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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2005
-------------------------------------------------
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
-------------------------------------------------
COMMISSION FILE NUMBER 1-5005
---------------------------------------------------------
INTRICON CORPORATION
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1069060
- ---------------------------------- ----------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO)
INCORPORATION OR ORGANIZATION)
1260 RED FOX ROAD, ARDEN HILLS, MINNESOTA 55112
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(651) 636-9770
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
(X) YES ( ) NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED BY RULE 12B-2 OF THE EXCHANGE ACT)
( ) YES (X) NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON SHARES, $1.00 PAR VALUE 5,129,214 (exclusive of 515,754
- ---------------------------------- ----------------------------------
CLASS treasury shares)
OUTSTANDING AT June 27, 2005
INTRICON CORPORATION
I N D E X
---------
Page
Numbers
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed (Unaudited) Balance Sheets
as of March 31, 2005 and December 31, 2004 3, 4
Consolidated Condensed (Unaudited) Statements 5
of Operations for the Three Months Ended
March 31, 2005 and 2004
Consolidated Condensed (Unaudited) Statements 6
of Cash Flows for the Three Months Ended
March 31, 2005 and 2004
Notes to Consolidated Condensed (Unaudited)
Financial Statements 7-11
Item 2. Management's Discussion and Analysis 12-18
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 18
About Market Risk
Item 4. Controls and Procedures 18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of 20
Security Holders
Item 5. Other Information 20
Item 6. Exhibits 20
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
INTRICON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
ASSETS
------
(UNAUDITED)
Restated
March 31, December 31,
2005 2004
----------- ------------
Current assets:
Cash $ 475,343 $ 246,430
Restricted cash 446,889 449,613
Accounts receivable (less allowance for doubtful accounts of $178,000
in 2005 and $177,000 in 2004) 5,669,581 4,996,705
Receivable from sale of discontinued operations 2,771,000 --
Inventories 5,133,571 4,287,643
Refundable Income Tax -- 46,163
Other current assets 621,431 379,318
Assets of discontinued operations -- 6,834,256
----------- -----------
Total current assets 15,117,815 17,240,128
Property, plant and equipment:
Land 170,500 170,500
Buildings 1,732,914 1,732,914
Machinery and equipment 26,074,938 25,635,452
----------- -----------
27,978,352 27,538,866
Less: Accumulated depreciation 20,736,417 20,260,792
----------- -----------
Net property, plant and equipment 7,241,935 7,278,074
Note receivable from sale of discontinued operations 800,000 --
Goodwill 5,264,585 5,264,585
Other assets, net 1,130,855 1,156,449
----------- -----------
$29,555,190 $30,939,236
=========== ===========
(See accompanying notes to the consolidated condensed financial statements)
3
INTRICON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(UNAUDITED)
Restated
March 31, December 31,
2005 2004
----------- ------------
Current liabilities:
Notes payable $ 4,457,817 $ 3,740,393
Checks written in excess of cash 141,955 665,098
Current maturities of long-term debt 1,509,770 1,458,470
Accounts payable 3,717,630 2,211,909
Income taxes payable 46,314 --
Customer's advance payments on contracts 75,000 75,000
Liabilities of discontinued operations -- 4,266,899
Other accrued liabilities 3,216,176 2,638,889
----------- -----------
Total current liabilities 13,164,662 15,056,658
Long term debt, less current maturities 141,933 --
Other postretirement benefit obligations 2,459,366 2,710,106
Deferred income taxes 143,030 143,902
Accrued pension liabilities 903,227 900,713
Commitments and contingencies(Notes 11 and 12)
Shareholders' equity:
Common shares, $1 par; 10,000,000 shares
authorized; 5,644,968 shares issued 5,644,968 5,644,968
Additional paid-in capital 12,025,790 12,025,790
Accumulated deficit (3,470,473) (3,680,704)
Accumulated other comprehensive loss (192,235) (597,119)
Less: 515,754 common shares held
in treasury, at cost (1,265,078) (1,265,078)
----------- -----------
Total shareholders' equity 12,742,972 12,127,857
----------- -----------
$29,555,190 $30,939,236
=========== ===========
(See accompanying notes to the consolidated condensed financial statements)
4
INTRICON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
---------------------------------
Restated
March 31, March 31,
2005 2004
---------- ----------
Sales, net $9,786,174 $9,338,078
Cost of sales 7,403,802 6,917,269
Gross margin 2,382,372 2,420,809
Operating expenses:
Selling expense 803,598 990,808
