-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FgEndj9MZqxRzEplMIWC7LX2Y0RWyrH2C9av9xx4PmDlgduHOBKGm7zPrS5Z+uE5 E0xFXfHcNrbi6QyPgu+b+Q== 0000897101-05-001462.txt : 20050628 0000897101-05-001462.hdr.sgml : 20050628 20050628163522 ACCESSION NUMBER: 0000897101-05-001462 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050628 DATE AS OF CHANGE: 20050628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTRICON CORP CENTRAL INDEX KEY: 0000088790 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 231069060 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05005 FILM NUMBER: 05921241 BUSINESS ADDRESS: STREET 1: 1260 RED FOX ROAD CITY: ARDEN HILLS STATE: MN ZIP: 55112 BUSINESS PHONE: 6516369770 MAIL ADDRESS: STREET 1: 1260 RED FOX ROAD CITY: ARDEN HILLS STATE: MN ZIP: 55112 FORMER COMPANY: FORMER CONFORMED NAME: SELAS CORP OF AMERICA DATE OF NAME CHANGE: 19920703 10-K/A 1 int052815_10ka.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________. Commission File Number 1-5005 INTRICON CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 23-1069060 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 1260 Red Fox Road Arden Hills, Minnesota 55112 ------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (651) 636-9770 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------------------- ------------------------------- Common Shares, $1 par value per share American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Act) Yes [ ] No [X] The aggregate market value of the voting common shares held by non-affiliates of the registrant on June 30, 2004 was $7,080,846. Common shares held by each officer and director and by each person who owns 10% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant's common shares on March 18, 2005 was 5,129,214. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's amended 2004 annual report to shareholders are incorporated by reference into Part II of this report. Portions of the Company's definitive proxy statement for the 2005 annual meeting of shareholders are incorporated by reference into Part III of this report; provided, however, that the Compensation Committee Report, The Audit committee Report, the graph showing the performance of the Company's stock and any other information in such Proxy Statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein or filed for the purposes of the Securities Act of 1933 or the Securities Exchange Act of 1934. Except for the parts of such documents that have been specifically incorporated herein by reference, such documents shall not be deemed "filed" for the purposes of this report. 2 EXPLANATORY NOTE We are filing this Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission (SEC) on April 1, 2005 to reflect the restatement of the Company's financial statements, as discussed in Note 2 to Consolidated Financial Statements, and other information related to such restated financial statements. Except for information contained or incorporated by reference in Items 1, 6, 7, 8, 9A, and 15 or described herein, no other information included in the original Annual Report on Form 10-K is amended by this Form 10-K/A. We are also updating the table of contents, the signature page and certifications contained in exhibits 31.1, 31.2, 32.1 and 32.2. Items not being amended are presented for the convenience of the reader only. This report continues to be presented as of the date of the original Annual Report on Form 10-K and the Company has not updated the disclosure in this report to a later date. Therefore, this amendment should be read together with other documents that the Company has filed with the Securities and Exchange Commission subsequent to the filing of the original Annual Report on Form 10-K. Information in such reports and documents updates and supersedes certain information contained in this amendment. 3 Table of Contents Page No. PART I Item 1. Business 5 Item 2. Properties 16 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 4A. Executive Officers of the Registrant 17 PART II Item 5. Market for Registrant's Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 Item 9A. Controls and Procedures 19 Item 9B. Other Information 20 PART III Item 10. Directors and Executive Officers of the Registrant 21 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 22 Item 13. Certain Relationships and Related Transactions 22 Item 14. Principal Accounting Fees and Services 22 PART IV Item 15. Exhibits, Financial Statement Schedules 23 SIGNATURES 28 4 PART I ITEM 1. Business IntriCon Corporation, formerly Selas Corporation of America (together with its subsidiaries referred herein as the "Company")is an international firm with operations and sales that engages in the design, development, engineering and manufacturing of micro-miniature components, systems and molded plastic parts primarily for the hearing instrument, electronics, telecommunications, computer and medical equipment industries. The Company, headquartered in Arden Hills, Minnesota has facilities in Minnesota, California, Singapore, and Germany, and operates directly or through subsidiaries. Within discontinued operations, the Company has facilities in Pennsylvania, Japan and Germany. The Company is a Pennsylvania corporation that was founded in 1930. 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. Since 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 the heat technology segment in the first quarter of 2005. For fiscal year 2004, the Company classified its heat technology segment as discontinued operations. RECENT DEVELOPMENTS Sale of Burners and Components Business - In the first quarter of 2005, the Company sold the remainder of its Heat Technology segment. The total purchase price was approximately $3.6 million, subject to adjustment, of which approximately $2.7 million was paid in cash and $900,000 was paid in the form of a subordinated promissory note. This segment consisted of the operating assets and liabilities of Selas Corporation of America (Dresher, Pennsylvania), Nippon Selas (Tokyo, Japan) and Selas Waermetechnik GmbH (Ratingen, Germany). This business was classified as a discontinued operation in 2004. For more detailed information, see note 2 to the Consolidated Financial Statements included herein. 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. MAJOR EVENTS IN 2004 Sale of Dresher Property - On June 23, 2004, the Company completed the sale of its property in Dresher, PA, to BT Limekiln LP, a Pennsylvania limited partnership, for approximately $3.6 million in cash, net of expenses. A gain of $3.1 million was recognized on the sale. The property was the headquarters for the Company's discontinued Heat Technology business and was previously classified as an asset held for sale on the Company's consolidated balance sheet. In connection with the sale, the Company leased back the property for a term of nine months at a base rental of $20,000 per month, plus expenses. Proceeds of the sale were used to reduce the Company's outstanding bank debt. Reduction of Overhead - In 2004, the Company experienced weakness in the hearing health markets. The weakness was due to competitive pricing pressures, customer inventory management programs resulting in more just-in-time inventory, and unfavorable legislation in the German market reducing the reimbursement amount for the purchase of hearing aids. These factors resulted 5 in both reduced sales and lower product margins. In an effort to return to operating profitability, the Company took steps during 2004 to reduce its overhead. These steps included the elimination of several management and other support positions, resulting in an annualized savings of over $3 million. Reacquisition of Selas Waermetechnik - In the third quarter of 2004, the Company reacquired Selas Waermetechnik GmbH, which was previously part of Selas SAS. Selas SAS filed insolvency in July of 2003. Since that time, Selas Waermetechnik GmbH was under the control of a French court administrator. The Company owned the rights to the Selas name and the technology for the European market. This enabled the Company to reacquire the subsidiary for the minimal amount of $10,500 and record an extraordinary gain within discontinued operations of approximately $684,000 on the acquisition. The Company sold this subsidiary during the first quarter of 2005, as part of its Burners and Components business; therefore it has classified the subsidiary as a discontinued operation. See note 3 of the consolidated financial statements for further information regarding this issue. MAJOR EVENTS IN 2003 SALE OF DEUER MANUFACTURING - In July 2003, the Company completed the planned sale of its Tire Holders, Lifts and Related Products segment. This segment consisted of one wholly owned subsidiary, Deuer Manufacturing Inc. (Deuer), which operated on a stand-alone basis. In 2003, prior to its sale, Deuer generated approximately $8.5 million of revenue and $8,000 in net income. The net purchase price of $6.6 million was determined by negotiations between the parties. The Company recognized a gain of approximately $1.5 million, net of tax, on the transaction. Proceeds from the transaction were used primarily to reduce the Company's outstanding bank debt. The Company classified the subsidiary as a discontinued operation beginning in December 2002. For more detailed information, see note 2 to the Consolidated Financial Statements included herein. INSOLVENCY OF FRENCH SUBSIDIARY - Selas SAS, the Company's French subsidiary, filed insolvency in France in July 2003 after four consecutive quarters of substantial losses. Under French law, Selas SAS is now under the control of a French insolvency court administrator. Because Selas SAS and its subsidiaries are no longer under the control of the Company, its results of operations are excluded from the Company's continuing operations and the Company's historical financial information has been restated to reflect these subsidiaries as discontinued operations. For more detailed information, see note 2 to the Consolidated Financial Statements included herein. FORWARD-LOOKING STATEMENTS Certain statements included or incorporated by reference in this Annual Report on Form 10-K or the Company's other public filings and releases, which are not historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to: o statements in "Business," "Legal Proceedings" and "Risk Factors", such as the Company's ability to focus on the precision miniature medical and electronics products business, the ability to compete, the adequacy of insurance coverage, and potential increase in demand for the Company's products; and o statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" statements in "Notes to the Consolidated Financial Statements," which are incorporated by reference into this Annual Report on Form 10-K from the 2004 Annual Report to Shareholders, such as the potential impact of 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 6 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. Forward-looking statements also include, without limitation, statements as to the Company's expected future results of operations and growth, the Company's business strategy, the expected benefits of reduction in employee headcount, the expected increases in operating efficiencies, anticipated trends in the hearing health market related to the Company's precision miniature medical and electronic products business, estimates of goodwill impairments and amortization expense of other intangible assets, 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 Annual Report on Form 10-K, 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 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 risks associated with terrorist attacks, war and threats of attacks and wars. 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. RISK FACTORS You should carefully consider the risks described below. If any of the risks actually occur, the Company's business, financial condition or results of future operations could be materially adversely affected. This Annual Report on Form 10-K contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by the Company described below and elsewhere in this Annual Report on Form 10-K. THE COMPANY HAS EXPERIENCED AND EXPECTS TO CONTINUE TO EXPERIENCE FLUCTUATIONS IN ITS RESULTS OF OPERATIONS, WHICH COULD ADVERSELY AFFECT THE COMPANY. Factors that affect the Company's results of operations include, but are not limited to, the volume and timing of orders received, changes in the global economy and financial markets, changes in the mix of products sold, market acceptance of the Company's and its customer's products, competitive pricing pressures, global currency valuations, the availability of electronic components that the Company purchases from suppliers, the Company's ability to meet increasing demand, the Company's ability to introduce new products on 7 a timely basis, the timing of new product announcements and introductions by the Company or its competitors, changing customer requirements, delays in new product qualifications, and the timing and extent of research and development expenses. These factors have caused and may continue to cause the Company to experience material fluctuations in operating results on a quarterly and/or annual basis. These fluctuations could materially adversely affect the Company's business, financial condition and results of operations, which in turn, could adversely affect the price of the Company's common stock. IF THE COMPANY'S PRECISION MINIATURE MEDICAL AND ELECTRONIC PRODUCTS BUSINESS IS UNABLE TO CONTINUE TO DEVELOP NEW PRODUCTS THAT ARE INEXPENSIVE TO MANUFACTURE, THE COMPANY'S RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. The Company may not be able to continue to achieve its historical profit margins in its precision miniature medical and electronic products business due to advancements in technology. The ability to continue its profit margins is dependent upon the Company's ability to stay competitive by developing products that are technologically advanced and inexpensive to manufacture. The precision miniature medical and electronic products business has also been affected by unfavorable conditions in the hearing instrument market and the impact of the Asian economic situation. The Company is unable to predict with any certainty when and if these conditions will improve. THE COMPANY OPERATES IN SINGAPORE AND GERMANY, VARIOUS FACTORS RELATING TO ITS INTERNATIONAL OPERATIONS COULD AFFECT ITS RESULTS OF OPERATIONS. In 2004, the Company operated in Singapore, Germany, and Japan. Approximately 12 percent of the Company's revenues were derived from these countries in 2004. The Company currently operates in Singapore and Germany. Political or economic instability in these countries could have an adverse impact on the Company's results of operations due to diminished revenues in these countries. The Company's future revenues, costs of operations and profit results could be affected by a number of factors related to the Company's international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to country, changes in a country's political condition, trade protection measures, licensing and other legal requirements and local tax issues. Unanticipated currency fluctuations in the Euro and Singapore Dollar could lead to lower reported consolidated revenues due to the translation of these currencies into U.S. dollars when the Company consolidates its revenues. THE COMPANY OPERATES IN A HIGHLY COMPETITIVE BUSINESS AND IF THE COMPANY IS UNABLE TO BE COMPETITIVE, ITS FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED. Several of the Company's competitors have been able to offer more standardized and less technologically advanced hearing products at lower prices. Price competition has had an adverse effect on the Company's sales and margins. There can be no assurance that the Company will be able to maintain or enhance its technical capabilities or compete successfully with its existing and future competitors. THE COMPANY MAY EXPERIENCE DIFFICULTY IN PAYING ITS DEBT WHEN IT COMES DUE, WHICH COULD LIMIT ITS ABILITY TO OBTAIN FINANCING. The Company's ability to pay the principal and interest on its indebtedness as it comes due will depend upon its current and future performance. The Company's 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. The Company believes that the amended credit facility combined with funds expected to be generated from 8 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. If, however, the Company is unable to renew these facilities in the future, or 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 the Company will be able to negotiate acceptable terms. In addition, the Company's access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as its own financial condition. THE COMPANY'S SUCCESS DEPENDS ON ITS SENIOR MANAGEMENT TEAM AND IF THE COMPANY IS NOT ABLE TO RETAIN THEM, IT COULD HAVE A MATERIALLY ADVERSE EFFECT ON THE COMPANY. The Company is highly dependent upon the continued services and experience of its senior management team, including Mark S. Gorder, the Company's President, Chief Executive Officer and a director. Mr. Gorder is also the President of the Company's Precision Miniature Medical and Electronics Products segment. The Company depends on the services of Mr. Gorder and the other members of its senior management team to, among other things, continue the development and implementation of the Company's business strategies and maintain and develop its client relationships. THE COMPANY IS SUBJECT TO NUMEROUS ASBESTOS-RELATED LAWSUITS, WHICH COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL POSITION, RESULTS OF OPERATIONS OR LIQUIDITY. The Company is a defendant along with a number of other parties in approximately 123 lawsuits as of December 31, 2004, (approximately 101 lawsuits as of December 31, 2003) 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. Certain carriers have informed the Company that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. The Company has requested that the carriers substantiate this situation. The Company believes it has additional policies available for other years which have been ignored by the carriers. As settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, the Company believes when settlement payments are applied to these additional policies, the Company will have availability under the years deemed exhausted. If the Company's insurance policies do not cover the costs and any awards for the asbestos-related lawsuits, the Company will have to use its cash or obtain additional financing to pay the asbestos-related obligations and settlement costs. There is no assurance that the Company will have the cash or be able to obtain additional financings on favorable terms, or at all to pay asbestos related obligations or settlements should they occur. The ultimate outcome of any legal matter cannot be predicted with certainty. In light of the significant uncertainty associated with asbestos lawsuits, there is no guarantee that these lawsuits will not materially adversely affect the Company's financial position, results of operations or liquidity. THE MARKET PRICE OF THE COMPANY'S COMMON STOCK HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE, WHICH MAY MAKE IT DIFFICULT FOR SHAREHOLDERS TO RESELL COMMON STOCK WHEN THEY WANT TO AND AT PRICES THEY FIND ATTRACTIVE. 9 The market price of the Company's common stock has been and is likely to be highly volatile, and there has been limited trading volume in the common stock. The common stock market price could be subject to wide fluctuations in response to a variety of factors, including the following: o announcements of fluctuations in the Company's or its competitors' operating results; o the timing and announcement of sales or acquisitions of assets by the Company or its competitors; o changes in estimates or recommendations by securities analysts; o adverse or unfavorable publicity about the Company's services or the Company; o the commencement of material litigation, or an unfavorable verdict, against the Company; o terrorist attacks, war and threats of attacks and war; o additions or departures of key personnel; and o sales of common stock. In addition, the stock market in recent years has experienced significant price and volume fluctuations. Such volatility and decline has affected many companies irrespective of, or disproportionately to, the operating performance of these companies. These broad fluctuations and limited trading volume may materially adversely affect the market price of the common stock, and the ability to sell said common stock. Most of the Company's outstanding shares are available for resale in the public market without restriction. The sale of a large number of these shares could adversely affect the share price and could impair the Company's ability to raise capital through the sale of equity securities or make acquisitions for common stock. MERGER AND ACQUISITION ACTIVITY IN THE COMPANY'S HEARING HEALTH MARKET HAS RESULTED IN A SMALLER CUSTOMER BASE. RELIANCE ON FEWER CUSTOMERS MAY HAVE AN ADVERSE EFFECT ON THE COMPANY. Several of the Company's customers in the hearing health market, have undergone mergers or acquisitions, resulting in a smaller customer base with larger customers. If the Company is unable to maintain satisfactory relationships with the reduced customer base, it may adversely affect the company's operating profits and revenue. UNFAVORABLE LEGISLATION IN THE HEARING HEALTH MARKET MAY DECREASE THE DEMAND FOR THE COMPANY'S PRODUCTS, AND MAY NEGATIVELY IMPACT THE FINANCIAL CONDITION OF THE COMPANY. In some of the Company's foreign markets government subsidies cover a portion of the cost of hearing aids. A change in legislation that would reduce or eliminate these subsidies could decrease the demand for the Company's hearing health products. This could result in an adverse effect on the Company's operating results. The Company is unable to predict the likelihood of any such legislation. TERRORIST ATTACKS, WAR AND THREATS OF ATTACKS AND WAR MAY NEGATIVELY IMPACT THE COMPANY'S RESULTS OF OPERATIONS, REVENUE AND COMMON STOCK MARKET PRICE. Terrorist attacks, war and threats of attacks and war may negatively impact the Company's results of operations, revenue and share price. Recent terrorist attacks in the United States, as well as future events occurring in response or in connection to them, including, without limitation, future terrorist attacks against United States targets and threats of war or actual conflicts involving the United States or its allies, may impact the Company's operations, including affecting its ability to operate its subsidiary's abroad. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the economy. 10 They could also result in the deepening of the economic recession in the United States. Any of these occurrences could have a material adverse effect on the Company's operating results, revenue, and may result in the volatility of the market price for the Company's common stock. "ANTI-TAKEOVER" PROVISIONS MAY MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE CONTROL OF THE COMPANY, EVEN IF THE CHANGE IN CONTROL WOULD BE BENEFICIAL TO SHAREHOLDERS. The Company is a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania law and the Company's charter and bylaws could make it more difficult for a third party to acquire control of the Company. These provisions could adversely affect the market price of the common stock and could reduce the amount that shareholders might receive if the Company is sold. For example, the Company's charter provides that the board of directors may issue preferred stock without shareholder approval. In addition, the Company's bylaws provide for a classified board, with each board member serving a staggered three-year term. Directors may be removed only with the approval of the holders of at least two-thirds of all of the shares outstanding and entitled to vote. IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD. AS A RESULT, CURRENT AND POTENTIAL SHAREHOLDERS AND CUSTOMERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULD HARM OUR BUSINESS, THE TRADING PRICE OF OUR STOCK AND OUR ABILITY TO RETAIN OUR CURRENT CUSTOMERS OR OBTAIN NEW CUSTOMERS. Beginning in fiscal 2004, we began a process to document and evaluate our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. In this regard, management has been dedicating internal resources, has engaged outside consultants and has adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting At this time, we are not aware, and our outside auditors have not advised us, of any "material weaknesses" or "significant deficiencies" in our internal controls, as defined in the relevant literature. If we fail to identify and correct any issues in the design or operating effectiveness of internal controls over financial reporting or fail to prevent fraud, current and potential shareholders and customers could lose confidence in our financial reporting, which could harm our business, the trading price of our stock and our ability to retain our current customers and obtain new customers. 11 PRECISION MINIATURE MEDICAL AND ELECTRONIC PRODUCTS The precision miniature medical and electronics products business represents the continuing operations of the Company. All other businesses are now included in discontinued operations. Resistance Technology, Inc. ("RTI"),and RTI Tech PTE LTD ("RTI Tech") both wholly-owned subsidiaries of the Company, manufacture microminiature components, systems and molded plastic parts for hearing instrument, medical equipment, electronics, professional audio, telecommunications and computer industry manufacturers. RTI Electronics, Inc. ("RTIE"), a wholly owned subsidiary of the company, has expanded RTI's microminiature components business through the manufacture of thermistors and film capacitors. Products and Industries Serviced. RTI is a leading manufacturer and supplier of microminiature electromechanical components to hearing instrument manufacturers. These components consist of volume controls, microphones, trimmer potentiometers and switches. RTI 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 52% of 2004 annual net sales for the Company's precision miniature medical and electronic products business. Hearing instruments, which fit behind or in a person's ear to amplify and process sound for a hearing impaired person, generally are composed of four basic parts and several supplemental components for control or fitting purposes. The four basic parts are microphones, amplifier circuits, miniature receivers/speakers and batteries. RTI's hybrid amplifiers are a type of amplifier circuit. Supplemental components include volume controls, trimmer potentiometers, which shape sound frequencies to respond to the particular nature of a person's hearing loss, and switches used to turn the instrument on and off and to go from telephone to normal speech modes. Faceplates and an ear shell molded to fit the user's ear often serve as a housing for hearing instruments. RTI manufactures its components on a short lead-time basis in order to supply "just-in-time" delivery to its customers and, consequently, order backlog amounts are not meaningful. Using DSP technology, RTI is building a new generation of affordable, high-quality hearing aids and similar amplifier devices. Compared to most products currently on the market, DSP devices have better clarity, attractive pricing points and an improved ability to filter out background noise. Low to moderately-priced DSP hearing aids, like newly introduced line of ClariD Digital ONE(TM) DSP hearing-aid amplifiers, represent the fastest-growing segment in the hearing-aid market. 