-----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, M8wTIh4IIYQaVPSqZR5aEK+AkenGJpfO4ZuBfJqkQZCsK0NOQPyAHN1zCKM6BtXL Yvp3Q9tMCy0ECwnTtXyWYQ== 0001157523-07-007708.txt : 20070802 0001157523-07-007708.hdr.sgml : 20070802 20070802101139 ACCESSION NUMBER: 0001157523-07-007708 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070802 DATE AS OF CHANGE: 20070802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVEX INC CENTRAL INDEX KEY: 0000050601 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 411223933 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13143 FILM NUMBER: 071018713 BUSINESS ADDRESS: STREET 1: 3033 CAMPUS DRIVE STREET 2: SUITE E180 CITY: PLYMOUTH STATE: MN ZIP: 55441 BUSINESS PHONE: 763-383-4000 MAIL ADDRESS: STREET 1: 3033 CAMPUS DRIVE STREET 2: SUITE E180 CITY: PLYMOUTH STATE: MN ZIP: 55441 10-Q 1 a5462286.txt INNOVEX, INC. 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2007 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission File Number 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.) 3033 Campus Drive, Suite E180, Plymouth, MN 55441 (Address of principal executive offices) (763) 383-4000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check One): Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No As of July 23, 2007, 19,397,095 shares of the Company's common stock, $.04 par value per share, were outstanding. ================================================================================ 1 Index
PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements. - ------- --------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------- -------------------------------------------------------------------------------------- Item 3. Quantitative and Qualitative Disclosures about Market Risk. - ------- ----------------------------------------------------------- Item 4 Controls and Procedures. - ------ ------------------------ PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings - ------- ----------------- Item 6. Exhibits. - ------- --------- SIGNATURES - ----------
2 PART 1 FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS INNOVEX, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited)
June 30, September 30, 2007 2006 --------------- ------------- ASSETS Current assets: Cash and equivalents $ 9,672,575 $ 9,819,045 Accounts receivable, net 10,187,159 14,151,405 Inventories 9,968,822 12,009,288 Other current assets 2,671,599 2,544,926 --------------- -------------- Total current assets 32,500,155 38,524,664 Property, plant and equipment, net of accumulated depreciation of $49,469,000 and $52,784,000 40,688,951 51,560,241 Assets held for sale 2,091,055 -- Goodwill 3,000,971 3,000,971 Other assets 908,867 1,081,374 --------------- -------------- $ 79,189,999 $ 94,167,250 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 10,963,262 $ 9,044,726 Line of credit 13,626,520 -- Accounts payable 9,676,534 15,724,543 Accrued compensation 1,717,218 2,545,072 Other accrued liabilities 1,620,461 1,543,850 --------------- -------------- Total current liabilities 37,603,995 28,858,191 Long-term debt, less current maturities 17,618,502 19,800,255 Stockholders' equity: Common stock, $.04 par value; 30,000,000 shares authorized, 19,397,095 and 19,380,558 shares issued and outstanding 775,884 775,222 Capital in excess of par value 61,584,388 61,144,435 Retained earnings (Accumulated deficit) (38,392,770) (16,410,853) --------------- -------------- Total stockholders' equity 23,967,502 45,508,804 --------------- -------------- $ 79,189,999 $ 94,167,250 =============== ==============
See accompanying notes to condensed consolidated financial statements. 3 INNOVEX, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended ------------------------------------------ June 30, 2007 July 1, 2006 ----------------------- ------------------ Net sales $ 18,150,064 $ 38,890,811 Costs and expenses: Cost of sales 19,612,363 35,926,890 Selling, general and administrative 2,835,808 3,573,197 Royalty expense 136,131 331,150 Engineering 765,556 1,274,764 Restructuring charges 1,369,182 597,152 Net (gain) loss on sale of assets 912,769 (2,672,691) Interest expense 648,205 574,524 Interest income (32,217) (41,974) Net other (income) expense 126,096 261,604 ----------------------- ------------------ Income (loss) before taxes (8,223,829) (933,805) Income taxes -- -- -------------------------------------------- Net income (loss) $ (8,223,829) $ (933,805) ============================================ Net income (loss) per share: Basic $ (0.42) $ (0.05) ======================= ================== Diluted $ (0.42) $ (0.05) ======================= ================== Weighted average shares outstanding: Basic 19,396,106 19,367,073 ======================= ================== Diluted 19,396,106 19,367,073 ======================= ==================
Nine Months Ended ------------------------------------------------------ June 30, 2007 July 1, 2006 -------------------------- --------------------------- Net sales $ 66,037,715 $ 140,938,042 Costs and expenses: Cost of sales 66,949,486 124,294,069 Selling, general and administrative 8,992,772 11,560,978 Royalty expense 498,979 1,186,988 Engineering 2,578,473 4,035,012 Net asset impairment 789,867 9,134,234 Restructuring charges 5,098,929 2,769,434 Net (gain) loss on sale of assets 1,237,965 (2,868,981) Interest expense 1,912,515 1,664,765 Interest income (145,922) (100,039) Net other (income) expense 106,568 499,435 -------------------------- --------------------------- Income (loss) before taxes (21,981,917) (11,237,853) Income taxes -- -- -------------------------- --------------------------- Net income (loss) $ (21,981,917) $ (11,237,853) ======================== =========================== Net income (loss) per share: Basic $ (1.13) $ (0.58) ======================== ========================= Diluted $ (1.13) $ (0.58) ======================== ========================= Weighted average shares outstanding: Basic 19,386,526 19,277,432 ========================== =========================== Diluted 19,386,526 19,277,432 ========================== ===========================
See accompanying notes to condensed consolidated financial statements. 4 INNOVEX, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended ---------------------------------------- June 30, 2007 July 1, 2006 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (21,981,917) $ (11,237,853) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 6,148,613 7,968,270 Asset impairment charges 789,867 9,131,804 Stock compensation expense 419,957 496,934 (Gain) loss on sale of assets 1,237,965 (2,868,981) Other non-cash items 8,919 (426,794) Changes in operating assets and liabilities: Accounts receivable 3,964,246 13,905,232 Inventories 2,040,466 4,650,950 Other current assets (126,673) (973,059) Other long term assets 169,875 2,536,618 Accounts payable (6,048,009) (5,101,083) Accrued compensation and other accrued liabilities (751,243) (599,613) ------------------- -------------------- Net cash provided by (used in) operating activities (14,127,934) 17,482,425 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,154,093) (7,247,792) Proceeds from sale of assets 4,751,596 5,344,204 ------------------- -------------------- Net cash provided by (used in) investing activities 597,503 (1,903,588) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (10,963,285) (6,165,073) Issuance of long-term debt 10,700,068 2,438,764 Net activity on line of credit 13,626,520 (12,728,277) Proceeds from exercise of stock options and employee stock purchase plan 20,658 406,170 ------------------- -------------------- Net cash provided by (used in) financing activities 13,383,961 (16,048,416) ------------------- -------------------- Increase (decrease) in cash and equivalents (146,470) (469,579) Cash and equivalents at beginning of period 9,819,045 12,914,110 ------------------- -------------------- Cash and equivalents at end of period $ 9,672,575 $ 12,444,531 =================== ==================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 1,925,000 $ 1,716,000 Income taxes $ 11,000 $ --
