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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 June 28, 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 July 28, 2008, 19,418,799 shares of the Company's common stock, $.04
par value per share, were outstanding.
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1
Index
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations.
----------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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Item 4 Controls and Procedures.
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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Item 1A. Risk Factors
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Item 3. Defaults Upon Senior Securities
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Item 4. Submission of Matters to a Vote of Security Holders
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Item 5. Other Information
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Item 6. Exhibits.
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SIGNATURES
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2
PART 1
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 28, September 29,
2008 2007
---------------- ----------------
ASSETS
------
Current assets:
Cash and equivalents $ 5,586,607 $ 10,453,803
Accounts receivable, net 13,548,978 13,742,477
Inventories 9,734,390 11,055,082
Other current assets 2,027,517 2,460,199
---------------- ----------------
Total current assets 30,897,492 37,711,561
Property, plant and equipment, net of accumulated depreciation of $54,682,000 and
$49,239,000 34,469,926 38,814,960
Assets held for sale 1,960,065 2,058,308
Other assets 482,887 775,593
---------------- ----------------
$ 67,810,370 $ 79,360,422
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 2,279,762 $ 11,049,170
Line of credit 34,962,075 20,433,958
Accounts payable 13,861,542 14,865,174
Accrued compensation 890,102 1,805,567
Other accrued liabilities 2,648,850 1,729,392
---------------- ----------------
Total current liabilities 54,642,331 49,883,261
Long-term debt, less current maturities 20,506,776 15,548,964
Stockholders' equity (deficit):
Common stock, $.04 par value; 30,000,000 shares authorized, 19,418,799 and
19,407,966 shares issued and outstanding 776,752 776,319
Capital in excess of par value 61,977,777 61,709,491
Accumulated deficit (70,093,266) (48,557,613)
---------------- ----------------
Total stockholders' equity (deficit) (7,338,737) 13,928,197
---------------- ----------------
$ 67,810,370 $ 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
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June 28, 2008 June 30, 2007
--------------------- ---------------------
Net sales $ 16,173,873 $ 18,150,064
Costs and expenses:
Cost of sales 18,535,646 19,612,363
Selling, general and administrative 2,083,613 2,835,808
Royalty expense -- 136,131
Engineering 635,176 765,556
Restructuring charges 467,636 1,369,182
Net (gain) loss on sale of assets -- 912,769
Interest expense 814,636 648,205
Interest income (33,798) (32,217)
Net other (income) expense (1,857,438) 126,096
--------------------- ---------------------
Net loss before taxes (4,471,598) (8,223,829)
Income taxes -- --
--------------------- ---------------------
Net loss $ (4,471,598) $ (8,223,829)
===================== =====================
Net loss per share:
Basic $ (0.23) $ (0.42)
===================== =====================
Diluted $ (0.23) $ (0.42)
===================== =====================
Weighted average shares outstanding:
Basic 19,410,237 19,396,106
===================== =====================
Diluted 19,410,237 19,396,106
===================== =====================
Nine Months Ended
-------------------------------------------
June 28, 2008 June 30, 2007
--------------------- ---------------------
Net sales $ 50,243,134 $ 66,037,715
Costs and expenses:
Cost of sales 56,576,000 66,949,486
Selling, general and administrative 6,819,287 8,992,772
Royalty expense 127,876 498,979
Engineering 1,917,332 2,578,473
Net asset impairment -- 789,867
Restructuring charges 3,438,633 5,098,929
Net (gain) loss on sale of assets (124,976) 1,237,965
Interest expense 2,321,368 1,912,515
Interest income (118,241) (145,922)
Net other (income) expense 821,388 106,568
--------------------- ---------------------
Net loss before taxes (21,535,533) (21,981,917)
Income taxes 120 --
--------------------- ---------------------
Net loss $ (21,535,653) $ (21,981,917)
===================== =====================
Net loss per share:
Basic $ (1.11) $ (1.13)
===================== =====================
Diluted $ (1.11) $ (1.13)
===================== =====================
Weighted average shares outstanding:
Basic 19,408,723 19,386,526
===================== =====================
Diluted 19,408,723 19,386,526
===================== =====================
See accompanying notes to condensed consolidated financial statements.