General and administrative expense 1,252,414 1,565,215
Research and development expense 406,934 460,634
---------- ----------
Total operating expenses 2,462,946 3,016,657
Operating loss (80,574) (595,848)
Interest expense (112,043) (96,076)
Interest income -- 841
Other income, net 34,916 94,863
---------- ----------
Loss from continuing operations
before income taxes (157,701) (596,220)
Income tax expense 95,824 117,406
---------- ----------
Loss from continuing operations (253,525) (713,626)
Income (loss) from discontinued operations, net of income tax
expense (benefit) 463,756 (78,886)
---------- ----------
Net income (loss) $ 210,231 $ (792,512)
========== ==========
Income (loss) per share:
Basic:
Continuing operations $ (.05) $ (.14)
Discontinued operations .09 (.02)
---------- ----------
$ .04 $ (.16)
========== ==========
Diluted:
Continuing operations $ (.05) $ (.14)
Discontinued operations .09 (.02)
---------- ----------
$ .04 $ (.16)
========== ==========
Average shares outstanding:
Basic 5,129,214 5,129,214
Diluted 5,129,214 5,145,193
(See accompanying notes to the consolidated condensed financial statements)
5
INTRICON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
---------------------------------
Restated
March 31, March 31,
2005 2004
----------- ----------
Cash flows from operating activities:
Net income (loss) $ 210,231 $ (792,512)
Adjustments to reconcile net (income)loss
to net cash used by operating activities:
(Income) loss from discontinued operations (463,756) 78,886
Depreciation and amortization 560,952 585,984
Gains on disposition of property (1,654) --
Changes in operating assets and liabilities:
Accounts receivable (1,727,502) (473,514)
Inventories (855,054) 432,187
Other assets (244,186) 66,473
Accounts payable 1,643,056 (780,457)
Accrued expenses 554,654 194,408
Customer advances -- 3,185
Other liabilities (375,645) 116,944
----------- ----------
Net cash used by continuing operations (698,904) (568,416)
Net cash provided by discontinued operations 1,037,342 303,626
----------- ----------
Net cash provided (used) by operating activities 338,438 (264,790)
Cash flows from investing activities:
Proceeds from sale of assets 2,950 --
Purchases of property, plant and equipment (500,654) 2,871
----------- ----------
Net cash used by investing activities (497,704) 2,871
Net cash used by discontinued operations -- (1,153)
----------- ----------
Net cash used by investing activities (497,704) 1,718
Cash flows from financing activities:
Proceeds from bank borrowings 721,097 800,001
Repayments of short-term bank borrowings -- (174,445)
Proceeds from long term borrowings 197,261 --
Change in checks written in excess of cash (523,143) --
Repayments of long-term debt (4,028) (41,800)
----------- ----------
Net cash provided by financing activities 391,187 583,756
Effect of exchange rate changes on cash (3,008) (48,260)
----------- ----------
Net increase in cash and cash equivalents 228,913 272,424
Cash and cash equivalents, beginning of period 246,430 294,167
----------- ----------
Cash and cash equivalents, end of period $ 475,343 $ 566,591
=========== ==========
(See accompanying notes to the consolidated condensed financial statements)
6
INTRICON CORPORATION
Notes to Consolidated Condensed Financial Statements (Unaudited)
- ----------------------------------------------------------------
1. General
In the opinion of management, the accompanying consolidated condensed
financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly IntriCon
Corporation's consolidated financial position as of March 31, 2005 and
December 31, 2004, and the consolidated results of its operations for
the three months ended March 31, 2005 and 2004.
2. Restatement of Prior Year Financial Statements
We have restated our consolidated financial statements for the years
2000 through 2004 (the "Restatement"). The determination to restate
these financial statements was made after errors were discovered in
May, 2005. In addition, certain disclosures in other notes to our
consolidated financial statements have been restated to reflect the
Restatement adjustments. In the Restatement, we have:
o Corrected the accounting for certain research and development
expenditures that were erroneously capitalized on the balance
sheet by recording charges to the statement of operations.
o Reversed amortization expense related to the erroneously
capitalized research and development expenditures.
o Adjusted income tax reserves as a function of the impact on
pre-tax income relating to the correction of accounting for
certain research and development expenditures noted above.
Further information regarding the impact of these adjustments is
provided in note 2 of the consolidated financial statements in Form
10-K/A for the year ended December 31, 2004.