5 INNOVEX INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements NOTE 1 - FINANCIAL INFORMATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions on Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of Innovex, Inc. and its subsidiaries (the "Company") after elimination of all significant intercompany transactions and accounts. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of operating results have been made. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. The Company utilizes a fiscal year that ends on the Saturday nearest to September 30 which results in a 52 or 53 week year rather than a twelve-month fiscal year. The Company's actual fiscal quarters end on the Saturday closest to the end of the calendar quarter. All quarters presented in these financial statements contain 13 weeks. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended September 30, 2006. Preparation of the Company's condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from these estimates. NOTE 2 - RESTRUCTURING CHARGES Litchfield restructuring: On January 16, 2006, the Company announced a plan to move prototyping and high volume manufacturing from its Litchfield, Minnesota facilities to its Lamphun, Thailand facilities. On September 25, 2006, the Company expanded the previously announced Litchfield restructuring to close the entire Litchfield facility and move the remaining development efforts to its Thailand facilities. The plan announced in September 2006 was to accelerate the end of life production for FSA flexible circuits in Litchfield and discontinue use of that facility by the end of April 2007. The plan also included acceleration of production end-of-life at the Company's Eastlake, Ohio laminate material manufacturing facility. In June 2006, as part of the plan, the Company divested its low-volume etched metal product line also located at its Litchfield facilities. In addition to closing its Litchfield and Eastlake facilities, the Company continues to selectively reduce its indirect labor and general and administrative expenses at both its U.S. and Thailand locations. The restructuring was triggered by the Company's need to reduce its cost structure in order to compete effectively and as a result of its lower than expected level of revenue. Asset impairment charges of $8.1 million and $2.0 million were recorded in the first and fourth quarters, respectively, of fiscal 2006 for a total of $10.1 million. The assets that were impaired include the Litchfield facilities and related equipment. The fair value of these assets was determined using appraised values. Assets that were not transferred to Lamphun, Thailand were sold or disposed. A $1.2 million loss on the sale or disposal of these assets was recorded during the first nine months of fiscal 2007 including $900,000 in the fiscal 2007 third quarter. There were no asset impairment charges in the first nine months of fiscal 2007. The Company has a purchase agreement to sell its Litchfield facilities for $2.4 million and the sale is expected to close during the fiscal 2007 fourth quarter. The facilities have been presented as assets held for sale in the accompanying balance sheet as of June 30, 2007. No additional restructuring charges are expected. Total cash related restructuring charges excluding asset impairments of approximately $8.0 million are expected. The $8.0 million is comprised of $3.2 million for one-time termination benefits and $4.8 million related to moving and closing costs associated with transferring portions of the Litchfield operation to Thailand and the disposition of the Eastlake and Litchfield facilities not being retained. Restructuring charges of $5.1 million related to the Litchfield and Eastlake restructuring were recorded in the first nine months of fiscal 2007. These charges were comprised of $2.4 million for one time termination benefits, $1.9 million for moving and closing costs and $0.8 million contract termination costs related to the Eastlake facility lease. Total restructuring charges through June 30, 2007 were $7.1 million. These charges were comprised of $3.2 million for one time termination benefits, $3.1 million for moving and closing costs and $0.8 million contract termination costs related to the Eastlake facility lease. Maple Plain restructuring: During fiscal 2004, the Company recorded asset impairment and restructuring charges of $13.1 million and $1.7 million related to the planned closure of the Maple Plain facility and the plan to discontinue support of the FSA attachment process. In fiscal 2005 additional restructuring charges of $2.8 million were recorded related to the plan. During fiscal 2006, additional asset impairment charges of approximately $1.0 million related to the disposition of the Maple Plain assets and restructuring charges of approximately $1.6 million were recorded under the restructuring plan. An asset impairment charge of $792,000 was recorded in the fiscal 2007 second quarter to reduce the book value of the facility to its net realizable value as determined by a purchase agreement to sell the facility. The Maple Plain facility was sold for $4.25 million in the quarter ending June 30. 2007. The assets that were impaired included the Maple Plain facility and related equipment and equipment used in the FSA attachment process. The manufacturing operation has been transferred from the Maple Plain facility to the Lamphun, Thailand facility. 6 Excluding asset impairment charges, restructuring charges were approximately $6.1 million. The $6.1 million was comprised of $1.9 million for one-time termination benefits, $0.4 million for contract termination costs and $3.8 million for other moving and closing costs associated with closing the Maple Plain location. NOTE 3 - NET INCOME (LOSS) PER SHARE The Company's basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares. The Company's diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options when dilutive. Options to purchase 2,093,170 and 1,978,652 shares of common stock were outstanding during the three and nine month periods ending June 30, 2007, but were excluded from the computation of common share equivalents because they were not dilutive. Options to purchase 934,627 and 1,294,222 shares of common stock were outstanding during the three and nine month periods ending July 1, 2006, but were excluded from the computation of common share equivalents because they were not dilutive. NOTE 4 - STOCK BASED COMPENSATION The Company recorded $114,000 and $417,000 of related compensation expense for the three and nine month periods ended June 30, 2007, respectively and $168,000 and $501,000 for the three and nine month periods ended July 1, 2006, respectively. This expense is included in selling, general and administrative expense. There was no tax benefit from recording this non-cash expense. The compensation expense increased both basic and diluted net loss by $0.01 for the three months ended June 30, 2007 and July 1, 2006, $0.02 for the nine months ended June 30, 2007 and $0.03 for the nine months ended July 1, 2006. As of June 30, 2007, $1,001,000 of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 1.4 years. The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The fair value of options at date of grant and the assumptions utilized to determine such values are indicated in the following table. No options were granted in the three months ended July 1, 2006. No adjustment was made to the Black Scholes calculation to reflect that the options are not freely traded: Three Months Ended Nine Months Ended June 30, July 1, 2006 June 30, 2007 2007 July 1, 2006 Risk-free interest rate 4.54% -- 4.53% 4.26% Expected volatility 46% -- 48% 48% Expected life (in years) 3.0 -- 3.0 3.0 Dividend yield -- -- -- -- Weighted average fair value of options granted $0.66 -- $0.85 $1.18 The Company has options outstanding under its 1987 Employee Stock Option Plan and its 1994 Stock Option Plan. The Company's stock option plans 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. New shares are issued under existing registration statements upon exercise. At June 30, 2007 the Company had 642,926 shares of common stock available for issuance under the plans. The Company also has a restricted stock plan that provides for grants of common stock to key employees of the Company other than the Chief Executive Officer and the four highest paid executives of the Company other