8

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Backlog

 

        The backlog for our continuing operations was $12.1 million, $14.1 million and $21.6 million at September 27, 2008, September 29, 2007 and September 30, 2006, respectively. Our backlog fluctuates based on the timing of the receipt of orders from customers. Backlog is defined by us as firm orders that are scheduled to be delivered within 12 months from the date of the order. While we believe substantially all of our current backlog will be delivered within 12 months, customers may determine not to release orders into production, may extend requested delivery dates or cancel orders. In such cases, we may not realize the revenue indicated by the backlog.

 

Item 1A.  RISK FACTORS

 

        An investment in our common stock involves a high degree of risk. The risks and uncertainties described below 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 actually occurs, our business, financial condition or results of operations would be materially adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

As a result of our history of operating losses, inadequate operating cash flow and net capital deficiency, our auditors have substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern depends upon our ability to obtain additional financing, secure new customers and increase sales to existing customers.

 

We have experienced significant operating losses in each fiscal year since 2000, including net losses from continuing operations of $28.0 million for fiscal 2008.  As of September 27, 2008, we had a working capital deficit of $31.2 million.  We have minimal financial resources, and our cash flow from operating activities continues to be insufficient to meet our operating needs and debt service obligations. As a result of these factors, among others, our independent public accountants have substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary as a result of this uncertainty. As a result of receiving this opinion from our independent public accountants, we may experience possible adverse effects from our customers, on our creditworthiness, or on investor confidence, any of which may have a material adverse effect on our business and the trading price of our common stock.

Our ability to continue as a going concern depends upon our ability to obtain additional financing, our success in securing new customers and increasing sales to existing customers, as well as our ability to improve our liquidity, whether through cash generated by operations or through incurring additional debt or the issuance of debt or equity.  Our management has and will continue to implement operational measures designed to address our operation and cash flow objectives.  In addition, management may seek waivers of covenants under our credit facilities or forbearances on interest or principal payments.  However, there can be no assurance that we will be successful in improving our business, obtaining waivers or other accommodations from our lenders or obtaining additional debt or equity on terms acceptable to us, if at all.

 

We have experienced ongoing losses from operations and we rely on our existing credit facilities to finance cash required for our operations.

 

        We had net losses from continuing operations of $28.0 million for fiscal 2008 and have experienced losses from operations in each fiscal year since 2000. Operating activities used $8.9 million and $17.6 million during the years ended September 27, 2008 and September 29, 2007, respectively.  As of September 27, 2008, we had a working capital deficit of $31.2 million.  Whether we achieve a sufficient level of net income to fund our operations will depend on a number of factors, including:

• the level of revenue in any given period;

• our expense levels, particularly for manufacturing costs;

• our manufacturing efficiency, particularly with respect to new product introductions and high volume products;

• increasing revenue from existing AFC and FPD customers;

• cultivating new AFC and FPD customers; and

• the qualification of new products, including new semiconductor packaging, smart cards, phone camera modules and printer flex products.

 

9

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We have historically financed our operations primarily through bank credit facilities, and, to a lesser extent, cash from operating activities.  From time to time, we have also received cash from sales of equity securities and employee stock option exercises. Cash and equivalents were $6.5 million at September 27, 2008 and $10.5 million at September 29, 2007.  As of September 27, 2008, our indebtedness under our Thai bank credit facilities consisted of:

 

·	Long-term debt of $19.0 million, less current maturities of $3.5 million; and

 

·	Short-term debt of $32.7 million; and

 

Total unused availability as of September 27, 2008 was approximately $2.5 million under our packing credit and short-term working capital facilities. Our ability to draw funds under the packing credit facility depends upon presenting qualifying customer purchase orders to the banks.

 

Because of the limited availability under our short-term packing credit facility, if we are unable to provide our lenders with qualifying purchase orders, we will not be able to obtain additional funds for our operations from this credit facility.  Moreover, the amount currently available under our Thai credit facilities is insufficient to fund our ongoing operations.  We must increase the income generated from our operations to fund our ongoing cash needs and to service our indebtedness.

 

        We may not be able to generate sufficient cash flow to service our outstanding debt and fund operations.        

