-----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, P8OwiC+cYkGSnrczGMnLU9BCcam5NZxzabWjKntrylryIvSjNjTW6itrKGKx5VtO ukgZDQCUadjfRjJ3B9aw9g== 0000891554-02-000827.txt : 20020414 0000891554-02-000827.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891554-02-000827 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVEX INC CENTRAL INDEX KEY: 0000050601 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 411223933 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13143 FILM NUMBER: 02548598 BUSINESS ADDRESS: STREET 1: 530 ELEVENTH AVENUE SOUTH CITY: HOPKINS STATE: MN ZIP: 55343-9904 BUSINESS PHONE: 6129384155 10-Q 1 d70718_10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 [x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the Period ended December 31, 2001. OR [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. Commission File Number: 0-13143 INNOVEX, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1223933 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359-9003 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (763) 479-5300 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 --- --- As of February 2, 2002, 15,053,349 shares of the registrant's common stock, $.04 par value per share, were outstanding. Exhibit Index, page 12 PART 1: ITEM 1 FINANCIAL INFORMATION
INNOVEX, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited) December 31, September 30, 2001 2001 - ------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and equivalents $ 2,422,027 $ 1,798,272 Accounts receivable, net 17,368,364 19,315,306 Inventories 14,815,267 13,782,195 Other current assets 6,283,489 6,465,201 ------------ ------------ Total current assets 40,889,147 41,360,974 Property, plant and equipment, net of accumulated depreciation of $30,887,000 and $27,534,000 84,140,375 86,738,970 Intangible and other assets, net of accumulated amortization of $1,316,000 and $1,316,000 3,000,971 3,000,971 Deferred income taxes 9,602,867 9,602,867 Other assets 2,130,794 1,962,759 ------------ ------------ $139,764,154 $142,666,541 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 8,953,492 $ 9,467,354 Line of credit 14,427,221 11,900,000 Accounts payable 16,869,262 16,438,885 Accrued compensation 1,678,390 1,617,672 Other accrued liabilities 4,472,167 7,819,837 ------------ ------------ Total current liabilities 46,400,532 47,243,748 Other long-term liabilities 845,000 845,000 Long-term debt, less current maturities 24,623,841 26,403,021 Stockholders' equity: Common stock, $.04 par value; 30,000,000 shares authorized, 15,053,349 and 15,044,249 shares issued and outstanding 602,134 601,770 Capital in excess of par value 17,753,017 17,736,455 Retained earnings 49,539,630 49,836,547 ------------ ------------ Total stockholders' equity 67,894,781 68,174,772 ------------ ------------ $139,764,154 $142,666,541 ============ ============
See accompanying notes to condensed consolidated financial statements. Page 2 of 21 INNOVEX, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, 2001 2000 ---- ---- Net sales $ 37,842,859 $ 38,576,884 Costs and expenses: Cost of sales 32,069,495 32,550,180 Selling, general and administrative 4,228,609 4,205,031 Engineering 1,393,783 1,695,565 Net interest (income) expense 769,746 919,023 Net other (income) expense (200,587) 90,109 ------------ ------------ Income (loss) before taxes (418,187) (883,024) Income taxes (121,270) (256,077) ------------ ------------ Net income (loss) $ (296,917) $ (626,947) ============ ============ Net income (loss) per share: Basic ($ 0.02) ($ 0.04) ============ ============ Diluted ($ 0.02) ($ 0.04) ============ ============ Weighted average shares outstanding: Basic 15,051,849 14,960,126 ============ ============ Diluted 15,051,849 14,960,126 ============ ============
See accompanying notes to condensed consolidated financial statements. Page 3 of 21 INNOVEX, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (296,917) $ (626,947) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,375,000 3,328,393 Other non-cash items (154,116) 42,965 Changes in operating assets and liabilities: Accounts receivable 1,946,942 6,362,352 Inventories (1,033,072) (1,592,719) Other current assets 181,712 (725,162) Accounts payable 430,377 (3,292,254) Other liabilities (3,186,617) (610,989) Income taxes payable (100,335) 661,353 ----------- ----------- Net cash provided by (used in) operating activities 1,162,974 3,546,992 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (791,943) (4,173,919) Proceeds from sale of assets 1,619 28,580 ----------- ----------- Net cash provided by (used in) investing activities (790,324) (4,145,339) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (2,292,389) (1,806,830) Issuance of long-term debt -- 1,864,732 Net activity on line of credit 2,526,568 800,000 Proceeds from exercise of stock options 16,926 344,697 ----------- ----------- Net cash provided by (used in) financing activities 251,105 1,202,599 Increase (decrease) in cash and equivalents 623,755 604,252 Cash and equivalents at beginning of year 1,798,272 1,673,486 ----------- ----------- Cash and equivalents at end of period $ 2,422,027 $ 2,277,738 =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest was $911,000 and $1,029,000 in fiscal 2002 and 2001. Income tax payments were $24,000 and $-0- in fiscal 2002 and 2001. See accompanying notes to condensed consolidated financial statements. Page 4 of 21 INNOVEX INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements NOTE 1 - FINANCIAL INFORMATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions on Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of Innovex, Inc. and its subsidiaries (the "Company") after elimination of all significant intercompany transactions and accounts. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of operating results have been made. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. The Company utilizes a fiscal year that ends on the Saturday nearest to September 30. For clarity of presentation, the Company has described all periods as if they end at the end of the calendar quarter. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended September 30, 2001. Preparation of the Company's condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from these estimates. NOTE 2 - RESTRUCTURING CHARGES Manufacturing operations restructuring- The fiscal 2001 second quarter included asset impairment and restructuring charges of $9,754,000 and $10,124,000 related to the restructuring of the Company's manufacturing operations. The restructuring is primarily related to moving manufacturing operations from the Company's Chandler, Arizona facility to the Company's Minnesota locations. The charges were recorded pursuant to a plan announced in January 2001. The charge included approximately $6,380,000 related to asset impairment of property and equipment and $3,374,000 for the impairment of the remaining unamortized balance of the goodwill recorded at the time of the Company's September 1999 acquisition of ADFlex Solutions, Inc. The charge also includes $1,636,000 of inventory written off related to discontinued product lines and accrued liabilities of $2,156,000 for employee severance and benefits and $6,332,000 for facility abandonment costs. The restructuring is substantially complete with the exception of the costs accrued to maintain the leased Chandler facility through the June 2003 lease termination. The fiscal 2000 first quarter includes a $13,785,000 restructuring charge related to restructuring the Company's manufacturing operations. The restructuring is primarily related to closing the Company's Agua Prieta, Mexico facility and moving operations to its facility in Lamphun, Thailand. The charge was recorded pursuant to a plan announced in November 1999. The charge included approximately $6,605,000 related to asset impairment of property and equipment, $356,000 for the write off of inventory and supplies, $176,000 for increasing the accounts receivable reserve, and accrued liabilities of $2,101,000 for facility abandonment costs and $4,547,000 in employee severance and benefits. A change in estimate was recorded in the quarter ending September 2000 increasing the facility abandonment accrual by $1,435,000 and decreasing the accrued employee severance by $1,485,000. The estimate changes were due to higher costs than expected to discontinue the operation of the Mexican facility and higher turnover than expected prior to the payment of severance. The restructuring was substantially complete as of September 2000 with the exception of completing the disposition of the Mexican facility. During the quarter ending March 31, 2001, the Company had a $495,000 increase in the estimate of the facility abandonment charges relating to the length of time required to complete the disposition of the facility located in Agua Prieta, Mexico. Page 5 of 21 The remaining restructuring accrual as of December 31, 2001 totaled $1,858,000. Selected information regarding the restructuring follows (in thousands):
Manufacturing Operations Manufacturing Operations Restructuring - Arizona Restructuring -Mexico -------------------------------- ------------------------------- Facility Employee Facility Employee Abandonment Termination Abandonment Termination Charges Benefits Charges Benefits Total - ------------------------------ ---------------- --------------- ---------------- -------------- --------- Accrual at October 1, 2001 $2,193 $ 824 $ 386 $ 136 $ 3,539 Payments (1,240) (439) (2) -- (1,681) ---------------- --------------- ---------------- -------------- --------- Accrual at December 31, 2001 $ 953 $ 385 $ 384 $ 136 $ 1,858 - ------------------------------ ================ =============== ================ ============== =========
NOTE 3 - EARNINGS PER SHARE The Company's basic net loss per share is computed by dividing net loss by the weighted average number of outstanding common shares. The Company's diluted net loss per share is computed by dividing net loss by the weighted average number of outstanding common shares and common share equivalents relating to stock options when dilutive. Options to purchase 1,470,673 shares of common stock with a weighted average exercise price of $10.89 were outstanding during the three month period ending December 31, 2001, but were excluded from the computation of common share equivalents because they were not dilutive. Options to purchase 805,250 shares of common stock with a weighted average exercise price of $14.97 were outstanding during the three month period ending December 31, 2000, but were excluded from the computation