-----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, IcDebO7oJWnuZDtBYsDgRRjjdRJqgB92WSbKPgF1YLWIEU03+RjSOIpMpSeQ8Vuy W4LDFY2WkD7nz4fNuAPX6w== 0000897101-99-001159.txt : 19991213 0000897101-99-001159.hdr.sgml : 19991213 ACCESSION NUMBER: 0000897101-99-001159 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991210 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-K SEC ACT: SEC FILE NUMBER: 000-13143 FILM NUMBER: 99772301 BUSINESS ADDRESS: STREET 1: 530 ELEVENTH AVENUE SOUTH CITY: HOPKINS STATE: MN ZIP: 55343-9904 BUSINESS PHONE: 6129384155 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------------------------- FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 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.) 530 Eleventh Avenue South, Hopkins, Minnesota 55343-9904 (Address of principal executive offices (Zip Code) Registrant's telephone number, including area code: (612) 938-4155 --------------------------------------- Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: (Title of Class) ---------------- Common Stock ($.04 par value) ------------------------------ 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, 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 (S229.405 of this chapter) 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. ( ) The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $139,898,000 at November 10, 1999 when the closing sale price of such stock, as reported in the Nasdaq National Market System, was $10.00. The number of shares outstanding of the Registrant's Common Stock, $.04 par value, as of November 10, 1999 was 14,823,704 shares. Documents Incorporated by Reference: 1. Portions of the Registrant's Proxy Statement to be filed with the Commission within 120 days after the end of the Registrants fiscal year are incorporated by reference into Part III of the Form 10-K. INNOVEX, INC. 1999 FORM 10-K PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS On July 7, 1999, Innovex, Inc. and its subsidiaries (the "Company") commenced a tender offer to purchase all of the issued and outstanding stock of ADFlex Solutions, Inc. ("ADFlex") at a purchase price of $3.80 per share. The tender offer closed on August 3, 1999. Approximately 76% of the outstanding shares of ADFlex were tendered in response to the offer. On August 9, 1999, the Company consummated the purchase of the tendered shares. The remaining approximately 24% of ADFlex issued and outstanding common stock not tendered in response to the tender offer was acquired by the Company through a merger transaction completed on September 14, 1999. The total ADFlex purchase price, including transaction costs, change in control payments and all of the issued and outstanding common stock was approximately $37 million. 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 will reduce 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 is combining the newly acquired ADFlex operation into 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. As a result, during the fiscal 1999 fourth quarter, charges of $2.8 million were recorded to account for the discontinuance of this product line. 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 companies 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 was founded in 1972 to acquire the assets of a manufacturer of needle and wire assemblies used in computer core memories. With the introduction of solid state memory devices, needle wire assemblies became obsolete and, in late 1973, the Company moved into related areas of manufacturing utilizing and expanding its micro-welding and miniature assembly expertise. In 1984, the Company expanded its scope to the photo equipment market by acquiring Lucht Engineering. The Company sold its photo business in two stages beginning November 29, 1992 with remaining portion sold November 1, 1993. 2 In an attempt to diversify, the InnoMedica Division was formed in late fiscal 1993 to impart a greater degree of strategic direction and business discipline to the Company's emerging medical business. This Division, which produced an immaterial portion of the Company's revenue, was sold on June 1, 1998. The Iconovex subsidiary was established in fiscal 1994 to market and further develop a technologically advanced software product purchased in November 1993. In October 1997, Iconovex became the 51% owner of a joint venture with Solutions Corporation of America. The operations of Iconovex and its joint venture, Smart Solution, were discontinued in June 1999 as a result of revenue not developing as expected and the Company recorded a $1.7 million charge related to this disposition. Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972. Its principal executive offices are located at 530 Eleventh Avenue South, Hopkins, Minnesota 55343-9904 and its telephone number is (612) 938-4155. 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. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Prior to the ADFlex acquisition, the Company had one major operating unit during fiscal 1999. The Company also had one other subsidiary, Iconovex and its Smart Solution joint venture, which generated less than 1% of the Company's revenue and was not considered a core segment due to its immaterial nature. The Company plans to combine Innovex and ADFlex into one operation that manufactures and markets flexible circuits to various industries. Financial results will be presented as a single segment due to the immaterial nature of the non-core operations. Topics covered throughout this document may be discussed referencing former separate operations where helpful to the reader's understanding. (c) NARRATIVE DESCRIPTION OF BUSINESS COMPANY OVERVIEW Innovex is a leading worldwide provider of flexible circuit interconnect solutions to original equipment manufacturers ("OEMs") in the electronics industry. The Company offers a full range of customized flexible circuit applications and services from initial design, development and prototype to fabrication, assembly and test on a global basis. The Company targets high-volume markets where miniaturization, form and weight are driving factors and flexible circuits are an enabling technology. Applications for flexible circuits currently addressed by the Company include notebook computers, portable communication devices such as cellular telephones and pagers, data storage devices such as hard disk drives ("HDDs"), tape drives and arrays and high-end consumer electronics products such as compact disk players. The Company's principal customers include Acer, Alps, Compaq, Dell, Digital Equipment, IBM, Iomega, Maxtor, Motorola, Nokia, Philips, Qualcomm, ReadRite, SAE Magnetics, Samsung, Seagate, Storage Technology, Xerox, Yamaha and other leading electronic OEMs. Flexible circuits consist of copper conductive patterns on flexible substrate materials, such as polyimide, and provide electrical connection between components in electronic systems. Flexible circuit interconnects frequently incorporate components such as integrated circuits ("ICs"), connectors, stiffeners, resistors and capacitors mounted directly on a flexible circuit. With proliferation of electronic applications, electronic products have become smaller, lighter and more portable. To meet the challenges represented by the increased complexity of miniaturization, form and weight requirements, OEMs have increasingly turned to flexible circuit interconnect solutions because they decrease the weight and expense of connectors and other packaging components, conform to contoured, ergonomic shapes or small spaces and provide mechanical flexure. The Company's products consist of flexible circuits with high to mid-range tolerances and may include other secondary finishing or assembly operations. The high-end flexible circuits generate the highest gross margin percents. The mid-range flexible circuits with components added through the performance of additional assembly steps garner lower gross margin percents due to higher material costs and the increased number of competitors. Historically, the Company's wire operations produced a variety of small lead wire assemblies primarily for computer disk drives. The disk drive industry has almost completed its transition away from lead wire assembly interconnects to integrated interconnects such as the Company's Head Interconnect Flex ("HIF"), Flex suspension assembly ("FSA") and BridgeFlex ("BFC") products. This transition has had a significant impact on the Company's operations over the last two years as it has had to manage the rapid increase in its flexible 3 circuit business while controlling the rapid drop in its lead wire assembly operations. Lead wire assembly sales constituted 26% of fiscal 1999 consolidated revenues and less than 5% of September's revenue as compared to over 72% of fiscal 1998 revenues. While the trend toward miniaturization and portability increases product complexity, electronic OEMs face escalating time to market, cost and global sourcing requirements. In response, the Company has established manufacturing facilities in China and Thailand that have lower cost structures and closer proximity to the Company's OEM customer base. The Company believes it is a preferred supplier for the majority of its customers' high-end and high-volume flexible circuit interconnect requirements. INDUSTRY OVERVIEW AND TRENDS Flexible circuit interconnects provide electrical connection between components in electronic systems and are increasingly used as a platform to support the attachment of electronic devices. Flexible circuits offer several advantages over rigid printed circuit boards ("PCBs") and ceramic hybrid circuits, particularly for small, complex electronic systems. Flexible circuits, due to their mechanical flexure and three-dimensional shape, accommodate packaging contours and motion in a manner that traditional two-dimensional rigid PCBs cannot. Flexible circuits also provide improved thermal dissipation and signal propagation as compared to PCBs. In addition, flexible circuits can reduce the size, weight and expense of: (i) the primary substrate for component attachment when flexible circuits are used in place of a PCB; (ii) connectors, cables and other interconnection schemes when flexible circuits provide the connection to other substrates or subsystems within the system; and (iii) individual IC die packages by bonding an IC directly to a flexible chip carrier rather than a ceramic or plastic package. These capabilities enable circuits to solve many of the challenges faced by electronic OEMs who currently use traditional interconnection devices. Products which currently use polyimide flexible circuit interconnect assemblies include notebook computers, portable communication devices such as cellular telephones, pagers and personal digital assistants ("PDAs"), printers, scanners and data storage devices such as HDDs, tape drives and arrays, and high-end consumer electronic products such as compact disk players, cameras and camcorders. Possible new applications for polyimide flexible circuit interconnect assemblies include high-density interposers and other chip carrier packaging applications. The Company considers the following trends important in understanding the electronic flexible circuit interconnect industry: MINIATURIZATION, PORTABILITY AND COMPLEXITY OF ELECTRONIC PRODUCTS. Electronics OEMs continue to design and introduce more compact and portable high-performance products with greater functionality. The complexity of these new products requires smaller size, lighter weight, greater circuit and component density, better thermal dissipation properties, higher frequencies and increased reliability as compared to conventional rigid board assemblies. These requirements necessitate greater sophistication in flexible circuit interconnect manufacturing and process technologies. The trend toward increasingly sophisticated products also requires greater engineering expertise and investment in manufacturing and process technology for suppliers to produce high-quality electronic interconnect products on time, in volume and at acceptable cost. SHORTER PRODUCT LIFE CYCLES AND TIME TO MARKET. Rapid advances in technology have significantly shortened the life cycle of complex electronic products and placed increased pressure on OEMs to quickly develop and introduce new products. These time-to-market challenges have in turn increased OEMs' emphasis on the development, design engineering, prototype development and ramp-to-volume capabilities of their suppliers. In addition, the importance of being first to market with new products has heightened the emphasis on shortening supply channels, reducing the number of suppliers and finding turnkey sourcing capabilities that are supported by technologically advanced manufacturing infrastructure. GLOBALIZATION AND REDUCTION OF MANUFACTURING COSTS. At the same time that shorter product life cycles increase time-to-market pressures, users continue to demand increased electronic performance at lower prices. Notable product examples of this trend are notebook computers, desktop computers, peripherals, portable communications and consumer electronics. Leading OEMs who often manufacture products in multiple geographic regions are relying more on suppliers with global sourcing capabilities which can help to shorten the OEMs' supply chain and provide regionally competitive pricing. As part of global sourcing, OEMs increasingly require their suppliers to establish local infrastructure to provide proximity to engineering, manufacturing and sales support. OUTSOURCING. To avoid delays in new product introductions, reduce manufacturing costs and avoid logistical complexities, OEMs are increasingly turning to fewer suppliers which are capable of producing electronic interconnect products from development, design, quick-turn prototype and pre-production through volume production and assembly. Many OEMs have accelerated this process by outsourcing their captive component, subsystem and even system manufacturing to focus on their core competencies. The accelerated time-to-market and time- 4 to-volume needs of OEMs have resulted in increased collaboration with qualified suppliers capable of providing a broad and integrated offering. To meet their rapidly changing electronic interconnect requirements, many OEMs have moved to limit their vendor base to a smaller number of technically qualified, strategically located suppliers capable of providing both quick-turn prototype and pre-production quantities as well as cost-competitive volume production quantities. PROLIFERATION OF ELECTRONICS AND CREATION OF NEW MARKETS. The markets for electronic products are growing as a result of technological change, increasing demands for a wider variety of electronic product features and more powerful and less expensive electronic components. Due to this growth, new markets have emerged in computing, data communications, telecommunications and multimedia. Moreover, existing markets such as computer networking and peripherals, digital and mobile communications, video-on-demand, the Internet, instrumentation and industrial controls have significantly expanded product applications. CURRENT PRODUCT APPLICATIONS The Company provides flexible circuit interconnect products to a diverse group of markets. Historically, the HDD market has represented the largest component of the Company's sales at 74%, 85% and 89% of total sales for 1999, 1998 and 1997. Through the ADFlex acquisition and new market expansion efforts, the Company is continuing its efforts to reduce the impact of cyclicality of the HDD industry on its business. However, net sales attributable to this market are expected to continue to represent a large component of total sales for the foreseeable future. Accordingly, the occurrence of significant slowdowns or changes in this industry has had and may continue to have a material adverse effect on the Company's operating results. Current applications addressed by the Company include: HARD DISK DRIVES. The HDD market uses flexible circuits as the interconnect between the read/write head and disk drive electronics. In HDD applications, circuits need to mechanically flex hundreds of millions of times through the life of the drive. These HDD applications include the Company's head interconnect flex ("HIF") which provides the electrical interconnect from the disk drive head to the back end electronics (actuator flex) of the disk drive. The HIF is bonded to a disk drive suspension by the Company's customers. The Flex Suspension Assembly ("FSA") is a HIF that is bonded to a suspension for customers desiring a more complete solution. The Bridge Flex ("BFC") product completes the connection from the suspension to the actuator flex for competing disk drive head interconnect solutions that terminate at the back end of the suspension. Prior to the use of flexible circuits, these disk drive interconnects were provided by lead wire assemblies which the Company produced. The Company also produces the actuator flex which provides the back end electronic interconnect for the disk drive. Mounting an unpackaged die directly onto the flexible circuit substrate, or flip chip, is becoming the predominant interconnect technology for these applications. NETWORK SYSTEMS. Large individual drive storage systems are being replaced by arrays of less expensive disk drives or tape drives. The growth of personal computer networks has generated a growth in small arrays for local area network storage. In addition to the flexible circuit interconnects inside each of the individual drives, controlled impedance flex interconnects are used to connect the back of the drives to standard interface boards. TELECOMMUNICATIONS. The use of polyimide flexible circuits in portable communications devices is growing as the space, weight and functionality challenges are becoming more difficult. In some cellular telephones, flexible circuits replace rigid PCBs, connectors and cables and can thereby reduce space, weight and cost. CONSUMER. CD/DVD-ROMS are growing in consumer applications where higher capacity and quicker access time, compared to tape drives, are needed. These devices use flexible circuits as the interconnect between the read/write head and CD/DVD-ROM drive electronics. COMPUTER AND OTHER. Early applications for flexible circuits in notebooks were mainly as interconnects from the motherboard to the LCD and as shielded jumpers. More recently, systems have used as many as ten flexible circuit interconnects per notebook, including PCMCIA connector/flex jumpers, LED/speaker flexible circuit assemblies, track ball/mouse button flexible circuit assemblies and various other shielded jumpers. Flexible circuit substrates are a leading candidate for use in semiconductor packaging and as interposers for high-density interconnect applications. SALES AND SUPPORT The Company markets its products directly to a number of industries requiring electronic interconnects through the use of an internal sales staff. Historically, the Company has sold a substantial portion of its flexible circuit interconnects to a limited number of customers. Innovex has benefited from early entry as a supplier to the disk drive industry and has been able to leverage relationships established through its 5 lead wire assembly interconnects to the next generation integrated flexible circuit interconnects. This, coupled with the Company's reputation for high standards of quality and innovative manufacturing processes, has established Innovex as a predominant supplier of interconnects for the industry. The Company has established sales with virtually every manufacturer of disk drive heads in the world and continues to work closely with virtually all of the world-wide disk drive head manufacturers on new generations of disk drive products. The Company's principal customers, each accounting for over 10 percent of the Company's consolidated net sales in at least one of the last three years are Read-Rite, SAE/TDK, Seagate and Yamaha. See Note J of Notes to Consolidated Financial Statements for additional information. Because of the Company's focus on leading edge imaging technology, its customers include a number of the leading technology companies in the world including Acer, Alps, Compaq, Dell, Digital Equipment, General Electric, Hewlett Packard, IBM, Iomega, Littelfuse, Maxtor, Medtronic, Motorola, Nokia, Philips, Qualcomm, ReadRite, SAE Magnetics, Samsung, Seagate, Storage Technology, Xerox, Yamaha and other leading electronic OEMs. Even though the Company's customer mix will likely change from period to period in the future, the Company expects that sales to relatively few customers will continue to account for a high percentage of its net sales in the foreseeable future. The loss of a significant customer or a substantial reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the computer, computer peripheral, communications and high-end consumer markets has had and may continue to have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. RESEARCH AND DEVELOPMENT The Company continually engages in research, development and engineering activities. The Company's goals are to utilize these activities to improve and enhance existing products and to develop new products in order to expand its market share. During fiscal years 1999, 1998 and 1997, the Company spent approximately $2,878,000, $2,356,000 and $1,784,000 on research and development. The Company's research and development effort is concentrated on improving and increasing the long run flexible circuit manufacturing capabilities for both adhesiveless and adhesive based flexible circuits, developing a high-quality source of material for double-sided flexible circuit applications and improving the attachment process for the new FSA product. The Company expects to continue its past practice of acquiring new technology from outside sources through the payment of cash, Company stock and royalties. ENVIRONMENTAL CONTROLS Flexible circuit interconnect manufacturing requires the use of chemicals. As a result, the Company is subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture the Company's products. The Company has conducted environmental studies of its facility in Chandler, Arizona, which revealed a limited amount of soil contamination that may require remediation. Based on these studies, the Company believes that the costs associated with the remediation of this situation will not have a material adverse effect on its operations or financial condition. However, given the uncertainties associated with environmental contamination, there can be no assurance that such costs will not have a material adverse impact on the Company. Pursuant to the agreements governing the 1993 ADFlex purchase of certain assets from the Rogers acquisition, Rogers Corporation has retained all environmental liabilities relating to the purchased assets prior to the closing date of the acquisition. While Rogers currently has sufficient assets to fulfill its obligations under the acquisition agreements, if environmental liabilities requiring remediation are discovered and the Company were unable to enforce the acquisition agreement against Rogers, the Company could become subject to costs and damages relating to such environmental liabilities. Any such costs and damages imposed on the Company could materially adversely affect the Company. In mid 1995, ADFlex acquired a manufacturing facility located in Agua Prieta, Mexico. In connection with this acquisition, ADFlex conducted an environmental study of the facility which indicated there was contamination by hazardous materials in the soil and groundwater. Pursuant to the purchase agreement, the sellers submitted a remediation plan to the appropriate Mexican authorities which was approved in May 1997. Subsequent remediation was completed in December 1997. The seller is awaiting acknowledgment that the remediation plan has been approved and no further action is required by the Mexican authorities. The seller's obligation for the cost of remediation is limited to $2.5 million. A total of $1.0 million originally was held in escrow pending the seller's performance of its environmental obligations under the agreement. One third of the escrow balance was used to conduct the remediation, one third was released to the seller according to the agreement and one third remains in escrow and will be released upon closure of the issue by the Mexican authorities with certification that no further action is required. 6 The Company believes it has been operating its facilities in substantial compliance in all material respects with existing environmental laws and regulations. However, the Company cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. For this reason, the Company implemented procedures geared toward minimizing the negative impacts and reducing potential financial risks arising from environmental issues. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of regulatory agencies could require substantial expenditures by the Company and could adversely affect the results of operations of the Company. The Company does not anticipate any material amount of environmental-related capital expenditures in fiscal 2000. BACKLOG The backlog for the Company's continuing operations was $36.6 million, $15.2 million and $26.1 million at September 30, 1999, 1998 and 1997. The increase in the 1999 backlog is due to the ADFlex acquisition. The Company's backlog fluctuates based on the timing of the receipt of orders from customers. Backlog is defined by the Company as firm orders that are scheduled to be delivered within 12 months from the date of the order. While the Company currently believes substantially all of its September 30, 1999 backlog will be delivered within 12 months, customers may determine not to release orders into production, may extend requested delivery dates or cancel orders. In such cases, the Company may not realize the revenue indicated by the backlog. COMPETITION The flexible circuit interconnect market is differentiated by customers, markets and geography with each niche having its own combination of complex packaging and interconnection requirements. The Company believes it competes principally on the basis of design capability, price, quality, flexibility and technological advancements in underlying applications. During periods of economic slowdown in the electronics industry and other periods when excess capacity exists, electronic OEMs become more price sensitive. The Company believes that once a customer has selected a particular vendor to design and manufacture a flexible circuit interconnect, the customer generally relies upon that vendor's design for the life of that specific application and, to the extent possible, subsequent generations of similar applications. Accordingly, it is difficult to achieve significant sales to a particular customer with respect to any application once another vendor has been selected to design and manufacture the flexible circuit interconnect used in that application. While this market paradigm may provide a barrier to the Company's competitors in the markets served by the Company, it also may present an obstacle to the Company's entry into other markets. The flexible circuit interconnect market is highly competitive. The Company experiences competition world-wide from a number of leading foreign and domestic providers such as Minnesota Mining and Manufacturing ("3M") and Sumitomo for high-end applications, and Nippon Mektron ("NOK"), Fujikura Ltd. ("Fujikura"), Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl Inc. ("Sheldahl") and Parlex Corporation ("Parlex") for mid-range applications. 3M, Sumitomo, NOK and Fujikura are substantially larger than the Company with greater financial and other resources. M-Flex, Sheldahl and Parlex are US-based flexible circuit manufacturers that have lower sales of polyimide flexible circuits than the Company and have historically targeted suppliers of computers, communication and automotive services and the military. Expansion of the Company's existing products or services could expose the Company to new competition. Moreover, new developments in the electronics industry could render existing technology obsolete or less competitive and could potentially introduce new competition into the market. There can be no assurance that the Company's competitors will not develop enhancements to, or future generations of, competitive products or services that will offer superior price or performance features to those of the Company or that new competitors will not enter the Company's markets. Finally, as many of the Company's competitors are based in foreign countries, they have cost structures and prices based on foreign currencies. Accordingly, currency fluctuations could cause the Company's dollar-priced products to be less competitive than its competitors' products priced in other currencies. The Company also competes in assembly matters with leading flexible circuit assembly providers such as Smartflex Systems, Inc. ("Smartflex") and Pemstar. The Company believes that competition in assembly is primarily driven by availability of assembly technology, price and cycle time. The Company believes it competes favorably with these competitors because it offers its customers a complete flexible circuit interconnect solution including design, fabrication, assembly and testing. The Company's competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price/performance characteristics. Competitive pressures often necessitate price reductions which adversely affect operating results. The Company will be required to make a continued high level of investment in product development and research, sales and marketing, and ongoing customer service and support to remain competitive. There can be no assurance that existing or future competitors will not be able to duplicate the Company's strategies or that competitive pressures faced by the Company will not have a material adverse effect on the Company. 