4
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------------------------
June 28, 2008 June 30, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,535,653) $ (21,981,917)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 5,777,089 6,148,613
Asset impairment charge (99) 789,867
Stock compensation expense 266,076 419,957
Other non-cash items (70,875) 1,246,884
Changes in operating assets and liabilities:
Accounts receivable 193,499 3,964,246
Inventories 1,320,692 2,040,466
Other current assets 432,682 (126,673)
Other long term assets 286,536 169,875
Accounts payable (1,003,632) (6,048,009)
Accrued compensation and other accrued liabilities 3,993 (751,243)
--------------------- ---------------------
Net cash used in operating activities (14,329,692) (14,127,934)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,382,443) (4,154,093)
Proceeds from sale of assets 125,775 4,751,596
--------------------- ---------------------
Net cash provided by (used in) investing activities (1,256,668) 597,503
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (6,003,604) (10,963,285)
Issuance of long-term debt 2,192,008 10,700,068
Net activity on line of credit 14,528,117 13,626,520
Proceeds from exercise of stock options and employee stock purchase plan 2,643 20,658
--------------------- ---------------------
Net cash provided by financing activities 10,719,164 13,383,961
--------------------- ---------------------
Decrease in cash and equivalents (4,867,196) (146,470)
Cash and equivalents at beginning of period 10,453,803 9,819,045
--------------------- ---------------------
Cash and equivalents at end of period $ 5,586,607 $ 9,672,575
===================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 2,368,000 $ 1,925,000
Income taxes $ 9,000 $ 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 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 $5.6 million at June
28, 2008 and $10.5 million at September 29, 2007. Long-term debt was $20.5
million at June 28, 2008 and $15.5 million at September 29, 2007 excluding
current maturities of $2.3 million and $11.0 million, respectively. During the
nine months ended June 28, 2008 and June 30, 2007, the Company incurred losses
from continuing operations of $21.5 million and $22.0 million, respectively.
Operating activities used cash of $14.3 million and $14.1 million during the
nine months ended June 28, 2008 and June 30, 2007, respectively. As of June 28,
2008, the Company had a working capital deficit of $23.7 million.
Total unused debt availability as of June 28, 2008 was approximately $300,000
under the Company's short-term packing credit and working capital facilities.
Utilization of the packing credit facility availability is dependent on
presenting qualifying customer purchase orders to the banks for draw down.
The Company will require additional capital resources for its business and to
otherwise respond to competitive pressures in the industry. The Company
completed restructuring its long-term credit facilities with its Thai lenders in
June 2008. The restructuring reduced the required principal payments for fiscal
year 2008 and fiscal year 2009 by approximately $6.0 million and $9.0 million,
respectively. 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's efforts
to raise additional funds from the sale of its common stock may be adversely
impacted by the fact that the Company's stock is no longer listed on the Nasdaq
Capital Market as of August 4, 2008. The Company's common stock is currently
being quoted on the Pink OTC Market under the symbol of "INVX.PK".
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.
NOTE 3 - RESTRUCTURING CHARGES
Corporate office relocation:
6
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 was expected to reach 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 $373,000 related to the planned
corporate office and Korat restructuring were recorded in the third quarter of
fiscal 2008. These charges were comprised of $321,000 one time termination
benefits and $52,000 for moving and closing costs. Total restructuring charges
related to the corporate office relocation restructuring for the nine months
ended June 28, 2008 were $3.0 million. These charges were comprised of $2.8
million for one time termination benefits and $160,000 for moving and closing
costs. Most of the remaining anticipated expenditures related to the plan of
approximately $600,000 are expected to be incurred prior to the end of calendar
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 $95,000 related to the Litchfield and Eastlake
restructuring were recorded in the fiscal 2008 third quarter. Total
restructuring charges related to the Eastlake and Litchfield restructuring
excluding asset impairments charges for the nine months ended June 28, 2008 were
$491,000. These charges were comprised of $324,000 for moving and closing costs
and $167,000 contract termination costs related to the Eastlake facility lease.