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. RTI 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 RTI products used by medical device manufacturers include components found in intravenous fluid administration pumps that introduce drugs into the bloodstream. RTI manufacturers and supplies bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system. 12 RTI also manufactures a family of safety needle products for an OEM customer that utilizes RTI'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. RTI entered the high-quality audio communication device market in 2001, and now has a line of miniature, professional audio headset products used by performers and support staff in the music and stage performance markets. For customers focusing on homeland security needs, the line includes several communication devices that are more portable and perform well in noisy or hazardous environments. These products are also well suited for applications in the fire, law enforcement, safety, aviation and military markets. RTIE 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. RTIE's Surge-GardTM product line, an inrush electric current limiting device used primarily in computer power supplies, represented approximately 28 percent of RTIE's sales in 2004. The balance of sales represents various industrial, commercial and military sales for thermistor and thermistor assemblies to domestic and international markets. RTI's and RTIE's principal raw materials are plastics, polymers, metals, various metal oxide powders and silver paste, for which there are multiple sources of supply. Marketing and Competition. RTI sells its hearing instrument components directly to domestic hearing instrument manufacturers through an internal sales force. Sales of microphone products and of molded plastic parts to industries other than hearing instrument manufacturers are made mainly through an internal sales force. In recent years, five companies have accounted for a substantial portion of the sales in the United States hearing instrument industry. In 2004 no one customer accounted for more than 10 percent of the Company's consolidated net sales, during 2004 the top five customers accounted for approximately $12 million or 34 percent of the Company's consolidated net sales. See note 5 to the consolidated financial statements for a discussion of net sales and long-lived assets by geographic area. Internationally, sales representatives employed by Resistance Technology, GmbH ("RT, GmbH"), a German company 90% of whose capital stock is owned by RTI, solicits sales from European hearing instrument manufacturers on behalf of RTI. RTI believes that it is the largest supplier worldwide of micro-miniature electromechanical components to hearing instrument manufacturers and that its full product line and automated manufacturing process allow it to compete effectively with the two other manufacturers within this market. In the market of hybrid amplifiers and molded plastic faceplates, RTI's primary competition is from the hearing instrument manufacturers themselves. The hearing instrument manufacturers produce a substantial portion of their internal needs for these components. RTI markets its high performance microphone products to the radio communication and professional audio industries and has several larger competitors who have greater financial resources. RTI holds a small market 13 share in the global market for microphone capsules and other related products. RTIE sells its thermistors and film capacitors through a combination of independent sales representatives and internal sales force. RTIE has many competitors, both domestic and foreign, that sell various thermistor and film capacitors and some of these competitors are larger and have greater financial resources. In addition, RTIE holds a relatively small market share in the world-market of thermistor and film capacitor products. Operations. The precision miniature medical and electronic products business has a total of 372 employees. RTI currently employs 178 people, of whom 16 are executive and administrative personnel, eight sales, and 154 engineering and operations personnel at RTI's two facilities near Minneapolis, Minnesota. At RT, GmbH, the Company employs three sales personnel located in Munich, Germany. In Singapore, RTI Tech PTE Ltd. employs 116 people, of whom four are administrative personnel, four sales, and 108 engineering and operations personnel. At its facilities in Anaheim, California, RTIE employs 75 employees, of which four are administrative, four are sales, and 67 are engineering and operations personnel. As a supplier of parts for consumer and medical products, RTI is subject to claims for personal injuries allegedly caused by its products. The Company maintains what it believes to be adequate insurance coverage. Research and Development. RTI and RTIE conduct research and development activities primarily to improve its existing products and technology. Their research and development expenditures were $1,616,000, $2,111,000 and $1,186,000 in 2004, 2003 and 2002, respectively. See note 1 to the consolidated financial statements for information regarding customer funded research and development projects. RTI owns a number of United States patents which cover a number of product designs and processes. The Company believes that, although these patents collectively add some value to the Company, no one patent or group of patents is of material importance to its business as a whole. DISCONTINUED OPERATIONS - HEAT TECHNOLOGY The Company specialized in the controlled application of heat to achieve precise process and temperature control. The Company's principal heat technology equipment and systems were smaller standard-engineered systems, burners and combustion control equipment. The Company sold this business in the first quarter of 2005 and has accounted for it as discontinued operations in the accompanying financial statements. Standard Engineered Systems. The Company engineered and fabricated a variety of small heat treating furnaces and heat processing equipment. This standard equipment and small-furnace business was conducted principally by its then wholly-owned subsidiaries, Nippon Selas (Tokyo, Japan) and Selas Waermetechnik (Ratingen, Germany). Burners and Combustion Control Equipment. At its Dresher, Pennsylvania facility and through its subsidiaries in Japan, Nippon Selas (Tokyo) and Germany, Selas Waermetechnik, (Ratingen) the Company designed, manufactured and sold an array of original equipment and replacement gas-fired industrial burners for many applications. The Company was a producer of burners used in fluid processing furnaces serving the petrochemical industry. The Company also produced burners suitable for creating a high temperature furnace environment desirable in steel and glass heat treating furnaces. The Company's burners accommodated a 14 wide variety of fuel types, environmental constraints and customer production requirements. The Company furnished many industries with gas combustion control equipment sold both as component parts and as systems that were engineered to meet a particular customer's needs. This equipment was provided with the Company's original custom-engineered and standard heat treating equipment, as replacement or additional components for existing furnaces being refurbished or upgraded, and as original components for heat treating equipment manufactured by others. Marketing and Competition. The Company marketed its standard-engineered systems products on a global basis through its sales and marketing personnel located in Dresher, Pennsylvania, and also sold these products through licensees and agents located in various parts of the world. Operations. The heat technology segment had a total of 48 employees. At its Dresher facility, the Company had 32 employees; 6 were executive and administrative personnel, 10 were sales and engineering personnel and 16 were personnel engaged in manufacturing. The hourly personnel were represented by a union, and the current union contract expires in May 2005. The Company considered its relations with its employees to be satisfactory. Selas Waermetechnik had 6 employees; 1 was an administrative personnel, 3 were sales and engineering personnel and 2 were personnel engaged in manufacturing. In April 2001, the Company sold a minority interest of Nippon Selas to three directors of Nippon Selas. This minority interest was reacquired by the Company in the first quarter of 2005 in contemplation of the sale of this business, which was completed in the first quarter of 2005. Its Tokyo facility employed 10 people; 3 administrative and 7 sales and engineering. Research and Development. The Company conducted limited research and development activities at its Dresher facility to support its heat processing services and products. Research and development expenditures for heat processing aggregated $18,000, $16,000 and $66,000 in 2004, 2003 and 2002, respectively. AVAILABLE INFORMATION The Company files or furnishes annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. You may read and copy any reports, statements and other information that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company's filings are also available on the SEC's Internet site as part of the EDGAR database (http://www.sec.gov). The Company maintains an internet web site at www.IntriCon.com. The Company maintains a link to the SEC's website by which you may review its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The information on the website listed above, is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document. This website is and is only intended to be an inactive textual reference. In addition, we will provide, at no cost (other than for exhibits), paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: 15 Corporate Secretary IntriCon Corporation 1260 Red Fox Road Arden Hills, MN 5112 ITEM 2. Properties Continuing Operations RTI leases a 47,000 sq. ft. manufacturing facility in Arden Hills, Minnesota, which also serves as the Company's headquarters, from a partnership consisting of two former officers of RTI and Mark S. Gorder who serves as an officer of the Company and RTI and on the Company's Board of Directors. At this facility, RTI manufactures all of its products other than plastic component parts. The lease expires in October 2011. In addition, RTI owns, subject to a mortgage from a third party lender, a 34,000 sq. ft. building in Vadnais Heights, Minnesota at which RTI produces plastic component parts. See notes 16 and 17 to the Company's consolidated financial statements, which are incorporated by reference into "Item 8. Financial Statements and Supplementary Data" from the 2004 annual report to shareholders. RTIE leases a building in Anaheim, California, which contains its manufacturing facilities and offices and consists of a total of 50,000 square feet. The lease expires in September 2008. RTI Technologies PTE LTD leases a 6,000 square foot building in Singapore which houses its production facilities and administrative offices. This lease expires in June 2007. Discontinued Operations In June 2004, the Company sold its manufacturing facility, on a 17 acres site in Dresher, Pennsylvania at which it produced standard-engineered systems, burners and combustion control equipment. The Company leased this facility back until it sold the Burners and Components Business in March 2005. The 136,000 square foot Dresher facility had substantially more space than was needed for the Company's operations. See note 8 to the Company's consolidated financial statements, which are incorporated by reference into "Item 8. Financial Statements and Supplementary Data" from the 2004 annual report to shareholders. Additionally, Nippon Selas leased office space in Tokyo, Japan for its sales and administrative facilities pursuant to a month-to-month lease. Selas Waermetechnik, Germany leased facilities in Ratingen, Germany which were used for sales, administrative and engineering activities and assembly of small furnaces and furnace components. ITEM 3. Legal Proceedings The Company is a defendant along with a number of other parties in approximately 123 lawsuits as of December 31, 2004, (approximately 101 lawsuits as of December 31, 2003) 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. Certain carriers have informed the Company that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. The Company has requested that the carriers substantiate this situation. The Company believes it has additional policies available for other years which have been ignored 16 by the carriers. As settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, the Company believes when settlement payments are applied to these additional policies, the Company will have availability under the years deemed exhausted. The Company does not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits, to which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company's consolidated financial position or results of operations. The Company is also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect the Company's consolidated financial position, liquidity, or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 4A. Executive Officers of the Registrant The names, ages and offices (as of March 18, 2005) of the Company's executive officers were as follows: Name Age Position - ------------------- ----------- ------------------------------------------- Mark S. Gorder 58 President, Chief Executive Officer and Director of the Company; President of Resistance Technology, Inc. Robert F. Gallagher 49 Chief Financial Officer, Treasurer and Secretary of the Company Mr. Gorder joined the Company in October 1993 when Resistance Technology, Inc. ("RTI") was acquired by the Company. Prior to the acquisition, Mr. Gorder was President and one of the founders of RTI, which began operations in 1977. Mr. Gorder was promoted to Vice President of the Company and elected to the Board of Directors in April 1996. In December 2000, he was elected President and Chief Operating Officer and in April 2001, Mr. Gorder assumed the role of Chief Executive Officer. Mr. Gallagher has served as the Company's Chief Financial Officer from August 2002 until April 1, 2005. From October 2000 until June 2002, he was Chief Financial Officer for Visionics Corporation (which merged with Identix Corporation in June 2002). From October 1989 until June 2000 he was employed by TSI Incorporated (which was acquired and taken private in June 2000), most recently as Chief Financial Officer. Both Visionics Corporation and TSI Incorporated were publicly-held manufacturing companies. Mr. Gallagher has left the Company to pursue other opportunities. 17 PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common shares are listed on the American Stock Exchange under the ticker symbol "SLS". The Company expects that its common shares will begin trading under the symbol "IIN" on or after April 4, 2005. The high and low sale prices during each quarterly period during the past two years were as follows: MARKET AND DIVIDEND INFORMATION 2004 2003 -------------------------- ------------------------- Market Market -------------------------- ------------------------- Price Range Price Range -------------------------- ------------------------- Quarter High Low High Low First......... $3.60 $2.82 $1.89 $1.29 Second........ 3.24 2.36 1.62 1.15 Third......... 2.99 1.40 1.95 1.40 Fourth........ 2.40 1.70 3.85 1.58 At March 25, 2005 the Company had 378 shareholders of record of common shares. The Company ceased paying quarterly cash dividends in the fourth quarter of 2001 and has no intention of paying cash dividends in the foreseeable future. The payment of any future cash dividends is subject to the discretion of the Board of Directors and is dependent on a number of factors, including the Company's capital requirements, financial condition, financial covenants and cash availability. Terms of the Company's banking agreements prohibit the payment of cash dividends without prior bank approval. See "ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -- Equity Compensation Plans" for disclosure regarding our equity compensation plans. ITEM 6. Selected Financial Data Certain selected financial data is incorporated by reference from "Five-Year Summary of Operations" and "Other Financial Highlights" as contained in the Company's 2004 annual report to shareholders, which is filed as an exhibit to this Form 10-K. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated by reference from the Company's 2004 annual report to shareholders, which is filed as an exhibit to this Form 10-K. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosure about market risk is incorporated by reference from the Company's 2004 annual report to shareholders, which is filed as an exhibit to this Form 10-K. 18 ITEM 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements, the "Notes to the Consolidated Financial Statements", and the "Report of Independent Auditors" are incorporated by reference from the Company's 2004 annual report to shareholders, which is filed as an exhibit to this Form 10-K. ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None Item 9A. 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 December 31, 2004. Based on the evaluation reported on April 1,2005 in the original filing of the Company's annual report on Form 10-K for the year ended December 31, 2004, the Company's chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. 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 re-evaluated the Company's disclosure controls and procedures and 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 December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our 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. 19 Item 9B. Other Information ASSET PURCHASE AGREEMENT On March 31, 2005, the Company entered into an asset purchase agreement with Selas Heat Technology Company LLC, a Delaware limited liability company, pursuant to which the Company sold the remaining assets and certain liabilities of its heat technology business including its subsidiaries Nippon Selas Co. Ltd., a Japanese company and Selas Waernetechnik GmbH, a German company. The Company also sold the rights to the name "Selas Corporation of America". The total purchase price was approximately $3.6 million, subject to adjustment, of which approximately $2.7 million was paid in cash and $900,000 was paid in the form of a subordinated promissory note. The asset purchase agreement included representations, warranties, covenants and indemnifications typical for transactions of this type. AMENDMENT TO ARTICLES OF INCORPORATION On April 1, 2005, the Company amended its articles of incorporation to change its name effective immediately from Selas Corporation of America to IntriCon Corporation. Additionally, the Company's common shares are now listed on the American Stock Exchange under the ticker symbol "IIN". CREDIT FACILITIES In March 2005, the Company entered into amended agreements for its domestic revolver and long-term debt. The new facility provides the Company with a revolving credit limit of $4.5 million which was reduced to $4.0 million upon the sale of burners and components business in the first quarter of 2005. The agreement also stipulates that a portion of the proceeds from the sale of the Burners and Components business be used to payoff the approximately $1.5 million outstanding principal balance on the term loan. These facilities expire on April 1, 2006. See note 8 to the consolidated financial statements for additional information regarding this agreement. DEPARTURE OF CHIEF FINANCIAL OFFICER Robert F. Gallagher will no longer serve as the Company's chief financial officer, treasurer and secretary effective April 1, 2005. Mr. Gallagher is pursuing other opportunities. EMPLOYMENT AGREEMENT FOR CHIEF EXECUTIVE OFFICER On March 30, 2005, the Corporation entered into an employment agreement with Mr. Gorder, dated as of December 4, 2004, whereby Mr. Gorder agreed to serve as the Corporation's Chief Executive Officer and President. The employment agreement will expire on April 30, 2006, unless further extended by Mr. Gorder and the Corporation. Mr. Gorder's base salary will be established from time to time by the Board of Directors of the or the Compensation Committee of the Board of Directors of the Corporation. In no event will Mr. Gorder's base salary be less than $275,000. For 2005, the Compensation Committee has set Mr. Gorder's base salary at $275,000. Mr. Gorder is entitled to receive performance bonuses in accordance with the policies and plans of the Corporation in place from time to time with respect to the payment of bonuses to executive officers. Mr. Gorder is also entitled to participate in the Corporation's employee benefit plans and benefit programs, including medical benefit programs, stock options under the Corporation's 2001 Stock Option Plan or any additional plans or programs, as may from time to time be provided by the Corporation for its executive officers. Additionally, the Corporation maintains disability insurance for his benefit. Under the employment agreement, the Corporation is required to reimburse Mr. Gorder for his country club membership fees and provide him with an automobile for use in connection with the performance of his duties under the employment agreement and reimburse him for all expenses reasonably incurred by him for the maintenance and operation, including fuel, of the automobile. The Corporation reimbursed Mr. Gorder $2,500 for the cost of consulting with counsel in connection with the negotiation of the employment agreement. 20 Upon termination of Mr. Gorder's employment due to a disability, Mr. Gorder is entitled to continue to receive medical benefits coverage for him and his wife (if any) in accordance with the Corporation's policies in effect from time to time through the remainder of the then-current term of the employment agreement, and is entitled to benefits under the disability policy to the extent provided therein. In the event of Mr. Gorder's death during the term of the employment agreement, his wife (if any) is entitled to continue to receive medical benefits coverage in accordance with the Corporation's policies in effect from time to time through the remainder of the then-current term of the employment agreement. The Corporation may terminate Mr. Gorder's employment for Cause (as defined in the employment agreement). If Mr. Gorder's employment is terminated by the Corporation prior to the end of the term for any reason other than Cause (as defined in the employment agreement) or the death or disability: (i) the Corporation must either (A) continue to pay Mr. Gorder his base salary or any performance bonus accrued (based on not less than the previous year's bonus and prorated to the end of the term) during the remainder of the then-current term of the employment agreement, or (B) if Mr. Gorder requests in writing, pay him in a lump sum upon such termination the present value of the payments that would have been made under clause (A), using a discount rate of 6 percent per year. Additionally, Mr. Gorder will be entitled to continue to receive medical benefits coverage in accordance with the Corporation's policies in effect from time to time through the remainder of the then-current term of the employment agreement. To be entitled to any payments Mr. Gorder must execute and deliver to the Corporation an agreement releasing the Corporation from all claims, undertaking to maintain confidentiality of the agreement and indemnify the Corporation if Mr. Gorder breaches such agreement. If Mr. Gorder's employment is terminated by the Corporation during the term of the employment agreement for any reason other than for Cause (as defined in the employment agreement) or if he terminates his employment during the term of the employment agreement under circumstances that would constitute an Involuntary Termination (as defined in the Change-of-Control Agreement), then any stock options granted to him which have not been exercised prior to his termination will accelerate and be exercisable in full. If Mr. Gorder becomes entitled to any payment by the terms of the Change-of-Control Agreement, he is not entitled to any additional payment under the employment agreement (other than accrued and unpaid bonus, salary and benefits) unless otherwise provided for in the employment agreement. PART III Item 10. Directors and Executive Officers of the Registrant The information called for by Item 10, except for the information concerning executive officers included in Item 4A hereof, is incorporated by reference from the Company's definitive proxy statement relating to its 2005 annual meeting of shareholders. 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 chief executive officer, chief financial 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 Human Resources, IntriCon Corporation, 1260 Red Fox Road, Arden Hills, MN 55112. 21 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 2005 annual meeting of shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters The information called for by Item 12 is incorporated by reference from the Company's definitive proxy statement relating to its 2005 annual meeting of shareholders. Equity Compensation Plans The following table details information regarding the Company's existing equity compensation plans as of December 31, 2004:
(c) Number of securities (a) remaining available for Number of securities (b) future issuance under to be issued upon Weighted-average equity compensation exercise of exercise price of plans (excluding outstanding options, outstanding options, securities reflected Plan Category warrants and rights warrants and rights in column (a)) - -------------------------------------- ----------------------- ------------------- ------------------------ Equity compensation plans approved by security holders................... 453,400 $5.03 829,000 Equity compensation plans not approved by security holders (1)...... 207,500 $3.03 42,500 ------- ------ Total................................. 660,900 $4.40 871,500
