UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2007
--------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
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COMMISSION FILE NUMBER 1-5005
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INTRICON CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1069060
----------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO)
INCORPORATION OR ORGANIZATION)
1260 RED FOX ROAD, ARDEN HILLS, MINNESOTA 55112
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(651) 636-9770
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
--------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND
FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
(X) YES ( ) NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCLERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. (CHECK
ONE):
LARGE ACCELERATED FILER [ ] ACCELERATED FILER [ ] NON-ACCELERATED FILER [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED BY
RULE 12B-2 OF THE EXCHANGE ACT)
( ) YES (X) NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON SHARES, $1.00 PAR VALUE 5,713,535 (net of 515,754
----------------------------------- -----------------------------------
CLASS treasury shares)
----------------
OUTSTANDING AT July 27, 2007
INTRICON CORPORATION
I N D E X
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Page
Numbers
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3, 4
as of June 30, 2007(Unaudited) and
December 31, 2006
Consolidated Condensed Statements of Operations 5
(Unaudited) for the Three Months Ended
June 30, 2007 and 2006
Consolidated Condensed Statements of Operations 6
(Unaudited) for the Six Months Ended
June 30, 2007 and 2006
Consolidated Condensed Statements of Cash Flows 7
(Unaudited) for the Six Months Ended
June 30, 2007 and 2006
Notes to Consolidated Condensed 8-21
Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis 22-31
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 32
About Market Risk
Item 4. Controls and Procedures 32
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of 33
Security Holders
Item 5. Other Information 33
Item 6. Exhibits 34
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
INTRICON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
ASSETS
------
June 30, December 31,
2007 2006
----------- ------------
(Unaudited)
Current assets:
Cash $ 1,016,976 $ 599,459
Restricted cash 60,158 60,158
Accounts receivable, less allowance for doubtful accounts of $253,000
at June 30, 2007 and $246,000 at December 31, 2006 9,526,446 8,456,450
Inventories 10,033,727 9,030,615
Refundable income tax 40,636 103,587
Note receivable from sale of discontinued operations, less allowance
of $225,000 at June 30, 2007 and December 31, 2006 225,000 300,000
Other current assets 364,840 235,418
----------- -----------
Total current assets 21,267,783 18,785,687
Machinery and equipment 36,123,100 28,767,904
Less: Accumulated depreciation 27,567,369 21,994,344
----------- -----------
Net machinery and equipment 8,555,731 6,773,560
Long-term note receivable from sale of discontinued operations, net of
current portion -- 75,000
Goodwill 7,942,582 5,927,181
Investment in partnership 1,720,000 1,800,000
Other assets, net 1,687,411 920,051
----------- -----------
$41,173,507 $34,281,479
=========== ===========
(See accompanying notes to the consolidated condensed financial statements)
3
INTRICON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------
June 30, December 31,
2007 2006
----------- ------------
(Unaudited)
Current liabilities:
Checks written in excess of cash $ 974,522 $ 661,756
Current maturities of long-term debt 1,469,403 952,730
Accounts payable 4,282,460 5,161,450
Income taxes payable 125,497 173,810
Deferred gain on building sale 110,084 110,084
Partnership payable 260,000 260,000
Other accrued liabilities 3,828,983 3,021,201
----------- -----------
Total current liabilities 11,050,949 10,341,031
Long term debt, less current maturities 9,458,234 3,830,461
Other postretirement benefit obligations 991,500 1,063,744
Partnership payable 1,280,000 1,280,000
Note payable, net of current portion 515,720 515,720
Deferred income taxes 79,273 79,273
Accrued pension liabilities 588,833 628,569
Deferred gain on building sale and other 880,673 935,715
----------- -----------
Total non-current liabilities 13,794,233 8,333,482
Total liabilities 24,845,182 18,674,513
Commitments and contingencies(Note 12)
Shareholders' equity:
Common shares, $1.00 par value per share; 10,000,000 shares
authorized; 5,713,535 and 5,706,235 shares issued;
5,197,781 and 5,190,481 outstanding 5,713,535 5,706,235
Additional paid-in capital 12,490,343 12,339,988
Accumulated deficit (435,153) (989,505)
Accumulated other comprehensive loss (175,322) (184,674)
Less: 515,754 common shares held
in treasury, at cost (1,265,078) (1,265,078)
----------- -----------
Total shareholders' equity 16,328,325 15,606,966
----------- -----------
$41,173,507 $34,281,479
=========== ===========
(See accompanying notes to the consolidated condensed financial statements)
4
INTRICON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
June 30, June 30,
2007 2006
(Unaudited) (Unaudited)
------------ ------------
Sales, net $ 16,937,697 $ 13,208,492
Cost of sales 12,731,182 9,689,188
------------ ------------
Gross margin 4,206,515 3,519,304
Operating expenses:
Selling expense 962,872 869,111
General and administrative expense 1,613,217 1,321,397
Research and development expense 650,777 611,838
------------ ------------
Total operating expenses 3,226,866 2,802,346
Operating income 979,649 716,958
Interest expense (333,129) (144,649)
Interest income 12,047 17,747
Equity in loss of partnership (60,000) --
Other income (expense), net 35,788 (28,758)
------------ ------------
Income before income taxes 634,355 561,298
Income tax expense 107,511 112,931
------------ ------------
Income from continuing operations 526,844 448,367
Loss from discontinued operations,
net of income taxes -- (25,876)
------------ ------------
Net income $ 526,844 $ 422,491
============ ============
Income (loss) per share:
Basic
Continuing operations $ .10 $ .09
Discontinued operations -- (.01)
------------ ------------
$ .10 $ .08
============ ============
Diluted
Continuing operations $ .10 $ .08
Discontinued operations -- (.00)
------------ ------------
$ .10 $ .08
============ ============
Average shares outstanding:
Basic 5,200,137 5,155,425
Diluted 5,455,743 5,462,396
(See accompanying notes to the consolidated condensed financial statements)
5
INTRICON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Six Months Ended
June 30, June 30,
2007 2006
(Unaudited) (Unaudited)
------------ ------------
Sales, net $ 31,516,964 $ 25,044,626
Cost of sales 24,099,192 18,758,911
------------ ------------
Gross margin 7,417,772 6,285,715
Operating expenses:
Selling expense 1,805,638 1,771,532
General and administrative expense 3,033,481 2,626,806
Research and development expense 1,383,458 1,180,821
------------ ------------
Total operating expenses 6,222,577 5,579,159
Operating income 1,195,195 706,556
Interest expense (486,406) (301,176)
Interest income 50,783 39,640
Equity in loss of partnership (80,000) --
Other income (expense), net 10,051 (60,944)
------------ ------------
Income before income taxes 689,623 384,076
Income tax expense 135,271 75,018
------------ ------------
Income from continuing operations 554,352 309,058
Loss from discontinued operations, net of income taxes -- (27,975)
------------ ------------
Net income $ 554,352 $ 281,083
============ ============
Income (loss) per share:
Basic
Continuing operations $ .11 $ .06
Discontinued operations -- (.01)
------------ ------------
$ .11 $ .05
============ ============
Diluted
Continuing operations $ .10 $ .06
Discontinued operations -- (.01)
------------ ------------
$ .10 $ .05
============ ============
Average shares outstanding:
Basic 5,198,542 5,152,914
Diluted 5,410,192 5,439,651
(See accompanying notes to the consolidated condensed financial statements)
6
INTRICON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months Ended
June 30, June 30,
2007 2006
(Unaudited) (Unaudited)
------------ ------------
Cash flows from operating activities:
Net income $ 554,352 $ 281,083
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss from discontinued operations -- 27,975
Depreciation and amortization 957,838 910,758
Stock-based compensation 141,699 93,346
Gain on disposition of property (3,858) --
Change in deferred gain (55,042) --
Allowance for doubtful accounts (17,536) 109,719
Equity in loss of partnership 80,000 --
Provision for deferred income taxes -- 5,000
Changes in operating assets and liabilities:
Accounts receivable 222,782 (617,570)
Inventories (206,432) (501,544)
Other assets (88,416) 380,948
Accounts payable (1,666,218) 504,804
Accrued expenses 130,523 426,485
Customer advances 35,454 (60,622)
Other liabilities (38,980) (79,044)
------------ ------------
Net cash provided by continuing operations 46,166 1,481,338
Net cash (used) by discontinued operations -- (23,675)
------------ ------------
Net cash provided by operating activities 46,166 1,457,663
Cash flows from investing activities:
Purchases of property, plant and equipment (1,625,091) (1,390,417)
Cash paid for acquisition of Amecon, Inc. -- (3,141)
Cash paid for acquisition of Tibbetts, Inc., net of
cash received (4,565,465) --
Proceeds from sales of property, plant and equipment 7,296 2,557,334
Proceeds from note receivable 150,000 --
------------ ------------
Net cash provided (used) by investing activities (6,033,260) 1,163,776
Cash flows from financing activities:
Repayments of short-term bank borrowings -- (214,531)
Proceeds from short-term bank borrowings -- --
Proceeds from long-term borrowings 10,906,486 --
Repayments of long-term borrowings (4,841,097) (2,847,427)
Proceeds from exercise of stock options 15,956 19,925
Change in checks written in excess of cash 312,766 173,037
------------ ------------
Net cash provided (used) by financing activities 6,394,111 (2,868,996)
Effect of exchange rate changes on cash 10,500 18,587
------------ ------------
Net increase (decrease) in cash and cash equivalents 417,517 (228,970)
Cash and cash equivalents, beginning of period 599,459 1,109,402
------------ ------------
Cash and cash equivalents, end of period $ 1,016,976 $ 880,432
============ ============
Noncash financing and investing activities:
Increase in other asset by accounts payable $ 460,000 $ --
(See accompanying notes to the consolidated condensed financial statements)
7
INTRICON CORPORATION
Notes to Consolidated Condensed Financial Statements (Unaudited)
----------------------------------------------------------------
1. General
In the opinion of management, the accompanying consolidated condensed
financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly IntriCon
Corporation's consolidated financial position as of June 30, 2007 and
December 31, 2006, and the consolidated results of its operations for
the three and six months ended June 30, 2007 and 2006. Results of
operations for the interim periods are not necessarily indicators of
the results of the operations expected for the full year.