Remaining expenditures of approximately $700,000 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 was $0.4
million at June 28, 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
1,403,772 and 1,738,484 shares of common stock were outstanding during the three
month and nine month periods ending June 28, 2008, but were excluded from the
computation of common share equivalents because they were not 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.
NOTE 5 - STOCK BASED COMPENSATION
The Company recorded $50,000 and $266,000 of related compensation expense for
the three and nine month periods ended June 28, 2008, respectively and $114,000
and $417,000 for the three and nine month periods ended June 30, 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 did not result in any significant increase in both basic
and diluted net loss per share for the three months ended June 28, 2008, but
increased both basic and diluted net loss per share by $0.01 for the nine months
ended June 28, 2008, $0.01 for the three months ended June 30, 2007 and $0.02
for the nine months ended June 30, 2007. As of June 28, 2008, $549,000 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:
Three Months Ended Nine Months Ended
June 28, 2008 June 30, 2007 June 28, 2008 June 30, 2007
Risk-free interest rate 1.83% 4.54% 2.56% 4.53%
Expected volatility 108% 46% 88% 48%
Expected life (in years) 2.9 3.0 2.9 3.0
Dividend yield -- -- -- --
Weighted average fair value of options
granted $0.24 $0.66 $0.29 $0.85
7
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 28, 2008 the Company had 664,176 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 28, 2008, the
Company had 25,883 shares of common stock available for issue under the plan.
Transactions under the stock option and restricted stock plans during the nine
months ended June 28, 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
Granted 505,000 0.37
Forfeited (548,758) 3.71
Exercised (3,333) --
------------------
Outstanding at June 28, 2008 2,158,192 3.04
==================
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 - $0.91 1,029,750 9.0 years $ 0.45 -- $ --
1.44 - 2.41 379,695 4.4 years 2.18 225,295 2.03
2.71 - 4.84 350,250 4.6 years 3.74 188,439 3.84
5.29 - 7.81 99,322 2.8 years 7.01 97,322 7.01
8.90 - 9.80 150,625 3.7 years 9.50 121,650 9.50
11.50 - 13.08 148,550 0.7 years 12.31 147,550 12.31
------------- -------------
2,158,192 3.04 780,256 6.20
============= =============
8
NOTE 6 - INVENTORIES
Inventories are comprised of the following (in thousands):
June 28, September 29,
2008 2007
----------------- -----------------
Raw materials and purchased parts $ 5,321 $ 4,549
Work-in-process and finished goods 4,413 6,506
----------------- -----------------
$ 9,734 $ 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 June 28, 2008, the Company had open forward
exchange contracts to buy Thai baht in return for U.S. dollars maturing on
September 5, 2008 and December 4, 2008, with an amount of 300 million baht and
230 million baht, respectively, for a total of 530 million baht.
Foreign currency translation gains or (losses) included in net other (income)
expense (in thousands):
Three months ended Nine months ended
------------------------------------ ------------------------------------
June 28, 2008 June 30, 2007 June 28, 2008 June 30, 2007
----------------- ----------------- ----------------- -----------------
Gain or (loss) from forward exchange contracts $ (2,077) $ 340 $ 222 $ 2,506
Other foreign currency gain or (loss) 3,913 (475) (1,117) (2,627)
----------------- ----------------- ----------------- -----------------
Net gain or (loss) from foreign currency
transactions $ 1,836 $ (135) $ (895) $ (121)
================= ================= ================= =================
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.
9
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.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurement
(SFAS 157). This standard clarifies the principle that fair value should be
based on the assumptions that market participants would use when pricing an
asset or liability. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We have not yet determined the impact that the implementation
of SFAS 157 will have on our results of operations or financial condition.
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.
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 Entorian, Hitachi, HP, Philips/TPO, Quantum, SAE Magnetics (a
subsidiary of TDK), Samsung, Seagate, StorageTek, Western Digital and other
leading electronic OEMs.
