The changes in the carrying amount of goodwill for the years presented are as follows:
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The Company and its subsidiaries, IntriCon, Inc. (formerly known as Resistance Technology, Inc.), RTI Electronics, Inc. and IntriCon Tibbetts Corporation, referred to as the borrowers, entered into a credit facility with LaSalle Bank, National Association (now Bank of America), referred to as the lender, on May 22, 2007 replacing the prior credit facilities with M & I Business Credit (formerly known as Diversified Business Credit, Inc.). The credit facility provides for:
| | |
| ▪ | a $10,000,000 revolving credit facility, with a $200,000 subfacility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of our eligible trade receivables and eligible inventory, less a reserve. |
| | |
| ▪ | a $4,500,000 term loan, which was used to fund the Tibbetts acquisition. |
Loans under the new credit facility are secured by a security interest in substantially all of the assets of the borrowers including a pledge of the stock of the subsidiaries. All of the borrowers are jointly and severally liable for all borrowings under the new credit facility.
Proceeds from the new facility were used to repay amounts owed under the prior credit facilities of approximately $5.0 million and the $4.5 million purchase price to complete the Tibbetts asset acquisition.
Loans under the new credit facility bear interest, at the option of the Company, at:
| |
• | the London InterBank Offered Rate (“LIBOR”) plus 1.90%, in the case of revolving line of credit loans, or LIBOR plus 2.15%, in the case of the term loan, or |
| |
• | the base rate, which is the higher of (a) the rate publicly announced from time to time by the lender as its “prime rate” and (b) the Federal Funds Rate plus 0.5%. |
Interest is payable monthly in arrears, except that interest on LIBOR based loans is payable at the end of the one, two or three month interest periods applicable to LIBOR based loans, or every three months in the case of LIBOR based loans with a six month interest period.
Weighted average interest on the domestic asset-based revolving credit facilities (including the prior credit facility) was 5.51%, 7.82% and 8.17% for 2008, 2007 and 2006, respectively.
The new credit facility will expire and all outstanding loans will become due and payable on June 30, 2012. The term loan requires quarterly principal payments, commencing on September 30, 2007, based on an increasing installment schedule, with any balance due on June 30, 2012. In 2008 we used proceeds of $1,013,000 from the equipment sale-leaseback described below to pay down the term loan.
The outstanding balance of the revolving credit facility was $3,000,000 at December 31, 2008 and 2007, respectively. The total remaining availability on the revolving credit facility was approximately $4,349,000 and $4,443,000 at December 31, 2008 and 2007, respectively.
The revolving facility carries a non-use fee equal to 0.25% per year of the unused portion of the revolving line of credit facility, payable quarterly in arrears.
The Company is subject to various covenants under the credit facility, including financial covenants relating to tangible net worth, funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization, fixed charge coverage ratio and capital expenditures. Under the credit facility, except as otherwise permitted, the borrowers may not, among other things, incur or permit to exist any indebtedness; grant or permit to exist any liens or security interests on their assets or pledge the stock of any subsidiary; make investments; be a party to any merger or consolidation, or purchase of all or substantially all of the assets or equity of any other entity; sell, transfer, convey or lease all or any substantial part of its assets or capital securities; sell or assign, with or without recourse, any receivables; issue any capital securities; make any distribution or dividend (other than stock dividends), whether in cash or otherwise, to any of its equityholders; purchase or redeem any of its equity interests or any warrants, options or other rights in respect thereof; enter into any transaction with any of its affiliates or with any director, officer or employee of any borrower; be a party to any unconditional purchase obligations; cancel any claim or debt owing to it; enter into any agreement inconsistent with the provisions of the credit facility or other agreements and documents entered into in connection with the credit facility; engage in any line of business other than the businesses engaged in on the date of the credit facility and businesses reasonably related thereto; or permit its charter, bylaws or other organizational documents to be amended or modified in any way which could reasonably be expected to materially adversely affect the interests of the lender. Effective as of September 30, 2007, the credit facility was amended to change the tangible net worth covenant. Effective as of June 30, 2008, the credit facility was amended to correct an error in the amortization table set forth in the loan agreement. Effective as of December 31, 2008, the credit facility was amended to change the fixed charge coverage covenant to exclude payments made in connection with the June 2008 equipment sale-leaseback described below. As of December 31, 2008, the Company was in compliance with all financial covenants under the credit facility, as amended.
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Upon the occurrence and during the continuance of an event of default (as defined in the credit facility), the lender may, among other things: terminate its commitments to the borrowers (including terminating or suspending its obligation to make loans and advances); declare all outstanding loans, interest and fees to be immediately due and payable; take possession of and sell any pledged assets and other collateral; and exercise any and all rights and remedies available to it under the Uniform Commercial Code or other applicable law. In the event of the insolvency or bankruptcy of any borrower, all commitments of the lender will automatically terminate and all outstanding loans, interest and fees will be immediately due and payable. Events of default include, among other things: failure to pay any amounts when due; material misrepresentation; default in the performance of any covenant, condition or agreement to be performed that is not cured within 20 days after notice from the lender; default in the payment of other indebtedness or other obligation with an outstanding principal balance of more than $50,000, or of any other term, condition or covenant contained in the agreement under which such obligation is created, the effect of which is to allow the other party to accelerate such payment or to terminate the agreements; the insolvency or bankruptcy of any borrower; the entrance of any judgment against any borrower in excess of $50,000, which is not fully covered by insurance; the occurrence of a change in control (as defined in the credit facility); certain collateral impairments; and a contribution failure with respect to any employee benefit plan that gives rise to a lien under ERISA.
The prior credit facility originally included a real estate loan with an original principal balance of $1,500,000, which was associated with our Vadnais Heights manufacturing facility. In June 2006, the Company completed a sale-leaseback of the Vadnais Heights manufacturing facility. The transaction generated proceeds of $2,650,000, of which $1,388,000 was used to repay the associated real estate loan and the remainder to pay down our domestic revolver. The remaining gain on the sale of $825,631 is being recognized over the initial 10-year lease term as the renewal options in the lease are not assured and a penalty does not exist if we do not exercise the renewal options.
In addition to its domestic credit facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for a $1.8 million line of credit through 2009. Borrowings bear interest at a rate of .75% to 2.5% over the lender’s prevailing prime lending rate. Weighted average interest on the international credit facilities was 5.84%, 6.36% and 6.47% for 2008, 2007 and 2006, respectively. The outstanding balance was $605,000 and $1,071,000 at December 31, 2008 and 2007, respectively. The total remaining availability on the international senior secured credit agreement was approximately $1,203,000 and $740,000 at December 31, 2008 and 2007, respectively.
In June 2008, the Company completed a sale-leaseback of machinery and equipment with Bank of America. The transaction generated proceeds of $1,098,000, of which $1,013,000 was used to pay down the domestic term loan. The capital lease agreement expires in June 2014, requires monthly payments of $15,800 and has a present value of future minimum lease payments of $1,098,000 with an effective interest rate of 5.14%. The transaction resulted in a gain of $62,000 which is being recognized over the initial 6-year lease term.
The Company also has entered into several other capital lease agreements to fund the acquisition of machinery and equipment. The total principal amount of all capital leases (including the equipment sale-leaseback described above) was $1,661,000 with effective interest rates ranging from 5.1% to 8.0%. These agreements range from 3 to 6 years. The outstanding balance under these capital lease agreements at December 31, 2008 and December 31, 2007 was $1,330,000 and $94,000, respectively. The accumulated amortization on leased equipment was $257,000 and $119,000 at December 31, 2008 and 2007, respectively. The amortization of capital leases is included in depreciation expense for 2008, 2007 and 2006.