Certain prior-year balances have been reclassified to be consistent
with the current-year presentation including; $19,925 of proceeds from
exercise of stock options previously included in repayments of
long-term borrowings in the statement of cash flows for the six months
ended June 30, 2006.
2. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has published FASB
Interpretation No. 48 (FIN No. 48), "Accounting for Uncertainty in
Income Taxes", to address the noncomparability in reporting tax assets
and liabilities resulting from a lack of specific guidance in SFAS No.
109 (SFAS 109), "Accounting for Income Taxes", on the uncertainty in
income taxes recognized in an enterprise's financial statements.
Specifically, FIN No. 48 prescribes (a) a consistent recognition
threshold and (b) a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be
taken in a tax return, and provides related guidance on derecognition,
classification, interest and penalties, accounting interim periods,
disclosure and transition. FIN No. 48 applied to fiscal years beginning
after December 15, 2006, with earlier adoption permitted. Effective
January 1, 2007, the Company adopted Fin No. 48. The adoption of FIN
No. 48 did not have a material impact on the consolidated financial
statements. The Company recognizes accrued interest and penalties
related to uncertain tax positions in income tax expense. At January 1,
2007, the Company had accrued zero for the payment of tax related
interest and there was no tax interest or penalties recognized in the
statements of operations. The Company's federal and state tax returns
are potentially open to examinations for fiscal years 2003-2006. The
Company does not expect any reasonably possible material changes to the
estimated amounts associated with its uncertain tax positions and
related accruals for interest and penalties through December 31, 2007.
FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157) in
September 2006. SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles in
the United States (GAAP), and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements, FASB having previously
concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this statement does not
require any new fair value measurements. However, for some entities,
the application of this statement will change current practice. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those
fiscal years.
8
The Company does not expect the adoption of SFAS 157 to have a material
impact on its consolidated financial statements.
FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans" (SFAS 158) in September 2006.
This statement requires an employer to: (1) recognize in its statement
of financial position an asset for a plan's over-funded status or a
liability for the plan's under-funded status, (2) measure the plans'
assets and obligations that determine its funded status as of the end
of the employer's fiscal year (with limited exceptions) and (3)
recognize as a component of other comprehensive income, the changes in
the funded status of the plan that arise during the year but are not
recognized as components of net periodic benefit cost pursuant to other
relevant accounting standards. SFAS 158 also requires an employer to
disclose in the notes to the financial statements additional
information on how delayed recognition of certain changes in the funded
status of a defined benefit postretirement plan affects net periodic
benefit cost for the next fiscal year. Adoption of SFAS 158 is required
for public companies by the end of the fiscal year ending after
December 15, 2006. Measurement of the plans' assets and obligations
that determine its funded status as of the end of the employer's fiscal
year is required to be adopted for fiscal years ending after December
15, 2008. The Company does not expect the measurement as of the end of
the fiscal year to have a material impact on its consolidated financial
statements.
FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities" (SFAS 159) in February 2007. This statement
expands the use of fair value measurement by permitting entities to
choose to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair
value. SFAS 159 is effective beginning the first fiscal year that
begins after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 159 on its consolidated financial statements.
3. Acquisitions
On May 22, 2007, the Company completed the acquisition of substantially
all of the assets, other than real estate, of Tibbetts Industries, Inc.
("Tibbetts"), a privately held designer and manufacturer of components
used in hearing aids and medical devices, based in Camden, Maine. The
acquisition expanded the Company's component technology and customer
base.
Pursuant to an asset purchase agreement, dated as of April 19, 2007, by
and among the Company and Tibbetts and certain of the principal
shareholders of Tibbetts, the Company purchased substantially all of
the assets of Tibbetts, other than real estate, for cash of $4,500,000,
subject to a closing adjustment, and the assumption of certain
liabilities (total purchase price of $5,536,000 including acquisition
costs of $195,000). Certain escrow amounts will be distributed to the
seller at the conclusion of the respective escrow periods.
The acquisition was financed with borrowings under the Company's new
credit facility, as further described in "Liquidity and Capital
Resources".
In addition, the Company entered into a five year lease and a ten year
lease, in each case with an option to renew for two additional periods
of five years each, for Tibbetts' two facilities in Camden, Maine.
The Company has accounted for the acquisition of substantially all of
the assets of Tibbetts, other than real estate, utilizing the generally
accepted accounting principles of SFAS Nos. 141, "Business
Combinations", and 142, "Goodwill and Other Intangible Assets". Under
the purchase
9
method of accounting, the assets and liabilities of Tibbetts were
recorded as of the acquisition date, at their respective fair values,
and consolidated with those of the Company. Likewise, the results of
operations of the Tibbetts' operations since May 22, 2007 have been
included in the accompanying consolidated statements of operations. The
preliminary allocation of the net purchase price of the acquisition
resulted in goodwill of approximately $2,015,000. The goodwill
represents operating and market synergies that we expect to be realized
as a result of the acquisition and future opportunities and is also
deductible for tax purposes. The purchase price allocation is based on
preliminary estimates of fair values of assets acquired and liabilities
assumed. The Company is in the process of gathering information to
finalize its valuation of certain assets, primarily the valuation of
acquired intangible assets. The purchase price allocation will be
finalized once the Company has all the necessary information to
complete its estimate, but no later than one year from the acquisition
date. The valuation requires the use of significant assumptions and
estimates. These estimates were based on assumptions the Company
believes to be reasonable. However, actual results may differ from
these estimates.
The preliminary purchase price was as follows as of June 30, 2007
(amounts in thousands):
Cash $ 4,500
Liabilities assumed 841
Acquisition costs 195
----------
Total purchase price $ 5,536
==========
The following table summarizes the preliminary purchase price
allocation for the Tibbetts acquisition as of June 30, 2007 (amounts in
thousands):
Cash $ 130
Other current assets 2,076
Intangible assets subject to amortization 265
Goodwill 2,015
Other long-term assets 1,050
Current liabilities (841)
----------
Total preliminary purchase price allocation $ 4,695
==========
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the acquisition
of Tibbetts had occurred at January 1, 2006, the beginning of the
earliest period presented. All amounts presented are in thousands. The
historical consolidated financial information has been adjusted to give
effect to pro forma events that are directly attributable to the
acquisition and are factually supportable, including the increase in
interest expense related to the borrowings used to fund the acquisition
and the increase in depreciation expense of Tibbetts related to the
step-up of fixed assets to fair value. The unaudited pro forma
condensed consolidated financial information is presented for
informational purposes only. The pro forma information is not
necessarily indicative of what the financial position or results of
operations actually would have been had the acquisition been completed
on the dates indicated. In addition, the unaudited pro forma condensed
consolidated financial information does not purport to project the
future financial position or operating results of the Company after
completion of the acquisition.
10
Three months ended Six months ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
------------- ------------- ------------- -------------
Net sales $ 17,616 $ 14,857 $ 33,966 $ 28,319
Cost of sales 13,412 10,911 26,187 21,256
S, G & A 3,493 3,179 6,855 6,354
Interest expense 414 229 635 465
Other expense 16 8 24 19
Income from continuing operations $ 167 $ 410 $ 116 $ 135
Earnings per share:
Basic $ 0.03 $ 0.08 $ 0.02 $ 0.03
Diluted $ 0.03 $ 0.08 $ 0.02 $ 0.02
Weighted average number
of shares outstanding:
Basic 5,200 5,155 5,199 5,153
Diluted 5,456 5,462 5,410 5,440
The pro forma income from continuing operations for each period
presented includes the increase in interest expense related to the
borrowings used to fund the acquisition and the increase in
depreciation expense of Tibbetts related to the step-up of fixed assets
to fair value.