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.
10
Costs and Expenses
Cost of sales consists primarily of:
-- material costs for raw materials and semi-finished components used
for assembly of our products;
-- labor costs directly related to manufacture, assembly and
inspection of our products;
-- costs of general utilities, production supplies and chemicals
consumed in the manufacturing processes;
-- costs related to the maintenance of our manufacturing equipment and
facilities;
-- costs related to material and product handling and shipment;
-- depreciation costs related to facilities, machinery and equipment
used to manufacture, assemble and inspect our products; and
-- salaries and overhead attributed to our supply chain, process
engineering and manufacturing personnel.
Selling, general and administrative expenses primarily consist of:
-- salaries and related selling (commissions, travel, business
development and program management), administrative, finance, human
resources, regulatory, information services and executive personnel
expenses;
-- other significant expenses related to external accounting, software
maintenance and legal and regulatory fees; and
-- 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:
-- salaries and related development personnel expenses;
-- overhead attributed to our development and test engineering
personnel; and
-- 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 Ended For the Nine Months Ended
-------------------------------- -------------------------------
June 30, 2007 June 28, 2008 June 30, 2007 June 28, 2008
--------------- --------------- --------------- ---------------
Net Sales 100% 100% 100% 100%
Cost of goods sold 108.1 114.6 101.4 112.6
--------------- --------------- --------------- ---------------
Gross profit (8.1) (14.6) (1.4) (12.6)
Operating expenses:
Selling, general and administrative and
royalty expense 16.4 12.9 14.4 13.9
Engineering 4.2 3.9 3.9 3.8
Restructuring and asset impairment 7.5 2.9 8.9 6.8
Net (gain) loss on sale of assets 5.0 -- 1.9 (0.2)
--------------- --------------- --------------- ---------------
Total operating expenses 33.1 19.7 29.1 24.3
--------------- --------------- --------------- ---------------
Income (loss) from operations (41.2) (34.3) (30.5) (36.9)
--------------- --------------- --------------- ---------------
Interest and other expense, net (4.1) 6.7 (2.8) (6.0)
--------------- --------------- --------------- ---------------
Income (loss) before provision (benefit) for
income taxes (45.3) (27.6) (33.3) (42.9)
Provision (benefit) for income taxes -- -- -- --
--------------- --------------- --------------- ---------------
Net income (loss) (45.3)% (27.6)% (33.3)% (42.9)%
=============== =============== =============== ===============
Comparison of Three Months Ended June 28, 2008 and June 30, 2007
Net Sales
Our net sales were $16.2 million for the three months ended June 28, 2008,
compared to $18.2 million for the three months ended June 30, 2007, a decrease
of 11%. This decrease primarily reflects an $8.8 million decrease in flex
suspension assembly (FSA) revenue and offset by a $6.6 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. While FSA revenue reached its end of life
during the fiscal 2008 second quarter, we expect FPD and actuator flex circuit
(AFC) revenue to continue to grow in the fiscal 2008 fourth quarter as compared
to fiscal 2008 third quarter as we release new products to production for our
FPD customer and production continues to ramp for our new AFC customer.
FPD application generated 56% of our net sales for the three months ended
June 28, 2008, compared to 14% for the three months ended June 30, 2007. Sales
of AFC's to the disk drive industry were 34%, compared to 31%, FSA sales to disk
drive industry were 1% compared to 49%, sales from integrated circuit packaging,
network system application and sales from other industry applications were 9%
and 6% for the three months ended June 28, 2008 and June 30, 2007, respectively.
Gross Profit (Loss)
Our gross loss was $2.4 million for the three months ended June 28, 2008
compared to a gross loss of $1.5 million for the three months ended June 30,
2007. Our gross margin for the three months ended June 28, 2008 decreased to
(14.6%), from (8.1%) for the three months ended June 30, 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
fourth quarter as the anticipated capacity utilization rate increases.
