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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 March 29, 2008
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, a non-accelerated filer or a smaller reporting
company. See definition of "accelerated filer" and "large accelerated filer" in
rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer
|_| Non-accelerated filer |_| Smaller reporting company |X|
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 April 29, 2008, 19,415,466 shares of the Company's common stock,
$.04 par value per share, were outstanding.
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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 1A. Risk Factors
Item4. Submission of Matters to a Vote of Securities Holders
Item 6. Exhibits.
SIGNATURES
2
PART 1
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 29, September 29,
2008 2007
--------------- ----------------
ASSETS
--------------------------------------------------------
Current assets:
Cash and equivalents $ 8,725,721 $ 10,453,803
Accounts receivable, net 10,747,948 13,742,477
Inventories 8,451,317 11,055,082
Other current assets 4,185,894 2,460,199
--------------- ----------------
Total current assets 32,110,880 37,711,561
Property, plant and equipment, net of accumulated
depreciation of $52,814,000 and $49,239,000 35,635,775 38,814,960
Assets held for sale 1,992,813 2,058,308
Other assets 501,330 775,593
--------------- -----------------
$ 70,240,798 $ 79,360,422
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 12,603,041 $ 11,049,170
Line of credit 33,501,631 20,433,958
Accounts payable 9,371,884 14,865,174
Accrued compensation 871,338 1,805,567
Other accrued liabilities 2,226,898 1,729,392
--------------- ----------------
Total current liabilities 58,574,792 49,883,261
Long-term debt, less current maturities 14,585,674 15,548,964
Stockholders' equity (deficit):
Common stock, $.04 par value; 30,000,000 shares
authorized, 19,407,966 shares issued and outstanding 776,319 776,319
Capital in excess of par value 61,925,681 61,709,491
Accumulated deficit (65,621,668) (48,557,613)
--------------- ----------------
Total stockholders' equity (deficit) (2,919,668) 13,928,197
--------------- ----------------
$ 70,240,798 $ 79,360,422
=============== ================
See accompanying notes to condensed consolidated financial statements.
3
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
---------------------------------------------------------------------
Three Months Ended
------------------------------
March 29, 2008 March 31, 2007
-------------- ---------------
Net sales $ 13,274,102 $ 21,870,810
Costs and expenses:
Cost of sales 16,227,554 21,839,632
Selling, general and administrative 2,188,479 2,998,632
Royalty expense 19,845 156,708
Engineering 596,830 813,118
Net asset impairment -- 792,295
Restructuring charges 719,927 1,886,000
Net (gain) loss on sale of assets (125,775) 336,449
Interest expense 768,728 694,480
Interest income (29,038) (77,560)
Net other (income) expense 2,094,025 (136,812)
-------------- ---------------
Net loss before taxes (9,186,473) (7,432,132)
Income taxes 120 --
-------------- ---------------
Net loss $ (9,186,593) $ (7,432,132)
============= =============
Net loss per share:
Basic $ (0.47) $ (0.38)
============= =============
Diluted $ (0.47) $ (0.38)
============= =============
Weighted average shares outstanding:
Basic 19,407,966 19,382,038
============== ===============
Diluted 19,407,966 19,382,038
============== ===============
Six Months Ended
------------------------------
March 29, 2008 March 31, 2007
-------------- ---------------
Net sales $ 34,069,261 $ 47,887,651
Costs and expenses:
Cost of sales 38,040,354 47,337,123
Selling, general and administrative 4,735,674 6,156,964
Royalty expense 127,876 362,848
Engineering 1,282,156 1,812,917
Net asset impairment -- 792,295
Restructuring charges 2,970,997 3,727,319
Net (gain) loss on sale of assets (124,976) 325,196
Interest expense 1,506,732 1,264,310
Interest income (84,443) (113,705)
Net other (income) expense 2,678,826 (19,528)
-------------- ---------------
Net loss before taxes (17,063,935) (13,758,088)
Income taxes 120 --
-------------- ---------------
Net loss $ (17,064,055) $ (13,758,088)
============ ===============
Net loss per share:
Basic $ (0.88) $ (0.71)
============ =============
Diluted $ (0.88) $ (0.71)
============ =============
Weighted average shares outstanding:
Basic 19,407,966 19,381,736
============== ===============
Diluted 19,407,966 19,381,736
============== ===============
See accompanying notes to condensed consolidated financial statements.
4
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
-------------------------------
March 29, 2008 March 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,064,055)$ (13,758,088)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 3,873,580 4,156,677
Asset impairment charge -- 792,295
Stock compensation expense 215,647 302,961
Other non-cash items (70,875) 325,367
Changes in operating assets and liabilities:
Accounts receivable 2,994,529 2,152,475
Inventories 2,603,765 641,619
Other current assets (1,725,695) (1,259,053)
Other long term assets 270,149 330,184
Accounts payable (5,493,290) (4,561,225)
Accrued compensation and other accrued
liabilities (436,723) 304,562
--------------- ---------------
Net cash used in operating activities (14,832,968) (10,572,226)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (679,686) (3,231,310)
Proceeds from sale of assets 125,775 213,745
--------------- ---------------
Net cash used in investing activities (553,911) (3,017,565)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (3,091,816) (4,302,466)
Issuance of long-term debt 3,682,397 9,630,910
Net activity on line of credit 13,067,673 6,281,945
Proceeds from exercise of stock options and
employee stock purchase plan 543 20,654
--------------- ---------------
Net cash provided by financing activities 13,658,797 11,631,043
--------------- ---------------
Decrease in cash and equivalents (1,728,082) (1,958,748)
Cash and equivalents at beginning of period 10,453,803 9,819,045
--------------- ---------------
Cash and equivalents at end of period $ 8,725,721 $ 7,860,297
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,507,000 $ 1,257,000
Income taxes $ 6,000 $ 10,000
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 29, 2007.