4. Product Warranty
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. The following table presents
changes in the Company's warranty liability for the six months ended
June 30, 2007:
June 30,
2007
---------
Beginning balance $ 104,500
Warranty expense 6,500
Closed warranty claims --
---------
Ending balance $ 111,000
=========
5. Geographic Information
The geographical distribution of long-lived assets to geographical
areas consisted of the following at:
Long-lived Assets
June 30, December 31,
2007 2006
------------ ------------
United States $ 17,976,392 $ 13,403,520
Other 1,106,894 1,097,221
------------ ------------
Consolidated $ 19,083,286 $ 14,500,741
============ ============
Long-lived assets consist primarily of property and equipment,
investment in partnership, 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
11
value from the estimated future production based on forecasted sales
exceeds the carrying value of the assets.
The geographical distribution of net sales to geographical areas for
the three and six months ended June 30, 2007 and 2006 were as follows:
Net Sales to Geographical Areas
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------- ------------ ----------- ------------
United States $12,078,091 $ 8,623,524 $22,461,029 $ 16,483,788
China 908,631 775,598 1,670,710 1,413,830
Germany 938,629 465,089 1,619,430 1,206,896
Switzerland 823,671 497,091 1,405,176 762,307
Japan 426,218 691,514 875,701 967,643
Singapore 364,527 270,528 695,668 867,188
United Kingdom 163,519 183,407 361,566 371,024
Hong Kong 129,907 86,754 291,671 163,410
Canada 94,678 193,755 186,303 289,981
France 103,168 101,194 163,895 197,470
All other countries 906,658 1,320,038 1,785,815 2,321,089
----------- ------------ ----------- ------------
Consolidated $16,937,697 $ 13,208,492 $31,516,964 $ 25,044,626
=========== ============ =========== ============
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.
For the three months ended June 30, 2007 and 2006, no one customer
accounted for more than 10 percent of the Company's consolidated net
sales. For the six months ended June 30, 2007, one customer accounted
for 11 percent of the Company's consolidated net sales. For the six
months ended June 30, 2006, no one customer accounted for more than 10
percent of the Company's consolidated net sales.
At June 30, 2007, no one customer accounted for more than 10 percent of
the Company's consolidated accounts receivable. At December 31, 2006,
one customer accounted for 10 percent of the Company's consolidated
accounts receivable.
6. Inventories
Inventories consisted of the following at:
June 30, December 31,
2007 2006
----------- -----------
Raw materials $ 4,842,691 $ 4,771,683
Work-in-process 3,038,737 2,373,983
Finished products and components 2,152,299 1,884,949
----------- -----------
Total Inventories $10,033,727 $ 9,030,615
=========== ===========
12
7. Short and Long Term Debt
Short and long term debt are summarized as follows at:
June 30, December 31,
2007 2006
----------- ------------
Domestic Asset-Based Revolving $ 5,051,608 $3,569,349
Credit Facility
Foreign Overdraft and Letter of
Credit Facility 1,243,837 1,044,791
Domestic Term Loan 4,500,000 --
Domestic Capital Equipment Leases 132,192 169,051
----------- ----------
10,927,637 4,783,191
Less: Current maturities (1,469,403) (952,730)
----------- ----------
Total Long Term Debt $ 9,458,234 $3,830,461
=========== ==========
Our subsidiaries, Resistance Technology, Inc., RTI Electronics, Inc.
and IntriCon Tibbetts Corporation, referred to as the borrowers,
entered into a credit facility with La Salle Bank, National
Association, referred to as the lender, on May 22, 2007 replacing the
prior credit facilities with Diversified Business Credit, Inc. The
credit facility provides for:
o a $10,000,000 revolving credit facility, with a $200,000
subfacility for letters of credit. Under the revolving
credit facility, the availability of funds depends on a
borrowing base composed of stated percentages of our
eligible trade receivables and eligible inventory, less a
reserve.
o a $4,500,000 term loan, which was used to fund the Tibbetts
acquisition.
Loans under the new credit facility are secured by a security interest
in substantially all of the assets of the borrowers including a pledge
of the stock of the subsidiaries. All of the borrowers are jointly and
severally liable for all borrowings under the new credit facility.
Loans under the new credit facility bear interest, at the option of the
Company, at:
o the London InterBank Offered Rate ("LIBOR") plus 1.90%, in
the case of revolving line of credit loans, or LIBOR plus
2.15%, in the case of the term loan, or
o the base rate, which is the higher of (a) the rate publicly
announced from time to time by the lender as its "prime
rate" and (b) the Federal Funds Rate plus 0.5%.
Interest is payable monthly in arrears, except that interest on LIBOR
based loans is payable at the end of the one, two or three month
interest periods applicable to LIBOR based loans, or every three months
in the case of LIBOR based loans with a six month interest period.
Weighted average interest on the domestic asset-based revolving credit
facility was 8.34% and 8.40% for the three months ended June 30, 2007
and 2006, respectively, and 8.54% and 8.16% for the six months ended
June 30, 2007 and 2006, respectively.
The new credit facility will expire and all outstanding loans will
become due and payable on June 30, 2012. The term loan requires
quarterly principal payments, commencing on September 30, 2007, based
on a 60 month installment schedule, with any balance due on June 30,
2012.
13
The outstanding balance of the revolving credit facilities was
$5,051,608 and $3,569,349 at June 30, 2007 and December 31, 2006,
respectively. The total remaining availability on the revolving credit
facility was $3,098,315 at June 30, 2007.
The revolving facility carries a non-use fee equal to 0.25% per year of
the unused portion of the revolving line of credit facility, payable
quarterly in arrears.
We are subject to various covenants under the credit facility,
including financial covenants relating to tangible net worth, funded
debt to EBITDA, fixed charge coverage ratio and capital expenditures.
Under the credit facility, except as otherwise permitted, the borrowers
may not, among other things, incur or permit to exist any indebtedness;
grant or permit to exist any liens or security interests on their
assets or pledge the stock of any subsidiary; make investments; be a
party to any merger or consolidation, or purchase of all or
substantially all of the assets or equity of any other entity; sell,
transfer, convey or lease all or any substantial part of its assets or
capital securities; sell or assign, with or without recourse, any
receivables; issue any capital securities; make any distribution or
dividend (other than stock dividends), whether in cash or otherwise, to
any of its equityholders; purchase or redeem any of its equity interest
or any warrants, options or other rights in respect thereof; enter into
any transaction with any of its affiliates or with any director,
officer or employee of any borrower; be a party to any unconditional
purchase obligations; cancel any claim or debt owing to it; enter into
any agreement inconsistent with the provisions of the credit facility
or other agreements and documents entered into in connection with the
credit facility; engage in any line of business other than the
businesses engaged in on the date of the credit facility and businesses
reasonably related thereto; or permit its charter, bylaws or other
organizational documents to be amended or modified in any way which
could reasonably be expected to materially adversely affect the
interests of the lender.
Upon the occurrence and during the continuance of an event of default
(as defined in the credit facility), the lender may, among other
things: terminate its commitments to the borrowers (including
terminating or suspending its obligation to make loans and advances);
declare all outstanding loans, interest and fees to be immediately due
and payable; take possession of and sell any pledged assets and other
collateral; and exercise any and all rights and remedies available to
it under the Uniform Commercial Code or other applicable law. In the
event of the insolvency or bankruptcy of any borrower, all commitments
of the lender will automatically terminate and all outstanding loans,
interest and fees will be immediately due and payable. Events of
default include, among other things: failure to pay any amounts when
due; material misrepresentation; default in the performance of any
covenant, condition or agreement to be performed that is not cured
within 20 days after notice from the lender; default in the payment of
other indebtedness or other obligation with an outstanding principal
balance of more than $50,0000, or of any other term, condition or
covenant contained in the agreement under which such obligation is
created, the effect of which is to allow the other party to accelerate
such payment or to terminate the agreements; the insolvency or
bankruptcy of any borrower; the entrance of any judgment against any
borrower in excess of $50,000, which is not fully covered by insurance;
the occurrence of a change in control (as defined in the credit
facility); certain collateral impairments; and a contribution failure
with respect to any employee benefit plan that gives rise to a lien
under ERISA.
The prior credit facility provided for:
14
o a $5,500,000 domestic revolving credit facility, bearing
interest at an annual rate equal to the greater of 5.25%, or
0.5% over prime. Under the revolving credit facility, the
availability of funds depended on a borrowing base composed
of stated percentages of our eligible trade receivables and
eligible inventory, less a reserve.
o a $1,000,000 domestic equipment term loan, bearing interest
at an annual rate equal to the greater of 5.25%, or 0.75%
over the prime rate.
The revolving facility carried a commitment fee of 0.25% per year,
payable on the unborrowed portion of the line. Additionally, the credit
facility required an annual fee of $27,500 due on August 31, 2007, and
2008. Upon termination of the credit facility by us prior to maturity,
we were required to pay a termination fee equal to 2% of the total of
the maximum amount available under the revolving credit facility plus
the amounts then outstanding under the term loan, equal to $110,000.
The credit facility originally included a real estate loan with an
original principal balance of $1,500,000, which was associated with our
Vadnais Heights manufacturing facility. In June 2006, we completed a
sale-leaseback of the Vadnais Heights manufacturing facility. The
transaction generated proceeds of $2,650,000, of which $1,388,000 was
used to repay the associated real estate loan and the remainder to pay
down our domestic revolver. The remaining gain on the sale of $990,757
is being recognized over the initial 10-year lease term as the renewal
options in the lease are not assured and a penalty does not exist if we
do not exercise the renewal options.