of common share equivalents because they were not dilutive. NOTE 4 - INVENTORIES Inventories are comprised of the following (in thousands): December 31, September 30, 2001 2001 ---------------- ---------------- Raw materials and purchased parts $7,082 $6,155 Work-in-process and finished goods 7,733 7,627 ---------------- ---------------- $14,815 $13,782 ================ ================ NOTE 5 - DERIVATIVE INSTRUMENTS AND HEDGING The Company adopted SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, on November 1, 2000. These Standards require entities to recognize derivatives in their financial statements as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative is recognized in earnings unless certain criteria are met. These Standards also require formal documentation, designation and effectiveness assessment of transactions receiving hedge accounting. The Company formally documents all relations between hedging instruments and the hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. The Company assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. The Company enters into forward exchange contracts, to hedge foreign currency denominated assets or liabilities, that are recorded at fair value with related fair value hedge gains or losses recorded in earnings within the caption other income / expense. Generally, the Company purchases these contracts near the beginning of each quarter while the expiration is near the end of each quarter. The Company does not enter into forward exchange contracts for trading purposes. As of December 31, 2001, the Company had open forward contracts to buy Thai Baht, maturing in January 2002, with notional amounts totaling 600,000,000 Thailand Baht or approximately $13.6 million US dollars. Page 6 of 21 NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. These pronouncements, among other things, eliminate the pooling-of-interest method of accounting for business combinations and require intangible assets acquired in business combinations to be recorded separately from goodwill. The pronouncements also eliminate the amortization of goodwill and other intangible assets with indefinite lives and require negative goodwill be recognized as an extraordinary gain. Goodwill and other intangible assets with indefinite lives will be tested for impairment annually or whenever an impairment indicator arises. The Company adopted these pronouncements as of October 1, 2001 and as a result, has discontinued the amortization of goodwill and any other intangible assets determined to have indefinite useful lives. The Company has determined goodwill relates to one reporting unit for purposes of impairment testing and expects to complete a transitional fair value based impairment test of goodwill by March 31, 2002. In September 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of long-lived Assets. SFAS 144 clarifies the accounting for disposals of long-lived assets. This statement is effective for the Company beginning October 1, 2002. PART I: ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY In the fiscal 1999 fourth quarter, Innovex, Inc. and its subsidiaries (the "Company") acquired ADFlex Solutions, Inc. ("ADFlex") for approximately $37 million. At that time, the Company also obtained credit facilities totaling in principal amount $40 million, which were utilized to refinance ADFlex's outstanding debt, pay down current liabilities and pay related transaction costs. Prior to the acquisition, ADFlex was a leading supplier of flexible circuit based solutions to the computer, computer peripheral, communications and consumer electronics industries. Applications for these flex-based interconnects include cellular phones, hard disk drives, other storage systems, high-end consumer products, notebook computers, pagers and personal communication systems. ADFlex's diverse customer and industry base has reduced Innovex's reliance on the disk drive industry. Prior to the ADFlex acquisition, the Company had one primary operating group, Innovex Precision Components. The Company has combined the ADFlex operation with its existing operations as both operations design and manufacture flexible circuits. Prior to fiscal 1999, the Company operated through three divisions, Precision Products (Precision), Litchfield Precision Components (LPC) and Iconovex. Each division had its own administrative, engineering, manufacturing and marketing organizations. During the quarter ending September 30, 1998, the Company combined the operations of its two core operating divisions, Precision and LPC into one operating division, Innovex Precision Components. The combination merged the rapidly growing LPC flexible circuit fabrication and chemical etching operations with Precision's high volume fine wire manufacturing expertise. The combination also allowed Innovex to leverage Precision's disk drive industry market and trade knowledge to disk drive industry flexible circuit applications as the industry transitioned from wire interconnects. Prior to the divisional combination, the largest division, Precision, developed, engineered and manufactured specialty precision electromagnetic products for original equipment manufacturers ("OEM's"). Lead wire assemblies for the thin film disk drive market were the division's primary product. Lead wire