
|
|
2010
|
|
Dollars
|
|
Percent
|
|
Medical
|
|
$
|
22,923
|
|
$
|
24,594
|
|
$
|
(1,671
|
)
|
|
(6.8
|
%)
|
Hearing
Health
|
|
|
21,032
|
|
|
21,007
|
|
|
25
|
|
|
0.1
|
%
|
Professional
Audio Communications
|
|
|
12,103
|
|
|
13,096
|
|
|
(993
|
)
|
|
(7.6
|
%)
|
Consolidated
net sales
|
|
$
|
56,058
|
|
$
|
58,697
|
|
$
|
(2,639
|
)
|
|
(4.5
|
%)
|
In 2011, we experienced a 7 percent decrease medical sales primarily
due to extended regulatory lead times and anticipated fluctuations in demand.
The persisting economic softness and regulatory delays has caused many patients
to defer discretionary medical procedures, and hospitals and doctors to cut
back on purchases of legacy med-tech products. As a result, during the course
of 2011, a few large medical customers experienced fluctuations in demand. As
the year progressed, we were encouraged by the reengagement of Medtronic and
other key medical customers, driving four quarters of sequential growth.
Management believes there is an industry-wide trend toward further
miniaturization and ambulatory monitoring enabled by wireless connectivity,
referred to as bio-telemetry, which in the past resulted in further growth in
our medical business. Additionally, we are actively involved with Medtronic for
future development of next-generation products. We are also working with our
strategic partner, AME, on proprietary bio-telemetry technologies that will
enable us to develop new devices that connect patients and care givers,
providing critical information and feedback.
Net sales in our hearing health business for the year ended December
31, 2011 remained flat compared to the same period in 2010 driven by growth in
our DSP circuits and sales to hi HealthInnovations, offset by temporary declines
in legacy products. We believe long term prospects in our hearing health
business remain strong as we continue to develop and launch advanced
technologies, such as our nanoDSP, Overtus, APT and Lumen products, which will
enhance the performance of hearing devices. In addition, we believe that the hi
HealthInnovations agreement holds tremendous potential. Further, 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 device sector decreased 8 percent
in 2011 compared to the same period in 2010. We believe that the primary driver
of the decrease was due to the possible U.S. government shutdown and budgetary
approval process which delayed our contract product launches with certain
government organizations. We believe our extensive portfolio of communication
devices that are portable, smaller and perform well in noisy or hazardous
environments will provide for future long-term growth in this market.
Gross Profit
Gross profit, both in dollars and as a percent of sales, for 2011 and
2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Change
|
|
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
12,666
|
|
|
22.6
|
%
|
$
|
15,013
|
|
|
25.6
|
%
|
$
|
(2,347
|
)
|
|
(15.6%
|
)
|
In 2011, gross profit decreased primarily due to lower sales volumes,
costs related to establishing the Companys Indonesian facility and ramp up
costs associated with the hi HealthInnovations agreement. The decrease in gross
profits was partially offset by the impact of various profit enhancement
programs. We have various activities underway to increase our gross profit,
such as transferring our microphone and receiver production from our Maine
facility 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.
In an effort to drive for further gross profit improvements, the
Company evaluated low cost manufacturing options in Asia. In July 2011, the
Company signed a five year lease agreement for a manufacturing facility in
Batam, Indonesia. The Company commenced manufacturing at the facility in
October 2011.
23
Table of Contents
Sales
and Marketing, General and Administrative and Research and Development Expenses
Sales and marketing, general and administrative and research and
development expenses for the years ended December 31, 2011 and 2010 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Change
|
|
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
marketing
|
|
$
|
3,185
|
|
|
5.7
|
%
|
$
|
3,133
|
|
|
5.3
|
%
|
$
|
52
|
|
|
1.7
|
%
|
General and
administrative
|
|
|
5,797
|
|
|
10.3
|
%
|
|
5,801
|
|
|
9.9
|
%
|
|
(4
|
)
|
|
(0.0
|
%)
|
Research and
development
|
|
|
4,876
|
|
|
8.7
|
%
|
|
4,485
|
|
|
7.6
|
%
|
|
391
|
|
|
8.7
|
%
|
Sales and marketing and general and administrative expenses were
relatively flat as compared to the prior year periods. Research and development
increased over the prior year period primarily due to continued development of
core technologies and research and development to support product offerings
under the hi HealthInnovations manufacturing agreement.
Interest
Expense
Interest expense for 2011 was $609, a decrease of $46 from $655 in
2010. The decrease in interest expense was primarily due to lower average debt
balances and interest rates as compared to the prior year.
Equity
in Income (Loss) of Partnerships
The equity in income (loss) of partnerships for 2011 was $174 compared
to ($135) in 2010.
The Company recorded a $34 decrease in the carrying amount of its
investment in the Hearing Instrument Manufacturers Patent Partnership (HIMPP)
for 2011, reflecting amortization of the patents and other intangibles and the
Companys portion of the partnerships operating results for the year ended
December 31, 2011, compared to a $191 decrease in the carrying amount of the
investment in 2010 for the amortization of the patents and other intangibles
and the Companys portion of the partnerships operating results for the year
ended December 31, 2010.
The Company recorded a $208 and $56 increase in the carrying amount of
IntriCons investment in a joint venture, reflecting the Companys portion of
the joint ventures operating results for year ended December 31, 2011 and
2010, respectively.
Other
Income (Expenses)
In 2011, other
income (expense) was $42 compared to $(4) in 2010.
Income
Taxes
Income taxes
were as follows:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Income tax
(expense) benefit
|
|
$
|
160
|
|
$
|
(145
|
)
|
Percentage
of pre-tax income (loss)
|
|
|
(10.1
|
%)
|
|
18.1
|
%
|
The (expense) benefit in 2011 and 2010 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 $19,800 of NOL
carryforwards available to offset future federal income taxes that begin to
expire in 2022.
Discontinued
Operations
We had no discontinued operations in 2011. We recorded a loss from
discontinued operations (electronics business) in 2010 as follows:
|
|
|
|
|
|
|
2010
|
|
Loss from
discontinued Electronics Products Business
|
|
$
|
(294
|
)
|
24
Table of Contents
The 2010 net loss of $(294), or $(0.05) per diluted share, was
primarily due to loss in operations, net of a $35 gain on sale of the
electronics business.
Results of Operations: 2010 Compared with
2009
Consolidated
Net Sales
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 for the years ended December 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
Dollars
|
|
Percent
|
|
Medical
|
|
$
|
24,594
|
|
$
|
23,005
|
|
$
|
1,589
|
|
|
6.9
|
%
|
Hearing
Health
|
|
|
21,007
|
|
|
18,432
|
|
|
2,575
|
|
|
14.0
|
%
|
Professional
Audio Communications
|
|
|
13,096
|
|
|
10,239
|
|
|
2,857
|
|
|
27.9
|
%
|
Consolidated
net sales
|
|
$
|
58,697
|
|
$
|
51,676
|
|
$
|
7,021
|
|
|
13.6
|
%
|
We experienced an increase of 7 percent in net sales in the medical
equipment market in 2010 as a direct result of continued sales to existing OEM
customers and the addition of sales from our proprietary Cardiac Monitoring
Devices, or CDMs, which we acquired in the Datrix acquisition in the third
quarter of 2009. The increase was partially offset by fourth quarter
sluggishness discussed below.
Persisting economic sluggishness has caused many patients to delay
discretionary medical procedures, and hospitals and doctors to cut back on
purchases of legacy med-tech products. During the course of the year, several
large medical customers experienced temporary fluctuations in demand. As some
customers had inventory levels above their immediate needs, the Company
experienced certain medical orders slowing in the fourth quarter of 2010.
Net sales in our hearing health business for the year ended December
31, 2010 increased 14 percent, respectively, from the same period in 2009. The
hearing health growth was primarily driven by a rebound in the hearing aid
industry during the second half of 2010 coupled with pent-up demand.
Net sales to the professional audio communications market increased 28
percent over the prior year, primarily through organic growth, resulting from
increased sales of headset devices to the installed sound market and
communication devices to government agencies.
Gross
Profit
Gross profit,
both in dollars and as a percent of sales, for 2010 and 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
15,013
|
|
|
25.6
|
%
|
$
|
11,051
|
|
|
21.4
|
%
|
$
|
3,962
|
|
|
35.9
|
%
|
In 2010, gross
profit increased primarily due to higher sales volumes and the impact of
various profit enhancement programs.
Sales
and Marketing, General and Administrative and Research and Development Expenses
Sales and marketing, general and administrative and research and
development expenses for the years ended December 31, 2010 and 2009 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent of
Sales
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
marketing
|
|
$
|
3,133
|
|
|
5.3
|
%
|
$
|
2,962
|
|
|
5.7
|
%
|
$
|
171
|
|
|
5.8
|
%
|
General and
administrative
|
|
|
5,801
|
|
|
9.9
|
%
|
|
5,374
|
|
|
10.4
|
%
|
|
427
|
|
|
7.9
|
%
|
Research and
development
|
|
|
4,485
|
|
|
7.6
|
%
|
|
3,345
|
|
|
6.5
|
%
|
|
1,140
|
|
|
34.1
|
%
|
The increased sales and marketing expenses for 2010 as compared to the
prior year period were driven by increases in royalties and commissions as a
result of higher revenues and additional sales expense from the August 2009
acquisition of Datrix. The increase in general and administrative expenses was
primarily driven by additional operating expenses from the acquisition of
Datrix. 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 proprietary technology to
further enhance our product portfolio.
25
Table of Contents
Interest
Expense
Interest expense for 2010 was $655, a decrease of $181 from $836 in
2009. The reduction in interest expense was primarily due to charges incurred
in the August 2009 debt refinancing with PrivateBank and Trust Company.
Additional 2009 interest charges included $84 of deferred financing costs, $121
to terminate and settle the Bank of America interest rate swap and $62 in
charges and interest incurred to repurchase equipment under our Bank of America
capital lease facility. These changes were partially offset by higher 2010 interest
rates in effect, as discussed below in Liquidity and Capital Resources.
Equity
in Income (Loss) of Partnerships
The equity in income (loss) of partnerships for 2010 was $(135)
compared to $(150) in 2009.
The Company recorded a $191 decrease in the carrying amount of its
investment in the Hearing Instrument Manufacturers Patent Partnership (HIMPP)
for 2010, reflecting amortization of the patents and other intangibles and the
Companys portion of the partnerships operating results for the year ended
December 31, 2010, compared to a $202 decrease in the carrying amount of the
investment in 2009 for the amortization of the patents and other intangibles
and the Companys portion of the partnerships operating results for the year
ended December 31, 2009.
The Company recorded a $56 and $53 increase in the carrying amount of
IntriCons investment in a joint venture, reflecting the Companys portion of
the joint ventures operating results for year ended December 31, 2010 and
2009, respectively.
Other
Income (Expenses)
In 2010, other income (expense) was $(4) compared to $(220) in 2009.
The other income (expense) for 2009 primarily related to the costs associated
with the acquisition of Datrix. The 2010 other income (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:
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Income tax
(expense) benefit
|
|
$
|
(145
|
)
|
$
|
34
|
|
Percentage
of pre-tax income (loss)
|
|
|
18.1
|
%
|
|
(1.9
|
%)
|
The expense (benefit) in 2010 and 2009 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.