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 - 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 $8.7 million at March
29, 2008 and $10.5 million at September 29, 2007. Long-term debt was $14.6
million at March 29, 2008 and $15.5 million at September 29, 2007 excluding
current maturities of $12.6 and $11.0, respectively. During the six months ended
March 29, 2008 and March 31, 2007, the Company incurred losses from continuing
operations of $17.1 million and $13.8 million, respectively. Operating
activities used $14.8 million and $10.6 million during the six months ended
March 29, 2008 and March 31, 2007, respectively. As of March 29, 2008, the
Company had a working capital deficit of $26.5 million.
Total unused debt availability as of March 29, 2008 was approximately $7.1
million under the Company's long-term Thailand credit facilities and
approximately $4.6 million under its short-term packing credit and working
capital facilities. Utilization of the $7.1 million available under the
long-term credit facility is based on the incurrence of capital expenditures and
utilization of the packing credit facility availability is dependent on
presenting qualifying customer purchase orders to the banks for draw down.
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 through a portion of the fiscal 2008
fourth quarter. The Company requires additional capital resources for its
business and to otherwise respond to competitive pressures in the industry. The
Company is working with the banks that provide the existing credit facilities to
restructure the long-term portion of the company's debt. In addition, 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. No assurance can be given that additional working
capital will be obtained in an amount that is sufficient for the Company's
needs, in a timely manner or on terms and conditions acceptable to the Company
or its shareholders.
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. However, the Company's efforts to raise additional funds from the
sale of its common stock may be hampered by the fact that the Company currently
fails to meet two of the listing requirements of the Nasdaq Global Market. If
the Company fails to regain compliance with the listing requirement or if at any
time the Company fails to satisfy each of the other requirements for continued
listing, its common stock will be delisted from the Nasdaq Global Market, which
will further hamper the Company's ability to raise additional working capital.
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, cash flow from operations and management
estimates as to future revenue and expenses.
6
NOTE 3 - RESTRUCTURING CHARGES
Corporate office relocation:
On October 1, 2007, the Company announced a plan to relocate its corporate
offices to Thailand and discontinue manufacturing activity at its Korat,
Thailand facility as the FSA product reaches its end of life by the end of the
fiscal 2008 second quarter. The restructuring was triggered by the previous move
of the Company's manufacturing operations to Thailand and the presence of its
banking sources and most of its customers and suppliers in Asia. In addition,
incremental cost reductions are required for the Company to return to
profitability. Restructuring charges of $0.6 million related to the planned
corporate office and Korat restructuring were recorded in the second quarter of
fiscal 2008. These charges were comprised of $533,000 one time termination
benefits and $30,000 for moving and closing costs. Total restructuring charges
related to the corporate office relocation restructuring for the six months
ended March 29, 2008 were $2.6 million. These charges were comprised of $2.5
million for one time termination benefits and $108.000 for moving and closing
costs. Most of the remaining anticipated expenditures related to the plan of
approximately $1.0 million are expected to be incurred prior to the end of
calendar 2008. The accrued restructuring charges related to the corporate office
relocation are $0.2 million at March 29, 2008.
Litchfield and Eastlake 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. The
restructuring was triggered by the Company's need to reduce its cost structure
in order to compete effectively and as a result of lower than expected revenue.
A purchase agreement has been signed to sell the Litchfield facilities for $2.4
million. The sale is expected to close after the buyer arranges financing.
Efforts are being made to sublease the Eastlake facility in fiscal 2008.
Restructuring charges of $157,000 related to the Litchfield and Eastlake
restructuring were recorded in the fiscal 2008 second quarter. Total
restructuring charges related to the Eastlake and Litchfield restructuring
excluding asset impairments charges for the six months ended March 29, 2008 were
$396,000. These charges were comprised of $311,000 for moving and closing costs
and $85,000 contract termination costs related to the Eastlake facility lease.
Remaining expenditures of approximately $800,000 are expected as part of the
plan primarily related to completing the transfer of equipment to Thailand. The
accrued restructuring charges related to Litchfield and Eastlake are $0.5
million at March 29, 2008.
NOTE 4 - 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
1,935,467 and 1,905,839 shares of common stock were outstanding during the three
month and six month periods ending March 29, 2008, but were excluded from the
computation of common share equivalents because they were not dilutive. Options
to purchase 1,919,328 and 1,921,393 shares of common stock were outstanding
during the three and six month periods ending March 31, 2007, but were excluded
from the computation of common share equivalents because they were not dilutive.