7 EMPLOYEES As of September 30, 1999, the Company had a total of 3,858 employees. Of these employees, 64 were based at the Company's Hopkins, Minnesota facility; 408 were based in Chandler, Arizona; 343 were based in Litchfield, Minnesota; 68 were based in Montevideo, Minnesota; 2,014 were based in Agua Prieta, Mexico and 961 were based in Thailand. Certain of the Company's employees located in Mexico are represented by a labor union and covered by a collective bargaining agreement that is subject to revision annually under Mexican labor laws. The Company has not experienced an employee-related work stoppage. The Company believes its relationship with its union and other employees is good, but there can be no assurance that the Company will be able to successfully negotiate with the labor union in Mexico in the future. In November 1999, the Company made the determination to close the Mexican facility and combine its operations with the Thailand facility. Those Mexican employees impacted by this decision will be paid severance in accordance with Mexican labor laws. The Company's future operating results depend in part upon its ability to attract and retain other qualified management, technical, manufacturing, sales and support personnel for its operations. Competition for such personnel is intense and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The failure to attract or retain such persons could materially adversely affect the Company. INTELLECTUAL PROPERTY The Company believes that, due to its customers' demands for rapid technological advances and the resulting limited product life cycles, the success of its business depends more on the technical and engineering expertise, creativity and marketing, and service abilities of its employees than on patents, trademarks and copyrights. Nevertheless, the Company owns patents and has a policy of seeking patents when appropriate on inventions concerning new products and improvements as part of its ongoing research, development and manufacturing activities. There can be no assurance that any patents issued to the Company will provide a competitive advantage or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or design around the patents issued to the Company. In addition, there can be no assurance that foreign intellectual property laws or the Company's agreements will protect the Company's intellectual property rights in any foreign country. Any failure to protect the Company's intellectual property rights could have a material adverse effect upon the Company. SUPPLIERS The Company purchases raw circuit materials, process chemicals and various components from multiple outside sources. For components, the Company typically makes short-term purchasing commitments to key suppliers for specific customer programs. These commitments are usually made for three to six month periods. These suppliers commit to providing cooperative engineering, as required, and in some cases maintain a local inventory to provide shorter lead times and reduced inventory levels for the Company. In most cases, suppliers are approved, and are often dictated by the Company's customers. For process chemicals, the Company relies on a limited number of key suppliers. Alternate chemical products are available from other sources, but process chemical changes would often require requalification of the processes, which could take weeks or months to complete. The Company has attempted to mitigate these risks by identifying stable companies with leading technology and delivery positions. The Company currently purchases a number of its components, process chemicals and other materials from single sources. In the United States, these products are available only from a limited number of suppliers. There can be no assurance that these sources will continue to supply the Company with the materials needed at competitive prices. While viable alternate suppliers exist, because of the Company's limited inventory of raw materials, tight manufacturing cycles and the significant amount of time required to qualify new suppliers, single sourcing is expected to continue. Consequently, any unanticipated interruption of material supplies or components would have a short-term material adverse effect on the Company. TECHNOLOGY DESIGN TECHNOLOGY. The flexible circuit interconnects manufactured by the Company are designed specifically for each application, requiring significant joint design activities between the Company and the customer at the start of a project. The Company has developed design methodologies that solve difficult interconnection problems and save the customer time and money. The Company also designs and produces, in volume, flexible circuits that range from high-density, single-sided circuits to more complex double-sided and multi-layer circuits. The Company is continually investing in and improving its computer-based design tools to more quickly design new flexible circuit interconnects, to enhance cooperative design and communication with its customers and to more closely link designs to the manufacturing process. The 8 Company is recognized as a technology leader in fine-line, single-sided flexible circuit technology and flexible circuit assembly technology, including advanced chip-on-flex, flip-chip-on-flex and high-density polyimide assembly technologies. CIRCUIT FABRICATION TECHNOLOGY. The Company has extensive experience in fine-line polyimide flex and has pioneered manufacturing processes that deliver high unit volumes at cost-effective yields. At the core of the process is roll-to-roll subtractive fine-line circuit processing. The starting materials are flexible laminates composed of a thin dielectric film that is either adhesive-bonded to treated copper foil or metalized without the use of adhesives. Very accurate images (down to 0.001") are produced in volume in photoresist. Circuit conductors are then formed by chemically etching the underlying copper foil. Coverfilm materials are adhered to the circuitry to provide an insulative coating and to expose contact pads for surface metalization. The exposed surfaces are then coated with solder for surface mount or bondable gold for chip-on-flex applications. Laser processing is then used to create various openings to drill vias and cut contoured peripheries in substrate materials. The Company's key flexible circuit fabrication technologies include: FINE FEATURE ROLL-TO-ROLL IMAGING AND ETCHING. Allows the fabrication of circuits with very fine line widths and spaces. This is critical to meeting complex space constrained interconnection needs. Processing wide web (up to 24 inches) in a continuous roll-to-roll format (as opposed to discrete panels) allows fabrication of high circuit volumes with improved material utilization resulting in lower cost. LASER PROCESSING. Laser technology is used to produce low cost, very fine openings, small vias and contoured shapes that solve density problems while avoiding more expensive traditional alternatives. Also, using a laser to cut the periphery of parts allows prototypes and low volume production parts to be built faster and without the cost of blanking die. BONDABLE GOLD PLATING. Prepares flexible circuits for chip-on-flex bonding, a process which saves space and improves electrical performance (access time) by wire bonding an IC die directly to the flexible circuit. COVERFILM, LAY-UP AND LAMINATION. A process where coverfilm materials are adhered to the circuitry to provide an insulative coating and to expose contact pads for surface metalization. This process allows accurate positioning of solder plated pads to support fine pitch surface mount assembly to the finished circuits. ASSEMBLY AND TEST TECHNOLOGY. The Company applies advanced assembly and test technology to provide flexible circuit interconnect assemblies to its customers. The Company assembles passive electrical and various mechanical components, including connectors, stiffeners, diodes, formed metal parts and other devices to its flexible circuits using primarily manual processes in its plants in Mexico and Thailand. The Company also performs advanced direct die attach and assembly of integrated circuit devices as well as the functional testing of these flexible circuit assemblies. Assembling these components directly onto the flexible circuit increases performance and reduces space, weight and cost. MANUFACTURING The Company has developed a manufacturing process that combines the use of technology with the deployment of human resources in a geographic and organizational manner that allows the Company to compete on a pure cost basis, if necessary, with suppliers of similar products throughout the world. Quality systems are in place that are certified to standards set by demanding customers in the electronics industry. The Chandler facility is ISO 9001 certified and the Thailand and Mexican operations have received ISO 9002 certification. The Company believes it enjoys a cost advantage based on a manufacturing process designed to optimize the utilization of automation, labor and capital, and a manufacturing process and technology with better yield, material utilization and throughput relative to its competitors. The Company also believes that integrating assembly technology with manufacturing technology and high-volume production capabilities will over time provide improvements in its production costs through higher product yields, faster production ramps, reduced inventories, shortened production cycle times, improved account control and increased leverage over expenses. In addition, the Company is expanding its Thailand manufacturing operation. The Company anticipates that the new Thailand facility will enable it to attain significant cost reductions that are crucial to mitigating competitive price pressures in Asia and help sustain the Company's implementation of a complete flexible circuit interconnect solution including design, fabrication, assembly and testing. 9 FOREIGN SALES AND OPERATIONS The Company has finishing and assembly facilities located in Agua Prieta, Mexico and Lamphun, Thailand and subcontractors primarily performing flexible circuit inspection in Korat, Thailand and China. While the Company believes it has established good relationships with its local labor forces and the local governments, the spread of the manufacturing process over multiple countries subjects the Company to risks inherent in international operations. Those risks include currency fluctuations, inflationary pressures, unexpected changes in regulatory requirements, tariffs and barriers, potentially limited intellectual property protection, potential cross border shipment delays, changes in political climate, difficulties in coordinating and managing foreign operations, foreign labor union issues, increases in employee turnover and potentially adverse tax consequences. Any of the foregoing could have a material adverse effect on the Company. While Innovex transacts business predominantly in U.S. Dollars and the majority of its net sales are collected in U.S. Dollars, a portion of its sales and expenses are denominated in foreign currencies. Changes in the relation of foreign currencies to the U.S. Dollar will affect the Company's cost of goods sold and operating margins and could result in exchange losses. To reduce the impact of certain foreign currency fluctuations, the Company enters into short-term forward foreign currency exchange contracts (hedges) in the regular course of business. The forward exchange contracts generally require the Company to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to at inception of the contracts. The gains or losses on hedges of transaction and remeasurement exposure are included in income in the period in which the exchange rates change. The gains and losses on unhedged foreign currency transactions are included in income as incurred. No assurance can be given that the Company's hedging strategies will prevent future currency fluctuations from adversely affecting the Company. There were no open hedge contracts at September 30, 1999. The Thai Baht experienced significant fluctuations in relation to the U.S. Dollar during 1999. As the majority of the sales and expenses for the Thailand operation are denominated in U.S. Dollars, the fluctuations did not have a significant impact on the Company's results of operations for those years. However, there can be no assurance that future currency fluctuations will not have a material adverse effect on the Company. ITEM 2. PROPERTIES In total, at September 30, 1999, the Company leased or owned approximately 653,000 square feet of manufacturing and other space. The Company's significant facilities are as follows:
FUNCTIONS LOCATION (NUMBER OF FACILITIES) SQUARE FEET OWNED/LEASED EXPIRATION - --------- ------------------------------- ----------- ------------- ---------- Executive Offices and Hopkins, Minnesota (one) 19,000 Leased February 2002 Research and Development Sales and Support; Research and Chandler, Arizona (one) 150,000 Leased June 2003 Development: Circuit Fabrication Circuit Finishing and Circuit Agua Prieta, Mexico (one) 161,000 Owned N/A Assembly 15,000 Owned N/A Circuit Finishing and Assembly; Lamphun Thailand (two) 140,000 Owned N/A Sales and Support Circuit Fabrication Litchfield, Minnesota (four) 60,000 Owned N/A 18,000 Owned N/A 10,000 Owned N/A 50,000 Owned N/A Lead wire manufacturing Montevideo, Minnesota (one) 30,000 Owned N/A
In addition to these facilities, the Company is currently constructing a new 60,000 square foot building in Maple Plain, Minnesota to be used for the manufacturing of materials for use in double-sided flexible circuit production, research and development and the corporate offices. The building is expected to be completed by March 2000. The Company obtained the Arizona, Mexico and Thailand facilities during fiscal 1999 as part of the ADFlex acquisition. The Thailand facility was completed in February 1999 and will be used for circuit finishing and assembly. In November 1999, the Company made the determination to close the Mexican facility and combine its operations with those in 10 Thailand to reduce excess manufacturing capacity. The Company believes that the facilities in Arizona, Minnesota and Thailand are adequate to meet its current requirements, and that suitable additional space or substitute space is readily available as needed. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries is a party to, and none of its property is the subject of, any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant did not submit any matter to a vote of its security holders during the fourth quarter of the fiscal year covered by this Report. ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT Name Age Position - ---- --- -------- Thomas W. Haley 63 Chairman, Chief Executive Officer and Director of the Company William P. Murnane 37 President and Chief Operating Officer Allan J. Chan 49 Senior Vice President, Sales and Marketing Brian R. Dahmes 39 Vice President, Managing Director, Innovex (Thailand) Douglas W. Keller 41 Vice President, Finance Srinivas Kuchipudi 31 Vice President, Operations Timothy S. McIntee 41 Senior Vice President, Corporate Venkatraman B. Rao, Ph.D. 47 Vice President, Research & Development Mr. Haley served as President of the Company from 1972 to 1988. Since October 1988, Mr. Haley has held the position of Chief Executive Officer. He has been a Director and Chairman of the Company since its inception in 1972. Mr. Murnane was promoted to President and Chief Operating Officer in July 1998. Mr. Murnane joined the Company in July 1995 as Vice President. From June 1993 to June 1995, Mr. Murnane was Chief Operating Officer of Boutwell, Owens & Co., a private manufacturer of packaging, in Fitchburg, Massachusetts. From June 1992 to June 1993, Mr. Murnane was Director of Operations for Uniform Printing & Supply, Inc. in Acton, Massachusetts. Prior to that, he held various operating and corporate planning positions during a ten-year career at United Parcel Service. Mr. Chan joined the Company in June 1988 as Director of Sales and Marketing for the Precision Products Division. In October 1990 Mr. Chan was promoted to Vice President of Sales and Marketing of the Precision Products Division. In 1991 his responsibilities were expanded to include manufacturing. In May 1995, he was promoted to Vice President and General Manager of Precision Products Division. In July of 1998, he was promoted to Senior Vice President , Sales and Marketing. Prior to joining Innovex, Mr. Chan was the Director of Sales and Marketing for Braemar Computer Corporation a division of Carlysle Corporation. Mr. Dahmes joined the Company in July 1997 as Plant Manager. Mr. Dahmes was promoted to Director of Manufacturing in July 1998 and to Vice President, Quality in March of 1999. In November 1999, he accepted his most recent promotion to Vice President, Managing Director Innovex (Thailand). From 1992 to 1995, Mr. Dahmes served as Process Engineering Manager for Sheldahl Interconnect, and from 1995 to 1997 he was an Engineering Manager with Sheldahl Microproducts. 11 Mr. Keller joined the Company in January 1990 as Corporate Controller. In May 1992, Mr. Keller was made an officer of the corporation and in October 1996 he was promoted to Vice President, Finance. From July 1988 to January 1990, Mr. Keller was Manager of Financial Accounting and Tax for UFE, Inc., a manufacturer of injection molded plastic components. From 1983 to 1988, Mr. Keller was a Senior Auditor for the Pillsbury Company. From 1980 to 1983, he was a Senior Accountant with Deloitte Haskins & Sells, a CPA firm. Mr. Kuchipudi joined the Company in September 1999 as Vice President, Operations. From July 1996 to August 1999, Mr. Kuchipudi was a management consultant for Pittiglio Rabin Todd & McGrath. Prior to that, he held various engineering and marketing positions during a five-year career at Motorola, Inc. Mr. McIntee joined the Company in August 1997 as Vice President, Corporate Development and was promoted to Senior Vice President, Corporate in July 1998. From 1984 to 1997, Mr. McIntee was an attorney for the law firm of Lindquist & Vennum in the Mergers & Acquisitions Division. Prior to that, he was a CPA for several years. Dr. Rao joined the company in December 1998 as the Vice President, Research and Development. Prior to that he held various senior management R&D positions at Silicon Graphics Inc., Cray Research Inc., Supercomputer Systems Inc. and Tektronix. Dr. Rao successfully led teams for the development of advanced high-density multi-chip modules, integrated circuits, multilayer printed circuit boards, flex circuits and flip chip assembly for high end super computer applications. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS COMMON STOCK INFORMATION The Company's common stock is traded in the over-the-counter market under the symbol "INVX." The table below sets forth the high and low closing sale prices as reported by NASDAQ. As of November 17, 1999, the Company had 663 shareholders of record. Dividends of $.04 per share have been paid for the most recent three quarters. The Company's intention is to continue this policy. Price Range of Common Stock 1999 1998 ---------------------------------------------- High Low High Low - -------------------------------------------------------------------------------- First Quarter $17-15/32 $9-5/16 $33-3/8 $18-7/8 Second Quarter 19-1/2 12-3/4 26-7/8 18-3/8 Third Quarter 14-3/8 12-5/8 28-1/8 11-1/4 Fourth Quarter 15-3/8 8-9/16 16-1/2 9-15/16 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data has been derived from the consolidated financial statements of the Company for each of the years in the five-year period ended September 30, 1999. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and related notes thereto included elsewhere in this report.
Years Ended September 30, 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Net sales $103,197,766 $96,277,930 $142,003,743 $69,570,222 $50,193,952 Net income 6,558,534 15,911,079 35,093,603 13,121,006 10,029,387 Net income per share: Basic $0.44 $1.08 $2.43 $0.93 $0.73 Diluted $0.44 $1.05 $2.31 $0.91 $0.70 Cash dividends per share $0.155 $0.135 $0.113 $0.088 $0.079 Total assets 178,806,124 109,651,849 97,274,754 58,244,346 41,283,483 Long-term debt, less current maturities 26,375,546 755,024 950,733 1,063,253 1,172,798 Stockholders' equity 107,134,199 102,418,060 86,817,374 48,400,116 36,029,173
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNINGS SUMMARY The Company reported net income of $6,559,000, or $0.44 basic and diluted net income per share for the fiscal year ended September 30, 1999. This compares to net income of $15,911,000, $1.08 basic and $1.05 diluted net income per share in fiscal 1998 and $35,094,000, $2.43 basic and $2.31 diluted net income per share in 1997. Fiscal 1999 results decreased in comparison to 1998 due to the increase in flexible circuit sales to the disk drive industry not offsetting the phase out of lead wire assembly revenue. This was due in part to continued disk drive industry softness. This softness appears to be the result of an over supply of disk drives and due to a reduction in the number of disk drives kept in inventory by computer manufacturers that have adopted a build-to-order business model. Also contributing to the sales decrease was a reduction in the average number of heads per disk drive. This reduction is the result of an increasing number of low-cost disk drives being sold and as a result of the use of magneto resistive (MR) and Giant Magneto Resistive (GMR) disk drive heads which increase the storage capacity per disk drive platter and reduce the number of heads required to provide the same disk drive capacity. The decrease in fiscal 1998 results as compared to 1997 was also due to softness in the cyclical disk drive industry. The drop in gross margin percent during 1999 was due to several factors, the inclusion of 8 weeks of lower margin ADFlex related sales, reduced yields and costs related to an aggressive new product ramp up in production concurrent with new flexible circuit capacity installation and due to lower shipments of lead wire assemblies reducing the leverage of the fixed overhead costs related to their production. The drop in gross margin percent during 1998 as compared to 1997 resulted principally from lower shipments of disk drive lead wire assemblies and the start-up costs of the new Litchfield facility. Operating expenses were 14% of revenue in fiscal 1999 as compared to 12% and 9% of revenue in fiscal years 1998 and 1997, respectively. The increase in operating expenses as a percent of sales for 1999 is primarily due to increases in marketing, professional and legal expenses. The percentage increase in 1998 from 1997 was due to decreased revenues as actual operating expenses dropped by $815,000. RESULTS OF OPERATIONS NET SALES. Net sales for fiscal 1999 were $103,198,000, a 7% increase from 1998 net sales of $96,278,000. The increase in 1999 was primarily due to the fourth quarter results including eight weeks of operating results related to the acquisition of ADFlex Solutions, Inc. Excluding the acquisition related revenue, net sales would have decreased by 14%. Fiscal 1999 revenue continued to be impacted by the transition of the disk drive industry from traditional lead wire interconnects to integrated interconnects including the Company's Head Interconnect Flex (HIF). The large increase in these flexible circuit sales to the disk drive industry did not offset the phase out of lead wire assembly revenue. This was due in part to continued disk drive industry softness. This softness appears to be the result of an over supply of disk drives and due to a reduction in the number of disk drives kept in inventory by computer manufacturers that have adopted a build-to-order business model. Also contributing to the sales decrease was a reduction in the average number of heads per disk drive. This reduction is the result of an increasing number of low-cost disk drives being sold and as a result of the use of magneto resistive (MR) and Giant Magneto Resistive (GMR) disk drive heads which increase the storage capacity per disk drive platter and reduce the number of heads required to provide the same disk drive capacity. Net sales for fiscal 1998 decreased 32% from 1997 net sales of $142,004,000. The decrease in 1998 sales was related to softness in the disk drive industry. The softness was primarily the result of an oversupply of disk drives caused by excess disk drive production in 1997 and the reduction of inventory levels by computer manufacturers as they adopted a build-to-order business model. Another contributing factor was a reduction in the average number of heads per disk drive. This reduction is the result of the conversion to MR heads which increased the storage capacity per disk drive platter and reduced the number of heads required to provide the same disk drive capacity. The higher prices obtained from the sale of MR assemblies which have a higher value added content and sell for a higher price than the low-end inductive assemblies, have partially offset the decreased number of assemblies being sold. The fourth quarter was also impacted by the disk drive industry's transition away from lead wire assembly interconnects and into alternative interconnect technologies. Flexible circuit sales continue to increase as a proportion of total sales providing 74% of fiscal 1999 sales as compared to 25% for fiscal 1998. The Company exited fiscal 1999 with flexible circuits comprising over 95% of the Company's net sales. This increase has been primarily due to shipments from the Company's high volume, flexible circuit production facility placed into service in fiscal 1998. The facility is currently being utilized to produce the HIF, FSA and BFC products for the disk drive industry and other high technology flexible circuits. 13 Fiscal 2000 should benefit from continued growth in the demand for high technology flexible circuits including the Company's HIF, FSA and Bridge Flex. Reductions in lead wire assembly revenue should not have a significant impact on fiscal 2000 revenue as the transition away from lead wire assembly interconnects to integrated interconnects was nearly complete at the end of fiscal 1999. Significant progress was made during fiscal 1999 in gaining customer acceptance of the Company's FSA product which will be integral to increasing revenue in the last half of fiscal 2000. Revenue is expected to increase significantly in fiscal 2000 as a result of the ADFlex acquisition. The acquisition of ADFlex should also reduce the Company's dependence on the disk drive industry to 50-55% of total revenue. Sales from Iconovex made up less than 1% of the Company's total revenue in fiscal 1999. Export sales accounted for 74% of the Company's revenue in fiscal 1999 as compared to 83% for 1998 and 86% for 1997, reflecting the high level of interconnect shipments to disk drive manufacturers in Asia. A significant portion of the remaining domestic sales are subsequently shipped internationally by the Company's customers. GROSS MARGIN. The Company's gross profit margin decreased to 26.1% of sales in fiscal 1999 as compared to 33.3% in 1998. The decrease in 1999 was partially due to the fourth quarter results including eight weeks of operating results related to the acquisition of ADFlex Solutions, Inc. The ADFlex revenue generates a lower gross margin percent than the existing Innovex flexible circuit revenue due to the higher material content of the assembly portion of the business and lower level of technical tolerances required. Gross margins for the existing flexible circuit revenue were lower in the fourth quarter due to reduced yields and costs related to an aggressive new product ramp up in production concurrent with new capacity installation. In addition, the fiscal 1999 gross margin percent decreased due to lower shipments of lead wire assemblies reducing the leverage of the fixed overhead costs related to their production. In 1998, the Company's gross profit as a percentage of sales decreased to 33.3% as compared to 42.9% in 1997. Gross margin percents decreased primarily due to the lower demand for lead wire assemblies which reduced the leverage of the fixed overhead costs related to their production. Also, pricing pressures returned to normal after being unusually low due to the heavy demand for lead wire assemblies during 1997. The flexible circuit gross margin percent was impacted by the increased level of fixed costs relating to the ramp up of the new high-volume flexible circuit facility. The increase in fiscal 2000 sales volume related to the ADFlex acquisition should result in an increase in gross margin dollars while causing a decrease in the overall gross margin percent. The gross margin percent on the pre-acquisition Innovex revenue should increase in fiscal 2000 as a result of improving flexible circuit manufacturing yields and the elimination of the fixed costs related to the lead wire assembly product line. OPERATING EXPENSES. Selling, general and administrative expenses were 9.5% of net sales in 1999 as compared to 7.7% in 1998 and 6.2% in 1997. The increase in operating expenses as a percent of sales for the current year is primarily due to the decrease in revenue and an increase in marketing, professional and legal expenses. Increases in marketing expenses were incurred to expand efforts to diversify the Company's revenue base and increases in professional services were due to consultants being retained to improve the manufacturing operation efficiency. The increase in 1998 expenses as a percent of sales is primarily due to the decrease in lead wire assembly sales. Total selling, general and administrative expenses for fiscal 1998 decreased from 1997 primarily due to reduced headcount, a change in estimated bad debts and lower bonus accruals. Fiscal 2000 operating expenses as a percent of sales are expected to decrease as a percent of sales and increase in total as a result of the ADFlex acquisition. Engineering expense increased to 4.4% of net sales in fiscal 1999 from 4.3% in 1998 and 2.5% in 1997. Engineering spending remained relatively stable in fiscal 1999 as compared to 1998. The 1999 spending was concentrated on FSA development and the development of a process to manufacture material for use in producing double sided, plated through-hole flexible circuits. The increase in 1998 was due both to the decrease in lead wire assembly sales and an increased level of spending. The actual spending in fiscal 1998 increased 16% over 1997 as a result of new product development costs for both wire and flexible circuit products and costs related to the new high-volume, flexible circuit production facility. Increases in fiscal 2000 engineering spending are expected to concentrate on technologies related to the material producing capability, FSA capabilities, semiconductor packaging substrates and other high-end flexible circuit technology development. The Company will also be increasing high-volume production capabilities and further automating the ADFlex flexible circuit fabrication processes. RESTRUCTURING CHARGES. Restructuring charges for fiscal 1999 included a $2.8 million charge related to the discontinuation of the lead wire assembly product line and charges of $1.7 million related to the disposition of Iconovex, Innovex's software division. 14 INTEREST INCOME (EXPENSE). Interest income increased to $2,035,000 in fiscal 1999 from $2,029,000 and $1,338,000 in 1998 and 1997, respectively. These increases correspond to increases in average cash and short-term investments. Interest expense increased to $467,000 in 1999, from $69,000 in 1998 and $96,000 in 1997. Interest is expected to increase substantially in fiscal 2000 related to the new $40 million credit facility put in place related to the ADFlex acquisition. OTHER INCOME (EXPENSE). Net other expense for fiscal 1999 included a $630,000 charge related to the settlement of threatened litigation by a former director of the Company. INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for income taxes was $9,239,000 for fiscal 1999 as compared to $22,654,000 for 1998 and $49,978,000 for 1997. As a percent of net sales, income before provision for income taxes was 9.0% for 1999 as compared to 23.4% and 35.2% for 1998 and 1997. LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments decreased by $31,914,000 to $25,541,000 at September 30, 1999. Net cash provided by operating activities decreased in 1999 to $26,215,000 from $32,207,000 in 1998 and $30,407,000 in 1997. The reduction in cash and short-term investments is primarily due to the ADFlex acquisition. During fiscal 1999, the Company invested approximately $23 million in capital expenditures. These expenditures include additional equipment to increase the capacity of the automated flexible circuit production facility and a portion of the costs to construct and equip a material manufacturing facility. The increase in 1998 cash and short-term investments was primarily due to cash flows from operations. During fiscal 1998, the Company invested approximately $13 million in capital expenditures. These expenditures included a portion of the costs to construct and equip an automated flexible circuit production facility. This facility was constructed to meet the expected demand for high-volume applications including the HIF, FSA and semiconductor packaging related products. On September 15, 1999, the Company entered into a new credit facility arranged by Norwest Bank Minnesota N.A. which includes U.S. Bank N.A. as an additional lender. The facility was put in place to pay off all outstanding balances existing at the time of the ADFlex acquisition under the Credit Agreement among ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended, as required by the ADFlex merger agreement. The new credit facility consists of a $15.0 million, five-year revolving line of credit and a $25.0 million, five-year term loan with equal principal payments due each quarter commencing on October 1, 2000 and continuing through the September 14, 2004 maturity date. Working capital decreased by $42,047,000 to $31,021,000 at September 30, 1999. The Company's current ratio was 1.7 to 1 at fiscal 1999 year-end, compared to 12.7 to 1 at the end of fiscal 1998. The decrease is due to the high level of current liabilities acquired with or resulting from the ADFlex acquisition. Net property, plant and equipment increased by $59 million to $87,158,000 at September 30, 1999. The increase was due to the ADFlex acquisition and capital expenditures related to increasing the capacity of the automated flexible circuit production facility and a portion of the costs to construct and equip a new material manufacturing facility. Intangible assets increased $3 million to $4.8 million at September 30, 1999 primarily as a result of the ADFlex acquisition. Long-term debt, net of current maturities, increased by $26 million as a result of the new credit facility entered into as a result of the ADFlex acquisition. The ratio of long-term debt to stockholders' equity was .246 at September 30, 1999 compared to .007 at the end of fiscal 1998. Management believes that existing credit facilities, cash and investments and cash generated from operations will provide an adequate source of funds to support projected working capital, capital expenditures and dividends in fiscal 2000. YEAR 2000 UPDATE The Company is taking steps to ensure that it is not adversely affected by the year 2000 equipment and software failures that may arise in software applications and equipment with embedded logic where two-year digits are used to define the applicable year. Our plan of action and current status follows: 15 YEAR 2000 STATE OF READINESS: The Company's products do not contain embedded logic and, as such, they do not pose any direct year 2000 problem. Innovex's internal operations utilize computer hardware, software and some equipment with embedded logic and the Company purchases raw materials from external sources. In order to prepare for the year 2000, Innovex formed an active year 2000 committee charged with the responsibility of securing year 2000 compliance to the fullest possible extent. The process was split into six major areas, information system hardware, information system software, all other equipment with potential embedded logic, critical vendors, critical customers and critical utilities and service providers. INFORMATION SYSTEM HARDWARE: The manufacturers of the Company's computer server and network hardware have indicated that the equipment is year 2000 compliant. Comprehensive tests were performed which indicate the computer server and network hardware are year 2000 compliant. The Company's personal computers have been tested and computers deemed critical were upgraded if they were not compliant. INFORMATION SYSTEM SOFTWARE: The vendors for the Company's primary manufacturing and financial software systems have indicated that the software is year 2000 compliant. Comprehensive tests verifying the compliance of this software were performed. Personal computer operating systems and primary application software were upgraded to vendor specified year 2000 compliant versions as personal computer hardware was tested. EQUIPMENT WITH POTENTIAL EMBEDDED LOGIC: A list of all Company equipment with potential embedded logic was prepared. The equipment was prioritized as Tier I - mission critical and Tier II - other equipment. Year 2000 date remedies have been developed and implemented for all Tier I and Tier II equipment which was not compliant based on information received from the equipment manufacturers. CRITICAL VENDORS: A list of significant vendors was compiled. Letters were sent to these vendors to determine the level of their year 2000 compliance. All critical vendors have replied and indicated that they are currently year 2000 compliant or will become compliant during 1999. Progress toward compliance of all other vendors that are not yet compliant will be monitored with alternative vendors being identified if necessary. CRITICAL CUSTOMERS: A list of customers considered significant to the Company was compiled. Letters were sent to these customers to determine the level of their year 2000 compliance. Approximately 50% have responded indicating full year 2000 compliance or have targeted their compliance by calendar third quarter 1999. Many of the Company's customers are proceeding with their own year 2000 compliance plans as indicated by their request for information from the Company as a supplier to them. Progress toward compliance of all customers that have not yet indicated compliance will be monitored. UTILITIES AND SERVICE PROVIDERS: A list of utilities and service providers considered critical to the Company's ongoing success was compiled. These companies have indicated that they are year 2000 compliant. Most of these companies are in regulated industries with stringent year 2000 compliance requirements and no significant problems are anticipated. COSTS TO ADDRESS YEAR 2000 ISSUES: The Company does not anticipate that the costs related to becoming year 2000 compliant will be material. Total costs incurred for consultants and equipment and software replacements and upgrades to address the year 2000 issue are expected to be less than $100,000. Costs of implementing the new manufacturing and financial software are not considered related to the year 2000 issue. RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND CONTINGENCY PLANS: Based on currently available information, management does not believe that the year 2000 matters discussed above related to internal systems or products sold to customers will have a material adverse impact on the Company's financial condition or overall trends in results of operations; however, it is uncertain to what extent the Company may be affected by such matters. In addition, there can be no assurance that the failure to ensure year 2000 capability by a supplier, customer or another party would not have a material adverse effect on the Company's financial condition or overall trends in results of operations through business interruption or shutdown, financial loss, reputational damage and legal liability to third parties. 16 FORWARD-LOOKING INFORMATION Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in the Annual Report, in the Company's Form 10-K 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, the impact of competitive products and pricing, interruptions in the Company's operations or those of its suppliers or major customers as may be caused by problems arising from the year 2000 and the successful integration of the ADFlex acquisition. In addition, a significant portion of the Company's revenue is generated from the disk drive and telecommunication industries and any changes in the structure, technology or outlook of these industries could have a significant 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. While the Company transacts business predominately in U.S. Dollars and most of its net sales are collected in U.S. Dollars, a portion of its sales and expenses are denominated in foreign currencies. Changes in the relation of foreign currencies to the U.S. Dollar will affect the Company's cost of goods sold and operating margins and could result in exchange gains or losses. To reduce the impact of certain foreign currency fluctuations, the Company enters into short-term forward foreign currency exchange contracts (hedges) in the regular course of business to manage its risk exposure, not as speculative instruments. Typically, these contracts have maturities of 1 month or less. The forward exchange contracts generally require the Company to exchange U.S. Dollars for foreign currencies at maturity, at rates agreed to at inception of the contracts. The gains or losses on hedges of transaction exposure are included in income in the period in which the exchange rates change. The gains and losses on unhedged foreign currency transactions are included in income. The Company periodically reviews the outlook for expected currency exchange rate movements as well as the policy on desired future foreign currency cash flow positions (long, short, balanced) for those currencies in which the Company has significant activity. Expected future cash flow positions and strategies are continuously monitored. At September 30, 1999, there were no open forward exchange contracts. No assurance can be given that the Company's hedging strategies will prevent future currency fluctuations from adversely affecting the Company's business, financial condition, results of operations and cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL DATA