In addition to our domestic credit facilities, on August 15, 2005, our
wholly-owned subsidiary, RTI Tech, PTE LTD., entered into an
international senior secured credit agreement with Oversea-Chinese
Banking Corporation Ltd. that provides for a $1.6 million line of
credit. Borrowings bear interest at a rate of 6.47%. The outstanding
balance was $1,243,837 and $1,044,791 at June 30, 2007 and December 31,
2006, respectively. The total remaining availability on the
international senior secured credit agreement was $391,163 at June 30,
2007.
During 2005, the Company entered into several capital lease agreements
to fund the acquisition of machinery and equipment. For 2005, the total
principal amount of these leases was $314,000 with effective interest
rates ranging from 6.7% to 8.0%. These agreements range from 3 to 5
years. The outstanding balance under these capital lease agreements at
June 30, 2007 and December 31, 2006 was $132,000 and $169,000,
respectively. The cost and accumulated amortization of leased equipment
was $314,000, $314,000, $96,553 and $74,129 at June 30, 2007 and
December 31, 2006, respectively. The amortization of capital leases is
included in depreciation expense for 2007 and 2006.
8. Income Taxes
Income tax expense for the three and six months ended June 30, 2007
were $107,511 and $135,271, respectively, compared to $112,931 and
$75,018 for the same periods in 2006, respectively. The expense for the
three and six months ended June 30, 2007 was primarily due to foreign
taxes on German and Singapore operations. The Company is in a net
operating loss position for federal income tax purposes and,
consequently, no federal expense from the current period domestic
operations was recognized as the deferred tax asset has a full
valuation allowance. On February 22, 2006 the Company received approval
from the Singapore Ministry of Trade and Industry to lower the
effective tax rate in Singapore from 20% to 13%. This change
15
was retroactive to September 2003. As such, a $106,000 benefit was
recognized for Singapore operations in the first quarter of 2006.
The following was the income before income taxes for each jurisdiction
that the Company has operations for the three and six months ended June
30, 2007 and 2006:
Three months ended Six months ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
------------- ------------- ------------- -------------
United States $ 49,367 $ (24,702) $ 37,731 $ (512,859)
Singapore 473,159 516,318 504,883 763,269
Germany 111,829 69,682 147,009 133,666
---------- ---------- ---------- ----------
Income before income taxes $ 634,355 $ 561,298 $ 689,623 $ 384,076
========== ========== ========== ==========
9. Stockholders' Equity and Stock-based Compensation
The Company applies the provisions of SFAS 123R, which establishes the
accounting for stock-based awards.
The Company has a 1994 stock option plan, a 2001 stock option plan, a
non-employee directors' stock option plan and a 2006 equity incentive
plan. The time for granting options under the 1994 plan has expired,
however certain option grants under this plan remain exercisable as of
March 31, 2007. As a result of the approval of the 2006 Equity
Incentive Plan by the shareholders at the 2006 annual meeting of
shareholders, no further grants will be made pursuant to the
non-employee directors' and 2001 stock option plans, and the 12,500
shares that would have been available for future issuance under the
non-employee directors' stock option plan will be available for
issuance pursuant to the 2006 Equity Incentive Plan. The aggregate
number of shares of common stock for which awards could be granted
under the 2006 Equity Incentive Plan as of the date of adoption was
698,500 shares. Additionally, as outstanding options under the 2001
stock option plan and non-employee directors' stock option plan expire,
such shares of the Company's common stock subject to the expired
options will become available for issuance under the 2006 Equity
Incentive Plan.
Under the various plans, executives, employees and outside directors
receive awards of options to purchase common stock. Under the 2006
equity incentive plan, the Company may also grant stock awards, stock
appreciation rights, restricted stock units and other equity-based
awards, although no such awards had been granted as of June 30, 2007.
Under all awards, the terms are fixed on the grant date. Generally, the
exercise price equals the market price of the Company's stock on the
date of the grant. Options under the plans generally vest over one to
five years, and have a maximum term of 10 years. Options issued to
directors vest over one to three years.
Stock option activity as of and during the six months ended June 30,
2007 is as follows:
16
Weighted-
average Aggregate
Number of Exercise Intrinsic
Shares Price Value
------ ----- -----
Outstanding at December 31, 2006 797,733 $4.51 $ 366,957
Options forfeited (2,000) 4.60
Options granted 20,000 6.59
Options exercised (7,300) 2.19
-------
Outstanding at June 30, 2007 808,433 $4.58 $1,835,143
Exercisable at June 30, 2007 506,866 $4.68 $1,099,899
Available for future grant at December 31, 2006. 588,500
Available for future grant at June 30,2007 570,500
The number of shares available for future grant at December 31, 2006,
does not include a total of up to 439,333 shares outstanding under the
2001 stock option plan and non-employee directors' stock option plan
which will become available for issue under the 2006 Equity Incentive
Plan in the event of the expiration of said options.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model. 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 Company's options have characteristics different from those
of traded options, in the opinion of management, the existing models do
not necessarily provide a reliable single measure of the fair value of
its options.
The Company calculates expected volatility for stock options and awards
using both historical volatility as well as the average volatility of
our peer competitors. Historical volatility is not strictly used due to
the material changes in the Company's operations as a result of the
sales of business segments that occurred in 2004 and 2005 (see Note 3
and Note 4 of the Company's consolidated financial statements included
in the Company's Annual Report on From 10-K for the year ended December
31, 2006).
The Company currently estimates a nine percent forfeiture rate for
stock options but will continue to review this estimate in future
periods.
The risk-free rates for the expected terms of the stock options and
awards and the employee stock purchase plan is based on the U.S.
Treasury yield curve in effect at the time of grant.
The following summarizes information about the Company's stock options
outstanding at June 30, 2007:
17
Options Outstanding Options Exercisable
Range of Number Weighted Weighted Number Weighted Weighted
Exercise Outstanding At Average Average Exercisable At Average Average
Prices 6/30/07 Remaining Exercise 6/30/07 Remaining Exercise Price
Contractual Price Contractual
Life Life
---------------------------------------------------------------------------------------------------------------------
$0 - 3.00 361,033 7.37 $ 2.46 243,800 7.37 $ 2.47
$3.01 - 4.40 115,400 3.55 $ 3.25 115,400 3.55 $ 3.25
$4.41 - 6.75 208,500 9.41 $ 5.75 24,167 9.41 $ 6.25
$6.76 - 20.00 123,500 0.83 $10.08 123,500 0.83 $10.08
------- ---- ------ ------- ---- ------
808,433 7.00 $ 4.58 506,866 7.00 $ 4.68
------- ---- ------ ------- ---- ------
As of June 30, 2007, there was $449,047 of total unrecognized
compensation costs related to non-vested awards that are expected to be
recognized over a weighted-average period of 2.0 years.
At the 2007 annual meeting of shareholders, the shareholders approved
the IntriCon Corporation 2007 Employee Stock Purchase Plan (the
"Purchase Plan"). A maximum of 100,000 shares may be sold under the
Purchase Plan. There were no employee stock purchases under the plan as
of June 30, 2007.
10. Income (Loss) Per Share
The following table presents a reconciliation of the denominators used
in the computation of basic and diluted earnings per share related to
the Company's employee stock option and equity plans:
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------- --------- --------- ---------
Basic - weighted shares outstanding 5,200,137 5,155,425 5,198,542 5,152,914
Weighted shares assumed upon exercise
of stock options 255,606 306,971 211,650 286,737
--------- --------- --------- ---------
Diluted - weighted shares outstanding 5,455,743 5,462,396 5,410,192 5,439,651
========= ========= ========= =========
The dilutive impact summarized above relates to the periods when the
average market price of Company stock exceeded the exercise price of
the potentially dilutive option securities granted. Net income (loss)
per common share was based on the weighted average number of common
shares outstanding during the periods when computing the basic net
income (loss) per share. When dilutive, stock options are included as
equivalents using the treasury stock market method when computing the
diluted net income (loss) per share. There were dilutive common stock
equivalents of 255,606 and 211,650 for the three and six months ended
June 30, 2007 compared to 306,971 and 286,737 of dilutive common stock
equivalents for the three and six months ended June 30, 2006,
respectively.
Excluded from the computation of diluted earnings per share for the
three and six months ended June 30, 2007 were options to purchase
approximately 123,500 and 186,000 common shares, respectively, with an
average exercise price of $10.08 and $8.94, respectively, because the
effect would have been anti-dilutive. Excluded from the computation of
diluted earnings per share at June 30, 2006 were options to purchase
approximately 124,000 common shares, with an average exercise price of
$10.08, because the effect would have been anti-dilutive.