than the Chief Executive Officer. The common stock grants vest over three years. At June 30, 2007, the Company had 107,300 shares of common stock available for issue under the plan. 7 Transactions under the stock option and restricted stock plans during the nine months ended June 30, 2007 are summarized as follows: Number of Weighted Shares Under Average Option Exercise Price --------------------- ------------------ Outstanding at October 1, 2006 2,135,977 6.43 Granted 384,250 2.39 Forfeited (209,950) 7.00 Exercised (1,480) 1.84 --------------------- Outstanding at December 30, 2006 2,308,797 5.71 Granted 60,000 2.17 Forfeited (135,635) 9.30 Exercised -- -- --------------------- Outstanding at March 31, 2007 2,233,162 5.41 Granted 30,000 1.86 Forfeited (158,470) 6.00 Exercised (3,334) -- --------------------- Outstanding at June 30, 2007 2,101,358 5.32 ===================== The following table summarizes information concerning currently outstanding and exercisable stock options:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ---------------------- ------------------------- ----------------------- ------------------ -------------- ------------- $ 0.00 - $2.41 731,926 7.5 years $ 2.13 264,910 $ 1.88 2.70 - 4.84 724,460 7.4 years 3.70 280,219 3.90 5.28 - 9.80 402,422 5.4 years 8.41 313,397 8.15 11.49 - 11.51 103,900 1.3 years 11.50 103,900 11.50 12.59 - 13.79 103,650 3.4 years 13.05 101,650 13.05 28.75 - 28.82 35,000 0.2 years 28.77 35,000 28.77 ------------------------- -------------- 2,101,358 5.32 1,099,076 6.98 ========================= ==============
NOTE 5 - INVENTORIES Inventories are comprised of the following (in thousands): June 30, September 30, 2007 2006 ---------------- ---------------- Raw materials and purchased parts $ 3,300 $ 5,370 Work-in-process and finished goods 6,669 6,639 ---------------- ---------------- $ 9,969 $ 12,009 ================ ================= 8 NOTE 6 - DERIVATIVE INSTRUMENTS - FOREIGN CURRENCY TRANSLATION The Company enters into forward exchange contracts that are recorded at fair value, with related fair value gains or losses recorded in income within the caption net other (income) expense. Generally, these contracts have maturities of six months or less. These contracts are entered into to offset the gains or losses on foreign currency denominated assets and liabilities. The Company does not enter into forward exchange contracts for trading purposes and the contracts are not designated as hedges. At June 30, 2007, the Company had open forward exchange contracts to sell US dollars in return for Thailand baht maturing on July 9, 2007; July 10, 2007; July 16, 2007; August 6, 2007; November 9, 2007; November 15, 2007; November 26, 2007; December 11, 2007; and December 19, 2007 with amounts of $1.5 million, $1.0 million, $1.7 million, $3.9 million, $12.6 million, $9.5 million, $1.8 million, $1.8 million and $2.2 million respectively, for a total of $36.0 million. Foreign currency translation gains or (losses) included in net other (income) expense (in thousands):
Three months ended Nine months ended -------------------------------- --------------------------------- March 31, 2007 July 1, 2006 March 31, 2007 July 1, 2006 --------------- --------------- ---------------- ---------------- Gain or (loss) from forward exchange $ 340 $ 33 $ 2,506 $ 1,590 contracts --------------- --------------- ---------------- ---------------- Other foreign currency gain or (loss) (475) (297) (2,627) (2,095) --------------- --------------- ---------------- ---------------- Net gain or (loss) from foreign currency $ (135) $ (264) $ (121) $ (505) transactions =============== =============== ================ ================
NOTE 7 - REVENUE RECOGNITION The Company makes electronic components (flexible circuits) based on customer specifications. The Company's revenue recognition policy is consistently applied regardless of sales channels utilized and product destination. In recognizing revenue in any period, the Company applies the provisions of SEC Staff Accounting Bulletin 104, "Revenue Recognition." Revenue from product sales is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. For all sales, a binding purchase order is used as evidence of an arrangement. The Company also stores inventory in warehouses (JIT hubs - third party owned warehouses) that are located close to the customer's manufacturing facilities. Revenue is recognized on sales from JIT hubs upon the transfer of title and risk of loss, following the customer's acknowledgement of the receipt of the goods. The Company has an implied warranty that the products meet the customer's specification. Credits are issued for customer returns. NOTE 8 - INCOME TAXES The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. A valuation allowance is established when the realization of a deferred tax asset becomes less likely than not to occur. The valuation allowance is analyzed periodically by the Company and may result in income tax expense different than statutory rates. The Company's current deferred tax asset valuation allowance fully offsets its deferred tax assets. With the exception of the Alternative Minimum Tax and certain state taxes, the Company will not use cash for domestic income taxes until its net operating losses are fully realized on its tax returns. NOTE 9- RELATED PARTY TRANSACTIONS Prior to March 7, 2006, the Company held 35% of the outstanding shares of Applied Kinetics Inc. (AKI). On March 7, 2006, the Company entered into a Settlement Agreement with AKI pursuant to which the parties dismissed with prejudice their lawsuits against one another in exchange for redemption by AKI of the 3,500 shares of AKI common stock owned by the Company and settlement of all royalty and rebate amounts under the License Agreement for prior and future periods. AKI is a technology development company that focuses on manufacturing processes related to disk drive components. AKI developed the manufacturing process technology utilized by the Company's FSA products. AKI granted the Company a license to use this technology in return for a royalty to be paid on the revenue generated from the sale of these products. The Company had accounted for its investment in AKI on the equity method. The Company did not record any gains or losses on its AKI equity investment from the filing of its lawsuit against AKI and certain AKI Shareholders in July 2005 through the settlement of the lawsuit on March 7, 2006. The Company recorded a $6,000 loss related to the sale of its equity holding in AKI as part of the March 7, 2006 settlement. NOTE 10- LIQUIDITY The Company has historically financed its operations primarily through cash from operating activities, sales of equity securities, bank credit facilities and employee stock option exercises. Cash and equivalents were $9.7 million at June 30, 2007 and $9.8 million at September 30, 2006. Long-term debt was $17.6 million at June 30, 2007 and $19.8 million at September 30, 2006 less current maturities of $11.0 and $9.0, respectively. During the nine months ended June 30, 2007 and July 1, 2006, the Company incurred losses from continuing operations of $22.0 million and $11.2 million, respectively. Operating activities used $14.1 million and provided $17.5 million during the nine months ended June 30, 2007 and July 1, 2006, respectively. As of June 30, 2007, the Company had a working capital deficit of $5.1 million. 