Page Report of Independent Certified Public Accountants 18 Consolidated Balance Sheets at September 30, 1999 and 1998 19 Consolidated Statements of Operations for each of the three years in the period ended September 30, 1999 20 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 1999 21 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1999 22 Notes to Consolidated Financial Statements 23-28 Quarterly Financial Data (unaudited) 28
17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Innovex, Inc. We have audited the accompanying consolidated balance sheets of Innovex, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innovex, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. We have also audited Schedule II of Innovex, Inc. and Subsidiaries to Form 10-K for each of the three years in the period ended September 30, 1999. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. \s\ Grant Thornton LLP Minneapolis, Minnesota November 11, 1999 (except for the third paragraph of Note L, as to which the date is November 15, 1999) 18 CONSOLIDATED BALANCE SHEETS INNOVEX, INC. AND SUBSIDIARIES
September 30, Assets 1999 1998 - ------------------------------------------------------------------------------------------ Current assets: Cash and equivalents $ 6,231,430 $ 17,021,264 Short-term investments 19,310,000 40,434,000 Accounts receivable, less allowance for doubtful accounts of $1,825,000 (1998 - $213,000) 28,498,621 10,521,518 Inventories 15,891,945 5,717,330 Income taxes receivable -- 938,447 Other 6,385,053 4,686,504 ---------------------------------------- Total current assets 76,317,049 79,319,063 Property, plant and equipment - at cost: Land and land improvements 3,060,441 679,250 Buildings and leasehold improvements 26,565,421 14,923,082 Machinery and equipment 67,125,169 25,662,596 Office furniture and fixtures 9,147,491 3,053,366 ---------------------------------------- 105,898,522 44,318,294 Less accumulated depreciation and amortization 18,740,285 15,816,851 ---------------------------------------- Net property, plant and equipment 87,158,237 28,501,443 Intangible assets, net of accumulated Amortization of $506,000 (1998 - $2,236,000) 4,841,025 1,826,343 Deferred income taxes 10,442,908 -- Other assets 46,905 5,000 ---------------------------------------- $178,806,124 $109,651,849 ======================================== Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------ Current liabilities: Current maturities of long-term debt $ 307,702 $ 83,000 Line of credit 9,163,931 -- Accounts payable 25,104,517 3,688,148 Accrued compensation 932,573 1,604,845 Income taxes payable 592,264 -- Other accrued liabilities 9,195,392 875,140 ---------------------------------------- Total current liabilities 45,296,379 6,251,133 Long-term debt, less current maturities 26,375,546 755,024 Deferred income taxes -- 227,632 Commitments and contingencies -- -- Stockholders' equity: Common stock, $.04 par value; 30,000,000 shares Authorized, 14,822,104 shares issued and outstanding (1998 - 14,779,604) 592,884 591,184 Capital in excess of par value 16,181,730 15,732,350 Retained earnings 90,359,585 86,094,526 ---------------------------------------- Total stockholders' equity 107,134,199 102,418,060 ---------------------------------------- $178,806,124 $109,651,849 ========================================
The accompanying notes are an integral part of these statements. 19 CONSOLIDATED STATEMENTS OF OPERATIONS INNOVEX, INC. AND SUBSIDIARIES
For the years ended September 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Net Sales $ 103,197,766 $ 96,277,930 $ 142,003,743 Costs and Expenses: Cost of sales 76,277,451 64,225,956 81,027,750 Selling, general and administrative 9,787,555 7,372,209 8,764,366 Engineering 4,580,774 4,148,895 3,572,203 Restructuring charges 4,460,570 -- -- Interest expense 467,050 68,510 95,670 Interest income (2,034,500) (2,029,496) (1,338,421) Other (income) expense 420,332 (162,223) (95,428) ---------------------------------------------------------- 93,959,232 73,623,851 92,026,140 ---------------------------------------------------------- Income Before Provision For Income Taxes 9,238,534 22,654,079 49,977,603 Provision For Income Taxes (2,680,000) (6,743,000) (14,884,000) ---------------------------------------------------------- Net Income $ 6,558,534 $ 15,911,079 $ 35,093,603 ========================================================== Net Income Per Share: Basic $ 0.44 $ 1.08 $ 2.43 ========================================================== Diluted $ 0.44 $ 1.05 $ 2.31 ========================================================== Common and Common Equivalent Shares Outstanding: Basic 14,798,442 14,695,214 14,424,427 Diluted 15,071,229 15,125,790 15,161,820
The accompanying notes are an integral part of these statements. 20 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY INNOVEX, INC. AND SUBSIDIARIES
Capital in Total Common Excess of Retained Stockholders' For the years ended September 30, 1999, 1998 and 1997 Stock Par Value Earnings Equity - ------------------------------------------------------------------------------------------------------------------- Balance at October 1, 1996 $284,425 $9,418,376 $38,697,315 $48,400,116 Shares issued through exercise of stock options 14,126 2,068,039 2,082,165 Tax benefits derived from exercise of stock options 2,865,000 2,865,000 Dividends paid ($0.1125 per share) (1,623,510) (1,623,510) Two-for-one stock split 286,229 (286,229) -- Net income 35,093,603 35,093,603 --------------------------------------------------------- Balance at September 30, 1997 584,780 14,065,186 72,167,408 86,817,374 Shares issued through exercise of stock options 6,404 1,120,359 1,126,763 Tax benefits derived from exercise of stock options 546,805 546,805 Dividends paid ($0.135 per share) (1,983,961) (1,983,961) Net income 15,911,079 15,911,079 --------------------------------------------------------- Balance at September 30, 1998 591,184 15,732,350 86,094,526 102,418,060 Shares issued through exercise of stock options 1,700 373,451 375,151 Tax benefits derived from exercise of stock options 75,929 75,929 Dividends paid ($0.155 per share) (2,293,475) (2,293,475) Net income 6,558,534 6,558,534 --------------------------------------------------------- Balance at September 30, 1999 $592,884 $16,181,730 $90,359,585 $107,134,199 =========================================================
The accompanying notes are an integral part of these statements. 21 CONSOLIDATED STATEMENTS OF CASH FLOWS INNOVEX, INC. AND SUBSIDIARIES
For the years ended September 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,558,534 $ 15,911,079 $ 35,093,603 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,197,982 6,960,581 4,863,417 Deferred income taxes 742,106 992,927 (612,603) Other non-cash items 1,639,433 540,564 117,206 Changes in operating assets and liabilities, net of business acquisition: Accounts receivable (424,137) 11,121,212 (10,017,772) Inventories 940,231 1,094,814 (1,682,014) Other current assets 2,641,389 (609,670) (937,637) Accounts payable 6,252,826 (921,974) 1,080,915 Other current and long-term liabilities (585,269) (1,626,823) 581,480 Income taxes 1,251,809 (1,255,954) 1,920,275 --------------------------------------------------- Net cash provided by operating activities 26,214,904 32,206,756 30,406,870 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (22,598,839) (12,730,141) (15,613,246) Business acquisition (35,967,038) -- -- Proceeds from sale of assets 2,109,467 1,169,936 75,327 Purchase of held-to-maturity securities (31,090,000) (44,749,000) (30,730,000) Sales and maturities of held-to-maturity securities 52,214,000 32,755,000 18,430,000 Other assets -- -- 884,000 --------------------------------------------------- Net cash used in investing activities (35,332,410) (23,554,205) (26,953,919) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (669,654) (216,709) (104,520) Payment of bank debt acquired in business acquisition (33,248,281) -- -- Net proceeds on line of credit 9,163,931 -- -- Issuance of long-term debt 25,000,000 -- -- Proceeds from exercise of stock options 375,151 1,126,763 2,082,165 Dividends paid (2,293,475) (1,983,961) (1,623,510) --------------------------------------------------- Net cash provided by (used in) financing activities (1,672,328) (1,073,907) 354,135 --------------------------------------------------- Increase (decrease) in cash and equivalents (10,789,834) 7,578,644 3,807,086 Cash and equivalents at beginning of year 17,021,264 9,442,620 5,635,534 --------------------------------------------------- Cash and equivalents at end of year $ 6,231,430 $ 17,021,264 $ 9,442,620 ===================================================
SUPPLEMENTAL DISCLOSURES: Cash paid for interest was approximately $895,000; $66,000 and $118,000 in 1999, 1998 and 1997. Income tax payments were approximately $2,181,000; $7,005,000 and $13,813,000 in 1999, 1998 and 1997. Tax benefits derived from exercise of stock options totaling approximately $76,000; $547,000 and $2,865,000 in 1999, 1998 and 1997 were recorded as a reduction of current income taxes payable and an increase in capital in excess of par value. A $400,000 note receivable was received as partial consideration for the June 1998 sale of InnoMedica assets. The accompanying notes are an integral part of these statements. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INNOVEX, INC. AND SUBSIDIARIES September 30, 1999, 1998 and 1997 NOTE A. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company is a diversified manufacturer of electrical components for the computer, network systems, consumer, medical, telecommunications and other electronic industries. Substantially all of the Company's revenues, operating profits and assets relate to one operating unit involved in the manufacture of flexible circuit interconnects. Company customers are located throughout the United States, Europe and the Pacific Rim. The Company has manufacturing facilities in Chandler, Arizona; Hopkins, Litchfield and Montevideo, Minnesota; Mexico and Thailand. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. 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 the year ended September 30. The fiscal years ended September 30, 1999, 1998 and 1997 include fifty-two weeks, fifty-three weeks and fifty-two weeks of operations. FOREIGN CURRENCY TRANSLATION - The Company uses the United States Dollar as its functional currency for its subsidiaries in Mexico and Thailand. Remeasurement gains and losses, resulting from the process of remeasuring the financial statements of these foreign subsidiaries into U.S. Dollars, are included in operations. To date, the effect on income of remeasurement gains and losses has been immaterial. FOREIGN EXCHANGE INSTRUMENTS - The Company enters into short-term forward foreign currency exchange contracts in the regular course of business to manage its exposure against foreign currency fluctuations, primarily relating to nonfunctional currency monetary assets and liabilities. The forward exchange contracts generally require the Company to exchange U.S. Dollars for foreign currencies at maturity, at rates agreed to at inception of the contracts. The gains or losses on hedges of transaction exposure are included in income in the period in which the exchange rates change. The gains and losses on unhedged foreign currency transactions are included in income. At September 30, 1999, there were no open forward currency exchange contracts. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company considers all highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Cash equivalents, which consist of money market funds and weekly put bonds, totaled $1,559,000 and $18,299,000 at September 30, 1999 and 1998 and are recorded at cost, which approximates market value. Debt securities have been classified as held-to-maturity securities, which are reported at amortized cost. ACCOUNTS RECEIVABLE - The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of customers. The Company maintains allowances for potential credit losses. INVENTORIES - Inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT - Depreciation is provided using the straight-line method over the estimated useful lives of the assets for financial reporting and accelerated methods for tax purposes. Estimated service lives range from 5 to 30 years for buildings and leasehold improvements, from 2 to 7 years for machinery and equipment and from 3 to 7 years for office furniture and fixtures. INTANGIBLE ASSETS - Intangible assets include goodwill, patents, licenses, technology and trademarks, which are capitalized at cost and amortized on the straight-line basis over their estimated useful lives. Useful lives range from 3 to 10 years. Management reviews the valuation and amortization of goodwill on an ongoing basis. As part of this review, management estimates the value and future benefits of the net income to be generated by the businesses acquired to determine whether an impairment of goodwill has occurred. NET INCOME PER SHARE - The Company's basic net income per share is computed by dividing net income by the weighted average number of outstanding common shares. The Company's diluted net income per share is computed by dividing net income by the weighted average number of outstanding common shares and common share equivalents related to stock options, when dilutive. Options to purchase 193,650, 196,250 and 38,000 shares of common stock with weighted average exercise purchase prices of $25.71, $28.76, and $30.23 were outstanding during 1999, 1998 and 1997, but were excluded from the computation of common share equivalents because they were antidilutive. REVENUE RECOGNITION - Sales are recorded at the time of shipment and provision for anticipated returns, net of exchanges, is recorded based on historical experience. 23 USE OF ESTIMATES - Preparation of the Company's 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. STOCK BASED COMPENSATION - The Company utilizes the intrinsic value method of accounting for its employee stock based compensation plans. Pro forma information related to the fair value based method of accounting is contained in Note F. NEW PRONOUNCEMENTS - The Financial Accounting Standards Board has also issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS 133 also specifies new methods of accounting for derivatives used in risk management strategies (hedging activities), prescribes the items and transactions that may be hedged, and specifies detailed criteria required to qualify for hedge accounting. Management believes the adoption of SFAS 133 will not have a material effect on the consolidated financial statements of the Company. NOTE B. - BUSINESS ACQUISITION On August 9, 1999, the Company purchased 76% of the outstanding shares of common stock of ADFlex Solutions, Inc.("ADFlex"). The remaining 24% of the shares outstanding were purchased on September 14, 1999. The $37.2 million purchase price, includes change in control payments of $1.9 million and transaction costs of $.9 million. The purchase price was paid in the form of cash. Pursuant to the purchase agreement, the Company was required to pay off all outstanding balances under that certain Credit Agreement among ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended (the "Credit Agreement"). Innovex obtained a credit facility totaling in principal amount $40 million, that was utilized to refinance amounts owed under the Credit Agreement, pay down ADFlex's current liabilities and pay related transaction costs. The acquisition has been accounted for as a purchase and, accordingly, the results of operations since acquisition are included in the accompanying financial statements. The excess cost over the fair value of net assets acquired of $3.9 million was allocated to goodwill and will be amortized on a straight-line basis over 10 years. The purchase price and fair value of the assets acquired were as follows (in thousands of dollars): Current assets $ 33,687 Property, plant and equipment 46,163 Intangible assets 3,856 Deferred tax assets 11,929 Other long-term assets 47 Current liabilities (57,221) Other long-term liabilities (1,294) -------- $ 37,167 ======== The following unaudited pro forma results of operations for the years ended September 30, 1999 and 1998 assume the acquisition occurred on October 1, 1997. The pro forma information includes adjustments for depreciation based on the fair market value of the property, plant and equipment acquired, amortization of intangibles arising from the transaction, the reduction of interest expense to reflect the refinancing of the ADFlex credit facility, the reduction of interest income on cash used to complete the acquisition, the elimination of salaries of ADFlex executives terminated in conjunction with the merger and related changes in the provision for income tax expense (in thousands of dollars except per share amounts): Years Ended 1999 1998 - ------------------------------------------------------------------- Net sales $215,975 $281,102 Net income (loss) (6,845) 15,782 Net income (loss) per share: Basic $(0.46) $1.07 Diluted $(0.46) $1.04 The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated on the assumed date, nor are they necessarily indicative of future operating results. NOTE C. - SHORT-TERM INVESTMENTS Short-term investments consist primarily of a diversified portfolio of tax exempt municipal bonds that are classified as held-to-maturity securities at September 30, 1999 and 1998. As of September 30, 1999 and 1998, a significant portion of the short-term investments had maturities within one year. Gross realized and unrealized gains and losses related to these securities were not material. Proceeds from sales of held-to-maturity securities during 1999, with an amortized cost of $5,119,022, were $5,104,765. Net realized losses on the sale of these securities were immaterial. These proceeds were used to complete the ADFlex acquisition on August 9 and September 14, 1999. 24 NOTE D. - INVENTORIES Inventories are comprised of the following at September 30: 1999 1998 --------------------------------- Raw materials and purchased parts $8,753,336 $2,237,266 Work-in-process and finished goods 7,138,609 3,480,064 --------------------------------- $15,891,945 $5,717,330 ================================= NOTE E. - LINE OF CREDIT AND LONG-TERM DEBT On September 15, 1999 the Company entered into a new credit facility arranged by Norwest Bank Minnesota N.A. which includes U.S. Bank N.A. as an additional lender. The facility was put in place to pay off all outstanding balances existing at the time of the ADFlex acquisition under the Credit Agreement among ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended, as required by the ADFlex merger agreement. The new credit facility consists of a $15.0 million, five-year revolving line of credit and a $25.0 million, five-year term loan with equal principal payments due each quarter commencing on October 1, 2000 and continuing through the September 14, 2004 maturity date. Under the terms of the credit facility, any outstanding balance bears interest at Norwest Minnesota, N.A.'s prime interest rate plus an applicable margin ranging from 0 to .25% or LIBOR plus an applicable margin ranging from 1.25% to 2.0% based on the Company achieving certain financial objectives at the end of each quarter. The credit facility is collateralized by all accounts receivable, inventory, equipment and general intangibles of the Company. The Company is required, under the credit agreement, to maintain certain financial ratios and meet certain net worth and indebtedness tests for which the Company is in compliance at September 30, 1999. At September 30, 1999, $25.0 million was outstanding under the term loan and $9.2 million was outstanding under the revolving line of credit. The interest rates for the term loan and revolving line of credit at September 30, 1999 were 6.76% and 6.61%. Other long-term debt consists of capitalized leases and industrial development revenue notes which are collateralized by certain buildings, improvements and equipment. Interest rates on these range from 6.75% to 7.46%. Aggregate maturities of long-term debt including capitalized leases for the next five years are as follows (in thousands) : 2000 - $308; 2001 - $6,666; 2002 - $6,579; 2003 - $6,587; 2004 - $6,543. The recorded value of long-term debt approximates fair market value. NOTE F. - STOCKHOLDERS' EQUITY Stock Splits - On November 23, 1996, the Company's Board of Directors declared a two-for-one split of the Company's common stock and increased the authorized shares from 15,000,000 to 30,000,000. The additional shares were distributed on December 23, 1996 to stockholders of record on December 16, 1996. All share and per share information throughout the financial statements reflect the split. Stock Option Plans - The Company has stock option plans that provide for incentive and non-qualified stock options to be granted to directors, officers and other key employees or consultants. The stock options granted generally have a ten-year life, vest over a period of six months to five years, and have an exercise price equal to the fair market value of the stock on the date of grant. At September 30, 1999, the Company had 790,050 shares of common stock available for issue under the plans. Transactions under the plans during each of the three years in the period ending September 30, 1999 are summarized as follows: Number of Weighted Shares Under Average Option Exercise Price - ------------------------------------------------------------------------------ Outstanding at October 1, 1996 1,067,510 $ 6.11 Granted 387,000 12.18 Forfeited (111,796) 6.55 Exercised (398,250) 5.23 - ------------------------------------------------------------- Balance at September 30, 1997 944,464 8.92 Granted 187,750 28.52 Forfeited (137,300) 13.39 Exercised (160,100) 7.04 - ------------------------------------------------------------- Balance at September 30, 1998 834,814 12.95 Granted 459,400 12.10 Forfeited (113,300) 18.29 Exercised (42,500) 8.83 - ------------------------------------------------------------- Balance at September 30, 1999 1,138,414 12.23 ============= 25 Options exercisable at September 30: Weighted Number Average Exercisable Exercise Price ------------------------------ 1997 122,865 $6.23 1998 270,564 7.97 1999 434,114 9.25 The following table summarizes information concerning currently outstanding and exercisable stock options:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Range of Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------------------------- $0.33 - $3.46 33,164 5.6 years $ 1.90 33,164 $1.90 6.49 - 8.72 327,900 6.2 years 7.30 297,500 7.17 9.13 - 11.50 558,200 8.4 years 11.06 59,800 10.22 13.00 - 16.26 70,500 9.3 years 14.93 -- -- 18.88 - 32.44 148,650 8.0 years 28.55 43,650 27.68 - --------------------------------------------------------------------------------------------------- 1,138,414 434,114 ========== ========
The Company's 1999, 1998 and 1997 pro forma net income and diluted net income per share would have been $5,871,000, $15,307,000, and $34,695,000 or $0.39, $1.02 and $2.30 had the fair value method been used for valuing options granted during those years. The impact on net income may differ in future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1996. The weighted average value of options granted in 1999, 1998 and 1997 was $4.68, $12.35 and $5.56. The value was computed by applying the following weighted average assumptions to the Black Scholes options pricing model: volatility of 51%, 53% and 60%; dividend yield of 1.2%, 0.4% and 1.7%; risk-free rate of return of 4.5%, 6.0% and 5.8%; and an average term of 3.5 years for 1999, 1998 and 1997. NOTE G. - INCOME TAXES The effective income tax rates differed from the federal statutory income tax rate as follows for the years ended September 30: 1999 1998 1997 - ------------------------------------------------------------------ Federal statutory rate 34.0% 34.6% 34.7% State income taxes 3.1 1.8 1.9 FSC benefit (9.2) (6.2) (5.0) Tax exempt interest (6.8) (2.8) (0.8) Additional income tax accrual 6.8 1.9 (0.6) Other 1.1 0.5 (0.4) ---------------------------------- 29.0% 29.8% 29.8% ================================== Components of the provision for income taxes are as follows for the years ended September 30 (thousands of dollars): 1999 1998 1997 - ------------------------------------------------------------------ Current: Federal $1,702 $5,128 $14,027 State 236 622 1,470 ---------------------------------- 1,938 5,750 15,497 Deferred 742 993 (613) ---------------------------------- $2,680 $6,743 $14,884 ================================== 26 The cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes are as follows at September 30 (thousands of dollars): 1999 1998 - ------------------------------------------------------------------------- Current deferred tax assets: Inventories $1,638 $ 331 Receivables 447 140 Compensation and benefits 329 217 Restructuring 893 -- Other 140 10 ------------------------ $3,447 $ 698 ======================== Long-term deferred tax assets (liabilities) - net: Accelerated depreciation $(2,914) $ (170) Intangibles 9,758 (58) Tax credit and NOL carryforwards 3,599 -- ------------------------ $10,443 $ (228) ======================== NOTE H. - RETIREMENT AND PROFIT-SHARING PLANS The Company sponsors a 401K retirement plan for all of its employees meeting minimum eligibility requirements. The plan provides Company matching contributions of 50% of the first 6% of employee contributions to the plan. An additional 401K retirement plan was also in effect for the last 8 weeks of the year relating to the ADFlex acquisition. This plan is sponsored for all employees of the ADFlex's United States operation. Under this plan, the Company may make contributions each year up to a maximum of 4% of an employee's total compensation. The Company plans to merge the ADFlex plan into the Company plan in 2000. Company contributions for both these plans were approximately $385,000, $435,000 and $404,000 for the years ended September 30, 1999, 1998 and 1997. NOTE I. - RESEARCH AND DEVELOPMENT COSTS The Company incurred research and development costs of approximately $2,878,000, $2,356,000 and $1,784,000 for the years ended September 30, 1999, 1998 and 1997. NOTE J. - FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS Prior to the ADFlex acquisition, the Company had no foreign-based operations; however, the Company utilized subcontractors in Thailand and China to perform certain labor intensive procedures on a large portion of its products. In October 1999, the Company purchased its Thailand subcontractor, Boron Public Limited Company, for $3.7 million in order to increase operational control and reduce foreign operating costs. A preliminary allocation of the purchase price to net assets results in goodwill of approximately $2.9 million which will be amortized on a straight- line basis over ten years. In addition, the Company acquired an Asian operation, located in Lamphun, Thailand, as part of the ADFlex acquisition. The Company will continue to increase the functions performed at this location in order to take advantage of the proximity to customers and favorable labor and operating costs. The Company had aggregate export sales of $76,607,000, $79,957,000 and $122,379,000 for the years ending September 30, 1999, 1998 and 1997, principally to Pacific Rim customers. With respect to foreign operations for the year ended September 30, 1999, long-lived assets of $15,061,000 and $12,308,000 were located in Thailand and Mexico. There were no foreign operations with long-lived assets for the year ended September 30, 1998. Revenues from four customers made up a significant portion of the Company's total net sales during the years ending September 30: 1999 1998 1997 ----------------------------------- Customer A 40% 28% 25% Customer B 14 20 15 Customer C 10 14 5 Customer D 1 12 28 Accounts receivable from the above four customers are 29% and 80% of the Company's accounts receivable at September 30, 1999 and 1998. NOTE K. - COMMITMENTS AND CONTINGENCIES The Company leases facilities and equipment under operating leases that expire at various dates through June 30, 2003. As of September 30, 1999, the future minimum lease commitments under the operating leases are payable as follows (in thousands): 2000 - $1,217; 2001 - $1,183; 2002 - $1,018; 2003 - $945. 27 The Company is constructing a new $13 million manufacturing and office building in Maple Plain, Minnesota. Costs related to the building of approximately $2 million were incurred in fiscal 1999. The nature of the Company's business exposes the Company to potential environmental remediation liabilities arising from the manufacture, use and disposal of hazardous materials used to manufacture flex interconnect products. Management believes that any cost associated with maintaining the Company's compliance with current environmental remediation laws will not have a material adverse effect on the Company's financial statements. NOTE L. - RESTRUCTURING CHARGES The 1999 results include a $2,765,000 restructuring charge related to the discontinuation of the lead wire assembly product line. The charge was recorded pursuant to a plan announced in September 1999. The charge included approximately $871,000 related to asset impairment, $156,000 for facility abandonment costs, $1,403,000 for the write off of inventory and supplies, $138,000 for increasing the accounts receivable reserve and $197,000 in employee severance and benefits. As of September 30, 1999, the following amounts were accrued, facility payments $156,000 and severance $197,000. This exit plan will be substantially complete by March 2000. The 1999 results also include a $1,695,000 restructuring charge associated with the disposition of the Iconovex Division and its 51% owned joint venture, Smart Solution. This charge was recorded in June 1999 when all operations were ceased and announced in July 1999. The charge included $801,000 for prepaid expenses, $779,000 for intangible assets including capitalized software, $14,000 in employee severance and $101,000 for administrative costs. As of September 30, 1999, all amounts relating to this restructuring have been paid. On November 15, 1999, subsequent to fiscal 1999, the Company announced its intention to restructure its manufacturing operations and close its Mexican facility. The Company expects to record a restructuring charge of up to $14 million in the fiscal year 2000 first quarter. The charges will primarily consist of severance costs and the write off of excess and obsolete plant and equipment. QUARTERLY FINANCIAL DATA
(Unaudited) 1999 1st Quarter 2nd Quarter 3rd Quarter* 4th Quarter* Year - ------------------------------------------------------------------------------------------------------- Net sales $22,027,861 $20,703,779 $20,636,068 $39,830,058 $103,197,766 Gross profit 7,076,533 6,785,131 6,322,225 6,736,426 26,920,315 Net income 2,994,767 2,539,101 1,509,671 (485,004) 6,558,535 Net income per share: Basic $0.20 $0.17 $0.10 $(0.03) $0.44 Diluted $0.20 $0.17 $0.10 $(0.03) $0.44
* The third-quarter includes restructuring charges of $1,695,000 related to the disposition of Iconovex, Innovex's software division and the fourth-quarter includes $2,765,000 related to the discontinuation of the lead wire assembly product line.