(1) Represents shares issuable under the Non-Employee Directors Stock Option Plan, pursuant to which directors who are not employees of the Corporation or any of its subsidiaries receive an automatic one-time grant of an option to acquire 5,000 common shares upon their initial election or appointment to the Board of Directors. The Plan also permits discretionary grants. The exercise price of the option is 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. Item 13. Certain Relationships and Related Transactions The information called for by Item 13 is incorporated by reference from the Company's definitive proxy statement relating to its 2005 annual meeting of shareholders. Item 14. Principal Accountant Fees and Service The information called for by Item 14 is incorporated by reference from the Company's definitive proxy statement relating to its 2005 Annual Meeting of shareholders. 22 PART IV ITEM 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as a part of this report: 1. Financial Statements - The Company's consolidated financial statements, as described below, are incorporated by reference as contained in the Company's 2004 annual report to shareholders, which is filed as an exhibit to this Form 10-K. Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002. Consolidated Balance Sheets at December 31, 2004 and 2003. Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002. Consolidated Statements of Shareholders' Equity and Comprehensive Loss for the years ended December 31, 2004, 2003 and 2002. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm. 2. Financial Statement Schedules The Board of Directors and Shareholders IntriCon Corporation: Under date of March 18, 2005, except as to notes 3, 4, 8 and 18, which are as of March 31, 2005 and note 2 which is as of June 24, 2005, we reported on the consolidated balance sheets of IntriCon Corporation (formerly Selas Corporation of America) and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2004, as contained in the 2004 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2004. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in note 2 to the consolidated financial statements, the Company has restated its consolidated financial statements as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004. As discussed in note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. /s/ KPMG LLP Minneapolis, Minnesota March 18, 2005, except as to notes 3, 4, 8 and 18 which are as of March 31, 2005 and note 2 which is as of June 24, 2005 23 Schedule II - Valuation and Qualifying Accounts INTRICON CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2003, 2002 AND 2001
"Addition" Balance at charged to "Other" (a) Balance beginning costs and additions "Less" at end Description of Year expense (deductions) deductions of year - ------------------------------ -------------- -------------- --------------- --------------- --------------- YEAR ENDED DECEMBER 31,2004 Allowance for doubtful accounts $ 253,840 $ 88,427 $ 19 $165,692(b) $ 176,594 Deferred tax asset valuation allowance $7,211,013 $1,455,615 -- $349,123(c) $8,317,505 YEAR ENDED DECEMBER 31,2003 Allowance for doubtful accounts $ 414,509 $ 191,771 $ 59 $352,499(b) $ 253,840 Deferred tax asset valuation allowance $ 743,859 $6,467,154 -- -- $7,211,013 YEAR ENDED DECEMBER 31,2002 Allowance for doubtful accounts $ 90,653 $ 338,949 $ 143 $ 15,236(b) $ 414,509 Deferred tax asset valuation allowance $ -- $ 743,859 -- -- $ 743,859
a) Represents the difference between translation rates of foreign currency at beginning and end of year and the average rate during the year. b) Uncollectible accounts written off. c) 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(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. 2.2(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. 24 2.3(7) 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. 3.1(1) The Company's Articles of Incorporation as amended May 18, 1984 and April 25, 1991. 3.2(1) The Company's By-Laws as amended March 15, 2004. 4.1(1) Amended, Restated and Consolidated Loan Agreement dated March 18, 2004 among the Company, certain of its subsidiaries, and Wachovia Bank. 4.2(1) Amended, Restated and Consolidated Guaranty dated March 18, 2004 among the Company, certain of its subsidiaries, and Wachovia Bank. 4.3(1) Amended, Restated and Consolidated Term Loan Note dated March 18, 2004 among the Company, certain of its subsidiaries, and Wachovia Bank. 4.4(1) Amended and Restated Revolving Credit Note dated March 18, 2004 among the Company, certain of its subsidiaries, and Wachovia Bank. 4.5* Fifth Amendment to Mortgage, Security Agreement and Fixture Financing Statement dated March 30, 2005 among Resistance Technology, Inc., a subsidiary of the Company, and Wachovia Bank. 4.6* Amendment to Amended, Restated and Consolidated Loan Agreement dated March 30, 2005 among the Company, certain of its subsidiaries, and Wachovia Bank. 4.7* Second Amended, Restated and Consolidated Term Loan Note dated March 30, 2005 among the Company, certain of its subsidiaries, and Wachovia Bank. 4.8* Second Amended and Restated Revolving Credit Note dated March 30, 2005 among the Company, certain of its subsidiaries, and Wachovia Bank. + 10.1(2) Amended and Restated 1994 Stock Option Plan. + 10.2(3) Form of Stock Option Agreements granted under the Amended and Restated 1994 Stock Option Plan. + 10.3(9) 2001 Stock Option Plan. + 10.4(3) Supplemental Retirement Plan (amended and restated effective January 1, 1995). 10.5(5) 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. 25 + 10.6(4) Amended and Restated Non-Employee Directors' Stock Option Plan. + 10.7(6) Retirement Agreement, Consulting Agreement and General Release, dated August 30, 2000, between the Company and Stephen F. Ryan. 10.8(4) Separation Agreement dated November 30, 2001 between the Company and Robert W. Ross. 10.9(10) Settlement agreement dated September 12, 2003 between the Company and Andritz AG, Andritz Acquisition S.A.A. + 10.10(7) Termination agreement following change of control or asset sale between the Company and Mark S. Gorder dated December 14, 2004 + 10.11(7) Termination agreement following change of control or asset sale between the Company and Robert F. Gallagher dated December 14, 2004 + 10.12(7) Separation Agreement between the Company and Gerald H. Broecker dated December 14, 2004 + 10.13* Summary sheet for director fees. + 10.14* Summary sheet for chief executive officer compensation. + 10.15* Employment agreement between the Company and Mark S. Gorder dated as of December 4, 2004 13. "Five-Year Summary of Operations" as contained in the Company's amended 2004 annual report to shareholders; "Other Financial Highlights" as contained in the Company's amended 2004 annual report to shareholders; "Management's Discussion and Analysis of Financial Condition and Results of Operations" as contained in the Company's amended 2004 annual report to shareholders; and the Company's consolidated financial statements, including the "Notes to Consolidated Financial Statements" and the "Report of Independent Auditors" as contained in the Company's amended 2004 annual report to shareholders. 21.* List of significant subsidiaries of the Company. 23. Consent of Independent Registered Public Accounting Firm. 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 26 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 April 1, 2005 announcing earnings 99.2* Press Release dated April 1, 2005 announcing sale of heat technology assets and new company name _______________________ + Denotes management contract, compensatory plan or arrangement. * Denotes previously filed exhibit on Form 10-K for the year ended December 31, 2004. (1) Incorporated by reference from the Company's annual report on Form 10-K for the year ended December 31, 2003. (2) Incorporated by reference from the Company's annual report on Form 10-K for the year ended December 31, 1997. (3) Incorporated by reference from the Company's annual report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference from the Company's annual report on Form 10-K for the year ended December 31, 2001. (5) Incorporated by reference from the Company's annual report on Form 10-K for the year ended December 31, 1996. (6) Incorporated by reference from the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2000. (7) Incorporated by reference from the Company's current report on Form 8-K filed with the Commission on December 20, 2004. (8) Incorporated by reference from the Company's current report on Form 8-K filed with the Commission on June 29, 2004. (9) Incorporated by reference from the Company's annual report on Form 10-K for the year ended December 31, 2000. (10) Incorporated by reference from the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2003. 27 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/ William J. Kullback ---------------------------- William J. Kullback Chief Financial Officer, Treasurer and Secretary /s/ Mark S. Gorder ---------------------------- Mark S. Gorder President and Chief Executive Officer (principal executive officer) Dated: June 27, 2005 28 EXHIBIT INDEX EXHIBITS: 13. "Summary of Operations" as contained in the Company's amended 2004 annual report to shareholders; "Other Financial Highlights" as contained in the Company's amended 2004 annual report to shareholders; "Management's Discussion and Analysis of Financial Condition and Results of Operations" as contained in the Company's amended 2004 annual report to shareholders; and the Company's consolidated financial statements, including the "Notes to Consolidated Financial Statements" and the "Report of Independent Auditors" as contained in the Company's amended 2004 annual report to shareholders. 23. Consent of Independent Registered Public Accounting Firm. 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. 29 EX-13 2 int052815_ex13.txt EXHIBIT 13 [Intricon Logo] --------------------- 2004 ANNUAL REPORT INTRICON, FORMERLY SELAS CORPORATION OF AMERICA Headquartered in Arden Hills, Minnesota, IntriCon Corporation 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 Minnesota, California, Singapore, and Germany. Within discontinued operations, the Company had facilities in Pennsylvania, Japan and Germany. See note 5 to the consolidated financial statements for a discussion of net sales and long-lived assets by geographic area for 2004, 2003, and 2002. 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 in the first quarter of 2005. For fiscal year 2004, the Company classified its heat technology segment as discontinued operations. The Company manufactures microminiature components, systems and molded plastic parts for hearing instrument, 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 52 percent of 2004 annual net sales for the Company's precision miniature medical and electronic products business. 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. The Company manufacturers and supplies bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system. The Company also manufactures a family of safety needle products for an OEM customer that utilizes the Company's insert and straight molding capabilities. These products are assembled using full automation including built-in quality checks within the production lines. Other examples include sensors used to detect pathologies in specific organs of the body and monitoring devices to detect cardiac and respiratory functions. The early and accurate detection of pathologies allows for increased likelihood 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 microminiature 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 percent of the Company's sales in 2004. The balance of sales represents various industrial, commercial and military sales for thermistor and thermistor assemblies to domestic and international markets. In 2004 and 2002 no one customer accounted for more than 10 percent of the Company's consolidated net sales. During 2004 the top five customers accounted for approximately $12 million or 34 percent of the Company's consolidated net sales. In 2003, Sonic Innovations, one of the Company's hearing-health customers accounted for $4.5 million or 12.4 percent of the Company's consolidated net sales. In 2004, the Company's foreign operations were conducted in Singapore, Germany, and Japan. Approximately 12 percent of the Company's revenues were derived from these countries in 2004. Currently the Company operates in Singapore and Germany, political or economic instability in these countries could have an adverse impact on the Company's results of operations due to diminished revenues in these countries. The Company's future revenues, costs of operations and profit results could be affected by a number of factors related to the Company's international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to country, changes in a country's political condition, trade protection measures, licensing and other legal requirements and local tax issues. Unanticipated currency fluctuations in the Euro and Singapore Dollar could lead to lower reported consolidated revenues due to the translation of these currencies into U.S. dollars when the Company consolidates its revenues. RECENT DEVELOPMENTS SALE OF BURNERS AND COMPONENTS BUSINESS - In the first quarter of 2005, the Company sold the remainder of its Heat Technology segment. The total purchase price was approximately $3.6 million, subject to adjustment, of which approximately $2.7 million was paid in cash and $900,000 was paid in the form of a subordinated promissory note. This segment consisted of the operating assets and liabilities of Selas Corporation of America (Dresher, Pennsylvania), Nippon Selas (Tokyo, Japan) and Selas Waermetechnik GmbH (Ratingen, Germany). This business was classified as a discontinued operation in 2004. For more detailed information, see note 3 to the Consolidated Financial Statements included herein. MAJOR EVENTS IN 2004 SALE OF DRESHER PROPERTY - On June 23, 2004, the Company completed the sale of its property in Dresher, PA, to BT Limekiln LP, a Pennsylvania limited partnership, for approximately $3.6 million in cash, net of expenses. A gain of $3.1 million was recognized on the sale. The property was the headquarters for the Company's discontinued Heat Technology business and was previously classified as an asset held for sale on the Company's consolidated balance sheet. In connection with the sale, the Company leased back the property for a term of nine months at a base rental of $20,000 per month, plus expenses. Proceeds of the sale were used to reduce the Company's outstanding bank debt. REDUCTION OF OVERHEAD - In 2004, the Company experienced weakness in the hearing health markets. The weakness was due to competitive pricing pressures, customer inventory management programs resulting in more just-in-time inventory, and unfavorable legislation in the German market reducing the reimbursement amount for the purchase of hearing aids. These factors resulted in both reduced sales and lower product margins. In an effort to return to operating profitability, the Company took steps in 2004 to reduce its overhead. These steps included the elimination of several management and other support positions, resulting in an annualized savings of over $3 million. REACQUISITION OF SELAS WAERMETECHNIK - In the third quarter of 2004, the Company reacquired Selas Waermetechnik GmbH, which was previously part of Selas SAS. Selas SAS filed insolvency in July of 2003. Since that time, Selas Waermetechnik GmbH was under the control of a French court administrator. The Company owned the rights to the Selas name and the technology for the European market. This enabled the Company to reacquire the subsidiary for the minimal amount of $10,500 and record an extraordinary gain within discontinued operations of approximately $684,000 on the acquisition. The Company sold this subsidiary during the first quarter of 2005, as part of its Burners and Components business; therefore it has classified the subsidiary as a discontinued operation. MAJOR EVENTS IN 2003 SALE OF DEUER MANUFACTURING - In July 2003, the Company completed the planned sale of its Tire Holders, Lifts and Related Products segment. This segment consisted of one wholly owned subsidiary, Deuer Manufacturing Inc. (Deuer), which operated on a stand-alone basis. In 2003, prior to its sale, Deuer generated approximately $8.5 million of revenue and $8,000 in net income. The net purchase price of $6.6 million was determined by negotiations between the parties. The Company recognized a gain of approximately $1.5 million, net of tax, 1 on the transaction. Proceeds from the transaction were used primarily to reduce the Company's outstanding bank debt. The Company classified the subsidiary as a discontinued operation beginning in December 2002. For more detailed information, see note 3 to the Consolidated Financial Statements included herein. INSOLVENCY OF FRENCH SUBSIDIARY - Selas SAS, the Company's then French subsidiary, filed insolvency in France in July 2003 after four consecutive quarters of substantial losses. Under French law, Selas SAS is now under the control of a French insolvency court administrator. Because Selas SAS and its subsidiaries are no longer under the control of The Company, its results of operations are excluded from the Company's continuing operations and the Company's historical financial information has been restated to reflect these subsidiaries as discontinued operations. For more detailed information, see note 3 to the Consolidated Financial Statements included herein. MARKET AND DIVIDEND INFORMATION 2004 2003 -------------------------- ------------------------- Market Market Price Range Price Range -------------------------- ------------------------- Quarter High Low High Low First......... $3.60 $2.82 $1.89 $1.29 Second........ 3.24 2.36 1.62 1.15 Third......... 2.99 1.40 1.95 1.40 Fourth........ 2.40 1.70 3.85 1.58 At March 25, 2005, the Company had 378 shareholders of record. There were no cash dividends declared in 2004 or 2003. The payment of any future cash dividends is subject to the discretion of the Board of Directors and is dependent on a number of factors, including the Company's capital requirements, financial condition, financial covenants and cash availability. The Company ceased paying quarterly cash dividends in the fourth quarter of 2001 and has no intention of paying cash dividends in the foreseeable future. Terms of the Company's banking agreements prohibit the payment of cash dividends without prior bank approval. THE COMMON STOCK OF THE COMPANY IS LISTED ON THE AMERICAN STOCK EXCHANGE UNDER THE SYMBOL "SLS". THE COMPANY EXPECTS THAT ITS COMMON SHARES WILL BEGIN TRADING UNDER THE SYMBOL "IIN" ON OR AFTER APRIL 4, 2005. 2 FINANCIAL HIGHLIGHTS YEARS ENDED DECEMBER 31, 2004 (a) 2003(a,b) (RESTATED) (restated) Sales, net..................................... $ 35,183,000 $ 36,202,000 ============ ============ Loss from continuing operations, net of income taxes.......................... (1,905,000) (4,032,000) Income (loss) from discontinued operations, net of income taxes.............. 1,369,000 (1,013,000) Extraordinary gain from discontinued operations 684,000 -- ------------ ------------ Net income (loss).............................. $ 148,000 $ (5,045,000) ============ ============ Basic earnings (loss) per share: Continuing operations...................... $ (.37) $ (.78) Discontinued operations.................... .27 (.20) Extraordinary gain discontinued operations................. .13 -- ------------ ------------ Net income (loss).......................... $ .03 $ (.98) ============ ============ Diluted income (loss) per share: Continuing operations...................... $ (.37) $ (.78) Discontinued operations.................... .27 (.20) Extraordinary gain discontinued operations.............................. .13 -- ------------ ------------ Net income (loss).......................... $ .03 $ (.98) ============ ============ Working capital................................ $ 2,183,000 $ 245,000 Total assets................................... $ 30,939,000 $ 34,729,000 Total shareholders' equity..................... $ 12,128,000 $ 11,807,000 (a) See note 2 to the Company's consolidated financial statement included herein for information pertaining to the restatement of earnings. (b) For 2003, the Company reclassified its remaining Heat Technology business which consisted of the burners and components portion of the business as discontinued operations. The Company sold this portion of the business in the first quarter of 2005. For 2004 and 2003, the Heat Technology business had revenues of $9.7 and $18.4 million, respectively, with net income of $2.1 million for 2004 and a net loss of $2.5 million for 2003. The Tire Holders, Lifts and Related Products business that was sold in July 2003 is also included in discontinued operations. For 2003, this segment had revenue of $8.5 million, and net income of $8,000. 3 [For purposes of this amendment, the Chief Executive Officer's letter has been deleted.] 4
FIVE-YEAR SUMMARY OF OPERATIONS* (IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE DATA) Years ended December 31, 2004(a) 2003(a,b) 2002(a) 2001(a) 2000(a) (RESTATED) (restated) (restated) (restated) (restated) Sales, net...................................... $ 35,183 $ 36,202 $ 34,975 $ 37,787 $ 39,663 Cost of sales................................... 27,121 27,638 26,811 27,808 27,901 Operating expenses.............................. 11,535 11,457 10,484 10,764 9,409 Interest expense................................ 465 533 720 713 739 Interest income................................. (2) (8) (34) (80) (25) Gain on sale of asset........................... 3,110 -- -- -- -- Other (income) expense, net..................... (61) 130 (31) 87 8 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes, discontinued operations and change in accounting principle.......... (765) (3,548) (2,975) (1,505) 1,631 Income tax expense (benefit).................... 1,140 484 (1,160) (451) 651 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before discontinued operations and change in accounting principle........................ (1,905) (4,032) (1,815) (1,054) 980 Income (loss) from discontinued operations, net of income taxes (note 3).... 1,369 (1,013) (10,544) (3,843) 1,943 Extraordinary gain from discontinued operation.. 684 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Cumulative effect of change in accounting principle........................ -- -- (9,428) -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss)............................... $ 148 $ (5,045) $ (21,787) $ (4,897) $ 2,923 =========== =========== =========== =========== =========== Basic earnings (loss) per share: Continuing operations....................... $ (.37) $ (.78) $ (.35) $ (.21) $ .19 Discontinued operations..................... .27 (.20) (2.06) (.75) .38 Extraordinary gain discontinued operations............................... .13 -- -- -- -- Accounting principle change................. -- -- (1.84) -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss)........................... $ .03 $ (.98) $ (4.25) $ (.96) $ .57 =========== =========== =========== =========== =========== Diluted earnings (loss) per share: Continuing operations....................... $ (.37) $ (.78) $ (.35) $ (.21) $ .19 Discontinued operations..................... .27 (.20) (2.06) (.75) .38 Extraordinary gain discontinued operations.. .13 -- -- -- -- Accounting principle change................. -- -- (1.84) -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss)........................... $ .03 $ (.98) $ (4.25) $ (.96) $ .57 =========== =========== =========== =========== =========== Weighted average number of Shares outstanding during year: Basic........................................... 5,129,214 5,124,433 5,119,214 5,119,214 5,121,513 =========== =========== =========== =========== =========== Diluted......................................... 5,131,841 5,124,433 5,119,214 5,119,214 5,134,494 =========== =========== =========== =========== ===========
5
OTHER FINANCIAL HIGHLIGHTS* (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) YEARS ENDED DECEMBER 31, 2004(a) 2003(a,b) 2002(a) 2001(a) 2000(a) (RESTATED) (restated) (restated) (restated) (restated) Working capital................. $ 2,183 $ 245 $ 4,711 $ 16,572 $ 21,525 Total assets.................... $ 30,939 $ 34,729 $ 63,936 $ 86,513 $ 96,974 Long-term debt.................. $ -- $ -- $ 2,415 $ 2,568 $ 1,882 Shareholders' equity: Capital stock and additional paid-in capital.......... $ 17,670 $ 17,670 $ 17,648 $ 17,648 $ 17,648 Retained earnings (accumulated deficit)..... (3,680) (3,828) 1,216 23,004 28,592 Accumulated other comprehensive loss....... (597) (770) (1,525) (1,008) (555) Treasury stock.............. (1,265) (1,265) (1,265) (1,265) (1,265) -------- -------- -------- -------- -------- Total shareholders' equity.. $ 12,128 $ 11,807 $ 16,074 $ 38,379 $ 44,420 Depreciation and amortization... $ 2,289 $ 2,387 $ 2,452 $ 3,354 $ 3,014 Dividends per share............. $ -- $ -- $ -- $ .18 $ .18