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8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 2008, and 2007 were as follows:
| | | | | | | |
| | 2008 | | 2007 | |
| | | | | | | |
Salaries, wages and commissions | | $ | 2,020,539 | | $ | 2,496,610 | |
Taxes, including payroll withholdings and excluding income taxes | | | 80,202 | | | 101,617 | |
Accrued severance benefits | | | 61,639 | | | 100,000 | |
Accrued professional fees | | | 361,580 | | | 161,736 | |
Current portion of note payable | | | 259,360 | | | 256,360 | |
Deferred revenue | | | — | | | 113,618 | |
Accrued Dynamic Hearing strategic alliance payments | | | 475,000 | | | — | |
Customers’ advance payments on contracts | | | — | | | 190,062 | |
Other | | | 993,387 | | | 962,752 | |
| | | | | | | |
| | $ | 4,251,707 | | $ | 4,382,755 | |
Accrued severance benefits recorded at December 31, 2007 were paid in 2008. Severance benefits accrued at December 31, 2008 will be paid in 2009.
9. DOMESTIC AND FOREIGN INCOME TAXES
Domestic and foreign income taxes (benefits) from continuing operations were comprised as follows:
| | | | | | | | | | |
| | Years ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
Current | | | | | | | | | | |
Federal | | $ | — | | $ | — | | $ | — | |
State | | | 93,319 | | | (11,978 | ) | | 21,654 | |
Foreign | | | 104,748 | | | 182,651 | | | 111,258 | |
| | | 198,067 | | | 170,673 | | | 132,912 | |
Deferred | | | | | | | | | | |
Federal | | | — | | | — | | | — | |
State | | | — | | | — | | | — | |
Foreign | | | 66,000 | | | 10,000 | | | 41,548 | |
| | | 66,000 | | | 10,000 | | | 41,548 | |
| | | | | | | | | | |
Income taxes | | $ | 264,067 | | $ | 180,673 | | $ | 174,460 | |
| | | | | | | | | | |
Income (loss) from continuing operations before income taxes is as follows: | | | | | | | | | | |
Foreign | | | 597,234 | | | 1,088,951 | | | 1,492,092 | |
Domestic | | | 704,434 | | | 958,960 | | | (77,130 | ) |
| | $ | 1,301,668 | | $ | 2,047,911 | | $ | 1,414,962 | |
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The following is a reconciliation of the statutory federal income tax rate to the effective tax rate based on income (loss):
| | | | | | | | | | |
| | Years ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
|
Tax provision at statutory rate | | | 34.0 | % | | 34.0 | % | | 34.0 | % |
Change in valuation allowance | | | (29.1 | ) | | (20.9 | ) | | 0.5 | |
Impact of permanent items, including stock based compensation expense | | | 14.6 | | | — | | | — | |
Effect of foreign tax rates | | | (2.4 | ) | | (8.7 | ) | | (25.1 | ) |
State taxes net of federal benefit | | | 3.2 | | | 1.4 | | | 1.5 | |
Other | | | 0.0 | | | 3.1 | | | 1.4 | |
| | | | | | | | | | |
Domestic and foreign income tax rate | | | 20.3 | % | | 8.8 | % | | 12.3 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2008, and 2007 are presented below:
| | | | | | | |
| | 2008 | | 2007 | |
|
Deferred tax assets: | | | | | | | |
Net operating loss carry forwards – United States | | $ | 4,707,273 | | $ | 5,299,146 | |
Post-retirement benefit obligations | | | 327,098 | | | 475,859 | |
Goodwill amortization | | | 155,937 | | | 269,948 | |
State income taxes | | | — | | | 483,594 | |
Inventory reserves | | | 785,976 | | | 901,720 | |
Guarantee obligations and estimated future costs of service accruals | | | 31,568 | | | 35,700 | |
Compensated absences, principally due to accrual for financial reporting purposes | | | 225,424 | | | 225,041 | |
Other | | | 1,033,860 | | | 442,827 | |
Total gross deferred tax assets | | | 7,267,135 | | | 8,133,835 | |
Less: valuation allowance | | | 7,267,135 | | | 8,133,835 | |
Net deferred tax assets | | $ | — | | $ | — | |
Deferred tax liabilities: | | | | | | | |
Plant and equipment, due to differences in depreciation and capitalized interest | | | (155,273 | ) | | (89,273 | ) |
Total gross deferred tax liabilities | | | (155,273 | ) | | (89,273 | ) |
Net deferred tax liabilities | | $ | (155,273 | ) | $ | (89,273 | ) |
Domestic and foreign deferred taxes were comprised as follows:
| | | | | | | | | | | | | |
December 31, 2008 | | Federal | | State | | Foreign | | Total | |
| | | | | | | | | | | | | |
Current deferred asset | | $ | — | | $ | — | | $ | — | | $ | — | |
Non-current deferred liability | | | — | | | — | | | (155,273 | ) | | (155,273 | ) |
| | | | | | | | | | | | | |
Net deferred tax liability | | $ | — | | $ | — | | $ | (155,273 | ) | $ | (155,273 | ) |
| | | | | | | | | | | | | |
December 31, 2007 | | Federal | | State | | Foreign | | Total | |
| | | | | | | | | | | | | |
Current deferred asset | | $ | — | | $ | — | | $ | — | | $ | — | |
Non-current deferred liability | | | — | | | — | | | (89,273 | ) | | (89,273 | ) |
| | | | | | | | | | | | | |
Net deferred tax liability | | $ | — | | $ | — | | $ | (89,273 | ) | $ | (89,273 | ) |
The valuation allowance is maintained against deferred tax assets which the Company has determined are not likely to be realized. In addition, the Company has net operating loss carryforwards for Federal tax purposes of approximately $13.6 million that begin to expire in 2022. Subsequently recognized tax benefits, if any, relating to the valuation allowance for deferred tax assets or realization of net operating loss carryforwards will be reported in the consolidated statements of operations. If substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of the carryforwards that are available to be utilized. The Company analyzes ownership changes on a consistent basis.
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At December 31, 2007, the Company had a valuation allowance against deferred tax assets to reduce the total to an amount our management believed was appropriate. The valuation allowance decreased in the current year primarily as a result of taxable income generated during the year, which was also impacted by an adjustment in the amount of $167,000 to decrease the valuation allowance to their proper amounts.
The Company has not recognized a deferred tax liability relating to cumulative undistributed earnings of controlled foreign subsidiaries in Germany and Singapore that are essentially permanent in duration. If some or all of the undistributed earnings of the controlled foreign subsidiaries are remitted to the Company in the future, income taxes, if any, after the application of foreign tax credits will be provided at that time. Determination of the amount of unrecognized tax liability related to undistributed earnings in foreign subsidiaries is not currently practical.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable income. The Company considers projected future taxable income and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not to be realized. Based upon the Company’s assessment of all available evidence, including the previous three years of United States based taxable income and loss after permanent items, estimates of future profitability, and the Company’s overall prospects of future business, the Company determined that it is more likely than not that the Company will not be able to realize a portion of the deferred tax assets in the future. The Company will continue to assess the potential realization of deferred tax assets on an annual basis, or an interim basis if circumstances warrant. If the Company’s actual results and updated projections vary significantly from the projections used as a basis for this determination, the Company may need to change the valuation allowance against the gross deferred tax assets.