9 Total unused debt availability as of June 30, 2007 was approximately $8.6 million under the Company's long-term Thailand credit facilities and approximately $21.1 million under its short-term packing credit and working capital facilities. The Company believes that with the existing Thailand credit facilities and cash generated from operations, it will have adequate funds to support projected working capital and capital expenditures for the next twelve months. The Company is considering alternatives for generating additional working capital and long-term financing and will continue to pursue financing opportunities to better leverage its assets. The Company also filed a "shelf" registration statement with the Securities and Exchange Commission on January 12, 2005 under which it may offer up to an aggregate of 3,500,000 shares of its common stock in one or more offerings from time to time. The Company's financing needs and the financing alternatives available to it are subject to change depending on, among other things, general economic and market conditions, changes in industry buying patterns, customer demand for its AFC, stacked memory flex, FPD flex and other new products, the Company's ability to meet its loan covenant requirements and cash flow from operations. NOTE 11- RECENT ACCOUNTING PRONOUNCEMENTS Fair Value Option: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This standard addresses earnings volatility caused by existing accounting standards that require related financial assets and liabilities to be measured using different measurement attributes (such as historical cost and fair value). SFAS 159 is intended to improve financial reporting by giving all entities the option to recognize most financial assets and liabilities and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. SFAS 159 is effective for the first quarter of the Company's fiscal 2009 beginning October 1, 2008. We do not expect SFAS 159 to have a material effect on our financial condition or results of operations. Accounting for Uncertainty in Income Taxes: In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for the first quarter of the Company's fiscal 2009 beginning October 1, 2008. We are currently evaluating the impact of this standard. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes to those statements included in this report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those described under the heading "Risks Related to Our Business" in our Annual Report on Form 10-K for the year ended September 30, 2006, as well as others not now anticipated. We utilize a fiscal year that ends on the Saturday nearest to September 30. Each quarter presented contains 13 weeks. Overview We are a leading worldwide provider of flexible circuit interconnect solutions to OEMs in the electronics industry. We offer 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. We target 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 us include data storage devices such as hard disk drives, liquid crystal displays (LCDs) for mobile communication devices, tape drives and arrays, flat panel displays (FPDs) and printers. Our customers include Hitachi, HP, Philips/TPO, Quantum, SAE Magnetics (a subsidiary of TDK), Samsung, Seagate, Staktek, StorageTek and other leading electronic OEMs. Net Sales and Revenue Recognition 10 We manufacture flexible circuits and perform certain additional assembly and test functions on these flexible circuits based on customer specifications. We sell our products directly throughout the world, primarily in North America, Europe and the Pacific Rim countries. We use non-exclusive sales representatives to augment our direct sales efforts. We recognize revenue from the sale of our products upon shipment or delivery of our product to our customers, depending on the customer agreement or shipping terms. We store some inventory in third party owned warehouses that are located close to customers' manufacturing facilities. Sales from third party warehouses are recognized upon the transfer of title and risk of loss which follows the customer's acknowledgment of the receipt of the goods. Costs and Expenses Cost of sales consists primarily of: o material costs for raw materials and semi-finished components used for assembly of our products; o labor costs directly related to manufacture, assembly and inspection of our products; o costs of general utilities, production supplies and chemicals consumed in the manufacturing processes; o costs related to the maintenance of our manufacturing equipment and facilities; o costs related to material and product handling and shipment; o depreciation costs related to facilities, machinery and equipment used to manufacture, assemble and inspect our products; and o salaries and overhead attributed to our supply chain, process engineering and manufacturing personnel. Selling, general and administrative expenses primarily consist of: o salaries and related selling (commissions, travel, business development and program management), administrative, finance, human resources, regulatory, information services and executive personnel expenses; o other significant expenses related to external accounting, software maintenance and legal and regulatory fees; and o overhead attributed to our selling, general and administrative personnel. Engineering expenses include costs associated with the design, development and testing of our products and processes. These costs consist primarily of: o salaries and related development personnel expenses; o overhead attributed to our development and test engineering personnel; and o prototyping costs related to the development of new products. Restructuring charges are those costs primarily related to manufacturing facility closures, severance and product discontinuations. On January 16, 2006, we announced a plan to retain a portion of our Litchfield operation as a product development center while transferring high volume manufacturing operations to Thailand and divesting the remaining portions of the Litchfield, Minnesota operation. On September 25, 2006, we announced a plan to accelerate the end of life production for our FSA flexible circuits in Litchfield and discontinue the use of that facility by the end of March 2007. The plan also included acceleration of end of life production of flexible circuit laminate material at our Eastlake, Ohio facility and a reduction of indirect labor and general and administrative expenses at our other U.S. and Thailand locations. In the third quarter of fiscal 2004, we announced the planned closure of our Maple Plain, Minnesota facility and the plan to discontinue the support of the FSA attachment process once all current program qualifications have reached their end of life. Results of Operations The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
For the Three Months Ended For the Nine Months Ended ------------------------------ -------------------------- July 1, 2006 June 30, 2007 July 1, June 30, 2006 2007 -------------- -------------- ------------ ------------ Net Sales 100% 100% 100% 100% Cost of goods sold 92.4 108.1 88.2 101.4 -------------- -------------- ------------ ------------ Gross profit 7.6 (8.1) 11.8 (1.4) Operating expenses: Selling, general and administrative and royalty expense 10.0 16.4 9.0 14.4 Engineering 3.3 4.2 2.9 3.9 Restructuring and asset impairment 1.5 7.5 8.4 8.9 Net (gain) loss on sale of assets (6.9) 5.0 (2.0) 1.9 -------------- -------------- ------------ ------------ Total operating expenses 7.9 33.1 18.3 29.1 -------------- -------------- ------------ ------------ Income (loss) from operations (0.3) (41.2) (6.5) (30.5) -------------- -------------- ------------ ------------ Interest and other expense, net (2.1) (4.1) (1.5) (2.8) -------------- -------------- ------------ ------------ Income (loss) before provision (benefit) for income taxes (2.4) (45.3) (8.0) (33.3) Provision (benefit) for income taxes -- -- -- -- -------------- -------------- ------------ ----------- Net income (loss) (2.4)% (45.3)% (8.0)% (33.3)% ============== ============== ============ ============