1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year - ------------------------------------------------------------------------------------------------------- Net sales $33,008,635 $25,105,195 $20,298,838 $17,865,262 $96,277,930 Gross profit 13,106,642 8,851,552 5,398,125 4,695,655 32,051,974 Net income 7,274,164 4,261,641 2,410,663 1,964,611 15,911,079 Net income per share: Basic $0.50 $0.29 $0.16 $0.13 $1.08 Diluted $0.48 $0.28 $0.16 $0.13 $1.05
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the section entitled "Election of Directors" in the Registrant's definitive proxy statement to be mailed to shareholders on or about December 20, 1999, and filed with the Securities and Exchange Commission. Information on executive officers is set forth in Part I, Item 4A hereto. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the section entitled "Executive Compensation" and "Election of Directors" in the Registrant's definitive proxy statement to be mailed to the Shareholders on or about December 20, 1999, and filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the section entitled "Security Ownership of Certain Beneficial Owners and Management" and "Election of Directors" in the Registrant's definitive proxy statement to be mailed to Shareholders on or about December 20, 1999, and filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the section entitled "Certain Transactions" in the Registrant's definitive proxy statement to be mailed to Shareholders on or about December 20, 1999, and filed with the Securities and Exchange Commission. 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS Page(s) ------- The following Consolidated Financial Statements of the Registrant, Innovex, Inc. and subsidiaries, are included in Item 8: * Consolidated Balance Sheets at September 30, 1999 and 1998...... 19 * Consolidated Statements of Operations for each of the three years in the period ended September 30, 1999.................... 20 * Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 1999.......... 21 * Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1999 ................... 22 * Notes to Consolidated Financial Statements...................... 23-28 (2) FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts for the three years ended September 30, 1999.................................. 32 ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE ACCOUNTING REGULATION OF THE SECURITIES AND EXCHANGE COMMISSION HAVE BEEN OMITTED BECAUSE THEY ARE NOT REQUIRED, ARE INAPPLICABLE OR THE INFORMATION IS INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR NOTES THERETO. (3) EXHIBITS 3(a) Articles of Incorporation, as amended, are incorporated by reference to Exhibit 3 of the Registrant's Form 10Q for the Quarter Ended December 31, 1996................................ 3(b) Bylaws, as amended, are incorporated by reference to Exhibit 3(b) of the Registrant's Form S-1 Registration Statement dated June 19, 1986 (Commission File No. 33-6594).................... 10(a) 1983 Employee Incentive Stock Option Plan is incorporated by reference to Exhibit 4(a) of the Registrant's Form S-8 dated June 3, 1987 (Commission File No. 33-14776).............. 10(b) 1987 Employee Stock Option Plan, as amended, is incorporated by reference to Exhibit 4(a) of te Registrant's Form S-8 dated March 17, 1989 (Commission File No. 33-27530)... 10(c) Innovex, Inc. and Subsidiaries Employees' Retirement Plan is incorporated by reference to Exhibit 10(i) of the Registrant's Form 10-K for the Year Ended September 30, 1992... 10(d) 1994 Stock Option Plan, as amended, is incorporated by reference to Exhibit 4.1 of the Registrant's Form S-8 dated May 27, 1999 (Commission File No. 333-79427)................... 10(e) Form of Employment Agreement between certain executive officers and the Company is incorporated by reference to Exhibit 10(g) of the Registrant's Form 10-K for the year ended September 30, 1996....................................... 10(f) Lease Agreement between Karon-Baronbaum LLC, Landlord, and Innovex, Inc., Tenant, for Hopkins facility is incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the quarter ended March 31, 1997........................... 10(g) Agreement and Plan of Merger, dated July 1, 1999, by and among ADFlex Solutions, Inc. and Innovex, Inc. and Innovex Acquisition Corp. is incorporated by reference to Exhibit (c)(1) of the Registrant's Schedule 14(d)(1) filed on July 7, 1999........................................................ 10(h) Lease dated June 28, 1993 between ADFlex Solutions, Inc. and TL Properties, Inc. and the First Amendment to Lease, dated June 1994, incorporated by reference to the ADFlex Solutions, Inc. Registration Statement on Form S-1 (SEC file No. 33-80324) or amendments thereto, filed on June 16, 1994.... 10(i) Credit Agreement dated as of September 15, 1999 among Innovex, Inc. as Borrower and the Banks Named Herein, as Banks, and Norwest Bank Minnesota, N.A., as Agent..............E1-E58 21 Subsidiaries of Registrant...................................... E59 23 Consent of Grant Thornton LLP................................... E60 27 Financial Data Schedule......................................... E61 (b) REPORTS ON FORM 8-K Form 8K and 8K/A were filed on August 20, 1999 and October 19, 1999 relating to the acquisition of ADFlex Solutions, Inc... (c) EXHIBITS Reference is made to Item 14(a)3................................ (d) SCHEDULES Reference is made to Item 14(a)2................................ 30 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. INNOVEX, INC. By \s\ Thomas W. Haley Thomas W. Haley Chairman and Chief Executive Officer Date December 10, 1999 By \s\ Douglas W. Keller Douglas W. Keller Vice President, Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 8th day of December, 1999. \s\ Thomas W. Haley Chairman and Chief Executive Officer Thomas W. Haley and Director (principal executive officer) \s\ Douglas W. Keller Vice President, Finance Douglas W. Keller (principal financial officer) \s\ Gerald M. Bestler Director Gerald M. Bestler \s\ Frank L. Farrar Director Frank L. Farrar \s\ Elick Eugene Hawk Director Elick Eugene Hawk \s\ William J. Miller Director William J. Miller \s\ William P. Murnane President and Chief Operating Officer William P. Murnane and Director \s\ Michael C, Slagle Director Michael C. Slagle \s\ Bernt M. Tessem Director Bernt M. Tessem 31 Innovex Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For The Three Years Ended September 30, 1999
Charged to Balance at Charged to Other Balance at Beginning of Costs and Accounts - Deductions - End of DESCRIPTION Period Expenses Describe Describe Period ------ -------- -------- -------- ------ Miscellaneous valuation and qualifying accounts (a) Year ended September 30, 1999 $ 445,000 $ -- $ -- $ -- $2,151,000 Year ended September 30, 1998 $ 903,000 $ -- $ -- $ -- $ 445,000 Year ended September 30, 1997 $ 640,000 $ -- $ -- $ -- $ 903,000
(a) Additions, deductions and balances were not individually significant. 32 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OF INNOVEX, INC. FOR FISCAL YEAR ENDED SEPTEMBER 30, 1999 ------------------------------------------------------------- EXHIBITS EX-10.(I) 2 CREDIT AGREEMENT EXHIBIT 10(I) CREDIT AGREEMENT DATED AS OF SEPTEMBER 15, 1999 AMONG INNOVEX, INC., AS BORROWER AND THE BANKS NAMED HEREIN, AS BANKS AND NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, AS AGENT TABLE OF CONTENTS ARTICLE I DEFINITIONS.............................................................................................1 SECTION 1.1. DEFINITIONS..................................................................................1 ARTICLE II CREDIT FACILITIES.....................................................................................14 SECTION 2.1. COMMITMENT AS TO REVOLVING FACILITY.........................................................14 SECTION 2.2. COMMITMENT AS TO TERM FACILITY..............................................................14 SECTION 2.3. PROCEDURES FOR BORROWING UNDER THE REVOLVING FACILITY.......................................14 SECTION 2.4. CONVERTING FLOATING RATE FUNDINGS TO EURODOLLAR FUNDINGS; PROCEDURES........................15 SECTION 2.5. PROCEDURES AT END OF AN INTEREST PERIOD.....................................................15 SECTION 2.6. SETTING AND NOTICE OF RATES.................................................................15 SECTION 2.7. INTEREST ON OBLIGATIONS.....................................................................16 SECTION 2.8. OBLIGATION TO REPAY ADVANCES; REPRESENTATIONS...............................................16 SECTION 2.9. NOTES; AMORTIZATION.........................................................................17 SECTION 2.10. INTEREST DUE DATES..........................................................................18 SECTION 2.11. COMPUTATION OF INTEREST AND FEES............................................................18 SECTION 2.12. FEES........................................................................................18 SECTION 2.13. USE OF PROCEEDS.............................................................................19 SECTION 2.14. VOLUNTARY REDUCTION OR TERMINATION OF THE COMMITMENTS; PREPAYMENTS..........................19 SECTION 2.15. PAYMENTS....................................................................................20 SECTION 2.16. TAXES.......................................................................................22 SECTION 2.17. INCREASED COSTS; CAPITAL ADEQUACY; FUNDING EXCEPTIONS.......................................23 SECTION 2.18. FUNDING LOSSES..............................................................................27 SECTION 2.19. RIGHT OF BANKS TO FUND THROUGH OTHER OFFICES................................................27 SECTION 2.20. DISCRETION OF BANKS AS TO MANNER OF FUNDING.................................................27 SECTION 2.21. CONCLUSIVENESS OF STATEMENTS; SURVIVAL OF PROVISIONS........................................28 ARTICLE III CONDITIONS OF LENDING................................................................................28 SECTION 3.1. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE.................................................28 SECTION 3.2. CONDITIONS PRECEDENT TO ALL ADVANCES........................................................30 ARTICLE IV REPRESENTATIONS AND WARRANTIES........................................................................30 SECTION 4.1. CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE.................................30 SECTION 4.2. AUTHORIZATION FOR BORROWINGS; NO CONFLICT AS TO LAW OR AGREEMENTS..................................................................................30 SECTION 4.3. LEGAL AGREEMENTS............................................................................31 SECTION 4.4. SUBSIDIARIES................................................................................31 SECTION 4.5. FINANCIAL CONDITION; NO ADVERSE CHANGE......................................................31 SECTION 4.6. LITIGATION..................................................................................32 SECTION 4.7. REGULATION U................................................................................32 SECTION 4.8. TAXES.......................................................................................32 SECTION 4.9. TITLES AND LIENS............................................................................32
-i- Exhibit 10(i) SECTION 4.10. PLANS.......................................................................................33 SECTION 4.11. DEFAULT.....................................................................................33 SECTION 4.12. ENVIRONMENTAL COMPLIANCE....................................................................33 SECTION 4.13. SUBMISSIONS TO BANKS........................................................................34 SECTION 4.14. FINANCIAL SOLVENCY..........................................................................34 ARTICLE V AFFIRMATIVE COVENANTS OF THE BORROWER..................................................................34 SECTION 5.1. REPORTING REQUIREMENTS......................................................................35 SECTION 5.2. BOOKS AND RECORDS; INSPECTION AND EXAMINATION...............................................37 SECTION 5.3. COMPLIANCE WITH LAWS........................................................................37 SECTION 5.4. PAYMENT OF TAXES AND OTHER CLAIMS...........................................................37 SECTION 5.5. MAINTENANCE OF PROPERTIES...................................................................37 SECTION 5.6. INSURANCE...................................................................................38 SECTION 5.7. PRESERVATION OF CORPORATE EXISTENCE.........................................................38 SECTION 5.8 YEAR 2000...................................................................................38 SECTION 5.9. INTEREST COVERAGE RATIO.....................................................................39 SECTION 5.10 LEVERAGE RATIO..............................................................................39 SECTION 5.11 MINIMUM NET WORTH...........................................................................39 ARTICLE VI NEGATIVE COVENANTS....................................................................................40 SECTION 6.1. LIENS.......................................................................................40 SECTION 6.2. INDEBTEDNESS................................................................................41 SECTION 6.3. GUARANTIES..................................................................................41 SECTION 6.4. INVESTMENTS.................................................................................41 SECTION 6.5. RESTRICTED PAYMENTS.........................................................................42 SECTION 6.6. SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS...............................42 SECTION 6.7. CONSOLIDATION AND MERGER; ASSET ACQUISITIONS................................................42 SECTION 6.8. SALE AND LEASEBACK..........................................................................42 SECTION 6.9. RESTRICTIONS ON NATURE OF BUSINESS..........................................................43 SECTION 6.10. ACCOUNTING..................................................................................43 SECTION 6.11. HAZARDOUS SUBSTANCES........................................................................43 SECTION 6.12. CAPITAL EXPENDITURES........................................................................43 ARTICLE VII EVENTS OF DEFAULT; RIGHTS AND REMEDIES...............................................................43 SECTION 7.1. EVENTS OF DEFAULT...........................................................................43 SECTION 7.2. RIGHTS AND REMEDIES.........................................................................45 ARTICLE VIII AGREEMENT AMONG BANKS AND AGENT.....................................................................46 SECTION 8.1. AUTHORIZATION; POWERS; AGENT FOR COLLATERAL PURPOSES........................................46 SECTION 8.2. APPLICATION OF PROCEEDS.....................................................................47 SECTION 8.3. EXCULPATION.................................................................................48 SECTION 8.4. USE OF THE TERM "AGENT".....................................................................48 SECTION 8.5. REIMBURSEMENT FOR COSTS AND EXPENSES........................................................48 SECTION 8.6. PAYMENTS RECEIVED DIRECTLY BY BANKS.........................................................48 SECTION 8.7. INDEMNIFICATION.............................................................................49
-ii- SECTION 8.8. AGENT AND AFFILIATES........................................................................49 SECTION 8.9. CREDIT INVESTIGATION........................................................................49 SECTION 8.10. DEFAULTS....................................................................................50 SECTION 8.11. OBLIGATIONS SEVERAL.........................................................................50 SECTION 8.12. SALE OR ASSIGNMENT; ADDITION OF BANKS.......................................................50 SECTION 8.13. PARTICIPATION...............................................................................51 SECTION 8.14. WITHHOLDING TAX EXEMPTION...................................................................52 SECTION 8.15. BORROWER NOT A BENEFICIARY OR PARTY.........................................................52 ARTICLE IX MISCELLANEOUS.........................................................................................52 SECTION 9.1. NO WAIVER; CUMULATIVE REMEDIES..............................................................52 SECTION 9.2. AMENDMENTS, REQUESTED WAIVERS, ETC..........................................................53 SECTION 9.3. ADDRESSES FOR NOTICES, ETC..................................................................53 SECTION 9.4. COSTS AND EXPENSES..........................................................................53 SECTION 9.5. INDEMNITY...................................................................................54 SECTION 9.6. EXECUTION IN COUNTERPARTS...................................................................55 SECTION 9.7. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL...........................................55 SECTION 9.8. INTEGRATION; INCONSISTENCY..................................................................56 SECTION 9.9. AGREEMENT EFFECTIVENESS.....................................................................56 SECTION 9.10. ADVICE FROM INDEPENDENT COUNSEL.............................................................56 SECTION 9.11. JUDICIAL INTERPRETATION.....................................................................56 SECTION 9.12. BINDING EFFECT; NO ASSIGNMENT BY BORROWER...................................................56 SECTION 9.13. SEVERABILITY OF PROVISIONS..................................................................56 SECTION 9.14. HEADINGS....................................................................................56
-iii- LIST OF EXHIBITS Exhibit A Form of Revolving Note Exhibit B Form of Term Note Exhibit C Notice of Borrowing under Revolving Facility Exhibit D Notice of Conversion to Eurodollar Rate Exhibit E Notice of Rollover to Eurodollar Rate Exhibit F Form of Certificate of Chief Financial Officer as to Annual Financial Statements Exhibit G Form of Certificate of Chief Financial Officer as to Fiscal Quarter Financial Statements Exhibit H Form of Assignment Certificate LIST OF SCHEDULES Schedule 4.1 Name under which Borrower and its Subsidiaries Have Done Business Schedule 4.4 Subsidiaries of the Borrower Schedule 4.6 Litigation Schedule 4.8 Unpaid Taxes and Assessments Schedule 4.9 Intellectual Property Schedule 4.10 Description of Pension Plans of the Borrower Schedule 4.12 Environmental Disclosures of the Borrower Schedule 6.1 Outstanding Liens of the Borrower and its Subsidiaries Schedule 6.2 Outstanding Indebtedness of the Borrower and its Subsidiaries Schedule 6.3 Outstanding Guaranties of the Borrower and its Subsidiaries -iv- CREDIT AGREEMENT This Credit Agreement is dated as of September 15, 1999, by and among INNOVEX, INC., a Minnesota corporation (the "Borrower"), and 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 this Agreement pursuant to the terms and conditions of Article VIII hereof (herein collectively called the "Banks" and individually each called a "Bank"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Norwest"), in its separate capacity as administrative agent for itself and all other Banks (in such capacity, the "Agent"). ARTICLE I Definitions Section 1.1. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in the preamble have the meanings therein assigned to them; (b) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and (d) all accounting terms, unless otherwise specified, shall be deemed to refer to Persons and their Subsidiaries on a consolidated basis in accordance with GAAP. "Adjustment Date" has the meaning specified in Section 8.12. "Administrative Fee" has the meaning specified in Section 2.12(c). "Advance" means a loan of funds by a Bank to the Borrower under a Facility. "Affiliate" means, with respect to any Person, (a) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, (i) ten percent (10%) or more of a Person that is publicly held or (ii) fifty percent (50%) or more of a Person that is privately held, of the stock having ordinary voting power in the election of directors of such Person, (b) each Person that controls, is controlled by or is under common control with such Person or (c) each of such Person's, officers, directors, joint venturers and partners. For purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise; provided, however, that the term "Affiliate" shall in no event include the Agent or a Lender. "Agent" has the meaning specified in the preamble. "Agreement" means this Credit Agreement and all exhibits, amendments and supplements hereto and all restatements thereof. "Applicant" has the meaning specified in Section 8.12. "Assignment Certificate" has the meaning specified in Section 8.12. "Bank" or "Banks" has the meaning specified in the preamble. "Base Rate" on any day means the higher of (i) the Prime Rate in effect on that day, or (ii) the Federal Funds Rate in effect on that day plus .50%. "Borrower" has the meaning specified in the preamble. "Borrowing" means a borrowing by the Borrower under the Revolving Facility, consisting of the aggregate of all Revolving Advances made by the Banks to the Borrower pursuant to a request under Section 2.3. "Business Day" means any day other than a Saturday or Sunday on which national banks are required to be open for business in Minneapolis, Minnesota, and, in addition, if such day relates to a Eurodollar Funding or fixing of a Eurodollar Rate, a day on which dealings in U.S. dollar deposits are carried on in the London interbank eurodollar market. "Capital Adequacy Rule" has the meaning specified in Section 2.17(b)(ii). "Capital Adequacy Rule Change" has the meaning specified in Section 2.17(b)(iii). "Capital Expenditures" of any Person means, with respect to the applicable Covenant Computation Period, the sum of: (a) the aggregate amount of all expenditures of such Person for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures; and (without duplication) (b) the aggregate amount of all Capitalized Lease Liabilities of such Person incurred during such Covenant Computation Period. E-2 Exhibit 10(i) "Capitalized Lease Expenditures" of any Person means, with respect to the applicable Covenant Computation Period, the total expenditures made by such Person on account of its Capitalized Lease Liabilities, determined in accordance with GAAP. "Capitalized Lease Liabilities" of any Person means, with respect to the applicable Covenant Computation Period, all monetary obligations of such Person under any leasing or similar arrangement which, in accordance with GAAP, would be classified as capitalized leases, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Cash Flow Available for Interest" of any Person means, with respect to the applicable Covenant Computation Period, such Person's Pre-Tax Earnings, plus such Person's Interest Expense, plus such Person's rental expense with respect to operating leases. "Change of Control" means, with respect to any corporation, either (i) the acquisition by any "person" or "group" (as those terms are used in Sections 13(d) and 14(d) of the Exchange Act) of beneficial ownership (as defined in Rules 13d-3 and 13d-4 of the Securities and Exchange Commission, except that a Person shall be deemed to have beneficial ownership of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 30% or more of the then-outstanding voting capital stock of such corporation; or (ii) a change in the composition of the board of directors of such corporation or any corporate parent of such corporation such that continuing directors cease to constitute more than 50% of such board of directors. As used in this definition, "continuing directors" means, as of any date, (i) those members of the board of directors of the applicable corporation who assumed office prior to such date, and (ii) those members of the board of directors of the applicable corporation who assumed office after such date and whose appointment or nomination for election by that corporation's shareholders was approved by a vote of at least 50% of the directors of such corporation in office immediately prior to such appointment or nomination. "Closing Date" means the date of this Agreement. "Collateral" means all real and personal property of the Borrower and/or any of its Subsidiaries in which the Banks have been granted a security interest pursuant to any Security Document, together with all substitutions and replacements for and products of any of the foregoing. "Commitment" means, with respect to each Bank, such Bank's Revolving Commitment or Term Commitment, as the context may require. "Commitment Fee" has the meaning specified in Section 2.12(b). "Commitment Fee Percentage" means, with respect to the computation of the applicable Commitment Fee under Section 2.12(b), the percentage as set forth and described E-3 Exhibit 10(i) in the table below, calculated according to the Borrower's then applicable Status; provided, however, that (i) notwithstanding the table set forth below during the period from the Closing Date through March 31, 2000, the applicable Commitment Fee Percentage shall be .25% and (ii) for all periods from and after April 1, 2000, any adjustment in the applicable Commitment Fee Percentage shall not become effective until the first day of the first month following the date on which the Agent and the Banks shall have received the financial statements relating to the last day of the relevant fiscal quarter pursuant to Section 5.1(b) hereof. If financial statements of the Borrower necessary to establish the appropriate Commitment Fee Percentage hereunder are not received by the Agent and the Banks with respect to the relevant fiscal quarter on or prior to the date required pursuant to Section 5.1(b) hereof, the applicable Commitment Fee Percentage shall be determined as if Level IV Status were in effect and such Level IV Status shall remain in effect until the first day of the first month following the date on which the required financial statements are received by the Agent and the Banks: COMMITMENT FEE PERCENTAGE Level I Status .25% Level II Status .25% Level III Status .30% Level IV Status .40% "Commitment Letter" means that certain commitment letter dated July 22, 1999 between Norwest and the Borrower, as the same may be amended or modified from time to time. "Covenant Computation Date" means the last day of each fiscal quarter of the Borrower, commencing with the fiscal quarter ending on September 30, 1999. "Covenant Computation Period" means the twelve (12) consecutive calendar months immediately preceding and ending on a Covenant Computation Date. "Debt" of any Person means, without duplication (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes, reimbursement agreements, recourse agreements or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (d) all Capitalized Lease Liabilities of such Person, (e) all debt of others secured by a lien on any asset of such Person, whether or not such debt is assumed by such Person, (f) all debt of others guaranteed by such other Person, (g) all obligations of such Person to pay a specified purchase price for goods or services, whether or not delivered or accepted (i.e., take-or-pay E-4 Exhibit 10(i) and similar obligations), (h) all obligations of such Person under any interest rate swap program or any similar agreement, arrangement or undertaking relating to fluctuations in interest rates and (i) all obligations of such Person to advance funds to, or purchase assets, property or services from, any other Person in order to maintain the financial condition of such Person and (j) all obligations of such Person under a letter of credit reimbursement agreement with respect to letters of credit issued thereunder. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Percentage" means, as to any Bank, a fraction determined as of the termination of the Revolving Commitments following the occurrence of an Event of Default, the numerator of which equals the principal amount of all Obligations owed to such Bank on such date and the denominator of which equals the principal amount of all Obligations owed to all Banks on such date. "Default Rate" shall have the meaning specified in Section 2.7(c). "EBITDA" of a Person means, with respect to the applicable Covenant Computation Period, such Person's Pre-Tax Earnings plus its Interest Expense and Non-Cash Charges. "Environmental Laws" has the meaning specified in Section 4.12. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Eurodollar Advance" means any Advance which bears interest at a rate determined by reference to a Eurodollar Rate. "Eurodollar Base Rate" means, with respect to an Interest Period, the rate per annum equal to the rate (rounded up if necessary to the nearest one-sixteenth of one percent (1/16%)) determined by the Agent in accordance with Section 2.6 to be a rate at which U.S. dollar deposits are offered to major banks in the London interbank eurodollar market for funds to be made available on the first day of such Interest Period and maturing at the end of such Interest Period, as determined by the Agent between the opening of business and 12:00 Noon, Minneapolis, Minnesota time, on the second Business Day prior to the beginning of such Interest Period. "Eurodollar Funding" means any Funding which bears interest at a rate determined by reference to a Eurodollar Rate, including Eurodollar Advances. "Eurodollar Rate" means, with respect to an Interest Period, the rate obtained by adding (a) the applicable Margin to (b) the rate obtained by dividing (i) the applicable Eurodollar Base Rate by (ii) a percentage equal to one (1.00) minus the applicable percentage E-5 Exhibit 10(i) (expressed as a decimal) prescribed by the Board of Governors of the Federal Reserve System (or any successor thereto) for determining the maximum reserve requirements applicable to eurodollar fundings (currently referred to as "Eurocurrency Liabilities" in Regulation D) or any other maximum reserve requirements applicable to a member bank of the Federal Reserve System with respect to such eurodollar fundings. "Event of Default" has the meaning specified in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Facility" means the Revolving Facility or the Term Facility, as the context requires. "Federal Funds Rate" means at any time an interest rate per annum equal to the weighted average of the rates for overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it; it being understood that the Federal Funds Rate for any day which is not a Business Day shall be the Federal Funds Rate for the next preceding Business Day. "Floating Rate" means an annual rate at all times equal to the sum of (a) the Base Rate and (b) the applicable Margin, which Floating Rate shall change when and as the Base Rate changes. "Floating Rate Advance" means any Advance which bears interest at a rate determined by reference to the Floating Rate. "Floating Rate Funding" means any Funding which bears interest at a rate determined by reference to the Floating Rate, including Floating Rate Advances. "Funded Debt" of any Person means all interest bearing Debt of such Person, and shall include all interest-bearing Debt created, assumed or guaranteed by such Person either directly or indirectly, including obligations secured by liens upon property of such Person and upon which such Person customarily pays the interest, and all Capitalized Lease Liabilities. "Funding" means a designated portion of outstanding principal indebtedness evidenced by a Note which bears interest at a rate determined by reference to a particular Eurodollar Rate or Floating Rate, as the case may be. "GAAP" means generally accepted accounting principles as in effect from time to time applied on a basis consistent with the accounting practices applied in the financial statements of the Borrower and its Subsidiaries referred to in Section 4.5. E-6 Exhibit 10(i) "Guarantor" means Innovex Precision Components, Innovex Southwest and each and every other domestic Subsidiary of the Borrower having assets with an aggregate fair market value at any time in excess of $200,000 and each and every domestic Subsidiary of a Subsidiary of the Borrower having assets with an aggregate fair market value at any time in excess of $200,000, whether now existing or hereafter created or acquired. "Guarantor Security Agreement" or "Guarantor Security Agreements" means the security agreement of a Guarantor, or all of the security agreements of the Guarantors, collectively, as the context may require. "Guaranty" or "Guaranties" means the guaranty of a Guarantor, or all of the guaranties of the Guarantors, collectively, as the context may require. "Hazardous Substance" means any asbestos, urea-formaldehyde, polychlorinated biphenyls, nuclear fuel or material, chemical waste, radioactive material, explosives, known carcinogens, petroleum products and by-products and other dangerous, toxic or hazardous pollutants, contaminants, chemicals, materials or substances listed or identified in, or regulated by, any Environmental Laws. "Indemnitees" has the meaning specified in Section 9.5. "Innovex Precision Components" means Innovex Precision Components, Inc., a Minnesota corporation, a wholly-owned Subsidiary of the Borrower. "Innovex Southwest" means Innovex Southwest, Inc., a Delaware corporation, a wholly-owned Subsidiary of the Borrower, formerly known as ADFlex Solutions, Inc., a Delaware corporation, which is the surviving entity following the merger of Innovex Acquisition Corp., a Delaware corporation, and ADFlex Solutions, Inc., a Delaware corporation. "Interest Coverage Ratio" of any Person means, with respect to the applicable Covenant Computation Period, the ratio of (a) such Person's Cash Flow Available for Interest to (b) such Person's Interest Expense, plus such Person's rental expense with respect to operating leases. "Interest Expense" of any Person means, with respect to the applicable Covenant Computation Period, the total gross interest expense on all Debt of such Person during such period, and shall in any event include, without limitation and without duplication, (a) accrued interest (whether or not paid) on all Debt, (b) the amortization of Debt discounts, (c) the amortization of all fees payable in connection with the incurrence of Debt to the extent included in interest expense, and (d) the interest portion of any Capitalized Lease Expenditure (determined in accordance with GAAP). "Interest Period" means, relative to any Eurodollar Funding, the period beginning on (and including) the date on which such Eurodollar Funding is made, or E-7 Exhibit 10(i) continued as, or converted into, a Eurodollar Funding pursuant to Sections 2.3, 2.4 or 2.5 and shall end on (but exclude) the day which numerically corresponds to such date one (1), two (2), three (3) or six (6) months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), as the Borrower may select in its relevant notice pursuant to Sections 2.3, 2.4, or 2.5; provided, however, that: (a) no more than five (5) different Interest Periods may be outstanding at any one time with respect to a Facility; (b) if an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next following Business Day (unless such next following Business Day is the first Business Day of a month, in which case such Interest Period shall end on the next preceding Business Day); (c) no Interest Period applicable to a Funding for a Facility may end later than the applicable Maturity Date for such Facility; and (d) in no event shall the Borrower select Interest Periods with respect to Fundings under the Term Facility which, in the aggregate, would require payment of funding losses under Section 2.18 in order to make payments of regularly scheduled installments of principal under such Facility. "Inventory" means all inventory of the Borrower, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Lessor's Agreement" means a Landlord's Disclaimer and Consent entered into by a Person leasing real estate to the Borrower or a Guarantor pursuant to which such Person makes certain agreements for the benefit of the Agent and the Banks with respect to the locations covered thereby. "Level I Status" means that period of time during which the Borrower's Leverage Ratio is less than or equal to 1.75 to 1.00. "Level II Status" means that period of time during which the Borrower's Leverage Ratio is greater than 1.75 to 1.00, but less than or equal to 2.25 to 1.00. "Level III Status" means that period of time during which the Borrower's Leverage Ratio is greater than 2.25 to 1.00, but less than or equal to 2.75 to 1.00. "Level IV Status" means that period of time during which the Borrower's Leverage Ratio is greater than 2.75 to 1.00. E-8 Exhibit 10(i) "Leverage Ratio" of any Person means, with respect to the applicable Covenant Computation Date, the ratio of (a) such Person's Funded Debt to (b) such Person's EBITDA. "Loan Documents" means this Agreement, the Notes and the Security Documents. "Margin" means, with respect to computation of the applicable interest rate on Fundings under a Facility, the increment payable by the Borrower with respect thereto, as set forth and described in the table below, calculated according to the Borrower's then applicable Status; provided, however, that (i) notwithstanding the table set forth below, during the period from the Closing Date through March 31, 2000, the applicable Margin on Fundings under the Revolving Facility shall be 0% for Floating Rate Advances and shall be 1.25% for Eurodollar Rate Advances, (ii) notwithstanding the table set forth below, during the period from the Closing Date through March 31, 2000, the applicable Margin on Fundings under the Term Facility shall be 0% for Floating Rate Advances and shall be 1.25% for Eurodollar Rate Advances, and (iii) for all periods from and after April 1, 2000, any adjustment in the applicable Margin shall not become effective until the first day of the first month following the date on which the Agent and the Banks shall have received the financial statements relating to the last day of the relevant fiscal quarter pursuant to Section 5.1(b) hereof. If financial statements of the Borrower necessary to establish the appropriate Margin hereunder are not received by the Agent and the Banks with respect to the relevant fiscal quarter on or prior to the date required pursuant to Section 5.1(b) hereof, the applicable Margin shall be determined as if Level IV Status were in effect and such Level IV Status shall remain in effect until the first day of the first month following the date on which the required financial statements are received by the Agent and the Banks: MARGIN FOR MARGIN FOR REVOLVING FACILITY TERM FACILITY FUNDINGS FUNDINGS Floating Rate Eurodollar Rate Floating Rate Eurodollar Rate Level I Status 0% 1.25% 0% 1.25% Level II Status 0% 1.50% 0% 1.50% Level III Status 0% 1.75% 0% 1.75% Level IV Status .25% 2.00% .25% 2.00% "Material Adverse Effect" means, with respect to any event or circumstance, a material adverse effect on: E-9 Exhibit 10(i) (a) the business, financial condition, operations or prospects of the Borrower and/or any of its Subsidiaries; (b) the ability of the Borrower or any of its Subsidiaries to perform its obligations under any Loan Document to which it is a party; (c) the validity, enforceability or collectibility of any Loan Document; or (d) the status, existence, perfection, priority or enforceability of any lien or security interest granted to the Banks pursuant to the Loan Documents. "Maturity Date" means (a) September 15, 2004 with respect to the Revolving Facility and (b) September 15, 2004 with respect to the Term Facility. "Net Income" of a Person means, with respect to the applicable Covenant Computation Period, such Person's after-tax net income as determined in accordance with GAAP, before any extraordinary or non-recurring items. "Net Worth" of any Person means, with respect to the applicable Covenant Computation Date, the aggregate capital and retained earnings of such Person, as determined in accordance with GAAP. "Non-Cash Charges" of a Person means, with respect to the applicable Covenant Computation Period, such Person's depreciation, amortization, deferred taxes and other non-cash charges which have the effect of reducing Pre-Tax Earnings or Net Income, as the case may be, all as determined in accordance with GAAP. "Norwest" has the meaning specified in the preamble. "Note" or "Notes" means a Revolving Note or a Term Note, or all such Notes, collectively, as the context may require. "Obligations" means each and every Debt, liability and other obligation of every type and description arising under or in connection with any of the Loan Documents which the Borrower may now or at any time hereafter owe to a Bank or to the Banks or to the Agent, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, all indebtedness, liabilities and obligations of the Borrower arising under this Agreement or evidenced by the Notes. "Origination Fee" has the meaning specified in Section 2.12(a). "Outstanding Obligations" means, as of the date of determination, the outstanding principal amount of all Obligations. E-10 Exhibit 10(i) "Payee" has the meaning specified in Section 2.16. "Percentage" means, with respect to a Facility and as to any Bank, the percentage set forth opposite such Bank's signature on the execution pages of this Agreement, or below such Bank's signature on any Assignment Certificate executed by such Bank, in relation to such Facility, representing the ratio of such Bank's Revolving Commitment or Term Commitment, as the case may be, to the Revolving Commitment Amount or Term Commitment Amount, respectively. "Permitted Liens" has the meaning specified in Section 6.1. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan maintained for employees of the Borrower or any of its Subsidiaries and covered by Title IV of ERISA. "Pre-Tax Earnings" of any Person means, with respect to the applicable Covenant Computation Period, such Person's Net Income, plus any provision for income taxes, plus any extraordinary or non-cash loss or expense paid or incurred by such Person, less any extraordinary, non-operating and non-cash income claimed or earned by such Person, all as determined in accordance with GAAP. "Prime Rate" means the rate of interest publicly announced from time to time by the Agent as its "base rate" or "prime rate", or, if the Agent ceases to announce a rate so designated, any similar successor rate designated by the Agent. The Prime Rate is not necessarily the most favored rate of the Agent and the Agent may lend to its customers at rates that are at, above or below the Prime Rate. "Reportable Event" has the meaning assigned to that term in Title IV of ERISA, but does not include any such event for which advance notification to the Pension Benefit Security Corporation is waived under ERISA or applicable regulations. "Required Banks" means, at any time, two or more of the Banks holding at least sixty-six and sixty-seven hundredths percent (66.67%) of the Commitments, or, if the Commitments have been terminated or have expired, two or more of the Banks having at least sixty-six and sixty-seven hundredths percent (66.67%) of the Outstanding Obligations. "Required Net Worth Amount" has the meaning specified in Section 5.11. "Required Payment" has the meaning specified in Section 2.15(c). "Return" has the meaning specified in Section 2.17(b)(i). E-11 Exhibit 10(i) "Revolving Advance" means a loan of funds by a Bank to the Borrower under the Revolving Facility, including both Floating Rate Advances and Eurodollar Advances made thereunder. "Revolving Commitment" means, with respect to each Bank, the amount of the Revolving Commitment set forth opposite such Bank's name on the execution pages of this Agreement, or below such Bank's signature on an Assignment Certificate executed by such Bank, unless such amount is reduced pursuant to Section 2.14(a) hereof, in which event it means the amount to which said amount is reduced pursuant thereto, or as the context may require, the obligation of such Bank to make Revolving Advances, as contemplated in Section 2.1. "Revolving Commitment Amount" shall mean Fifteen Million Dollars ($15,000,000), 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). "Revolving Commitment Termination Date" means the earlier of (a) the Maturity Date with respect to the Revolving Facility or (b) the date on which the Revolving Commitments are terminated pursuant to Section 7.2 or reduced to zero pursuant to Section 2.15(a). "Revolving Facility" means the revolving credit facility being made available to the Borrower by the Banks pursuant to Section 2.1. "Revolving Facility Outstanding Amount" means, as of the date of determination, the aggregate principal amount of all outstanding Revolving Advances. "Revolving Note" means a promissory note of the Borrower payable to a Bank in the amount of such Bank's Revolving Commitment, in substantially the form of Exhibit A (as such promissory note may be amended, extended or otherwise modified from time to time), evidencing the aggregate indebtedness of the Borrower to such Bank resulting from such Bank's Percentage of each Borrowing under the Revolving Facility, and also means each promissory note accepted by such Bank from time to time in substitution therefor or in renewal thereof. "Security Agreement" means the Security Agreement of the Borrower of even date herewith pursuant to which the Borrower grants the Banks a security interest in all personal property assets of the Borrower to secure payment of the Obligations. "Security Documents" means the Security Agreement and the Guarantor Security Agreements, as amended from time to time, and each and every additional agreement entered into by the Borrower and/or any Guarantor for the benefit of the Banks to secure payment of the Obligations. E-12 Exhibit 10(i) "Status" means the financial condition of the Borrower determined in accordance with the definitions of "Level I Status," "Level II Status", "Level III Status" and "Level IV Status". "Subsidiary" of a Person means any corporation, limited liability company, partnership or other entity of which more than fifty percent (50%) of the outstanding equity or membership interests or shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors (or other governing body) of such entity, (irrespective of whether or not at the time stock or membership interests of any other class or classes shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more Subsidiaries of such Person, or by one or more other Subsidiaries of such Person. "Taxes" has the meaning specified in Section 2.16. "Term Advance" means a loan of funds by a Bank to the Borrower under the Term Facility, including both Floating Rate Advances and Eurodollar Advances thereunder. "Term Commitment" means, with respect to each Bank, the amount of the Term Commitment set forth opposite such Bank's name on the execution pages of this Agreement, or below such Bank's signature on an Assignment Certificate, or as the context may require, the obligation of such Bank to make Term Advances to the Borrower under Section 2.2 hereof. "Term Commitment Amount" means Twenty-Five Million Dollars ($25,000,000), being the maximum amount of the Term Commitments of all Banks, in the aggregate, to make Term Advances to the Borrower pursuant to Section 2.2. "Term Facility" means the term loan facility being made available to the Borrower by the Banks pursuant to Section 2.2. "Term Note" means a promissory note of the Borrower payable to a Bank in the amount of such Bank's Term Commitment, in substantially the form of Exhibit B (as such promissory note may be amended, extended or otherwise modified from time to time), evidencing the aggregate indebtedness of the Borrower to such Bank resulting from such Bank's Percentage of the Term Facility, and also means each other promissory note accepted from time to time in substitution therefor or in renewal thereof. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.7 (a) as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. "Year 2000 Compliant" has the meaning specified in Section 5.8. E-13 Exhibit 10(i) ARTICLE II CREDIT FACILITIES Section 2.1. Commitment as to Revolving Facility. Each Bank hereby agrees, on the terms and subject to the conditions herein set forth, to make Revolving Advances to the Borrower from time to time during the period from the date hereof to and including the Revolving Commitment Termination Date, in an aggregate amount at any time outstanding not to exceed such Bank's Percentage of each Borrowing from time to time requested by the Borrower under the Revolving Facility; provided, however, that (a) the Revolving Facility Outstanding Amount shall at no time exceed the Revolving Commitment Amount and (b) no Bank's Percentage of the Revolving Facility Outstanding Amount shall at any time exceed such Bank's Revolving Commitment. Within the above limits, the Borrower may obtain Revolving Advances, prepay Revolving Advances in accordance with the terms hereof and reborrow Revolving Advances in accordance with the applicable terms and conditions of this Article II. Section 2.2. Commitment as to Term Facility. Each Bank hereby agrees, on the terms and subject to the conditions herein set forth, to make a single Term Advance to the Borrower on the Closing Date in an amount equal to such Bank's Term Commitment. The Term Facility is not a revolving facility and, once the initial Term Advance is made by a Bank, such Bank shall have no further obligation to make any additional Term Advances to the Borrower under the Term Facility, whether or not any amounts are repaid thereunder. Section 2.3. Procedures for Borrowing Under the Revolving Facility. Each Borrowing under the Revolving Facility shall be funded by the Banks as either Floating Rate Advances or Eurodollar Advances, as the Borrower shall specify in the related notice of proposed Borrowing. Floating Rate Advances and Eurodollar Advances may be outstanding at the same time. It is understood, however, that (i) in the case of a Borrowing which is to bear interest at a Floating Rate, the principal amount of the Borrowing shall be in an amount equal to or greater than $500,000 or a higher integral multiple of $100,000 and (ii) in the case of a Borrowing which is to bear interest at a Eurodollar Rate, the principal amount of the Borrowing shall be in an amount equal to $1,000,000 or a higher integral multiple of $100,000. The Borrower shall give notice to the Agent of each proposed Borrowing not later than 10:30 a.m., Minneapolis, Minnesota time, on a Business Day which, in the case of a Borrowing that is to bear interest initially at a Floating Rate, is the proposed date of such Borrowing or, in the case of a Borrowing that is to bear interest initially at a Eurodollar Rate, is at least two (2) Business Days prior to the proposed date of such Borrowing. Each such notice shall be effective upon receipt by the Agent, shall be in writing or by telephone or telecopy transmission, to be confirmed in writing by the Borrower if so requested by the Agent (in the form of Exhibit C), and shall specify whether the Borrowing is to bear interest initially at a Floating Rate or a Eurodollar Rate, and in the case of a Borrowing that is to bear interest initially at a Eurodollar Rate, shall specify the Interest Period to be applicable thereto. Promptly upon receipt of such notice (but in no event later than 12:00 Noon, E-14 Exhibit 10(i) Minneapolis, Minnesota time, with respect to a Floating Rate Advance, and the close of business, with respect to a Eurodollar Advance, in each case on the Business Day of receipt of such notice), the Agent shall advise each Bank of the proposed Borrowing. At or before 2:00 p.m., Minneapolis, Minnesota time, on the date of the requested Borrowing, each Bank shall provide the Agent at the principal office of the Agent in Minneapolis, Minnesota with immediately available funds covering such Bank's Percentage of such Borrowing. Subject to satisfaction of the conditions precedent set forth in Article III with respect to such Borrowing, the Agent shall pay over such funds to the Borrower prior to the close of business on the date of the requested Borrowing. Section 2.4. Converting Floating Rate Fundings to Eurodollar Fundings; Procedures. So long as no Default or Event of Default shall exist, the Borrower may convert all or any part of any outstanding Floating Rate Funding into a Eurodollar Funding by giving notice to the Agent of such conversion not later than 10:30 a.m., Minneapolis, Minnesota time, on a Business Day which is at least two (2) Business Days prior to the date of the requested conversion. Each such notice shall be irrevocable, shall be effective upon receipt by the Agent, shall be in writing or by telephone or telecopy transmission, to be confirmed in writing by the Borrower if so requested by the Agent (in the form of Exhibit D), shall specify the date and amount of such conversion, the total amount of the Funding to be so converted and the Interest Period therefor. Each conversion of a Funding shall be on a Business Day, and the aggregate amount of each such conversion of a Floating Rate Funding to a Eurodollar Funding shall be in an amount equal to $1,000,000 or a higher integral multiple of $100,000. Section 2.5. Procedures at End of an Interest Period. Unless the Borrower requests a new Eurodollar Funding in accordance with the procedures set forth below, or prepays the principal of an outstanding Eurodollar Funding at the expiration of an Interest Period, each Bank shall automatically and without request of the Borrower convert each Eurodollar Funding to a Floating Rate Funding on the last day of the relevant Interest Period. So long as no Default or Event of Default shall exist, the Borrower may cause all or any part of any outstanding Eurodollar Funding to continue to bear interest at a Eurodollar Rate after the end of the then applicable Interest Period by notifying the Agent not later than 10:30 a.m., Minneapolis, Minnesota time, on a Business Day which is at least two (2) Business Days prior to the first day of the new Interest Period. Each such notice shall be in writing or by telephone or telecopy transmission, to be confirmed in writing by the Borrower if so requested by the Agent (in the form of Exhibit E), shall be irrevocable, effective when received by the Agent, and shall specify the first day of the applicable Interest Period, the amount of the expiring Eurodollar Funding to be continued and the Interest Period therefor. Each new Interest Period shall begin on a Business Day and the amount of each Funding bearing a new Eurodollar Rate shall be in an amount equal to $1,000,000 or a higher integral multiple of $100,000. Section 2.6. Setting and Notice of Rates. The applicable Eurodollar Rate for each Interest Period shall be determined by the Agent on the second Business Day prior to E-15 Exhibit 10(i) the beginning of such Interest Period, whereupon notice thereof (which may be by telephone) shall be given by the Agent to the Borrower and each Bank. Each such determination of the applicable Eurodollar Rate shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error. The Agent, upon written request of the Borrower or any Bank, shall deliver to the Borrower or such requesting Bank a statement showing the computations used by the Agent in determining the applicable Eurodollar Rate hereunder. Section 2.7. Interest on Obligations. The Borrower hereby agrees to pay interest on the unpaid principal amount of each unpaid Obligation for the period commencing on the date of this Agreement until the unpaid principal amount thereof is paid in full, in accordance with the following: (a) Floating Rate Fundings. Subject to subsection (c) below, while any outstanding principal of a Note constitutes a Floating Rate Funding, the outstanding principal balance thereof shall bear interest at an annual rate at all times equal to the Floating Rate applicable to such Floating Rate Funding. (b) Eurodollar Fundings. Subject to subsection (c) below, while any outstanding principal of a Note constitutes a Eurodollar Funding, the outstanding principal balance thereof shall bear interest for the applicable Interest Period at an annual rate equal to the Eurodollar Rate established with respect such Eurodollar Funding in accordance with Section 2.3, 2.4 or 2.5 hereof. (c) Default Rate. From and after the occurrence of an Event of Default and continuing thereafter until such Event of Default shall be remedied to the written satisfaction of the Required Banks, the outstanding principal balance of each Note shall bear interest, until paid in full, at a rate equal to the sum of (i) the interest rate otherwise in effect with respect to such outstanding principal and (ii) two percent (2%). In addition, all fees, indemnification obligations and other Obligations not paid when due hereunder shall bear interest, until paid in full, at an annual rate equal to the sum of (i) the Floating Rate (with the then applicable Revolving Facility Margin) and (ii) two percent (2%) (each rate described in this subsection (c) herein a "Default Rate"). Section 2.8. Obligation to Repay Advances; Representations. The Borrower shall be obligated to repay all Advances under this Article II notwithstanding the failure of the Agent to receive any written request therefor or written confirmation thereof and notwithstanding the fact that the person requesting the same was not in fact authorized to do so. Any request for a Borrowing under Section 2.3, whether written, telephonic, telecopy or otherwise, shall be deemed to be a representation by the Borrower that (a) the amount of the requested Borrowing, when added to the Revolving Facility Outstanding Amount, would not exceed the Revolving Commitment Amount and (b) the statements set forth in Section 3.2 are correct as of the time of the request. E-16 Exhibit 10(i) Section 2.9. Notes; Amortization. (a) Revolving Facility. All Revolving Advances made by a Bank hereunder shall be evidenced by and repayable in accordance with a Revolving Note issued by the Borrower to such Bank. The aggregate unpaid principal amount of each Revolving Note shall bear interest at the applicable Floating Rate unless a Eurodollar Rate shall become applicable thereto pursuant to Sections 2.3, 2.4 or 2.5, and shall be payable on the applicable Maturity Date with respect thereto or earlier in accordance with Section 7.2. (b) Term Facility. All Term Advances made by a Bank hereunder shall be evidenced by and repayable in accordance with a Term Note issued by the Borrower to such Bank. The aggregate unpaid principal amount of each Term Note shall bear interest at the applicable Floating Rate unless a Eurodollar Rate shall become applicable thereto pursuant to Sections 2.3, 2.4 or 2.5, shall be payable in quarterly installments, commencing on October 1, 2000, and continuing on the first day of each January, April, July and October thereafter until the final Maturity Date, when all unpaid principal thereof shall be finally due and payable. Principal due with respect to the Term Facility on each such quarterly installment date shall be in an aggregate amount of One Million Five Hundred Sixty-Two Thousand Five Hundred Dollars ($1,562,500). In addition to the required quarterly installments of principal on the Term Note described above, in the event that the Borrower or any Subsidiary sells the stock of any Subsidiary or the Borrower and/or its Subsidiaries sell any assets (other than the sale of Inventory in the ordinary course of business) or the Borrower and/or its Subsidiaries engage in any similar transactions which result in net cash proceeds received by the Borrower and/or its Subsidiaries and the aggregate amount of net cash proceeds received by the Borrower and/or its Subsidiaries from all such sales and transactions in any fiscal year of the Borrower exceed $5,000,000, then, on the last day of the fiscal quarter in which such net cash proceeds for such fiscal year exceeds $5,000,000 and on the last day of each subsequent fiscal quarter of such fiscal year in which such net cash proceeds are received, the Borrower shall make a prepayment of the unpaid principal balance of the Term Note in an amount equal to one hundred percent (100%) of such net cash proceeds in excess of such $5,000,000 annual amount. Any mandatory prepayment of the Term Note occasioned by any such sale of stock, assets or other similar transactions shall be in addition to the required quarterly installments of principal of the Term Note and shall be applied against such remaining quarterly installments of principal of the Term Note in inverse order of their maturity. The Borrower acknowledges that Article VI of this Agreement contains provisions which restrict the ability of the Borrower and its Subsidiaries to sell stock, to sell assets and to engage in similar transactions without the prior written consent of the Required Banks and the Borrower acknowledges that it must obtain such prior written consent before engaging in any restricted sale or similar transaction. E-17 Exhibit 10(i) Section 2.10. Interest Due Dates. Accrued interest on each Eurodollar Funding shall be payable on the last day of the Interest Period relating to such Eurodollar Funding; provided, however, that if any Interest Period is longer than three (3) months, interest shall be payable in arrears (3) three months, or a whole multiple thereof, after the first day of such Interest Period and on the last day of the Interest Period. Accrued interest on each Floating Rate Funding shall be payable in arrears on the last day of each calendar quarter and at maturity or conversion of such Floating Rate Funding to a Eurodollar Funding. Section 2.11. Computation of Interest and Fees. Interest accruing on the Notes and all other fees described in Section 2.13 shall be computed on the basis of actual number of days elapsed in a year of three hundred sixty (360) days. Section 2.12. Fees. The Borrower hereby agrees to pay fees to the Agent and the Banks, commencing on the date hereof and continuing until all Obligations are paid in full, in accordance with the following: (a) Origination Fee. The Borrower agrees to pay to the Agent a non-refundable origination fee (the "Origination Fee") in accordance with the fee letter between the Borrower and the Agent. (b) Commitment Fee. The Borrower agrees to pay to the Agent for the pro rata account of the Banks a commitment fee (the "Commitment Fee") computed at the rate of the applicable Commitment Fee Percentage per annum on the daily average amount by which the Revolving Commitment Amount exceeds the Revolving Facility Outstanding Amount, from the Closing Date to and including the Revolving Commitment Termination Date, payable quarterly in arrears on the last day of each September, December, March and June, commencing September 30, 1999. Any such Commitment Fee remaining unpaid on the Revolving Commitment Termination Date shall be due and payable on such date. The Commitment Fee shall be shared by the Banks on the basis of their respective Percentages of the Revolving Facility. (c) Administrative Fee. The Borrower agrees to pay the Agent, for the Agent's sole account, an annual administrative fee (the "Administrative Fee") equal to the greater of (A) $2,500 or (B) $2,500 plus the product of (x) $2,500 and (y) the number of Banks (other than the Agent) which are a party to this Agreement, from the first anniversary of the Closing Date until the date on which the Commitments are terminated and all of the Notes are paid in full, payable in advance, with the first annual Administrative Fee being due and payable on the first anniversary of the Closing Date and with subsequent Administrative Fees being due and payable on each anniversary of such date thereafter. The Administrative Fee shall be adjusted (on an annualized basis) from time to time over the course of a year if and to the extent Banks are added to or deleted from this Agreement. E-18 Exhibit 10(i) (d) Audit Fees. Following the occurrence of an Event of Default, the Borrower agrees to pay to the Agent, on written demand, reasonable fees charged by the Agent in connection with any audits or inspections by the Agent (or by the employees, agents, consultants or auditors of the Agent) of any Collateral or the operations or businesses of the Borrower and its Subsidiaries, together with actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection. Section 2.13. Use of Proceeds. The Proceeds of each Borrowing under the Revolving Facility shall be used by the Borrower solely for its working capital purposes. The Proceeds of the Term Facility shall be used by the Borrower to finance a portion of the purchase price paid by the Borrower for the acquisition of Innovex Southwest. Section 2.14. Voluntary Reduction or Termination of the Commitments; Prepayments. (a) Reduction or Termination of Revolving Commitments. The Borrower, from time to time upon not less than five (5) Business Days' prior written notice to the Agent, may permanently reduce the Revolving Commitment Amount; provided, however, that no such reduction shall reduce the Revolving Commitment Amount to an amount less than the Revolving Facility Outstanding Amount. Any such voluntary