3. New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 123R,
Share-Based Compensation, which supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123R focuses primarily on
accounting for transactions in which an entity obtains employee
services through share-based payment transactions. SFAS No. 123R
requires a public entity to measure the cost of employee services
received in exchange for the award of equity investments based on the
fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to
provide services in exchange for the award. On April 14, 2005, the
Securities and Exchange Commission issued a release announcing the
adoption of a new rule delaying the required implementation of SFAS No.
123R. Under this new rule, SFAS No. 123R is effective as of the
beginning of the first annual reporting period that begins after June
15, 2005. The impact on net earnings as a result of the adoption of
SFAS No. 123R, from a historical perspective, can be found in Note 9 to
the Consolidated Financial Statements in this Quarterly Report and in
Note 1 to the Consolidated Financial Statements contained in our 2004
Annual Report. We are currently evaluating the provisions of SFAS No.
123R and will adopt it in the first quarter of 2006, as required.
7
4. Discontinued Operations
Burners and Components Business - In 2003, the Company initiated its
plan to sell the remainder of its Heat Technology segment. This segment
consisted of the operating assets of Selas Corporation of America,
located in Dresher, Pennsylvania, Nippon Selas located in Tokyo, Japan
and Selas Waermetechnik located in Ratingen, Germany. This business
generated sales of $2.1 million, and $1.6 million and net income of
$464,000 and a net loss of $54,000 for the three months ended March 31,
2005 and 2004, respectively. The net income for the three months ended
March 31, 2005, included a gain on the sale of the operations of
$536,000. The Company sold the remainder of the burners and components
business on March 31, 2005. The total purchase price was approximately
$3.7 million, subject to adjustment, of which approximately $2.8
million was paid in cash on April 1, 2005, and $900,000 was paid in the
form of a subordinated promissory note.
The consolidated condensed financial statements reflect the Company's
presentation of discontinued operations. A recap of discontinued
operations at March 31 is as follows:
Three Months Ended March 31,
----------------------------
2005 2004
--------- --------
Income (loss) from operations
Gain from Sale of Discontinued
Operations $ 536,037 $ --
Small furnace -- (25,125)
Burners and components (72,281) (53,761)
--------- --------
$ 463,756 $(78,886)
========= ========
5. Business Segment Information
The Company has made a strategic decision to focus its future on the
Precision Miniature Medical and Electronics business. The Company sold
the remaining operations of its Heat Technology segment of the Burners
and Components business on March 31, 2005. As a result of this decision
and other divestures the Company has made over the past three years,
the Company now operates in only one segment.
6. Inventories consist of the following at:
March 31, December 31,
2005 2004
----------- -----------
Raw material $ 2,603,844 $ 2,240,194
Work-in-process 1,174,746 1,008,706
Finished products and components 1,354,981 1,038,743
----------- -----------
$ 5,133,571 $ 4,287,643
=========== ===========
8
7. Long term debt
Notes payable at March 31, 2005 and December 31, 2004 are summarized
below:
March 31, December 31,
2005 2004
----------- ------------
Notes payable:
Short term borrowings, domestic $ 3,855,447 $ 3,171,447
Short term borrowings, Asia 602,370 568,946
----------- ------------
Total notes payable $ 4,457,817 $ 3,740,393
=========== ===========
The Company and its domestic subsidiaries have a revolving credit loan
facility which expires April 1, 2006. This loan facility, which
originally had a maximum limit of $4,500,000, was reduced to a maximum
limit of $4,000,000 after the completion of the sale of the burners and
components business. This facility had outstanding borrowings of
approximately $3,855,000 as of March 31, 2005 bearing an interest rate
of 8.75% (Prime plus 3.0%). This facility carries a commitment fee of
.25% per annum, payable on the unborrowed portion of the line.
In addition, the Company's operation in Singapore maintains an
overdraft and letter of credit facility which as of March 31, 2005, had
outstanding borrowings of approximately $602,000. Remaining
availability under this facility as of March 31, 2005 was $489,000.
At March 31, 2005 the Company was in compliance with all the financial
covenants contained in its credit facility.
Long-term debt at March 31, 2005 and December 31, 2004 is summarized
below:
March 31, December 31,
2005 2004
----------- ------------
Long Term Debt:
Term loan, domestic $ 1,458,204 $ 1,458,470
Equipment leases 193,499 --
----------- -----------
1,651,703 1,458,470
Less: current maturities 1,509,770 1,458,470
----------- -----------
$ 141,933 $ --
=========== ===========
The terms of the domestic term loan agreement required quarterly
principal payments of $300,000 beginning in March 2005 through March
2006, with a balloon payment due at the end of the loan. The loan also
required proceeds from the sale of certain assets be applied against
the loan. At March 31, 2005, the borrowings under the loan agreement
bore interest, payable monthly, at an interest rate of 8.75% (Prime
plus 3.00%). The term loan was paid in full on April 1, 2005, upon
receipt of the proceeds from the sale of discontinued operations.