11 Comparison of Three Months Ended June 30, 2007 and July 1, 2006 Net Sales Our net sales were $18.2 million for the three months ended June 30, 2007, compared to $38.9 million for the three months ended July 1, 2006, a decrease of 53%. This decrease primarily reflects lower flex suspension assembly (FSA) revenue and lower actuator flex circuit (AFC) revenue. The decline in FSA revenue to $8.9 million in the fiscal 2007 third quarter from $23.4 million in the prior year reflects our FSA customer's transition to its next generation of desktop disk drive products which use an alternative technology. AFC revenue was lower than the prior year period as a result of a new generation of AFC programs ramping up in fiscal 2006. The AFC programs that ramped up in fiscal 2006 began declining in the fiscal 2007 second quarter and continued to decline in the fiscal 2007 third quarter while our ramp up of a new generation large volume program did not begin until late in the fiscal 2007 third quarter. While we expect FSA revenue to continue to decrease during fiscal 2007 and fiscal 2008 as the disk drive industry completes the transition to its next generation of products, we expect increases in AFC and flat panel display (FPD) revenue in the fiscal 2007 fourth quarter as compared to the fiscal 2007 third quarter as new programs reach volume production. FSA sales to the disk drive industry generated 49% of our net sales for the three months ended June 30, 2007, compared to 60% for the three months ended July 1, 2006. Sales of AFC's to the disk drive industry were 31%, compared to 27%, FPD application net sales were 14% compared to 5%, sales from integrated circuit packaging, network system application and sales from other industry applications were 6% and 8% for the three months ended June 30, 2007 and July 1, 2006, respectively. Gross Profit (Loss) Our gross loss was $1.5 million for the three months ended June 30, 2007 compared to a gross profit of $3.0 million for the three months ended July 1, 2006. Our gross margin for the three months ended June 30, 2007 decreased to (8.1%), from 7.6% for the three months ended July 1, 2006. The decrease in gross profit and gross margin as compared to the prior year reflects the decreased fixed cost absorption driven by lower revenue resulting in a higher level of excess manufacturing capacity. Spending levels were lower as a result of cost reductions related to the transfer of operations from the U.S. facilities to our Thailand facilities, but not low enough to offset the impact of the lower revenue. We expect to return to a gross profit and we expect gross margins to improve during the fiscal 2007 fourth quarter as revenue increases and further cost benefits of transitioning our manufacturing operation from the U.S to Thailand are realized. Selling, General and Administrative and Royalty Expense Selling, general and administrative expenses including royalty expenses for the three months ended June 30, 2007 were $3.0 million, compared to $3.9 million in the three months ended July 1, 2006, a decrease of 24%. As a percentage of net sales, selling, general and administrative expenses were 16% for the three months ended June 30, 2007, up from 10% for the same period in the prior year. Royalty expense was lower compared with the prior year as a result of lower FSA revenue which is royalty bearing. The dollar decrease in selling, general and administrative expenses from the prior year primarily reflects lower payroll expenses related to reductions in U.S. sales and administrative positions. The increase as a percentage of net sales from the prior year primarily reflects the decrease in revenue. Selling, general and administrative expenses for the remainder of fiscal 2007 are expected to decrease slightly from the fiscal 2007 third quarter. 12 Engineering Engineering expenses for the three months ended June 30, 2007 were $800,000, compared to $1.3 million for the three months ended July 1, 2006, a decrease of 40%. The decrease was primarily the result of reducing or transferring engineering positions to our lower salary base Thailand facility as a result of closing our U.S. facilities. As a percentage of net sales, engineering expenses were 4% of sales for the three months ended June 30, 2007 compared to 3% for the same period in the prior year. Restructuring Litchfield restructuring: On January 16, 2006, we announced a plan to move prototyping and high volume manufacturing from our Litchfield, Minnesota facilities to our Lamphun, Thailand facilities. On September 25, 2006, we expanded the previously announced Litchfield restructuring to close the entire Litchfield facility and move the remaining development efforts to our Thailand facilities. The plan announced in September 2006 was to accelerate the end of life production for FSA flexible circuits in Litchfield and discontinue use of that facility by the end of April 2007. The plan also included acceleration of production end-of-life at our Eastlake, Ohio laminate material manufacturing facility. In June 2006, as part of the plan, we divested our low-volume etched metal product line also located at our Litchfield facilities. In addition to closing our Litchfield and Eastlake facilities, we continue to selectively reduce our indirect labor and general and administrative expenses at both our U.S. and Thailand locations. The restructuring was triggered by our need to reduce our cost structure in order to compete effectively and as a result of our lower than expected level of revenue. We expect actions related to the expanded restructuring plan to be substantially completed prior to the end of fiscal 2007. These actions should result in an annual operating expense reduction of approximately $18 million, which will be realized in subsequent years. The estimated savings of $18 million is based on a comparison of the fixed cost structure in place on December 31, 2005 to our estimated fixed cost structure for the fourth quarter of fiscal 2007 after completion of the planned restructuring. Approximately $17.0 million of the projected savings are expected to have a positive impact on cash flow upon realization. These cash related savings are comprised of $12.0 million related to compensation reductions and $5 million related to other spending. The $1.0 million remaining savings are expected to be depreciation related and have no impact on cash flow. Through June 30, 2007, the planned annualized operating cost savings of approximately $18.0 million have been realized, primarily comprised of compensation savings of $12.0 million, other operating cost savings of $5.0 million and depreciation savings of $1.0 million. The impact of these reductions on our fixed cost basis has not been evident in our operating results as a result of concurrent reductions in revenue. Asset impairment charges of $8.1 million and $2.0 million were recorded in the first and fourth quarters, respectively, of fiscal 2006 for a total of $10.1 million. The assets that were impaired include the Litchfield facilities and related equipment. The fair value of these assets was determined using appraised values. The fair value of the Litchfield facility impairment was determined from an independent appraisal performed by Ruhland Commercial Consultants, Ltd. The fair value of the equipment located at the facilities was determined from appraisals performed by Asset Reliance International, LLC. Assets that were not transferred to Lamphun, Thailand were sold or disposed. A $900,000 loss on the sale of assets was recorded during the fiscal 2007 third quarter as the remaining assets were sold. Capital expenditures of less than $1 million are expected related to the plan. These expenditures would primarily increase selected capacity and capabilities at the Lamphun, Thailand facilities. Manufacturing operations were completed in the Eastlake facility in February 2007 and decommission of the facility is expected to be complete by the end of July 2007. Manufacturing operations in the Litchfield facilities were completed during April 2007 and decommission of the facilities was completed by the end of the fiscal 2007 third quarter. A purchase agreement has been signed to sell the Litchfield facilities for $2.4 million. The sale is expected to close during the fiscal 2007 fourth quarter. Efforts are being made to sublease the Eastlake facility in fiscal 2007. Total cash related restructuring charges excluding asset impairments of approximately $8.0 million are expected. The $8.0 million is comprised of $3.2 million for one-time termination benefits and $4.8 million related to moving and closing costs associated with transferring portions of the Litchfield operation to Thailand and the disposition of the Eastlake and Litchfield facilities not being retained. Restructuring charges of $1.4 million related to the Litchfield and Eastlake restructuring were recorded in the third quarter of fiscal 2007. These charges were comprised of $280,000 for one time termination benefits and $1.1 million for moving and closing costs. Total restructuring charges through June 30, 2007 were $7.1 million. These charges were comprised of $3.2 million for one time termination benefits, $3.1 million for moving and closing costs and $768,000 contract termination costs related to the Eastlake facility lease. 