Discontinued
Operations
We recorded a loss from discontinued operations (electronics business)
as follows:
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Loss from
discontinued Electronics Products Business
|
|
$
|
(294
|
)
|
$
|
(2,119
|
)
|
The 2010 net loss of $(294), or
$(0.05) per diluted share, was primarily due to loss in operations, net of the
$35 gain on sale of the electronics business. The 2009 net loss of $(2,119), or
$(0.39) per diluted share, was primarily due to an impairment charge associated
with challenges in the 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.
Liquidity and Capital Resources
Our primary sources of cash have been cash flows from operations, bank
borrowings, and other financing transactions. For the last three years, cash
has been used for repayments of bank borrowings, the Datrix and Tibbetts
acquisitions, purchases of equipment, establishment of an additional Asian
manufacturing facility and working capital to support research and development,
including product offerings under our hi HealthInnovations agreement.
26
Table of Contents
As of December 31, 2011, we had approximately $119 of cash on hand.
Sources and uses of our cash for the year ended December 31, 2011 have been
from our operations, as described below.
Consolidated net working capital decreased to $8,200 at December 31,
2011 from $8,600 at December 31, 2010. Our cash flows from operating, investing
and financing activities, as reflected in the statement of cash flows for the
years ended December 31, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Cash
provided (used) by:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(3
|
)
|
$
|
1,616
|
|
$
|
2,105
|
|
Investing activities
|
|
|
(2,582
|
)
|
|
(1,043
|
)
|
|
(2,484
|
)
|
Financing activities
|
|
|
2,420
|
|
|
(668
|
)
|
|
523
|
|
Effect of exchange rate changes on cash
|
|
|
3
|
|
|
(9
|
)
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
(162
|
)
|
$
|
(104
|
)
|
$
|
136
|
|
Operating
Activities
.
The most significant items that
contributed to the $3 of cash used by continuing operations were increases in
inventory and receivables offset by non-cash depreciation and amortization of
$2,258 and increases in accounts payable. Days sales in inventory increased
from 68 at December 31, 2010 to 95 at December 31, 2011 due to inventory ramp
up associated with the hi Health Innovations agreement. Days payables
outstanding increased from 35 days at December 31, 2010 to 64 days at December
31, 2011.
Investing Activities
. Net cash used by investing activities consisted of purchases of property, plant
and equipment of $2,582. A significant portion of the purchases of the
property, plant and equipment related to the cash invested to fund the
Indonesia facility build and capital to support the ramp up associated with the
hi Health Innovations agreement.
Financing Activities
. Net cash provided by financing activities of $2,420 was comprised primarily of
net borrowings of bank debt of $2,540 to support the costs related to
establishing the Companys Indonesian facility and ramp up associated with the
hi HealthInnovations agreement.
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,:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Total
availability under existing facilities
|
|
$
|
13,517
|
|
$
|
10,532
|
|
|
|
|
|
|
|
|
|
Borrowings
and commitments:
|
|
|
|
|
|
|
|
Domestic credit facility
|
|
|
5,369
|
|
|
3,920
|
|
Domestic term loans
|
|
|
3,500
|
|
|
2,563
|
|
Foreign overdraft and letter of credit
facility
|
|
|
1,881
|
|
|
1,377
|
|
Total borrowings and commitments
|
|
|
10,750
|
|
|
7,860
|
|
Remaining
availability under existing facilities
|
|
$
|
2,767
|
|
$
|
2,672
|
|
Domestic Credit Facilities
To
finance a portion of the Companys acquisition of Jon Barron, Inc. doing
business as Datrix (Datrix) and replace the Companys existing credit
facilities with Bank of America, including capital leases, the Company and its
domestic subsidiaries entered into a credit facility with The PrivateBank and
Trust Company on August 13, 2009. The credit facility, as amended, provides
for:
|
|
§
|
an $8,000 revolving credit facility, with a $200 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 term loan in the original amount of $3,500.
|
In August 2011, the Company amended the credit facility with The
PrivateBank. Per the terms of the amended agreement, the maturity of both the term
loan and the revolving credit facility was extended to expire on August 13,
2014. Further, the term loan was increased from its then current balance of
$2,225 to $4,000. In addition, the amendment reset certain financial covenants.
27
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 the Companys leverage
ratio 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) 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 3.93%, 5.06% and 4.07% for 2011, 2010 and 2009,
respectively.
The outstanding balance of the revolving credit facility was $5,369 and
$3,920 at December 31, 2011 and 2010, respectively. The total remaining
availability on the revolving credit facility was approximately $1,935 and
$2,072 at December 31, 2011 and 2010, respectively. The credit facility expires
on August 13, 2014 and all outstanding borrowings will become due and payable.
The outstanding principal balance of the term loan, as amended, is
payable in quarterly installments of $250, commencing with the calendar quarter
ended September 30, 2011. Any remaining principal and accrued interest is
payable on August 13, 2014. 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.
During 2011, the Company entered into interest rate swaps with The
PrivateBank which are accounted for as effective cash flow hedges. The interest
rate swaps had a combined initial notional amount of $5,500, with a portion of
the swap amortizing on a basis consistent with the $250 quarterly installments
required under the term loan. The interest rate swaps fix the Companys one
month LIBOR interest rate on the notional amounts at rates ranging from 4.33% -
4.62%. The interest rate swaps expire on August 13, 2014. Interest rate swaps,
which are considered derivative instruments, of $93 are reported in the balance
sheets at fair value in other current liabilities at December 31, 2011. The
impact of the interest rate swaps and related additional disclosure is not
considered material to the financial statements for 2011.
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 2012, the Company entered into an amendment with The
PrivateBank to waive certain covenant violations at December 31, 2011 and reset
certain covenant thresholds defined in the agreement. After giving effect to
the waiver, the Company was in compliance with all applicable covenants under
the credit facility as of December 31, 2011.
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, 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, 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).
28
Table of Contents
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 $1,977 line of credit. The international credit agreement
was modified in August 2010 and again in August 2011 to allow for an additional
total of $736 in borrowing under the existing base to fund the Singapore facility
relocation, Batam facility construction and various other capital needs.
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 4.28% and 4.14% for the years ended December 31, 2011 and 2010.
The outstanding balance was $1,881 and $1,377 at December 31, 2011 and 2010,
respectively. The total remaining availability on the international senior
secured credit agreement was approximately $832 and $600 at December 31, 2011
and 2010, respectively.
Datrix Promissory Note
A portion of the purchase price of the Datrix acquisition was paid by
the issuance of a promissory note to the seller in the amount of $1,050 bearing
annual interest at 6%. The remaining principal amount of the promissory note is
payable in one installment of $350 on August 13, 2012. The note bears annual
interest at 6% and is payable with each installment of principal as set forth
above. The Company made the first two installment payments, including interest,
of $413 and $395 on August 13, 2010 and August 13, 2011, respectively.
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, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
More than
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic credit facility
|
|
$
|
5,369
|
|
$
|
|
|
$
|
5,369
|
|
$
|
|
|
$
|
|
|
Domestic term loan
|
|
|
3,500
|
|
|
1,000
|
|
|
2,500
|
|
|
|
|
|
|
|
Domestic note payable
|
|
|
350
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
Foreign overdraft and letter of credit facility
|
|
|
1,881
|
|
|
1,533
|
|
|
348
|
|
|
|
|
|
|
|
Partnership payable
|
|
|
240
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Pension and other post retirement benefit obligations
|
|
|
1,378
|
|
|
213
|
|
|
379
|
|
|
288
|
|
|
498
|
|
Operating leases
|
|
|
4,861
|
|
|
1,499
|
|
|
2,200
|
|
|
1,162
|
|
|
|
|
|
Total contractual cash
obligations
|
|
$
|
17,579
|
|
$
|
4,835
|
|
$
|
10,796
|
|
$
|
1,450
|
|
$
|
498
|
|
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 $17, $134 and $13 in 2011,
2010 and 2009, respectively. See Note 11 to the Companys consolidated
financial statements included herein.
29
Table of Contents
Off-Balance Sheet
Obligations
We had no material off-balance sheet obligations as of December 31,
2011 other than the operating leases disclosed above.
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
The Company recognizes revenue when the customer takes ownership,
primarily upon product shipment, 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.
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 shipment other than warranty obligations. Contracts with customers do not
include product return rights, however, the Company may elect in certain
circumstances to accept returns of products. The Company records revenue for
product sales net of returns. Sales and use tax are reported on a net basis,
excluding them from sales 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.
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, forecasts 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.
30
Table of Contents
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 2011, 2010 or 2009, other than that related to discontinued operations
described in Note 2 to the Companys financial statements. 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.
Long-lived Assets
The carrying value of long-lived assets is periodically assessed to
insure their carrying value does not exceed the undiscounted cash flows
expected to be generated from their expected use and eventual disposition. 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 impact on the valuation allowance.
Employee Benefit
Obligations
We provide retirement and health care insurance for certain domestic
and retirees and former Selas 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.
|
|
I
TEM 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. We cannot assure you that foreign currency
fluctuations will not have a material adverse impact on our financial condition
and results of operations.
31
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. The functional currency of the
Companys Indonesian operations is 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 $17, $134 and $13 in 2011, 2010
and 2009, respectively.
For more information regarding foreign currency risks, see Foreign
Currency Fluctuation above.
Interest Rate Risk
From time to time, 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. Interest rate swaps, which are
considered derivative instruments, of $93 are reported in the balance sheets at
fair value in other current liabilities at December 31, 2011. For more
information on the interest rate swaps outstanding see Note 7 in the notes to
the Companys financial statements.
32
Table of Contents
|
|
I
TEM 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, 2011, 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, 2011,
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 a provision of the Dodd
Frank Act, which eliminated such requirement for smaller reporting companies,
as defined in SEC regulations, such as IntriCon.
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.