The following was the income before income taxes for each jurisdiction in which the Company has operations for the years ended December 31, 2008, 2007 and 2006:
| | | | | | | | | | |
| | December 31,
2008 | | December 31,
2007 | | December 31,
2006 | |
United States | | $ | 704,434 | | $ | 958,960 | | $ | (77,130 | ) |
Singapore | | | 283,455 | | | 930,718 | | | 1,346,807 | |
Germany | | | 313,779 | | | 158,233 | | | 145,285 | |
Income before income taxes | | $ | 1,301,668 | | $ | 2,047,911 | | $ | 1,414,962 | |
The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by FASB Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of Interpretation 48, the Company did not record any adjustment to the liability for unrecognized income tax benefits or retained earnings. The Company does not have any unrecognized tax benefits as of December 31, 2008.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years starting before 2005. There are no other on-going or pending IRS, state, or foreign examinations.
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The Company recognizes penalties and interest accrued related to unrecognized tax benefits in income tax expense for all periods presented. During the tax years ended December 31, 2008, 2007, and 2006 the Company has no amounts accrued for the payment of interest and penalties.
10. EMPLOYEE BENEFIT PLANS
The Company has defined contribution plans for most of its domestic employees. Under these plans, eligible employees may contribute amounts through payroll deductions supplemented by employer contributions for investment in various investments specified in the plans. The Company contribution to these plans for 2008, 2007, and 2006 was $419,000, $360,000, and $289,000, respectively.
The Company provides post-retirement medical benefits to certain domestic full-time employees who meet minimum age and service requirements. In 1999, a plan amendment was instituted which limits the liability for post-retirement benefits beginning January 1, 2000 for certain employees who retire after that date. This plan amendment resulted in a $1.1 million unrecognized prior service cost reduction which will be recognized as employees render the services necessary to earn the post-retirement benefit. The Company’s policy is to pay the cost of these post-retirement benefits when required on a cash basis. The Company also has provided certain foreign employees with retirement related benefits.
The following table presents the amounts recognized in the Company’s consolidated balance sheet at December 31, 2008 and 2007 for post-retirement medical benefits:
| | | | | | | |
| | 2008 | | 2007 | |
Change in Projected Benefit Obligation | | | | | | | |
Projected benefit obligation at January 1 | | $ | 1,001,532 | | $ | 1,243,744 | |
Service cost (excluding administrative expenses) | | | — | | | 629 | |
Interest cost | | | 55,292 | | | 69,225 | |
Actuarial loss/(gain) | | | 8,784 | | | (132,066 | ) |
Participant contributions | | | 85,000 | | | 115,000 | |
Benefits paid | | | (245,000 | ) | | (295,000 | ) |
| | | | | | | |
Projected benefit obligation at December 31 | | | 905,608 | | | 1,001,532 | |
| | | | | | | |
Change in fair value of plan assets | | | | | | | |
Employer contributions | | | 160,000 | | | 180,000 | |
Participant contributions | | | 85,000 | | | 115,000 | |
Benefits paid | | | (245,000 | ) | | (295,000 | ) |
| | | | | | | |
Fair value of plan assets at December 31 | | | — | | | — | |
| | | | | | | |
Funded status | | | (905,608 | ) | | (1,001,532 | ) |
| | | | | | | |
Amount recognized in statement of financial position | | | | | | | |
Current liabilities | | | 145,000 | | | 185,000 | |
Noncurrent liabilities | | | 760,608 | | | 816,532 | |
Net amount | | $ | 905,608 | | $ | 1,001,532 | |
| | | | | | | |
Amount recognized in other comprehensive income | | | | | | | |
Unrecognized net actuarial gain | | | — | | | — | |
Total | | $ | — | | $ | — | |
Accrued post-retirement medical benefit costs are classified as other post-retirement benefit obligations as of December 31, 2008 and 2007.
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Net periodic post-retirement medical benefit costs for 2008, 2007 and 2006 included the following components:
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Service cost | | $ | — | | $ | 629 | | $ | 5,029 | |
Interest cost | | | 55,292 | | | 69,225 | | | 71,175 | |
Amortization of unrecognized actuarial loss | | | — | | | — | | | (5,908 | ) |
| | | | | | | | | | |
Net periodic post-retirement medical benefit cost | | $ | 55,292 | | $ | 69,854 | | $ | 70,296 | |
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 2009; the rate was assumed to decrease gradually to 5% by the year 2013 and remain at that level thereafter. The health care cost trend rate assumption may have a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement medical benefit obligation as of December 31, 2008 by $11,707 and the aggregate of the service and interest cost components of net periodic post-retirement medical benefit cost for the year ended December 31, 2008 by $768. Employer contributions for 2009 are expected to be approximately $145,000.
The assumptions used years ended December 31 were as follows:
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
|
Annual increase in cost of benefits | | | 9.00 | % | | 9.00 | % | | 10.00 | % |
|
Discount rate used to determine year-end obligations | | | 7.00 | % | | 6.00 | % | | 6.00 | % |
|
Discount rate used to determine year-end expense | | | 6.00 | % | | 6.00 | % | | 6.00 | % |
The following employer benefit payments, which reflect expected future service, are expected to be paid:
| | |
2009 | | $ 145,000 |
2010 | | $ 145,000 |
2011 | | $ 145,000 |
2012 | | $ 145,000 |
2013 | | $ 140,000 |
Years 2014 – 2018 | | $ 685,000 |
The Company provides retirement related benefits to former executive employees and to certain employees of foreign subsidiaries. The liabilities established for these benefits at December 31, 2008 and 2007 are illustrated below.
| | | | | | | |
| | 2008 | | 2007 | |
| | | | | | | |
Current portion | | $ | 90,656 | | $ | 90,656 | |
Long term portion | | | 578,388 | | | 624,517 | |
| | | | | | | |
Total liability at December 31 | | $ | 669,044 | | $ | 715,173 | |
11. CURRENCY TRANSLATION ADJUSTMENTS
All assets and liabilities of foreign operations in which the functional currency is foreign are translated into U.S. dollars at prevailing rates of exchange in effect at the balance sheet date. Revenues and expenses are translated using average rates of exchange for the year. The functional currency of the Company’s German operations is the European euro. As of January 1, 2006, the functional currency of the Company’s Singapore operations changed from the Singapore dollar to the U.S. dollar. Adjustments resulting from the process of translating the financial statements of foreign subsidiaries into U.S. dollars are reported as a separate component of shareholders’ equity, net of tax, where appropriate. Foreign currency transaction amounts included in the statements of operation include a loss of $77,000 in 2008, a loss of $112,000 in 2007, and a loss of $100,000 in 2006.
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12. COMMON STOCK AND STOCK OPTIONS
The Company applies the provisions of SFAS No. 123R “Share-Based Payment” (“FAS 123(R)”), 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. New grants may not be made under the 1994, the 2001 and the non-employee directors’ stock option plans; however certain option grants under these plans remain exercisable as of December 31, 2008. The aggregate number of shares of common stock for which awards could be granted under the 2006 equity incentive plan as of the date of adoption was 698,500 shares. Additionally, as outstanding options under the 2001 stock option plan and non-employee directors’ stock option plan expire, the shares of the 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, other than awards under the director program and management purchase program described below, had been granted as of December 31, 2008. 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 three years, and have a maximum term of 10 years.