18
11. Comprehensive Income
The components of comprehensive income, as required to be reported by
SFAS No. 130, Reporting Comprehensive Income, were as follows:
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------- --------- --------- ---------
Net income $ 526,844 $ 422,491 $ 554,352 $ 281,083
Gain on foreign currency translation
adjustment 3,340 8,981 9,352 14,336
--------- --------- --------- ---------
Comprehensive income $ 530,184 $ 431,472 $ 563,704 $ 295,419
========= ========= ========= =========
Accumulated other comprehensive loss totaled $175,322 and $184,674 at
June 30, 2007 and December 31, 2006, respectively and principally
relates to foreign currency translations.
12. Legal Proceedings
We are a defendant along with a number of other parties in
approximately 122 lawsuits as of June 30, 2007, (approximately 122
lawsuits as of December 31, 2006) alleging that plaintiffs have or may
have contracted asbestos-related diseases as a result of exposure to
asbestos products or equipment containing asbestos sold by one or more
named defendants. Due to the noninformative nature of the complaints,
we do not know whether any of the complaints state valid claims against
us. Certain insurance carriers have informed us that the primary
policies for the period August 1, 1970-1973, have been exhausted and
that the carriers will no longer provide a defense under those
policies. We have requested that the carriers substantiate this
situation. We believe we have additional policies available for other
years which have been ignored by the carriers. As settlement payments
are applied to all years a litigant was deemed to have been exposed to
asbestos, we believe when settlement payments are applied to these
additional policies, we will have availability under the years deemed
exhausted. We do not believe that the asserted exhaustion of the
primary insurance coverage for this period will have a material adverse
effect on our financial condition, liquidity, or results of operations.
Management believes that the number of insurance carriers involved in
the defense of the suits and the significant number of policy years and
policy limits, to which these insurance carriers are insuring us, make
the ultimate disposition of these lawsuits not material to our
consolidated financial position or results of operations.
A claim has been made against the Company by BET Investments ("BET")
for recovery of costs allegedly incurred by BET in connection with the
removal of drums containing hazardous materials and related clean-up
costs from real estate which the Company sold to BET in 2003 and upon
which the Company formerly operated a manufacturing facility. Based
upon invoices submitted by BET, the maximum amount of BET's claim is
approximately $270,000. The Company and its counsel are currently
evaluating the extent of the Company's liability, if any, for this
claim. Although we are unable to estimate the exact amount of loss, we
believe at this time the loss estimate could range from $0 to $270,000.
Based on the information available to us at this time, no amount in
this range appears to be a better estimate than any other amount. As
such, as of June 30, 2007 we have not recorded a reserve for this
claim.
The Company's former wholly owned French subsidiary, Selas SAS, filed
for insolvency in France and is being managed by a court appointed
administrator. The Company may be subject to additional litigation or
liabilities as a result of the French insolvency proceeding.
19
The Company is a defendant, along with a number of other parties, in a
lawsuit made by Energy Transportation Group, Inc. ("ETG") alleging
infringement of certain patents. Based upon the discovery provided thus
far by the Plaintiff, the Company and its counsel believe the Company
has meritorious defenses in this matter. As such, as of June 30, 2007
we have not recorded a reserve for this claim.
We are also involved in other lawsuits arising in the normal course of
business. While it is not possible to predict with certainty the
outcome of these matters, management is of the opinion that the
disposition of these lawsuits and claims will not materially affect our
consolidated financial position, liquidity or results of operations.
13. Related-Party Transactions
One of the Company's subsidiaries leases office and factory space from
a partnership consisting of three present or former officers of the
subsidiary, including Mark Gorder, the President and Chief Executive
Officer of the Company. The subsidiary is required to pay all real
estate taxes and operating expenses. In the opinion of management, the
terms of the lease agreement are comparable to those which could be
obtained from unaffiliated third parties. The total base rent expense
incurred under the lease was approximately $184,000 for each of the six
months ended June 30, 2007 and 2006. Annual lease commitments
approximate $475,000 through October 2011.
The Company uses the law firm of Blank Rome LLP for legal services. A
partner of that firm is the son-in-law of the Chairman of our Board of
Directors. For the six months ended June 30, 2007, we paid that firm
approximately $280,000 for legal services and costs. The Chairman of
our Board of Directors is considered independent because the amount
paid to Blank Rome LLP is less than 5% of its revenues. Furthermore,
the aforementioned partner does not provide any legal services to the
Company and is not involved in billing matters.
14. Statements of Cash Flows
The following table provides supplemental disclosures of cash flow
information:
Six months ended
-------------------------
June 30, June 30,
2007 2006
--------- ---------
Interest received $ 51,280 $ 16,243
Interest paid 317,182 111,632
Income taxes paid 134,138 800
Acquisition of assets of Amecon, Inc.
Goodwill -- 113,020
Property and equipment -- 53,522
The adjustment to the assets of Amecon, Inc. which were acquired in
October 2005, was due to the final adjustment to the working capital
requirement pursuant to the asset purchase agreement by and between the
Company and Amecon, Inc. The Company believes no future material
adjustment is likely.
15. Investment in Equity Instruments
On December 27, 2006, the Company joined the Hearing Instrument
Manufacturers Patent Partnership (HIMPP). Members of the partnership
include the largest six hearing aid manufacturers as well as several
other smaller manufacturers. The purchase price of $1,800,000 includes
a 9%
20
equity interest in K/S HIMPP as well as a license agreement that will
grant the company access to over 45 US registered patents. The Company
accounted for the K/S HIMPP investment using the equity method of
accounting for common stock, as the equity interest is deemed to be
"more than minor" as defined in AICPA Statement of Position 78-9
"Accounting for Investments in Real Estate Ventures". The investment
required a $260,000 payment made at the time of closing. The unpaid
balance of $1,540,000 at December 31, 2006 will be paid in five annual
installments of $260,000 in 2007 through 2011, with a final installment
of $240,000 in 2012. The unpaid balance is unsecured and bears interest
at an annual rate of 4%, which is payable annually with each
installment. The investment in the partnership exceeded underlying net
assets by approximately $1,475,000. Based on a preliminary assessment
of the partnership, the Company has determined that portions of the
excess of the investment over the underlying partnership assets relate
to underlying patents. Based on the initial estimated value, the
Company has recorded a $80,000 decrease in the carrying amount of the
investment, reflecting amortization of the patents for the six months
ended June 30, 2007. The Company is in the process of finalizing the
allocation of the investment in the underlying equity in net assets of
K/S HIMPP, therefore the amount recorded as investment is subject to
refinement.
21
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Business Overview
-----------------
Headquartered in Arden Hills, Minnesota, IntriCon Corporation (formerly Selas
Corporation of America) is an international firm that designs, develops,
engineers and manufactures micro-miniature medical and electronic products. The
Company supplies micro-miniaturized components, systems and molded plastic
parts, primarily to the hearing instrument manufacturing industry, as well as
the computer, electronics, telecommunications and medical equipment industries.
In addition to its operations in Minnesota, the Company has facilities in
California, Maine, Singapore, and Germany.
Currently, the Company has one operating segment, its precision miniature
medical and electronics products segment. The Company manufactures
micro-miniature components, systems and molded plastic parts for hearing
instruments, medical equipment, electronics, telecommunications and computer
industry manufacturers. These components consist of volume controls,
microphones, trimmer potentiometers and switches. The Company also manufactures
hybrid amplifiers and integrated circuit components ("hybrid amplifiers"), along
with faceplates for in-the-ear and in-the-canal hearing instruments. Components
are offered in a variety of sizes, colors and capacities in order to accommodate
a hearing manufacturer's individualized specifications.
In the medical market, the Company is focused on sales of microelectronics,
micromechanical assemblies and high-precision plastic molded components to
medical device manufacturers. Targeted customers include medical product
manufacturers of portable and lightweight battery powered devices, large
AC-powered units often found in clinics and hospitals, as well as a variety of
sensors designed to connect a patient to an electronic device.
The medical industry is faced with pressures to reduce the costs of healthcare.
The Company offers medical manufacturers the capabilities to design, develop and
manufacture components for medical devices that are easier to use, measure with
greater accuracy and provide more functions while reducing the costs to
manufacture these devices. Examples of the Company's products used by medical
device manufacturers include components found in intravenous fluid
administration pumps that introduce drugs into the bloodstream, and bubble
sensors and flow restrictors that monitor and control the flow of fluid in an
intravenous infusion system.
The Company also manufactures a family of safety needle products for an OEM
customer that utilizes the Company's insert and straight molding capabilities.
These products are assembled using full automation including built-in quality
checks within the production lines. Other examples include sensors used to
detect pathologies in specific organs of the body and monitoring devices to
detect cardiac and respiratory functions. The early and accurate detection of
pathologies allows for increased likelihood of successful treatment of chronic
diseases and cancers. Accurate monitoring of multiple functions of the body,
such as heart rate and breathing, aids in generating more accurate diagnosis and
treatments for patients.
The Company has also expanded its micro-miniature components business through
the manufacture of thermistors and film capacitors. The Company manufactures and
sells thermistors and thermistor assemblies, which are solid state devices that
produce precise changes in electrical resistance as a function of any change in
absolute body temperature. The balance of sales represents various industrial,
commercial and military sales for thermistor and thermistor assemblies to
domestic and international markets.