33
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, MN
We have audited the accompanying consolidated balance sheets of
IntriCon Corporation and Subsidiaries (the Company) as of December 31, 2011 and
2010, and the related consolidated statements of operations, shareholders
equity and comprehensive income (loss), and cash flows for the years ended
December 31, 2011, 2010 and 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, 2011 and 2010 and the results
of their operations and cash flows for the years ended December 31, 2011, 2010
and 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Baker
Tilly Virchow Krause, LLP
Minneapolis,
Minnesota
March 14, 2012
34
Table of Contents
IntriCon Corporation
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
56,058
|
|
$
|
58,697
|
|
$
|
51,676
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales
|
|
|
43,392
|
|
|
43,684
|
|
|
40,625
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,666
|
|
|
15,013
|
|
|
11,051
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,185
|
|
|
3,133
|
|
|
2,962
|
|
General and administrative
|
|
|
5,797
|
|
|
5,801
|
|
|
5,374
|
|
Research and development
|
|
|
4,876
|
|
|
4,485
|
|
|
3,345
|
|
Total operating expenses
|
|
|
13,858
|
|
|
13,419
|
|
|
11,681
|
|
Operating income (loss)
|
|
|
(1,192
|
)
|
|
1,594
|
|
|
(630
|
)
|
|
Interest expense
|
|
|
(609
|
)
|
|
(655
|
)
|
|
(836
|
)
|
Equity in income (loss) of partnerships
|
|
|
174
|
|
|
(135
|
)
|
|
(150
|
)
|
Other income (expense), net
|
|
|
42
|
|
|
(4
|
)
|
|
(220
|
)
|
Income (loss) from continuing operations before income taxes and
discontinued operations
|
|
|
(1,585
|
)
|
|
800
|
|
|
(1,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
160
|
|
|
(145
|
)
|
|
34
|
|
Income (loss) before discontinued operations
|
|
|
(1,425
|
)
|
|
655
|
|
|
(1,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes
|
|
|
|
|
|
(329
|
)
|
|
(2,119
|
)
|
Gain on sale of discontinued operations, net of income taxes
|
|
|
|
|
|
35
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,425
|
)
|
$
|
361
|
|
$
|
(3,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.25
|
)
|
$
|
.12
|
|
$
|
(.34
|
)
|
Discontinued operations
|
|
|
|
|
|
(.05
|
)
|
|
(.39
|
)
|
Net income (loss)
|
|
$
|
(.25
|
)
|
$
|
.07
|
|
$
|
(.73
|
)
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.25
|
)
|
$
|
.12
|
|
$
|
(.34
|
)
|
Discontinued operations
|
|
|
|
|
|
(.05
|
)
|
|
(.39
|
)
|
Net income (loss)
|
|
$
|
(.25
|
)
|
$
|
.07
|
|
$
|
(.73
|
)
|
See accompanying notes to the consolidated financial statements.
35
Table of Contents
IntriCon Corporation
Consolidated Balance Sheets (In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
At
December 31,
|
|
2011
|
|
2010
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
119
|
|
$
|
281
|
|
Restricted cash
|
|
|
540
|
|
|
478
|
|
Accounts receivable, less allowance for doubtful accounts of $223 and
$219 at December 31, 2011 and 2010, respectively
|
|
|
8,545
|
|
|
8,228
|
|
Inventories
|
|
|
11,720
|
|
|
8,331
|
|
Refundable income taxes
|
|
|
82
|
|
|
|
|
Other current assets
|
|
|
652
|
|
|
446
|
|
Total current assets
|
|
|
21,658
|
|
|
17,764
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
39,170
|
|
|
36,610
|
|
Less: Accumulated depreciation
|
|
|
32,164
|
|
|
30,184
|
|
Net machinery and equipment
|
|
|
7,006
|
|
|
6,426
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
9,709
|
|
|
9,709
|
|
Investment in partnerships
|
|
|
1,283
|
|
|
1,109
|
|
Other assets, net
|
|
|
1,074
|
|
|
1,259
|
|
Total assets
|
|
$
|
40,730
|
|
$
|
36,267
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Checks written in excess of cash
|
|
$
|
396
|
|
$
|
409
|
|
Current maturities of long-term debt
|
|
|
2,883
|
|
|
2,095
|
|
Accounts payable
|
|
|
6,298
|
|
|
3,161
|
|
Accrued salaries, wages and commissions
|
|
|
1,617
|
|
|
1,593
|
|
Deferred gain
|
|
|
110
|
|
|
110
|
|
Partnership payable
|
|
|
240
|
|
|
260
|
|
Income taxes payable
|
|
|
|
|
|
24
|
|
Other accrued liabilities
|
|
|
1,907
|
|
|
1,497
|
|
Total current liabilities
|
|
|
13,451
|
|
|
9,149
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
8,217
|
|
|
6,465
|
|
Other postretirement benefit obligations
|
|
|
685
|
|
|
710
|
|
Long-term partnership payable
|
|
|
|
|
|
240
|
|
Deferred income taxes
|
|
|
|
|
|
169
|
|
Accrued pension liabilities
|
|
|
431
|
|
|
464
|
|
Deferred gain
|
|
|
385
|
|
|
495
|
|
Other long-term liabilities
|
|
|
115
|
|
|
4
|
|
Total liabilities
|
|
|
23,284
|
|
|
17,696
|
|
Commitments and contingencies (note 14)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
Common stock, $1.00 par value per share; 20,000 shares authorized;
5,646 and 6,073 shares issued; 5,646 and 5,557 shares outstanding at December
31, 2011 and 2010, respectively
|
|
|
5,646
|
|
|
6,073
|
|
Additional paid-in capital
|
|
|
15,259
|
|
|
15,644
|
|
Accumulated deficit
|
|
|
(3,069
|
)
|
|
(1,644
|
)
|
Accumulated other comprehensive loss
|
|
|
(390
|
)
|
|
(237
|
)
|
Less: 516 common shares held in treasury, at cost
|
|
|
|
|
|
(1,265
|
)
|
Total shareholders equity
|
|
|
17,446
|
|
|
18,571
|
|
Total liabilities and shareholders equity
|
|
$
|
40,730
|
|
$
|
36,267
|
|
See accompanying notes to the consolidated financial statements.
36
Table of Contents
IntriCon Corporation
Consolidated
Statements of Cash Flows (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,425
|
)
|
$
|
361
|
|
$
|
(3,921
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
|
|
|
|
(35
|
)
|
|
|
|
Loss on impairment of long lived assets and goodwill
|
|
|
|
|
|
|
|
|
910
|
|
Depreciation and amortization
|
|
|
2,258
|
|
|
2,601
|
|
|
2,470
|
|
Stock-based compensation
|
|
|
214
|
|
|
474
|
|
|
561
|
|
Loss (gains) on sale of property and equipment
|
|
|
8
|
|
|
28
|
|
|
(51
|
)
|
Deferred taxes
|
|
|
(169
|
)
|
|
40
|
|
|
(27
|
)
|
Change in deferred gain
|
|
|
(110
|
)
|
|
(110
|
)
|
|
(166
|
)
|
Allowance for doubtful accounts
|
|
|
4
|
|
|
(7
|
)
|
|
9
|
|
Equity in (income) loss of partnerships
|
|
|
(174
|
)
|
|
135
|
|
|
150
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(354
|
)
|
|
(1,192
|
)
|
|
1,763
|
|
Inventories
|
|
|
(3,391
|
)
|
|
(164
|
)
|
|
729
|
|
Other assets
|
|
|
(303
|
)
|
|
159
|
|
|
201
|
|
Accounts payable
|
|
|
3,155
|
|
|
(468
|
)
|
|
743
|
|
Accrued expenses
|
|
|
376
|
|
|
(223
|
)
|
|
(1,249
|
)
|
Other liabilities
|
|
|
(92
|
)
|
|
17
|
|
|
(17
|
)
|
Net cash (used) provided by continuing operations
|
|
|
(3
|
)
|
|
1,616
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(2,582
|
)
|
|
(1,811
|
)
|
|
(1,467
|
)
|
Cash paid for acquisitions, net of cash received
|
|
|
|
|
|
|
|
|
(1,342
|
)
|
Proceeds from sales of property, plant and equipment
|
|
|
|
|
|
|
|
|
100
|
|
Proceeds from sale of discontinued operations, net
|
|
|
|
|
|
775
|
|
|
|
|
Proceeds from note receivable
|
|
|
|
|
|
|
|
|
225
|
|
Other
|
|
|
|
|
|
(7
|
)
|
|
|
|
Net cash used by investing activities
|
|
|
(2,582
|
)
|
|
(1,043
|
)
|
|
(2,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock purchases and exercise of stock options
|
|
|
230
|
|
|
261
|
|
|
152
|
|
Proceeds from long-term borrowings
|
|
|
16,685
|
|
|
12,194
|
|
|
17,813
|
|
Repayments of long-term debt
|
|
|
(14,145
|
)
|
|
(13,074
|
)
|
|
(17,180
|
)
|
Payments of partnership payable
|
|
|
(260
|
)
|
|
(260
|
)
|
|
(260
|
)
|
Change in restricted cash
|
|
|
(77
|
)
|
|
(96
|
)
|
|
(8
|
)
|
Change in checks written in excess of cash
|
|
|
(13
|
)
|
|
307
|
|
|
6
|
|
Net cash provided (used) by financing activities
|
|
|
2,420
|
|
|
(668
|
)
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
3
|
|
|
(9
|
)
|
|
(8
|
)
|
Increase (decrease) in cash
|
|
|
(162
|
)
|
|
(104
|
)
|
|
136
|
|
Cash beginning of year
|
|
|
281
|
|
|
385
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of year
|
|
$
|
119
|
|
$
|
281
|
|
$
|
385
|
|
See accompanying notes to the consolidated financial statements.
37
Table of Contents
IntriCon Corporation
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Number of
Shares
|
|
Common
Stock
$
Amount
|
|
Additional
Paid-in
Capital
|
|
Retained
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Comprehensive
Income (loss)
|
|
Treasury
Stock
|
|
Total
Shareholders
Equity
|
|
Balance December 31, 2008
|
|
|
5,858
|
|
$
|
5,858
|
|
$
|
14,122
|
|
$
|
1,916
|
|
$
|
(318
|
)
|
|
|
|
$
|
(1,265
|
)
|
$
|
20,313
|
|
Shares issued for the purchase of Datrix
|
|
|
75
|
|
|
75
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
Shares issued under the Employee Stock Purchase Plan
|
|
|
30
|
|
|
30
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
Shares issued in lieu of cash for services
|
|
|
3
|
|
|
3
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Shares issued under the Non-employee Director and Exec. Officer Stock
Purchase Program
|
|
|
20
|
|
|
20
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(3,921
|
)
|
|
|
|
$
|
(3,921
|
)
|
|
|
|
|
(3,921
|
)
|
Change in fair value of interest rate swap, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
102
|
|
|
|
|
|
102
|
|
Translation gain, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
2
|
|
|
|
|
|
2
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,817
|
)
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
|
5,986
|
|
$
|
5,986
|
|
$
|
14,987
|
|
$
|
(2,005
|
)
|
$
|
(214
|
)
|
|
|
|
$
|
(1,265
|
)
|
$
|
17,489
|
|
Exercise of stock options
|
|
|
69
|
|
|
69
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
Shares issued under the Employee Stock Purchase Plan
|
|
|
15
|
|
|
15
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
Shares issued in lieu of cash for services
|
|
|
3
|
|
|
3
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
361
|
|
|
|
|
$
|
361
|
|
|
|
|
|
361
|
|
Change in fair value of interest rate swap, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
35
|
|
|
|
|
|
35
|
|
Translation loss, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
(58
|
)
|
|
|
|
|
(58
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
338
|
|
|
|
|
|
|
|
Balance December 31, 2010
|
|
|
6,073
|
|
$
|
6,073
|
|
$
|
15,644
|
|
$
|
(1,644
|
)
|
$
|
(237
|
)
|
|
|
|
$
|
(1,265
|
)
|
$
|
18,571
|
|
|
Exercise of stock options
|
|
|
69
|
|
|
69
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
Shares issued under the Employee Stock Purchase Plan
|
|
|
17
|
|
|
17
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Shares issued in lieu of cash for services
|
|
|
3
|
|
|
3
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214
|
|
Retirement of Treasury Shares
|
|
|
(516
|
)
|
|
(516
|
)
|
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
1,265
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(1,425
|
)
|
|
|
|
$
|
(1,425
|
)
|
|
|
|
|
(1,425
|
)
|
Change in fair value of interest rate swap, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93
|
)
|
|
(93
|
)
|
|
|
|
|
(93
|
)
|
Translation loss, net of income taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
(60
|
)
|
|
|
|
|
(60
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,578
|
)
|
|
|
|
|
|
|
Balance December 31, 2011
|
|
|
5,646
|
|
$
|
5,646
|
|
$
|
15,259
|
|
$
|
(3,069
|
)
|
$
|
(390
|
)
|
|
|
|
$
|
|
|
$
|
17,446
|
|
See accompanying notes to the consolidated financial statements.