12
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the three months ended June 28, 2008 were $2.1 million, compared to $3.0 million
in the three months ended June 30, 2007, a decrease of 30%. As a percentage of
net sales, selling, general and administrative expenses were 13% for the three
months ended June 28, 2008, down from 16% 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.
Engineering
Engineering expenses for the three months ended June 28, 2008 were
$635,000, compared to $766,000 for the three months ended June 30, 2007, a
decrease of 17%. 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 3.9% of sales for the three months ended June 28, 2008
compared to 4.2% for the same period in the prior year.
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 was expected to reach 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 $3.1 million for one-time
termination benefits and $0.5 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 $400,000 related to the planned
corporate office and Korat restructuring were recorded in the third quarter of
fiscal 2008. These charges were comprised of $321,000 one time termination
benefits and $52,000 for moving and closing costs. Total restructuring charges
related to the corporate office relocation restructuring through June 28, 2008
were $3.4 million. These charges were comprised of $2.8 million for one time
termination benefits, $160,000 for moving and closing costs and $400,000 of
asset impairment charges. Most of the remaining anticipated expenditures related
to the plan of approximately $600,000 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 June 28,
2008, 593 of these positions have been eliminated.
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.
13
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 $95,000 related to the Litchfield and
Eastlake restructuring were recorded in the fiscal 2008 third quarter. Total
restructuring charges related to the Eastlake and Litchfield restructuring
excluding asset impairments charges through June 28, 2008 were $8.1 million.
These charges were comprised of $3.3 million for one time termination benefits,
$3.8 million for moving and closing costs and $1.0 million contract termination
costs related to the Eastlake facility lease. Remaining expenditures of
approximately $700,000 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
There were no sale of assets recorded in the fiscal 2008 third quarter
compared to a net loss on the sale of assets of $913,000 for the three months
ended June 30, 2007. The fiscal 2007 loss was the 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.
Net Interest and Other (Income) Expense
Net interest expense was $0.8 million for the three months ended June 28,
2008 and $0.6 million for the three months ended June 30, 2007. The increase was
driven by higher level of debt outstanding in fiscal 2008. Net other income was
$1.9 million in the three months ended June 28, 2008 as compared to net other
expenses of $126,000 in the three months ended June 30, 2007. The change was
related to a large foreign currency valuation gain being recorded in the fiscal
2008 third quarter which was driven by the value of the U.S. dollar
strengthening against the Thai baht during the quarter, resulting in a decrease
in the value of our baht denominated debt. The foreign currency valuation gain
of approximately $3.9 million in the three months ended June 28, 2008 was partly
offset by the loss of approximately $2.1 million associated with our forward
contracts placed previously. 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, large changes in the
value of the U.S. dollar versus the Thai baht will drive significant foreign
currency valuation gains or losses as the value of our baht denominated debt
increases or decreases.
Income Taxes
No net income tax expense or benefit was recorded for the three months
ended June 28, 2008 and June 30, 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.
Comparison of Nine Months Ended June 28, 2008 and June 30, 2007
Net Sales
Our net sales were $50.2 million for the nine months ended June 28, 2008,
compared to $66.0 million for the nine months ended June 30, 2007, a decrease of
24%. This decrease primarily reflects a $25.9 million decrease in flex
suspension assembly (FSA) revenue and a $3.8 million decrease in actuator flex
circuit (AFC) revenue offset by a $14.7 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
and second quarters.
14
FSA sales to the disk drive industry generated 17% of our net sales for the
nine months ended June 28, 2008, compared to 52% for the nine months ended June
30, 2007. Sales of AFC's to the disk drive industry were 37%, compared to 34%,
FPD application net sales were 40% compared to 8%, sales from integrated circuit
packaging, network system application and sales from other industry applications
were 6% and 6% for the nine months ended June 28, 2008 and June 30, 2007,
respectively.
Gross Profit (Loss)
Our gross loss was $6.3 million for the nine months ended June 28, 2008
compared to a gross loss of $912,000 for the nine months ended June 30, 2007.