Our ability to pay the principal and interest on our indebtedness as it
comes due will depend upon our current and future performance. Our
performance is affected by general economic conditions and by
financial, competitive, political, business and other factors. Many of
these factors are beyond our control.
We believe that 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 through
March 31, 2006. If, however, we do not generate sufficient cash from
operations, or if we incur additional liabilities as a result of the
Selas SAS insolvency (note 12), we may be required to seek additional
financing or sell equity on terms which may not be as favorable as we
could have otherwise obtained. No assurance can be given that any
refinancing, additional borrowing or sale of equity will be possible
when needed or that we will be able to negotiate acceptable terms. In
addition, our access to capital is affected by prevailing conditions in
the financial and equity capital markets, as well as our own financial
condition. While management believes that the
9
Company will meet its liquidity needs through March 31, 2006, no
assurance can be given that the Company will be able to do so.
8. Income Taxes
Income taxes expense was $95,824 and $117,406 for the three months
ended March 31, 2005 and 2004, respectively. The income tax expense for
both three month periods was due to the Company's profitability at its
foreign operations. The Company is in a net operating loss position for
Federal income tax purposes and, consequently, no benefit from the
current period domestic operating loss was recognized. At March 31,
2005 the Company had net operating loss carryforwards for Federal
income tax purposes of approximately $15.9 million that begin to expire
in 2022.
9. Accounting for Stock Options
The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock option plans. Therefore, no compensation
expense has been recognized for the stock option plans. SFAS No. 123
"Accounting for Stock-Based Compensation", amended by SFAS No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure",
requires the Company to disclose pro forma net loss and pro forma loss
per share amounts as if compensation expense was recognized for all
options granted (note 2). The pro forma amounts are as follows:
Three Months Ended
March 31,
----------------------
Restated
2005 2004
-------- ---------
Net income (loss) as reported $210,231 $(792,512)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
(46,319) (19,721)
-------- ---------
Pro forma net income (loss) $163,912 $(812,233)
======== =========
Income (loss) per share:
Basic and diluted - as reported $ .04 $(.16)
Basic and diluted - pro forma $ .03 $(.16)
10. Income (Loss) Per Share
Excluded from the computation of diluted earnings per share at March
31, 2005 were options to purchase approximately 661,000 common shares
because the effect would have been anti-dilutive.
11. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 117 lawsuits as of March 31, 2005(approximately 123
lawsuits as of December 31, 2004)alleging that plaintiffs have or may
have contracted asbestos-related diseases as a result of exposure to
asbestos products or equipment containing asbestos sold by one or more
named defendants. Due to the noninformative nature of the complaints,
the Company does not know whether any of the complaints state valid
claims against the Company. The lead insurance carrier has informed the
Company that the primary policy for the period July 1, 1972 - July 1,
1975 has been exhausted and that the lead carrier will no longer
provide a defense
10
under that policy. The Company has requested that the lead carrier
substantiate its position. The Company has contacted representatives of
the Company's excess insurance carrier for some or all of this period.
The Company does not believe that the asserted exhaustion of the
primary insurance coverage for this period will have a material adverse
effect on the financial condition, liquidity, or results of operations
of the Company. Management believes that the number of insurance
carriers involved in the defense of the suits and the significant
number of policy years and policy limits to which these insurance
carriers are insuring the Company, make the ultimate disposition of
these lawsuits not material to the Company's consolidated financial
position or results of operations.
As more fully described in Note 12, the Company's wholly owned French
subsidiary, Selas SAS filed 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.
The Company is also involved in other lawsuits arising in the ordinary
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 the
Company's consolidated financial position, liquidity, or results of
operations.
12. Subsidiary Insolvency
On August 4, 2003 the Company's wholly owned French subsidiary, Selas
SAS, filed insolvency in the Commercial Court of Nanterre, France and
is being managed through a court appointed judiciary administrator.
Historical financial information has been restated to include this
European operation in discontinued operations. In addition, the Company
may be subject to additional litigation or liabilities as a result of
the French insolvency.