Additionally, the board has established the non-employee directors stock fee election program, referred to as the director program, as an award under the 2006 equity incentive plan. The director program gives each non-employee director the right under the 2006 equity incentive plan to elect to have some or all of his quarterly director fees paid in common shares rather than cash. There were 1,902 and 754 shares issued in lieu of cash for director fees under the director program for the years ended December 31, 2008 and 2007, respectively.
On July 23, 2008, the Compensation Committee of the Board of Directors approved the non-employee director and executive officer stock purchase program, referred to as the management purchase program, as an award under the 2006 Plan. The purpose of the management purchase program is to permit the Company’s non-employee directors and executive officers to purchase shares of the Company’s Common Stock directly from the Company. Pursuant to the management purchase program, as amended, participants may elect to purchase shares of Common Stock from the Company not exceeding an aggregate of $100,000 during any fiscal year. Participants may make such election one time during each twenty business day period following the public release of the Company’s earnings announcement, referred to as a window period, and only if such participant is not in possession of material, non-public information concerning the Company and subject to the discretion of the Board to prohibit any transactions in Common Stock by directors and executive officers during a window period. There were 5,000 shares purchased under the management purchase program during the year ended December 31, 2008.
Stock option activity during the periods indicated is as follows:
| | | | | | | | | | |
| | Number of Shares | | Weighted-average
Exercise Price | | Aggregate Intrinsic
Value | |
|
Outstanding at December 31, 2005 | | | 729,900 | | $ | 3.98 | | | | |
Options forfeited | | | (51,500 | ) | | 1.96 | | | | |
Options granted | | | 160,000 | | | 5.68 | | | | |
Options exercised | | | (40,667 | ) | | 2.79 | | | | |
Outstanding at December 31, 2006 | | | 797,733 | | $ | 4.51 | | | | |
Options forfeited | | | (2,000 | ) | | 4.60 | | | | |
Options granted | | | 165,000 | | | 13.72 | | | | |
Options exercised | | | (106,502 | ) | | 8.19 | | | | |
Outstanding at December 31, 2007 | | | 854,231 | | $ | 5.83 | | | | |
Options forfeited | | | (45,131 | ) | | 9.82 | | | | |
Options granted | | | 175,950 | | | 7.35 | | | | |
Options exercised | | | (3,400 | ) | | 2.44 | | | | |
| | | | | | | | | | |
Outstanding at December 31, 2008 | | | 981,650 | | $ | 5.93 | | $ | — | |
| | | | | | | | | | |
Exercisable at December 31, 2007 | | | 524,397 | | $ | 3.70 | | $ | — | |
| | | | | | | | | | |
Exercisable at December 31, 2008 | | | 642,866 | | $ | 4.23 | | | | |
| | | | | | | | | | |
Available for future grant at January 1, 2008 | | | 425,500 | | | | | | | |
| | | | | | | | | | |
Available for future grant at December 31,2008 | | | 261,894 | | | | | | | |
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The number of shares available for future grant at December 31, 2008, does not include a total of up to 399,200 shares subject to options outstanding under the 2001 stock option plan and non-employee directors’ stock option plan which will become available for grant under the 2006 Equity Incentive Plan in the event of the expiration of said options. Based on the stock price at December 31, 2008, the aggregate intrinsic value of outstanding and exercisable options was $0.
The weighted-average remaining contractual term of options exercisable at December 31, 2008, was 5.6 years. The total intrinsic value of options exercised during fiscal 2008, 2007, and 2006, was $19,028, $475,090, and $111,874, respectively.
The weighted-average per share fair value of options granted was $2.85, $5.13, and $2.77, in 2008, 2007, and 2006, respectively, using the Black-Scholes option-pricing model.
For disclosure purposes, the fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Dividend yield | | | 0.0 | % | | 0.0 | % | | 0.0 | % |
Expected volatility | | | 42.3 - 53.5 | % | | 43.0 | % | | 57.5 | % |
Risk-free interest rate | | | 1.4 - 2.8 | % | | 3.5 | % | | 4.6 | % |
Expected life (years) | | | 4.0 | | | 4.0 | | | 4.0 | |
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected stock price volatility. Because the 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. The reason historical volatility was not strictly used is 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 2). The expected term for stock options and awards is calculated based on the Company’s estimate of future exercise at the time of grant.
The Company currently estimates a nine percent forfeiture rate for stock options but will continue to review this estimate in future periods.
The risk-free rates for the expected terms of the stock options and awards and the employee stock purchase plan is based on the U.S. Treasury yield curve in effect at the time of grant.
The Company recorded $525,972, $280,376 and $213,531 of non-cash stock option expense related to FAS 123(R) for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, there was $946,492 of total unrecognized compensation costs related to non-vested awards that is expected to be recognized over a weighted-average period of 2.0 years.
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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 34,213 shares purchased under the plan for the year ended December 31, 2008. There were no employee stock purchases under the plan as of December 31, 2007.
| |
13. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
The following is a tabulation of unaudited quarterly results of operations (in thousands, except for per share data).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | 2007 | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Sales, net | | $ | 16,591 | | $ | 17,525 | | $ | 16,091 | | $ | 15,348 | | $ | 14,579 | | $ | 16,938 | | $ | 18,442 | | $ | 19,025 | |
| | | | | | | | | | | | | | | | | | | | | �� | | | | |
Gross profit | | | 3,845 | | | 4,254 | | | 3,943 | | | 4,004 | | | 3,211 | | | 4,207 | | | 5,126 | | | 4,701 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | 150 | | | 410 | | | 309 | | | 169 | | | 28 | | | 527 | | | 650 | | | 662 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Income per share (a): | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic income per share | | $ | .03 | | $ | .08 | | $ | .06 | | $ | .03 | | $ | .01 | | $ | .10 | | $ | .13 | | $ | .13 | |
Diluted income per share | | $ | .03 | | $ | .07 | | $ | .06 | | $ | .03 | | $ | .01 | | $ | .10 | | $ | .12 | | $ | .12 | |
| | |
| a) | Per share amounts for the quarters have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period. Additionally, in regard to diluted per share amounts only, quarterly amounts may not add to the annual amounts. |
| |
14. | INCOME PER SHARE |
The following table sets forth the computation of basic and diluted income per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
| | Income
Numerator | | Shares
Denominator | | Per
Share
Amount | | Income
Numerator | | Shares
Denominator | | Per
Share
Amount | | Loss
Numerator | | Shares
Denominator | | Per
Share
Amount | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic income per share Income available to common shareholders | | $ | 1,037,601 | | 5,314,387 | | $ | .20 | | $ | 1,867,238 | | 5,209,567 | | $ | .36 | | $ | 1,162,512 | | | 5,159,216 | | $ | .23 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Effect of dilutive securities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options | | | — | | 225,069 | | | | | | — | | 310,213 | | | | | | — | | | 160,586 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted income per share | | $ | 1,037,601 | | 5,539,456 | | $ | .19 | | $ | 1,867,238 | | 5,519,780 | | $ | .34 | | $ | 1,162,512 | | | 5,319,802 | | $ | .22 | |
The Company excluded stock options of 231,950, 190,131, and 196,000, in 2008, 2007, and 2006, respectively, from the computation of the diluted income per share as their effect would be anti-dilutive. For additional disclosures regarding the stock options, see Note 12.
| |
15. | CONTINGENCIES AND COMMITMENTS |
We are a defendant along with a number of other parties in approximately 122 lawsuits as of December 31, 2008, (approximately 122 lawsuits as of December 31, 2007) alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. Due to the noninformative nature of the complaints, we do not know whether any of the complaints state valid claims against us. Certain insurance carriers have informed us that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. We have requested that the carriers substantiate this situation. We believe we have additional policies available for other years which have been ignored by the carriers. Because settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, we believe when settlement payments are applied to these additional policies, we will have availability under the years deemed exhausted. We do not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on our financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits, to which these insurance carriers are insuring us, make the ultimate disposition of these lawsuits not material to our consolidated financial position or results of operations.