13 The restructuring plan calls for the elimination of 320 positions in the U.S. and Thailand consisting of 90 direct labor positions, 173 indirect labor production support positions and 57 administrative positions. As of June 30, 2007, 318 positions have been eliminated and the overall restructuring plan remains substantially unchanged. Maple Plain restructuring: During fiscal 2004, we recorded asset impairment and restructuring charges of $13.1 million and $1.7 million related to the planned closure of the Maple Plain facility and the plan to discontinue support of the FSA attachment process. In fiscal 2005 additional restructuring charges of $2.8 million were recorded related to the plan. During fiscal 2006, additional asset impairment charges of approximately $1.0 million related to the disposition of the Maple Plain assets and restructuring charges of approximately $1.6 million were recorded under the restructuring plan. The assets that were impaired included the Maple Plain facility and related equipment and equipment used in the FSA attachment process. The manufacturing operation has been transferred from the Maple Plain facility to the Lamphun, Thailand facility. In order to reduce our cost structure, we closed our Maple Plain facility and consolidated its operations with our Lamphun, Thailand facility. In addition, we planned to discontinue supporting the FSA attachment process in order to utilize our resources in other growth areas where we believe we have an advantage. Excluding asset impairment charges, restructuring charges were approximately $6.1 million. The $6.1 million was comprised of $1.9 million for one-time termination benefits, $0.4 million for contract termination costs and $3.8 million for other moving and closing costs associated with closing the Maple Plain location. Through June 30, 2007, annualized operating cost savings of approximately $9.5 million have been realized primarily comprised of cash related compensation and other savings of $6 million on an annual basis and depreciation savings of $3.5 million on an annual basis. An additional expected benefit of $0.5 million should be realized as the FSA product line reaches its end of life. Net (Gain) Loss on the Sale of Assets Net loss on the sale of assets was $913,000 for the three months ended June 30, 2007 compared to a net gain on the sale of assets of $2.7 million for the three months ended July 1, 2006. The change was a result of the loss generated on the sale or disposal of the remaining U.S equipment that was not transferred to Thailand in the fiscal 2007 third quarter while the fiscal 2006 third quarter including a gain from the sale of the business, facility and assets of our Litchfield etched metal components business. Net Interest and Other Expense Net interest expense was $0.6 million for the three months ended June 30, 2007 and July 1, 2006. Net other expense was $126,000 in the three months ended June 30, 2007 as compared to $262,000 in the three months ended July 1, 2006. The change was a result of lower foreign currency valuation losses being recorded in fiscal 2007 as compared to fiscal 2006. Income Taxes No net income tax expense or benefit was recorded for the three months ended June 30, 2007 and July 1, 2006 as the deferred tax valuation allowance was increased to offset the tax benefit generated during the quarter. The deferred tax assets continue to be fully reserved. Comparison of Nine Months Ended June 30, 2007 and July 1, 2006 Net Sales Our net sales were $66.0 million for the nine months ended June 30, 2007, compared to $140.9 million for the nine months ended July 1, 2006, a decrease of 53%. This decrease primarily reflects lower FSA revenue and lower FPD revenue. The decline in FSA revenue to $35 million in the first nine months of fiscal 2007 from $83 million in the prior year reflects our FSA customer's transition to its next generation of desktop disk drive products which use an alternative technology. FPD revenue was lower than the prior year period as a result of our largest FPD customer experiencing lower demand from its customers and slower than expected new program transitions. 14 FSA sales to the disk drive industry generated 52% of our net sales for the nine months ended June 30, 2007, compared to 59% for the nine months ended July 1, 2006. Sales of AFC's to the disk drive industry were 34%, compared to 19%, FPD application net sales were 8% compared to 16%, sales from integrated circuit packaging, network system application and sales from other industry applications were 6% for the nine months ended June 30, 2007 and July 1, 2006, respectively. Gross Profit Our gross loss was $912,000 for the nine months ended June 30, 2007, compared to a gross profit of $16.6 million for the nine months ended July 1, 2006. Our gross margin for the nine months ended June 30, 2007 decreased to (1.4%) from 11.8% for the nine months ended July 1, 2006. The decrease in gross profit and gross margin as compared to the prior year reflects the decreased fixed cost absorption driven by lower revenue resulting in a higher level of excess manufacturing capacity. Spending levels were lower as a result of cost reductions related to the transfer of operations from the U.S. facilities to our Thailand facilities, but not low enough to offset the impact of the lower revenue. Selling, General and Administrative and Royalty Expense Selling, general and administrative expenses including royalty expenses for the nine months ended June 30, 2007 were $9.5 million, compared to $12.7 million in the nine months ended July 1, 2006, a decrease of 26%. As a percentage of net sales, selling, general and administrative expenses were 14% for the nine months ended June 30, 2007 and 9% for the nine months ended July 1, 2006. The dollar decrease in selling, general and administrative expenses from the prior year primarily reflects lower payroll expenses related to reductions in U.S. sales and administrative positions and a $400,000 reduction in accrued incentive compensation. The increase as a percentage of net sales from the prior year primarily reflects the decrease in revenue. Engineering Engineering expenses for the nine months ended June 30, 2007 were $2.6 million, compared to $4.0 million for the nine months ended July 1, 2006, a decrease of 36%. The decrease was primarily the result of transferring engineering positions to our lower salary base Thailand facility as a result of closing our U.S. facilities. As a percentage of net sales, engineering expenses were 4% of sales for the nine months ended June 30, 2007 and 3% of sales for the nine months ended July 1, 2006. Restructuring Litchfield restructuring: As discussed above, on January 16, 2006, we announced a plan to move prototyping and high volume manufacturing from our Litchfield, Minnesota facilities to our Lamphun, Thailand facilities. On September 25, 2006, we expanded the previously announced Litchfield restructuring to close the entire Litchfield facility and our Eastlake, Ohio facility. Restructuring charges of $5.1 million were recorded during the first nine months of fiscal 2007 related to the Litchfield restructuring. These charges were comprised of $2.4 million for one time termination benefits, $1.9 million for moving and closing costs and $0.8 million contract termination costs related to the Eastlake facility lease. Restructuring charges of $1.2 million were recorded during the first nine months of fiscal 2006 related to the Litchfield restructuring. These charges were comprised of $630,000 for one time termination benefits and $540,000 for moving and closing costs. Asset impairment charges of $8.1 million were recorded in the first quarter of fiscal 2006 related to the Litchfield facilities and related equipment. Maple Plain restructuring: An asset impairment charge of $792,000 was recorded in the fiscal 2007 second quarter to reduce the book value of the facility to its net realizable value. During the first nine months of fiscal 2006, restructuring charges of $1.6 million were recorded under the restructuring plan related to closing the Maple Plain facility and the discontinuation of support of the FSA attachment process. These charges were primarily related to moving and closing costs. Net (Gain) Loss on the Sale of Assets Net loss on the sale of assets was $1.2 million for the nine months ended June 30, 2007 compared to a net gain on the sale of assets of $2.9 million for the nine months ended July 1, 2006. The change was a result of the loss generated in the first nine months of fiscal 2007 on the sale or disposal of the remaining U.S equipment that was not transferred to Thailand while the first nine months of fiscal 2006 including a gain from the sale of the business, facility and assets of our Litchfield etched metal components business. 