* See note 14 to the Company's consolidated financial statements included herein for quarterly results of operations. (a) See note 2 to the Company's consolidated financial statements included herein for information pertaining to the restatement of earnings. (b) The Company has reclassified two of its business segments as discontinued operations. This includes the entire Heat Technology business, including the large custom-engineered furnace portion of this segment, which was sold in 2002, and the burners and components portion of the segment which the Company sold in the first quarter of 2005. The Company's Tire Holders, Lifts and Related Products business that was sold in July of 2003 is also included in discontinued operations. Accordingly, the historical financial information has been reclassified. See note 3 to the Consolidated Financial Statements. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has not amended and does not intend to amend its previously filed Form 10K for the fiscal year ended December 31,2003 or its previously filed Annual Reports on Form10-k or Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to December 31,2004. For this reason the consolidated financial statements, auditors' reports and related financial information for the affected periods contained in such reports should no longer be relied upon. However, we have restated the financial information for 2000 and 2001 presented in "Other Financial Highlights" of this report. 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 to 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 result of the changes to pre-tax income relating to the correction of accounting for certain research and development expenditures noted above. The Restatement narrative below includes only the 2002, 2003, and 2004 audited amounts as well as the impact of prior period Restatement amounts on beginning retained earnings at January 1, 2002. The Restatement reduced our earnings before income taxes for 2002 and 2003 by $314,000 and $97,000, respectively. For 2004, the Restatement increased our earnings before income taxes by $49,000. The 2002 Restatement was comprised of a $24,000 reduction in cost of sales to reverse amortization expense and a $338,000 charge to research and development expense to reverse capitalized research and development costs. The 2003 Restatement was comprised of a $347,000 reduction in cost of sales to reverse amortization expense, a $37,000 charge to general and administrative expense to reverse capitalized engineering support costs, and a $408,000 charge to research and development expense to reverse capitalized research and development costs. The 2004 Restatement was comprised of a $193,000 reduction in cost of sales to reverse amortization expense, a $15,000 charge to general and administrative expense to reverse capitalized engineering support costs, and a $129,000 charge to research and development expense to reverse capitalized research and development costs. The Restatement decreased beginning retained earnings for the year ended December 31, 2002 presented on our consolidated statements of stockholders' equity from $23,297,000 as previously reported to $23,004,000 as restated. This $293,000 decrease, net of tax of $127,000 represented the cumulative impact of restating 2000 and 2001 for the accounting errors described above. The Restatement had no impact on historical cash balances or total cash flows from operating, investing or financing activities for the years ended December 31, 2004 and 2003. The only impact on the consolidated statements of cash flows was to reclassify certain amounts within the cash flow statement categories. The primary impact of the above adjustments on the December 31, 2004 and December 31, 2003 consolidated balance sheet was a reduction to property, plant and equipment. Further information regarding the impact of these adjustments is provided in Note 2. OVERVIEW The Company has embarked on a strategy to focus on its Precision Miniature Medical and Electronics Products markets for future growth. Consistent with this strategy, the following actions were taken in 2004: 7 BURNERS AND COMPONENTS BUSINESS - In the fourth quarter of 2003, the Company initiated its plan to sell the remainder of its Heat Technology segment. This segment consists of the operating assets of Selas Corporation of America (Dresher, Pennsylvania) and Nippon Selas (Tokyo, Japan). The Company sold the segment during the first quarter of 2005 and has classified the segment as a discontinued operation and, accordingly, has reclassified the historical financial data. For more detailed information, see note 3 to the Consolidated Financial Statements included herein. PROPERTY IN DRESHER, PENNSYLVANIA. - On June 23, 2004, the Company completed the sale of its property in Dresher, PA, to BT Limekiln LP, a Pennsylvania limited partnership, for approximately $3.6 million in cash, net of expenses. A gain of $3.1 million was recognized on the sale. The property was the headquarters for the Company's discontinued Heat Technology business and was previously classified as an asset held for sale on the Company's consolidated balance sheet. In connection with the sale, the Company leased back the property for a term of nine months at a base rental of $20,000 per month, plus expenses. Proceeds of the sale were used to reduce the Company's outstanding bank debt. REDUCTION OF OVERHEAD - In 2004, the Company experienced weakness in the hearing health markets. The weakness was due to competitive pricing pressures, customer inventory management programs resulting in more just-in-time inventory, as well as unfavorable legislation in the German market reducing the reimbursement amount for the purchase of hearing aids. These factors resulted in both reduced sales and lower product margins. In an effort to return to operating profitability, the Company took steps in 2004 to reduce its overhead. These steps included the elimination of several management and other support positions, resulting in an annualized savings of over $3 million. FORWARD-LOOKING AND CAUTIONARY STATEMENTS Certain statements included in this Annual Report to Shareholders or documents the Company files with the Securities and Exchange Commission, which are not historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to: o statements in the letter to shareholders, such as the Company's position and focus on the Company's core product lines, ability to compete, the potential for growth for the hearing health market, growth in the military and aviation markets, disposition of assets and the renaming of the Company; 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; o statements in "Notes to the Company's Consolidated Financial Statements;" and o statements in the Company's annual report on Form 10-K for the year ended December 31, 2004, in "Business", Legal Proceedings" and "Risk Factors", such as the Company's ability to focus on the precision miniature medical and electronics products business segment and exit the heat technology segment, the ability to compete, the adequacy of insurance coverage, and potential increase in demand for the Company's products. Forward-looking statements 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 related to the Company's Precision Miniature Medical and Electronic Products segment; and o estimates of goodwill impairments and amortization expense of other intangible assets. 8 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 Annual Report to Shareholders, 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 The Company 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 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; o ability to sell businesses marked for sale; and o risks associated with terrorist attacks, war and threats of attacks and wars. For a description of these and other risks see "Risk Factors" in 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. 9 RESULTS OF OPERATIONS 2004 COMPARED WITH 2003 CONSOLIDATED NET SALES Consolidated net sales for 2004 and 2003 were as follows (in thousands): Change ------ 2004 2003 Dollars Percent ---- ---- ------- ------- Consolidated net sales.... $35,183 $36,202 $(1,019) (2.8)% The Company's sales continued to be impacted by weakness in its primary hearing-health market. Competitive pricing issues, customer inventory reduction efforts as well as unfavorable legislation in the German market, which reduced the reimbursement amount to the end user for the purchase of hearing aids, contributed to a 15 percent decrease in sales to the hearing-health market in 2004. The Company also saw a decline of 15 percent in sales to the medical equipment market in 2004. Sales to this market are extremely reliant on orders from two customers, and are volatile depending on sales levels, inventory levels and acceptance of these customer's end products. Medical products comprised $4.2 million, about 12 percent of the Company's 2004 consolidated net sales, compared to $4.9 million or 13 percent in 2003. The weakness in the hearing-health and medical equipment markets was partially offset by increases in sales to the Company's remaining markets. Sales of the Company's thermistor and capacitor products, into the telecommunication markets, represented 20 percent of the Company's sales in 2004 increasing 17 percent year-over-year as the overall world telecommunications market continued to strengthen. Sales to the professional audio market represented 16 percent of the Company's 2004 sales increasing 44 percent; 2004 sales to this market included a $1.1 million order of helmets for the Singapore military. Looking forward to 2005, the Company believes its new digital products will help it gain market share in the hearing health market, as the product performance has been rated exceptional. The telecommunications market seems to be recovering and the Company expects sales to its medical equipment market to rebound. GROSS PROFIT Gross profit, both in dollars and as a percent of sales, for 2004 and 2003, were as follows (in thousands): 2004 2003 Change ---- ---- ------ (restated) (restated) (restated) -------- -------- -------- Dollars Percent Dollars Percent Dollars Percent ------- ------- ------- ------- ------- ------- Gross profit.... $8,061 22.9% $8,564 23.7% $(503) (.8)% 2004 gross margins decreased due to the lower overall sales volume, this included a decrease in sales to the medical equipment products market, which generally provides higher gross profit margins. The hearing-health product mix continued shifting away from higher gross profit margins of mechanical components to digital products, which typically have lower gross profit margins for the Company. These factors were partially offset by lower inventory reserves in 2004 when compared to 2003, along with an increase in sales of electronic products, which generally have higher gross profit margins. Inventory write-downs were $770,000 and $1.1 million in 2004 and 2003, respectively and are the result of more specialized inventory, changes in product mix, and shorter product life cycles particularly in the hearing health market. The Company believes its gross profit margins in 2005 will be in the 23 to 26 percent range due to cost saving measures which have been implemented, including staffing reductions, additional automation, shifting certain production to its 10 Singapore facility and changes in product mix including an anticipated rebound of its medical product sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses (SG&A) for the years ended December 31, 2004 and 2003 were (in thousands):
2004 2003 Change ---- ---- ------ (restated) (restated) (restated) -------- -------- -------- Year-over- Percent of Percent of year Dollars Sales Dollars Sales Dollars Incr.(Decr.) ------- ----- ------- ----- ------- ----------- Selling.................... $3,934 11.2% $3,649 10.1% $ 285 7.8% Research and development... $1,616 4.6% $2,170 6.0% $(554) (25.5)% Asset impairment........... $ 488 1.4% $ 379 1.0% $ 109 28.8% General and administrative. $5,497 15.6% $5,259 14.5% $ 238 4.5%
The higher SG&A expenses in 2004 were mainly attributable to an increase in selling and administrative expense, partially offset by a decline in development cost. The $285,000 increase in selling expense was mainly due to the hiring of a sales and marketing manager for our medical products market and the associated fees paid to a third party recruiter. Research and development decreased as a result of an increase in customer funded development projects, as the Company partners with its customers to bring new hearing health products to market. The $238,000 increase in administrative expenses was mainly attributable to accruals of severance cost in 2004, as the Company reduced its staff, to compensate for the decline in sales. IMPAIRMENT OF LONG-TERM ASSETS In 2004, the Company recorded an impairment from abandonment of long-term assets of $488,000 based on analysis of future cash flows; in 2003, an impairment from abandonment of long-term assets of $379,000 was recorded. The 2004 abandonment was mainly associated with technology having to do with the development of a specific microphone for use in both the professional audio and hearing health markets; management determined that due to external technological advances the technology was no longer viable. The 2003 abandonment was due to previously capitalized technology costs primarily related to microphone and headset products for the professional audio-device market. These technology costs were no longer considered to have future value. NET INTEREST EXPENSE Net interest expense for 2004 was $465,000 a decline of $68,000 from $533,000 in 2003. This was principally due to a reduction in the overall bank debt, offset by an increase in interest rates. Total bank debt was $5.2 million at December 31, 2004 compared to $8.2 million December 31, 2003. OTHER In 2004, other income was $61,000 compared to other expense of $130,000 in 2003. The difference principally stemmed from an exchange loss of $94,000 on Euro denominated bank debt in 2003. There was no similar loss in 2004. INCOME TAXES Income taxes were as follows (in thousands): 2004 2003 (restated) (restated) -------- -------- Income tax expense (benefit)................. $ 1,140 $ 485 Percentage of pre-tax loss................... (149.0%) (13.6%) 11 The effective tax rate of (149.0%) percent compared to the U.S. Federal statutory rate of 34 percent in 2004 was primarily due to three reasons: - - The Company established an $890,000 valuation reserve against previously established tax assets as their realizability was uncertain due to the operating losses the Company has generated for the last three years; - - The estimated 2003 Federal income tax refund was reduced by approximately $45,000 in alternative minimum tax; and - - The Company generated taxable profits in its foreign operations and recognized income tax expense of approximately $196,000 related to those operations. The Company estimates it has approximately $16.3 million of net operating loss (NOL) carryforwards available to offset future federal income taxes. DISCONTINUED OPERATIONS The Company recorded a net profit (loss) from discontinued operations as follows (in thousands): 2004 2003 ---- ---- Net income (loss) from Heat Technology Business.... $ 1,369 $(2,512) Net income from Tire Holders, Lifts and related products segment...................... -- 1,499 Extraordinary gain from discontinued operations.... 684 -- ------- ------- Net income (loss) from discontinued operations..... $ 2,053 $(1,013) ======= ======= HEAT TECHNOLOGY SEGMENT The 2004 net income was a result of the operating profits from its remaining burners and components business, and an extraordinary gain from the reacquisition of Selas Warmetechnik (see note 3 and note 4 in the consolidated financial statements). The 2003 net loss from the Heat Technology business was primarily the result of the insolvency filed in France by the Company's wholly owned French subsidiary. This consisted of the European heat technology operation remaining after the 2002 sale of the large custom-engineered furnace business. The European loss in 2003 was partially offset by $110,000 of net income from the remaining the Company's burner and component business with locations in Dresher, Pennsylvania, and Tokyo, Japan. In the first quarter of 2005, the Company sold its remaining burner and component business for approximately $3 million. TIRE HOLDER, LIFTS AND RELATED PRODUCTS SEGMENT The 2003 net income from the Tire Holder, Lifts and Related Products segment was the combination of net income of $8,000 from Deuer Manufacturing, Inc. prior to its sale In July 2003 and the approximately $1.5 million gain recognized from the sale. 2003 COMPARED WITH 2002 CONSOLIDATED NET SALES Consolidated net sales for 2003 and 2002 were as follows (in thousands): Change ------ 2003 2002 Dollars Percent ---- ---- ------- ------- Consolidated net sales.... $36,202 $34,975 $1,227 3.5% 12 The Company's sales in 2003 were impacted by weakness in its primary hearing-health market. Competitive pricing issues and a continued decline in sales of component products contributed to a 5 percent decrease in sales to the hearing-health market. Other contributing factors included a fourth-quarter reduction in orders from two major customers, as they sought to lower their inventory levels. The weakness in the hearing-health market was offset by gains in other markets. Sales of the Company's Thermistor and Capacitor products into the telecommunication markets increased 10 percent year-over-year as the overall world telecommunications market strengthened. The Company continued to expand its customer base in the medical equipment market; the Company's sales to this market saw a 40 percent year-over-year growth. Medical products comprised about 13 percent of the Company's 2003 sales, compared to 10 percent in 2002. GROSS PROFIT Gross profit, both in dollars and as a percent of sales, for 2003 and 2002, were as follows (in thousands): 2003 2002 Change ---- ---- ------ (restated) (restated) (restated) -------- -------- -------- Dollars Percent Dollars Percent Dollars Percent ------- ------- ------- ------- ------- ------- Gross profit..... $8,564 23.7% $8,164 23.3% $400 .4% Although year over year sales increased by $1.2 million, gross profit remained relatively flat as a percentage of sales in 2003, due primarily to an increase in inventory reserves in 2003. The increase in inventory reserves of approximately $1.1 million was the result of more specialized inventory, changes in product mix, and shorter product life cycles. The hearing-health product mix continued shifting away from higher gross profit margins of mechanical components to digital products, which typically have lower gross profit margins for the Company. These factors were partially offset by an increase in sales of electronic products as well as medical products, which generally have higher gross profit margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses (SG&A) for the years ended December 31, 2003 and 2002 were (in thousands):
2003 2002 Change (restated) (restated) (restated) -------- -------- -------- Year-over- Percent of Percent of year Dollars Sales Dollars Sales Dollars Incr.(Decr.) ------- ----- ------- ----- ------- ----------- Selling................... $3,649 10.1% $3,667 10.5% $ (18) (.5%) Research and development.. $2,170 5.8% $1,187 3.4% $ 983 82.8% Asset impairment.......... $ 379 1.0% -- -- $ 379 -- General and administrative $5,259 14.7% $5,630 16.1% $(371) (6.6%)
The higher SG&A expenses in 2003 were mainly attributable to the significant increase in research and development cost, partially offset by a decline in general and administrative expenses. Research and development increased as a result of the Company's efforts to develop new products for its growing sales to the medical equipment market, as well as new digital products for the hearing-health market. The $371,000 decline in administrative expenses was mainly attributable to accruals of severance cost in 2002, along with reduced legal and consulting fees in 2003. IMPAIRMENT OF LONG-TERM ASSETS In 2003, the Company recorded an impairment from abandonment of long-term assets of $379,000 based on analysis of future cash flows; no abandonment was recorded in 2002. The abandonment was due to previously capitalized technology costs primarily related to microphone and headset products for the professional audio-device market. These technology costs were no longer considered to have future value. 13 NET INTEREST EXPENSE Net interest expense declined by $161,000 from $525,000 in 2003 compared to $686,000 in 2002. This was principally due to a reduction in the overall bank debt. Total bank debt was $8.2 million and $14.3 million at December 31, 2003 and 2002, respectively. OTHER In 2003, other expense was $130,000 compared to other income of $31,000 in 2002. The difference stemmed from an exchange loss of $94,000 on Euro denominated bank debt in 2003. There was no similar loss in 2002. INCOME TAXES Income taxes were as follows (in thousands): 2003 2002 (restated) (restated) -------- -------- Income tax expense (benefit)...... $ 485 $ (1,160) Percentage of pre-tax loss........ (13.7%) (39.0%) The effective tax rate of (13.7) percent compared to the U.S. Federal statutory rate of 34 percent in 2003 was primarily due to two reasons: - - The Company established a $1.8 million valuation reserve against previously established tax assets as their realizability was uncertain due to the operating losses the Company has generated for the last three years. - - The Company generated net operating losses (NOL) for Federal tax purposes, but only recognized them to the extent of the $714,000 current refund available. The Company estimated it had $16.6 million of carry forward available to offset future federal income taxes, as of December 31, 2003. DISCONTINUED OPERATIONS The Company recorded a net loss from discontinued operations as follows (in thousands): 2003 2002 ---- ---- Net loss from Heat Technology Business............................. $ (2,512) $(11,637) Net income from Tire Holders, Lifts and related products segment............. 1,499 1,093 -------- -------- Net loss from discontinued operations..... $ (1,013) $(10,544) ======== ======== HEAT TECHNOLOGY SEGMENT The 2003 net loss from the Heat Technology business was a result of the insolvency filed in France. This consisted of the European heat technology operation remaining after the 2002 sale of the large custom-engineered furnace business. The European loss was partially offset by $110,000 of net income from the remaining Heat Technology business with locations in Dresher, Pennsylvania, and Tokyo, Japan. The 2002 loss was primarily due to the large custom-engineered furnace business located in France that was sold in 2002. TIRE HOLDER, LIFTS AND RELATED PRODUCTS SEGMENT The net income from the Tire Holder, Lifts and Related Products segment was the combination of net income of $8,000 from Deuer Manufacturing, Inc. prior to its sale In July 2003 and the $1.5 million gain recognized from the sale. This compares to net income of $1.1 million from its operations in 2002. The net income from the operation declined substantially, stemming from lower sales volume due to decreased automotive production and margin reductions from increased industry pricing pressures. Additionally, 2003 only includes approximately seven months of operations prior to the sale. 14 SALE OF PRIMARY CUSTOM-ENGINEERED (LARGE) FURNACE BUSINESS In 2002, the Company completed its agreement with Andritz AG to sell certain operating assets and liabilities of its large custom-engineered furnace business operated by its wholly owned subsidiary Selas SAS and 100 percent of the shares of Selas UK. In addition, the Company sold certain intellectual property used in the business. The total consideration was equal to the net book value of the assets transferred and liabilities assumed, plus approximately $645,000 for the intellectual property and goodwill transferred. In 2003, it was determined liabilities exceeded assets sold by approximately $548,000. The assets and liabilities sold represented most of the Company's discontinued operations as reported in the Company's financial statements for the year ended December 31, 2001. The sale excluded the remaining smaller furnace business in France that filed insolvency in 2003. See note 3 to the Consolidated Financial Statements. GOODWILL IMPAIRMENT As of January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". Statement 142 set forth new financial and reporting standards for the acquisition of intangible assets, other than those acquired in a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized but tested for impairment at least annually. The Company discontinued the amortization of goodwill effective January 1, 2002. The provisions of Statement 142 also required the completion of a transitional impairment test with any impairment identified accounted for as a cumulative effect of a change in accounting principle. As of the date of adoption, the Company had unamortized goodwill in the amount of $14.7 million. The Company determined the goodwill associated with its operations had been impaired and wrote off goodwill of $9.4 million as of January 1, 2002. The charge was recognized as a cumulative change in accounting principle in the 2002 consolidated statement of operations. In 2004 and 2003, the results of the annual impairment test yielded no additional impairment of the remaining $5.2 million of goodwill. Changes in the estimated future cash flows from these businesses could have a significant impact on the amount of any future impairment, if any. LIQUIDITY AND CAPITAL RESOURCES Consolidated net working capital increased to $1.9 million at December 31, 2004 from $24,000 at December 31, 2003. The primary reason for the increase was the net proceeds of approximately $3.6 million from the sale of the Dresher property, which were used to pay down bank debt. The Company's cash flows from operating, investing and financing activities, as reflected in the statement of cash flows at December 31, are summarized as follows (in thousands): 2004 2003 2002 (restated) (restated) (restated) Cash provided (used) by: Continuing operations.................. $ (847) $ 2,689 $ 1,778 Discontinued operations................ 939 4,002 (1,555) Investing activities................... 2,678 (984) (1,969) Financing activities................... (2,678) (7,373) 643 Effect of exchange rate changes on cash (39) 247 1,203 ------- ------- ------- Increase (decrease) in cash................ $ 53 $(1,419) $ 100 ======= ======= ======= The Company had the following bank arrangements at December 31, (in thousands): 2004 2003 ---- ---- Total availability under existing facilities $ 7,056 $10,399 ------- ------- Borrowings and commitments: Notes payable........................... 3,740 6,271 Current maturities of long-term debt.... 1,458 1,967 ------- ------- Total borrowings and commitments........... 5,198 8,238 Remaining availability under existing facilities.............................. $ 1,857 $ 2,161 ======= ======= 15 In March 2005, the Company entered into amended agreements for its domestic revolver and long-term debt. The new facility provides the Company with a revolving credit limit of $4.5 million which was reduced to $4.0 million upon the sale of burners and components business in the first quarter of 2005. A portion of the proceeds from the sale of the Burners and Components business was used to payoff the approximately $1.5 million outstanding principal balance on the term loan. These facilities expire on April 1, 2006. Borrowings under the Company's domestic credit facilities currently bear interest at prime plus 3.0 percent. The terms of the amended agreement increase this rate to prime plus 3.5 percent on July 1, 2005, prime plus 4.0 percent on October 1, 2005 and prime plus 4.5 percent on January 1, 2006. The domestic term loan and the revolving credit facility are secured by the Company's domestic assets and the Company's domestic subsidiaries' stock. The agreements contain restrictive covenants regarding the payment of cash dividends, incurrence of additional debt, issuance of equity, maintenance of working capital, net worth, shareholders' equity, and capital equipment expenditures along with the maintenance of certain financial ratios. The Company and its domestic subsidiaries are required to maintain, consolidated tangible capital funds of at least $6.5 million, a consolidated current ratio of at least 1.0, and a consolidated fixed charge coverage ratio of at least 1.0 on a year-to-date basis, which will be calculated excluding mandatory principal repayments. In addition the Company is required to maintain consolidated total liabilities to consolidated tangible capital funds ratio of 3.0, which was reset to 2.25 after the sale of the Burners and Components business in the first quarter of 2005. Management believes that the Company will be able to maintain the amended covenants through April 1, 2006. The Company did not meet certain covenants during the first and fourth quarters of 2004, for which it obtained waivers from the bank. At December 31, 2004, the Company was in compliance with all covenants of the amended agreement. The Company believes that the amended credit facility combined with funds expected to be generated from operations, the available borrowing capacity through its revolving credit loan facilities 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 The Company will be able to negotiate acceptable terms. In addition, access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as the Company's financial condition. CONTRACTUAL OBLIGATIONS The following table represents the Company's contractual obligations and commercial commitments as of December 31, 2004.