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The Company’s wholly owned French subsidiary, Selas SAS, filed for insolvency in France and is being managed by a court appointed judiciary administrator. The Company may be subject to additional litigation or liabilities as a result of the French insolvency proceeding.
We are also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect our consolidated financial position, liquidity or results of operations.
Total rent expense for 2008, 2007, and 2006 under leases pertaining primarily to engineering, manufacturing, sales and administrative facilities, with an initial term of one year or more, aggregated $1,583,000, $1,440,000, and $1,082,000, respectively. Remaining rentals payable under such leases, including equipment leases are as follows: 2009 - $1,588,000; 2010 - $1,126,000; 2011 - $954,000; 2012 - $477,000; 2013 - $406,000 and thereafter - $1,056,000, which includes two leased facilities in Minnesota that expire in 2011 and 2016 respectively, one leased facility in California that expires in 2009, two leased facilities in Maine that expire in 2012 and 2017 respectively, one leased facility in Singapore that expires in 2010 and one leased facility in Germany that expires in 2012. Certain leases contain renewal options as defined in the lease agreements.
On October 5, 2007, the Company entered into employment agreements with its executive officers. The agreements call for payments ranging from three months to two years base salary and unpaid bonus, if any, to the executives should there be a change of control as defined in the agreement and the executives are not retained for a period of at least one year following such change of control. Under the agreements, all stock options granted to the executives would vest immediately and be exercisable in accordance with the terms of such stock options. The Company also agreed that if it enters into an agreement to sell substantially all of its assets, it will obligate the buyer to fulfill its obligations pursuant to the agreements. The agreements terminate, except to the extent that any obligation remains unpaid, upon the earlier of termination of the executive’s employment prior to a change of control or asset sale for any reason or the termination of the executive after a change of control for any reason other than by involuntary termination as defined in the agreements.
On July 20, 2008, the Company entered into a strategic alliance agreement with Dynamic Hearing Pty Ltd (“Dynamic Hearing”). Effective October 1, 2008, Dynamic Hearing granted a license to the Company to use certain of Dynamic Hearing’s technology. The initial term of the agreement is five years from the date of execution and may be extended upon agreement of the parties within two months of the expiration of the initial term; however, either party may terminate the agreement after the second year of the term upon three months notice. The Company agreed to pay Dynamic Hearing: (i) an annual fee for access to the technology licensed pursuant to the agreement and (ii) an additional “second component” fee to maintain exclusive rights granted to the Company with respect to hearing health products. Additionally, IntriCon agreed to make royalty payments on products that incorporate Dynamic Hearing’s technology, and Dynamic Hearing has also agreed to provide the Company with engineering and other services in connection with the licensed technology. The Company has recorded $1,000,000 payable to Dynamic Hearing for the first two years of exclusive license fees described above. The Company has $331,000 and $691,000 of short-term and long-term assets, respectively, remaining at December 31, 2008 which will be amortized through September 2010 as it pertains to exclusive rights and engineering and other services. The technology access fee will be amortized through September 2013, the life of the agreement.
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| |
16. | 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, a member of the Company’s Board of Directors and the President and Chief Executive Officer of the Company. The subsidiary is required to pay all real estate taxes and operating expenses. 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, real estate taxes and other charges incurred under the lease was approximately $477,000 in 2008 and $481,000 for each of 2007 and 2006. Annual lease commitments, which include base rent expense, real estate taxes and other charges approximate $475,000 through October 2011.
The Company uses the law firm of Blank Rome LLP for legal services. A partner of that firm is the son-in-law of the Chairman of our Board of Directors. We paid that firm approximately $235,000, $466,000, and $282,000 for legal services and costs in 2008, 2007, and 2006, respectively. The Chairman of our Board of Directors is considered independent under applicable Nasdaq and SEC rules because (i) no payments were made to the Chairman or the partner directly in exchange for the services provided by the law firm and (ii) the amounts paid to the law firm did not exceed the thresholds contained in the Nasdaq standards. Furthermore, the aforementioned partner does not provide any legal services to the Company and is not involved in billing matters.
| |
17. | STATEMENTS OF CASH FLOWS |
Supplemental disclosures of cash flow information:
| | | | | | | | | | |
| | Years ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
Interest received | | $ | 30,692 | | $ | 78,896 | | $ | 33,674 | |
Interest paid | | | 599,856 | | | 741,930 | | | 380,159 | |
Income taxes paid | | | 222,224 | | | 194,502 | | | 205,565 | |
Deferred gain recorded on sale of manufacturing facility | | | — | | | — | | | 1,045,799 | |
Acquisition of assets of Amecon, Inc: | | | | | | | | | | |
Goodwill | | | — | | | — | | | 172,962 | |
Property and equipment | | | — | | | — | | | 53,522 | |
Equipment purchased through capital lease obligation | | | 1,277,823 | | | — | | | — | |
Shares issued for services | | | 12,233 | | | 6,120 | | | — | |
License agreement financed through licensor | | | 1,000,000 | | | — | | | — | |
The 2006 adjustments to the assets of Amecon, Inc., which were acquired in October 2005, was due to the final adjustment to the working capital requirement pursuant to the asset purchase agreement.
| |
18. | DERIVATIVE FINANCIAL INSTRUMENTS |
Derivative financial instruments in the form of interest rate swaps are used by the Company in managing its interest rate exposure. The Company does not hold or issue derivative financial instruments for trading purposes. When entered into, the Company formally designates the derivative financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at inception and at least quarterly thereafter, whether the derivative financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because of the high correlation between the derivative financial instrument and the underlying exposure being hedged, fluctuations in the value of the derivative financial instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. Any ineffective portion of a derivative financial instrument’s change in fair value would be immediately recognized in earnings.
The swaps are designated as cash flow hedges with the changes in fair value recorded in accumulated other comprehensive loss and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or accounts receivable and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. Approximately $40,000 and $2,000 of additional expense were recorded to interest expense as a result of said adjustments for the years ended December 31, 2008 and 2007, respectively. During 2008 and 2007, ineffectiveness from such hedges was $0.