22
On May 22, 2007, the Company completed the acquisition of substantially all of
the assets of Tibbetts Industries, Inc., other than real estate. Pursuant to an
asset purchase agreement, dated as of April 19, 2007, by and among the Company
and Tibbetts and certain of the principal shareholders of Tibbetts, the Company
purchased substantially all of the assets of Tibbetts, other than real estate,
for cash of $4,500,000, subject to a closing adjustment, and the assumption of
certain liabilities (total purchase price of $5,536,000 including acquisition
costs of $195,000). The Company deposited a total of $525,000 of the closing
payment in escrow to be held after closing of the purchase. $475,000 will be
held for 18 months to cover potential indemnification claims and $50,000 will be
held for 45 days to cover potential purchase price adjustment based on the net
tangible asset value at purchase. Certain escrow amounts will be distributed to
the seller at the conclusion of the respective escrow periods.
The acquisition was financed with borrowings under the Company's new credit
facility, as further described in "Liquidity and Capital Resources".
The addition of Tibbetts provides us with incremental gains in both our medical
and professional audio businesses. We believe the benefits of this acquisition
will eventually carry over to hearing health, where we expect to incorporate
Tibbetts' pioneering magnetic telecoil and miniature transducer technology into
key hearing aid components.
Tibbetts' surveillance capabilities also expand our markets to include security
products--which are reflected in our professional audio performance.
Forward-Looking and Cautionary Statements
-----------------------------------------
Certain statements included in this Quarterly Report on Form 10-Q or documents
the Company files with the Securities and Exchange Commission, which are not
historical facts, 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to the Company's
Condensed Consolidated Financial Statements" such as, net operating loss
carry-forwards, the impact of future cash flows, the ability to meet working
capital requirements and liquidity needs, the adequacy of insurance coverage,
liability in connection with the sale of a manufacturing facility, statements
concerning no future material adjustments to working capital requirements in the
Amecon, Inc. asset purchase agreement or purchase price adjustments regarding
the sale of the discontinued operations, and the impact of recent accounting
pronouncements and litigation.
Forward-looking statements also include, without limitation, statements as to
the Company's:
o statements concerning the Tibbetts acquisition and its benefits;
o expected future results of operations and growth;
o ability to meet working capital requirements;
o business strategy;
o expected increases in operating efficiencies;
o anticipated trends in our Precision Miniature Medical and Electronics
Products markets; and
o estimates of goodwill impairments and amortization expense of other
intangible assets.
23
In addition, forward-looking statements also include the effects of changes in
accounting pronouncements, the effects of litigation and the amount of insurance
coverage, and statements as to trends or the Company's or management's beliefs,
expectations and opinions. Forward-looking statements are subject to risks and
uncertainties and may be affected by various factors that may cause actual
results to differ materially from those in the forward-looking statements. In
addition to the factors discussed in this Quarterly Report on Form 10-Q, certain
risks, uncertainties and other factors can cause actual results and developments
to be materially different from those expressed or implied by such
forward-looking statements, including, without limitation, the following:
o risks related to the Tibbetts acquisition, including unanticipated
liabilities and expenses;
o the ability to successfully implement the Company's business and growth
strategy;
o risks arising in connection with the insolvency of our former subsidiary,
Selas SAS, and potential liabilities and actions arising in connection
therewith;
o the volume and timing of orders received by the Company;
o changes in estimated future cash flows;
o ability to collect on our accounts receivable;
o foreign currency movements in markets the Company services;
o changes in the global economy and financial markets;
o changes in the mix of products sold;
o ability to meet increasing demand;
o changes in customer requirements;
o timing and extent of research and development expenses;
o acceptance of the Company's products;
o competitive pricing pressures;
o pending and potential future litigation;
o availability of electronic components for the Company's products;
o ability to create and market products in a timely manner and develop
products that are inexpensive to manufacture;
o ability to repay debt when it comes due;
o the loss of one or more of our major customers;
o ability to identify and integrate acquisitions;
o effects of legislation;
o effects of foreign operations;
o ability to recruit and retain engineering and technical personnel;
o loss of members of our senior management team;
o our ability and the ability of our customers to protect intellectual
property; and
o risks associated with terrorist attacks, war and threats of attacks and wars.
For a description of these and other risks see "Risk Factors" in Part I, Item
1A: Risk Factors in the Company's Annual Report on Form 10-K for the year ended
December 31, 2006 or in other filings the Company makes from time to time with
the Securities and Exchange Commission. 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.
Results of Operations
---------------------
SALES, NET
Consolidated net sales for the three and six months ended June 30, were as
follows (in thousands):
24
Change
------
2007 2006 Dollars Percent
---- ---- ------- -------
Three months ended June 30 $16,938 $ 13,208 $ 3,730 28.2%
Six months ended June 30 $31,517 $ 25,045 $ 6,472 25.8%
Our net sales for the three and six months ended June 30, 2007 grew
approximately 28.2% and 25.8%, respectively, over the same prior year periods.
The primary driver to our increase was our core hearing health, medical, and
professional audio businesses. Our net sales from our three core businesses
increased for the three and six months ended June 30, 2007 approximately 38.4%
and 34.3%, respectively, over the same prior year periods.
The hearing health increases were primarily due to new product offerings in our
advanced line of amplifier assemblies and systems based on Digital Signal
Processing (DSP).
Medical net sales increases were due to strengthened orders for design and
contract manufacturing with several medical OEM customers. Also contributing was
approximately $455,000 of sales from the May 22, 2007 acquisition of Tibbetts.
The professional audio device net sales increase for the three months ended June
30, 2007 relates to a significant customer who delayed sales orders into the
second quarter. The increase for the six months ended June 30, 2007 was
primarily due to higher demand for microphones from existing customers. Also
contributing was approximately $230,000 of sales from the May 22, 2007
acquisition of Tibbetts.
The electronics net sales for the three and six months ended June 30, 2007
decreased 9.9% and 9.1%, respectively, over the same prior year periods. The
decreases were due to lower demand from one customer.
GROSS PROFIT
Gross profit margins for the three and six months ended June 30, were as follows
(in thousands):
2007 2006 Change
---- ---- ------
Percent Percent
Dollars of Sales Dollars of Sales Dollars Percent
------- -------- ------- -------- ------- -------
Three months ended June 30 $4,207 24.8% $3,519 26.6% $ 688 (1.8%)
Six months ended June 30 $7,418 23.5% $6,286 25.1% $ 1,132 (1.6%)
The gross profit margin as a percentage of sales, decreased slightly for the
three and six months ended June 30, 2007 compared to the previous year periods
primarily due to a higher volume of new product introductions combined with a
lower margin product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Selling, general and administrative expenses (SG&A) for the three months ended
June 30 were as follows (in thousands):
25
2007 2006 Change
---- ---- ------
Increase/ Percent
Percent Percent (Decrease Increase/
Dollars of Sales Dollars of Sales Dollars (Decrease)
------- -------- ------- -------- ------- ----------
Selling $ 963 5.7% $ 869 6.6% $ 94 10.8%
General and Administrative 1,613 9.5% 1,321 10.0% 292 22.1%
Research and Development 651 3.8% 612 4.6% 39 6.4%
SG&A for the six months ended June 30 were as follows (in thousands):
2007 2006 Change
---- ---- ------
Increase/ Percent
Percent Percent (Decrease Increase/
Dollars of Sales Dollars of Sales Dollars (Decrease)
------- -------- ------- -------- ------- ----------
Selling $1,806 5.7% $1,772 7.1% $ 34 1.9%
General and Administrative 3,033 9.6% 2,627 10.5% 406 15.5%
Research and Development 1,383 4.4% 1,181 4.7% 202 17.1%
The increased selling, general and administrative, and research and development
expenses for three and six months ended June 30, 2007 as compared to the prior
year periods were primarily driven by the need to adequately support our growth.
Also contributing to the increase was approximately $247,000 of additional
operating expenses from the May 22, 2007 acquisition of Tibbetts.
OPERATING INCOME
Operating income for the three and six months ended June 30, 2007 was $980,000
and $1,195,000, respectively compared to $717,000 and $707,000 for the same
periods in 2006, respectively. These increases were due to the reasons described
above.
INTEREST EXPENSE
Interest expense for the three and six months ended June 30, 2007, was $333,000
and $486,000, respectively, compared to $145,000 and $301,000 for the same
periods in 2006, respectively. The increase in interest expense is primarily due
to charges related to the refinancing of the credit facility in connection with
the Tibbetts acquisition.
INTEREST INCOME
Interest income for the three and six months ended June 30, 2007, was $12,000
and $51,000, respectively, compared to $18,000 and $40,000 for the same periods
in 2006, respectively. The interest income was primarily attributable to
interest on the note receivable from the buyer of the discontinued operations
that were sold on March 31, 2005.
OTHER INCOME (EXPENSE)
Other income (expense) for the three and six months ended June 30, 2007, was
$36,000 and $10,000, respectively, compared to $(29,000) and $(61,000) for the
same periods in 2006, respectively. The change in other income (expense)
primarily related to the changes in foreign currency exchange.