PAYMENTS DUE BY PERIOD ---------------------- CONTRACTUAL LESS THAN MORE THAN OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEAR ----------- ----- ------ --------- --------- ------ Notes payable........ $3,740,000 $3,740,000 $ -- $ -- $ -- Term debt............ 1,458,000 1,458,000 -- -- -- Operating leases..... 4,458,000 977,000 1,738,000 1,068,000 675,000 ---------- ---------- ---------- ---------- --------- Total contractual cash obligations.. $9,656,000 $6,175,000 $1,738,000 $1,068,000 $ 675,000 ========== ========== ========== ========== =========
16 The Company incurred approximately $254,000 in period pension and post retirement medical benefit costs in 2004, and contributed approximately $268,000 to defined contribution plans. The Company expects a similar level of funding in 2005. FOREIGN CURRENCY FLUCTUATION A portion of the discontinued operations are denominated in foreign currencies, primarily the Euro and Japanese Yen. Generally, the income statement effect of changes in foreign currencies is partially or wholly offset by the subsidiaries' ability to make corresponding price changes in the local currency. From time to time, the impact of fluctuations in foreign currencies may have a material effect on the financial results of the Company. Foreign currency transaction amounts included in the statements of operation include a gain of $14,000 in 2004 and losses of $141,000 and $23,000 in 2003 and 2002, respectively. See note 12 to the Company's Consolidated Financial Statements included herein. LITIGATION The Company is a defendant along with a number of other parties in approximately 123 lawsuits as of December 31, 2004, (approximately 101 lawsuits as of December 31, 2003) 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. Certain carriers have informed the Company that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. The Company has requested that the carriers substantiate this situation. The Company believes it has additional policies available for other years which have been ignored by the carriers. As settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, the Company believes when settlement payments are applied to these additional policies, the Company will have availability under the years deemed exhausted. The Company does not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits, to which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company's consolidated financial position or results of operations. The Company is also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect the Company's consolidated financial position, liquidity or results of operations. 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. SFAS No. 123R is effective as of the beginning of the first interim or 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 1 to the Consolidated Financial Statements of this Annual Report. The Company is currently evaluating the provisions of SFAS No. 123R and will adopt it on July 1, 2005, as required. In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, which amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, INVENTORY PRICING, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In 17 addition, SFAS No. 151 requires allocation of fixed production overheads to the costs of conversion be based on the normal capacit of the production facilities. We do not have any idle facility expense or wasted material expense as of December 31, 2004. We will continue to apply the requirements of SFAS No. 151 in future periods. In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS. SFAS No. 153 is an amendment to APB Opinion No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. We are currently evaluating the provisions of SFAS No. 153 and will adopt it on July 1, 2005, as required. CRITICAL ACCOUNTING POLICIES The significant accounting policies of the Company are described in note 1 to the Consolidated Financial Statements and have been reviewed with the audit committee of the Company's Board of Directors. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Certain accounting estimates and assumptions are particularly sensitive because of their importance to the consolidated financial statements and possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions are described below. Revenue Recognition The Company's continuing operation recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. A portion of the Company's net sales from its discontinued Heat Technology segment is generated pursuant to contracts that require substantial time to complete and are accordingly accounted for on a percentage-of-completion basis. Under this method of accounting, the sales recognized on each contract during a particular accounting period are determined by multiplying the total contract amount by the ratio of costs incurred to estimated total costs and deducting sales recognized in prior accounting periods. Such contract costs and expenses incurred on a progress basis at the time the sales value is recorded are charged to cost of sales. Under percentage-of-completion accounting, revisions in cost estimates during the progress of the work under the contracts have the effect of including in the current accounting period adjustments necessary to reflect the results indicated by the revised estimates of the final cost. Revised costs may be affected by changes in material purchase price estimates, labor and subcontractor completion estimates and other factors related to the contract. In addition, the Company provides currently for any anticipated or known contract losses. Accounts Receivable Reserves This reserve is an estimate of the amount of accounts receivable that are uncollectible. The reserve is based on a combination of specific customer knowledge, general economic conditions and historical trends. Management believes the results could be materially different if economic conditions change for the Company's customers. Inventory Reserves This reserve is an estimate of the future net realizable value of the Company's inventory. It is based on historical trends, product life cycles, forecast of future inventory needs and on-hand inventory levels. Management believes reserve levels could be materially affected by changes in technology, the Company's customer base, customer needs, general economic conditions and the success of certain Company sales programs. 18 Discontinued Operations The Company continuously assesses the return on their business segments. When management with the appropriate level of authority determines that a plan is in place to restructure the operations of a business or discontinue an operation, contractual commitments and obligations are recorded. See a discussion in note 3 to the consolidated financial statements. Goodwill The Company performs an annual assessment of the carrying value of goodwill. As part of this assessment, the Company estimates future cash flows, as well as making a risk assessment of investing in the Company versus other investment opportunities. Changes in either the risk assessment or estimated future cash flows could have a material adverse impact on the carrying value of goodwill. Long-lived Assets The carrying value of long-lived assets is periodically assessed to insure their carrying value does not exceed their estimated net realizable future value. This assessment includes certain assumptions related to future needs for the asset to help generate future cash flow. Changes in those assessments, future economic conditions or technological changes could have a material adverse impact of the carrying value of these assets. Deferred Taxes The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Actual future operating results, as well as changes in the future performance of the Company, could have a material adverse impact on the valuation reserves. Employee Benefit Obligations The Company provides retirement and health care insurance for certain domestic retirees and employees. The Company measures the costs of its obligation based on its best estimate. The net periodic costs are recognized as employees render the services necessary to earn the post-retirement benefit. Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. Assumptions about the discount rate, the expected rate of return on plan assets and the future rate of compensation increases are determined by the Company. The actuarial models also use assumptions on demographic factors such as retirement, mortality and turnover. Changes in actuarial assumptions could vary materially from actual results due to economic events and different rates of retirement, mortality and withdrawal. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's consolidated cash flows and earnings are subject to fluctuations due to changes in foreign currency exchange rates. The Company attempts to limit its exposure to changing foreign currency exchange rates through operational and financial market actions. The Company does not hold derivatives for trading purposes. The Company manufactures and sells its products in a number of locations around the world, resulting in a diversified revenue and cost base that is exposed to fluctuations in European and Asian currencies. This diverse base of foreign currency revenues and costs serves to create a hedge that limits the Company's net exposure to fluctuations in these foreign currencies. Short-term exposures to changing foreign currency exchange rates are occasionally managed by financial market transactions, principally through the purchase of forward foreign exchange contracts (with maturities of six months or less) to offset the earnings and cash flow impact of the nonfunctional currency denominated receivables and payables relating to select contracts. The decision by management to hedge any such transaction is made on a case-by-case basis. Foreign exchange forward contracts are denominated in the same currency as the receivable or payable being covered, and the term and amount of the forward foreign exchange contract substantially mirrors the term and amount of the underlying receivable or payable. The receivables and payables being covered arise from bank debt, trade and intercompany transactions of and among the Company's foreign subsidiaries. At December 31, 2004, the Company did not have any forward foreign exchange contracts outstanding. 19
INTRICON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31 2004 2003 2002 (restated) (restated) (restated) -------- -------- -------- Sales, net............................................... $35,182,612 $36,202,164 $ 34,974,602 Costs of sales........................................... 27,120,897 27,638,208 26,810,538 ----------- ----------- ------------ Gross profit............................................. 8,061,715 8,563,956 8,164,064 Operating expenses: Selling expense.......................................... 3,933,657 3,649,027 3,666,701 General and administrative expense....................... 5,496,798 5,258,721 5,630,424 Impairment of long term assets........................... 488,214 378,864 -- Research and development expense......................... 1,616,085 2,170,415 1,186,453 ----------- ----------- ------------ Total operating expenses............................... 11,534,754 11,457,027 10,483,578 Gain on sale of asset.................................... 3,109,627 -- -- Operating loss........................................... (363,412) (2,893,071) (2,319,514) Interest expense......................................... 465,272 533,461 719,990 Interest income.......................................... (1,626) (7,919) (33,664) Other (income) expense, net.............................. (61,618) 129,173 (31,140) ----------- ----------- ------------ Loss from continuing operations before income taxes, discontinued operations and change in accounting principle....................... (765,440) (3,547,786) (2,974,700) Income tax expense (benefit)............................. 1,139,797 484,599 (1,159,557) ----------- ----------- ------------ Loss from continuing operations before discontinued operations and change in accounting principle....................... (1,905,237) (4,032,385) (1,815,143) Income (loss) from discontinued operations, net of income taxes (note 3)............. 1,369,433 (1,012,937) (10,543,700) Extraordinary gain from discontinued operations.......................................... 683,630 -- -- ----------- ----------- ------------ Income (loss) before change in accounting principle................................. 147,826 (5,045,322) (12,358,843) Cumulative effect of change in accounting principle............................................ -- -- (9,428,354) ----------- ----------- ------------ Net income (loss)........................................ $ 147,826 $(5,045,322) $(21,787,197) =========== =========== ============ Basic earnings (loss) per share: Continuing operations................................ $ (.37) $ ( .78) $ (.35) Discontinued operations.............................. .27 ( .20) ( 2.06) Extraordinary gain from discontinued operations........................................ .13 -- -- Accounting principle change.......................... -- -- (1.84) ----------- ----------- ------------ Net income (loss).................................... $ .03 $ (.98) $ (4.25) =========== =========== ============ Diluted income (loss) per share: Continuing operations................................ $ (.37) $ (.78) $ (.35) Discontinued operations.............................. .27 (.20) (2.06) Extraordinary gain from discontinued operations........................................ .13 -- -- Accounting principle change.......................... -- -- (1.84) ----------- ----------- ------------ Net income (loss).................................... $ .03 $ (.98) $ (4.25) =========== =========== ============
See accompanying notes to the consolidated financial statements. 20
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 2004 2003 ASSETS (restated) (restated) -------- -------- Current assets Cash........................................................... $ 246,430 $ 193,811 Restricted cash................................................ 449,613 431,056 Accounts receivable, less allowance for doubtful accounts of $177,000 in 2004 and $254,000 in 2003....................... 4,996,705 4,537,830 Inventories.................................................... 4,287,643 5,709,642 Refundable income taxes........................................ 46,163 913,339 Deferred income taxes.......................................... -- 890,230 Asset held for sale............................................ -- 540,175 Other current assets........................................... 379,318 480,305 Assets of discontinued operations.............................. 6,834,256 5,729,410 ----------- ----------- Total current assets......................................... 17,240,128 19,425,798 Property, plant and equipment Land........................................................... 170,500 170,500 Buildings and improvements..................................... 1,732,914 1,732,914 Machinery and equipment........................................ 25,635,452 25,325,708 ----------- ----------- 27,538,866 27,229,122 Less: accumulated depreciation................................. 20,260,792 18,316,776 ----------- ----------- Net property, plant and equipment............................ 7,278,074 8,912,346 Goodwill........................................................... 5,264,585 5,264,585 Other assets, net.................................................. 1,156,449 1,126,371 ----------- ----------- $30,939,236 $34,729,100 =========== ===========
See accompanying notes to the consolidated financial statements. 21
AT DECEMBER 31 2004 2003 LIABILITIES AND SHAREHOLDERS' EQUITY (restated) (restated) -------- -------- Current liabilities Notes payable.................................................. $ 3,740,393 $ 6,270,663 Checks written in excess of cash............................... 665,098 330,699 Current maturities of long-term debt........................... 1,458,470 1,966,800 Accounts payable............................................... 2,211,909 2,757,942 Customers' advance payments on contracts....................... 75,000 172,279 Liabilities of discontinued operations......................... 4,266,899 4,265,638 Other accrued liabilities...................................... 2,638,889 3,416,480 ----------- ----------- Total current liabilities................................... 15,056,658 19,180,501 Other post-retirement benefit obligations.......................... 2,710,106 2,827,417 Deferred income taxes.............................................. 143,902 123,529 Accrued pension liability.......................................... 900,713 790,618 Commitments and contingencies (notes 8 and 16) Shareholders' equity Common shares, $1 par; 10,000,000 shares authorized; 5,644,968 shares issued; 5,129,214 outstanding................. 5,644,968 5,644,968 Additional paid-in capital..................................... 12,025,790 12,025,790 Accumulated deficit............................................ (3,680,704) (3,828,530) Accumulated other comprehensive loss........................... (597,119) (770,115) ----------- ----------- 13,392,935 13,072,113 Less: 515,754 common shares held in treasury, at cost......... (1,265,078) (1,265,078) ----------- ----------- Total shareholders' equity..................................... 12,127,857 11,807,035 ----------- ----------- $30,939,236 $34,729,100 =========== ===========
See accompanying notes to the consolidated financial statements. 22
CONSOLIDATED STATEMENTS OF CASH FLOWS 2004 2003 2002 YEARS ENDED DECEMBER 31, (restated) (restated) (restated) -------- -------- -------- Cash flows from operating activities: Net income (loss)................................................... $ 147,826 $(5,045,322) $(21,787,197) Adjustments to reconcile net loss to net cash provided (used) by operating activities: (Income) loss from discontinued operations....................... (1,369,433) 1,012,937 10,543,700 Extraordinary gain from discontinued operations.................. (683,630) --- --- Cumulative effect of accounting change........................... --- --- 9,428,354 Impairment of long-term assets................................... 488,214 378,864 --- Depreciation and amortization.................................... 2,289,181 2,387,227 2,451,634 (Gains) losses on sale of property and equipment................. (1,541) 29,265 (11) Deferred taxes................................................... 905,615 1,147,740 (224,267) Gain on sale of asset held for sale.............................. (3,109,627) --- --- Changes in operating assets and liabilities: Accounts receivable........................................... (353,078) 341,987 480,931 Inventories................................................... 1,464,236 149,434 786,965 Other assets.................................................. 732,640 (1,092,688) 312,645 Accounts payable.............................................. (687,363) 1,483,787 (158,215) Accrued expenses.............................................. (579,576) 1,798,476 221,064 Customers advance payments on contracts....................... (97,279) (5,741) 60,321 Other liabilities............................................. 6,822 (103,421) (337,179) ---------- ----------- ------------ Net cash provided (used) by continuing operations................... (846,993) 2,689,428 1,778,745 Net cash provided (used) by discontinued operations................. 980,428 (2,573,594) (1,194,139) ---------- ----------- ------------ Net cash provided by operating activities........................... 133,435 115,835 584,606 Cash flows from investing activities: Purchases of property, plant and equipment....................... (976,043) (985,086) (1,731,599) Proceeds from sales of property, plant and equipment............. 3,800 500 9,600 Proceeds from sale of asset held for sale........................ 3,649,802 --- --- Purchase of patents and intangibles.............................. --- --- (247,410) ---------- ----------- ------------ Net cash provided (used) by continuing operations.................. 2,677,559 (984,586) (1,969,409) Net cash provided (used) by discontinued operations................. (41,890) 6,575,496 (361,235) ---------- ----------- ------------ Net cash provided (used) by investing activities.................... 2,635,669 5,590,909 (2,330,644) Cash flows from financing activities: Proceeds from short-term borrowings.............................. 716,133 291,205 1,503,126 Proceeds from issuance of stock.................................. --- 23,250 --- Repayments of short-term borrowings.............................. (432,806) (6,089,228) (1,106,416) Proceeds from borrowings used to acquire subsidiaries............ --- --- 955,378 Proceeds from long term borrowings............................... 800,001 --- --- Repayments of long-term debt..................................... (4,092,879) (1,203,742) (727,473) Change in restricted cash........................................ (2,706) (12,811) (29,316) Change in checks written in excess of cash....................... 334,399 (381,785) 47,732 ---------- ----------- ------------ Net cash provided (used) by financing activities.................... (2,677,858) (7,373,111) 643,031 ---------- ----------- ------------ Effect of exchange rate changes on cash............................. (38,627) 246,732 1,202,813 ---------- ----------- ------------ Increase (decrease) in cash......................................... 52,619 (1,419,634) 99,806 Cash beginning of year.............................................. 193,811 1,613,445 1,513,639 ---------- ----------- ------------ Cash end of year.................................................... $ 246,430 $ 193,811 $ 1,613,445 ========== =========== ============