NOTE 5 - STOCK BASED COMPENSATION
The Company recorded $104,000 and $216,000 of related compensation expense for
the three and six month periods ended March 29, 2008, respectively and $156,000
and $303,000 for the three and six month periods ended March 31, 2007,
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 March 29, 2008 and March 31, 2007, $0.01 for the six months
ended March 29, 2008 and $0.02 for the six months ended March 31, 2007. As of
March 29, 2008, $744,000 of total unrecognized compensation costs related to
non-vested awards is expected to be recognized over a weighted average period of
approximately 1.2 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 adjustment was made to the Black Scholes calculation to
reflect that the options are not freely traded:
7
Three Months Ended Six Months Ended
March 29, 2008 March 31, 2007 March 29, 2008 March 31, 2007
Risk-free interest rate 1.79% 4.49% 3.21% 4.52%
Expected volatility 92% 50% 79% 50%
Expected life (in years) 2.9 3.0 2.9 3.0
Dividend yield -- -- -- --
Weighted average fair value of
options granted $ 0.19 $ 0.83 $ 0.33 $ 0.86
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
March 29, 2008 the Company had 631,876 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 March 29, 2008, the
Company had 14,425 shares of common stock available for issue under the plan.
Transactions under the stock option and restricted stock plans during the six
months ended March 29, 2008 are summarized as follows:
Number of Weighted
Shares Under Average
Option Exercise Price
--------------- --------------
Outstanding at September 30, 2007 1,977,968 5.25
Granted 459,125 0.71
Forfeited (95,090) 10.94
Exercised -- --
---------------
Outstanding at December 29, 2007 2,342,003 4.13
Granted 210,000 0.34
Forfeited (346,720) 3.82
Exercised -- --
---------------
Outstanding at March 29, 2008 2,205,283 3.82
===============
8
The following table summarizes information concerning currently outstanding and
exercisable stock options:
Options Outstanding Options Exercisable
----------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------------------------- --------------- ------------- ----------------- ---------------
$0.00 - $2.41 1,204,336 8.3 years $ 1.32 315,195 $ 2.02
2.70 - 4.84 504,500 6.9 years 3.70 267,239 3.81
5.28 - 7.82 121,822 3.4 years 7.14 117,822 7.13
8.89 - 9.80 188,275 5.7 years 9.56 151,800 9.56
11.49 - 11.51 90,000 0.6 years 11.50 90,000 11.50
12.59 - 13.08 96,350 2.7 years 13.03 95,350 13.03
-------------- -----------------
2,205,283 3.82 1,037,406 6.00
============== =================
NOTE 6 - INVENTORIES
Inventories are comprised of the following (in thousands):
March 29, September 29,
2008 2007
------------ --------------
Raw materials and purchased
parts $ 3,677 $ 4,549
Work-in-process and finished
goods 4,774 6,506
------------ --------------
$ 8,451 $ 11,055
============ ==============
NOTE 7 - 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 March 29, 2008, the Company had open forward
exchange contracts to buy Thailand baht in return for US dollars maturing on May
14, 2008; May 20, 2008; May 27, 2008; June 12, 2008, June 19, 2008 and September
5, 2008, each with an amount of 200 million baht except for the contract
maturing on September 5, 2008 which has an amount of 300 million baht for a
total of 1.3 billion Thailand baht.
Foreign currency translation gains or (losses) included in net other (income)
expense (in thousands):
Three months ended Six months ended
------------------------ ------------------------
March 29, March 31, March 29, March 31,
2008 2007 2008 2007
----------- ------------ ----------- ------------
Gain or (loss) from forward
exchange contracts $ 2,093 $ 468 $ 2,299 $ 2,166
Other foreign currency gain or
(loss) (4,221) (335) (5,030) (2,151)
----------- ------------ ----------- ------------
Net gain or (loss) from foreign
currency transactions $ (2,128) $ 133 $ (2,731) $ 15
=========== ============ =========== ============
9
NOTE 8 - 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 9 - 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 10- RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or
SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008. The adoption of SFAS No. 141(R) would change the
Company's accounting treatment for business combinations on a prospective basis
beginning in the period it is adopted.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently evaluating the provisions of FASB 161 to
determine the impact on the company's consolidated financial statements.
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 29, 2007, 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, Western Digital and other
leading electronic OEMs.
10
Net Sales and Revenue Recognition
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 October 1, 2007,
we announced a plan to relocate our corporate offices to Thailand and
discontinue manufacturing activity at our Korat, Thailand location as the Flex
Suspension Assembly product reached its end of life by the end of the fiscal
2008 second quarter. On January 16, 2006, we announced a plan to transfer our
high volume manufacturing operations from Litchfield, Minnesota to Thailand. 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. Concurrently, we also planned to accelerate
the end of life production of flexible circuit laminate material at our
Eastlake, Ohio facility and reduce indirect labor and general and administrative
expenses at our other U.S. and Thailand locations.