assemblies are fine twisted magnet wires that connect the back end electronics of a disk drive with the inductive or magneto resistive thin film heads that read and write information on the disk. Since the divisional combination, the lead wire assembly revenue declined as anticipated. Page 7 of 21 LPC, prior to the fiscal 1998 divisional combination, designed and manufactured highly complex flexible circuitry and chemically machined components for computer, computer peripheral, medical and other applications. The Company purchased Litchfield Precision Components, Inc. on May 16, 1996. This acquisition reduced the Company's reliance on the disk drive industry while providing an entry into the large and rapidly growing flexible circuit market. Innovex's flexible circuit operation is one of a limited number of operations in the world able to produce flexible circuits with line and spacing tolerances of less than 2 mils for the high-end portion of the flexible circuit market. Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972. Its principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359-9003 and its telephone number is (763) 479-5300. Products are developed and manufactured through the Company's wholly owned subsidiaries, Innovex Precision Components, Inc., Innovex Southwest, Inc., Innovex (Thailand) Ltd. and Innovex Limited. Innovex Precision Components, Inc. and Innovex Ltd. are Minnesota corporations. Innovex Southwest, Inc. is a Delaware corporation and Innovex (Thailand) Ltd. is a Thailand corporation. RESULTS OF OPERATIONS NET SALES - --------- The Company's net sales from operations totaled $37,843,000 for the quarter, down 2% from $38,577,000 reported in fiscal 2001. The small decrease in net sales for the first quarter of fiscal 2002 as compared to fiscal 2001 was due to the increased revenue from the adoption of the Company's FSA product being offset by lower revenue generated by other product lines as a result of economic conditions. Revenue from the disk drive industry generated 77% of the Company's revenue for the quarter as compared to 61% for fiscal 2001. In addition, revenue from consumer applications was 11% versus 14% from the prior year, network system application revenue was 7% versus 16% and revenue from other industry applications was 5% versus 9% from the prior year. Although revenue growth for the next quarter will be limited as a result of the current economic conditions, the last half of 2002 should benefit from improvements in economic conditions and growth in demand for high technology flexible circuit products including the Company's Flex Suspension Assembly (FSA). Significant progress has been made in gaining customer acceptance of the Company's FSA product that will be integral to increasing revenue in fiscal 2002. GROSS MARGINS - ------------- The Company's gross profit as a percent of sales for the quarter decreased to 15.3% from the 15.6% reported for the fiscal 2001 first quarter. The decrease was due to a change in product mix from the prior year. The reduction in labor and overhead costs as a result of the Company's cost cutting measures was offset by increased material costs primarily due to purchased suspensions required for the FSA product. The Company anticipates that gross margins in the last half of fiscal 2002 will improve as a result of the refinement of manufacturing processes transferred to the Company's Minnesota and Thailand locations due to closing the Chandler manufacturing facility. Revenue increases during the last half of fiscal 2002 should also have a favorable impact on gross margins. OPERATING EXPENSES - ------------------ Operating expenses were 14.9% of sales for the current quarter, as compared to 15.3% in the prior year's first quarter. The decrease in operating expenses as a percent of sales for the current year is primarily due to cost reduction measures taken in fiscal 2001 including the closing of the Company's Chandler facility. Fiscal 2002 operating expenses are expected to decrease as a percent of sales due to cost reductions and anticipated increased revenue in the last half of the year. Page 8 of 21 OPERATING PROFIT - ---------------- The consolidated operating profit of $151,000 in the current quarter was virtually unchanged from the $126,000 for the prior year first quarter. NET LOSS - -------- Net loss for the fiscal 2002 first quarter was $(297,000) as compared to $(627,000) for the prior year first quarter. Basic and diluted net loss per share were ($0.02) as compared to ($0.04) for the prior year first quarter. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash and short-term investments increased to $2.4 million at December 31, 2001 from $1.8 million at September 30, 2001. Accounts receivable at December 31, 2001 decreased by $1.9 from September 30, 2001 due to the timing of payment receipts. Inventories at December 31, 2001 increased by $1.0 million from September 30, 2001 due a build up of inventory to ensure adequate availability through the holiday period. Accounts payable at December 31, 2001 increased by $0.4 million primarily due to the increased level of inventory. Other liabilities at December 31, 2001 decreased by $3.2 million primarily due to the payment of restructuring related expenses and severance. Working capital totaled ($5.5) million and ($5.9) million at December 31, 2001 and September 30, 2001. Since September 30, 2001, the Company has invested $0.8 million in capital expenditures. Capital expenditures of approximately $3 million are expected during the remainder of fiscal 2002. These expenditures will include technological upgrades and replacement of equipment. On January 25, 2002, the Company entered into a sale/leaseback transaction that is expected to generate $11.5 million in cash, which funds will be used to reduce bank debt and provide additional working capital for the Company. The transaction is expected to close on or before March 31, 2002, although it is subject to various conditions and, therefore, there can be no assurance that it will close. In addition, the Company is negotiating an expansion of its Thailand credit facilities. The Company believes that with the existing U.S. and Thailand credit facilities, cash generated from operations and cash generated from the sale/leaseback transaction, it will have adequate funds to support projected working capital and capital expenditures for fiscal 2002 and beyond. The Company is considering alternatives for generating additional working capital and will continue to pursue financing opportunities in both Thailand and the U.S to better leverage its assets. The Company's financing needs and the financing alternatives available to it are subject to change depending on, among other things, general economic and market conditions, changes in industry buying patterns, customer acceptance of the FSA product and cash flow from operations. The Company failed to comply with certain covenants under its U.S. credit facility during the current quarter. The attached Sixth Amendment to Credit Agreement includes the bank's waiver of this non-compliance as of December 31, 2001 and a revised second quarter payment schedule. FORWARD LOOKING STATEMENTS - -------------------------- Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this report and in future filings by the Company with the SEC, except for the historical information contained herein and therein, are "forward-looking statements" that involve risks and uncertainties. These risks and uncertainties include the timely availability and acceptance of new products including the FgSA and semiconductor packaging substrates, the impact of Page 9 of 21 competitive products and pricing, interruptions in the operations of the Company's single source suppliers, changes in manufacturing efficiencies and other risks detailed from time to time in the Company's reports filed with the Securities and Exchange Commission. In addition, a significant portion of the Company's revenue is generated from the disk drive, consumer electronics, computer and data storage industries and the global economic downturn has had and a continued economic downturn will continue to have an adverse impact on the Company's operations. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect subsequent events or circumstances or the occurrence of unanticipated events. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes in the Company's market risk during the three-month period ended December 31, 2001. PART II - OTHER INFORMATION Responses to Items 1 through 5 are omitted since these items are either inapplicable or the response thereto would be negative. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10 Sixth Amendment to Credit Agreement. b) Reports on Form 8-K None. Page 10 of 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INNOVEX, INC. Registrant Date: February 14, 2002 By \s\ William P. Murnane William P. Murnane President and Chief Executive Officer By \s\ Thomas Paulson Thomas Paulson Chief Financial Officer Page 11 of 21 INDEX TO EXHIBITS Exhibits Page 10 Sixth Amendment to Credit Agreement 13 Page 12 of 21 EX-10 3 d70718_ex-10.txt CREDIT AGREEMENT Exhibit 10 SIXTH AMENDMENT TO CREDIT AGREEMENT This Amendment, dated as of February 13, 2002, is made by and among INNOVEX, INC., a Minnesota corporation (the "Borrower"), each of the banks appearing on the signature pages hereof, together with such other banks as may from time to time become a party to the Credit Agreement (defined below) pursuant to the terms and conditions of Article VIII of the Credit Agreement (herein collectively called the "Banks" and individually each called a "Bank"), and WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, formerly known as Norwest Bank Minnesota, National Association, a national banking association, in its separate capacity as administrative agent for itself and all other Banks (in such capacity, the "Agent"). Recitals A. The Borrower, the Banks and the Agent are parties to a Credit Agreement dated as of September 15, 1999, a First Amendment to Credit Agreement dated as of June 29, 2000, a Second Amendment to Credit Agreement dated as of December 31, 2000, a Third Amendment to Credit Agreement dated as of March 30, 2001, a Fourth Amendment to Credit Agreement dated as of June 30, 2001 and a Fifth Amendment to Credit Agreement dated as of September 30, 2001 (as so amended and as further amended or restated from time to time, the "Credit Agreement"). B. Under Section 2.9(b) of the Credit Agreement, the Borrower is required to make installment payments on the Term Notes on the first day of January, April, July