15 Net Interest and Other Expense Net interest expense was $1.9 million for the nine months ended June 30, 2007 and $1.7 million for the nine months ended July 1, 2006. The increase is the result of higher average levels of debt outstanding during fiscal 2007. Net other expense was $107,000 in the nine months ended June 30, 2007 as compared to $499,000 in the nine months ended July 1, 2006. The change was a result of a lower loss on foreign currency valuation in fiscal 2007. Income Taxes No net income tax expense or benefit was recorded for the nine months ended June 30, 2007 and July 1, 2006 as the deferred tax valuation allowance was increased to offset the tax benefit generated during the period. The deferred tax assets continue to be fully reserved. Critical Accounting Policies Our significant accounting policies are described in Note A to the Consolidated Financial Statements and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report for the year ended September 30, 2006. The accounting policies used in preparing our interim 2007 Consolidated Financial Statements are the same as those described in our Annual Report. Liquidity and Capital Resources We have historically financed our operations primarily through cash from operating activities, sales of equity securities, bank credit facilities and employee stock option exercises. Cash and equivalents were $9.7 million at June 30, 2007 and $9.8 million at September 30, 2006. As of June 30, 2007, the Company had a working capital deficit of $5.1 million. For the nine months ended June 30, 2007, net cash used in operating activities of $14.1 million primarily resulted from the net loss for the period net of non-cash charges. The decreases in accounts receivable and inventory offset the decrease in accounts payable. Accounts receivable, inventory and accounts payable all decreased primarily related to lower revenue in the fiscal 2007 third quarter as compared to the fiscal 2006 fourth quarter. A large portion of the lower revenue was related to the FSA product which contains a pass-through material component that makes up a large portion of the product cost and drives higher levels of revenue, receivables, inventory and payables than other products. Net cash provided by investing activities was $0.6 million in the first nine months of fiscal 2007, compared to net cash used in investing activities of $1.9 million in the first nine months of fiscal 2006. In fiscal 2007, net cash provided by investing activities was attributed to the $4.8 million proceeds from the sale of the U.S based assets including the Maple Plain facility more than offsetting capital spending related to process improvements at our Thailand facility. Fiscal 2006 net cash used in investing activities was attributed to the expansion of our Thailand facility. Net cash provided by financing activities was $13.4 million in the first nine months of fiscal 2007, compared to net cash used in financing activities of $16.0 million in the first nine months of fiscal 2006. Fiscal 2007 net cash provided by financing activities was the result of the $13.6 million borrowed under our short-term Thailand packing credit facilities and a $8.4 million draw down under our new long term Thailand credit facilities and a $2.3 million increase in the U.S. dollar foreign exchange valuation of the Thailand baht denominated debt partially offset by the $4 million pay down of the US facility from the Maple Plain facility sale proceeds and scheduled debt payments on our existing Thailand debt facilities and US based debt and capital leases. For the first nine months of fiscal 2006, net cash used in financing activities was primarily related to the $12.7 million pay down of the balance outstanding on our short-term Thailand revolving packing credit facility made possible by the cash provided by operations. In December 2006, we entered into a new credit facility with Bank of Ayudhya Public Company Limited (BAY) and TMB Bank Public Company Limited (TMB) which expanded our existing credit facilities with these banks. The new Third Credit Facilities Agreement provides for an additional 600 million baht facility to be used for procurement of equipment within 24 months from the December 19, 2006 effective date. We drew down approximately $8.4 million under this new credit facility in the first nine months of fiscal 2007. In June 2004, we entered into the Second Credit Facilities Agreement with BAY and TMB which expanded the existing credit facility with these banks. The Second Credit Facilities Agreement is now comprised of a 660 million baht long-term facility, a 400 million baht long-term facility, packing credit facilities totaling 1,100 million baht, short-term working capital facilities totaling 90 million baht and a 10 million baht overdraft facility. The Thailand facilities are secured by certain receivables, inventory and assets held by us in Thailand. As of June 30, 2007, we had approximately $27.3 million outstanding under our long-term Thailand credit facilities and a 13.6 million outstanding balance under our short-term Thailand credit facilities. Total unused availability as of June 30, 2007 was approximately $8.6 million under our long-term Thailand credit facilities and approximately $21.1 million under our short-term packing credit and working capital facilities. Utilization of the $8.6 million available under our long-term credit facility is based on capital expenditures and utilization of our packing credit facility availability is based on qualifying customer purchase orders. Drawdowns under the As of June 30, 2007, we were in compliance with covenants under our Thailand credit facilities. 16 In January 2005, we entered into a financing agreement with US Federal Credit Union under which we borrowed $4.0 million. An additional $3.1million was borrowed under that agreement on April 15, 2005. In addition to normally scheduled payments, a principal payment of $1.5 million was made on June 27, 2006 related to sale of the business, facility and assets of our etched metal components business. An additional principal payment of $4 million was made on May 18, 2007 related to the sale of the Maple Plain facility. As of June 30, 2007, $1.2 million was outstanding under our US Federal credit facility. The note is due February 1, 2010 with principal amounts under the arrangement bearing interest at a rate of 7% per annum. Payments under the underlying note are calculated using a 25 year amortization with the remaining principal amount due at maturity. The note is secured by our Litchfield facilities and any proceeds from the sale of those facilities will be used to pay down the outstanding note balance. We believe that with the existing Thailand credit facilities and cash generated from operations, we will have adequate funds to support projected working capital and capital expenditures for the next twelve months. We are considering alternatives for generating additional working capital and long-term financing and will continue to pursue financing opportunities to better leverage our assets. We also filed a "shelf" registration statement with the Securities and Exchange Commission on January 12, 2005 under which we may offer up to an aggregate of 3,500,000 shares of our common stock in one or more offerings from time to time. Our financing needs and the financing alternatives available to us are subject to change depending on, among other things, general economic and market conditions, changes in industry buying patterns, customer demand for our AFC, stacked memory flex, FPD flex and other new products, our ability to meet our loan covenant requirements and cash flow from operations. Contractual Obligations The table below discloses a summary of the Company's specified contractual obligations at March 31, 2007 (in thousands):