13. Statements of Cash Flows
Supplemental disclosures of cash flow information:
Three Months Ended
---------------------------------
March 31, March 31,
2005 2004
--------- ----------
Interest received $ 53 $ 2,982
Interest paid $ 103,104 $ 84,785
Income taxes paid $ 20,975 $ 5,000
11
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Business Overview
- -----------------
Headquartered in Arden Hills, Minnesota, IntriCon Corporation (formerly Selas
Corporation of America) is an international firm that designs, develops,
engineers and manufactures micro-miniature medical and electronic products. The
Company supplies micro-miniaturized components, systems and molded plastic
parts, primarily to the hearing instrument manufacturing industry, as well as
the computer, electronics, telecommunications and medical equipment industries.
In addition to its Arden Hills headquarters, the Company has facilities in
California, Singapore, and Germany. Within discontinued operations, the Company
had facilities in Pennsylvania, Japan and Germany. See also notes 4 and 5 to the
Condensed Consolidated Financial Statements.
Currently, the Company has one operating segment, its precision miniature
medical and electronics products segment. In the past the Company had operated
three segments, precision miniature medical and electronics products segment,
heat technology segment, and tire holders, lifts and related products segment.
In 2001, the Company began focusing on its precision miniature medical and
electronics products segment and developing plans to exit the businesses that
comprised the heat technology segment, and tire holders, lifts and related
products segment. The Company exited the tire holders, lifts and related
products business in 2003 and exited the heat technology segment on March 31,
2005. The Company classified its heat technology segment as discontinued
operations in 2004.
With the completed sale of the burner and components business, the Company has
successfully completed the shift from its traditional business segments to the
emerging prospects in its precision miniature medical and electronic products
business. To reflect the Company's redefined focus, it has changed it name to
IntriCon Corporation.
The Company manufactures micro-miniature components, systems and molded plastic
parts for hearing instruments, medical equipment, electronics,
telecommunications and computer industry manufacturers. These components consist
of volume controls, microphones, trimmer potentiometers and switches. The
Company also manufactures hybrid amplifiers and integrated circuit components
("hybrid amplifiers"), along with faceplates for in-the-ear and in-the-canal
hearing instruments. Components are offered in a variety of sizes, colors and
capacities in order to accommodate a hearing manufacturer's individualized
specifications. Sales to hearing instrument manufacturers represented
approximately 51% of net sales for the Company's precision miniature medical and
electronic products business in the first quarter of fiscal 2005.
In the medical market, the Company is focused on sales of microelectronics,
micromechanical assemblies and high-precision plastic molded components to
medical device manufacturers. Targeted customers include medical product
manufacturers of portable and lightweight battery powered devices, large
AC-powered units often found in clinics and hospitals, as well as a variety of
sensors designed to connect a patient to an electronic device.
The medical industry is faced with pressures to reduce the costs of healthcare.
The Company offers medical manufacturers the capabilities to design, develop and
manufacture components for medical devices that are easier to use, measure with
greater accuracy and provide more functions while reducing the costs to
manufacture these devices. Examples of the Company's products used by medical
device manufacturers include components found in intravenous fluid
administration pumps that introduce drugs into the bloodstream, and bubble
sensors and flow restrictors that monitor and control the flow of fluid in an
intravenous infusion system.
12
The Company also manufactures a family of safety needle products for an OEM
customer that utilizes the Company's insert and straight molding capabilities.
These products are assembled using full automation including built-in quality
checks within the production lines. Other examples include sensors used to
detect pathologies in specific organs of the body and monitoring devices to
detect cardiac and respiratory functions. The early and accurate detection of
pathologies allows for increased likelihood for successful treatment of chronic
diseases and cancers. Accurate monitoring of multiple functions of the body,
such as heart rate and breathing, aids in generating more accurate diagnosis and
treatments for patients.
The Company has also expanded its micro-miniature components business through
the manufacture of thermistors and film capacitors. The Company manufactures and
sells thermistors and thermistor assemblies, which are solid state devices that
produce precise changes in electrical resistance as a function of any change in
absolute body temperature. The Company's Surge-Gard TM product line, an inrush
electric current limiting device used primarily in computer power supplies,
represented approximately 5% of the Company's sales in the first quarter of
fiscal 2005. The balance of sales represent various industrial, commercial and
military sales for thermistor and thermistor assemblies to domestic an
international markets.