 

Our ability to satisfy our obligations to pay interest and to repay debt depends on the performance of our business. Our performance depends, in part, on our ability to secure new customers, generate significant revenue from existing and new customers, manage expenses (in particular manufacturing expenses) and maintain manufacturing efficiency, as well as general economic conditions and other factors over which we have little control. To the extent that we use a portion of our cash flow from operations to pay the principal of, and interest on our indebtedness, that cash flow will not be available to fund future operations and capital expenditures.  Historically, we have not generated sufficient cash flow from operations to fund both our operations and debt service.  Our operating cash flow will not be sufficient to fund our future capital expenditure and debt service requirements or to fund future operations unless we increase revenues significantly.  We cannot assure you that we will generate sufficient cash flow from operations to enable us to service or reduce our indebtedness or to fund our other liquidity needs.

 

If we do not generate sufficient cash flow from our operations in an amount that significantly exceeds the cash flow generated from our operations in prior fiscal years, our ability to make required payments on our debt will be impaired and may result in payment or covenant defaults, acceleration of our indebtedness, seizure by the banks of assets that secure our indebtedness, loss of control of our business or bankruptcy. This could also create additional concern with our customers that may reduce orders allocated to us and impact our ability to maintain current business levels or even reduce future business expansion.

 

The current severe downturn and uncertainty in the global economy in general and weakness in the disk drive and telecommunications industries in particular may harm our business and operating results.

 

        The worldwide economy is currently undergoing unprecedented turmoil amid stock market volatility, tightening of credit markets, concerns of inflation and deflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns and business insolvencies. This turmoil and the uncertainty about future economic conditions could negatively impact our customers and, among other things, postpone their decision-making, decrease their spending and jeopardize or delay their ability or willingness to make payment obligations, any of which could adversely affect our business. We cannot predict the timing, strength or duration of this severe global economic downturn or subsequent recovery.

 

We manufacture electrical components, primarily flexible circuit interconnects, for the computer, data storage, consumer, medical, telecommunications and other electronic industries.  If the demand for products incorporating our flexible circuit interconnects declines significantly, or customer spending for those products declines, our revenue will be adversely affected. Challenging economic conditions also may impair the ability of our customers to pay for products and services they have purchased. As a result, reserves for doubtful accounts and write-offs of accounts receivable may increase. 

 

        If the general economy and the disk drive and telecommunications industries do not improve, our business, financial condition and results of operations could be harmed.

 

10

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        We need additional capital to continue and grow our business, which may not be available.

 

        Our ability to execute our long-term strategy depends on our ability to obtain additional working capital.  While we are attempting to generate capital through increasing income and cash flow from our operations, we have an immediate need for additional debt or equity capital to fund our existing operations and to grow our business.  We may also need to identify and secure capital to refinance our existing indebtedness at the maturity of 2012 or earlier, if required repayment of our debt is accelerated because of a payment or covenant default.

 

We may seek additional capital by incurring additional indebtedness or from an offering of our equity securities or both.  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 conditions acceptable to us.  Our financing needs are based upon management estimates as to future revenue and expense.  Our business plan and financing needs are also subject to change based upon, among other factors, market and industry conditions, our ability to increase cash flow from operations and our ability to control costs and expenses. Our efforts to raise additional funds from the sale of equity may be hampered by depressed trading price of our common stock and the fact that our common stock is listed on the Pink Sheets. Our efforts to raise funds by incurring additional indebtedness may be hampered by the fact that we have significant outstanding indebtedness and the challenges we face in servicing our current indebtedness with cash flow from operations, as well as the fact that our assets are pledged to our lenders to secure existing debt.  In addition, the covenants of our credit agreement restrict our ability to make distributions, create liens, incur indebtedness, and sell our assets and properties.   The following factors may also affect our ability to obtain additional financing on favorable terms, or at all:

• our results of operations, financial condition and business prospects;

• conditions in the disk drive industry as well as the telecommunications market;

• general economic conditions, including the availability of credit and lending standards of banks and other financial institutions; and

• the perception in the capital markets of our business.

 

        If we are unable to obtain sufficient capital, we may further curtail our capital expenditures, further reduce research and development expenditures, or suspend or discontinue our operations.  Our ability to make required payments on our debt may also be impaired, which may result in payment or covenant defaults, acceleration of our indebtedness, seizure by the banks of assets that secure our indebtedness, loss of control of our business or bankruptcy.