Under 1 Year 1 to 3 Years 3 to 5 Years After 5 Years Total ------------- ------------- ------------- -------------- ------------- Long-term Debt Obligations (1) $ 11,025 $ 15,328 $ 2,305 -- $ 28,658 Operating Leases 286 516 257 -- 1,059 ------------- ------------- ------------- -------------- ------------- Total $ 11,311 $ 15,844 $ 2,562 -- $ 29,717 ============= ============= ============= ============== =============
(1) Includes interest at a fixed rate of 7% on a portion of the debt and excludes interest on all debt with variable interest rates. Recent Accounting Pronouncements Fair Value Option: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This standard addresses earnings volatility caused by existing accounting standards that require related financial assets and liabilities to be measured using different measurement attributes (such as historical cost and fair value). SFAS 159 is intended to improve financial reporting by giving all entities the option to recognize most financial assets and liabilities and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. SFAS 159 is effective for the first quarter of our fiscal 2009 beginning October 1, 2008. We do not expect SFAS 159 to have a material effect on our financial condition or results of operations. Accounting for Uncertainty in Income Taxes: In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for the first quarter of our fiscal 2009 beginning October 1, 2008. We are currently evaluating the impact of this standard. Forward Looking Statements Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this report and in future filings by the Company with the SEC, except for the historical information contained herein and therein, are "forward-looking statements" that involve risks and uncertainties. These risks and uncertainties include those described under Part I, Item 1A, "Risk Factors" as our Annual Report on Form 10-K for the year ended September 30, 2006, as well as: the increased utilization by our largest customer of alternative interconnect technologies that compete with our FSA product, AFC revenue may not increase enough to offset decreases in our FSA revenue, any interruption in the operations of the Company's single source suppliers or any failure of any of the Company's single source suppliers to timely deliver an adequate supply of components, the risk related to the transfer of manufacturing operations from our Litchfield facilities to our Thailand facilities, the timely availability and acceptance of new products, the impact of competitive products and pricing, changes in our customers' market share, changes in manufacturing efficiencies and other risks detailed from time to time in our reports filed with the Securities and Exchange Commission. In addition, a significant portion of the our revenue is generated from the disk drive, flat panel display, stacked memory substrate, consumer electronics and data storage industries and the global economic softness has had and may have in the future, an adverse impact on our operations. We disclaim any obligation subsequently to revise any forward-looking statements to reflect subsequent events or circumstances or the occurrence of unanticipated events. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our business, financial condition and results of operations. Our earnings and cash flows are subject to fluctuations resulting from changes in foreign currency exchange rates. While we transact business primarily in U.S. dollars, a portion of our sales and expenses are denominated in foreign currencies. Changes in the relation of foreign currencies to the U.S. dollar will affect our cost of sales and operating margins and could result in exchange gains or losses. To reduce the impact of certain foreign currency fluctuations, we enter into short-term forward foreign currency exchange contracts in the regular course of business to manage our risk exposure, not as speculative instruments. Typically, these contracts have maturities of 6 months or less. The forward exchange contracts generally require us to exchange Thailand baht for U.S. dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to at inception of the contracts. These contracts are not designated as hedges, therefore, the gains and losses on foreign currency transactions are included in income. We periodically review the outlook for expected currency exchange rate movements as well as the policy on desired future foreign currency cash flow positions (long, short or balanced) for those currencies in which we have significant activity. Expected future cash flow positions and strategies are continuously monitored. At June 30, 2007, the Company had open forward exchange contracts to sell US dollars in return for Thailand baht maturing on July 9, 2007; July 10, 2007; July 16, 2007; August 6, 2007; November 9, 2007; November 15, 2007; November 26, 2007; December 11, 2007; December 19, 2007 with amounts of $1.5 million, $1.0 million, $1.7 million, $3.9 million, $12.6 million, $9.5 million, $1.8 million, $1.8 million and $2.2 million respectively, for a total of $36.0 million. No assurance can be given that our strategies will prevent future currency fluctuations from adversely affecting our business, financial condition and results of operations. We are exposed to interest rate risk as a large portion of our interest-bearing debt is subject to interest rates which fluctuate with changes in market interest rates or are periodically reset based on market interest rates. A large change in market interest rates could have an adverse impact on our business, financial condition and results of operations. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company's Chief Executive Officer, William P. Murnane, and Principal Financial Officer, Douglas W. Keller, have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, they have concluded that these controls and procedures are effective. (b) Changes in Internal Control Over Financial Reporting There have been no changes in internal control over financial reporting that occurred during the fiscal period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Responses to Items 1A through 5 are omitted since these items are either inapplicable or the response thereto would be negative. 18 ITEM 1. LEGAL PROCEEDINGS We are party to certain lawsuits in the ordinary course of business. We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations. ITEM 6. EXHIBITS The following exhibits are included herein: 31.1 Certification of Chief Executive Officer pursuant Rules 13a-14 and 15d-14 of the Exchange Act. 31.2 Certification of Principal Financial Officer pursuant Rules 13a-14 and 15d-14 of the Exchange Act. 32 Certificate pursuant to 18 U.S.C. Section 1350. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INNOVEX, INC. Date: August 2, 2007 By /s/ William P. Murnane ------------------------- William P. Murnane President and Chief Executive Officer By /s/ Douglas W. Keller ---------------------- Douglas W. Keller Principal Financial Officer 20 EX-31.1 2 a5462286ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATIONS -------------- I, William P. Murnane, certify that: 1. I have reviewed this Form 10-Q of Innovex Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 2, 2007 /s/ William P. Murnane ------------------------ President and Chief Executive Officer 21 EX-31.2 3 a5462286ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 I, Douglas W. Keller, certify that: 1. I have reviewed this Form 10-Q of Innovex Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 2, 2007 /s/ Douglas W. Keller ------------------------ Principal Financial Officer 22 EX-32 4 a5462286ex32.txt EXHIBIT 32 Exhibit 32 CERTIFICATION The undersigned certify pursuant to 18 U.S.C. ss. 1350, that: (1) The accompanying Quarterly Report on Form 10-Q for the period ended June 30, 2007, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 2, 2007 /s/ William P. Murnane ------------------------ President and Chief Executive Officer Date: August 2, 2007 /s/ Douglas W. Keller ------------------------ Principal Financial Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----