Forward-Looking and Cautionary Statements
- -----------------------------------------
Certain statements included in this Quarterly Report on Form 10-Q or documents
the Company files with the Securities and Exchange Commission, which are not
historical facts, are forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995), which are intended to be
covered by the safe harbors created thereby. These statements may include, but
are not limited to:
o statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" such as, new digital products to
gain market share, recovery of the telecommunications market, potential
growth in the Company's medical profits, future gross profit margins,
future cost savings, net operating loss carryforwards, the impact of
future cash flows, the ability to maintain financial covenants, the
ability to meet working capital requirements, future level of funding
of employee benefit plans, the ability to negotiate extension on
purchases, the impact of foreign currencies and litigation; and
o statements in "Notes to the Company's Condensed Consolidated Financial
Statements".
Forward-looking statements also include, without limitation, statements as to
the Company's:
o expected future results of operations and growth;
o ability to meet working capital requirements;
o business strategy;
o expected benefits from staff reductions;
o expected increases in operating efficiencies;
o anticipated trends in the hearing-health market; and
o estimate of goodwill impairment and amortization expense of the
intangible assets.
In addition, forward-looking statements also include the effects of changes in
accounting pronouncements, the effects of litigation and the amount of insurance
coverage, and statements as to trends or the Company's or management's beliefs,
expectations and opinions. Forward-looking statements are subject to risks and
uncertainties and may be affected by various factors that may cause actual
results to differ materially from those in the forward-looking statements. In
addition to the factors discussed in this Quarterly
13
Report on Form 10-Q, certain risks, uncertainties and other factors can cause
actual results and developments to be materially different from those expressed
or implied by such forward-looking statements, including, without limitation,
the following:
o the ability to implement the Company's business strategy;
o risks arising in connection with the insolvency of Selas SAS, and
potential liabilities and actions arising in connection therewith;
o the volume and timing of orders received by the Company;
o changes in estimated future cash flows;
o foreign currency movements in markets the Company services;
o changes in the global economy and financial markets;
o changes in the mix of products sold;
o acceptance of the Company's products;
o reliance on two customers in the Company's medical products business;
o competitive pricing pressures;
o pending and potential future litigation;
o availability of electronic components for the Company's products;
o ability to create and market products in a timely manner;
o ability to pay debt when it comes due; and
o the risks associated with terrorist attacks, war and threats of
attacks.
For a description of these and other risks see "Risk Factors" in Part 1, Item 1:
Business in the Company's Annual Report on Form 10-K for the year ended December
31, 2004, or in other filings the Company makes from time to time with the
Securities and Exchange Commission. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
14
2005 compared with 2004
- -----------------------
Consolidated net sales for the three months ended March 31, were as follows (in
thousands):
Change
--------------------
2005 2004 Dollars Percent
---- ---- ------- -------
Consolidated net sales $9,786 $9,338 $448 4.8%
The Company's sales increased for three of the four product sectors over the
same quarter last year. Sales increased by 10.7% for hearing health products,
75.9% for medical products, and 6.2% for electronics products. The sales
increase for hearing heath products was primarily due to new product offerings
in the Company's advance line of amplifier assemblies and systems based on
Digital Signal Processing (DSP). The sales increase for medical products was due
to strengthened orders for design and contract manufacturing with several
medical OEM customers. The sales increase for electronics products was primarily
attributable to thermistor sales to a specific customer. The increases for these
three product groups were partially offset by a decline of 37.6% in sales of
professional audio and military products; sales for the same quarter last year
of these products included a $1.1 million, one-time order from the Singapore
military.
Gross profit margin for the three months ended March 31 was as follows (in
thousands):
Restated
2005 2004 Change
------------------ ------------------- --------------------
Percent Percent
Dollars of Sales Dollars of Sales Dollars Percent
------- -------- ------- -------- ------- -------
Gross profit margin $2,382 24.3% $2,421 25.9% $ (39) 1.6%
The gross profit margin as a percentage of sales, decreased slightly from the
same period last year due to higher manufacturing costs associated with sales of
new products for the hearing health market. Gross profit margins were also
negatively impacted by a shift in sales for hearing health products to products
with higher material content; additionally the Company experienced an increase
in raw material costs for certain electronics products.
Selling, general and administrative expenses (SG&A) were as follows (in
thousands):
Restated
2005 2004 Change
------------------ ------------------- --------------------
Percent Percent
Dollars of Sales Dollars of Sales Dollars Percent
------- -------- ------- -------- ------- -------
Selling $ 804 8.2% $ 991 10.6% $(187) (18.9)%
General and
administrative 1,252 12.8% 1,565 16.8% $(313) (20.0)%
Research and
development 407 4.2% 461 4.9% $ (54) (11.7)%
The lower selling, administrative, and research and development expense over the
same year-ago period was the result of a reduction in staffing that occurred in
November 2004. The staffing adjustment was a combination of reductions due to
the transfer of a portion of manufacturing to an overseas operation and an
effort to streamline administrative functions. These actions are expected to
reduce the Company's ongoing costs by between $1.5 million and $2.0 million
annually.