EQUITY IN LOSS OF PARTNERSHIP
The equity in losses of partnership for the three and six months ended June 30,
2007, was $60,000 and $80,000, respectively. The investment in the partnership
exceeded underlying net assets by approximately $1,475,000. Based
26
on a preliminary assessment of the partnership, the Company has determined that
portions of the excess of the investment over the underlying partnership assets
relate to underlying patents. Based on initial estimated value, the Company has
recorded a $80,000 total reduction in the carrying amount of the investment,
reflecting amortization of the patents.
INCOME TAXES
Income tax expense for the three and six months ended June 30, 2007, was
$108,000 and $135,000, respectively, compared to $113,000 and $75,000 for the
same periods in 2006, respectively. The expenses in 2007 were primarily due to
foreign taxes on German and Singapore operations. The Company is in a net
operating loss position for federal income tax purposes and, consequently, no
expense from the current period domestic operations was recognized. On February
22, 2006 the Company received approval from the Singapore Ministry of Trade and
Industry to lower the effective tax rate in Singapore from 20% to 13%. This
change was retroactive to September 2003. As such a $106,000 benefit was
recognized in the first quarter of 2006.
Liquidity and Capital Resources
As of June 30, 2007, we had approximately $1.0 million of cash on hand. Sources
of our cash for the six months ended June 30, 2007 have been from our operations
and our credit facility, as described below.
The Company's cash flows from operating, investing and financing activities, as
reflected in the statement of cash flows, are summarized as follows (in
thousands):
Six months Ended
June 30, June 30,
2007 2006
-------- --------
Cash provided (used) by:
Continuing operations $ 46 $ 1,481
Discontinued operations -- (24)
Investing activities (6,033) 1,164
Financing activities 6,394 (2,869)
Effect of exchange rate
changes on cash 11 19
-------- --------
Increase (decrease) in cash
and cash equivalents $ 418 $ (229)
======== ========
The Company had the following bank arrangements (in thousands):
June 30, December 31,
2007 2006
-------- ------------
Total borrowing capacity under existing
facilities $ 14,417 $ 8,669
-------- --------
Facility Borrowings:
Domestic Asset-Based Revolving 5,052 3,569
Credit Facility
Domestic Term Loan 4,500 --
Foreign Overdraft and Letter of 1,244 1,045
Credit Facility
Domestic Capital Equipment Leases 132 169
-------- -------
Total Borrowings 10,928 4,783
Total borrowing availability under
existing facilities $ 3,489 $ 3,886
======== =======
27
Our subsidiaries, Resistance Technology, Inc., RTI Electronics, Inc. and
IntriCon Tibbetts Corporation, referred to as the borrowers, entered into a
credit facility with La Salle Bank, National Association, referred to as the
lender, on May 22, 2007 replacing the prior credit facilities with Diversified
Business Credit, Inc. The credit facility provides for:
o a $10,000,000 revolving credit facility, with a $200,000
subfacility for letters of credit. Under the revolving credit
facility, the availability of funds depends on a borrowing base
composed of stated percentages of our eligible trade receivables
and eligible inventory, less a reserve.
o a $4,500,000 term loan which was used to fund the Tibbetts
acquisition.
Loans under the new credit facility are secured by a security interest in
substantially all of the assets of the borrowers including a pledge of the stock
of the subsidiaries. All of the borrowers are jointly and severally liable for
all borrowings under the new credit facility.
Loans under the new credit facility bear interest, at the option of the Company,
at:
o the London InterBank Offered Rate ("LIBOR") plus 1.90%, in the
case of revolving line of credit loans, or LIBOR plus 2.15%, in
the case of the term loan, or
o the base rate, which is the higher of (a) the rate publicly
announced from time to time by the lender as its "prime rate" and
(b) the Federal Funds Rate plus 0.5%.
Interest is payable monthly in arrears, except that interest on LIBOR based
loans is payable at the end of the one, two or three month interest periods
applicable to LIBOR based loans, or every three months in the case of LIBOR
based loans with a six month interest period.
Weighted average interest on the domestic asset-based revolving credit facility
was 8.34% and 8.40% for the three months ended June 30, 2007 and 2006,
respectively, and 8.54% and 8.16% for the six months ended June 30, 2007 and
2006, respectively.
The new credit facility will expire and all outstanding loans will become due
and payable on June 30, 2012. The term loan requires quarterly principal
payments, commencing on September 30, 2007, based on a 60 month installment
schedule, with any balance due on June 30, 2012.
The outstanding balance of the revolving credit facilities was $5,051,608 and
$3,569,349 at June 30, 2007 and December 31, 2006, respectively. The total
remaining availability on the revolving credit facility was $3,098,315 at June
30, 2007.
The revolving facility carries a non-use fee equal to 0.25% per year of the
unused portion of the revolving line of credit facility, payable quarterly in
arrears.
We are subject to various covenants under the credit facility, including
financial covenants relating to tangible net worth, funded debt to EBITDA, fixed
charge coverage ratio and capital expenditures. Under the credit facility,
except as otherwise permitted, the borrowers may not, among other things, incur
or permit to exist any indebtedness; grant or permit to exist any liens or
security interests on their assets or pledge the stock of any subsidiary; make
investments; be a party to any merger or consolidation, or purchase of all or
substantially all of the assets or equity of any other entity; sell, transfer,
convey or lease all or any substantial part of its
28
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 interest or any warrants,
options or other rights in respect thereof; enter into any transaction with any
of its affiliates or with any director, officer or employee of any borrower; be
a party to any unconditional purchase obligations; cancel any claim or debt
owing to it; enter into any agreement inconsistent with the provisions of the
credit facility or other agreements and documents entered into in connection
with the credit facility; engage in any line of business other than the
businesses engaged in on the date of the credit facility and businesses
reasonably related thereto; or permit its charter, bylaws or other
organizational documents to be amended or modified in any way which could
reasonably be expected to materially adversely affect the interests of the
lender.
Upon the occurrence and during the continuance of an event of default (as
defined in the credit facility), the lender may, among other things: terminate
its commitments to the borrowers (including terminating or suspending its
obligation to make loans and advances); declare all outstanding loans, interest
and fees to be immediately due and payable; take possession of and sell any
pledged assets and other collateral; and exercise any and all rights and
remedies available to it under the Uniform Commercial Code or other applicable
law. In the event of the insolvency or bankruptcy of any borrower, all
commitments of the lender will automatically terminate and all outstanding
loans, interest and fees will be immediately due and payable. Events of default
include, among other things, failure to pay any amounts when due; material
misrepresentation; default in the performance of any covenant, condition or
agreement to be performed that is not cured within 20 days after notice from the
lender; default in the payment of other indebtedness or other obligation with an
outstanding principal balance of more than $50,0000, or of any other term,
condition or covenant contained in the agreement under which such obligation is
created, the effect of which is to allow the other party to accelerate such
payment or to terminate the agreements; the insolvency or bankruptcy of any
borrower; the entrance of any judgment against any borrower in excess of
$50,000, which is not fully covered by insurance; the occurrence of a change in
control (as defined in the credit facility); certain collateral impairments; and
a contribution failure with respect to any employee benefit plan that gives rise
to a lien under ERISA.
The prior credit facility provided for:
o a $5,500,000 domestic revolving credit facility, bearing interest
at an annual rate equal to the greater of 5.25%, or 0.5% over
prime. Under the revolving credit facility, the availability of
funds depended on a borrowing base composed of stated percentages
of our eligible trade receivables and eligible inventory, less a
reserve.
o a $1,000,000 domestic equipment term loan, bearing interest at an
annual rate equal to the greater of 5.25%, or 0.75% over the
prime rate.
The revolving facility carried a commitment fee of 0.25% per year, payable on
the unborrowed portion of the line. Additionally, the credit facility required
an annual fee of $27,500 due on August 31, 2007, and 2008. Upon termination of
the credit facility by us prior to maturity, we were required to pay a
termination fee equal to 2% of the total of the maximum amount available under
the revolving credit facility plus the amounts then outstanding under the term
loan, equal to $110,000.
29
The credit facility originally included a real estate loan with an original
principal balance of $1,500,000, which was associated with our Vadnais Heights
manufacturing facility. In June 2006, we completed a sale-leaseback of the
Vadnais Heights manufacturing facility. The transaction generated proceeds of
$2,650,000, of which $1,388,000 was used to repay the associated real estate
loan and the remainder to pay down our domestic revolver. The remaining gain on
the sale of $990,757 is being recognized over the initial 10-year lease term as
the renewal options in the lease are not assured and a penalty does not exist if
we do not exercise the renewal options.
In addition to our domestic credit facilities, on August 15, 2005, our
wholly-owned subsidiary, RTI Tech, PTE LTD., entered into an international
senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd.
that provides for a $1.6 million line of credit. Borrowings bear interest at a
rate of 6.47%. The outstanding balance was $1,243,837 and $1,044,791 at June 30,
2007 and December 31, 2006, respectively. The total remaining availability on
the international senior secured credit agreement was $391,163 at June 30, 2007.