38
Table of Contents
IntriCon Corporation
Notes to Consolidated Financial Statements
(In Thousands, Except Per
Share Data)
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 company 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 products,
microelectronics, micro-mechanical assemblies and complete assemblies,
primarily for bio-telemetry devices, hearing instruments and professional audio
communication devices. In addition to its operations in Minnesota, the Company
has facilities in California, Maine, Singapore, Indonesia and Germany.
Basis of Presentation
In the fourth quarter of 2009, the Company initiated its plan to divest its
non-core electronics segment to allow for greater focus on its body-worn device
segment. On May 28, 2010 the Company completed the sale of substantially all of
the assets of its electronics business to an affiliate of Shackleton Equity
Partners. For all periods presented, the Company classified its former
electronics products segment as discontinued operations. Consequently, the
financial statements and footnote disclosures reflect continuing operations. See
further information in Note 2.
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. 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. 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 the components of its only operating segment of 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, intangible assets, and employee benefit obligations
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.
Revenue Recognition
The Company recognizes revenue when the customer takes ownership,
primarily upon product shipment, 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.
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 shipment
other than warranty obligations. Contracts with customers do not include
product return rights, however, the Company may elect in certain circumstances
to accept returns of products. The Company records revenue for product sales
net of returns. Sales and use tax are reported on a net basis.
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 includes 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, accounts receivable, notes payable, and trade
accounts payables, approximate fair value because of the short maturity of
those instruments. The fair values of the Companys long-term debt 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.
39
Table of Contents
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 $223 and $219 at December 31, 2011 and 2010,
respectively.
Inventories
Inventories are stated at the lower of cost or market. The cost of the
inventories was determined by the average cost and first-in, first-out methods.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is computed by
straight-line and accelerated methods using estimated useful lives of 5 to 40
years for buildings and improvements, and 3 to 12 years for machinery and
equipment. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of the asset.
Improvements are capitalized and expenditures for maintenance, repairs and
minor renewals are charged to expense when incurred. At the time assets are
retired or sold, the costs and accumulated depreciation are eliminated and the
resulting gain or loss, if any, is reflected in the consolidated statement of
operations. Depreciation expense was $1,994, $2,127, and $1,967 for the years
ended December 31, 2011, 2010, and 2009, respectively.
Impairment of Long-lived Assets and Long-lived Assets to be
Disposed Of
The
Company reviews its long-lived assets, certain identifiable intangibles, and
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset group to future net undiscounted 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. 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 as of November 30th. 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 utilizing 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. Debt issuance cost
included in interest expense was $142, $135 and $159 for the years ended
December 31, 2011, 2010 and 2009, respectively. Amortization expense was $264,
$262, and $260 for the years ended December 31, 2011, 2010 and 2009,
respectively.
Investments in Partnerships
Certain of the Companys investments 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 17. The
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 lack
of future benefit from the deferred tax assets realization is more likely than
not unable 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, 2011, the Company
had no accrual for the payment of tax related interest and there was no tax
interest or penalties recognized in the consolidated statements of operations.
The Companys federal and state tax returns are potentially open to
examinations for fiscal years 2008-2011 and state tax returns for the fiscal
year 2007-2011.
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 retained 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 liabilities.
40
Table of Contents
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 three years, and
the options maximum term is 10 years. Options issued to directors vest from
one to three years. One of the plans also permits the granting of stock awards,
stock appreciation rights, restricted stock units and other equity based
awards. The Company expenses 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 assesses 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, 2011, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
Beginning of the year
balance
|
|
$
|
105
|
|
$
|
71
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty expense
|
|
|
27
|
|
|
116
|
|
|
48
|
|
Closed warranty claims
|
|
|
(50
|
)
|
|
(82
|
)
|
|
(77
|
)
|
End of the year balance
|
|
$
|
82
|
|
$
|
105
|
|
$
|
71
|
|
Patent Costs
Costs associated with the submission of a patent application are
expensed as incurred given the uncertainty of the patents providing future
economic benefit to the Company.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising
costs were $3, $11, and $15, for the years ended December 31, 2011, 2010 and
2009, respectively, and are included in sales and marketing expense in the
consolidated statements of operations.
Research and Development Costs
Research and development costs, net of
customer funding, amounted to $4,876, $4,485, and $3,345 in 2011, 2010 and
2009, respectively, and are charged to expense when incurred.
Customer Funded Tooling Costs
The Company designs and develops molds and
tools for reimbursement on behalf of several customers. Costs associated with
the design and development of the molds and tools are charged to expense, net
of the customer reimbursement amount. Customer funded tooling, net was income
of $266, $35 and $21 for the years ended December 31, 2011, 2010 and 2009,
respectively, and is included in research and development in the consolidated
statements of operations.
Income (loss) Per Share
Basic income (loss) per share is computed
by dividing net income (loss) 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
- The Companys German subsidiary accounts 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
When deemed appropriate, the Company enters
into derivative instruments. We do not use derivative financial instruments for
speculative or trading purposes. All derivative transactions are linked to an
existing balance sheet item or firm commitment, and the notional amount does
not exceed the value of the exposure being hedged.
41
Table of Contents
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 income (loss) on the consolidated statements of operations.
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 income (loss), net of tax or, if ineffective, on the
consolidated statements of operations.
New Accounting Pronouncements
In
May 2011, the Financial Accounting Standards Board (FASB) issued new guidance
concerning fair value measurements and disclosure. The new guidance is the
result of joint efforts by the FASB and the International Accounting Standards
Board to develop a single, converged fair value framework on how to measure
fair value and the necessary disclosures concerning fair value measurements.
The guidance is effective for interim and annual periods beginning after
December 15, 2011 and no early adoption is permitted. The Company is
currently evaluating this new guidance and does not anticipate that the
adoption will have a material impact on the consolidated financial statements.
In
June 2011, the FASB issued an Accounting Standards Update (ASU) increasing the
prominence of other comprehensive income (OCI) in the financial statements
and providing companies two options for presenting OCI, which until now has
typically been placed within the statement of equity. One option allows an OCI
statement to be included with the statement of operations, and together the two
will make a statement of total comprehensive income. Alternately, companies may
present an OCI statement separate from the statement of operations; however,
the two statements will have to appear consecutively within a financial report.
This ASU does not affect the types of items that are reported in OCI, nor does
it affect the calculation or presentation of earnings per share. For public
companies, this ASU is effective for periods beginning after December 15, 2011.
The Company will adopt the OCI presentation requirements beginning with its
first quarter in 2012 and does not anticipate that the adoption will have a
material impact on the consolidated financial statements.
In
September 2011, the FASB issued an ASU that permits an entity to first assess
qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment
test. The more-likely-than-not threshold is defined as having a likelihood of
more than 50 percent. Under this ASU, an entity is not required to calculate
the fair value of a reporting unit unless the entity determines that it is more
likely than not that its fair value is less than its carrying amount. This ASU
is effective for annual periods beginning after December 15, 2011. We do not
expect that it will have any material impact on our financial position and
results of operations because it is a change in application of the goodwill
impairment test only.
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, Inc. 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. 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 relating to goodwill, (ii) a reduction to
realizable value of $720 to tangible assets, and (iii) $275 in employee
termination costs for the year ended December 31, 2009. Additional costs
related to employee terminations of approximately $200 were recorded during the
first half of 2010.
On
May 28, 2010 the Company completed the sale of substantially all of the assets
of its electronics business to an affiliate of Shackleton Equity Partners
(Shackleton), pursuant to an Asset Purchase Agreement dated May 28, 2010.
Shackleton paid $850 cash at closing for the assets and assumed certain
operating liabilities of IntriCons electronics business, subject to an
accounts receivable adjustment.
42
Table of Contents
The Company recorded a
net gain on sale of $35. The net gain was computed as follows during the
second quarter of the 2010 fiscal year:
|
|
|
|
|
Cash
|
|
$
|
4
|
|
Accounts
receivable, net
|
|
|
773
|
|
Inventory, net
|
|
|
383
|
|
Other
current assets
|
|
|
16
|
|
Property and
equipment, net
|
|
|
72
|
|
Other assets
|
|
|
26
|
|
Accounts
payable
|
|
|
(356
|
)
|
Accrued
expenses
|
|
|
(130
|
)
|
Long-term
debt
|
|
|
(48
|
)
|
Total
|
|
$
|
740
|
|
Cash
proceeds received from Shackleton
|
|
|
850
|
|
Net assets
sold
|
|
|
(740
|
)
|
Transaction
costs
|
|
|
(75
|
)
|
Gain on sale
of discontinued operations
|
|
$
|
35
|
|
The following table shows the results of operations of the Companys
electronic products segment for the 2010 and 2009 fiscal years:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
|
Sales, net
|
|
$
|
2,346
|
|
$
|
5,382
|
|
Operating
costs and expenses
|
|
|
(2,670
|
)
|
|
(5,653
|
)
|
Loss on
impairment of long lived asset and goodwill
|
|
|
|
|
|
(910
|
)
|
Operating
loss
|
|
|
(324
|
)
|
|
(1,181
|
)
|
Other
expense, net
|
|
|
(5
|
)
|
|
(923
|
)
|
Loss from
operations before income tax benefit
|
|
|
(329
|
)
|
|
(2,104
|
)
|
Income tax
expense (benefit)
|
|
|
|
|
|
15
|
|
Net loss
from discontinued operations
|
|
$
|
(329
|
)
|
$
|
(2,119
|
)
|
As discussed above, along with the decision to divest the electronics
business, the Company evaluated assets for impairment as of December 31, 2009.
There was no additional impairment identified and recorded during the 2010
fiscal year. Information regarding the nonrecurring fair value measurement of
such impairments completed during the twelve month period ended December 31,
2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009:
|
|
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 provided the Company
entry into the ambulatory electrocardiograph (AECG) and event recording
markets.
The
purchase price included a closing cash payment of $1,225, issuance of 75 shares
of restricted common stock of the Company, valued at $270 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 bearing annual interest at 6%. The remaining
principal amount of the promissory note is payable in one installment of $350
on August 13, 2012. The note bears annual interest at 6% and is payable with
each installment of principal as set forth above. The Company made the first
two installment payments, including interest, of $413 and $395 on August 13,
2010 and August 13, 2011, respectively.
43
Table of Contents
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 $2,128. 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.
