The most significant items that contributed to the ($0.1) million of cash used by operating activities were changes in operating assets and liabilities of $0.1 million, depreciation of $1.2 million and net loss of $(1.6) million. The change in operating assets and liabilities was primarily due to decreases in accrued expenses, partially offset by decreases in accounts receivable. The change in accrued expenses is primarily due to less accrued expense for salary and benefits. The changes in accounts receivable is due to lower revenue and the timing of sales and customer payments.
Net cash used by investing of activities consisted of purchases of property, plant and equipment of $0.6 million, partially offset by $0.3 million of cash received from notes receivable and equipment sales.
Net cash provided by financing activities of $0.3 million was comprised primarily of an increase in checks written in excess of cash of $0.4 million.
The Company and its subsidiaries, IntriCon, 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. The credit facility provided for:
Loans under the credit facility were secured by a security interest in substantially all of the assets of the borrowers including a pledge of the stock of the subsidiaries. All of the borrowers were jointly and severally liable for all borrowings under the credit facility.
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Weighted average interest on the domestic asset-based revolving credit facilities was 3.09% and 5.49% for the three months ended June 30, 2009 and 2008, respectively, and 3.42% and 6.17% for the six months ended June 30, 2009 and 2008, respectively.
The principal balance of the term loan was $2,475,000 and $2,756,250 at June 30, 2009 and December 31, 2008, respectively. 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 $3,400,000 at June 30, 2009 and $3,000,000 at December 31, 2008. The total remaining availability on the revolving credit facility was approximately $3,150,000 and $4,349,000 at June 30, 2009 and December 31, 2008, respectively.
The revolving facility carried 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 was 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. . As of June 30, 2009, the Company was in default of the financial covenant relating to maintenance of a fixed charge coverage ratio under the credit facility, as amended. Such default constituted an event of default under the credit facility. As discussed in Footnote 19 and below, the Company entered into a new three year credit facility with The PrivateBank and Trust Company to replace the existing facility on August 13, 2009. In conjunction with this refinancing, no provision has been made to the debt classification for the covenant violation under Financial Accounting Standard (“FAS”) 78 “Classification of Obligations That are Callable by the Creditor” at June 30, 2009. In addition, the payment terms of the new facility are substantially similar; therefore no adjustment to debt classification has been made as of June 30, 2009, in accordance with FAS 6 “Classification of Short-Term Obligations Expected to Be Refinanced”.
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 approximately $1.8 million line of credit. 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 5.53% and 5.61% for the three months ended June 30, 2009 and 2008, respectively, and 5.68% and 5.49% for the six months ended June 30, 2009 and 2008, respectively. The outstanding balance was $548,000 and $605,000 at June 30, 2009 and December 31, 2008, respectively. The total remaining availability on the international senior secured credit agreement was approximately $1,250,000 and $1,203,000 at June 30, 2009 and December 31, 2008, respectively.
In June 2008, the Company completed a sale-leaseback of machinery and equipment with Bank of America. This facility was repaid on August 13, 2009 with proceeds borrowed from the new credit facility described below.
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 sale-leaseback described above) at June 30, 2009 and December 31, 2008 was $1,548,000 and $1,661,000, respectively, 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 June 30, 2009 and December 31, 2008 was $1,225,000 and $1,330,000, respectively. The accumulated amortization on leased equipment was $319,000 and $257,000 at June 30, 2009 and December 31, 2008, respectively. The amortization of capital leases is included in depreciation expense for 2009 and 2008.
On August 13, 2009, to finance the acquisition and replace the Company’s existing facilities with Bank of America, including capital leases, the Company and its domestic subsidiaries entered into a new three year credit facility with The PrivateBank and Trust Company on August 13, 2009. The credit facility provides for:
| | |
| § | a $8,000,000 revolving credit facility, with a $200,000 subfacility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Company’s eligible trade receivables, eligible inventory and eligible equipment, less a reserve; and |
| | |
| § | a $3,500,000 term loan. |
Loans under the credit facility are secured by a security interest in substantially all of the assets of the Company and its domestic subsidiaries, including a pledge of the stock of its domestic subsidiaries. Loans under the credit facility bear interest at varying rates based on predefined levels of Funded Debt / EBITDA , at the option of the Company, at:
| | |
| § | the London InterBank Offered Rate (“LIBOR”) plus 3.00% – 4.00%, or |
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| | |
| § | the base rate, which is the higher of (a) the rate publicly announced from time to time by the lender as its “prime rate” and (b) the Federal Funds Rate plus 0.5%, plus 0.25% - 1.25%. |
As of August 13, 2009, the Company had borrowed $3,500,000 on the term note and $6,458,148 on the revolving line of credit. Proceed from the loans were used to repay amounts owed under the Bank of America credit facilities of $8,524,057 and a portion of the purchase price to complete the acquisition of Datrix.