11
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 For the Six Months
Ended Ended
------------------------ ---------------------
March 31, March 29, March 31, March 29,
2007 2008 2007 2008
---------- ------------ --------- ----------
Net Sales 100% 100% 100% 100%
Cost of goods sold 99.9 122.2 98.9 111.7
---------- ------------ --------- ----------
Gross profit 0.1 (22.2) 1.1 (11.7)
Operating expenses:
Selling, general and
administrative and royalty
expense 14.4 16.6 13.6 14.3
Engineering 3.7 4.5 3.8 3.8
Restructuring and asset
impairment 12.2 5.4 9.4 8.7
Net (gain) loss on sale of
assets 1.6 (0.9) 0.7 (0.4)
---------- ------------ --------- ----------
Total operating expenses 31.9 25.6 27.5 26.4
---------- ------------ --------- ----------
Income (loss) from operations (31.8) (47.8) (26.4) (38.1)
---------- ------------ --------- ----------
Interest and other expense, net (2.2) (21.4) (2.3) (12.0)
---------- ------------ --------- ----------
Income (loss) before provision
(benefit) for income taxes (34.0) (69.2) (28.7) (50.1)
Provision (benefit) for income
taxes -- -- -- --
---------- ------------ --------- ----------
Net income (loss) (34.0)% (69.2)% (28.7)% (50.1)%
========== ============ ========= ==========
Comparison of Three Months Ended March 29, 2008 and March 31, 2007
Net Sales
Our net sales were $13.3 million for the three months ended March 29, 2008,
compared to $21.9 million for the three months ended March 31, 2007, a decrease
of 39%. This decrease primarily reflects a $10 million decrease in flex
suspension assembly (FSA) revenue and a $1.1 million decrease in actuator flex
circuit (AFC) revenue offset by a $3.0 million increase in flat panel display
(FPD) revenue. The decline in FSA revenue to $1.4 million in the fiscal 2008
second quarter from $11.6 million in the prior year reflects the completion of
our FSA customer's transition to its next generation of disk drive products
which use an alternative technology. The AFC reduction was related to first
quarter production issues reducing our product allocation at a significant
customer and the delay in the expected production ramp up for our new actuator
flex customer. The growth in the FPD revenue resulted from the ramp up of a
number of new FPD programs and increased volume from the FPD programs that
ramped up in the first quarter. While FSA revenue reached its end of life during
the fiscal 2008 second quarter, we expect increases in AFC and FPD revenue in
the fiscal 2008 third quarter as compared to the fiscal 2008 second quarter as
new FPD programs reach volume production and production begins to ramp up for
our new AFC customer.
FSA sales to the disk drive industry generated 11% of our net sales for the
three months ended March 29, 2008, compared to 53% for the three months ended
March 31, 2007. Sales of AFC's to the disk drive industry were 44%, compared to
32%, FPD application net sales were 38% compared to 9%, sales from integrated
circuit packaging, network system application and sales from other industry
applications were 7% and 6% for the three months ended March 29, 2008 and March
31, 2007, respectively.
Gross Profit (Loss)
Our gross loss was $3.0 million for the three months ended March 29, 2008
compared to a gross profit of $31,000 for the three months ended March 31, 2007.
Our gross margin for the three months ended March 29, 2008 decreased to (22.2%),
from 0.1% for the three months ended March 31, 2007. 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 gross margins to improve during the fiscal 2008 third quarter
as an increase in revenue is expected.
12
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the three months ended March 29, 2008were $2.2 million, compared to $3.2 million
in the three months ended March 31, 2007, a decrease of 30%. As a percentage of
net sales, selling, general and administrative expenses were 17% for the three
months ended March 29, 2008, up from 14% from 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.
Selling, general and administrative expenses as a percentage of net sales
increased as compared to the prior year as the decrease in revenue more than
offset the decrease in expenses. Selling, general and administrative expenses
for the remainder of fiscal 2008 are expected to decrease slightly from the
fiscal 2008 second quarter.
Engineering
Engineering expenses for the three months ended March 29, 2008 were $597,000,
compared to $800,000 for the three months ended March 31, 2007, a decrease of
27%. 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 4.5% of sales for the three months ended March 29, 2008 compared to 3.7%
for the same period in the prior year. Engineering expenses as a percent of net
sales increased as a result of the decreased revenue.
Restructuring
Corporate office relocation:
On October 1, 2007, we announced a plan to relocate our corporate offices to
Thailand and discontinue manufacturing activity at our Korat, Thailand facility
as the FSA product reaches its end of life by the end of the fiscal 2008 second
quarter. The restructuring was triggered by the previous move of our
manufacturing operations to Thailand and the presence of our banking sources and
most of our customers and suppliers in Asia. In addition, incremental cost
reductions are required for us to return to profitability.
Actions related to the restructuring plan were substantially completed by
the end of the fiscal 2008 second quarter. These actions are expected to result
in annual operating expense reductions of at least $6 million. Approximately
$5.7 million of the annualized savings are expected to have a positive impact on
cash flow. These cash related savings are comprised of $4.2 million related to
compensation reductions and $1.5 million related to other spending. The $0.3
million remaining savings are depreciation related and have no impact on cash
flow.