15
Interest expense for the three months ended March 31, 2005 was $112,000 compared
to $96,000 for the same period in 2004. The increase over the prior year's
expense was due to an increase in the interest rate partially offset by the
lower outstanding debt balance.
Other income was $35,000 compared to $95,000 for the three months ended March
31, 2005 and 2004, respectively. The income in 2005 was attributable to the sale
of securities the Company had received in settlement of an outstanding debt with
one of its former customers. The majority of the other income in 2004 was
attributable to foreign exchange gain on a portion of the Company's debt that
was Euro denominated until its amendment in March 2004.
Income taxes reflected an expense for the three months ended March 31, 2005 of
$96,000 compared with $117,000 for the three months ended March 31, 2004, which
results in effective tax rates of (60.8)% and (19.6)%, respectively. The
effective rate in 2005 and 2004 was primarily due to foreign taxes on German and
Singapore operations. The Company is in a net operating loss position for
Federal income tax purposes and, consequently, no benefit from the current
period domestic operating loss was recognized.
For the three months ended March 31, 2005, the net loss from continuing
operations was $254,000 compared with a loss of $714,000 for the same period
last year. The decreased loss was a combination of the factors noted above
reflecting higher gross margin dollars and lower selling, research and
development, and administrative expenses.
Discontinued operations generated a net income for the three months ended March
31, 2005 of $464,000 compared to a net loss of $79,000 for the same three month
period in 2004. The income in 2005 included a gain on the sale of the Burners
and Components business of $968,000. See note 4 of the Consolidated Condensed
Financial Statements.
Liquidity and Capital Resources
Consolidated net working capital remained relatively flat at approximately $2.0
million at March 31, 2005 compared to $1.9 million December 31, 2004.
The Company's cash flows from operating, investing and financing activities, as
reflected in the statement of cash flows, are summarized as follows (in
thousands):
Three Months Ended
----------------------------
Restated
March 31, March 31,
2005 2004
--------- ---------
Cash provided (used) by:
Continuing operations $ (699) $(568)
Discontinued operations * 1,037 302
Investing activities (498) 2
Financing activities 391 584
Effect of exchange rate
changes on cash (2) (48)
----- -----
Increase in cash $ 229 $ 272
===== =====
*Includes gain on sale of discontinued operations.
16
The Company had the following bank arrangements (in thousands):
March 31, December 31,
2005 2004
--------- ------------
Total availability under
existing facilities $ 7,049 $7,056
------- ------
Borrowings and commitments:
Notes payable 4,458 3,740
Current maturities of long-
term debt 1,458 1,458
------- ------
Total outstanding borrowings and
commitments 5,916 5,198
------- ------
Remaining availability under
existing facilities $ 1,133 $1,858
======= ======
Borrowings under the majority of the Company's credit facilities bear interest
at prime plus 3%. See Note 7 of the Consolidated Condensed Financial Statements.
In March 2005, the Company and its domestic subsidiaries entered into an amended
and restated revolving credit loan facility maturing April 1, 2006 for which
borrowings of $4,500,000 could be outstanding at any one time. The Company had
borrowings of approximately $3,855,000 as of March 31, 2005 bearing an interest
rate of 8.75% (prime plus 3.0%). The loan carries a commitment fee of .25% per
annum, payable on the unborrowed portion of the line. After the Company's
discontinued operations were sold on March 31, 2005 the maximum outstanding
balance of the facility was reduced to $4,000,000, representing a permanent
reduction in the Company's availability under the facility.
In addition, the Company's operation in Singapore maintains an overdraft and
letter of credit facility which as of March 31, 2005, had outstanding borrowings
of approximately $602,000, bearing an interest rate of 6.0%. Remaining
availability under this facility as of March 31, 2005 was $489,000.
The Company and its domestic subsidiaries entered into a $1,458,470 note
scheduled to mature April 1, 2006. This facility required quarterly principal
payments of $300,000 commencing March 31, 2004 and bore interest of 8.75% (prime
plus 3.0%). Proceeds from the sale the Company's burner and components business
which was sold on March 31, 2005, were used to payoff the loan on April 1, 2005,
representing a permanent reduction in the Company's availability under the
facility.