The
purchase price was as follows as of August 13, 2009:
|
|
|
|
|
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:
|
|
|
|
|
Cash
|
|
$
|
13
|
|
Other
current assets
|
|
|
522
|
|
Intangible
assets (weighted average life of 2.4 years)
|
|
|
125
|
|
Goodwill
|
|
|
2,128
|
|
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.
Acquisition costs of $277 were primarily incurred and recorded during
the year ended December 31, 2009 and included the following:
|
|
|
|
|
Investment
Banker
|
|
$
|
121
|
|
Legal
|
|
|
127
|
|
Accounting
|
|
|
2
|
|
Other
|
|
|
27
|
|
Total
|
|
$
|
277
|
|
Acquisition costs are included in other expenses, net in the
consolidated statements of operations. We consider the majority of the
acquisition costs to be of the non-operating, miscellaneous nature, as they
were incurred as part of a non-operating activity, a business acquisition. The
Companys investment banker costs during the period relate to the acquisition
and without such acquisition, the costs would not have been incurred. Further,
legal and accounting services were specifically related for the acquisition
project.
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 are set forth
below:
Long-lived Assets
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
United
States
|
|
$
|
5,382
|
|
$
|
5,027
|
|
Other
primarily Singapore
|
|
|
2,014
|
|
|
1,789
|
|
Consolidated
|
|
$
|
7,396
|
|
$
|
6,816
|
|
Long-lived assets consist of property and equipment and certain other
assets as they are difficult to move and relatively illiquid. Excluded from
long-lived assets are investments in partnerships, patents, license agreements
and goodwill. The Company capitalizes long-lived assets pertaining to the
production of specialized parts. These assets are periodically reviewed to
assure the net realizable value from the estimated future production based on
forecasted cash flows exceeds the carrying value of the assets.
44
Table of Contents
Net Sales to Geographical Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
39,912
|
|
$
|
40,108
|
|
$
|
36,587
|
|
Germany
|
|
|
1,979
|
|
|
2,517
|
|
|
3,335
|
|
China
|
|
|
1,745
|
|
|
3,531
|
|
|
2,716
|
|
Switzerland
|
|
|
1,122
|
|
|
764
|
|
|
561
|
|
Singapore
|
|
|
715
|
|
|
1,367
|
|
|
892
|
|
France
|
|
|
1,424
|
|
|
1,625
|
|
|
1,428
|
|
Japan
|
|
|
1,473
|
|
|
1,810
|
|
|
1,741
|
|
United
Kingdom
|
|
|
1,480
|
|
|
799
|
|
|
528
|
|
Turkey
|
|
|
766
|
|
|
401
|
|
|
298
|
|
Hong Kong
|
|
|
1,026
|
|
|
757
|
|
|
365
|
|
Vietnam
|
|
|
1,110
|
|
|
1,330
|
|
|
868
|
|
All other
countries
|
|
|
3,306
|
|
|
3,688
|
|
|
2,357
|
|
Consolidated
|
|
$
|
56,058
|
|
$
|
58,697
|
|
$
|
51,676
|
|
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, 22 percent and 22 percent of the
Companys consolidated net sales in 2011, 2010 and 2009, respectively. A second
customer accounted for 11 percent of the Companys consolidated net sales in
2009. During 2011, 2010 and 2009 the top five customers accounted for
approximately $25,000, $25,000 and $24,000 or 44 percent, 42 percent and 46
percent of the Companys consolidated net sales, respectively.
At December 31, 2011, one customer accounted for 12 percent of the Companys
consolidated accounts receivable. One customer accounted for 13 percent of the
Companys consolidated accounts receivable at December 31, 2010.
5. GOODWILL
The Company performed the required goodwill impairment test as of
November 30
th
for each of the years ended December 31, 2011, 2010 and 2009. The
Company completed or obtained an analysis to assess the fair value of its
reporting units to determine whether goodwill was impaired and the extent of
such impairment, if any for the years ended December 31, 2011, 2010 and 2009.
Based upon this analysis, the Company determined that its current goodwill
balance was not impaired as of the date of testing.
A two-step approach is used in evaluating goodwill for impairment.
First, the Company compares 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, the Company uses the income approach. The income approach is a
valuation technique under which the Company estimates 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 the Company estimated cost of capital derived using both known and
estimated customary market metrics. In determining the fair value of the
Companys reporting units, the Company is 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
the Companys reporting units fair values is compared to the Company
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 the Company 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, the Company measures 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, 2008
|
|
$
|
7,581
|
|
Goodwill
acquired during the year (Note 3)
|
|
|
2,136
|
|
Carrying
amount at December 31, 2009
|
|
|
9,717
|
|
Revision to
prior year purchase price allocation
|
|
|
(8
|
)
|
Carrying
amount at December 31, 2010
|
|
|
9,709
|
|
Changes to
the carrying amount
|
|
|
|
|
Carrying
amount at December 31, 2011
|
|
$
|
9,709
|
|
45
Table of Contents
6. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Raw
materials
|
|
Work-in
process
|
|
Finished
products
and components
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,198
|
|
$
|
1,793
|
|
$
|
2,317
|
|
$
|
8,308
|
|
Foreign
|
|
|
2,174
|
|
|
1,078
|
|
|
160
|
|
|
3,412
|
|
Total
|
|
$
|
6,372
|
|
$
|
2,871
|
|
$
|
2,477
|
|
$
|
11,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
3,614
|
|
$
|
1,258
|
|
$
|
1,129
|
|
$
|
6,001
|
|
Foreign
|
|
|
1,667
|
|
|
476
|
|
|
187
|
|
|
2,330
|
|
Total
|
|
$
|
5,281
|
|
$
|
1,734
|
|
$
|
1,316
|
|
$
|
8,331
|
|
7. SHORT AND LONG-TERM DEBT
Short and long-term debt at December 31were as follows:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Domestic
Asset-Based Revolving Credit Facility
|
|
$
|
5,369
|
|
$
|
3,920
|
|
Foreign
Overdraft and Letter of Credit Facility
|
|
|
1,881
|
|
|
1,377
|
|
Domestic
Term Loan
|
|
|
3,500
|
|
|
2,563
|
|
Note Payable
Datrix Purchase (See Note 3)
|
|
|
350
|
|
|
700
|
|
Total Debt
|
|
|
11,100
|
|
|
8,560
|
|
Less:
Current maturities
|
|
|
(2,883
|
)
|
|
(2,095
|
)
|
Total Long
Term Debt
|
|
$
|
8,217
|
|
$
|
6,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
Thereafter
|
|
Total
|
|
Domestic credit facility
|
|
$
|
|
|
$
|
|
|
$
|
5,369
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
5,369
|
|
Domestic term loan
|
|
|
1,000
|
|
|
1,000
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
Domestic note payable
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
Foreign overdraft and letter of credit
facility
|
|
|
1,533
|
|
|
271
|
|
|
61
|
|
|
16
|
|
|
|
|
|
|
|
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
2,883
|
|
$
|
1,271
|
|
$
|
6,930
|
|
$
|
16
|
|
$
|
|
|
$
|
|
|
$
|
11,100
|
|
Domestic
Credit Facilities
To finance a portion of the Companys acquisition of Jon Barron, Inc.
doing business as Datrix (Datrix) and replace the Companys existing credit
facilities with Bank of America, including capital leases, the Company and its
domestic subsidiaries entered into a credit facility with The PrivateBank and
Trust Company on August 13, 2009. The credit facility, as amended, provides
for:
|
|
|
|
§
|
an $8,000 revolving credit facility, with a $200 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 term loan in the original amount of $3,500.
|
In August 2011, the Company amended the credit facility with The
PrivateBank. Per the terms of the amended agreement, the maturity of both the
term loan and the revolving credit facility was extended to expire on August
13, 2014. Further, the term loan was increased from its then current balance of
$2,225 to $4,000. In addition, the amendment reset certain financial covenants.
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 the Companys leverage
ratio of funded debt / EBITDA, at the option of the Company, at:
|
|
|
|
§
|
the London InterBank Offered Rate (LIBOR) plus 3.00% - 4.00%, or
|
46
Table of Contents
|
|
|
|
§
|
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 3.93%, 5.06% and 4.07% for 2011, 2010 and 2009,
respectively.
The outstanding balance of the revolving credit facility was $5,369 and
$3,920 at December 31, 2011 and 2010, respectively. The total remaining
availability on the revolving credit facility was approximately $1,935 and
$2,072 at December 31, 2011 and 2010, respectively. The credit facility expires
on August 13, 2014 and all outstanding borrowings will become due and payable.
The outstanding principal balance of the term loan, as amended, is
payable in quarterly installments of $250, commencing with the calendar quarter
ended September 30, 2011. Any remaining principal and accrued interest is
payable on August 13, 2014. 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.
During 2011, the Company entered into interest rate swaps with The
PrivateBank which are accounted for as effective cash flow hedges. The interest
rate swaps had a combined initial notional amount of $5,500, with a portion of
the swap amortizing on a basis consistent with the $250 quarterly installments
required under the term loan. The interest rate swaps fix the Companys one
month LIBOR interest rate on the notional amounts at rates ranging from 4.33% -
4.62%. The interest rate swaps expire on August 13, 2014. Interest rate swaps,
which are considered derivative instruments, of $93 are reported in the balance
sheets at fair value in other current liabilities at December 31, 2011. The
impact of the interest rate swaps and related additional disclosure is not
considered material to the financial statements for 2011.
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 2012, the Company entered
into an amendment with The PrivateBank to waive certain covenant violations at
December 31, 2011 and reset certain covenant thresholds defined in the
agreement. After giving effect to the waiver, the Company was in compliance with
all applicable covenants under the credit facility as of December 31,
2011.
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, 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, 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).