We believe that funds expected to be generated from operations, the available
borrowing capacity through the our revolving credit loan facilities and the
control of capital spending will be sufficient to meet our anticipated cash
requirements for operating needs through September 2008. 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 its own financial condition. While management believes that we will
meet our liquidity needs through September 2008, no assurance can be given that
we will be able to do so.
During 2005, the Company entered into several capital lease agreements to fund
the acquisition of machinery and equipment. For 2005, the total principal amount
of these leases was $314,000 with effective interest rates ranging from 6.7% to
8.0%. These agreements range from 3 to 5 years. The outstanding balance under
these capital lease agreements at June 30, 2007 and December 31, 2006 was
$132,000 and $169,000, respectively. The cost and accumulated amortization of
leased equipment was $314,000, $314,000, $96,553 and $74,129 at June 30, 2007
and December 31, 2006, respectively. The amortization of capital leases is
included in depreciation expense for 2007 and 2006.
Recent Accounting Pronouncements
As previously discussed under note 2 to the Consolidated Condensed Financial
Statements, the Financial Accounting Standards Board has published FASB
Interpretation (FIN) No. 48 (FIN No. 48), "Accounting for Uncertainty in Income
Taxes", to address the noncomparability in reporting tax assets and liabilities
resulting from a lack of specific guidance in FASB Statement of Financial
Accounting Standards (SFAS) No. 109 (SFAS 109), "Accounting for Income Taxes",
on the uncertainty in income taxes recognized in an enterprise's financial
statements. Specifically, FIN No. 48 prescribes (a) a consistent recognition
threshold and (b) a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return, and provides related guidance on derecognition, classification,
interest and penalties, accounting interim periods, disclosure and transition.
FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with
earlier adoption permitted. The adoption of FIN No. 48 did not have a material
impact on the consolidated financial statements.
30
FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157) in September
2006. SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements, FASB
having previously concluded in those accounting pronouncements that fair value
is the relevant measurement attribute. Accordingly, this statement does not
require any new fair value measurements. However, for some entities, the
application of this statement will change current practice. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
does not expect the adoption of SFAS 157 to have a material impact on its
consolidated financial statements.
FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans" (SFAS 158) in September 2006. This statement
requires an employer to: (1) recognize in its statement of financial position an
asset for a plan's over-funded status or a liability for the plan's under-funded
status, (2) measure the plans' assets and obligations that determine its funded
status as of the end of the employer's fiscal year (with limited exceptions) and
(3) recognize as a component of other comprehensive income, the changes in the
funded status of the plan that arise during the year but are not recognized as
components of net periodic benefit cost pursuant to other relevant accounting
standards. SFAS 158 also requires an employer to disclose in the notes to the
financial statements additional information on how delayed recognition of
certain changes in the funded status of a defined benefit postretirement plan
affects net periodic benefit cost for the next fiscal year. Adoption of SFAS 158
is required for public companies by the end of the fiscal year ending after
December 15, 2006. Measurement of the plans' assets and obligations that
determine its funded status as of the end of the employer's fiscal year is
required to be adopted for fiscal years ending after December 15, 2008. The
Company does not expect the measurement as of the end of the fiscal year to have
a material impact on its consolidated financial statements.
FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" (SFAS 159) in February 2007. This statement expands the
use of fair value measurement by permitting entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS 159 is effective beginning
the first fiscal year that begins after November 15, 2007. The Company is
currently evaluating the impact of adopting SFAS 159 on its consolidated
financial statements.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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
their significance to the consolidated condensed financial statements and the
possibility that future events affecting them may differ markedly. The
accounting policies of the Company with significant estimates and assumptions
include the Company's revenue recognition, accounts receivable reserves,
inventory reserves, discontinued operations, goodwill, long-lived assets and
deferred taxes policies. These and other significant accounting policies are
described in and incorporated by reference from "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Note 1 to the
financial statements contained in or incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended December 31, 2006.
31
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
For information regarding the Company's exposure to certain market risks, see
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006. There
have been no material changes in the Company's portfolio of financial
instruments or market risk exposures which have occurred since December 31,
2006.
ITEM 4. Controls and Procedures
-----------------------
The Company's management, with the participation of its chief executive officer
and chief financial officer, conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures, as defined in Exchange Act Rule
13a-15(e), as of June 30, 2007 (the "Disclosure Controls Evaluation"). Based on
the Disclosure Controls Evaluation, the Company's chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures were effective to provide a reasonable level of assurance that: (i)
information required to be disclosed by the Company in the reports the Company
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the specific time periods in the Securities and Exchange
Commission's rules and forms and (ii) information required to be disclosed in
the reports the Company files or submits under Exchange Act are accumulated and
communicated to management, including the chief executive officer and chief
financial officer, to allow timely decisions regarding required disclosure, all
in accordance with Exchange Act Rule 13a-15(e).
There were no changes in the Company's internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f), during the quarter ended
June 30, 2007, that have materially affected, or are reasonably likely to
materially affect, the Company's 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.
32
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The information contained in note 12 to the Consolidated Condensed Financial
Statements in Part I of this quarterly report is incorporated by reference
herein.
ITEM 1A. Risk Factors
------------
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2006, which could
materially affect the Company's business, financial condition or future results.
The risk factors in the Company's Annual Report on Form 10K have not materially
changed. The risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
None.
ITEM 3. Defaults upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 2007 Annual Meeting of Shareholders of the Company held on April 25,
2007:
Messrs. Mark S. Gorder and Michael J. McKenna were re-elected as directors of
the Board of Directors of the Company for terms expiring at the 2007 Annual
Meeting. In the election, 4,538,403 votes were cast for Mr. Gorder and 4,163,188
votes were cast for Mr. McKenna. Under Pennsylvania law, votes cannot be cast
against a candidate. Proxies filed at the 2007 Annual Meeting by the holders of
26,606 shares withheld authority to vote for Mr. Gorder and holders of 401,821
shares withheld authority to vote for Mr. McKenna. The terms of the following
directors continued after the Annual Meeting: Nicholas A. Giordano, Robert N.
Masucci, and Philip N. Seamon.
The 2007 Employee Stock Purchase Plan was also approved. In the election,
2,193,695 votes were cast in favor of approval, while 26,694 were cast opposing
approval, and holders of 29,990 shares abstained. Additionally, there were
2,314,630 broker non-votes.
The appointment of Virchow, Krause & Company, LLP as the Company's independent
auditor for fiscal year 2007 was also ratified. In the election, 4,429,080 votes
were cast in favor of ratification of the appointment, while 108,615 were cast
opposing ratification of the appointment, and holders of 27,314 shares
abstained. There were no broker non-votes.
ITEM 5. Other Information
-----------------
None.
33
ITEM 6. Exhibits
--------
(a) Exhibits
2.1 Asset Purchase Agreement by and among IntriCon Corporation,
IntriCon Tibbetts Corporation (formerly known as TI Acquisition
Corporation), Tibbetts Industries, Inc. and certain shareholders
of Tibbetts Industries, Inc. dated April 19, 2007, incorporated by
reference from the Company's current report on Form 8-K filed with
the Securities Exchange Commission on April 23, 2007. A list of
the schedules and exhibits to the Asset Purchase Agreement appears
on page 4 of the Agreement. The Company will furnish to the
Securities and Exchange Commission a copy of any omitted schedules
or exhibits upon request.
10.1 Loan and Security Agreement dated as of May 22, 2007, by and among
IntriCon, Resistance Technology, Inc., RTI Electronics, Inc. and
IntriCon Tibbetts Corporation and LaSalle Bank National
Association, incorporated by reference from the Company's current
report on Form 8-K filed with the Securities Exchange Commission
on May 25, 2007. A list of the schedules and exhibits to the Loan
and Security Agreement appears following the last page of this
Agreement. The Company will furnish to the Securities and Exchange
Commission a copy of any omitted schedules or exhibits upon
request.
10.2 Trademark Security Agreement dated as of May 22, 2007, by the
Company in favor of LaSalle Bank National Association,
incorporated by reference from the Company's current report on
Form 8-K filed with the Securities Exchange Commission on May 25,
2007.
10.3 Trademark Security Agreement dated as of May 22, 2007, by
Resistance Technology, Inc. in favor of LaSalle Bank National
Association, incorporated by reference from the Company's current
report on Form 8-K filed with the Securities Exchange Commission
on May 25, 2007.
10.4 Patent Security Agreement dated as of May 22, 2007, by Resistance
Technology, Inc. in favor of LaSalle Bank National Association,
incorporated by reference from the Company's current report on
Form 8-K filed with the Securities Exchange Commission on May 25,
2007.
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 to U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
34
INTRICON CORPORATION
SIGNATURE
Pursuant to the requirements 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)
Date: August 8, 2007 By: /s/ Mark S. Gorder
-------------------------------
Mark S. Gorder
President and Chief Executive
Officer (principal executive
officer)
Date: August 8, 2007
By: /s/ Scott Longval
-------------------------------
Scott Longval
Chief Financial Officer and
Treasurer (principal
financial officer)
35
EXHIBIT INDEX
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 to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
36