See accompanying notes to the consolidated financial statements. 23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (RESTATED) COMMON COMMON ACCUMULATED STOCK STOCK ADDITIONAL OTHER TOTAL NUMBER OF $ PAID IN RETAINED COMPREHENSIVE COMPREHENSIVE TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS INCOME(LOSS) INCOME(LOSS) STOCK EQUITY --------- ---------- ----------- ----------- ----------- ------------ ----------- ------------ Balance December 31, 2001 5,634,968 $5,634,968 $12,012,541 $23,297,747 $(1,075,561) $(1,265,078) $ 38,604,617 Effect of restatement (note 2)................ (293,758) 67,627 (226,131) --------- ---------- ----------- ----------- ----------- ------------ ----------- ------------ Balance December 31, 2001 (as restated)........... 5,634,968 $5,634,968 $12,012,541 $23,003,989 $(1,007,934) $(1,265,078) $ 38,378,486 Net loss................. (21,787,197) $(21,787,197) (21,787,197) Translation loss......... (519,285) (519,285) (519,285) Derivative financial..... instrument gain......... 1,948 1,948 1,948 --------- ---------- ----------- ----------- ----------- ------------ ----------- ------------ Comprehensive loss....... $(22,304,534) ============ Balance December 31, 2002 5,634,968 5,634,968 12,012,541 1,216,792 (1,525,271) (1,265,078) 16,073,952 Issuance of stock........ 10,000 10,000 13,249 23,249 Net loss................. (5,045,322) (5,045,322) (5,045,322) Translation gain......... 1,338,722 1,338,722 1,338,722 Additional minimum....... pension liability....... (583,566) (583,566) (583,566) --------- ---------- ----------- ----------- ----------- ------------ ----------- ------------ Comprehensive loss....... $ (4,290,166) ============ Balance December 31, 2003 5,644,968 5,644,968 12,025,790 (3,828,530) (770,115) (1,265,078) 11,807,035 Net income............... 147,826 147,826 147,826 Translation gain......... 172,996 172,996 172,996 --------- ---------- ----------- ----------- ----------- ------------ ----------- ------------ Comprehensive income..... $ 320,822 ============ Balance December 31, 2004 5,644,968 $5,644,968 $12,025,790 $(3,680,704) $ (597,119) $(1,265,078) $ 12,127,857 ========= ========== =========== =========== =========== =========== ============
See accompanying notes to the consolidated financial statements. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Headquartered in Arden Hills, Minnesota, IntriCon Corporation (formerly Selas Corporation of America) is an international firm that designs, develops, engineers and manufactures microminiaturized medical and electronic products. The Company's core business segment, Precision Miniature Medical and Electronic Products, supplies microminiaturized 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. BASIS OF PRESENTATION - A portion of the Company's prior Heat Technology segment, operating through a wholly-owned subsidiary located in France, filed insolvency in 2003. The Company has reclassified the historical financial data related to this operation into discontinued operations. In the fourth quarter of 2003, the Company initiated its plan to dispose of the remaining Heat Technology segment. This segment consists of the operating assets of Selas Corporation of America in Dresher, Pa., and subsidiaries located in Tokyo, Japan and Ratingen, Germany. The Company has accounted for the plan to dispose of the subsidiaries as a discontinued operation and, accordingly, has reclassified the historical financial data (note18). Consequently, the financial statements reflect in continuing operations the business previously known as its Precision Miniature Medical and Electronics segment. In the fourth quarter of 2002, the Company initiated its plan to dispose of its Tire Holders, Lifts and Related Products segment. This segment consisted of one wholly owned subsidiary that operated on a stand alone basis. The Company had accounted for the plan to dispose of the subsidiary as a discontinued operation and, accordingly, had reclassified the historical financial data. The sale of this business was completed in 2003 and the results of operations for 2003 are included in discontinued operations. See further information in note 3. CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. SEGMENT DISCLOSURES - The Company has reviewed Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information," and has determined that the Company meets the aggregation criteria as its various operations do not have discrete assets and are managed as one business. RECLASSIFICATIONS - Certain prior-year balances have been reclassified to be consistent with the current-year presentation. USE OF ESTIMATES - Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the recording of reported amounts of revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates. REVENUE RECOGNITION - The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of cash, short-term accounts and notes receivable, other current assets, notes payable to banks, trade accounts payables, and other accrued expenses approximate fair value because of the short maturity of those instruments. RESTRICTED CASH - Restricted cash consists of cash deposits required to secure a credit facility at our Singapore location. 25 INVENTORIES - Inventories are stated at the lower of cost or market. The cost of the inventories was determined by the average cost and first-in, first-out methods. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at cost. Depreciation is computed by straight-line and accelerated methods using estimated useful lives of 5 to 40 years for buildings and improvements, and 3 to 12 years for machinery and equipment. Improvements are capitalized and expenditures for maintenance, repairs and minor renewals are charged to expense when incurred. At the time assets are retired or sold, the costs and accumulated depreciation are eliminated and the resulting gain or loss, if any, is reflected in the consolidated statement of operations. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF - The Company reviews its long-lived assets, certain identifiable intangibles, and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The test for goodwill impairment is a two-step process, and is performed at least annually. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of the reporting unit over the fair value of all identified assets and liabilities. Beginning in 2002, the Company discontinued amortizing goodwill according to SFAS Statement 142 "Goodwill and Other Intangible Assets." As a result, no amortization expense for goodwill was recorded in 2002, 2003 or 2004. As of January 1, 2002, the Company recognized a cumulative change in accounting principle related to the adoption of Statement 142. See note 6 for additional information. INCOME TAXES - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation reserves are established to the extent the future benefit from the deferred tax assets realization is uncertain. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. EMPLOYEE BENEFIT OBLIGATIONS - The Company provides pension and health care insurance for certain domestic retirees and employees of its discontinued operations. These obligations have been included in continuing operations as the Company expects to retain these obligations. The Company also provides retirement related benefits for certain foreign employees. The Company measures the costs of its obligation based on actuarial determinations. The net periodic costs are recognized as employees render the services necessary to earn the post-retirement benefit. Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. Assumptions about the discount rate, the expected rate of return on plan assets and the future rate of compensation increases are determined by the Company. Note 11 includes disclosure of these rates on a weighted-average basis, encompassing the plans. The actuarial models also use assumptions on demographic factors such as retirement, mortality and turnover. The Company believes the assumptions are within accepted guidelines and ranges. However, these actuarial assumptions could vary materially from actual results due to economic events and different rates of retirement, mortality and withdrawal. Deferred pension costs are actuarially determined and are amortized on a straight-line basis over the expected periods to be benefited, which currently is 15 years. STOCK OPTION PLAN - The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including Financial Accounting Standard Board (FASB) Interpretation No. 44, "Accounting for 26 Certain Transactions involving Stock Compensation," an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. As allowed by Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation", as amended by Statement of Financial Accounting Standards No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation - Transition and Disclosure", the Company has elected to continue to apply the intrinsic-value-based method, and has adopted only the disclosure requirements of SFAS No. 123. Therefore, no compensation expense has been recognized for the stock option plans. SFAS No. 123, amended by SFAS No. 148, requires the Company to disclose pro forma net income and pro forma earnings per share amounts as if compensation expense was recognized for options granted after 1995. Using this approach, net loss and loss per share would have been increased to the pro forma amounts indicated in the table:
YEAR ENDED DECEMBER 31, ------------------------ 2004 2003 2002 (restated) (restated) (restated) -------- -------- -------- Net Income (loss) as reported............... $ 147,826 $(5,045,322) $(21,787,197) Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects................ (245,040) (173,987) (152,335) --------- ----------- ------------ Pro forma net loss.......................... $ (97,214) $(5,219,309) $(21,939,532) ========= =========== ============ Earnings (loss) per share: Basic-as reported......................... $ .03 $ (0.98) $ (4.25) Basic-pro forma........................... $ (.02) $ (1.02) $ (4.29)
Reported basic and diluted earnings are the same for all periods presented. 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: 2004 2003 2002 ---- ---- ---- Dividend yield............... 2.0% 2.1% 2.2% Expected volatility.......... 78.0% 66.9% 55.4% Risk-free interest rate...... 4.3% 4.2% 3.7% Expected life (years)........ 6.3 6.3 6.2 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. RESEARCH AND DEVELOPMENT COSTS - Research and development costs, net of customer funding amounted to $1.6 million, $2.1 million and $1.2 million in 2004, 2003 and 2002, respectively. Such costs are charged to expense when incurred. 27 The following table sets forth development costs associated with customer funding: YEARS ENDED DECEMBER 31, ------------------------ 2004 2003 2002 ---- ---- ---- Total cost incurred.......... $ 435,000 $ 746,000 $ -- Amount funded by customers... (366,000) (469,000) -- --------- --------- ------- Net expense.................. $ 69,000 $ 346,000 -- ========= ========= ======= EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share reflect the potential dilution of securities that could share in the earnings. COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments, minimum pension liability adjustments, and derivative financial instrument gains and is presented in the consolidated statements of shareholders' equity. 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. SFAS No. 123R is effective as of the beginning of the first interim or 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 1 to the Consolidated Financial Statements of this Annual Report. We are currently evaluating the provisions of SFAS No. 123R and will adopt it on July 1, 2005, as required. In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, which amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, INVENTORY PRICING, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS No. 151 requires allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We are currently evaluating the provisions of SFAS No. 151 and will adopt it as required. In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS. SFAS No. 153 is an amendment to APB Opinion No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. We are currently evaluating the provisions of SFAS No. 153 and will adopt it on July 1, 2005, as required. 2. RESTATEMENT OF 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 to 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. 28 The Restatement narrative below includes only the 2002, 2003, and 2004 audited amounts as well as the impact of prior period Restatement amounts on beginning retained earnings at January 1, 2002. The Restatement reduced our earnings before income taxes for 2002 and 2003 by $314,000 and $98,000, respectively. For 2004, the Restatement increased our earnings before income taxes by $49,000. The 2002 Restatement was comprised of a $24,000 reduction in cost of sales to reverse amortization expense and a $338,000 charge to research and development expense to reverse capitalized research and development costs. The 2003 Restatement was comprised of a $347,000 reduction in cost of sales to reverse amortization expense, a $37,000 charge to general and administrative expense to reverse capitalized engineering support costs, and a $408,000 charge to research and development expense to reverse capitalized research and development costs. The 2004 Restatement was comprised of a $193,000 reduction in cost of sales to reverse amortization expense, a $15,000 charge to general and administrative expense to reverse capitalized engineering support costs, and a $129,000 charge to research and development expense to reverse capitalized research and development costs. The impact of the Restatement on the consolidated statements of operations for these periods is shown on the accompanying table. The quarterly impact of the Restatement for 2003 and 2004 is presented in the note, "Supplementary Quarterly Data." The Restatement decreased beginning retained earnings for the year ended December 31, 2001 presented on our consolidated statements of stockholders' equity from $23,297,000 as previously reported to $23,004,000 as restated. This $293,000 decrease, net of tax of $127,000 represented the cumulative impact of restating 2000 and 2001 for the accounting errors described above. The Restatement had no impact on historical cash balances. For 2002 the Restatement had no impact on net cash provided by operating activities. For 2003 the Restatement decreased net cash provided by operating activities by $418,000 with an offsetting reduction in cash used in investing activities of $418,000. For 2004 the Restatement decreased net cash provided by operating activities by $118,000 with an offsetting reduction in cash used in investing activities of $118,000. The following tables present the effect of the Restatement on the consolidated statements of operations (in thousands except for per share data). 29
For the Year Ending December 31, 2004 ------------------------------------- As Presented Adjustment Restated ------------ ---------- -------- Sales, net......................................................... $35,183 $ -- $35,183 Cost of sales...................................................... 27,314 (193) 27,121 ------- ------ ------- Gross profit....................................................... 7,869 193 8,062 Operating expenses: Selling expense.................................................... 3,934 -- 3,934 General and administrative expense................................. 5,482 15 5,497 Impairment of long term assets..................................... 488 -- 488 Research and development expense................................... 1,487 129 1,616 ------- ------ ------- Total operating expenses........................................ 11,391 144 11,535 Gain on sale of asset.............................................. 3,110 -- 3,110 ------- ------ ------- Operating loss..................................................... (412) 49 (363) Interest expense................................................... (465) -- (465) Interest income.................................................... 2 -- 2 Other (income) expense, net........................................ (61) -- (61) ------- ------ ------- Loss from continuing operations before income taxes, discontinued operations and change in accounting principle...... (814) 49 (765) Income tax expense................................................. 1,144 (4) 1,140 ------- ------ ------- Loss from continuing operations before discontinued operations and change in accounting principle.............................. (1,958) 53 (1,905) Income from discontinued operations, net of income taxes........... 1,369 -- 1,369 Extraordinary gain from discontinued operations.................... 684 -- 684 ------- ------ ------- Net income (loss).................................................. $ 95 $ 53 $ 148 ======= ====== ======= Basic earnings (loss) per share: Continuing operations........................................... $ (.38) $ .01 $ (.37) Discontinued operations......................................... .27 -- .27 Extraordinary gain from discontinued operations................. .13 -- .13 ------- ------ ------- Net income (loss).............................................. $ .02 $ .01 $ .03 ======= ====== ======= Diluted income (loss) per share: Continuing operations........................................... $ (.38) $ .01 $ (.37) Discontinued operations......................................... .27 -- .27 Extraordinary gain from discontinued operations................. .13 -- .13 ------- ------ ------- Net income (loss)............................................... $ .02 $ .01 $ .03 ======= ====== =======
30
For the Year Ending December 31, 2003 ------------------------------------- As Presented Adjustment Restated ------------ ---------- -------- Sales, net......................................................... $36,202 $ -- $36,202 Cost of sales...................................................... 27,985 (347) 27,638 ------- ------ ------- Gross profit....................................................... 8,217 347 8,564 Operating expenses: Selling expense.................................................... 3,649 -- 3,649 General and administrative expense................................. 5,222 37 5,259 Impairment of long term assets..................................... 379 -- 379 Research and development expense................................... 1,763 408 2,171 ------- ------ ------- Total operating expenses........................................ 11,013 445 11,458 Operating loss..................................................... (2,796) (97) (2,893) Interest expense................................................... (533) -- (533) Interest income.................................................... 8 -- 8 Other (income) expense, net........................................ 129 -- 129 ------- ------ ------- Loss from continuing operations before income taxes and discontinued operations......................................... (3,450) (97) (3,547) Income tax expense (benefit)....................................... 511 (26) 485 ------- ------ ------- Loss from continuing operations before discontinued operations..... (3,961) (71) (4,032) Loss from discontinued operations, net of income taxes............. (1,013) -- (1,013) ------- ------ ------- Net income (loss).................................................. $(4,974) $ (71) $(5,045) ======= ====== ======= Basic earnings (loss) per share: Continuing operations........................................... $ (.77) $ (.01) $ (.78) Discontinued operations......................................... (.20) -- (.20) ------- ------ ------- Net income (loss).............................................. $ (.97) $ (.01) $ (.98) ======= ====== ======= Diluted income (loss) per share: Continuing operations........................................... $ (.77) $ (.01) $ (.78) Discontinued operations......................................... (.20) -- (.20) ------- ------ ------- Net income (loss)............................................... $ (.97) $ (.01) $ (.98) ======= ====== =======
31
For the Year Ending December 31, 2002 ------------------------------------- As Presented Adjustment Restated ------------ ---------- -------- Sales, net......................................................... $ 34,975 $ -- $ 34,975 Cost of sales...................................................... 26,835 (24) 26,811 -------- ------ -------- Gross profit....................................................... 8,140 24 8,164 Operating expenses: Selling expense.................................................... 3,667 -- 3,667 General and administrative expense................................. 5,630 -- 5,630 Impairment of long term assets..................................... -- -- -- Research and development expense................................... 848 338 1,186 -------- ------ -------- Total operating expenses........................................ 10,145 338 10,483 Operating loss..................................................... (2,005) (314) (2,319) Interest expense................................................... (720) -- (720) Interest income.................................................... 34 -- 34 Other (income) expense, net........................................ (30) -- (30) -------- ------ -------- Loss from continuing operations before income taxes, discontinued operations and change in accounting principle...... (2,661) (314) (2,975) Income tax expense (benefit)....................................... (1,078) (81) (1,160) -------- ------ -------- Loss from continuing operations before discontinued operations and change in accounting principle.............................. (1,583) (233) (1,815) Income (loss) from discontinued operations, net of income taxes.... (10,544) -- (10,544) Income (loss) before change in accounting principle................ (12,127) (233) (12,359) -------- ------ -------- Cumulative effect of change in accounting principle................ (9,428) -- (9,428) -------- ------ -------- Net income (loss).................................................. $(21,555) $ (233) $(21,787) ======== ====== ======== Basic earnings (loss) per share: Continuing operations........................................... $( .31) $ (.04) $ (.35) Discontinued operations......................................... (2.06) -- (2.06) Accounting principle change..................................... (1.84) -- (1.84) -------- ------ -------- Net income (loss).............................................. $ (4.21) $ (.04) $ (4.25) ======== ====== ======== Diluted income (loss) per share: Continuing operations........................................... $ (.31) $ (.04) $ (.35) Discontinued operations......................................... (2.06) -- (2.06) Accounting principle change..................................... (1.84) -- (1.84) -------- ------ -------- Net income (loss)............................................... $ (4.21) $ (.04) $ (4.25) ======== ====== ========
32 The following tables present the effect of the Restatement on the consolidated balance sheet for December 31, 2004 and 2003 respectively (in thousands).