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At December 31, 2008 and 2007, the Company had a United States Dollar (“USD”) denominated interest rate swap outstanding which effectively fixed the interest rate on floating rate debt, exclusive of lender spreads, at 5.36% for a notional principal amount of $2,000,000 through September 2010. The derivative net loss on this contract recorded in accumulated other comprehensive loss at December 31, 2008 and 2007 was $136,248 and $79,215, respectively. The accumulated other comprehensive loss at December 31, 2008 is expected to be reclassified into earnings over the next 21 months, the life of the agreement.
| |
19. | INVESTMENT IN EQUITY INSTRUMENTS |
On December 27, 2006, the Company joined the Hearing Instrument Manufacturers Patent Partnership (HIMPP). Members of the partnership include the largest six hearing aid manufacturers as well as several other smaller manufacturers. The purchase price of $1,800,000 included a 9% equity interest in K/S HIMPP as well as a license agreement that will grant the Company access to over 45 US registered patents. The Company accounted for the K/S HIMPP investment using the equity method of accounting for common stock, as the equity interest is deemed to be “more than minor” as defined in AICPA Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures”. The investment required a $260,000 payment made at the time of closing. The unpaid balance of $1,020,000 at December 31, 2008 will be paid in three annual installments of $260,000 in 2009 through 2011, with a final installment of $240,000 in 2012. The unpaid balance is unsecured and bears interest at an annual rate of 4%, which is payable annually with each installment. The investment in the partnership exceeded underlying net assets by approximately $1,475,000. Based on the final assessment of the partnership, the Company has determined that approximately $345,000 of the excess of the investment over the underlying partnership net assets relates to underlying patents. The remaining $1,130,000 of the excess of the investment over the underlying partnership net assets has been assigned to the non-exclusive patent license agreement. The Company has recorded a $144,900 and $332,500 decrease in the carrying amount of the investment, reflecting amortization of the patents, patent license agreement and the Company’s portion of the partnership’s operating results for the years ended December 31, 2008 and 2007, respectively. Total amortization expense remaining is $1,180,000. The difference of $207,000 in the carrying value of the investment at December 31, 2008 is the Company’s remaining investment in partnership net assets.
The Company’s subsidiary, IntriCon Tibbetts Corporation, owns a 50% interest in a joint venture with a Swiss company to market, design, manufacture, and sell audio coils to the hearing health industry. The Company has recorded a total decrease of approximately $59,000 in the carrying amount of the investment for the year ended December 31, 2008, consisting of an approximately $141,000 increase for the Company’s portion of the joint venture’s operating results for the year ended December 31, 2008 offset by a decrease of $200,000 for dividends received from the joint venture during the year ended December 31, 2008. The Company recorded a $175,000 increase in the carrying amount of the investment, reflecting the Company’s portion of the joint venture’s operating results for the period ended December 31, 2007. The carrying amount of the investment was $64,000 and $123,000 at December 31, 2008 and 2007, respectively.
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Condensed financial information of the joint venture at and for the years ended December 31, 2008 and 2007 are as follows (in thousands):
| | | | | | | |
| | 2008 | | 2007 | |
Balance Sheet: | | | | | | | |
Current assets | | $ | 642 | | $ | 1,013 | |
Non-current assets | | | 196 | | | 273 | |
Total assets | | $ | 838 | | $ | 1,286 | |
| | | | | | | |
Current liabilities | | | 312 | | | 889 | |
Non-current liabilities | | | — | | | 353 | |
Stockholders’ equity | | | 526 | | | 44 | |
Total liabilities and stockholders’ equity | | $ | 838 | | $ | 1,286 | |
| | | | | | | |
Income Statement: | | | | | | | |
Net revenues | | $ | 2,750 | | $ | 2,820 | |
| | | | | | | |
Net income | | $ | 282 | | $ | 400 | |
The following tables set forth, for the periods indicated, net revenue by market:
| | | | | | | | | | |
| | December 31,
2008 | | Years Ended
December 31,
2007 | | December 31,
2006 | |
Body-Worn Device Segment | | | | | | | | | | |
Hearing Health | | $ | 23,768,000 | | $ | 29,297,000 | | $ | 24,956,000 | |
Medical | | | 20,133,000 | | | 18,765,000 | | | 8,439,000 | |
Professional Audio Communications | | | 14,007,000 | | | 11,606,000 | | | 8,041,000 | |
| | | | | | | | | | |
Electronic Products Segment | | | | | | | | | | |
Electronics | | | 7,647,000 | | | 9,315,000 | | | 10,290,000 | |
Total Revenue | | $ | 65,555,000 | | $ | 68,983,000 | | $ | 51,726,000 | |
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ITEM 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A(T).Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting. The report of management required under this Item 9A is contained in Item 8 of this Annual Report on Form 10-K under the caption “Management’s Report on Internal Control Over Financial Reporting.”
Changes in Internal Controls over Financial Reporting. There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter covered by this report that would have materially affected, or are reasonably likely to materially affect, the 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.
ITEM 9B.Other Information
In December 2008, the Compensation Committee of the Board of Directors made determinations with respect to the bonuses and stock options to be awarded to the executive officers for services in 2008 and salaries to be paid in 2009. For further information, see Exhibit 10.13 which is incorporated herein by reference.
In February 2009, the Compensation Committee of the Board of Directors adopted the 2009 Annual Incentive Plan for Executives and Key Employees for Fiscal Year 2009. For further information, see Exhibit 10.13 which is incorporated herein by reference.
The disclosure of the foregoing information is voluntary and shall not be deemed an admission that such information is material or required to be disclosed on a Current Report on Form 8-K.
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PART III
ITEM 10.Directors, Executive Officers and Corporate Governance
The information called for by Item 10 is incorporated by reference from the Company’s definitive proxy statement relating to its 2009 annual meeting of shareholders, including but not necessarily limited to the sections of the 2009 proxy statement entitled “Proposal 1 – Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
The information concerning executive officers contained in Item 4A hereof is incorporated by reference into this Item 10.
Code of Ethics
The Company has adopted a code of ethics that applies to its directors, officers and employees, including its principal executive officer, principal financial and accounting officer, controller and persons performing similar functions. Copies of the Company’s code of ethics are available without charge upon written request directed to Cari Sather, Director of Human Resources, IntriCon Corporation, 1260 Red Fox Road, Arden Hills, MN 55112. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any future amendments to a provision of its code of ethics by posting such information on the Company’s website: www.intricon.com.
ITEM 11.Executive Compensation
The information called for by Item 11 is incorporated by reference from the Company’s definitive proxy statement relating to its 2009 annual meeting of shareholders, including but not necessarily limited to the sections of the 2009 proxy statement entitled “Director Compensation for 2008,” and “Executive Compensation”.
ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by Item 12 is incorporated by reference from the Company’s definitive proxy statement relating to its 2009 annual meeting of shareholders, including but not necessarily limited to the section of the 2009 proxy statement entitled “Share Ownership of Certain Beneficial Owners, Directors and Certain Officers.”
Equity Compensation Plan Information
The following table details information regarding the Company’s existing equity compensation plans as of December 31, 2008:
| | | | | | | | | | |
Plan Category | | (a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights | | (b)
Weighted-average
exercise price of
outstanding options,
warrants and rights | | (c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) | |
Equity compensation plans approved by security holders | | | 799,150 | | $ | 6.68 | | | 261,894 | (1) |
Equity compensation plans not approved by security holders(2) | | | 182,500 | | $ | 3.02 | | | — | |
| | | | | | | | | | |
Total | | | 981,650 | | $ | 5.93 | | | 261,894 | |
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(1) The amount shown in column (c) represents shares issuable under the Company’s 2006 Equity Incentive Plan (the “2006 Plan”). Under the terms of the 2006 Plan, as outstanding options under the Company’s 2001 Stock Option Plan and Non-Employee Directors’ Stock Option Plan expire, the shares of common stock subject to the expired options will become available for issuance under the 2006 Plan. As of December 31, 2008, 399,200 shares of common stock were subject to outstanding options under the 2001 Stock Option Plan and Non-Employee Directors’ Stock Option Plan. Accordingly, if any of these options expire, the shares of common stock subject to expired options also will be available for issuance under the 2006 Plan.