IntriCon believes that funds expected to be generated from operations, the
available borrowing capacity through its revolving credit loan facilities,
curtailment of the dividend payment and control of capital spending will be
sufficient to meet its anticipated cash requirements for operating needs through
April 1, 2006. However, the Company's ability to pay the principal and interest
on its indebtedness as it comes due will depend upon current and future
performance. Performance is affected by general economic conditions and by
financial, competitive, political, business and other factors. Many of these
factors are beyond the Company's control. If, however, the Company does not
generate sufficient cash or complete such financings on a timely basis, it may
be required to seek additional financing or sell equity on terms, which may not
be as favorable as it could have otherwise obtained. No assurance can be given
that any refinancing, additional borrowing or sale of equity will be possible
when needed, or that IntriCon will be able to negotiate acceptable terms. In
addition, access to capital is affected by prevailing conditions in
17
the financial and equity capital markets, as well as the Company's financial
condition.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period.
Certain accounting estimates and assumptions are particularly sensitive because
their significance to the consolidated condensed financial statements and the
possibility that future events affecting them may differ markedly. The
accounting policies of the Company with significant estimates and assumptions
include the Company's revenue recognition, accounts receivable reserves,
inventory reserves, discontinued operations, goodwill, long-lived assets and
deferred taxes policies. These and other significant accounting policies are
described in and incorporated by reference from "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Note 1 to the
financial statements contained in or incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
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, 2004. There
have been no material changes in the Company's portfolio of financial
instruments or market risk exposures which have occurred since December 31,
2004.
ITEM 4. Controls and Procedures
-----------------------
The Company's management, with the participation of its chief executive officer
and chief financial officer, conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures, as defined in Exchange Act Rule
13a-15(e), as of March 31, 2005. On May 31, 2005, subsequent to the original
evaluation, the Company concluded, after discussions among the Audit Committee
of the Board of Directors of the Company and management, that it would restate
financial results for the years 2000 through 2004 in order to correct the
accounting for certain research and development expenditures that were
erroneously capitalized on the balance sheet instead of being recorded as
charges on the statement of operations. As the result of this error, the
Company's chief executive officer and chief financial officer concluded that
control deficiencies existed with respect to our historical financial reporting
related to capitalization of research and development expenditures and
accordingly, have concluded that the Company's disclosure controls and
procedures were not effective as of the end of the period covered by this
report. We have subsequently corrected our methodology for accounting for our
research and development expenses and implemented policies and procedures to
ensure that the expense is properly reported in our financial statements.
There were no changes in our internal controls over financial reporting during
the quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
18
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.
19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The information contained in Notes 11 and 12 to the Consolidated Condensed
Financial Statements in part 1 of this quarterly report is incorporated by
reference herein.
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
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
The following information is being provided for purposes of Items 2.02 and 7.01
of Form 8-K. Such information, including the exhibit attached hereto as exhibit
99.1, should not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
On June 27, 2005, the Company announced earnings for the three months ended
March 31, 2005. A copy of the press release is attached as Exhibit 99.1 and is
incorporated herein by reference.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
2.1 Asset purchase agreement dated March 31, 2005 among the Company
and Selas Heat Technology, LLP (Schedules and exhibits are
omitted pursuant to Regulation S-K, Item 601(b)(2); IntriCon
Corporation agrees to furnish a copy of such schedules and/or
exhibits to the Securities and Exchange Commission upon
request)
3.1 Amended and restated articles of incorporation, as amended
10.1 Promissory note from Selas Heat Technology, LLP dated March
31, 2005
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
99.1 Press release dated June 27, 2005.
20
INTRICON CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTRICON CORPORATION
(Registrant)
Date: June 27, 2005 By: /s/ Mark S. Gorder
-----------------------------
Mark S. Gorder
President and Chief Executive
Officer (principal executive
officer)
21
EXHIBIT INDEX
2.1 Asset purchase agreement dated March 31, 2005 among the
Company and Selas Heat Technology, LLP(Schedules and exhibits
are omitted pursuant to Regulation S-K, Item 601(b)(2);
IntriCon Corporation agrees to furnish a copy of such
schedules and/or exhibits to the Securities and Exchange
Commission upon request)
3.1 Amended and restated articles of incorporation, as amended
10.1 Promissory note from Selas Heat Technology, LLP dated
March 31, 2005
31.1 Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of principal executive officer pursuant to
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of principal financial officer pursuant to
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Press release dated June 27, 2005
22