Asset impairment charges of $400,000 related to the plan were recorded in the
fiscal 2007 fourth quarter. The impaired assets were primarily equipment used in
the FSA manufacturing process at the Korat facility. The assets were written
down to their estimated net realizable value which is negligible as a result of
their age and specialized nature. Total cash related restructuring charges
excluding asset impairments of approximately $3.6 million are expected related
to the plan. The $3.6 million is comprised of $3.2 million for one-time
termination benefits and $0.4 million related to moving and closing costs
associated with transferring the corporate offices to Thailand, terminating the
Plymouth, Minnesota office lease and transferring equipment from Korat, Thailand
to Lamphun, Thailand. Restructuring charges of $0.6 million related to the
planned corporate office and Korat restructuring were recorded in the second
quarter of fiscal 2008. These charges were comprised of $533,000 one time
termination benefits and $30,000 for moving and closing costs. Total
restructuring charges related to the corporate office relocation restructuring
through March 29, 2008 were $3.0 million. These charges were comprised of $2.5
million for one time termination benefits, $108,000 for moving and closing costs
and $400,000 of asset impairment charges. Most of the remaining anticipated
expenditures related to the plan of approximately $1.0 million are expected to
be incurred prior to the end of calendar 2008.
The restructuring plan calls for the elimination of 594 positions in the U.S.
and Thailand consisting of 466 direct labor positions, 97 indirect labor
production support positions and 31 administrative positions. As of March 29,
2008, 590 of these positions have been eliminated.
13
Litchfield and Eastlake 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. 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.
While several action items related to the expanded restructuring plan remain
open, all of the expected savings were realized as of September 29, 2007. Asset
impairment charges related to the expanded restructuring plan 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.
Manufacturing operations were completed in the Eastlake facility in February
2007 and decommission of the facility was substantially completed by the end of
March 2008. 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 after the
buyer arranges financing. Efforts are being made to sublease the Eastlake
facility in fiscal 2008.
Total cash related restructuring charges excluding asset impairments of
approximately $8.8 million are expected for the Litchfield and Eastlake
restructuring. The $8.8 million is comprised of $3.3 million for one-time
termination benefits and $5.5 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 $157,000 related to the Litchfield and
Eastlake restructuring were recorded in the fiscal 2008 second quarter. Total
restructuring charges related to the Eastlake and Litchfield restructuring
excluding asset impairments charges through March 29, 2008 were $8.0 million.
These charges were comprised of $3.3 million for one time termination benefits,
$3.8 million for moving and closing costs and $0.9 million contract termination
costs related to the Eastlake facility lease. Remaining expenditures of
approximately $800,000 are expected as part of the plan primarily related to
completing the transfer of equipment to Thailand.
Net (Gain) Loss on the Sale of Assets
Net gain on the sale of assets was $125,000 for the three months ended March
29, 2008 compared to a net loss on the sale of assets of $336,000 for the three
months ended March 31, 2007.
Net Interest and Other Expense
Net interest expense was $0.7 million for the three months ended March 29,
2008 and $0.6 million for the three months ended March 31, 2007. The increase
was driven by higher level of debt outstanding in fiscal 2008. Net other expense
was $2.1 million in the three months ended March 29, 2008 as compared to net
other income of $137,000 in the three months ended March 31, 2007. The change
was a result of higher foreign currency valuation losses being recorded in
fiscal 2008 as compared to fiscal 2007. The foreign currency loss for the
quarter was driven by the large drop in the value of the US dollar during the
quarter as compared to other currencies and in particular, the Thai baht. Our
Thailand debt is denominated in Thai baht, and as a result, we have a
significant short position in Thai baht. We made the decision in fiscal 2007 to
reduce the level of forward contracts we place to purchase Thai baht to offset
this short position because of the short term cash risks associated with placing
these contracts. As a result, the weaker dollar drove the foreign currency loss
as the value of our baht denominated debt increased.
Income Taxes
Only minimal net income tax expense or benefit was recorded for the three
months ended March 29, 2008 and March 31, 2007 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.
14
Comparison of Six Months Ended March 29, 2008 and March 31, 2007
Net Sales
Our net sales were $34.0 million for the six months ended March 29, 2008,
compared to $47.9 million for the six months ended March 31, 2007, a decrease of
29%. This decrease primarily reflects a $17 million decrease in flex suspension
assembly (FSA) revenue and a $3.7 million decrease in actuator flex circuit
(AFC) revenue offset by a $8.0 million increase in flat panel display (FPD)
revenue. The decline in FSA revenue reflects the completion of our FSA
customer's transition to its next generation of disk drive products which use an
alternative technology. The AFC reduction was related to first quarter
production issues reducing our product allocation at a significant customer and
the delay in the expected production ramp up for our new actuator flex customer.
The growth in the FPD revenue resulted from the ramp up of a number of new FPD
programs and increased volume from the FPD programs that ramped up in the first
quarter.
FSA sales to the disk drive industry generated 25% of our net sales for the
six months ended March 29, 2008, compared to 54% for the six months ended March
31, 2007. Sales of AFC's to the disk drive industry were 38%, compared to 34%,
FPD application net sales were 32% compared to 6%, sales from integrated circuit
packaging, network system application and sales from other industry applications
were 5% and 6% for the six months ended March 29, 2008 and March 31, 2007,
respectively.