47
Table of Contents
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 $1,977 line of credit. The international credit agreement was
modified in August 2010 and again in August 2011 to allow for an additional
total of $736 in borrowing under the existing base to fund the Singapore
facility relocation, Batam facility construction and various other capital
needs. 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 4.28% and 4.14% for the years ended December 31, 2011 and
2010. The outstanding balance was $1,881 and $1,377 at December 31, 2011 and
2010, respectively. The total remaining availability on the international
senior secured credit agreement was approximately $832 and $600 at December 31,
2011 and 2010, respectively.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
Taxes, including payroll withholdings and
excluding income taxes
|
|
$
|
27
|
|
$
|
4
|
|
Accrued professional fees
|
|
|
223
|
|
|
294
|
|
Pension
|
|
|
91
|
|
|
90
|
|
Postretirement benefit obligations
|
|
|
165
|
|
|
165
|
|
Other
|
|
|
1,401
|
|
|
944
|
|
|
|
$
|
1,907
|
|
$
|
1,497
|
|
9. DOMESTIC AND FOREIGN INCOME TAXES
Domestic and foreign income taxes (benefits) were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State
|
|
|
(33
|
)
|
|
6
|
|
|
|
|
Foreign
|
|
|
42
|
|
|
99
|
|
|
(7
|
)
|
|
|
|
9
|
|
|
105
|
|
|
(7
|
)
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(169
|
)
|
|
40
|
|
|
(27
|
)
|
|
|
|
(169
|
)
|
|
40
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
(benefit)
|
|
$
|
(160
|
)
|
$
|
145
|
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
(636
|
)
|
$
|
634
|
|
$
|
12
|
|
Domestic
|
|
|
(949
|
)
|
|
166
|
|
|
(1,848
|
)
|
|
|
$
|
(1,585
|
)
|
$
|
800
|
|
$
|
(1,836
|
)
|
48
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,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
provision at statutory rate
|
|
|
(34.0
|
)%
|
|
34.0
|
%
|
|
(34.0
|
)%
|
Change in
valuation allowance
|
|
|
39.9
|
|
|
(53.03
|
)
|
|
31.2
|
|
Impact of
permanent items, including stock based compensation expense
|
|
|
6.32
|
|
|
22.73
|
|
|
3.0
|
|
Effect of
foreign tax rates
|
|
|
5.21
|
|
|
(2.97
|
)
|
|
(0.0
|
)
|
State taxes
net of federal benefit
|
|
|
(2.12
|
)
|
|
1.21
|
|
|
(0.4
|
)
|
Effect of
dividend of foreign subsidiary in prior year
|
|
|
0.0
|
|
|
30.61
|
|
|
0.0
|
|
Prior year provision to return true-up
|
|
|
(23.12
|
)
|
|
0.0
|
|
|
0.0
|
|
Other
|
|
|
(2.28
|
)
|
|
(10.12
|
)
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Domestic and
foreign income tax rate
|
|
|
(10.09
|
)%
|
|
22.43
|
%
|
|
(1.8
|
)%
|
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2011, and 2010 are presented below:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
Net operating loss carry forwards and
credits United States
|
|
$
|
7,071
|
|
$
|
6,353
|
|
Depreciation and amortization
|
|
|
132
|
|
|
197
|
|
Inventory related timing differences
|
|
|
475
|
|
|
478
|
|
Compensation accruals
|
|
|
963
|
|
|
702
|
|
Accruals and reserves
|
|
|
159
|
|
|
430
|
|
Other
|
|
|
210
|
|
|
201
|
|
Total deferred tax assets
|
|
|
9,010
|
|
|
8,361
|
|
Less: valuation allowance
|
|
|
9,010
|
|
|
8,361
|
|
Deferred tax assets net of valuation
allowance
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
Plant and equipment, due to differences in
depreciation and capitalized interest- Foreign
|
|
$
|
|
|
$
|
(169
|
)
|
Total deferred tax liabilities
|
|
|
|
|
|
(169
|
)
|
Net deferred tax
|
|
$
|
|
|
$
|
(169
|
)
|
Domestic and foreign deferred taxes were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
deferred asset
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Non-current
deferred liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred
tax liability
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
deferred asset
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Non-current
deferred liability
|
|
|
|
|
|
|
|
|
(169
|
)
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred
tax liability
|
|
$
|
|
|
$
|
|
|
$
|
(169
|
)
|
$
|
(169
|
)
|
The valuation allowance is maintained against deferred tax assets which
the Company has determined are more likely than not unable to be realized. The
change in valuation allowance was $649, $(399) and $1,493 for the years ended
December 31, 2011, 2010 and 2009, respectively. In addition as of December 31,
2011, the Company has net operating loss carryforwards for Federal tax purposes
of approximately $19,800. 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.
49
Table of Contents
Excluded from
the Companys net operating loss carryforwards is $105 in tax deductions
resulting from the exercise of non-qualified stock options during the year.
Because the Company is currently in an NOL position, the $105 windfall is not
recorded through additional paid-in capital until the tax benefit is recognized
through a reduction in actual tax payments. For tax reporting purposes, the
Company has actual federal and state net operating loss carryforwards of
$19,905 and $5,937, respectively. These net operating loss carryforwards begin
to expire in 2022 for federal tax purposes and 2017 for state tax purposes.
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
unable 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, 2011 and 2010.
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 2008 and state for the years starting before
2007. 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, 2011, 2010, and 2009 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 2011, 2010, and 2009 was $0,
$0, and $74, 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 $1,100 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.
50
Table of Contents
The following table presents the amounts recognized in the Companys
consolidated balance sheets at December 31, 2011 and 2010 for post-retirement
medical benefits:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Change in
Projected Benefit Obligation
|
|
|
|
|
|
|
|
Projected
benefit obligation at January 1
|
|
$
|
875
|
|
$
|
889
|
|
Interest
cost
|
|
|
47
|
|
|
49
|
|
Actuarial
loss
|
|
|
130
|
|
|
109
|
|
Participant
contributions
|
|
|
85
|
|
|
77
|
|
Benefits
paid
|
|
|
(287
|
)
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at December 31
|
|
|
850
|
|
|
875
|
|
|
|
|
|
|
|
|
|
Change in
fair value of plan assets
|
|
|
|
|
|
|
|
Employer
contributions
|
|
|
202
|
|
|
172
|
|
Participant
contributions
|
|
|
85
|
|
|
77
|
|
Benefits
paid
|
|
|
(287
|
)
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
(850
|
)
|
|
(875
|
)
|
|
|
|
|
|
|
|
|
Amount
recognized in consolidated balance sheets
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
165
|
|
|
165
|
|
Noncurrent
liabilities
|
|
|
685
|
|
|
710
|
|
Net amount
recognized
|
|
$
|
850
|
|
$
|
875
|
|
|
|
|
|
|
|
|
|
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, 2011 and 2010.
Net periodic post-retirement medical benefit costs for 2011, 2010, and
2009 included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Service cost
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Interest
cost
|
|
|
47
|
|
|
49
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
post-retirement medical benefit cost
|
|
$
|
47
|
|
$
|
49
|
|
$
|
58
|
|
For measurement purposes, an 8.0% annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was assumed
for 2011; the rate was assumed to decrease gradually to 3.5% by the year 2018
and remain at that level thereafter. The difference in 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, 2011 by $11 and the aggregate of
the service and interest cost components of net periodic post-retirement
medical benefit cost for the year ended December 31, 2011 by $1. Employer
contributions for 2012 are expected to be approximately $122.
The
assumptions used for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
increase in cost of benefits
|
|
|
8.0
|
%
|
|
8.0
|
%
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate used to determine year-end obligations
|
|
|
5.5
|
%
|
|
6.0
|
%
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate used to determine year-end expense
|
|
|
6.0
|
%
|
|
6.0
|
%
|
|
7.0
|
%
|
The following employer benefit payments, which reflect expected future
service, are expected to be paid:
|
|
|
|
|
2012
|
|
$
|
122
|
|
2013
|
|
$
|
113
|
|
2014
|
|
$
|
103
|
|
2015
|
|
$
|
93
|
|
2016
|
|
$
|
83
|
|
Years 2017
2021
|
|
$
|
275
|
|
51
Table of Contents
The Company provides retirement related benefits to former executive
employees and to certain employees of foreign subsidiaries. The Company has
consistently applied various assumptions in determining the fair market value
of these liabilities including discount rates, and mortality tables. The
liabilities established for these benefits at December 31, 2011 and 2010 are
illustrated below.
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
Current
portion
|
|
$
|
91
|
|
$
|
90
|
|
Long-term
portion
|
|
|
431
|
|
|
464
|
|
|
|
|
|
|
|
|
|
Total
liability at December 31
|
|
$
|
522
|
|
$
|
554
|
|
11. CURRENCY TRANSLATION AND
TRANSACTION ADJUSTMENTS
All assets and liabilities of foreign operations in which the
functional currency is not the U.S. dollar 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 consolidated
statements of operations include a loss of $17, $134, and $13 in 2011, 2010,
and 2009.
12. COMMON STOCK AND STOCK OPTIONS
The Company has 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 or the non-employee directors stock option plans; however,
certain option grants under these plans remain exercisable as of December 31,
2011. 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 699
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. On April 21, 2010, the Companys
shareholders approved an amendment to the 2006 Equity Incentive Plan to
increase (i) the authorized number of shares of the Companys common stock
reserved and issuable under the plan by an additional 250 shares and (ii) the
maximum number of incentive stock options that may be granted under the plan to
be the same as the maximum number of shares that may be granted under the 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, 2011. 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.
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 shares issued in lieu of cash for director fees under
the director program for each of the years ended December 31, 2011, 2010 and
2009, 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
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 0, 0 and 20 shares purchased under the management
purchase program during the years ended December 31, 2011, 2010 and 2009,
respectively.
52
Table of Contents
Stock option activity during
the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at December 31, 2008
|
|
|
982
|
|
|
5.93
|
|
|
|
|
|
Options forfeited
|
|
|
(11
|
)
|
|
10.69
|
|
|
|
|
Options granted
|
|
|
83
|
|
|
3.29
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
1,054
|
|
|
5.67
|
|
|
|
|
|
Options forfeited
|
|
|
(40
|
)
|
|
4.97
|
|
|
|
|
Options granted
|
|
|
127
|
|
|
3.44
|
|
|
|
|
Options exercised
|
|
|
(69
|
)
|
|
3.11
|
|
|
|
|
Outstanding
at December 31, 2010
|
|
|
1,072
|
|
|
5.60
|
|
|
|
|
|
Options forfeited
|
|
|
(95
|
)
|
|
3.07
|
|
|
|
|
Options granted
|
|
|
177
|
|
|
4.43
|
|
|
|
|
Options exercised
|
|
|
(69
|
)
|
|
2.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2011
|
|
|
1,085
|
|
$
|
5.84
|
|
$
|
1,933
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2010
|
|
|
829
|
|
$
|
5.93
|
|
$
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2011
|
|
|
840
|
|
$
|
6.32
|
|
$
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for future grant at January 1, 2011
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for future grant at December 31, 2011
|
|
|
239
|
|
|
|
|
|
|
|
The number of shares available for future grant at December 31, 2011,
does not include a total of up to 285 shares subject to options outstanding
under the 2001 stock option plan and non-employee directors stock option plan
which will become available for grant under the 2006 Equity Incentive Plan in
the event of the expiration of said options.
The weighted-average remaining contractual term of options exercisable
at December 31, 2011, was 5.03 years. The total intrinsic value of options
exercised during fiscal 2011, 2010, and 2009, was $163, $55, and $0,
respectively.
The weighted-average per share fair value of options granted was $2.57,
$1.86, and $1.71, in 2011, 2010, and 2009, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
volatility
|
|
|
68.68 69.22
|
%
|
|
62.03 62.16
|
%
|
|
58.8 62.4
|
%
|
Risk-free
interest rate
|
|
|
2.06 - 2.22
|
%
|
|
2.35 - 2.52
|
%
|
|
1.27 - 2.58
|
%
|
Expected
life (years)
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
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 the Companys historical volatility.
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
and continually reviews this estimate.
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 $214, $474 and $561 of non-cash stock option
expense for the years ended December 31, 2011, 2010 and 2009, respectively. As
of December 31, 2011, there was $417 of total unrecognized compensation costs
related to non-vested awards that is expected to be recognized over a
weighted-average period of 1.9 years.