and October of each year. On January 1, 2002, the Borrower failed to make the required payment on the Term Notes (the "Payment Default"). C. The Borrower has requested that the Banks and the Agent, among other things, agree to accept two installment payments in lieu of the payment that was due and owing on January 1, 2002, waive certain defaults and provide other accommodations. D. The Banks and the Agent are willing to grant the Borrower's requests subject to the terms and conditions set forth below. Agreement ACCORDINGLY, in consideration of the premises and for other good and valuable consideration, the Borrower, the Banks and the Agent agree as follows: 1. Definitions. All capitalized terms used in this Amendment and not otherwise specifically defined in this Amendment shall have the meanings given such terms in the Credit Agreement. In addition, Section 1.1 of the Credit Agreement is hereby amended by restating the following definitions in the appropriate alphabetical location: "Sixth Amendment" means the Sixth Amendment to Credit Agreement, dated as of February 13, 2002, by and among the Borrower, the Banks and the Agent. "Margin" means, with respect to computation of the applicable interest rate on Fundings under a Facility, without regard to the Borrower's Leverage Ratio and status: (a) until the aggregate principal amount outstanding under the Term Note is less than $8,000,000 and the Borrower is not in default under the Credit Agreement, two percent (2.00%) for Floating Rate Advances and three and three-quarters percent (3.75%) for Eurodollar Advances, and (b) after the aggregate principal amount outstanding under the Term Note is less than $8,000,000 and so long as the Borrower is not in default under the Credit Agreement, one and one-half percent (1.50%) for Floating Rate Advances and three and one-quarter percent (3.25%) and for Eurodollar Advances. "Revolving Commitment Amount" shall mean Three Million Five Hundred Thousand Dollars ($3,500,000), being the maximum amount of the Revolving Commitments of all Banks, in the aggregate, to make Revolving Advances to the Borrower pursuant to Section 2.1, subject to reduction in accordance with Section 2.14(a). 2. Eurodollar Advances. As of the date this Amendment is executed, the Borrower shall not be permitted to request any additional Eurodollar Advances under the Credit Agreement. All requests for Advances shall be considered requests for Floating Rate Advances. Notwithstanding the forgoing, as of the date of this Amendment, any existing and outstanding Eurodollar Advances (the "Existing Eurodollar Advances") shall remain outstanding as such until expiration of the applicable Interest Period, whereupon such Eurodollar Advances shall be converted to Floating Rate Advances. Prior to the expiration of the Interest Period, such Existing Eurodollar Advances shall be treated as `Eurodollar Advances' for all purposes under the Credit Agreement, including but not limited to the calculation of interest thereunder. 3. Covenant Waiver. The requirements of Section 5.9 regarding the Borrower's Minimum Interest Coverage Ratio, Section 5.10 regarding the Borrower's Maximum Leverage Ratio, Section 5.11 regarding the Borrower's Minimum Net Worth, and Section 5.12 regarding Borrower's Profitability, in each case as of December 31, 2001 are waived by Banks. Such waivers are limited to the December 31, 2001 Covenant Computation Date. 4. January 2002 Payment. The Borrower hereby agrees to fully satisfy the amounts due and owing to the Banks that were otherwise due and owing to the Banks on January 1, 2002 by paying the Agent $1,562,500 as follows: (a) $781,250 upon the -2- execution of this Agreement (the "Initial Payment"); and (b) $781,250 on or before February 28, 2002 (the "Final Payment"). Upon the date this Amendment is effective, the Agent shall waive the Payment Default. In consideration for the waiver contained in this paragraph 4, the Borrower shall pay the Agent a fee of $35,000, which shall be due and owing to the Agent as of the date of this Amendment is executed. The Borrower's failure to make the payments as set forth in this pararagraph 4 shall constitute an Event of Default under the Credit Agreement. 5. Conditions to Effectiveness. This Amendment, including the covenant waivers contained in paragraph 3 herein, shall not be or become effective unless the Agent receives each of the following items in form and substance acceptable to the Agent on or before February 14, 2002: (a) This Amendment, duly executed by the Agent, the Banks and the Borrower, and duly acknowledged by the Guarantors; (b) A certified copy of the resolutions of the Board of Directors of the Borrower evidencing that the officers of the Borrower have authority to enter into this Amendment and the transactions contemplated by this Amendment (which resolutions may, at the option of the Agent, be in the form of ratifying resolutions); (c) Payment of the Initial Payment; (d) Payment of the fee referenced in paragraph 4; and (e) Payment of all legal fees incurred by the Agent through the date of this Amendment. 6. Continued Effectiveness. Except as amended by this Amendment, all of the terms and conditions of the Credit Agreement and the other Loan Documents shall remain in all other respects in full force and effect. 7. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 8. Release. The Borrower and each Guarantor, by signing its respective Acknowledgment and Agreement set forth below, each hereby absolutely and unconditionally releases and forever discharges the Agent and each of the Banks, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing (the "Released Parties"), from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or -3- otherwise, which the Borrower or such Guarantor has had, now has or has made claim to have against such Released Party for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment in connection with or related to the transactions evidenced by the Loan Documents, whether such claims, demands and causes of action are mature or unmatured or known or unknown. 9. No Other Waiver. Except as expressly set forth herein, the execution of this Amendment shall not be deemed to be a waiver of any Event of Default under the Credit Agreement, whether or not known to the Agent and/or the Banks and whether or not existing on the date of this Amendment. 10. Representations and Warranties. The Borrower hereby represents and warrants to the Agent and the Banks as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations under the Credit Agreement, as amended by this Amendment, and the Credit Agreement, as amended by this Amendment, and the other Loan Documents executed on behalf of the Borrower have been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms. (b) The execution, delivery and performance by the Borrower of the Credit Agreement, as amended by this Amendment, and the other Loan Documents executed on behalf of the Borrower have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the Articles of Incorporation or By-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article IV of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 11. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment; and any and all references in any of the other Loan Documents to the "Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment. -4- [Signature Page Follows] -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. INNOVEX, INC. By ------------------------------------- Its ---------------------------------- WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, formerly known as Norwest Bank Minnesota, National Association, as Bank and as Agent By ------------------------------------- Its ---------------------------------- U.S. BANK NATIONAL ASSOCIATION, as Bank By ------------------------------------- Its ---------------------------------- -6- ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS The undersigned, each a guarantor of all debts, liabilities and other obligations of Innovex, Inc., a Minnesota corporation (the "Borrower") to the Banks (as defined in the foregoing Amendment) and the Agent (as defined in the foregoing Amendment) under the Credit Agreement (as defined in the foregoing Amendment) and related Loan Documents (as defined in the foregoing Amendment) pursuant to (i) a separate Guaranty from Innovex Precision Components, Inc. dated as of September 15, 1999 (the "Precision Guaranty") secured by a separate Security Agreement from Innovex Precision Components, Inc. dated as of September 15, 1999 (the "Precision Security Agreement"), (ii) a separate Guaranty from Innovex Southwest, Inc. dated as of September 15, 1999 (the "Southwest Guaranty") secured by a separate Security Agreement from Innovex Southwest, Inc. dated as of September 15, 1999 (the "Southwest Security Agreement"), and (iii) a separate Guaranty from ADFlex Cayman Limited dated as of December 31, 2000 (the "ADFlex Guaranty," together with the Precision Guaranty and the Southwest Guaranty, each hereinafter called a "Guaranty") secured by a separate Stock Pledge Agreement from ADFlex Cayman Limited dated as of December 31, 2000 (the "ADFlex Security Agreement," together with the Precision Security Agreement and the Southwest Security Agreement, each hereinafter called a "Security Agreement"), hereby (a) acknowledges receipt of the foregoing Amendment; (b) consents to the terms of the foregoing Amendment (including, without limitation, the releases set forth in paragraph 8 of the foregoing Amendment) and execution of the foregoing Amendment by the Borrower; (c) reaffirms its obligations to the Agent and the Banks pursuant to the terms of its Guaranty, its Guarantor Security Agreement and any other Loan Documents to which it is a party; and (d) acknowledges that the Agent and the Banks may amend, restate, extend, renew, or otherwise modify the Credit Agreement or any other Loan Document or any indebtedness or agreement of the Borrower in favor of the Agent and/or the Banks, or enter into any agreement or extend additional or other credit accommodations to the Borrower, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty, its Guarantor Security Agreement and any other Loan Documents to which it is a party. INNOVEX PRECISION COMPONENTS, INC. By ------------------------------------- Its ---------------------------------- -7- INNOVEX SOUTHWEST, INC. By ------------------------------------- Its ---------------------------------- ADFLEX CAYMAN LIMITED By ------------------------------------- Its ---------------------------------- -8- -----END PRIVACY-ENHANCED MESSAGE-----