(2) Represents shares issuable under the Non-Employee Directors Stock Option Plan, the (“Non-Employee Directors Plan”), pursuant to which directors who are not employees of the Company or any of its subsidiaries were eligible to receive options. The exercise price of the option was the fair market value of the stock on the date of grant. Options become exercisable in equal one-third annual installments beginning one year from the date of grant, except that the vesting schedule for discretionary grants is determined by the Compensation Committee. As a result of the approval of the 2006 Plan by the shareholders at the 2006 annual meeting of shareholders, no further grants will be made pursuant to the Non-Employee Directors Plan.
ITEM 13.Certain Relationships and Related Transactions, and Director Independence
The information called for by Item 13 is incorporated by reference from the Company’s definitive proxy statement relating to its 2009 annual meeting of shareholders, including but not necessarily limited to the sections of the 2009 proxy statement entitled “Certain Relationships and Related Party Transactions” and “Independence of the Board of Directors.”
ITEM 14.Principal Accountant Fees and Services
The information called for by Item 14 is incorporated by reference from the Company’s definitive proxy statement relating to its 2009 annual meeting of shareholders, including but not necessarily limited to the sections of the 2009 proxy statement entitled “Independent Registered Public Accounting Fee Information.”
PART IV
ITEM 15.Exhibits, Financial Statement Schedules
| |
(a) | The following documents are filed as a part of this report: |
| |
1) | Financial Statements – The consolidated financial statements of the Registrant are set forth in Item 8 of Part II of this report. |
| |
| Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006. |
| |
| Consolidated Balance Sheets at December 31, 2008 and 2007. |
| |
| Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006. |
| |
| Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006. |
| |
| Notes to Consolidated Financial Statements. |
| |
2) | Financial Statement Schedules |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
SUPPLEMENTARY INFORMATION
To the Shareholders, Audit Committee and Board of Directors
IntriCon Corporation and Subsidiaries
Minneapolis, Minnesota
Our audits were made for the purpose of forming an opinion on the basic 2008, 2007, and 2006 consolidated financial statements of IntriCon Corporation and Subsidiaries taken as a whole. The consolidated supplemental schedule II is presented for purposes of complying the Securities Exchange Commission’s rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the 2008, 2007 and 2006 basic consolidated financial statements and, in our opinion, is fairly stated in all materials respects in relation to the basic consolidated financial statements taken as a whole.
VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
March 3, 2009
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Schedule II - Valuation and Qualifying Accounts
INTRICON CORPORATION AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
December 31, 2008, 2007 and 2006
| | | | | | | | | | | | | |
Description | | Balance at
beginning
of Year | | “Addition”
charged to
costs and
expense | | “Less”
deductions | | Balance
at end
of year | |
| | | | | | | | | | | | | |
Year ended December 31,2008 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 258,873 | | $ | 131,090 | | $ | 956 | (a) | $ | 389,007 | |
Allowance for note receivable | | $ | 225,000 | | $ | — | | $ | 225,000 | | $ | — | |
Deferred tax asset valuation allowance | | $ | 8,133,835 | | $ | — | | $ | 866,700 | | $ | 7,267,135 | |
| | | | | | | | | | | | | |
Year ended December 31,2007 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 245,543 | | $ | 91,236 | | $ | 77,906 | (a) | $ | 258,873 | |
Allowance for note receivable | | $ | 225,000 | | $ | — | | $ | — | | $ | 225,000 | |
Deferred tax asset valuation allowance | | $ | 8,562,449 | | $ | — | | $ | 428,614 | | $ | 8,133,835 | |
| | | | | | | | | | | | | |
Year ended December 31,2006 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 370,195 | | $ | 19,036 | | $ | 143,688 | (a) | $ | 245,543 | |
Allowance for note receivable | | $ | 296,077 | | $ | — | | $ | 71,077 | | $ | 225,000 | |
Deferred tax asset valuation allowance | | $ | 8,593,829 | | $ | — | | $ | 31,380 | | $ | 8,562,449 | |
| | |
| a) | Uncollectible accounts written off. |
| b) | Continuing operations net operating loss utilized to offset tax impact of operating income from discontinued operations. |
| | |
| All other schedules are omitted because they are not applicable, or because the required information is included in the consolidated financial statements or notes thereto. |
| | |
3) | | Exhibits – |
| |
2.1 | Asset and Share Purchase Agreement dated as of October 11, 2002 among the Company, Selas S.A.S., Andritz A.G. and Andritz Acquisition S.A.S. Schedules and attachments are listed under section 1.2 of the agreement and will be provided to the Commission upon request. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on December 17, 2002.) |
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2.2 | Stock purchase Agreement dated July 21, 2003 between the Company and Ventra Ohio Corp, and VTA USA, INC. Schedules and attachments are listed beginning on page 38 of the agreement and will be provided to the Commission upon request. (Incorporated by reference from the Company’s current report on Form 8-K/A filed with the Commission on July 23, 2003.) |
| |
2.3 | Agreement of Sales between the Company and BET Investments, Inc. dated December 31, 2002, as amended. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on June 29, 2004.) |
| |
2.4 | Asset purchase agreement dated March 31, 2005 among the Company and Selas Heat Technology, LLP (Schedules and exhibits are omitted pursuant to Regulation S-K, Item 601(b)(2); IntriCon Corporation agrees to furnish a copy of such schedules and/or exhibits to the Securities and Exchange Commission upon request) (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2005.) |
| |
2.5 | Asset Purchase Agreement by and among IntriCon Corporation, TI Acquisition Corporation, Tibbetts Industries, Inc. and certain shareholders of Tibbetts Industries, Inc. dated April 19, 2007. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on April 23, 2007.) |
| |
3.1 | The Company’s Amended and Restated Articles of Incorporation, as amended. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on April 24, 2008.) |
| |
3.2 | The Company’s Amended and Restated By-Laws. (Incorporated by reference from the Company’s annual report on Form 8-K filed with the Commission October 12, 2007.) |
| |
+ 10.1.1 | Amended and Restated 1994 Stock Option Plan. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 1997.) |
| |
+ 10.1.2 | Form of Stock Option Agreements granted under the Amended and Restated 1994 Stock Option Plan. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 1995.) |
| |
+ 10.2.1 | 2001 Stock Option Plan. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2000.) |
| |
10.2.2 | Form of Stock Option Agreement issued to executive officers pursuant to the 2001 Stock Option Plan. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on April 26, 2005.) |
| |
+ 10.3 | Supplemental Retirement Plan (amended and restated effective January 1, 1995). (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 1995.). |
| |
10.4 | Amended and Restated Office/Warehouse Lease, between Resistance Technology, Inc. and Arden Partners I. L.L.P. (of which Mark S. Gorder is one of the principal owners) dated November 1, 1996. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 1996.) |
| |
+ 10.5.1 | Amended and Restated Non-Employee Directors’ Stock Option Plan. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2001.) |
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10.5.2 | Form of Non-employee director Option Agreement for options issued pursuant to the Amended and Restated Non-Employee Directors Stock Option Plan. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on October 3, 2005.) |
| |
+ 10.6 | Retirement Agreement, Consulting Agreement and General Release, dated August 30, 2000, between the Company and Stephen F. Ryan. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2000.) |
| |
10.7 | Separation Agreement dated November 30, 2001 between the Company and Robert W. Ross. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2001.) |
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10.8 | Settlement agreement dated September 12, 2003 between the Company and Andritz AG, Andritz Acquisition S.A.A. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2003.) |