Our gross margin for the nine months ended June 28, 2008 decreased to (12.6%),
from (1.4%) for the nine months ended June 30, 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 nine months ended June 28, 2008 were $6.9 million, compared to $9.5 million
in the nine months ended June 30, 2007, a decrease of 27%. As a percentage of
net sales, selling, general and administrative expenses were 13.9% for the nine
months ended June 28, 2008 and 14.4% for the nine months ended June 30, 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 offset the
decrease in expenses.
Engineering
Engineering expenses for the nine months ended June 28, 2008 were $1.9
million, compared to $2.6 million for the nine months ended June 30, 2007, a
decrease of 26%. 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 nine months ended June 28, 2008
and 3.9% for the nine months ended June 30, 2007.
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 was expected to reach its end of
life by the end of the fiscal 2008 second quarter. Restructuring charges of $3.0
million were recorded during the first nine months of fiscal 2008 related to the
corporate office restructuring. These charges were comprised of $2.8 million of
one time employee termination benefits and $160,000 for moving and closing
costs. No charges were recorded related to this restructuring in the first nine
months of fiscal 2007.
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
$491,000 were recorded during the first nine months of fiscal 2008 related to
the Litchfield restructuring. These charges were comprised of $324,000 for
moving and closing costs and $167,000 contract termination costs related to the
Eastlake facility lease. 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 $800,000
contract termination costs related to the Eastlake facility lease.
15
Net (Gain) Loss on the Sale of Assets
Net gain on the sale of assets was $125,000 for the nine months ended June
28, 2008 compared to a net loss on the sale of assets of $1.2 million for the
nine months ended June 30, 2007. The fiscal 2007 loss was the 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.
Net Interest and Other Expense
Net interest expense was $2.2 million for the nine months ended June 28,
2008 and $1.8 million for the nine months ended June 30, 2007. The increase was
driven by higher level of debt outstanding in fiscal 2008. Net other expense was
$821,000 in the nine months ended June 28, 2008 as compared to net other expense
of $107,000 in the nine months ended June 30, 2007. The change was a result of
higher foreign currency valuation losses being recorded in the fiscal 2008 first
and second quarters as compared to fiscal 2007. The foreign currency loss for
the fiscal 2008 first and second quarters was driven by the large drop in the
value of the U.S. dollar as compared to the Thai baht, resulting in an increase
in the value of our baht denominated debt. The currency valuation losses in the
fiscal 2008 first and second quarters were partly offset by the foreign currency
valuation gain related to the strengthening of the U.S. dollar against the Thai
baht during the fiscal 2008 third quarter.
Income Taxes
Only minimal net income tax expense or benefit was recorded for the nine
months ended June 28, 2008 and June 30, 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 $5.6 million at June
28, 2008 and $10.5 million at September 29, 2007. As of June 28, 2008, the
Company had a working capital deficit of $23.7 million.
For the nine months ended June 28, 2008, net cash used in operating
activities of $14.3 million primarily resulted from the net loss for the period
net of non-cash charges and a $1.0 million decrease in accounts payable,
partially offset by a $1.3 million decrease in inventory. The accounts payable
and inventory decreases were driven by the reduced level of revenue.
Net cash used in investing activities was $1.3 million in the first nine
months of fiscal 2008, compared to net cash provided by investing activities of
$0.6 million in the first nine 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. In fiscal 2007, net cash provided
by investing activities was attributed to $4.8 million proceeds from the sale of
the U.S. based assets including the Maple Plain facility which was partially
offset by capital spending related to process improvements at our Thailand
facility.
Net cash provided by financing activities was $10.7 million in the first
nine months of fiscal 2008, compared to net cash provided by financing
activities of $13.4 million in the first nine months of fiscal 2007. Fiscal 2008
net cash provided by financing activities was the result of the $14.5 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 $0.7 million
increase in the U.S. dollar foreign exchange valuation of the Thai baht
denominated debt partially offset by the normally scheduled debt payments on our
existing Thailand debt facilities and U.S. based debt. For the first nine months
of fiscal 2007, net cash provided by financing activities was primarily related
to 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 Thai baht denominated debt partially offset by the $4 million
pay down of the U.S. facility from the Maple Plain facility sale proceeds and
scheduled debt payments on our existing Thailand debt facilities and U.S. based
debt and capital leases.