The Company also has an Employee Stock Purchase Plan (the Purchase
Plan). The Purchase Plan initially provided that a maximum of 100 shares may
be sold under the Purchase Plan as of the date of adoption. On April 27, 2011,
the Companys shareholders approved an amendment to the Purchase Plan to
increase the number of shares which may be purchased under the plan by an
additional 100 shares. There were 17, 15 and 30 shares purchased under the plan
for the years ended December 31, 2011, 2010 and 2009, respectively.
53
Table of Contents
13. INCOME (LOSS) PER SHARE
The following
table sets forth the computation of basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued
operations
|
|
$
|
(1,425
|
)
|
$
|
655
|
|
$
|
(1,802
|
)
|
Loss from discontinued operations, net of
taxes and gain on sale
|
|
|
|
|
|
(294
|
)
|
|
(2,119
|
)
|
Net income (loss)
|
|
$
|
(1,425
|
)
|
$
|
361
|
|
$
|
(3.921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic weighted shares outstanding
|
|
|
5,599
|
|
|
5,484
|
|
|
5,394
|
|
Weighted shares assumed upon exercise of
stock options
|
|
|
|
|
|
51
|
|
|
|
|
Diluted weighted shares outstanding
|
|
|
5,599
|
|
|
5,535
|
|
|
5,394
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.25
|
)
|
$
|
0.12
|
|
$
|
(0.34
|
)
|
Discontinued operations
|
|
|
|
|
|
(0.05
|
)
|
|
(0.39
|
)
|
Basic earnings (loss) per share:
|
|
$
|
(.25
|
)
|
$
|
0.07
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.25
|
)
|
$
|
0.12
|
|
$
|
(0.34
|
)
|
Discontinued operations
|
|
|
|
|
|
(0.05
|
)
|
|
(0.39
|
)
|
Diluted earnings (loss) per share:
|
|
$
|
(.25
|
)
|
$
|
0.07
|
|
$
|
(0.73
|
)
|
The Company
excluded stock options of 1,085, 575, and 1,247, in 2011, 2010, and 2009,
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
lawsuits 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, the Company 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. 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, it 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 the 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 former 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. 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 2011, 2010, and 2009 under leases pertaining
primarily to engineering, manufacturing, sales and administrative facilities,
with an initial term of one year or more, aggregated $1,497, $1,365, and
$1,211, respectively. Remaining rentals payable under such leases are as
follows: 2012 - $1,432; 2013- $1,266; 2014 - $848; 2015 - $798; 2016 - $329,
which includes two leased facilities in Minnesota that expire in 2013 and 2016,
two leased facilities in Maine that expire in 2012 and 2017, one leased
facility in California that expires in 2012, one leased facility in Singapore
that expires in 2015, one leased facility in Indonesia that expires in 2016 and
one leased facility in Germany that expires in 2012. Certain leases contain
renewal options as defined in the lease agreements.
54
Table of Contents
On October 5, 2007, the Company entered into employment agreements with
its executive officers. The agreements call for payments ranging from six
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 was five years
from the date of execution with an extension available upon agreement of the
parties within two months of the expiration of the initial term; however,
either party had ability to 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. Minimal royalty payments were made for the years ended
December 31, 2011 and 2010. The Company recorded $1,000 payable to Dynamic
Hearing for the first two years of exclusive license fees described above which
was paid during 2010. In January of 2011, the strategic alliance agreement was
amended to, among other things, remove the second component fee for the
remainder of the term and extend the date after which either party can
terminate the agreement through December 2012. Exclusive rights and engineering
and other services were amortized through September 2010. The technology access
fee will be amortized through September 2017, the estimated useful life and is
included in other assets, net on the balance sheet. The technology access fee
asset was $312 and $206 as of December 31, 2011 and 2010, respectively.
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 $486, $477 and $477 for each of the years ended 2011, 2010 and
2009. On October 31, 2011 the subsidiary executed a lease amendment with the
partnership to extend the term of the lease for two years. The total annual
base rent expense, real estate taxes and other charges under the newly executed
lease amendment are expected to be approximately $481.
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. The Company paid approximately $217, $205, and $345 to Blank Rome
LLP for legal services and costs in 2011, 2010 and 2009, 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.
16. STATEMENTS OF CASH FLOWS
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Interest
received
|
|
$
|
1
|
|
$
|
2
|
|
$
|
3
|
|
Interest
paid
|
|
|
461
|
|
|
531
|
|
|
469
|
|
Income taxes
paid
|
|
|
4
|
|
|
7
|
|
|
35
|
|
Shares
issued for services
|
|
|
10
|
|
|
10
|
|
|
10
|
|
Retirement
of treasury shares
|
|
|
1,265
|
|
|
|
|
|
|
|
License
agreement financed through licensor
|
|
|
|
|
|
|
|
|
|
|
Fair value
of assets acquired in the acquisition of Datrix
|
|
|
|
|
|
|
|
|
2,788
|
|
Issuance of
stock consideration for acquisition of Datrix
|
|
|
|
|
|
|
|
|
(270
|
)
|
Note payable
issued for acquisition of Datrix
|
|
|
|
|
|
|
|
|
(1,050
|
)
|
Liabilities
assumed in the acquisition of Datrix
|
|
|
|
|
|
|
|
|
(113
|
)
|
55
Table of Contents
17. 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 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 $240
at December 31, 2011 will be paid in one annual principal installment 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 at the time
of the agreement. Based on the final assessment of the partnership, the Company
determined that approximately $345 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 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 $34, $191 and $202 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, 2011, 2010 and 2009, respectively. The
carrying amount of the K/S HIMPP partnership is $903 and $937 at December 31,
2011 and 2010, respectively. The remaining amount to amortize at December 31,
2011 is $148, for each of the years ending December 31, 2012 through 2016,
respectively.
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. The Company recorded a $208 increase in the carrying amount of the
investment, reflecting the Companys portion of the joint ventures operating
results for the year ended December 31, 2011. The Company recorded an increase
of approximately $56 and $53 in the carrying amount of the investment for the
years ended December 31, 2010 and 2009. The carrying amount of the investment
was $380 and $172 at December 31, 2011 and 2010, respectively. The Company had
a receivable of approximately $376 and $285 related to management fees as of
December 31, 2011 and 2010, respectively.
Condensed financial information of the joint venture at and for the
years ended December 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,594
|
|
$
|
1,424
|
|
Non-current assets
|
|
|
124
|
|
|
202
|
|
Total assets
|
|
$
|
1,718
|
|
$
|
1,626
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
737
|
|
|
1,061
|
|
Stockholders equity
|
|
|
981
|
|
|
565
|
|
Total liabilities and stockholders equity
|
|
$
|
1,718
|
|
$
|
1,626
|
|
|
|
|
|
|
|
|
|
Income
Statement:
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
4,900
|
|
$
|
3,953
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
416
|
|
$
|
112
|
|
18. REVENUE BY MARKET
The following table set forth, for the periods indicated, net revenue
by market:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Body-Worn
Device Segment
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
$
|
22,923
|
|
$
|
24,594
|
|
$
|
23,005
|
|
Hearing
Health
|
|
|
21,032
|
|
|
21,007
|
|
|
18,432
|
|
Professional
Audio Communications
|
|
|
12,103
|
|
|
13,096
|
|
|
10,239
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net
Sales
|
|
$
|
56,058
|
|
$
|
58,697
|
|
$
|
51,676
|
|
56
Table of Contents
|
|
I
TEM
9.
|
Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure
|
None.
|
|
|
|
I
TEM 9A.
|
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.
|
|
I
TEM 9B.
|
Other
Information
|
Annual Incentive Plan
On March 12, 2012, the
Compensation Committee of the Board of Directors of IntriCon adopted the Annual Incentive Plan for Executives and Key
Employees, referred to as the Annual Incentive Plan, and the targets under such plan for 2012. Under the Annual Incentive
Plan, IntriCon’s executive officers and key employees are eligible to receive incentive compensation based on (i)
IntriCon achieving a designated level of financial results, referred to as the “plan target,” for a designated
calendar year, referred to as a “plan year,” and (ii) if applicable, achievement of designated strategic
objectives. The plan targets and strategic objectives, if any, will be determined each year by the Compensation
Committee.
57
Table of Contents
A participant will receive incentive compensation
only if the minimum plan target is achieved. Based on IntriCon achieving from 80% to 150% of the plan target, IntriCon’s
president and chief executive officer, Mark S. Gorder will be eligible to receive incentive compensation ranging from 25% to 75%,
respectively, of his plan year base salary and each of the other executive officers named below will be eligible to receive incentive
compensation ranging from 20% to 60%, respectively, of their plan year base salary. Key employees are eligible to receive from
5% to 37.5% of their plan year base salaries. Between these points, the amount of the incentive compensation available will increase
or decrease proportionately based upon IntriCon achieving more or less than the plan target; however, no incentive compensation
will be paid if IntriCon achieves less than 80% of the plan target and the maximum incentive compensation payable is capped at
IntriCon achieving 150% of the plan target. The Committee has the discretion to determine whether (and at what level) the plan
target and strategic objectives have been satisfied and to adjust the plan target and strategic objectives as circumstances warrant.
The Committee also has the authority to weight the importance of the strategic objectives and to determine the amount of the awards
if less than all of the strategic objectives are achieved.
For 2012, the plan target is based on 2012 net
income; provided, that the plan target will not be achieved unless IntriCon’s 401(k) matching contribution for all employees
has been restored retroactively to January 1, 2012 (and therefore reflected in net income). Further, the plan target must be achieved
after accruing any incentive compensation payable under the Annual Incentive Plan. The Committee did not impose any strategic objectives
for 2012 because the Committee believed that reaching the plan targets would necessitate meeting any strategic objectives they
would otherwise have imposed.
The following table shows the potential amounts
payable to the executive officers named below under the Annual Incentive Plan at different levels of the 2012 plan target.
|
|
Potential incentive compensation payable under the Annual Incentive Plan at the following levels of the 2012 Plan Target:
|
|
|
|
Minimum (80% of Plan Target)
|
|
|
Target
(100% of Plan Target)
|
|
|
Maximum (150% of Plan Target)
|
|
Name
|
|
Potential Incentive Compensation
|
|
Mark S. Gorder
|
|
$
|
93,750
|
|
|
$
|
187,500
|
|
|
$
|
281,250
|
|
Scott Longval
|
|
|
38,000
|
|
|
|
76,000
|
|
|
|
114,000
|
|
Christopher D. Conger
|
|
|
41,000
|
|
|
|
82,000
|
|
|
|
123,000
|
|
Michael P. Geraci
|
|
|
44,000
|
|
|
|
88,000
|
|
|
|
132,000
|
|
Dennis L. Gonsior
|
|
|
40,000
|
|
|
|
80,000
|
|
|
|
120,000
|
|
Greg Gruenhagen
|
|
|
35,000
|
|
|
|
70,000
|
|
|
|
105,000
|
|
58
P
ART III
|
|
I
TEM
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 2012 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2012
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.
|
|
I
TEM 11.
|
Executive
Compensation
|
The information called for by Item 11 is incorporated by reference from
the Companys definitive proxy statement relating to its 2012 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2012
proxy statement entitled Director Compensation for 2011, and Executive
Compensation.
|
|
I
TEM 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 2012 annual meeting of
shareholders, including but not necessarily limited to the section of the 2012
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, 2011:
|
|
|
|
|
|
|
|
|
|
|
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(1)
|
|
|
980
|
|
$
|
6.07
|
|
|
342
|
|
Equity compensation plans not approved by
security holders(2)
|
|
|
105
|
|
$
|
3.68
|
|
|
|
|
|
Total
|
|
|
1,085
|
|
$
|
5.84
|
|
|
342
|
|
(1) The amount shown in column (c) includes 239 shares issuable under
the Companys 2006 Equity Incentive Plan (the 2006 Plan) and 104 shares
available for purchase under the Companys Employee Stock Purchase 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, 2011, 285 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.