| |
+ 10.9 | Termination agreement following change of control or asset sale between the Company and Mark S. Gorder dated December 14, 2004. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on December 20, 2004.) |
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+ 10.10.1* | Summary sheet for director fees. |
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+ 10.10.2* | Summary sheet for executive officer compensation. |
| |
10.11.1 | Credit and Security Agreement dated August 31, 2005 by Resistance Technology, Inc. and RTI Electronics, Inc. and Diversified Business Credit, Inc. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2005.) |
| |
10.11.2 | Security Agreement dated August 31, 2005 between IntriCon Corporation and Diversified Business Credit, Inc. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2005.) |
| |
10.11.3 | First Amendment to Credit and Security Agreement between Resistance Technology, Inc., RTI Electronics, Inc. and M&I Business Credit f/k/a Diversified Business Credit, Inc. dated June 30, 2006. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006.) |
| |
10.11.4 | Guaranty by Corporation dated August 31, 2005 between IntriCon Corporation and Diversified Business Credit, Inc. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2005.) |
| |
10.11.5 | Term Loan Supplement (Real Estate) to Credit Agreement dated August 31, 2005, by Resistance Technology, Inc. and RTI Electronics, Inc. for the benefit of Diversified Business Credit, Inc. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2005.) |
| |
10.11.6 | Term Loan Supplement (Equipment) to Credit Agreement dated August 31, 2005, by Resistance Technology, Inc. and RTI Electronics, Inc. for the benefit of Diversified Business Credit, Inc. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2005.) |
| |
10.11.7 | Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents by Resistance Technology, Inc. to Diversified Business Credit, Inc. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2005.) |
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10.12 | Promissory note from Selas Heat Technology, LLP dated March 31, 2005. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2005.) |
| |
10.13.1 | Employment agreement between the Company and William J. Kullback dated April 25, 2005. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on April 26, 2005.) |
| |
10.13.2 | Termination agreement following change of control or asset sale between the Company and William J. Kullback dated April 25, 2005. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on April 26, 2005.) |
| |
+ 10.14.1 | 2006 Equity Incentive Plan. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2006.) |
| |
+ 10.14.2 | Form of Stock Option Agreement issued to executive officers pursuant to the 2006 Equity Incentive Plan. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2006.) |
| |
+ 10.14.3 | Form of Stock Option Agreement issued to directors pursuant to the 2006 Equity Incentive Plan. (Incorporated by reference from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2006.) |
| |
+ 10.14.4 | Non-Employee Directors Stock Fee Election Program. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2006.) |
| |
+10.14.5 | Non-Employee Director and Executive Officer Stock Purchase Program, as amended. (Incorporated by reference from the Company’s quarterly report on Form 10-Q filed with the Commission on November 14, 2008.) |
| |
+ 10.15 | Deferred Compensation Plan. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on May 17, 2006.) |
| |
10.16 | Purchase Agreement between Resistance Technology, Inc. and MDSC Partners, LLP dated May 5, 2006. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on June 21, 2006.) |
| |
10.17 | Land and Building Lease Agreement between Resistance Technology, Inc. and MDSC Partners, LLP dated June 15, 2006. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on June 21, 2006.) |
| |
10.18 | Agreement by and between K/S HIMPP and IntriCon Corporation dated December 1, 2006 and the schedules thereto. (Incorporated by reference from the Company’s annual report on Form 10-K for the year ended December 31, 2006.) |
| |
+ 10.19 | Employment Agreement with Mark S. Gorder. (Incorporated by reference from the Company’s annual report on Form 8-K filed with the Commission October 12, 2007.) |
| |
+ 10.20 | Form of Employment Agreement with executive officers. (Incorporated by reference from the Company’s annual report on Form 8-K filed with the Commission October 12, 2007.) |
| |
10.21.1 | 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 Commission on May 25, 2007.) |
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10.21.2 | First Amendment to Loan and Security Agreement dated as of September 30, 2007, by and among IntriCon, Resistance Technology, Inc., RTI Electronics, Inc. and IntriCon Tibbetts Corporation and LaSalle Bank National Association. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission October 12, 2007.) |
| |
10.21.3 | Second Amendment to Loan and Security Agreement dated as of June 30, 2008, by and among IntriCon, Resistance Technology, Inc., RTI Electronics, Inc., IntriCon Tibbetts Corporation and LaSalle Bank National Association. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission July 7, 2008.) |
| |
10.21.4* | Third Amendment to Loan and Security Agreement dated as of December 31, 2008, by and among IntriCon, IntriCon, Inc., RTI Electronics, Inc., IntriCon Tibbetts Corporation and LaSalle Bank National Association. |
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10.21.5 | Trademark Security Agreement dated as of May 22, 2007, by IntriCon in favor of LaSalle Bank National Association. (Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on May 25, 2007.) |
| |
10.21.6 | 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 Commission on May 25, 2007.) |
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10.22* | Strategic Alliance Agreement among IntriCon Corporation and Dynamic Hearing Pty Ltd effective as of October 1, 2008. |
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21* | List of significant subsidiaries of the Company. |
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23.1* | Consent of Independent Registered Public Accounting Firm (Virchow, Krause & Company, LLP). |
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31.1* | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2* | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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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 |
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32.2* | Certification of principal financial officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
* | Filed herewith. |
+ | Denotes management contract, compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | INTRICON CORPORATION
(Registrant) |
|
| By: | /s/ Scott Longval | |
| | Scott Longval |
| | Chief Financial Officer, |
| | Treasurer and Secretary |
Dated: March 3, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | |
/s/ Mark S. Gorder |
|
| |
Mark S. Gorder |
President and Chief Executive |
Officer and Director (principal executive officer) |
March 3, 2009 |
|
/s/Scott Longval |
|
| |
Scott Longval |
Chief Financial Officer |
Treasurer and Secretary |
(principal accounting and financial officer) |
March 3, 2009 |
|
/s/Nicholas A. Giordano |
|
| |
Nicholas A. Giordano |
Director |
March 3, 2009 |
|
/s/Robert N. Masucci |
|
| |
Robert N. Masucci |
Director |
March 3, 2009 |
|
/s/ Michael J. McKenna |
|
| |
Michael J. McKenna |
Director |
March 3, 2009 |
|
/s/ Philip N. Seamon |
|
| |
Philip N. Seamon |
Director |
March 3, 2009 |
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EXHIBIT INDEX
| |
EXHIBITS: |
| |
10.10.1 | Summary sheet for director fees. |
| |
10.10.2 | Summary sheet for executive officer compensation. |
| |
10.21.4 | Third Amendment to Loan and Security Agreement dated as of December 31, 2008, by and among IntriCon, IntriCon, Inc., RTI Electronics, Inc., IntriCon Tibbetts Corporation and LaSalle Bank National Association. |
| |
10.22 | Strategic Alliance Agreement among IntriCon Corporation and Dynamic Hearing Pty Ltd effective as of October 1, 2008. |
| |
21 | List of significant subsidiaries of the Company. |
| |
23.1 | Consent of Independent Registered Public Accounting Firm (Virchow, Krause and Company, LLP). |
| |
31.1 | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 | Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
| |
32.2 | Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
78