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 provided 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 $1.6 million in the fiscal 2008 first and
second quarters. 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 28, 2008, we had approximately $22.2 million
outstanding under our long-term Thailand credit facilities and a $35.0 million
outstanding balance under our short-term Thailand credit facilities. Total
unused availability as of June 28, 2008 was approximately $300,000 under our
short-term packing credit and working capital facilities. Utilization of the
packing credit facility availability is dependent on presenting qualifying
customer purchase orders to the banks for draw down.
In June 2008, we completed the restructuring of our long-term debt facility
with our Thai lenders. As part of the restructuring, our debt repayment
schedules were modified resulting in a $6.0 million reduction in repayments
required to be made in the remainder of the fiscal 2008 and $9.0 million
reduction in payments required to be made in fiscal 2009. In addition, the
undrawn portion available under the Third Credit Facilities Agreement of 600
million baht will be cancelled as part of the bank restructuring.
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 28,
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 will require additional capital resources for our business and to
otherwise respond to competitive pressures in the industry. 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. Our efforts
to raise additional funds from the sale of common stock may be adversely impact
by the fact that our stock is no longer listed on the Nasdaq Stock Market as of
August 4, 2008. We are seeking to have our common stock quoted on the OTC
Bulletin Board.
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.
Contractual Obligations
The table below discloses a summary of the Company's specified contractual
obligations at June 28, 2008 (in thousands):
Under 1 Year 1 to 3 Years 3 to 5 Years After 5 Years Total
-------------- -------------- -------------- -------------- --------------
Long-term Debt Obligations (1) $ 3,506 $ 11,429 $ 7,891 -- $ 22,826
Operating Leases 348 702 253 -- 1,303
-------------- -------------- -------------- -------------- --------------
Total $ 3,854 $ 12,131 $ 8,144 -- $ 24,129
============== ============== ============== ============== ==============
(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.
17
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.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurement
(SFAS 157). This standard clarifies the principle that fair value should be
based on the assumptions that market participants would use when pricing an
asset or liability. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We have not yet determined the impact that the implementation
of SFAS 157 will have on our results of operations or financial condition.
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.
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, fluctuations in currency rates 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.
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 28, 2008, the Company had open forward exchange
contracts to buy Thai baht in return for U.S. dollars maturing on September 5,
2008 and December 4, 2008, with an amount of 300 million baht and 230 million
baht, respectively, for a total of 530 million 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.
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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 defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) 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.
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PART II - OTHER INFORMATION
Responses to Items 3, 4 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.
Our common stock was delisted from the Nasdaq Capital Market effective
August 4, 2008, and is currently listed on the Pink Over-the-Counter (OTC)
Market under the symbol of "INVX.PK", which may result in a negative impact on
the price per share and make our stock 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. 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.
On July 31, 2008, we received a letter from the Nasdaq Hearings Panel,
informing the Company that it had determined to delist the Company's common
stock from the Nasdaq Capital Market. The Nasdaq Capital Market suspended
trading in the Company's common stock effective on the open of business on
August 4, 2008. The Company's common stock is currently quoted on the Pink OTC
Market under the symbol of "INVX.PK".
If our common stock is quoted on the Pink OTC Market, it will be subjected
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, if our common
stock is quoted on the Pink OTC Market, we believe an investor may find it more
difficult to buy or sell our common stock in the open market. Further, until the
date our common stock is quoted on the OTC Bulletin Board, investors may have a
particularly difficult time making transactions in our common stock because of
the lack of market to do so. There can be no assurance that our common stock may
be sold without a significant negative impact on the price per share, that our
common stock will be quoted on the OTC Bulletin Board at any particular time, or
that any market will exist for our common stock.
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: August 12, 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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