59
Table of Contents
|
|
I
TEM 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 2012 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2012
proxy statement entitled Certain Relationships and Related Party Transactions
and Independence of the Board of Directors.
|
|
I
TEM 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 2012 annual meeting of
shareholders, including but not necessarily limited to the sections of the 2012
proxy statement entitled Independent Registered Public Accounting Fee
Information.
P
ART IV
|
|
I
TEM
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, 2011, 2010 and 2009.
|
|
|
|
Consolidated Balance
Sheets at December 31, 2011 and 2010.
|
|
|
|
Consolidated Statements of
Cash Flows for the years ended December 31, 2011, 2010 and 2009.
|
|
|
|
Consolidated Statements of
Shareholders Equity and Comprehensive Income (Loss) for the years ended
December 31, 2011, 2010 and 2009.
|
|
|
|
Notes to Consolidated
Financial Statements.
|
|
|
2)
|
Financial
Statement Schedules
|
60
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
Arden Hills, Minnesota
Our audits were made for the purpose of forming an opinion on the basic
2011, 2010 and 2009 consolidated financial statements of IntriCon Corporation
and Subsidiaries taken as a whole. The consolidated supplemental schedule II is
presented for purposes of complying with 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 2011, 2010 and 2009 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.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
Minneapolis,
Minnesota
March 14, 2012
Schedule II - Valuation and Qualifying Accounts
INTRICON CORPORATION AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
December 31, 2011, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
beginning
of Year
|
|
Addition
charged to
costs and
expense
|
|
Less
deductions
|
|
Balance
at end
of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
219
|
|
$
|
5
|
|
$
|
1
|
(a)
|
$
|
223
|
|
Deferred tax asset
valuation allowance
|
|
$
|
8,361
|
|
$
|
649
|
|
$
|
|
|
$
|
9,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
226
|
|
$
|
50
|
|
$
|
57
|
(a)
|
$
|
219
|
|
Deferred tax asset
valuation allowance
|
|
$
|
8,760
|
|
$
|
1,069
|
|
$
|
1,468
|
|
$
|
8,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts
|
|
$
|
332
|
|
$
|
67
|
|
$
|
173
|
(a)
|
$
|
226
|
|
Deferred tax asset
valuation allowance
|
|
$
|
7,267
|
|
$
|
1,493
|
|
$
|
|
|
$
|
8,760
|
|
|
|
a)
|
Uncollectible accounts written off.
|
|
|
|
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.
|
|
|
|
3)
|
Exhibits
|
|
|
|
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.)
|
61
Table of Contents
|
|
|
2.3
|
|
Asset
Purchase Agreement dated as of May 28, 2010 among RTIE Holdings LLC, RTI
Electronics, Inc., and IntriCon Corporation. (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 Current Report on Form 8-K filed with the Commission on June 3,
2010).
|
|
|
|
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.)
|
|
|
|
+ 10.1.3
|
|
Amendment
No. 1 to 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, 2010.)
|
|
|
|
+ 10.1.4
|
|
Amendment
No. 1 to Form of Stock Option Agreements granted under the Amended and
Restated 1994 Stock Option Plan, as amended. (Included in Exhibit 10.1.3.)
|
|
|
|
+ 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.).
|
|
|
|
10.4.1
|
|
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.)
|
|
|
|
10.4.2
|
|
Amended and
Restated Office/Warehouse Lease Second Extension Agreement dated as of
October 20, 2011 between IntriCon Inc. and Arden Partners I, L.L.P.
(Incorporated by reference from the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2011 filed with the Commission on
November 14, 2011.)
|
|
|
|
+ 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
|
|
2006 Equity
Incentive Plan. (Incorporated by reference from Appendix A to the Companys
proxy statement filed with the SEC on March 15, 2010.)
|
|
|
|
+ 10.7
|
|
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.)
|
|
|
|
+ 10.8
|
|
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.)
|
|
|
|
+ 10.9
|
|
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.)
|
62
Table of Contents
|
|
|
+10.10
|
|
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.)
|
|
|
|
+ 10.11
|
|
Deferred
Compensation Plan. (Incorporated by reference from the Companys current
report on Form 8-K filed with the Commission on May 17, 2006.)
|
|
|
|
10.12
|
|
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.)
|
|
|
|
10.13
|
|
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.)
|
|
|
|
10.14
|
|
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.)
|
|
|
|
+ 10.15
|
|
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.)
|
|
|
|
+ 10.16
|
|
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.)
|
|
|
|
10.17
|
|
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.)
|
|
|
|
10.18
|
|
First
Amendment to Strategic Alliance Agreement among IntriCon Corporation and
Dynamic Hearing Pty Ltd effective as of January 1, 2011 (Incorporated by
reference from the Companys annual report on Form 10-K for the year ended
December 31, 2010.)
|
|
|
|
10.19.1
|
|
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.)
|
|
|
|
10.19.2
|
|
First
Amendment and Waiver dated March 12, 2010 to Loan and Security Agreement
dated as of August 13, 2009 by and among IntriCon Corporation, RTI
Electronics, Inc., IntriCon Tibbetts Corporation, IntriCon Datrix Corporation
and The PrivateBank and Trust Company. (Incorporated by reference from the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2010
filed with the Commission on May 17, 2010.)
|
|
|
|
10.19.3
|
|
Second
Amendment to Loan and Security Agreement and Limited Consent dated as of
August 12, 2011 to Loan and Security Agreement dated as of August 13, 2009 by
and among IntriCon Corporation, IntriCon, Inc., IntriCon Tibbetts
Corporation, IntriCon Datrix Corporation and The PrivateBank and Trust
Company (Incorporated by reference from the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2011 filed with the Commission
on November 14, 2011.)
|
|
|
|
10.19.4*
|
|
Third
Amendment to Loan and Security Agreement and Waiver dated as of March 1, 2012
to Loan and Security Agreement dated as of August 13, 2009 by and among
IntriCon Corporation, IntriCon, Inc., IntriCon Tibbetts Corporation, IntriCon
Datrix Corporation and The PrivateBank and Trust Company
|
|
|
|
10.20
|
|
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.)
|
|
|
|
10.21.1
|
|
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.)
|
63
Table of Contents
|
|
|
10.21.2
|
|
Term Note
dated August 12, 2011 from IntriCon Corporation, IntriCon, Inc., IntriCon
Tibbetts Corporation and IntriCon Datrix Corporation to The PrivateBank and
Trust Company (Incorporated by reference from the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2011 filed with the
Commission on November 14, 2011.)
|
|
|
|
10.22
|
|
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.)
|
|
|
|
10.23
|
|
Amended and
Restated Sale or Change of Control, Exclusivity and Noncompete Agreement
dated November 12, 2011 between IntriCon Corporation and United Healthcare
Services, Inc. (Incorporated by reference from the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2011 filed with the Commission
on November 14, 2011.)
|
|
|
|
21*
|
|
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
|
|
|
|
99.1
|
|
Shareholders
Agreement dated October 10, 2011 by and among the Company, United Healthcare
Services, Inc., Mark S. Gorder, Michael J. McKenna, Robert N. Masucci,
Nicolas A. Giordano, Philip N. Seamon, Christopher D. Conger, Michael P.
Geraci, Scott Longval, Dennis L. Gonsior, and Greg Gruenhagen (Incorporated
by reference from the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2011 filed with the Commission on November 14, 2011.)
|
|
|
|
101
|
|
The
following materials from IntriCon Corporations Annual Report on Form 10-K
for the year ended December 31, 2011, formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated Statements of Operations for the years
ended December 31, 2011, 2010 and 2009; (ii) Consolidated Balance Sheets as of
December 31, 2011 and 2010; (iii) Consolidated Statements of Cash Flows for
the years ended December 31, 2011, 2010 and 2009; (iv) Consolidated
Statements of Shareholders Equity and Comprehensive Income (Loss) for the
years ended December 31, 2011, 2010 and 2009; and (v) Notes to Consolidated
Financial Statements
|
|
|
|
|
|
*
|
|
Filed
herewith.
|
+
|
|
Denotes
management contract, compensatory plan or arrangement.
|
|
|
Pursuant to
Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto
are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are
deemed not filed for purposes of Section 18 of the Exchange Act and otherwise
are not subject to liability under those sections.
|
64
Table of Contents
S
IGNATURES
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
14, 2012
|
|
|
|
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 14, 2012
|
|
|
|
|
|
|
|
/s/ Scott Longval
|
|
|
Scott
Longval
Chief Financial Officer
Treasurer and Secretary
(principal accounting and financial officer)
March 14, 2012
|
|
|
|
|
|
|
|
/s/Nicholas A. Giordano
|
|
Nicholas A.
Giordano
Director
March 14, 2012
|
|
|
|
|
|
|
|
|
/s/Robert N. Masucci
|
|
Robert N.
Masucci
Director
March 14, 2012
|
|
|
|
|
|
|
|
|
/s/ Michael J. McKenna
|
|
Michael J.
McKenna
Director
March 14, 2012
|
|
|
|
|
|
|
|
|
/s/ Philip N. Seamon
|
|
Philip N.
Seamon
Director
March 14, 2012
|
|
|
65
Table of Contents
E
XHIBIT INDEX
|
|
EXHIBITS:
|
|
|
|
10.19.4
|
Third Amendment to Loan and Security Agreement and Waiver dated as of
March 1, 2012 to Loan and Security Agreement dated as of August 13, 2009 by
and among IntriCon Corporation, IntriCon, Inc., IntriCon Tibbetts
Corporation, IntriCon Datrix Corporation and The PrivateBank and Trust
Company
|
|
|
21
|
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.
|
|
|
101
|
The following materials from IntriCon Corporations Annual Report on
Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Statements of Operations for
the years ended December 31, 2011, 2010 and 2009; (ii) Consolidated Balance
Sheets as of December 31, 2011 and 2010; (iii) Consolidated Statements of
Cash Flows for the years ended December 31, 2011, 2010 and 2009; (iv)
Consolidated Statements of Shareholders Equity and Comprehensive Income
(Loss) for the years ended December 31, 2011, 2010 and 2009; and (v) Notes to
Consolidated Financial Statements
|
|
|
|
|
|
|
|
Pursuant to
Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto
are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are
deemed not filed for purposes of Section 18 of the Exchange Act and otherwise
are not subject to liability under those sections.
|
66
Intricon (NASDAQ:IIN)
Historical Stock Chart
From Apr 2024 to May 2024
Intricon (NASDAQ:IIN)
Historical Stock Chart
From May 2023 to May 2024