Gross Profit (Loss)
Our gross loss was $4.0 million for the six months ended March 29, 2008
compared to a gross profit of $550,000 for the six months ended March 31, 2007.
Our gross margin for the six months ended March 29, 2008 decreased to (11.7%),
from 1.1% for the six months ended March 31, 2007. 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 and short-term incremental costs incurred while
addressing operating issues related to new product ramp ups and the introduction
of a new material set. 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 six months ended March 29, 2008were $4.9 million, compared to $6.5 million
in the six months ended March 31, 2007, a decrease of 25%. As a percentage of
net sales, selling, general and administrative expenses were 14% for the six
months ended March 29, 2008 and March 31, 2007. 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. Selling, general and
administrative expenses as a percentage of net sales was similar as compared to
the prior year as the decrease in revenue more than offset the decrease in
expenses.
Engineering
Engineering expenses for the six months ended March 29, 2008 were $1.3
million, compared to $1.8 million for the six months ended March 31, 2007, a
decrease of 29%. 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 3.8% of sales for the six months ended March 29, 2008
unchanged from the same period in the prior year.
Restructuring
Corporate office relocation:
As discussed above, on October 1, 2007, we announced a plan to relocate our
corporate offices to Thailand and discontinue manufacturing activity at our
Korat, Thailand facility as the FSA product reaches its end of life by the end
of the fiscal 2008 second quarter. Restructuring charges of $2.6 million were
recorded during the first six months of fiscal 2008 related to the corporate
office restructuring. These charges were comprised of $2.5 million of one time
employee termination benefits and $108,000 for moving and closing costs. No
charges were recorded related to this restructuring in the first six months of
fiscal 2007.
15
Litchfield and Eastlake 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
$396,000 were recorded during the first six months of fiscal 2008 related to the
Litchfield restructuring. These charges were comprised of $311,000 for moving
and closing costs and $85,000 contract termination costs related to the Eastlake
facility lease. Restructuring charges of $3.7 million were recorded during the
first six months of fiscal 2007 related to the Litchfield restructuring. These
charges were comprised of $2.1 million for one time termination benefits, $0.8
million for moving and closing costs and $756,000 contract termination costs
related to the Eastlake facility lease.
Net (Gain) Loss on the Sale of Assets
Net gain on the sale of assets was $125,000 for the six months ended March
29, 2008 compared to a net loss on the sale of assets of $325,000 for the six
months ended March 31, 2007.
Net Interest and Other Expense
Net interest expense was $1.4 million for the six months ended March 29, 2008
and $1.2 million for the six months ended March 31, 2007. The increase was
driven by higher level of debt outstanding in fiscal 2008. Net other expense was
$2.7 million in the six months ended March 29, 2008 as compared to net other
income of $20,000 in the six months ended March 31, 2007. The change was a
result of higher foreign currency valuation losses being recorded in fiscal 2008
as compared to fiscal 2007. The foreign currency loss for the quarter was driven
by the large drop in the value of the US dollar during the quarter as compared
to other currencies and in particular, the Thai baht. Our Thailand debt is
denominated in Thai baht, and as a result, we have a significant short position
in Thai baht. We made the decision in fiscal 2007 to reduce the level of forward
contracts we place to purchase Thai baht to offset this short position because
of the short term cash risks associated with placing these contracts. As a
result, the weaker dollar in fiscal 2008 drove the foreign currency loss as the
value of our baht denominated debt increased.
Income Taxes
Only minimal net income tax expense or benefit was recorded for the six
months ended March 29, 2008 and March 31, 2007 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.
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 29, 2007. The accounting policies used in preparing
our interim 2008 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 $8.7 million at March
29, 2008 and $10.5 million at September 29, 2007. As of March 29, 2008, the
Company had a working capital deficit of $26.5 million.
For the six months ended March 29, 2008, net cash used in operating
activities of $14.8 million primarily resulted from the net loss for the period
net of non-cash charges and a $5.5 million decrease in accounts payable,
partially offset by a $3.0 million decrease in accounts receivable and a $2.6
million decrease in inventory. The accounts payable, accounts receivable and
inventory decreases were driven by the reduced level of revenue.
Net cash used in investing activities was $0.6 million in the first six
months of fiscal 2008, compared to net cash used in investing activities of $3.0
million in the first six months of fiscal 2007. In fiscal 2008, net cash used in
investing activities was attributed to capital spending related to process
improvements at our Thailand facility. Fiscal 2007 net cash used in investing
activities was also attributed to capital spending for process improvements at
our Thailand facility.