reduction shall be pro rata as to all Revolving Commitments according to each Bank's Percentage of the Revolving Facility and shall be in an aggregate amount equal to $5,000,000 or a higher integral multiple of $1,000,000. The Borrower at any time prior to the Revolving Commitment Termination Date may terminate the Revolving Commitments by (i) providing to the Agent not less than five (5) Business Days prior written notice of its intention to so terminate the Revolving Commitments and (ii) making payment in full of all principal and interest on the Revolving Notes. (b) Prepayments. The Borrower from time to time may voluntarily prepay the Notes in whole or in part. In the event of any voluntary prepayment hereunder (i) any prepayment of a Facility shall be applied against outstanding Advances of each Bank under that Facility pro rata according to each Bank's Percentage of that Facility, (ii) each prepayment of the Notes shall be made to the Agent not later than 12:00 Noon, Minneapolis, Minnesota time, on a Business Day, and funds received after that hour shall be deemed to have been received by the Agent on the next following Business Day, (iii) each partial prepayment of Fundings which, at the time of such prepayment, bear interest at a Eurodollar Rate shall be accompanied by accrued interest on such partial prepayment through the date of prepayment and additional compensation calculated in accordance with Section 2.18, (iv) each partial prepayment of Fundings with respect to a Facility which, at the time of such prepayment, bear interest at a Eurodollar Rate, shall be in an aggregate amount equal to the applicable minimum Funding amount specified in Section 2.5 for such Facility and, after application of any such prepayment, shall not result in a Eurodollar Funding remaining outstanding in an amount less than such minimum Funding amount, (v) E-19 Exhibit 10(i) each partial prepayment of Fundings with respect to a Facility which, at the time of such prepayment, bear interest at a Floating Rate, shall be in an aggregate amount equal to $500,000 or a higher integral multiple of $100,000, unless (in either case) the aggregate outstanding balance of all Notes under the Facility being prepaid is less than such minimum Funding amount, in which event any such prepayment may be in such lesser amount, (vi) unless notified by the Borrower in writing to the contrary, the Agent shall apply all partial prepayments to outstanding Revolving Advances and, if no Revolving Advances are then outstanding, to outstanding Term Advances and (vii) each partial prepayment of the Term Facility shall be applied to principal installments becoming due under such Facility in inverse order of their respective maturities. Section 2.15. Payments. (a) Making of Payments. All payments of principal of and interest due with respect to a Facility shall be made to the Agent for the account of the Banks pro rata according to their respective Percentages of such Facility; provided, that any such payments so received by the Agent after the termination of the Revolving Commitments following the occurrence of an Event of Default hereunder shall be allocated among the Banks pro rata according to their Default Percentages. All payments of fees pursuant to Section 2.12 shall be made to the Agent (i) for the account of the Agent as to all amounts specified in Section 2.12 as payable for the exclusive account of the Agent and (ii) for the account of the Banks pro rata according to their respective Percentages as to all fees specified in Section 2.12 as payable for the account of the Banks. All payments to the Agent shall be made to the Agent at its office in Minneapolis, Minnesota, not later than 12:00 Noon, Minneapolis, Minnesota time, on the date due, in immediately available funds, and funds received after that hour shall be deemed to have been received by the Agent on the next following Business Day. The Borrower hereby authorizes the Agent to charge the Borrower's demand deposit account maintained with the Agent (or with any other Bank) for the amount of any Obligation on its due date, but the Agent's failure to so charge any such account shall in no way affect the obligation of the Borrower to make any such payment. The Agent shall remit to each Bank in immediately available funds on the same Business Day as received by the Agent its share of all such payments received by the Agent for the account of such Bank. If the Agent fails to remit any payment to any Bank when required hereby, the Agent shall pay interest on demand to that Bank for each day during the period commencing on the date such remittance was due until the date such remittance is made at an annual rate equal to the Federal Funds Rate for such day. All payments under Section 2.16, 2.17 or 2.18 shall be made by the Borrower directly to the Bank entitled thereto. (b) Effect of Payments. Each payment by the Borrower to the Agent for the account of any Bank pursuant to Section 2.15(a) shall be deemed to constitute payment by the Borrower directly to such Bank, provided, however, that in the event E-20 Exhibit 10(i) any such payment by the Borrower to the Agent is required to be returned to the Borrower for any reason whatsoever, then the Borrower's obligation to such Bank with respect to such payment shall be deemed to be automatically reinstated. (c) Distributions by Agent. Unless the Agent shall have been notified by a Bank or the Borrower prior to the date on which such Bank or the Borrower is scheduled to make payment to the Agent of (in the case of a Bank) the proceeds of an Advance to be made by it hereunder or (in the case of the Borrower) a payment to the Agent for the account of one or more of the Banks hereunder (such payment by a Bank or the Borrower (as the case may be) being herein called a "Required Payment"), which notice shall be effective upon receipt, that it does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date and, if such Bank or the Borrower (as the case may be) has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon for each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate (i) equal to the Federal Funds Rate for such day, in the case of a Required Payment owing by a Bank, or (ii) equal to the applicable rate of interest as provided in this Agreement, in the case of a Required Payment owing by the Borrower. (d) Setoff. The Borrower agrees that each Bank, subject to such Bank's sharing obligations set forth in Section 8.6, shall have all rights of setoff and bankers' lien provided by applicable law, and in addition thereto, the Borrower agrees that if at any time any Obligation is due and owing by the Borrower under this Agreement or the other Loan Documents to any Bank at a time when an Event of Default has occurred and is continuing hereunder, any Bank may apply any and all balances, credits, and deposits, accounts or moneys of the Borrower then or thereafter in the possession of such Bank (excluding, however, any trust or escrow accounts held by the Borrower for the benefit of any third party) to the payment thereof. (e) Due Date Extension. If any payment of principal of or interest on any Floating Rate Funding or any fees payable hereunder falls due on a day which is not a Business Day, then such due date shall be extended to the next following Business Day, and (in the case of principal) additional interest shall accrue and be payable for the period of such extension. (f) Application of Payments. Except as otherwise provided herein, so long as no Default or Event of Default has occurred and is continuing hereunder, each payment received from the Borrower shall be applied to such Obligation as the Borrower shall specify by notice to be received by the Agent on or before the date of such payment, or in the absence of such notice, as the Agent shall determine in its E-21 Exhibit 10(i) discretion. Concurrently with each remittance to any Bank of its appropriate share of any such payment (based upon such Bank's Percentage of the Facility to which such payment relates), the Agent shall advise such Bank as to the application of such payment. Except as otherwise provided in Article VIII, after the termination of the Revolving Commitments following the occurrence of a Default or Event of Default, all payments received by the Agent or any Bank from the Borrower shall be shared on the basis of each Bank's Default Percentage thereof. Section 2.16. Taxes. All payments made by the Borrower to the Agent or any Bank (herein any "Payee") under or in connection with this Agreement or the Notes shall be made without any setoff or other counterclaim, and shall be free and clear of and without deduction for or on account of any present or future taxes now or hereafter imposed by any governmental or other authority, except to the extent that any such deduction or withholding is compelled by law. As used herein, the term "Taxes" shall include all income, excise and other taxes of whatever nature (other than taxes generally assessed on the overall net income of a Payee by the government or other authority of the country, state or political subdivision in which such Payee is incorporated or in which the office through which such Payee is acting is located) as well as all levies, imposts, duties, charges, or fees of whatever nature. "Taxes" shall not include, however, any foreign withholding taxes or similar deductions imposed solely as a result of a Bank's election to fund an Advance through a foreign office of such Bank. If the Borrower is compelled by law to make any deductions or withholdings on account of any Taxes (including any foreign withholding) it will: (a) pay to the relevant authorities the full amount required to be so withheld or deducted; (b) pay such additional amounts (including, without limitation, any penalties, interest or expenses) as may be necessary in order that the net amount received by the Payee after such deductions or withholdings (including any required deduction or withholding on such additional amounts) shall equal the amount the Payee would have received had no such deductions or withholdings been made; and (c) promptly forward to the Agent (for delivery to the appropriate Payee) an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authorities. The amount that the Borrower shall be required to pay to any Payee pursuant to the foregoing clause (b) shall be reduced, to the extent permitted by applicable law, by the amount of any offsetting tax benefit which such Payee receives as the result of the Borrower's payment to the relevant authorities as reasonably determined by such Payee; provided, however, that if such Payee shall subsequently determine that it has lost the benefit of all or a portion of such tax benefit, the Borrower shall promptly remit to such Payee the amount certified by such Payee to be the amount necessary to restore such Payee to the position it would have been in if no payment had been made pursuant to this sentence. If any Taxes otherwise payable by E-22 Exhibit 10(i) the Borrower pursuant to the foregoing are directly asserted against a Payee, such Payee may pay such taxes and the Borrower promptly shall reimburse such Payee to the full extent otherwise required under this Section 2.16. The obligations of the Borrower under this Section 2.16 shall survive any termination of this Agreement. If circumstances arise in respect of any Bank which would, or would upon the giving of notice, result in any liability of the Borrower under this Section 2.16 then, without in any way limiting, reducing or otherwise qualifying the Borrower's obligations under this Section 2.16 such Bank shall promptly, upon becoming aware of the same, notify the Agent and the Borrower thereof and shall, in consultation with the Agent and the Borrower and to the extent that it can do so without, in its reasonable judgment, disadvantaging itself, take such reasonable steps as may be available to it to mitigate the effects of such circumstances (including, without limitation, the designation of an alternate office or the transfer of its Eurodollar Fundings to another office). If and so long as a Bank has been unable to take, or has not taken, steps reasonably acceptable to the Borrower to mitigate the effect of the circumstances in question, such Bank shall be obliged, at the request of the Borrower, to assign all its rights and obligations hereunder to another Person designated by the Borrower with the approval of the Agent (which shall not be unreasonably withheld) which is willing to participate in the Revolving Facility in place of such Bank; provided that such Person satisfies all of the requirements of this Agreement, including, but not limited to, providing the forms and documents required by Section 8.14 and any such Person shall cover all costs incurred in connection with effecting such replacement. Section 2.17. Increased Costs; Capital Adequacy; Funding Exceptions. (a) Increased Costs on Eurodollar Advances. If Regulation D of the Board of Governors of the Federal Reserve System or after the date of this Agreement the adoption of any applicable law, rule or regulation, or any change in any existing law, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall: (i) subject a Bank to or cause the withdrawal or termination of any exemption previously granted to a Bank with respect to, any tax, duty or other charge with respect to its Eurodollar Fundings or its obligation to make Eurodollar Fundings, or shall change the basis of taxation of payments to a Bank of the principal of or interest under this Agreement in respect of its Eurodollar Fundings or its obligation to make Eurodollar Fundings (except for changes in the rate of tax on the overall net income of a Bank imposed by the jurisdictions in which a Bank's principal executive office is located); or E-23 Exhibit 10(i) (ii) impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve included in the determination of interest rates pursuant to Section 2.6), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, a Bank; or (iii) impose on a Bank any other condition affecting its making, maintaining or funding of its Eurodollar Fundings or its obligation to make Eurodollar Fundings; and the result of any of the foregoing is to increase the cost to an affected Bank of making or maintaining any Eurodollar Funding, or to reduce the amount of any sum received or receivable by such Bank under this Agreement or under its Notes with respect to a Eurodollar Funding, then the affected Bank will notify the Borrower and the Agent of such increased cost and within fifteen (15) days after demand by such Bank (which demand shall be accompanied by a statement setting forth the basis of such demand) the Borrower shall pay to such Bank such additional amount or amounts as will compensate the Bank for such increased cost or such reduction; provided, however, that no such increased cost or such reduction shall be payable by the Borrower for any period longer than forty-five (45) days prior to the date on which notice thereof is delivered to the Borrower. Each Bank will promptly notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 2.17. If the Borrower receives notice from a Bank of any event which will entitle such Bank to compensation pursuant to this Section 2.17 the Borrower may prepay any then outstanding Eurodollar Fundings or notify the affected Bank that any pending request for a Eurodollar Funding shall be deemed to be a request for a Floating Rate Funding, in each case subject to the provisions of Section 2.18. (b) Capital Adequacy. If a Bank determines at any time that such Bank's Return has been reduced as a result of any Capital Adequacy Rule Change, such Bank may require the Borrower to pay to such Bank the amount necessary to restore such Bank's Return to what it would have been had there been no Capital Adequacy Rule Change. For purposes of this Section 2.17b), the following definitions shall apply: (i) "Return", for any calendar quarter or shorter period, means the percentage determined by dividing (A) the sum of interest and ongoing fees earned by a Bank under this Agreement during such period by (B) the average capital such Bank is required to maintain during such period as a result of its being a party to this Agreement, as determined by such Bank based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect. Return may be calculated for a Bank for each calendar quarter and for the shorter period E-24 Exhibit 10(i) between the end of a calendar quarter and the date of termination in whole of this Agreement. (ii) "Capital Adequacy Rule" means any law, rule, regulation or guideline regarding capital adequacy that applies to a Bank, or the interpretation thereof by any governmental or regulatory authority. Capital Adequacy Rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (iii) "Capital Adequacy Rule Change" means any change in any Capital Adequacy Rule occurring after the date of this Agreement, but does not include any changes in applicable requirements that at the date hereof are scheduled to take place under the existing Capital Adequacy Rules or any increases in the capital that a Bank is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of such Bank's financial condition. The initial notice sent by a Bank shall be sent as promptly as practicable after such Bank learns that its Return has been reduced, shall include a demand for payment of the amount necessary to restore such Bank's Return for the quarter in which the notice is sent, and shall state in reasonable detail the cause for the reduction in such Bank's Return and such Bank's calculation of the amount of such reduction. Thereafter, a Bank may send a new notice during each calendar quarter setting forth the calculation of the reduced Return for that quarter and including a demand for payment of the amount necessary to restore such Bank's Return for that quarter. A Bank's calculation in any such notice shall be conclusive and binding absent demonstrable error. (c) Basis for Determining Interest Rate Inadequate or Unfair. If with respect to any Interest Period: (i) the Agent determines that, or the Required Banks determine and advise the Agent that, deposits in U.S. dollars (in the applicable amounts) are not being offered in the London interbank eurodollar market for such Interest Period; or (ii) the Agent otherwise determines, or the Required Banks determine and advise the Agent (which determination shall be binding and conclusive on all parties), that by reason of circumstances affecting the London interbank eurodollar market adequate and reasonable means do not exist for ascertaining the applicable Eurodollar Rate; or E-25 Exhibit 10(i) (iii) the Agent determines, or the Required Banks determine and advise the Agent, that the Eurodollar Rate as determined by the Agent will not adequately and fairly reflect the cost to the Banks of maintaining or funding a Eurodollar Funding for such Interest Period, or that the making or funding of Eurodollar Fundings has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of such Banks materially affects such Eurodollar Fundings; then the Agent shall promptly notify the affected parties and (A) in the event of any occurrence described in the foregoing clause (i) the Borrower shall enter into good faith negotiations with each affected Bank in order to determine an alternate method to determine the Eurodollar Rate for such Bank, and during the pendency of such negotiations with any Bank, such Bank shall be under no obligation to make any new Eurodollar Fundings, and (B) in the event of any occurrence described in the foregoing clauses (ii) or (iii), for so long as such circumstances shall continue, no Bank shall be under any obligation to make any new Eurodollar Fundings. (d) Illegality. In the event that any change in (including the adoption of any new) applicable laws or regulations, or any change in the interpretation of applicable laws or regulations by any governmental authority, central bank, comparable agency or any other regulatory body charged with the interpretation, implementation or administration thereof, or compliance by a Bank with any request or directive (whether or not having the force of law) of any such authority, central bank, comparable agency or other regulatory body, should make it or, in the good faith judgment of the affected Bank, shall raise a substantial question as to whether it is unlawful for such Bank to make, maintain or fund Eurodollar Fundings, then (i) the affected Bank shall promptly notify the Borrower and the Agent, (ii) the obligation of the affected Bank to make, maintain or convert into Eurodollar Fundings shall, upon the effectiveness of such event, be suspended for the duration of such unlawfulness, and (iii) for the duration of such unlawfulness, any notice by the Borrower pursuant to Sections 2.3, 2.4 or 2.5 requesting the affected Bank to make or convert into Eurodollar Fundings shall be construed as a request to make or to continue making Floating Rate Fundings. (e) Procedures to Mitigate. If circumstances arise in respect of any Bank which would or would upon the giving of notice result in any liability of the Borrower under this Section 2.17 then, without in any way limiting, reducing or otherwise qualifying the Borrower's obligations under this Section 2.17, such Bank shall promptly, upon becoming aware of the same, notify the Agent and the Borrower thereof and shall, in consultation with the Agent and the Borrower and to the extent that it can do so without, in its reasonable judgment, disadvantaging itself, take such reasonable steps as may be available to it to mitigate the effects of such circumstances (including, without limitation, the designation of an alternate office or the transfer of E-26 Exhibit 10(i) its Eurodollar Fundings to another office). If and so long as a Bank has been unable to take, or has not taken, steps reasonably acceptable to the Borrower to mitigate the effect of the circumstances in question, such Bank shall be obliged, at the request of the Borrower, to assign all its rights and obligations hereunder to another Person designated by the Borrower with the approval of the Agent (which shall not be unreasonably withheld) and willing to participate in the Revolving Facility in place of such Bank; provided that such Person satisfies all of the requirements of this Agreement, including, but not limited to, providing the forms and documents required by Section 8.14 and any such Person shall cover all costs incurred in connection with effecting such replacement. Section 2.18. Funding Losses. The Borrower hereby agrees that upon demand by any Bank (which demand shall be accompanied by a statement setting forth the basis for the calculations of the amount being claimed) the Borrower will indemnify such Bank against any loss or expense which such Bank may have sustained or incurred (including, without limitation, any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund or maintain Eurodollar Fundings) or which such Bank may be deemed to have sustained or incurred, as reasonably determined by such Bank, (i) as a consequence of any failure by the Borrower to make any payment when due of any amount due hereunder in connection with any Eurodollar Fundings, (ii) due to any failure of the Borrower to borrow or convert any Eurodollar Fundings on a date specified therefor in a notice thereof or (iii) due to any payment or prepayment of any Eurodollar Funding on a date other than the last day of the applicable Interest Period for such Eurodollar Funding. For this purpose, all notices under Sections 2.3, 2.4 and 2.5 shall be deemed to be irrevocable. Section 2.19. Right of Banks to Fund through Other Offices. Each Bank, if it so elects, may fulfill its agreements hereunder with respect to any Eurodollar Funding by causing a foreign branch or affiliate of such Bank to make such Eurodollar Funding; provided, that in such event the obligation of the Borrower to repay such Eurodollar Funding shall nevertheless be to such Bank and such Eurodollar Funding shall be deemed held by such Bank for the account of such branch or affiliate. Section 2.20. Discretion of Banks as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to fund and maintain all or any part of its Eurodollar Fundings in any manner it deems fit, it being understood, however, that for the purposes of this Agreement (specifically including, without limitation, Section 2.18 hereof) all determinations hereunder shall be made as if each Bank had actually funded and maintained each Eurodollar Funding during each Interest Period for such Eurodollar Funding through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the appropriate Eurodollar Rate for such Interest Period. E-27 Exhibit 10(i) Section 2.21. Conclusiveness of Statements; Survival of Provisions. Determinations and statements of a Bank pursuant to Section 2.16, 2.17, or 2.18 shall be conclusive absent demonstrable error. Each Bank may use reasonable averaging and attribution methods in determining compensation pursuant to such Sections 2.16, 2.17 or 2.18 and the provisions of Sections 2.16, 2.17 and 2.18 shall survive termination of this Agreement. ARTICLE III CONDITIONS OF LENDING Section 3.1. Conditions Precedent to the Initial Advance. The obligation of the Banks to fund the initial Advances is subject to the condition precedent that the Agent shall have received the following, each in form and substance satisfactory to the Agent: (a) The Notes, properly executed on behalf of the Borrower. (b) The Guaranties, each properly executed on behalf of the appropriate Guarantor. (c) The Security Documents, properly executed on behalf of the Borrower and the Guarantors. (d) Financing statements sufficient when filed to perfect the security interests granted under the Security Documents, to the extent such security interests are capable of being perfected by filing. (e) A true and correct copy of the lease between Innovex Southwest and TL Properties, Inc. pursuant to which Innovex Southwest is leasing the facilities in which it operates in Chandler, Arizona, together with Lessor's Agreement in which TL Properties, Inc. disclaims any interest in the Collateral and grants the Agent and the Banks certain rights, properly executed by TL Properties, Inc. (f) Current searches of appropriate filing offices showing that no state or federal tax liens have been filed and remain in effect against the Borrower or any of its Subsidiaries (including, without limitation, against Innovex Southwest (under its current and past names)), and that no financing statements or other notifications or filings have been filed and remain in effect against the Borrower or any of its Subsidiaries (including, without limitation, against Innovex Southwest (under its current and past names)), other than those for which the Agent has received an appropriate release, termination or satisfaction or those permitted in accordance with Section 6.1. E-28 Exhibit 10(i) (g) A certified copy of the resolutions of the board of directors of the Borrower and each Guarantor evidencing approval of all Loan Documents to which the Borrower or such Guarantor is a party and the other matters contemplated hereby. (h) Copies of the Articles of Incorporation and Bylaws of the Borrower and each Guarantor (including evidence of the merger of Innovex Acquisition Corp. into ADFlex Solutions, Inc., with ADFlex Solutions, Inc. as the surviving entity and the name change of ADFlex Solutions, Inc. to Innovex Southwest, Inc.), certified by the Secretary or Assistant Secretary of the Borrower and such Guarantor as being true and correct copies thereof. (i) A certificate of good standing of the Borrower and each Guarantor, dated not more than thirty (30) days prior to the date hereof, and evidence satisfactory to the Agent that the Borrower and each Guarantor is qualified to conduct its business in each state where it presently conducts such business if failure to obtain any such qualification or licensing would have a Material Adverse Effect. (j) A signed copy of a certificate of the Secretary or an Assistant Secretary of the Borrower and each Guarantor which shall certify the names of the officers of the Borrower and each Guarantor authorized to sign the Loan Documents and the other documents or certificates to be delivered pursuant to this Agreement, including requests for Advances and Eurodollar Fundings, together with the true signatures of such officers. The Agent and each Bank may conclusively rely on such certificates until they shall receive a further certificate of the Secretary or an Assistant Secretary of the Borrower and each Guarantor canceling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (k) Certificates of the insurance required under the Security Documents, naming the Agent, as collateral agent for all Banks, as loss payee thereunder, together with an acceptable lender's loss payable endorsement. (l) Audited financial statements acceptable to the Banks for the period ended September 30, 1998 for the Borrower and for the period ended December 27, 1998 for ADFlex Solutions, Inc. and unaudited financial statements for the period ended March 31, 1999 for the Borrower and for the period ended March 28, 1999 for ADFlex Solutions, Inc. and the pro forma financial statements entitled "Project Canyon" and "Canyon and Lake Combined" prepared by the Borrower. (m) A signed copy of an opinion of counsel for the Borrower and the Guarantors, addressed to the Banks. (n) Payment of all fees and expenses then due and payable pursuant to Sections 2.12 and 9.4 hereof. E-29 Exhibit 10(i) (o) A UCC Release (or a payoff letter acceptable to the Agent) relating to UCC Filing No. 922456 filed with the Arizona Secretary of State, properly executed by the secured party thereunder. (p) Such other items as the Agent or the Required Banks shall reasonably require. Section 3.2. Conditions Precedent to All Advances. The obligation of the Banks to make each Advance shall be subject to the further conditions precedent that on such date: (a) the representations and warranties contained in Article IV hereof are correct in all material respects on and as of the date of such Advance as though made on and as of such date; and (b) no event has occurred and is continuing, or would result from such Advance, which constitutes a Default or an Event of Default. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Banks as follows: Section 4.1. Corporate Existence and Power; Name; Chief Executive Office. The Borrower and each of its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its respective state of incorporation, and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary and where failure to obtain such licensing or qualification would have a Material Adverse Effect. The Borrower and each of its Subsidiaries has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. Within the last twelve (12) months, the Borrower and each of its Subsidiaries has done business solely under the names set forth in Schedule 4.1 hereto. The chief executive office and principal place of business of the Borrower and each of its Subsidiaries is located at the address set forth in Schedule 4.1 hereto, and all of Borrower's records relating to its businesses are kept at that location. Section 4.2. Authorization for Borrowings; No Conflict as to Law or Agreements. The execution, delivery and performance by the Borrower and each of its Subsidiaries of the Loan Documents to which it is a party, and the Advances from time to time obtained hereunder, have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval which has not been obtained prior to the E-30 Exhibit 10(i) date hereof, (ii) require any authorization, consent or approval by, or registration, declaration or filing (other than filing of financing statements as contemplated hereunder) with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof, (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or any of its Subsidiaries or of the articles of incorporation, bylaws or other organizational documents of the Borrower or any of its Subsidiaries, (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower or any of its Subsidiaries is a party or by which it or its properties may be bound or affected, or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature upon or with respect to any of the properties now owned or hereafter acquired by the Borrower or other organizational documents (other than as required hereunder in favor of the Banks). Section 4.3. Legal Agreements. Each of the Loan Documents to which the Borrower or any of its Subsidiaries is a party constitutes the legal, valid and binding obligations and agreements of the Borrower or such Subsidiary, as applicable, enforceable against the Borrower or such Subsidiary, as applicable, in accordance its terms, except to the extent that enforcement thereof may be limited by an applicable bankruptcy, insolvency or similar laws now or hereafter in effect affecting creditors' rights generally and by general principles of equity. Section 4.4. Subsidiaries. All Subsidiaries of the Borrower are set forth and described in Schedule 4.4. Section 4.5. Financial Condition; No Adverse Change. The Borrower has heretofore furnished to the Agent audited consolidated financial statements of the Borrower and its Subsidiaries for its fiscal year ended September 30, 1998, and unaudited financial statements of the Borrower and its Subsidiaries for the period ended March 31, 1999, and those statements fairly present the financial condition of the Borrower and its Subsidiaries on the dates thereof and the results of operations and cash flows for the periods then ended (subject to year-end audit adjustments) and were prepared in accordance with GAAP. The Borrower has heretofore furnished to the Agent audited consolidated financial statements of ADFlex Solutions, Inc. and its Subsidiaries for its fiscal year ended December 27, 1998, and unaudited financial statements of ADFlex Solutions, Inc. and its Subsidiaries for the period ended March 28, 1999, and, to the best of the Borrower's knowledge, these statements fairly present the financial condition of ADFlex Solutions, Inc. and its Subsidiaries on the dates thereof and the results of operations and cash flows for the periods then ended (subject to year-end audit adjustments) and were prepared in accordance with GAAP. Since the date of E-31 Exhibit 10(i) the financial statements described above, there has not occurred any event or circumstance that would have a Material Adverse Effect. Section 4.6. Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries or the properties of the Borrower or any of its Subsidiaries before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Subsidiaries, could reasonably be expected to have a Material Adverse Effect, except as set forth and described in Schedule 4.6. Section 4.7. Regulation U. Neither the Borrower nor any of its Subsidiaries has engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 4.8. Taxes. Except as set forth and described on Schedule 4.8, the Borrower and each of its Subsidiaries has paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by it. The Borrower and each of its Subsidiaries has filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower, are required to be filed, and the Borrower and each of its Subsidiaries has paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by it to the extent such taxes have become due, except (a) for any such tax, assessment, charge or claim whose amount, applicability or validity is being contested by the Borrower or any such Subsidiary, as applicable, in good faith and by proper proceedings and for which the Borrower or any such Subsidiary, as applicable, shall have set aside adequate reserves, and (b) as set forth and described on Schedule 4.8. Section 4.9. Titles and Liens. The Borrower or one of its Subsidiaries has good and absolute title to all properties and assets reflected in the latest consolidated balance sheet referred to in Section 4.5, free and clear of all mortgages, security interests, liens and encumbrances, except for (a) mortgages, security interests and liens permitted by Section 6.1, and (b) covenants, restrictions, rights, easements and minor irregularities in title which do not (i) materially interfere with the business or operations of the Borrower and its Subsidiaries as presently conducted and (ii) materially impair the value of the property to which they attach. In addition, no financing statement naming the Borrower or any of its Subsidiaries (including, without limitation, Innovex Southwest (under any of Innovex Southwest, Inc., Innovex Acquisition Corp. or ADFlex Solutions, Inc.)) as debtor is on file in any office except to perfect only security interests permitted by Section 6.1. Each patent, trademark, copyright and other intellectual property interest having a fair market value in excess of E-32 Exhibit 10(i) $200,000 in which the Borrower and/or any of its Subsidiaries has a legal or equitable interest are set forth in Schedule 4.9 attached hereto. Section 4.10. Plans. Except as set forth and described in Schedule 4.10, neither the Borrower nor any of any Subsidiaries currently maintains and has not in the past maintained any Plan. Neither the Borrower nor any of its Subsidiaries has received any notice, nor has it received any knowledge to the effect, that it is not in full compliance in all material respects with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which would reasonably be expected to have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Subsidiaries has: (a) any accumulated funding deficiency within the meaning of ERISA; or (b) any liability or know of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which are or which may become payable to participants or beneficiaries of any such Plan). Section 4.11. Default. The Borrower and each of its Subsidiaries is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could reasonably be expected to have a Material Adverse Effect. Section 4.12. Environmental Compliance. The Borrower and each of its Subsidiaries has obtained all permits, licenses and other authorizations which are required under federal, state and local laws and regulations relating to emissions, discharges, releases of pollutants, contaminants, hazardous or toxic materials, or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes ("Environmental Laws") at the facilities of the Borrower or any of its Subsidiaries or in connection with the operation of such facilities. Except as disclosed in Schedule 4.12, the Borrower and each of its Subsidiaries and all activities of the Borrower and each of its Subsidiaries at its respective facilities comply with all Environmental Laws and with all terms and conditions of any required permits, licenses and authorizations applicable to the Borrower or any such Subsidiary with respect thereto. Except as disclosed in Schedule 4.12, the Borrower and each of its Subsidiaries is in compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in Environmental Laws or contained in any plan, order, decree, judgment or notice of which the Borrower or such Subsidiary is aware and with respect to which noncompliance would have a Material Adverse Effect. Except as disclosed in Schedule 4.12, the Borrower is not aware of, nor has the Borrower received notice of, any events, conditions, circumstances, activities, practices, E-33 Exhibit 10(i) incidents, actions or plans which may interfere with or prevent continued compliance with, or which may give rise to any liability under, any Environmental Laws. Section 4.13. Submissions to Banks. All financial and other information provided to the Agent or any Bank by or on behalf of the Borrower and its Subsidiaries in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or pro forma financial statements, present a good faith opinion as of the date made as to such projections, valuations and pro forma condition and results. Section 4.14. Financial Solvency. Both before and after giving effect to all of the transactions contemplated in the Loan Documents, the Borrower: (a) was and will not be insolvent, as that term is used and defined in Section 101(32) of the United States Bankruptcy Code and Section 2 of the Uniform Fraudulent Transfer Act; (b) does not have unreasonably small capital and is not engaged or about to engage in a business or a transaction for which any remaining assets of the Borrower are unreasonably small; (c) does not, by executing, delivering or performing its obligations under the Loan Documents or by taking any action with respect thereto, intend to, nor believe that it will, incur debts beyond its ability to pay them as they mature; (d) does not, by executing, delivering or performing its obligations under the Loan Documents or by taking any action with respect thereto, intend to hinder, delay or defraud either its present or future creditors; and (e) does not contemplate filing a petition in bankruptcy or for an arrangement or reorganization or similar proceeding under any law any jurisdiction or country, and, to the best knowledge of the Borrower, is not the subject of any bankruptcy or insolvency proceedings or similar proceedings under any law of any jurisdiction or country threatened or pending against the Borrower. ARTICLE V AFFIRMATIVE COVENANTS OF THE BORROWER So long as any Note shall remain unpaid or any Commitment shall be outstanding, the Borrower will comply with the following requirements, unless the Required Banks shall otherwise consent in writing: E-34 Exhibit 10(i) Section 5.1. Reporting Requirements. The Borrower will deliver, or cause to be delivered, to each Bank each of the following, which shall be in form and detail reasonably acceptable to the Required Banks: (a) as soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Borrower, audited annual financial statements of the Borrower and its Subsidiaries with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Agent, which annual financial statements shall include the balance sheets of the Borrower and its Subsidiaries as at the end of such fiscal year and the related statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, prepared on a consolidated and consolidating basis, all in reasonable detail and prepared in accordance with GAAP, together with a certificate of the chief financial officer of the Borrower, substantially in the form of Exhibit F, stating that such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within forty-five (45) days after the end of each fiscal quarter of the Borrower, an unaudited/internal balance sheet and statement of income, cash flow and retained earnings of the Borrower and its Subsidiaries as at the end of and for such month and for the year-to-date period then ended, prepared on a consolidated and consolidating basis, in reasonable detail and the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP hereof, subject to year-end audit adjustments; and accompanied by a certificate of the chief financial officer of the Borrower, substantially in the form of Exhibit G, stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to (A) the Status of the Borrower for purposes of establishing the appropriate Margins and Commitment Fee Percentage and (B) whether or not the Borrower is in compliance with the requirements set forth in Sections 5.9 through 5.11 and 6.12; (c) not later than thirty (30) days after the beginning of each fiscal year of the Borrower, the projected balance sheets, income statements, Capital Expenditures budget, and cash flow statements for the Borrower and its Subsidiaries for each month of such year, each in reasonable detail, representing the good faith projections of the Borrower for each such month, and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used E-35 Exhibit 10(i) by the Borrower for internal planning purposes, together with such supporting schedules and information as the Agent from time to time may reasonably request; (d) immediately after the commencement thereof, notice in writing of all uninsured litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower or any of its Subsidiaries of the type described in Section 4.6 or which (i) seek a monetary recovery against the Borrower or any of its Subsidiaries in excess of $1,000,000; or (ii) if determined adversely to the Borrower or any of its Subsidiaries, could reasonably be expected to have a Material Adverse Effect. (e) as promptly as practicable (but in any event not later than five (5) Business Days) after an officer of the Borrower obtains knowledge of the occurrence of a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower setting forth the steps being taken by the Borrower to cure the effect of such Default or Event of Default; (f) as soon as possible and in any event within thirty (30) days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the chief financial officer of the Borrower setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (g) as soon as possible, and in any event within ten (10) days after the Borrower fails to make any quarterly contribution required with respect to any Plan under Section 4.12(m) of the Internal Revenue Code of 1986, as amended, the statement of the chief financial officer of the Borrower setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (h) promptly upon obtaining knowledge thereof, notice of the violation by the Borrower or any of its Subsidiaries of any law, rule or regulation, the non-compliance with which could reasonably be expected to have a Material Adverse Effect; (i) promptly upon their distribution, copies of all financial statements, reports, proxy statements and other communications which the Borrower shall have sent to its stockholders; (j) promptly after the sending or filing thereof, copies of all regular and periodic financial reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange; and E-36 Exhibit 10(i) (k) such other information respecting the financial conditions and results of operation of the Borrower and/or any of its Subsidiaries as the Agent or the Required Banks may from time to time reasonably request. Section 5.2. Books and Records; Inspection and Examination. The Borrower will, and will cause each of its Subsidiaries to, keep accurate books of record and account for itself pertaining its business and financial condition and such other matters as the Agent may from time to time request in which true and complete entries will be made in accordance with GAAP consistently applied and, upon request of and reasonable notice by the Agent, will permit any officer, employee, attorney or accountant for any Bank to audit, review, make extracts from or copy any and all of its corporate and financial books and records at all reasonable times during ordinary business hours and to discuss its affairs with any of its directors, officers, employees or agents. The Borrower will, and will cause each of its Subsidiaries to, permit any Bank or its employees, accountants, attorneys or agents, to examine and inspect any of its property at any time during ordinary business hours; provided, that each Bank will use reasonable efforts to conduct (or have conducted) any such examination or inspection so as to minimize disruptions to operations. Section 5.3. Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, (a) comply with the requirements of applicable laws and regulations, the noncompliance with which would have a Material Adverse Effect, (b) use and keep its assets, and will require that others use and keep its assets, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance, the noncompliance with which could reasonably be expected to have a Material Adverse Effect. Section 5.4. Payment of Taxes and Other Claims. The Borrower will pay or discharge, when due, and will cause each of its Subsidiaries to pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any of its properties; provided, the Borrower and its Subsidiaries shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside adequate reserves in accordance with GAAP. Section 5.5. Maintenance of Properties. The Borrower will, and will cause each of its Subsidiaries to, keep and maintain, all of its properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted); provided, however, that nothing in this Section 5.5 shall prevent the Borrower or any of its Subsidiaries from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the reasonable judgment of the Borrower or such Subsidiary, as E-37 Exhibit 10(i) applicable, desirable in the conduct of the its business and not disadvantageous in any material respect to the Banks. The Borrower and/or its Subsidiaries will at all times own or hold a valid, irrevocable and exclusive license to use all patents, trademarks, copyrights and other intellectual property interests which are utilized in the operations of the Borrower and/or its Subsidiaries or which are being developed by or on behalf of the Borrower and/or its Subsidiaries for use in the operations of the Borrower and/or its Subsidiaries, including without limitation those set forth on Schedule 4.9 attached hereto, and the Borrower and/or its Subsidiaries will have the full and exclusive right to control and manage all such intellectual property interests. The Borrower will, and will cause each of its Subsidiaries to, protect, defend and maintain all such intellectual property interests, including without limitation prosecution of all patent, trademark and copyright applications and timely payment of all necessary maintenance and other fees. The Borrower will promptly notify the Agent if the Borrower and/or any of its Subsidiaries owns, creates or acquires any legal or equitable interest in any patent, trademark, copyright or other intellectual property interest having a fair market value in excess of $200,000. Upon request of the Agent, the Borrower will, or will cause each of its Subsidiaries to, execute and deliver to the Agent all such security agreements, financing statements and other documents required by the Agent related to patents, trademarks, copyrights and other intellectual property interests of the Borrower and/or its Subsidiaries. Section 5.6. Insurance. The Borrower will, and will cause each of its Subsidiaries to, obtain and all times maintain, insurance with insurers believed by it to be responsible and reputable in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which it operates. Without limiting the foregoing, at all times the Borrower shall, and shall cause each of its Subsidiaries to, keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (in case of Collateral consisting of motor vehicles) and such other risks and in such amounts as the Agent may reasonably request, with lender's loss payable clauses or endorsements in favor of the Agent as collateral agent on behalf of the Banks, in form reasonably acceptable to the Agent (including, without limitation a provision requiring at least thirty (30) days prior written notice to the Agent of any cancellation or modification of such insurance) and, upon request of the Agent, deliver policies or certificates of such insurance to the Agent. Section 5.7. Preservation of Corporate Existence. The Borrower will, and will cause each of its Subsidiaries to, preserve and maintain its corporate existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 5.8 Year 2000. The Borrower will, and will cause each of its Subsidiaries to, proceed with reasonable diligence to evaluate all of the data processing systems necessary to the conduct of its business (including computer hardware, software and firmware, and including data processing systems embedded within equipment) and will E-38 Exhibit 10(i) implement such hardware and software modifications and upgrades as may be necessary for such systems to be Year 2000 Compliant, and all such systems shall be Year 2000 Compliant, by no later than September 30, 1999. For purposes hereof, "Year 2000 Compliant" means with respect to any data processing system, (i) that such system accurately records, stores, processes and presents date data with respect to dates on and after January 1, 2000 in the same manner, and with substantially the same functionality, as such system records, stores, processes and presents date data with respect to dates on and before December 31, 1999; and (ii) that such system accurately records, stores, processes and presents date ranges beginning on or before December 31, 1999 and ending on or after January 1, 2000, or occurring entirely on or after January 1, 2000, in the same manner, and with substantially the same functionality, as such system records, stores, processes and presents date ranges occurring entirely on or before December 31, 1999. Section 5.9. Interest Coverage Ratio. As of each Covenant Computation Date, the Borrower will maintain its Interest Coverage Ratio at not less than 1.75 to 1.00. Section 5.10 Leverage Ratio. As of each Covenant Computation Date, the Borrower will maintain its Leverage Ratio at not less than 3.00 to 1.00. Section 5.11 Minimum Net Worth. As of each Covenant Computation Date, the Borrower will maintain its Net Worth at an amount not less than the amount set forth below opposite the applicable Covenant Computation Date set forth below: Applicable Covenant Minimum Net Computation Date Worth Amount ---------------- ------------ Closing Date $91,850,000 September 30, 1999 and each Required Net Worth Amount subsequent Covenant Computation Date As used in this Section 5.11, the "Required Net Worth Amount" for any given Covenant Computation Date is an amount equal to the sum of the minimum Net Worth required as of the immediately preceding Covenant Computation Date, plus seventy-five percent (75%) of the Net Income realized by the Borrower since such immediately preceding Covenant Computation Date (with any net loss counting as zero in such calculation), plus one hundred percent (100%) of the net cash proceeds received by the Borrower and/or its Subsidiaries from any equity offering made by the Borrower and/or its Subsidiaries since such immediately preceding Covenant Computation Date. E-39 Exhibit 10(i) ARTICLE VI NEGATIVE COVENANTS So long as any Note shall remain unpaid or any Commitment shall be outstanding, the Borrower will comply with the following requirements, unless the Required Banks shall otherwise consent in writing: Section 6.1. Liens. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any assets of the Borrower or any of its Subsidiaries, now owned or hereafter acquired, to secure any indebtedness; excluding from the operation of the foregoing (herein "Permitted Liens"): (a) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Schedule 6.1; (b) liens for taxes or assessments or other governmental charges to the extent not required to be paid by Section 5.4; and any extension, renewal or replacement thereof (so long as such indebtedness is not increased above the amount outstanding as of the date of any such extension, renewal or replacement; (c) materialmen's, merchants', carriers', worker's, repairer's, or other like liens arising in the ordinary course of business to the extent not required to be paid by Section 5.4; (d) pledges or deposits to secure obligations under worker's compensation laws, unemployment insurance and social security laws, or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business; (e) zoning restrictions, easements, licenses, restrictions on the use of real property or minor irregularities in title thereto, which do not materially impair the use of such property in the operation of the business of the Borrower or its Subsidiaries or the value of such property for the purpose of such business; (f) liens and security interests granted to the Banks pursuant to any of the Loan Documents; and (g) purchase money mortgages, liens or security interests, including conditional sale agreements or other title retention agreements and leases which are in the nature of title retention agreements, upon or in property acquired after the Closing Date by the Borrower or its Subsidiaries, or mortgages, liens or security interests existing in such property at the time of the acquisition thereof, provided that: E-40 Exhibit 10(i) (i) no such mortgage, lien or security interest extends or shall extend to or cover any property of the Borrower or any of its Subsidiaries other than the property then being acquired; and (ii) the aggregate principal amount of the indebtedness secured by any such mortgage, lien or security interest shall not exceed the cost of such property so acquired in connection therewith. Section 6.2. Indebtedness. The Borrower will not, and will not permit any of its Subsidiaries to, incur, create, assume, permit or suffer to exist, any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) Obligations arising hereunder; (b) indebtedness in existence on the date hereof and listed in Schedule 6.2; and (c) Capitalized Lease Liabilities and indebtedness of the Borrower or its Subsidiaries secured by security interests permitted by Section 6.1(g) incurred after the Closing Date. Section 6.3. Guaranties. The Borrower will not, and will not permit any of its Subsidiaries to, assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) guaranties of the Obligations arising hereunder; (b) the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in existence on the date hereof and listed in Schedule 6.3. Section 6.4. Investments. The Borrower will not, and will not permit any of its Subsidiaries to, purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or create or acquire any Subsidiary or make any investment or acquire any interest whatsoever in, any other Person, except: (a) investments in (i) direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute the full faith and credit obligations of the United States of America having a maturity of eighteen (18) E-41 Exhibit 10(i) months or less, (ii) bonds issued by states, state agencies or municipalities which are rated "A-" or better by Standard & Poors Corporation or "A3" or better by Moody's Investors Service, (iii) bonds issued by states, state agencies or municipalities which are rated below "A-" by Standard & Poors Corporation or below "A3" by Moody's Investors Service or which are unrated; provided, however, that investments under this Section 6.4(a)(iii) will not at any time exceed five percent (5%) of the Borrower's Net Worth, (iv) commercial paper issued by a U.S. corporation rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service, (v) money market mutual funds whose underlying assets are exclusively investments which would otherwise be permitted investments under this Section 6.4(a), or (vi) repurchase agreements, certificates of deposit or bankers' acceptances having a maturity of eighteen (18) months or less issued by members of the Federal Reserve System having deposits in excess of $500,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (b) advances or loans to officers and employees of the Borrower or its Subsidiaries not exceeding at any one time an aggregate of $100,000; and (c) advances in the form of progress payments, prepaid rent or security deposits. Section 6.5. Restricted Payments. The Borrower will not declare or pay any dividends on any shares of any class of stock of the Borrower, or directly or indirectly apply any assets to the redemption, retirement, purchase or other acquisition of any shares of any class of stock of the Borrower; provided, however, the Borrower may pay dividends on its stock so long as prior to and immediately after giving effect to any such dividend no Default or Event of Default shall exist. Section 6.6. Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease, assign, transfer or otherwise dispose of all or a substantial part of its assets (whether in one transaction or in a series of transactions) to any other Person, other than the sale of Inventory in the ordinary course of business, and will not liquidate, dissolve or suspend its business operations. Section 6.7. Consolidation and Merger; Asset Acquisitions. The Borrower will not, and will not permit any of its Subsidiaries to, consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person, except for the merger of any Subsidiary of the Borrower into the Borrower, provided the Borrower survives as the sole remaining entity. Section 6.8. Sale and Leaseback. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any arrangement, directly or indirectly, with any other E-42 Exhibit 10(i) Person whereby the Borrower or any Subsidiary shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower or any Subsidiary intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 6.9. Restrictions on Nature of Business. The Borrower will not, and will not permit any of its Subsidiaries to, engage in any line of business materially different from that in which it is presently engaged and will not purchase, lease or otherwise acquire assets not related to its business. Section 6.10. Accounting. The Borrower will not, and will not permit any of its Subsidiaries to, adopt any material change in accounting principles, other than as required by GAAP, and will not adopt, permit or consent to any change in its fiscal year. Section 6.11. Hazardous Substances. The Borrower will not, and will not permit any of its Subsidiaries to, cause or permit any Hazardous Substances to be disposed of in any manner which might result in any material liability to the Borrower or any Subsidiary, on, under or at any real property which is operated by the Borrower or any Subsidiary or in which the Borrower or any Subsidiary has any interest. Section 6.12. Capital Expenditures. The Borrower will not, and will not permit any of its Subsidiaries to, make Capital Expenditures during any fiscal year, in an aggregate amount in excess of the amount set forth opposite the applicable period below: Maximum Aggregate Amount of Capital Expenditures Fiscal Year ----------------------- ----------- $35,000,000 Fiscal Year Ended September 30, 2000 $25,000,000 Fiscal Year Ended September 30, 2001 $25,000,000 Fiscal Year Ended September 30, 2002 $20,000,000 Fiscal Year Ended September 30, 2003 $20,000,000 Fiscal Year Ended September 30, 2004 ARTICLE VII EVENTS OF DEFAULT; RIGHTS AND REMEDIES Section 7.1. Events of Default. "Event of Default", wherever used herein, means any one of the following events: (a) default in the payment of any principal of any Note when it becomes due and payable; or E-43 Exhibit 10(i) (b) default in the payment of any interest on any Note or any fees, costs or expenses required to be paid by the Borrower or any Guarantor under this Agreement or any other Loan Document and the continuation of such default for more than five (5) calendar days; or (c) default in the performance, or breach, of any covenant or agreement on the part of the Borrower contained in Sections 5.8 through 5.11 or in Article VI; or (d) default in the performance, or breach, of any covenant or agreement of the Borrower in this Agreement (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section 7.1 specifically dealt with) and the continuance of such default or breach for a period of thirty (30) calendar days after the Borrower has or should reasonably have had notice thereof; or (e) default in the performance, or breach, of any covenant or agreement of the Borrower or any Guarantor in any Loan Document other than this Agreement (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section 7.1 specifically dealt with) and the continuance of such default or breach beyond the applicable period of grace, if any specified in such Loan Document; or (f) the Borrower or any of its Subsidiaries shall be or become insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any of its Subsidiaries shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or any such Subsidiary; or the Borrower or any of its Subsidiaries shall institute (by petition, application, answer, consent or otherwise) any insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any of its Subsidiaries; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any of its Subsidiaries and such judgment, writ, or similar process shall not be released, vacated or fully bonded within thirty (30) calendar days after its issue or levy; or (g) a petition naming the Borrower or any of its Subsidiaries as debtor shall be filed under the United States Bankruptcy Code; or (h) any representation or warranty made by the Borrower or any of its Subsidiaries in any Loan Document or by the Borrower (or any of its officers) in any request for a Borrowing, or in any other certificate, instrument, or statement E-44 Exhibit 10(i) contemplated by or made or delivered pursuant to or in connection with any Loan Document, shall prove to have been incorrect in any material respect when made; or (i) the rendering against the Borrower or any of its Subsidiaries a final judgment, decree or order for the payment of money in excess of $1,000,000 (unless the payment of such judgment is fully insured) and the continuance of such judgment, decree or order unsatisfied and in effect for any period of thirty (30) consecutive calendar days without a stay of execution; or (j) a default under any bond, debenture, note, securitization agreement or other evidence of indebtedness or similar obligation of the Borrower or any of its Subsidiaries or under any indenture or other instrument under which any such evidence of indebtedness or similar obligation has been issued or by which it is governed and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture or other instrument; or (k) any Reportable Event, which the Agent determines in good faith could reasonably be expected to constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing thirty (30) days after written notice to such effect shall have been given to the Borrower by the Agent; or any Plan shall have been terminated (other than a standard termination which is not reasonably expected to have a Material Adverse Effect), or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan, or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or (l) the Borrower or any of its Subsidiaries shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or shall sell all or substantially all of its assets; or (m) Any Guarantor shall repudiate, purport to revoke or fail to perform any of such Guarantor's obligations under any Loan Document to which such Guarantor is a party; or (n) a Change of Control shall occur with respect to the Borrower. Section 7.2. Rights and Remedies. Upon the occurrence of an Event of Default or at any time thereafter until such Event of Default is cured or waived to the written satisfaction of the Required Banks, the Agent or the Required Banks may (and, upon written request of the Required Banks the Agent shall) exercise any or all of the following rights and remedies: E-45 Exhibit 10(i) (a) by notice to the Borrower, declare the Revolving Commitments, the Term Commitments or all Commitments to be terminated, whereupon the same shall forthwith terminate; (b) by notice to the Borrower, declare the entire unpaid principal amount of the Notes, all interest accrued and unpaid thereon, and all other Obligations to be forthwith due and payable, whereupon the Notes, all such accrued interest and all such other Obligations shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; (c) without notice to the Borrower and without further action, apply any and all monies owing by any Bank to the Borrower or to any Subsidiary of the Borrower to the payment of the Notes, including interest accrued thereon, and to payment to payment of all other Obligations then owing by the Borrower; (d) exercise and enforce the rights and remedies available to the Banks or to any Bank under any Loan Document; and (e) exercise any other rights and remedies available to the Banks or to any Bank by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in Section 7.1(g) hereof, the entire unpaid principal amount of the Notes, all interest accrued and unpaid thereon, and all other amounts payable under this Agreement shall be immediately due and payable without presentment, demand, protest or notice of any kind. ARTICLE VIII AGREEMENT AMONG BANKS AND AGENT Section 8.1. Authorization; Powers; Agent for Collateral Purposes. Each Bank irrevocably appoints and authorizes the Agent to act as administrative agent for and on behalf of such Bank to the extent provided herein, in any Loan Documents or in any other document or instrument delivered hereunder or in connection herewith, and to take such other actions as may be reasonably incidental thereto. The Agent agrees to act as administrative agent for each Bank upon the express conditions contained in this Article VIII, but in no event shall the Agent constitute a fiduciary of any Bank, nor shall the Agent have any fiduciary responsibilities in respect of any Bank. In furtherance of the foregoing, and not in limitation thereof, each Bank irrevocably (a) authorizes the Agent to execute and deliver and perform those obligations under each of the Loan Documents to which the Agent is a party as are specifically delegated to the Agent, and to exercise all rights, powers and remedies as may be specifically delegated hereunder or thereunder, together with such additional powers as may be reasonably incidental thereto, (b) appoints the Agent as nominal E-46 Exhibit 10(i) beneficiary or nominal secured party, as the case may be, under the Loan Documents and all related UCC financing statements, and (c) authorizes the Agent to act as agent of and for such Bank for purposes of holding, perfecting and disposing of Collateral under the Loan Documents. As to any matters not expressly provided for by the Loan Documents, the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Banks or, if so required pursuant to Section 9.2, upon the instructions of all Banks; provided, however, that except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action, and the Agent shall not in any event be required to take any action which is contrary to the Loan Documents or applicable law. Section 8.2. Application of Proceeds. The Agent, after deduction of any costs of collection, as provided in Section 8.5, shall remit to each Bank (to the extent a Bank is to share therein) that Bank's pro rata share of all payments of principal, interest and fees payable hereunder in accordance with such Bank's appropriate Percentage with respect to the Facility under which such payments are received; provided, however, that all payments received after the termination of the Revolving Commitments following the occurrence of an Event of Default, after application to the costs and expenses incurred by the Agent or any Bank in collection thereof (as contemplated in Section 8.5), shall be allocated to the Banks in accordance with their Default Percentages. Each Bank's interest under the Loan Documents shall be payable solely from payments, collections and proceeds actually received by the Agent under the Loan Documents; and the Agent's only liability to a Bank with respect to any such payments, collections and proceeds shall be to account for such Bank's Percentage (or Default Percentage, as the case may be) of such payments, collections and proceeds in accordance with this Agreement. If the Agent is required for any reason to refund any such payments, collections or proceeds, each Bank will refund to the Agent, upon demand, its Percentage (or Default Percentage, as the case may be) of such payments, collections or proceeds, together with its Percentage (or Default Percentage, as the case may be) of interest or penalties, if any, payable by the Agent in connection with such refund. If any Bank has wrongfully refused to fund its Percentage of any Borrowing, or if the outstanding principal balance of the Advances made by any Bank under a Facility is for any other reason less than its respective Percentage of the aggregate principal balance of all Advances under that Facility, the Agent may remit payments received by it to the other Banks until such payments have reduced the aggregate amounts owed by the Borrower to the extent that the aggregate amount of the Advances owing to such Bank hereunder are equal to its Percentage of the aggregate amounts of the Advances owing under the applicable Facility to all of the Banks hereunder. The foregoing provision is intended only to set forth certain rules for the application of payments, proceeds and collections in the event that a Bank has breached its obligations hereunder and shall not be deemed to excuse any Bank from such obligations. E-47 Exhibit 10(i) Section 8.3. Exculpation. The Agent shall not be liable for any action taken or omitted to be taken by the Agent in connection with the Loan Documents, except for its own gross negligence or willful misconduct. The Agent shall be entitled to rely upon advice of counsel concerning legal matters, the advice of independent public accountants with respect to accounting matters and advice of other experts as to any other matters and upon any Loan Document and any schedule, certificate, statement, report, notice or other writing which it reasonably believes to be genuine or to have been presented by a proper Person. Neither the Agent nor any of its directors, officers, employees or agents shall be responsible or in any way liable for (a) any recitals, representations or warranties contained in, or for the execution, validity, genuineness, effectiveness or enforceability of any Loan Document, or any other instrument or document delivered hereunder or in connection herewith, (b) the validity, genuineness, perfection, effectiveness, enforceability, existence, value of enforcement of any Collateral or (c) any action taken or omitted by it. The designation of Norwest as Agent hereunder shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, Norwest in its individual capacity as Bank hereunder. Section 8.4. Use of the Term "Agent". The term "Agent" is used herein in reference to the Agent merely as a matter of custom. It is intended to reflect only an administrative relationship between the Agent and the Banks, in each case as independent contracting parties. However, the obligations of the Agent shall be limited to those expressly set forth herein and in no event shall the use of such term create or imply any fiduciary relationship or any other obligation arising under the general law of agency. Section 8.5. Reimbursement for Costs and Expenses. All payments, collections and proceeds received or effected by the Agent may be applied first to pay or reimburse the Agent for all reasonable costs and expenses at any time incurred by or imposed upon the Agent in connection with this Agreement or any other Loan Document (including but not limited to all reasonable attorney's fees (including allocated costs of in-house counsel), foreclosure expenses and advances made to protect the security of any Collateral, but excluding any costs, expenses, damages or liabilities arising from the gross negligence or willful misconduct of the Agent). If the Agent does not receive payments, collections or proceeds sufficient to cover any such costs and expenses within five (5) days after their incurrence or imposition, each Bank shall, upon demand, remit to the Agent such Bank's Percentage of the difference between (i) such costs and expenses and (ii) such payments, collections and proceeds, together with interest on such amount for each day following the thirtieth day after demand therefor until so remitted at a rate equal to the Federal Funds Rate for each such day. Section 8.6. Payments Received Directly by Banks. If any Bank shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise) on account of any Facility or on account of any fees under this Agreement (other than through distributions made in accordance with Section 8.2 hereof) in excess of such E-48 Exhibit 10(i) Bank's applicable Percentage with respect to such Facility (or such Bank's Default Percentage, if applicable), such Bank shall promptly give notice of such fact to the Agent and shall promptly remit to the Agent such amount as shall be necessary to cause the remitting Bank to share such excess payment or other recovery ratably with each of the Banks in accordance with their respective Percentages, (or Default Percentages, as the case may be) together with interest for each day on such amount until so remitted at a rate equal to the Federal Funds Rate for each such day; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such remitting Bank or holder, the remittance shall be restored to the extent of such recovery. Section 8.7. Indemnification. Each Bank severally (but not jointly) hereby agrees to indemnify and hold harmless the Agent, as well as the Agent's agents, employees, officers and directors, ratably according to their respective Percentages from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgment, demands, damages, costs, disbursements, or expenses (including attorneys' fees and expenses)(including allocated costs of in-house counsel)) of any kind or nature whatsoever, which are imposed on, incurred by, or asserted against the Agent or its agents, employees, officers or directors in any way relating to or arising out of the Loan Documents, or as a result of any action taken or omitted to be taken by the Agent; provided, however, that no Bank shall be liable for any portion of any such losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs disbursements, or expenses resulting from the gross negligence or willful misconduct of the Agent. Notwithstanding any other provision of the Loan Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Banks against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Section 8.8. Agent and Affiliates. Norwest shall have the same rights and powers in its capacity as a Bank hereunder as any other Bank, and may exercise or refrain from exercising the same as though it were not the Agent, and Norwest and its affiliates may accept deposits from and generally engage in any kind of business with the Borrower and its Subsidiaries or any affiliate of the Borrower and its Subsidiaries as fully as if Norwest were not the Agent hereunder. Section 8.9. Credit Investigation. Each Bank acknowledges that it has made such inquiries and taken such care on its own behalf as would have been the case had its Commitments been granted and its Advances made directly by such Bank to the Borrower without the intervention of the Agent or any other Bank. Each Bank agrees and acknowledges that the Agent makes no representations or warranties about the creditworthiness of the Borrower or any other party to this Agreement or with respect to the legality, validity, sufficiency or enforceability of this Agreement, any Loan Document, any Collateral or any other instrument or document delivered hereunder or in connection herewith. E-49 Exhibit 10(i) Section 8.10. Defaults. The Agent shall have no duty to inquire into any performance or failure to perform by the Borrower and shall not be deemed to have knowledge of the occurrence of a Default or an Event of Default (other than under Sections 7.1(a) or 7.1(b)) hereof unless the Agent has received notice from a Bank or the Borrower specifying the occurrence of such Default or Event of Default. In the event that the Agent receives such a notice of the occurrence of a Default or an Event of Default, the Agent shall give prompt notice thereof to the Banks. In the event of any Default, the Agent shall (subject to Section 8.7 hereof) (a) in the case of a Default that constitutes an Event of Default, not take any the actions referred to in Section 7.2(b) hereof unless so directed by the Required Banks, and (b) in the case of any Default, take such actions with respect to such Default as shall be directed by the Required Banks; provided that, unless and until the Agent shall have received such directions, the Agent may take any action, or refrain from taking any action, with respect to such Default as it shall deem advisable in the best interest of the Banks. Section 8.11. Obligations Several. The obligations of each Bank hereunder are the several obligations of such Bank, and neither any Bank nor the Agent shall be responsible for the obligations of any other Bank hereunder, nor will the failure by the Agent or any Bank to perform any of its obligations hereunder relieve the Agent or any other Bank from the performance of its respective obligations hereunder. Nothing contained in this Agreement, and no action taken by any Bank or the Agent pursuant hereto or in connection herewith or pursuant to or in connection with the Loan Documents shall be deemed to constitute the Banks, together or with or without the Agent, as a partnership, association, joint venture, or other entity. Section 8.12. Sale or Assignment; Addition of Banks. Except as permitted under the terms and conditions of this Section 8.12 or, with respect to participations, under Section 8.13, no Bank may sell, assign or transfer its rights or obligations under this Agreement or its interest in any Note. Any Bank, at any time upon at least five (5) Business Days' prior written notice to the Agent and the Borrower (unless the Agent and the Borrower consent to a shorter period of time), may assign all or a portion (provided such portion is not less than $5,000,000) of such Bank's Notes, Advances, and Commitments to a domestic or foreign bank (having a branch office in the United States), an insurance company or other financial institution (an "Applicant") on any date (the "Adjustment Date") selected by such Bank, but only so long as the Borrower and the Agent shall have provided their prior written approval of such proposed Applicant. Notwithstanding the foregoing, (i) the Borrower will not unreasonably withhold its consent to any such assignment, (ii) no such consent of the Borrower shall be required after the occurrence and during the continuance of an Event of Default, and (iii) no such consent of the Borrower or the Agent shall be required in connection with an assignment to the Federal Reserve Bank for purposes of satisfying a Bank's capital requirements. Upon receipt of such approval and to confirm the status of each additional Bank as a party to this Agreement and to evidence the assignment in accordance herewith: E-50 Exhibit 10(i) (a) the Agent, the Borrower (if the Borrower's consent is required), the assigning Bank and such Applicant shall, on or before the Adjustment Date, execute and deliver to the Agent an Assignment Certificate in substantially the form of Exhibit H (an "Assignment Certificate"); (b) if requested by the Agent, the Borrower will execute and deliver to the Agent, for delivery by the Agent in accordance with the terms of the Assignment Certificate, (i) new Notes payable to the order of the Applicant in amounts corresponding to the applicable Commitments acquired by such Applicant and (ii) new Notes payable to the order of the assigning Bank in amounts corresponding to the retained Commitments. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of the Notes to be replaced by such new Notes, shall be dated the effective date of such assignment and shall otherwise be in the form of the Notes to be replaced thereby. Such new Notes shall be issued in substitution for, but not in satisfaction or payment of, the Notes being replaced thereby and such new Notes shall be treated as Notes for purposes of this Agreement; and (c) the assigning Bank shall pay to the Agent an administrative fee of $3,000. Upon the execution and delivery of such Assignment Certificate and such new Notes, and effective as of the effective date thereof (i) this Agreement shall be deemed to be amended to the extent, and only to the extent, necessary to reflect the addition of such additional Bank and the resulting adjustment of the Percentages arising therefrom, (ii) the assigning Bank shall be relieved of all obligations hereunder to the extent of the reduction of the assigning Bank's Percentage, and (iii) the Applicant shall become a party hereto and shall be entitled to all rights, benefits and privileges accorded to a Bank herein and in each other Loan Document or other document or instrument executed pursuant hereto and subject to all obligations of a Bank hereunder, including, without limitation, the right to approve or disapprove actions which, in accordance with the terms hereof, require the approval of the Required Banks or all Banks. In order to facilitate the addition of additional Banks hereto, the Borrower (subject to is approval rights hereunder, if any) and the Banks shall cooperate fully with the Agent in connection therewith and shall provide all reasonable assistance requested by the Agent relating thereto, including, without limitation, the furnishing of such written materials and financial information regarding the Borrower as the Agent may reasonably request, the execution of such documents as the Agent may reasonably request with respect thereto, and the participation by officers of the Borrower, and the Banks in a meeting or teleconference call with any Applicant upon the request of the Agent. Section 8.13. Participation. In addition to the rights granted in Section 8.12, each Bank may grant participations in all or a portion of its Notes, Advances and Commitments to any domestic or foreign commercial bank (having a branch office in the United States), insurance company, financial institution or an affiliate of such Bank. No E-51 Exhibit 10(i) holder of any such participation shall be entitled to require any Bank to take or omit to take any action hereunder. The Banks shall not, as among the Borrower, the Agent and the Banks, be relieved of any of their respective obligations hereunder as a result of any such granting of a participation. The Borrower hereby acknowledges and agrees that any participation described in this Section 8.13 may rely upon, and possess all rights under, any opinions, certificates, or other instruments or documents delivered under or in connection with any Loan Document. Except as set forth in this Section 8.13, no Bank may grant any participation in the Notes, Advances or Commitments. Section 8.14. Withholding Tax Exemption. At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. Section 8.15. Borrower not a Beneficiary or Party. Except with respect to the limitation of liability applicable to the Banks under Section 8.11 and the Borrower's right to approve additional Banks in accordance with Section 8.12, the provisions and agreements in this Article VIII are solely among the Banks and the Agent and the Borrower shall not be considered a party thereto or a beneficiary thereof. ARTICLE IX MISCELLANEOUS Section 9.1. No Waiver; Cumulative Remedies. No failure or delay on the part of the Agent or any Bank in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any E-52 Exhibit 10(i) such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.2. Amendments, Requested Waivers, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower or any Guarantor therefrom shall be effective unless the same shall be in writing and signed by the Required Banks and, if the rights or duties of the Agent are affected thereby, by the Agent; provided that no amendment, modification, termination, waiver or consent shall do any of the following unless the same shall be in writing and signed by all Banks: (a) change the amount of any Commitment (except as permitted in accordance with Section 8.12), (b) increase the Term Commitment Amount or the Revolving Commitment Amount, (c) reduce the amount of any principal of or interest due on any Advances or the Commitment Fees payable to the Banks hereunder, (d) postpone any date fixed for any payment of principal of or interest on any outstanding Advances or the Commitment Fees payable to the Banks hereunder, (e) change the definition of "Required Banks," (f) amend this Section 9.2 or any other provision of this Agreement requiring the consent or other action of the Required Banks or all Banks, (g) release any Guaranty or (h) release, subordinate or terminate any security interest in or mortgage lien on any Collateral (other than the sale of Inventory in the ordinary course of business) if the fair market value of all Collateral so affected during any fiscal year of the Borrower exceeds $1,000,000 in the aggregate. Any waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.3. Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and mailed or delivered to the applicable parties at their respective addresses set forth on the execution pages hereto, or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 9.3. All such notices, requests, demands and other communications, when delivered, shall be effective upon actual delivery and when mailed, shall be effective when sent by nationally recognized overnight mail courier or delivery service, addressed as aforesaid, except that notices or requests to the Agent or any Bank pursuant to any of the provisions of Article II shall not be effective until received by the Agent or such Bank. Section 9.4. Costs and Expenses. The Borrower will reimburse the Agent for (a) any and all out-of-pocket costs and expenses, including without limitation attorneys' fees and expenses (including allocated costs of in-house counsel), lien and UCC searches, title and recording expenses and other similar expenses, paid or incurred by the Agent in connection with the preparation, filing or recording of the Loan Documents and any other E-53 Exhibit 10(i) document or agreement related hereto or thereto, and the transactions contemplated hereby (which amount shall be paid on the Closing Date or as soon thereafter as demand is made therefor) and the negotiation of any amendments, modifications or extensions to or of any of the foregoing documents, instruments or agreements and the preparation of any and all documents necessary or desirable to effect such amendments, modifications or extensions, (b) customary transaction fees of the Agent incurred in connection with the loans contemplated hereby, (c) fees in connection with any audits or inspections by the Agent of any Collateral or the operations or business of the Borrower and/or its Subsidiaries, whether conducted at the premises of the Borrower and/or its Subsidiaries or at the Agent's premises, and (d) any and all other out-of-pocket costs and expenses incurred by the Agent in connection with any of the transactions contemplated hereby. The Borrower will reimburse the Agent and each Bank for any and all costs and expenses incurred by the Agent or any Bank in connection with the enforcement of any of the rights or remedies of the Agent or the Banks under any of the Loan Documents or under applicable law, whether or not suit is filed with respect thereto. Section 9.5. Indemnity. In addition to the payment of expenses pursuant to Section 9.4, the Borrower agrees to indemnify, defend and hold harmless the Agent, each Bank and each of their respective participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees and agents (the "Indemnitees"), from and against (i) any claim, loss or damage to which any Indemnitee may be subjected as a result of any past, present or future existence, use, handling, storage, transportation or disposal of any Hazardous Substance by the Borrower or any of its Subsidiaries or with respect to any property owned, leased or controlled by the Borrower or any of its Subsidiaries, (ii) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority (excluding income or gross receipts taxes) by reason of the execution and delivery of this Agreement and the other Loan Documents or the making of any Advances and (iii) any and all liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with any investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against such Indemnitee, in any manner relating to or arising out of or in connection with, the making of any Advances or entering into this Agreement or any other Loan Documents or the use or intended use of the proceeds of the Advances, excepting, however, from the foregoing any such liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses resulting solely from the willful misconduct or gross negligence of any Indemnitee. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon request of such Indemnitee, the Borrower, or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrower's sole cost and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing E-54 Exhibit 10(i) undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the indemnified liabilities contemplated hereby which is permissible under applicable law. The obligations of the Borrower under this Section 9.5 shall survive termination of this Agreement and the discharge of the Obligations. Section 9.6. Execution in Counterparts. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.7. Governing Law; Jurisdiction; Waiver of Jury Trial. (a) Governing Law. The Loan Documents shall be governed by, and construed in accordance with, the laws of the State of Minnesota, except to the extent the law of any other jurisdiction applies as to the perfection or enforcement of the any security interest in any Collateral and except to the extent expressly provided to the contrary in any Loan Document. (b) Jurisdiction. The Borrower hereby irrevocably submits to the jurisdiction of any state or federal court sitting in the State of Minnesota in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents, and the Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such state or federal court. The Borrower hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. The Borrower irrevocably consents to the service of copies of the summons and complaint and any other process which may be served in any such action or proceeding by the mailing of copies of such process to the Borrower at its addresses specified in Section 9.3 above. The Borrower agrees that a final judgment in any such action or proceeding may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Section 9.7(b) shall affect the right of the Agent or any Bank to serve legal process in any other manner permitted by law or affect the right of the Agent or any Bank to bring any action or proceeding against the Borrower or its property in the courts of other jurisdictions. (c) WAIVER OF JURY TRIAL. THE BORROWER, THE BANKS AND THE AGENT HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT OR ANY INSTRUMENT OR DOCUMENT DELIVERED THEREUNDER. E-55 Exhibit 10(i) Section 9.8. Integration; Inconsistency. This Agreement, together with the Loan Documents, comprise the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to such subject matter, superseding all prior oral or written understandings. If any provision of a Loan Document is inconsistent with or conflicts with a comparable or similar provision appearing in this Agreement, the comparable or similar provision in this Agreement shall govern. Section 9.9. Agreement Effectiveness. This Agreement shall become effective upon delivery of fully executed counterparts hereof to each of the parties hereto. Section 9.10. Advice from Independent Counsel. The parties hereto understand that this Agreement is a legally binding agreement that may affect such party's rights. Each party hereto represents to the other that it has received legal advice from counsel of its choice regarding the meaning and legal significance of this Agreement and that it is satisfied with its legal counsel and the advice received from it. Section 9.11. Judicial Interpretation. Should any provision of this Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any person by reason of the rule of construction that a document is to be construed more strictly against the person who itself through its agent prepared the same, it being agreed that all parties hereto have participated in the preparation of this Agreement. Section 9.12. Binding Effect; No Assignment by Borrower. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Banks, the Agent and their respective successors and assigns; provided, however, the Borrower may not assign any or all of its rights or obligations hereunder or any of its interest herein without the prior written consent of all Banks. Section 9.13. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.14. Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW] E-56 Exhibit 10(i) IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. Address: INNOVEX, INC. 530 11th Avenue South Hopkins, Minnesota 55343 Attn: Douglas W. Keller By Telecopy No. (612) 938-7718 ------------------------------------ Its -------------------------------- Address: NORWEST BANK MINNESOTA, 7900 Xerxes Avenue South NATIONAL ASSOCIATION, as Bank Bloomington, Minnesota 55431-2206 and as Agent Attn: Sharlyn G. Rekenthaler Telecopy No. (612) 316-4203 By ------------------------------------ Its -------------------------------- Revolving Commitment: $9,375,000 Revolving Percentage: 62.50% Term Commitment: $15,625,000 Term Percentage: 62.50% SIGNATURE PAGE TO CREDIT AGREEMENT Exhibit 10(i) Address: U.S. BANK NATIONAL ASSOCIATION U.S. Bank Place 601 Second Avenue South By MPFO0602 ------------------------------------ Minneapolis, Minnesota 55402-4302 Its Attn: Michael J. Staloch -------------------------------- Telecopy No. (612) 973-0823 Revolving Commitment: $5,625,000 Revolving Percentage: 37.50% Term Commitment: $9,375,000 Term Percentage: 37.50% SIGNATURE PAGE TO CREDIT AGREEMENT Exhibit 10(i) EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21. SUBSIDIARIES OF INNOVEX, INC. State or other jurisdiction of Name Incorporation or Organization - ---- ----------------------------- Innovex Precision Components, Inc. Minnesota Innovex Southwest, Inc. Delaware ADFlex Cayman Ltd. Cayman Island Innovex (Thailand) Ltd. Thailand ADFlex Solutions Ltd. Delaware and United Kingdom ADFlex Mexico S.A. de C.V. Mexico ADFlex Solutions FSC Inc. Barbados Iconovex Corporation Minnesota Innovex Limited Minnesota Mar Engineering, Inc. Minnesota Innovex Sales Limited Jamaica Smart Solution, LLC Delaware E-59 Exhibit 21 EX-23 4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated November 11, 1999(except for the third paragraph of Note L, as to which the date is November 15, 1999), accompanying the consolidated financial statements included in the Annual Report of Innovex, Inc. on Form 10-K for the year ended September 30, 1999. We hereby consent to the incorporation by reference of said report in the Registration Statements of Innovex, Inc. on Forms S-8 (File No. 33-14776, effective June 3, 1987, File No. 33-27530, effective March 17, 1989, File No. 33-59035, effective May 2, 1995, File No. 333-10045, effective August 12, 1996, File No. 333-10047, effective August 12, 1996 and File No. 333-79427, effective May 27, 1999.) \s\ GRANT THORNTON LLP Minneapolis, Minnesota December 10, 1999 E-60 Exhibit 23 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS INCLUDED IN FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS SEP-30-1999 SEP-30-1999 6,231 19,310 30,324 1,825 15,892 76,317 105,898 18,740 178,806 45,296 26,376 0 0 593 106,541 178,806 103,198 103,198 76,277 76,277 0 107 467 9,239 2,680 6,559 0 0 0 6,559 0.44 0.44
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