Upon termination of the Bank of America credit facility, the Company was required to settle the outstanding obligations of $121,000 for the interest rate swap agreement with Bank of America and recognize the corresponding charge of $121,000 in interest expense, in addition to recognizing previously deferred financing costs of $86,000 related to the Bank of America facility.
We believe that funds expected to be generated from operations, the available borrowing capacity through our revolving credit loan facilities and the control of capital spending will be sufficient to meet our anticipated cash requirements for operating needs for at least the next 12 months. If, however, we do not generate sufficient cash from operations, or if we incur additional unanticipated liabilities, we may be required to seek additional financing or sell equity or debt on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity or debt will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as its own financial condition. While management believes that we will be able to meet our liquidity needs for at least the next 12 months, no assurance can be given that we will be able to do so.
Recent Accounting Pronouncements
As discussed in note 2 to the Consolidated Condensed Financial Statements, in June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The objective of this Statement is to replace Statement 162 and to establish the FASB Accounting Standards CodificationTM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not believe that the adoption of SFAS 168 will have a material effect on its results of operations, financial position or cash flows.
In June 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”, which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R). This statement is effective for interim and annual periods beginning after November 15, 2009. This statement will be effective for the Company beginning in fiscal 2010. The Company is currently assessing the effect the standard will have on its results of operations, financial position and cash flows.
In May 2009, the FASB issued FASB Statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of the provisions of SFAS No. 165 did not have a material effect on the Company’s consolidated financial condition, results of operations, or cash flows.
In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles that are presented in conformity with generally accepted accounting principles in the United States of America. This statement became effective during November 2008. The adoption of SFAS 162 did not have a material effect on the Company’s results of operations, financial position or cash flows.
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In April 2009, the FASB issued FASB Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This Staff Position clarifies the application of FASB Statement No. 157,Fair Value Measurements,when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. Additionally, FASB Staff Position No. 157-4 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The guidance in this Staff Position is effective for interim and annual reporting periods ending after June 15, 2009, and must be applied prospectively. The adoption of this Staff Position did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
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 valuation, goodwill, long-lived assets, deferred taxes policies and employee benefit obligations. 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
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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, 2008. There have been no material changes in the Company’s market risk exposures which have occurred since December 31, 2008.
ITEM 4T.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, 2009 (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 Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified 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 is accumulated and communicated to management, including the principal executive officer and principal 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, 2009, 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.
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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, 2008, which could materially affect the Company’s business, financial condition or future results. The risk factors in the Company’s Annual Report on Form 10-K 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 2009 Annual Meeting of Shareholders of the Company held on April 15, 2009:
Mr. Nicholas A. Giordano and Mr. Philip N. Seamon were re-elected as a directors of the Board of Directors of the Company for a term expiring at the 2012 Annual Meeting. In the election, 4,531,911 votes were cast for Mr. Giordano and 4,523,209 votes were cast for Mr. Seamon. Under Pennsylvania law, votes cannot be cast against a candidate. Proxies filed at the 2009 Annual Meeting by the holders of 35,759 and 44,461 shares withheld authority to vote for Mr. Giordano and Mr. Seamon, respectively. The terms of the following directors continued after the Annual Meeting: Mark S. Gorder, Michael J. McKenna and Robert N. Masucci.
The appointment of Baker Tilly Virchow Krause, LLP as the Company’s independent auditor for fiscal year 2009 was also ratified. In the ratification, 4,551,837 votes were cast in favor of ratification of the appointment, while 5,120 were cast opposing ratification of the appointment, and holders of 10,712 shares abstained. There were no broker non-votes.
ITEM 5.Other Information
None.
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ITEM 6.Exhibits
| | |
| (a) Exhibits |
| | |
| 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 |
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SIGNATURES
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 14, 2009 | | By: | /s/ Mark S. Gorder | |
| | Mark S. Gorder |
| | President and Chief Executive Officer |
| | (principal executive officer) |
| | | | |
Date: August 14, 2009 | | By: | /s/ Scott Longval | |
| | Scott Longval |
| | Chief Financial Officer and Treasurer |
| | (principal financial officer) |
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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 |
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