Net cash provided by financing activities was $13.7 million in the first six
months of fiscal 2008, compared to net cash provided by financing activities of
$11.6 million in the first six months of fiscal 2007. Fiscal 2008 net cash
provided by financing activities was the result of the $13.1 million borrowed
under our short-term Thailand packing credit facilities, a $1.5 million draw
down under our new long term Thailand credit facilities and a $2.2 million
increase in the U.S. dollar foreign exchange valuation of the Thailand baht
denominated debt partially offset by the normally scheduled debt payments on our
existing Thailand debt facilities and US based debt. For the first six months of
fiscal 2007, net cash provided by financing activities was primarily related to
the $6.3 million borrowed under our short-term Thailand packing credit
facilities and a $7.8 million draw down under our new long term Thailand credit
facilities partially offset by the normally scheduled debt payments on our
existing Thailand debt facilities and US based debt.
16
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 $9.5 million under this new credit
facility in fiscal 2007 and $1.1 million in the fiscal 2008 first quarter. 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 March 29, 2008, we had approximately $26.5 million outstanding under our
long-term Thailand credit facilities and a $33.5 million outstanding balance
under our short-term Thailand credit facilities. Total unused availability as of
March 29, 2008 was approximately $7.1 million under our long-term Thailand
credit facilities and approximately $4.6 million under our short-term packing
credit and working capital facilities. Utilization of the $7.1 million available
under the long-term credit facility is based on the incurrence of capital
expenditures and utilization of the packing credit facility availability is
dependent on presenting qualifying customer purchase orders to the banks for
draw down. As of March 29, 2008, we were in compliance with covenants under our
Thailand credit facilities.
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 March 29,
2008, $0.6 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 through a portion of the fiscal 2008
fourth quarter. We require additional capital resources for our business and to
otherwise respond to competitive pressures in the industry. We are working with
the banks providing our existing credit facilities to restructure the existing
credit facilities. 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. No assurance can be given that
additional working capital will be obtained in an amount that is sufficient for
our needs, in a timely manner or on terms and conditional acceptable to the
Company or its shareholders.
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. However, our efforts to raise additional funds from the sale of
common stock may be hampered by the fact that we currently fail to meet two of
the listing requirements of the Nasdaq Capital Market. If we fail to regain
compliance with the listing requirement or if at any time we fail to satisfy
each of the other requirements for continued listing, our common stock will be
delisted from the Nasdaq Capital Market, which will further hamper our ability
to raise additional working capital.
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, cash flow from operations and our estimates as to
future revenue and expenses.
17
Contractual Obligations
The table below discloses a summary of the Company's specified contractual
obligations at December 29, 2007 (in thousands):
1 to 3 After 5
Under 1 Year Years 3 to 5 Years Years Total
------------ ---------- ------------ ------------ ----------
Long-term Debt
Obligations (1) $ 12,638 $ 12,206 $ 2,386 -- $ 27,229
Operating Leases 348 701 341 -- 1,390
------------ ---------- ------------ ------------ ----------
Total $ 12,986 $ 12,907 $ 2,727 -- $ 28,619
============ ========== ============ ============ ==========
(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
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently evaluating the provisions of FASB 161 to
determine the impact on the company's consolidated financial statements.
Forward Looking Statements
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, elsewhere in this report and in future
filings by the Company with the SEC, except for the historical information
contained herein and therein, are "forward-looking statements" that involve
risks and uncertainties. These risks and uncertainties include: the increased
utilization by our largest customer of alternative interconnect technologies
that compete with our FSA product, AFC and FPD 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
timely availability and acceptance of new products, the impact of competitive
products and pricing, changes in our customers' market share, impact of
restructuring charges, changes in manufacturing efficiencies, ability to secure
additional financing, continued cash availability under our credit facilities
and other risks detailed from time to time in our reports filed with the
Securities and Exchange Commission, including those risks described under Part
I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended
September 29, 2007. 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.
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.
18
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 March 29, 2008, the Company had open forward exchange
contracts to buy Thailand baht in return for US dollars maturing on May 14,
2008; May 20, 2008; May 27, 2008; June 12, 2008, June 19, 2008 and September 5,
2008, each with an amount of 200 million baht except for the contract maturing
on September 5, 2008 which has an amount of 300 million baht for a total of 1.3
billion Thailand baht. 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, Terry M. Dauenhauer, and Chief Financial
Officer, Randy L. Acres, 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. The Company hired Mr. Acres as its Chief
Financial Officer during the quarter and this position will be located at the
Company's Thailand facility. The Company does not believe this constitutes a
change in internal control over financial reporting as described above.
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PART II - OTHER INFORMATION
Responses to Items 1A through 3 and 5 are omitted since these items are either
inapplicable or the response thereto would be negative.
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 1A: RISK FACTORS
An investment in our common stock involves a high degree of risk. The risks and
uncertainties described below and in our Annual Report on Form 10K for the year
ended September 29, 2007 are not the only ones we face. Additional risks and
uncertainties that we are unaware of, or that we may currently deem immaterial,
may become important factors that harm our business, financial condition or
results of operations. If any of the following risks or those risks described in
our Annual Report on Form 10K for the year ended September 29, 2007 actually
occurs, our business, financial condition or results of operations could suffer.
In that case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
We currently fail to meet two of Nasdaq's listing requirements and if our
common stock is delisted it may then become illiquid.