December 31, 2004 ----------------- As Presented Adjustment Restated ------------ ---------- -------- ASSETS Cash............................................................... $ 246 -- $ 246 Restricted cash.................................................... 450 -- 450 Accounts receivable................................................ 4,997 -- 4,997 Inventories........................................................ 4,288 -- 4,288 Refundable income tax.............................................. -- 46 46 Other current assets............................................... 379 -- 379 Assets of discontinued operations.................................. 6,834 6,834 -------- ------ -------- Total current assets............................................ 17,194 46 17,240 Property, plant and equipment Land............................................................. 171 -- 171 Buildings and improvements....................................... 1,733 -- 1,733 Machinery and equipment.......................................... 26,498 (863) 25,635 -------- ------ -------- 28,402 (863) 27,539 Less accumulated depreciation...................................... (20,402) 141 (20,261) -------- ------ -------- Net property, plant and equipment............................... 8,000 (722) 7,278 Goodwill........................................................... 5,265 -- 5,265 Other assets, net.................................................. 1,261 (104) 1,156 -------- ------ -------- Total assets....................................................... $ 31,720 $(781) $ 30,939 ======== ====== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes Payable...................................................... $ 3,740 -- $ 3,740 Checks written in excess of cash................................... 665 -- 665 Current maturities of long-term debt............................... 1,458 -- 1,458 Accounts payable................................................... 2,212 -- 2,212 Federal, state and foreign income taxes............................ 179 (179) -- Customers' advance payments on contracts........................... 75 -- 75 Liabilities of discontinued operations............................. 4,267 -- 4,267 Other accrued liabilities.......................................... 2,639 -- 2,639 -------- ------ -------- Total current liabilities...................................... 15,235 (179) 15,056 Other post-retirement benefit obligations.......................... 2,710 -- 2,710 Deferred income taxes.............................................. 144 -- 144 Accrued pension liability.......................................... 901 -- 901 Shareholders' equity Common shares...................................................... 5,645 -- 5,645 Additional paid-in capital......................................... 12,026 -- 12,026 Accumulated deficit................................................ (3,136) (545) (3,681) Accumulated other comprehensive loss............................... (540) (57) (597) -------- ------ -------- 13,995 (602) 13,393 Less: treasury stock............................................... (1,265) -- (1,265) -------- ------ -------- Total shareholders' equity......................................... 12,730 (602) 12,128 -------- ------ -------- Total liabilities and shareholders' equity......................... $ 31,720 $(781) $ 30,939 ======== ====== ========
33
December 31, 2003 ----------------- As Presented Adjustment Restated ------------ ---------- -------- ASSETS Cash............................................................... $ 194 -- $ 194 Restricted cash.................................................... 431 -- 431 Accounts receivable................................................ 4,538 -- 4,538 Inventories........................................................ 5,710 -- 5,710 Refundable income tax.............................................. 728 185 913 Other current assets............................................... 480 -- 480 Deferred income taxes.............................................. 890 -- 890 Asset held for sale................................................ 540 -- 540 Assets of discontinued operations.................................. 5,729 5,729 -------- ------ -------- Total current assets............................................ 19,240 185 19,425 Property, plant and equipment Land............................................................. 171 -- 171 Buildings and improvements....................................... 1,733 -- 1,733 Machinery and equipment.......................................... 26,353 (1,028) 25,325 -------- ------ -------- 28,257 (1,028) 27,229 Less accumulated depreciation...................................... (18,621) 304 (18,317) -------- ------ -------- Net property, plant and equipment............................... 9,636 (724) 8,912 Goodwill........................................................... 5,265 -- 5,265 Other assets, net.................................................. 1,253 (126) 1,127 -------- ------ -------- Total assets....................................................... $ 35,394 $ (665) $ 34,729 ======== ====== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes Payable...................................................... $ 6,271 -- $ 6,271 Checks written in excess of cash................................... 331 -- 331 Current maturities of long-term debt............................... 1,967 -- 1,967 Accounts payable................................................... 2,758 -- 2,758 Federal, state and foreign income taxes............................ 37 (37) -- Customers' advance payments on contracts........................... 172 -- 172 Liabilities of discontinued operations............................. 4,265 -- 4,265 Other accrued liabilities.......................................... 3,416 -- 3,416 -------- ------ -------- Total current liabilities...................................... 19,217 (37) 19,180 Other post-retirement benefit obligations.......................... 2,827 -- 2,827 Deferred income taxes.............................................. 123 -- 123 Accrued pension liability.......................................... 791 -- 791 Shareholders' equity Common shares...................................................... 5,645 -- 5,645 Additional paid-in capital......................................... 12,026 -- 12,026 Accumulated deficit................................................ (3,231) (597) (3,828) Accumulated other comprehensive loss............................... (739) (31) (770) -------- ------ -------- 13,701 (628) 13,073 Less: treasury stock............................................... (1,265) -- (1,265) -------- ------ -------- Total shareholders' equity......................................... 12,436 (629) 11,808 -------- ------ -------- Total liabilities and shareholders' equity......................... $ 35,394 $ (665) $ 34,729 ======== ====== ========
34 3. DISCONTINUED OPERATIONS The Company has embarked on a strategy to focus on its Precision Miniature Medical and Electronics Products markets for future growth. Consistent with this strategy, the Company completed its planned sale of its Tire Holders, Lifts and Related Products segment in July of 2003. This segment consisted of one wholly owned subsidiary, Deuer Manufacturing, Inc. (Deuer) that operated on a stand alone basis. The net purchase price of $6.6 million was determined by negotiations between the parties. The Company recognized a gain of approximately $1.5 million, net of tax, on the transaction. Proceeds from the transaction were used primarily to reduce the Company's outstanding bank debt. The Company accounted for the plan to sell the subsidiary as a discontinued operation beginning in 2002. The following table shows the results of operations of Deuer: YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 ---- ---- (in thousands) Sales, net.................................. $ 8,522 $16,783 Operating costs and expenses................ 8,520 15,077 ------- ------- Operating income............................ 2 1,706 Other income, net (including gain on sale).. 1,491 6 ------- ------- Income before income taxes.................. 1,493 1,712 Income tax expense (benefit)................ (6) 619 ------- ------- Net income from discontinued operations..... $ 1,499 $ 1,093 ======= ======= The Company's Heat Technology segment consisted of three components: a primary custom-engineered furnace business, a small furnace business, and a burners and components business. Primary Custom-Engineered Furnace Business - In the fourth quarter of 2002, the Company disposed of the assets held by Selas SAS (Paris, France), together with the stock of its subsidiary, Selas U.K. (Derbyshire, United Kingdom). These subsidiaries formed the Company's large custom-engineered furnaces division used primarily in the steel and glass industries worldwide. The furnaces designed by this division were custom-engineered to meet customer specific requirements. The purchase price was approximately $645,000 above the net asset value at the time of sale, and the $645,000 was paid at closing in 2002. The buyer assumed the underlying liabilities. In addition, the purchaser acquired a receivable of $1.5 million ((euro)1,290,000) representing 85 percent of a receivable due on a completed construction contract. The Company agreed to repurchase that portion of the receivable that was not collected by May 2003. During 2003, the following was determined: - - Liabilities assumed by the buyer exceeded assets by approximately $548,000; - - Selas SAS collected approximately $489,000 from assets sold to the buyer, but did not remit these funds to the buyer prior to its insolvency; and - - Selas SAS collected $350,000 on the receivable assumed by the purchase, but did not remit the funds to the buyer prior to insolvency. As a result of these events, including the insolvency of the Company's French subsidiary, the Company agreed to a settlement with the buyer pursuant to which the Company agreed to pay approximately $2,540,000 ((euro)2,180,000) to the buyer, payable in an initial installment of $466,000 ((euro)400,000) plus monthly installment of approximately $125,000 per month ((euro)100,000). The December 31, 2003, balance sheet reflected a net outstanding liability of $796,000 related to the above matter. The Company paid this liability in 2004, and the receivable on the aforementioned construction contract has been collected. As of December 31, 2004, no additional liability related to this matter exists. 35 Small Furnace Business - In July 2003, the Company's subsidiary Selas SAS, filed insolvency in France and is under the control of a French insolvency court administrator. Selas SAS and its subsidiaries constituted the Company's small furnace business. Because Selas SAS and its subsidiaries are no longer under the control of the Company, their results of operations are excluded from the continuing operations and the historical financial information has been reclassified to reflect these subsidiaries as discontinued operations. Burners and Components Business - In 2003, the Company initiated its plan to sell the remainder of its Heat Technology segment and has classified it as a discontinued operation. 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 in Ratingen, Germany. In the third quarter of 2004, Selas Corporation of America reacquired Selas Waermetechnik GmbH, which was previously part of Selas SAS. Selas SAS filed insolvency in August of 2003 (note 3). The Company recorded an extraordinary gain of approximately $684,000 on the reacquisition of Selas Waermetechnik, GmbH (note 4). In the first quarter of 2005, the Company sold the remainder of its Heat Technology segment. The total purchase price was approximately $3.6 million, subject to adjustment, of which approximately $2.7 million was paid in cash and $900,000 was paid in the form of a subordinated promissory note (note 18). The following table shows the results of operations of the Company's Heat Technology segment:
YEARS ENDED DECEMBER 31, ------------------------ 2004 2003 2002 ---- ---- ---- (in thousands) Sales, net................................................... $ 9,732 $ 18,370 $ 43,086 Operating costs and expenses................................. 8,263 19,154 52,785 -------- -------- -------- Operating income (loss)...................................... 1,469 (784) (9,699) Other expense, net (including loss on abandonment)........... (10) (3,054) (582) -------- -------- -------- Income (loss) from operations before income tax (benefit).... 1,459 (3,838) (10,281) Income tax expense (benefit)................................. 90 (1,326) 232 -------- -------- -------- Net income (loss ) from discontinued operations before extraordinary gain and change in accounting principle.... 1,369 (2,512) (10,513) Extraordinary gain........................................... 684 -- -- -------- -------- -------- Net income (loss ) from discontinued operations before change in accounting principle.................................. 2,053 (2,512) -- Cumulative effect of change in accounting principle.......... -- -- (1,124) -------- -------- -------- Net income (loss) from discontinued operations............... $ 2,053 $ (2,512) $(11,637) ======== ======== ========
The following table shows the component assets and liabilities of the Heat Technology business segment: DECEMBER 31, ------------ 2004 2003 ------ ------ (in thousands) Current assets...................... $6,479 $5,346 Property plant and equipment, net... 216 247 Other assets........................ 139 137 ------ ------ Total assets.................... $6,834 $5,729 ====== ====== Current liabilities................. $2,422 $2,259 Other liabilities................... 1,845 2,007 ------ ------ Total liabilities............... $4,267 $4,266 ====== ====== Certain notes to these consolidated financial statements have been restated to reflect the Company's presentation of what constitutes its discontinued operations. 36 4. ACQUISITIONS In the third quarter of 2004, the Company reacquired Selas Warmetechnik GmbH, which was previously part of Selas SAS. Selas SAS filed insolvency in August of 2003. Since that time Selas Waermetechnik GmbH was under the control of a French court administrator. The Company owned the rights to the Selas name and the technology for the European market. This enabled the Company to reacquire the subsidiary for the minimal amount of $10,500 and record an extraordinary gain within discontinued operations of approximately $684,000 on the acquisition. The components of the gain are illustrated in the following table. Fair market value of assets acquired $1,060,666 Fair market value of liabilities assumed (366,528) ---------- Net fair market value acquired 694,138 Purchase price 10,508 ---------- Gain on acquisition $ 683,630 The Company sold the subsidiary during the first quarter of 2005, as part of its Burners and Components business (note 18); therefore it has classified the segment as a discontinued operation and, accordingly, has reclassified the historical data. 5. GEOGRAPHIC INFORMATION The geographical distribution of long-lived assets and net sales to geographical areas for the years ended December 31, 2004, 2003 and 2002 are set forth below: LONG-LIVED ASSETS 2004 2003 2002 (restated) (restated) (restated) -------- -------- -------- United States..... $13,041,036 $14,624,054 $16,727,354 Other............. 658,072 679,248 621,180 ----------- ----------- ----------- Consolidated...... $13,699,108 $15,303,302 $17,348,534 =========== =========== =========== Long-lived assets consist primarily of property and equipment, goodwill and other intangibles. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These assets are periodically reviewed to assure the net realizable value from the estimated future production based on forecasted sales exceeds the carrying value of the assets. In 2004, the Company recorded an impairment from abandonment of long-term assets of $488,000 based on analysis of future cash flows; in 2003, an impairment from abandonment of long-term assets of $379,000 was recorded. NET SALES TO GEOGRAPHICAL AREAS 2004 2003 2002 ---- ---- ---- United States.......... $23,016,596 $23,114,839 $20,175,564 Germany................ 2,299,733 1,921,226 1,657,598 Singapore.............. 2,045,673 2,180,837 1,162,104 Switzerland............ 1,332,322 694,265 480,832 Canada................. 1,225,414 1,735,565 1,579,251 United Kingdom......... 886,183 834,585 158,000 Hong Kong.............. 862,588 1,684,001 612,862 China.................. 862,314 854,302 76,100 Japan.................. 643,628 546,602 1,209,584 France................. 201,369 149,000 2,780,196 All other countries.... 1,806,792 2,485,942 5,082,511 ----------- ----------- ----------- Consolidated........... $35,182,612 $36,202,164 $34,974,602 =========== =========== =========== 37 Geographic net sales are allocated based on the location of the customer. All other countries include net sales primarily to various countries in Europe and in the Asian Pacific. In 2004 and 2002, no one customer accounted for more than 10 percent of the Company's consolidated net sales. During 2004 the top five customers accounted for approximately $12 million or 34 percent of the Company's consolidated net sales. In 2003 Sonic Innovations, one of the Company's hearing-health customers accounted for $4.5 million or 12.4 percent of the Company's consolidated net sales. 6. GOODWILL AND OTHER INTANGIBLE ASSETS As of January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Statement 142 set forth new financial and reporting standards for the acquisition of intangible assets, other than those acquired in a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized but tested for impairment on a periodic basis. The Company discontinued the amortization of goodwill effective January 1, 2002. The provisions of Statement 142 also required the completion of a transitional impairment test with any impairment identified accounted for as a cumulative effect of a change in accounting principle. As of the date of adoption, the Company had unamortized goodwill from continuing operations in the amount of $14,693,000. The Company determined the goodwill was impaired and recognized an impairment charge of $9,428,000. The charge was recognized as a cumulative change in accounting principle in the 2002 consolidated statement of operations. Within its discontinued Heat Technology operations, The Company also determined goodwill had been impaired and wrote off the remaining net goodwill of $1,124,000. The combined net charge totaled $10,552,000. Changes in the estimated future cash flows from these businesses could have a significant impact on the amount of any future impairment, if any. Prior to the adoption of Statement 142, the Company assessed the recoverability of intangible assets by determining whether the amortization of the balance over its remaining life could be recovered through projected undiscounted future cash flows of the business for which the intangible assets arose. No impairment was recognized in prior years. In accordance with Statement 142, the Company discontinued amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net earnings (loss) per share adjusted for goodwill, net of the related income tax effects, follows: DECEMBER 31, 2002 (restated) -------- Net loss before accounting change.................. $(12,358,843) Cumulative effect in change in accounting.......... (9,428,354) ------------ Adjusted net loss.................................. $(21,787,197) ============ Earnings per share: Net loss before accounting change.............. $ (2.41) Cumulative effect of change in accounting...... (1.84) ------------ Adjusted net loss.............................. $ (4.25) ============ There was no change in the carrying amount of goodwill from continuing operations for the years ended December 31, 2004 and 2003. After taking into consideration the growth in the overall hearing health, professional audio and medical markets during 2004, revised future industry estimates, and the overall market capitalization of the Company, the earnings forecast for the next five years was revised and indicated no additional impairment charge was required in 2004. The fair value was estimated using the expected present value of future cash flows. In determining the discount factor, the Company took into consideration its size, factors for other public companies in similar markets and qualitative factors in developing discount rates. 38 7. INVENTORIES Inventories consist of the following: FINISHED RAW WORK-IN PRODUCTS AND MATERIALS PROCESS COMPONENTS TOTAL --------- ------- ---------- ----- DECEMBER 31, 2004 Domestic...... $1,635,079 $ 668,059 $ 863,320 $3,166,458 Foreign....... 605,115 340,647 175,423 1,121,185 ---------- ---------- ---------- ---------- Total....... $2,240,194 $1,008,706 $1,038,743 $4,287,643 ========== ========== ========== ========== 2003 Domestic...... $2,222,071 $1,248,009 $ 931,912 $4,401,992 Foreign....... 864,056 302,489 141,105 1,307,650 ---------- ---------- ---------- ---------- Total....... $3,086,127 $1,550,498 $1,073,017 $5,709,642 ========== ========== ========== ========== 8. NOTES PAYABLE AND LONG-TERM DEBT NOTES PAYABLE Notes payable at December 31, 2004, and 2003 are summarized below: 2004 2003 -------- -------- Notes payable: Short term borrowings, Europe....... $ -- $1,473,618 Short-term borrowings, domestic..... 3,171,447 4,258,253 Short-term borrowings, Singapore.... 568,946 538,792 ---------- ---------- Total notes payable................. $3,740,393 $6,270,663 ========== ========== In July 2003, the Company's French subsidiary, Selas SAS filed insolvency in France. Short-term debt in the amount of $7,852,000 was assumed by domestic operations. $6,378,000 was subsequently paid against the facility from proceeds of the sale of its Tire Holder and Lift business. European borrowings had pertained to Selas SAS, the Company's French subsidiary that filed insolvency. This debt was guaranteed by the Company and has been transferred to domestic operations subsequent to December 31, 2003. During 2004, the debt was refinanced and is now included with the Company's long term debt. For domestic operations, the maximum amounts of short-term borrowings and bank guarantees at any month end were $6,462,000 in 2004, $13,270,000 in 2003, and $11,365,000 in 2002. The average short-term borrowings and bank guarantees outstanding during 2004, 2003 and 2002 amounted to $3,681,000, $10,227,000 and $9,512,000, respectively. The average short-term interest rates in 2004, 2003 and 2002 for outstanding borrowings were 7.2 percent, 4.2 percent, and 5.2 percent, respectively. The maximum amounts of short-term borrowings on the domestic facility at any month end in 2004 were $3,685,000. The average short-term borrowings outstanding during 2004 were $3,205,000. The average short-term interest rate on the facility in 2004 was 7.30 percent. A subsidiary of The Company located in Singapore has three credit facilities with a combined limit totaling $1,098,000, of which $553,000 was outstanding at December 31, 2004. Maximum borrowings were $553,000 and average borrowings were $413,000. Borrowings under the three facilities on December 31, 2004, carried an average interest rate of 5.34 percent, payable monthly. The Singapore credit facilities have no specific term date, but are reviewed annually. 39 LONG-TERM DEBT Long-term debt at December 31, 2004, and 2003 is summarized below: 2004 2003 -------- -------- Long-term debt: Term loans, domestic....... $1,458,204 $1,966,800 Less: current maturities... 1,458,204 1,966,800 ---------- ---------- $ -- $ -- ========== ========== In 2004, the Company consolidated its short-term European and some of its domestic borrowings into a $5,508,000 domestic term loan. The terms of the domestic loan agreement required quarterly principal payments of $300,000 on the term loan. In addition, as required by the loan agreement, the Company paid down a large portion of this loan using proceeds from the sale of its property in Dresher, Pennsylvania. At December 31, 2004, the domestic borrowings under the credit agreement bore interest, payable monthly, at 8.25 percent (prime plus 3.0 percent). CREDIT FACILITIES In 2004, the Company did not meet certain covenants during the first, and fourth quarters, for which it obtained waivers from the bank. On March 30, 2005, the Company entered into amended agreements for its domestic revolver and long-term debt. The new facility provides the Company with a revolving credit limit of $4.5 million which was reduced to $4.0 million upon the sale of burners and components business in the first quarter of 2005. A portion of the proceeds from the sale of the Burners and Components business was used to payoff the approximately $1.5 million outstanding principal balance on the term loan. These facilities expire on April 1, 2006. The interest rate on these facilities is prime plus 3.0 percent, the terms of the agreement increase this rate to prime plus 3.5 percent on July 1, 2005, prime plus 4.0 percent on October 1, 2005 and prime plus 4.5 percent on January 1, 2006. A commitment fee of .25% per annum is payable on the unborrowed portion of the revolving credit facility. In addition, the Company was required to pay a commitment fee of $45,000, of which $25,000 was due upon closing, with $5,000 due at the end of each of the next four quarters. In connection with the amended agreement, the Company has pledged as collateral substantially all of the assets of its domestic subsidiaries with a book value totaling approximately $8.6 million. The domestic term loan and the revolving credit facility are secured by the Company's domestic assets and the Company's domestic subsidiaries' stock. The agreements contain restrictive covenants regarding the payment of cash dividends, incurrence of additional debt, issuance of equity, maintenance of working capital, net worth, shareholders' equity, and capital equipment expenditures along with the maintenance of certain financial ratios. The Company and its domestic subsidiaries are required to maintain consolidated tangible capital funds of at least $6.5 million, a consolidated current ratio of at least 1.0, and a consolidated fixed charge coverage ratio of at least 1.0 on a year-to-date basis, which will be calculated excluding mandatory principal repayments. In addition the Company is required to maintain a ratio of consolidated total liabilities to consolidated tangible capital funds of 3.0, which was reset to 2.25 after the sale of the Burners and Components business in the first quarter of 2005. At December 31, 2004, the Company was in compliance with all covenants of the amended agreement. Management believes that the Company will be able to maintain the amended covenants through April 1, 2006. The Company's ability to pay the principal and interest on its indebtedness as it comes due will depend on the Company's 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. The Company believes that the amended credit facility combined with funds expected to be generated from operations, the sale of assets, the available borrowing capacity through its revolving credit loan facilities, the potential sale of certain assets curtailment of the dividend payment and control of 40 capital spending will be sufficient to meet its anticipated cash requirements for operating needs through April 1, 2006. If, however, the Company does not generate sufficient cash or complete such financings on a timely basis, we may be required to seek additional financing or sell equity on terms which may not be available or which may be available only on unfavorable terms. No assurance can be given that any refinancing, additional borrowing or sale of equity will be possible when needed or that the Company will be able to negotiate acceptable terms. In addition, the Company's access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as its own financial condition. The fair value of the Company's debt is estimated using standard pricing models that take into consideration the present value of future cash flows as of the balance sheet date. Since the interest rates on the majority of the Company's long-term debt at December 31, 2004, were renegotiated in March 2005 and mature within 16 months of the balance sheet date, the carrying value approximates the fair value. 9. OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 2004, and 2003 are as follows: 2004 2003 -------- -------- Salaries, wages and commissions..................... $1,889,769 $1,522,232 Taxes, including payroll withholdings and excluding income taxes............................ 45,112 48,788 Accrued severance benefits.......................... 100,000 175,000 Accrued professional fees........................... 230,756 281,223 Amount due buyer of French subsidiary (see note 3).. -- 796,130 Other............................................... 373,252 593,107 ---------- ---------- $2,638,889 $3,416,480 ========== ========== 10. DOMESTIC AND FOREIGN INCOME TAXES Domestic and foreign income taxes (benefits) are comprised as follows: YEARS ENDED DECEMBER 31, ------------------------------------------- 2004 2003 2002 (restated) (restated) (restated) -------- -------- -------- Current Federal.................... $ 45,433 $ (709,294) $ (697,283) State...................... 5,500 6,521 (74,530) Foreign.................... 183,248 39,632 (163,477) ----------- ----------- ----------- 234,181 (663,141) (935,290) ----------- ----------- ----------- Deferred Federal.................... 890,230 510,318 (194,115) State...................... -- 556,962 (30,152) Foreign.................... 15,386 80,460 -- ----------- ----------- ----------- 905,616 1,147,740 (224,267) ----------- ----------- ----------- Income taxes (benefit)......... $ 1,139,797 $ 484,599 $(1,159,557) =========== =========== =========== Income (loss) before income taxes is as follows: Foreign.................... $ 663,685 $ 373,595 $ (433,396) Domestic................... (1,429,125) (3,908,538) (2,528,461) ----------- ----------- ----------- $ (765,440) $(3,547,786) $(2,974,700) =========== =========== =========== 41 The following is a reconciliation of the statutory federal income tax rate to the effective tax rate based on income (loss): YEARS ENDED 31 -------------- 2004 2003 2002 (restated) (restated) (restated) -------- -------- -------- Tax provision at statutory rate.......... 34.0% 34.0% 34.0% Change in valuation allowance............ (187.0) (48.7) -- Effect of foreign tax rates.............. 3.5 .1 .4 State taxes net of federal benefit....... (.6) (.2) 3.1 Tax benefits related to export sales..... 3.6 1.6 1.9 Other.................................... (2.4) (.4) (.4) ----- ---- ---- Domestic and foreign income tax rate..... (148.9)% (13.6)% 39.0% ===== ==== ==== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004, and 2003 are presented below:
2004 2003 ---- ---- Deferred tax assets: Net operating loss carry forwards........................................ $ 5,811,346 $5,635,490 Post-retirement benefit obligations...................................... 1,143,141 1,198,465 Goodwill amortization.................................................... 566,462 648,899 State income taxes....................................................... 605,554 605,554 Inventory reserves....................................................... 497,244 359,019 Guarantee obligations and estimated future costs of service accruals..... 85,996 53,006 Compensated absences, principally due to accrual for financial reporting purposes.................................................... 154,713 159,126 Other.................................................................... 180,206 157,791 ----------- ---------- Total gross deferred tax assets....................................... 9,044,662 8,817,350 Less: valuation allowance............................................ 8,317,505 7,211,013 ----------- ---------- Net deferred tax assets............................................... 727,157 1,606,337 ----------- ---------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capitalized interest.................................................. (609,315) (600,815) Other.................................................................... (261,744) (238,821) ----------- ---------- Total gross deferred tax liabilities..................................... (871,059) (839,636) ----------- ---------- Net deferred tax assets (liabilities).................................... $ (143,902) $ 766,701 =========== ==========
Domestic and foreign deferred taxes are comprised as follows:
DECEMBER 31, 2004 FEDERAL STATE FOREIGN TOTAL ------- ----- ------- ------ Current deferred asset............................. $ -- $ -- $ -- $ -- Non-current deferred asset (liability)............. -- -- (143,902) (143,902) --------- ------- --------- --------- Net deferred tax asset (liability)................. $ -- $ -- $(143,902) $(143,902) ========= ======= ========= ========= DECEMBER 31, 2003 FEDERAL STATE FOREIGN TOTAL ------- ----- ------- ------ Current deferred asset............................. $ 890,230 $ -- $ -- $ 890,230 Non-current deferred asset (liability)............. -- -- (123,529) (123,529) --------- ------- --------- --------- Net deferred tax asset............................. $ 890,230 $ -- $(123,529) $ 766,701 ========= ======= ========= =========
42 The net change in the total valuation allowance for the year ended December 31, 2004 was an increase of approximately $1.1 million. A portion of the 2004 net operating loss from continuing operations was utilized to offset income from discontinued operation and, therefore, is not included in the effective tax rate reconciliation. As a result, the change in the valuation allowance reflected in the disclosure of deferred tax assets and liabilities does not agree to the change reflected in the effective tax rate reconciliation. 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 $16.4 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. 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 ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, historical taxable income including available net operating loss carryforwards to offset taxable income, and projected future taxable income in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, along with reasonable and prudent tax planning strategies and the expiration dates of carryforwards, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances, at December 31, 2004. 11. 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 2004, 2003 and 2002 was $267,796, $277,378 and $276,769 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, 2004 and 2003 for post-retirement medical benefits: 2004 2003 ---- ---- Change in Projected Benefit Obligation Projected benefit obligation at January 1......... $ 2,142,274 $ 2,016,995 Service cost (excluding administrative expenses).. 25,246 25,461 Interest cost..................................... 110,231 131,506 Amendments........................................ -- -- Actuarial (gain) loss............................. (177,901) 124,093 Benefits paid..................................... (178,217) (155,781) ----------- ----------- Projected benefit obligation at December 31....... 1,921,633 2,142,274 ----------- ----------- Change in Fair Value of Plan Assets Employer contribution............................. 178,217 155,781 Benefits paid..................................... (178,217) (155,781) ----------- ----------- Fair value of plan assets at December 31.......... -- -- ----------- ----------- Funded status..................................... 1,921,633 2,142,274 Unrecognized net actuarial gain (loss)............ (42,760) (135,141) Unrecognized prior service cost................... (745,713) 820,284 ----------- ----------- Accrued post-retirement benefit cost.............. $ 2,710,106 $ 2,827,417 =========== =========== 43 Accrued post-retirement medical benefit costs are classified as other post-retirement benefit obligations as of December 31, 2004 and 2003. Net periodic post-retirement medical benefit costs for 2004, 2003 and 2002 include the following components:
2004 2003 2002 ---- ---- ---- Service cost ..................................... $ 25,246 $ 25,461 $ 29,676 Interest cost..................................... 110,231 131,506 132,800 Amortization of unrecognized prior service cost... (74,571) (71,575) (71,575) --------- --------- --------- Net periodic post-retirement medical benefit cost. $ 60,906 $ 85,392 $ 90,901 ========= ========= =========
For measurement purposes, a 10.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 2004; the rate was assumed to decrease gradually to 5% by the year 2009 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, 2004 by $180,095 and the aggregate of the service and interest cost components of net periodic post-retirement medical benefit cost for the year ended December 31, 2004 by $13,861. The assumptions used years ended December 31 were as follows: 2004 2003 ---- ---- Annual increase in cost of benefits 10.00% 11.00% Discount rate used to determine year-end obligations 5.75% 6.00% Discount rate used to determine year-end expense 6.00% 6.75% The following benefit payments, which reflect expected future service, are expected to be paid: 2005........................ $ 178,412 2006........................ $ 175,558 2007........................ $ 163,888 2008........................ $ 163,160 2009........................ $ 164,423 Years 2010 - 2014........... $ 759,595 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, 2004 and 2003 are illustrated below. 2004 2003 ---- ---- Current portion..................................... $ 104,861 $ 104,861 Long term portion................................... 795,852 685,757 --------- --------- Total liability at December 31...................... $ 900,713 $ 790,618 ========= ========= 44 12. CURRENCY TRANSLATION ADJUSTMENTS All assets and liabilities of foreign operations 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 foreign operations is the currency of the country in which the entity resides; such currencies are the European euro, and the Singapore 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. As a result of the insolvency of the Company's French subsidiary Selas SAS, a considerable amount of Euro denominated debt, has been recorded by the parent company. This debt is adjusted as of the balance sheet date to reflect fluctuations in the Euro exchange rate. Gains and losses arising from foreign currency transactions are reflected in the consolidated statements of operations as incurred. This debt was refinanced in 2004, as a result, as of December 31, 2004 the Company no longer has any Euro denominated debt. Foreign currency transaction amounts included in the statements of operation include a gain of $14,000 in 2004 and losses of $141,000 and $23,000 in 2003 and 2002, respectively 45 13. COMMON STOCK AND STOCK OPTIONS Under the various plans, executives, employees and outside directors receive awards of options to purchase common stock. Under all awards, the terms are fixed at the grant date. Generally, the exercise price equals the market price of the Company's stock on the date of the grant. Options under the plans generally vest from one to five years, and the option's maximum term is 10 years. Options issued to directors vest from one to three years. Stock option activity during the periods indicated is as follows: Weighted-average Number of Shares Exercise Price ---------------- -------------- Outstanding at January 1, 2002................ 619,400 $6.63 Options forfeited......................... (100,350) 5.99 Options granted........................... 192,500 1.99 --------- Outstanding at December 31, 2002.............. 711,550 $5.48 Options forfeited......................... (93,400) 7.34 Options expired........................... (151,250) 5.32 Options granted........................... 75,000 3.05 --------- Outstanding at December 31, 2003.............. 541,900 $4.86 Options forfeited......................... (127,000) 3.07 Options granted........................... 246,000 2.70 --------- Outstanding at December 31, 2004.............. 660,900 $4.40 Exercisable at end of year.................... 380,215 ========= Available for future grant at January 1, 2004. 1,608,100 Available for future grant at December 31, 2004........................... 1,489,100 ========= The weighted-average per share fair market value of options granted was $2.22, $1.67, and $.92, in 2004, 2003, and 2002, respectively, using the Black-Scholes option-pricing model. For more information on the assumptions used in the Black-Scholes option-pricing model, please refer to note 1, "Stock Option Plan". The following summarizes information about the Company's stock options outstanding at December 31, 2004:
Outstanding Options Options Exercisable --------------------------------------------- --------------------------- Weighted Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices At 12/31/04 Contractual Life Price At 12/31/04 Price ------ ----------- ---------------- ----- ----------- ----- $2.05 - 2.35 233,500 8.36 $2.19 83,575 $2.12 $2.93 - 3.70 233,800 7.82 $3.10 103,040 $3.21 $5.35 - 5.35 57,000 1.00 $5.35 57,000 $5.35 $9.06 - 10.50 136,600 4.00 $10.02 136,600 $10.02
46 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) As described in Note 2, "Restatement of Financial Statements", we have made corrections to our consolidated statements of operations related to accounting for research and development cost. The effect of the Restatement on our quarterly results of operations in 2004 and 2003 is presented in an accompanying table. The following is a tabulation of unaudited quarterly results of operations (in thousands, except for per share data).
2004 (a) 2003 (a) ---- ---- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (restated) (restated) (restated) (restated) (restated) (restated) (restated) (restated) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Sales, net (b)...................... $9,338 $8,354 $8,524 $ 8,965 $8,993 $9,675 $9,232 $8,302 Gross profit........................ 2,421 2,058 1,675 1,908 2,632 2,739 2,437 756 Income (loss) from continuing operations net of tax........... (714) 1,359 (975) (1,576) (106) (123) (1,748) (2,055) Income (loss) from discontinued operations net of tax (b)....... (79) 609 286 554 (176) (1,189) 870 (518) Extraordinary gain from discontinued operations......... -- -- 684 -- -- -- -- -- Net income (loss)................... (793) 1,968 (5) (1,022) (281) (1,312) (878) (2,573) Earnings (loss) per share (c): Basic income (loss) per share Continuing operations........... $ (.14) $ .26 $ (.19) $ (.31) $ (.01) $ (.03) $ (.34) $ (.40) Discontinued operations......... (.02) .12 .06 .11 (.03) (.23) .17 (.10) Extraordinary gain from discontinued operations...... --- --- .13 --- --- --- --- --- Net loss........................ $ (.16) $ .38 $ -- $ (.20) $ (.04) $ (.26) $ (.17) $ (.50) ====== ====== ====== ======= ====== ====== ====== ====== Diluted income (loss) per share Continuing operations........... $ (.14) $ .26 $ (.19) $ (.31) $ (.01) $ (.03) $ (.34) $ (.40) Discontinued operations......... (.02) .12 .06 .11 (.03) (.23) .17 (.10) Extraordinary gain from discontinued operations...... --- --- .13 --- --- --- --- --- Net loss........................ $ (.16) $ .38 $ -- $ (.20) $ (.04) $ (.26) $ (.17) $ (.50) ====== ====== ====== ======= ====== ====== ====== ======
a) The effect of the Restatement on our quarterly income from continuing operations net of tax and our quarterly net income for 2004 was $11,000 for the first quarter; ($29,000) for the second quarter; ($6,000) for the third quarter; and $77,000 for the fourth quarter. The effect of the Restatement for 2003 was ($45,000) for the first quarter; $19,000 for the second quarter; ($68,000) for the third quarter; and $24,000 for the fourth quarter. b) 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. c) The Company reclassified its Heat Technology business, as discontinued operations in the fourth quarter of 2004; this includes the burners and components portion of the business which the Company sold in the first quarter of 2005. The Company' Tire Holders, Lifts and Related Products business was also included in discontinued operations until it was sold in July 2003. Accordingly, the historical financial information has been reclassified. See note 2 to the consolidated financial statements. 47 15. INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted loss per share:
2004 2003 2002 ------------------------------- --------------------------------- --------------------------------- Per Per Income Shares Share Loss Shares Per Share Loss Shares Share Numerator Denominator Amount Numerator Denominator Amount Numerator Denominator Amount --------- ----------- ------ --------- ----------- ------ --------- ----------- ------ BASIC LOSS PER SHARE Income (loss) available to common shareholders $147,826 5,129,214 $ .03 $(5,045,322) 5,124,433 $(.98) $(21,787,197) 5,119,214 $(4.25) ===== ===== ====== EFFECT OF DILUTIVE SECURITIES Stock options --- 2,627 --- --- --- --- -------- --------- ----------- --------- ------------ ---------- DILUTED LOSS PER SHARE $ 47,826 5,131,841 $ .03 $(5,045,322) 5,124,433 $(.98) $(21,787,197) 5,119,214 $(4.25) ======== ========= ===== =========== ========= ===== ============ ========= ======
The Company excluded stock options of 367,800, 348,300, 0, in 2004, 2003, and 2002, respectively, from the computation of the diluted loss per share as their effect would be anti-dilutive. For additional disclosures regarding the stock options, see note 13. 16. CONTINGENCIES AND COMMITMENTS. The Company is a defendant along with a number of other parties in approximately 123 lawsuits as of December 31, 2004, (approximately 101 lawsuits as of December 31, 2003) 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. Certain carriers have informed the Company that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. The Company has requested that the carriers substantiate this situation. The Company believes it has additional policies available for other years which have been ignored by the carriers. As settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, the Company believes when settlement payments are applied to these additional policies, the Company will have availability under the years deemed exhausted. The Company does not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits, to which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company's consolidated financial position or results of operations. The Company is also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect the Company's consolidated financial position, liquidity or results of operations. 48 Total rent expense for 2004, 2003 and 2002 under leases pertaining primarily to engineering, manufacturing, sales and administrative facilities, with an initial term of one year or more, aggregated $1,156,000, $1,096,000, and $1,023,000, respectively. Remaining rentals payable under such leases are as follows: 2005 - $977,000; 2006 - $928,000; 2007 - $810,000; 2008 - $700,000; 2009 - $368,000 and thereafter - $675,000. 17. RELATED-PARTY TRANSACTIONS One of the Company's subsidiaries leases office and factory space from a partnership consisting of three present or former officers of the subsidiary, including Mark Gorder, the President and Chief Executive Officer of the Company. The subsidiary is required to pay all real estate taxes and operating expenses. In the opinion of management, the terms of the lease agreement are comparable to those which could be obtained from unaffiliated third parties. The total rent expense incurred under the lease was approximately $368,000 for 2004, $336,000 for 2003 and $330,000 for 2002. Annual lease commitments approximate $368,000 through October 2011. 18. SUBSEQUENT EVENT On March 31, 2005 the Company sold its burner and component business. This business consisted of the operating assets and liabilities of Selas Corporation of America (Dresher, Pennsylvania), Nippon Selas (Tokyo, Japan) and Selas Waermetechnik (Ratingen, Germany). The total purchase price was approximately $3.6 million, subject to adjustment, of which approximately $2.7 million was paid in cash and $900,000 was paid in the form of a subordinated promissory note. A portion of the proceeds from the transactions were used to pay off the Company's domestic $1.5 million term loan as required by its loan agreement. The remaining proceeds were primarily used to reduce the Company's outstanding balance on its revolving credit facility. Commensurate with the transaction, the Company reduced its maximum availability under its revolving credit facility from $4.5 million to $4 million (see note 8). With the completed sale of the burner and components business, the Company has 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. 19. STATEMENTS OF CASH FLOWS Supplemental disclosures of cash flow information: YEARS ENDED DECEMBER 31, ------------------------ 2004 2003 2002 ---- ---- ---- Interest received......... $ 3,091 $ 7,455 $ 20,990 Interest paid............. $431,148 $507,157 $688,885 Income taxes paid......... $ 44,070 $ 38,969 $321,121 49 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders IntriCon Corporation: We have audited the accompanying consolidated balance sheets of IntriCon Corporation (formerly Selas Corporation of America) and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IntriCon Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. As discussed in note 2 to the consolidated financial statements, the Company has restated its consolidated financial statements as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004. As discussed in note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. /s/ KPMG LLP Minneapolis, Minnesota March 18, 2005, except as to notes 3, 4, 8 and 18 which are as of March 31, 2005 and note 2 which is as of June 24, 2005 50 DIRECTORS EXECUTIVE OFFICERS Michael J. McKenna Mark S. Gorder Chairman of IntriCon Board, President and Chief Executive Officer, Retired Vice Chairman, President Resistance Technology, Inc. and and Director, Crown Cork & Seal President and Chief Executive Officer Company Inc. IntriCon Corporation Nicholas A. Giordano Business Consultant, Former Chairman and Chief Executive Officer Philadelphia Stock Exchange Mark S. Gorder President and Chief Executive Officer IntriCon Corporation Robert N. Masucci Chief Executive Officer, Barclay Brand Ferndon, Inc, and Chairman of Montgomery Capital Advisors, Inc. LEGAL COUNSEL Blank Rome LLP Philadelphia, Pennsylvania AUDITORS KPMG LLP Minneapolis, Minnesota TRANSFER AGENT AND REGISTRAR Stock Trans 44 West Lancaster Avenue Ardmore, Pennsylvania 19003 www.stocktrans.com 1-800-733-1121 INTRICON CORPORATION HEADQUARTERS 1260 RED FOX ROAD ARDEN HILLS, MINNESOTA 55112 PHONE: 651-636-9770 FAX: 651-636-8944 WWW.INTRICON.COM Resistance Technology, Inc. RTI Tech PTE LTD 1260 Red Fox Road 26 Ayer Rajah Crescent Arden Hills, Minnesota 55112 #04-04 www.rti-corp.com Singapore 139944 RTI Electronics, Inc. Resistance Technology Gmbh 1800 Via Burton Street Arabellastrasse 17/4 Anaheim, California 92806 8000 Munich, Germany INTRICON CORPORATION WORLDWIDE HEADQUARTERS - ARDEN HILLS, MINNESOTA 55112 PHONE 651-636-9770 FAX 651-636-8944 WWW.INTRICON.COM EX-23 3 int052815_ex23.txt EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors IntriCon Corporation: We consent to the incorporation by reference in the registration statement No. 33-33712 on Form S-3, and in the registration statements (No. 333-16377, No. 333-66433, and No. 333-59694) on Form S-8 of IntriCon Corporation (formerly Selas Corporation of America) and subsidiaries of our reports dated March 18, 2005, except as to notes 3, 4, 8 and 18, which is as of March 31, 2005 and note 2 which is as of June 24, 2005, relating to the consolidated balance sheets of IntriCon Corporation and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows and related financial statement schedule for each of the years in the three-year period ended December 31, 2004, which reports are included in the December 31, 2004 annual report on Form 10-K of IntriCon Corporation. Our reports refer to the Company's restatement of the consolidated financial statements as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004. As discussed in note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. /s/ KPMG LLP Minneapolis, Minnesota June 24, 2005 EX-31.1 4 int052815_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Mark S. Gorder certify that: 1.I have reviewed this annual report on Form 10-K/A of IntriCon Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Intentionally Omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 27, 2005 /s/ Mark S. Gorder --------------------------- Chief Executive Officer EX-31.2 5 int052815_ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, William J. Kullback certify that: 1.I have reviewed this annual report on Form 10-K/A of IntriCon Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Intentionally Omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 27, 2005 /s/William J. Kullback ---------------------------- Chief Financial Officer EX-32.1 6 int052815_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark S. Gorder, Chief Executive Officer (principal executive officer) of IntriCon Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) the annual report on Form 10-K/A of the Company for the year ended December 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 27, 2005 /s/ Mark S. Gorder ------------------------------ Mark S. Gorder President and Chief Executive Officer (principal executive officer) The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document. EX-32.2 7 int052815_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, William J. Kullback, Chief Financial Officer (principal financial officer) of IntriCon Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) the annual report on Form 10-K/A of the Company for the year ended December 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 27, 2005 /s/ William J. Kullback ------------------------------ William J. Kullback Chief Financial Officer and Treasurer (principal financial officer) The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----