Our common stock was listed on The Nasdaq Global Market. On November 21,
2007, we received a Staff Deficiency Letter from The Nasdaq Stock Market that
stated that for the last 30 consecutive business days the bid price of our
common stock has closed below the minimum $1.00 per share required for continued
inclusion on the Nasdaq Global Market. Therefore, we are not in compliance with
the requirements for continued listing of the Nasdaq Global Market. If, at
anytime before May 19, 2008, the bid price of our common stock closes at $1.00
per share or more for a minimum of 10 consecutive business days, the staff of
The Nasdaq Stock Market will provide us written notification that we have
achieved compliance with this requirement for continued listing.
In addition, on February 11, 2008 we received a Staff Deficiency letter from
The Nasdaq Stock Market that stated that our stockholders' equity at December
29, 2007 was less than the $10 million minimum in stockholders' equity required
for continued listing on The Nasdaq Global Market. In response to the deficiency
letter, we transferred our listing to the Nasdaq Capital Market on March 27,
2008. Based on our financial performance reported in the current Form 10Q, our
current stockholders' equity will fall below the $2.5 million minimum
stockholders' equity required for continued listing on the Nasdaq Capital Market
and we expect to receive a Staff Deficiency Letter from the Nasdaq Stock Market
upon the filing of this Form 10Q. The $1.00 minimum per share bid price
requirement also applies to The Nasdaq Capital Market.
If we fail to regain compliance with the minimum bid price requirement, the
stockholders' equity requirement or if at any time we fail to satisfy each of
the other requirements for continued listing, our common stock will be delisted
from The Nasdaq Capital Market. If delisted from The Nasdaq Capital Market, our
common stock will likely be quoted in the over-the-counter market in the
so-called "pink sheets" or quoted in the OTC Bulletin Board. In addition, our
common stock would be subject to the rules promulgated under the Securities
Exchange Act of 1934 relating to "penny stocks." These rules require brokers who
sell securities that are subject to the rules, and who sell to persons other
than established customers and institutional accredited investors, to complete
required documentation, make suitability inquiries of investors and provide
investors with information concerning the risks of trading in the security.
Consequently, we believe an investor would find it more difficult to buy or sell
our common stock in the open market if it were quoted on the over-the-counter
market or the OTC Bulletin Board. There can be no assurance that our common
stock may be sold without a significant negative impact on the price per share
which may make it more difficult for us to meet the minimum bid price
requirement or that any market will continue to exist for our common stock.
We face risks from fluctuations in the value of foreign currency versus
the U.S. dollar and the cost of currency exchange.
While we transact business predominantly in U.S. dollars, a large
portion of our debt, sales and expenses are denominated in foreign currencies.
Our Thailand debt is denominated in Thai baht, and as a result, we have a
significant short position in Thai baht. 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 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. The forward exchange
contracts usually have a six month term and generally require us to exchange
U.S. dollars for Thailand baht at maturity, at rates agreed to at inception of
the contracts. These contracts are not designed as hedges; therefore, the gains
and losses on foreign currency transactions are included in net income as
incurred.
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When these contracts mature, the contract value will be determined based on the
difference between the contract price and the current US dollar/Thai baht
exchange rate as of the settlement date. We will receive a cash settlement for
the contract value if the value of the dollar weakens and we will be required to
pay a cash settlement if the dollar strengthens. As a result of the cash risk
inherent in these contracts, we made the decision in fiscal 2007 to reduce the
level of forward contracts we place to purchase Thai baht to offset this short
position. As disclosed in Note 7 to the financial statements, our fiscal 2008
second quarter results highlight the impact that this decision has on our
financial performance as we incurred a net $2.1 million foreign currency loss
during the quarter while the value of the forward contracts we held during the
quarter increased by $2.1 million. The net loss was driven by the increase in
the value of our baht denominated debt as a result of the weaker dollar.
No assurance can be given that our strategies will prevent future currency
fluctuations from having a material adverse effect on our business, financial
condition and results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of the shareholders of Innovex, Inc. was held on January
15, 2008. There were 19,407,966 shares of common stock entitled to vote at
the meeting and a total of 16,169,302 shares were represented at the meeting.
b) Five directors were elected at the meeting to serve until the next Annual
Meeting of shareholders or until their respective successors are elected and
qualified. Shares were voted as follows:
For Withheld
------------ -----------
D. Allen Andersen 15,020,444 1,148,858
Philip D. Ankeny 15,018,751 1,150,551
Robert C. Buhrmaster 15,012,568 1,156,734
Terry M. Dauenhauer 15,000,109 1,169,193
William P. Murnane 14,994,566 1,174,736
c) Other matters voted on at the meeting:
Proposal #2. A proposal was made to approve the selection of the Company's
independent registered public accountants for the current fiscal year.
Shares were voted as follows:
For Against Abstain
------------- ------------- -------------
15,578,867 544,032 46,403
Accordingly, each nominee was elected as a director and the appointment of Grant
Thornton LLP was approved.
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.
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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: May 13, 2008
By/s/ Terry M.Dauenhauer
----------------------
Terry M. Dauenhauer
President and Chief Executive Officer
By/s/ Randy Acres
---------------
Randy Acres
Senior Vice President and Chief
Financial Officer
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