 

        Our sales are concentrated in a small customer base and in the HDD industry.

 

        Sales to our largest customer from fiscal 2008 constituted 43% of net sales for fiscal 2008, 11% for fiscal 2007 and 14% for fiscal 2006.  Sales in fiscal 2008 to our second largest customer, which historically was our largest customer, constituted 23% of net sales for fiscal 2008, 66% for fiscal 2007 and 73% for fiscal 2006, respectively. Sales to our five largest customers constituted 97%, 99% and 94% of net sales for fiscal 2008, 2007 and 2006, respectively. Our largest customer historically, discontinued use of our FSA product during our fiscal 2008 second quarter.  As a result, sales to this customer decreased substantially during fiscal 2008.  The loss of FSA sales to this customer had a material adverse effect on our business and the loss of one or more of our major customers or a substantial reduction in orders by any other significant customer, for any reason, could have a material adverse effect on our business, financial condition and results of operations.  Various factors, many of which are outside our control, could cause a loss of customers or reduction in orders including market, economic or competitive conditions in the computer, computer peripheral, mobile communication device and high-end consumer markets, the development by a customer of the capability to produce flexible circuits in high volume for its own products, a transfer of manufacturing operations by a customer to a lower-cost country, a change in the type of interconnect or suspension assembly used by our largest customers or the failure of a customer to pay its account balance with us.        

 

Sales of our FSA and AFC products to the hard disk drive industry accounted for 51%, 84% and 80% of our net sales in fiscal 2008, 2007 and 2006, respectively. The disk drive industry is intensely competitive and technology changes rapidly. The industry's demand for disk drive components also fluctuates. The disk drive industry experiences periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction. These cycles may affect suppliers to this industry because disk drive manufacturers tend to order more disk drive components than they may need during growth periods, and reduce orders for these components during periods of contraction.  Fluctuations in the hard disk drive industry may result in fluctuations in our operating results, but these fluctuations are difficult to predict and are likely to vary in the future.

 

11

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Our second largest customer in fiscal 2008 and largest customer historically, discontinued use of our FSA products during the fiscal 2008 second quarter.

 

 Because our largest customer has increased utilization of alternative interconnect technology that competes with our FSA product, our FSA product reached the end of its life during our fiscal 2008 second quarter and revenue generated from FSA product decreased substantially.  Sales of our FSA product accounted for 12%, 49% and 58% of our net sales in fiscal 2008, 2007 and 2006, respectively.  Revenue generated from the sale of our FSA product was $8.7 million, $43.3 million and $100.4 million in fiscal 2008, 2007 and 2006 respectively.   The value added or revenue excluding pass-through components portion of the FSA product relates to the flexible circuit of the FSA which we manufacture.  FSA revenue excluding pass-through components has ranged from 34% to 37% of the FSA selling price in the past three fiscal years.  The remaining non-value added portion of the FSA product selling price is related to the cost of the suspension attached to the flexible circuit.  To date, increases in revenue excluding pass-through components from other products have not been sufficient to replace the decreases in FSA revenue excluding pass-through.  As a result, we have taken a number of steps to reduce our cost structure including the closure of our U.S. manufacturing facilities.  Our business has been adversely impacted by the reduction of FSA revenue and if we cannot increase our revenue excluding pass-through to replace the reductions in FSA revenue excluding pass-through or reduce our cost structure to correspond to decreases in revenue excluding pass-through, our business, financial condition and results of operations will continue to be materially adversely affected.

 

       Our financing agreements contain restrictive covenants with which we may not be able to comply.

 

 

        We may not be able to adequately protect our intellectual property.

 

        We attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures. We may not, however, be able to protect our technology adequately. In addition, competitors may be able to develop similar technology independently. Our success depends in large part on trade secrets relating to our proprietary manufacturing processes. We seek to protect these trade secrets and our other proprietary technology in part by requiring each of our employees to enter into non-disclosure and non-competition agreements. In these agreements, the employee agrees to maintain the confidentiality of all of our proprietary information and, subject to certain exceptions, to assign to us all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, we regularly enter into non-disclosure agreements with third parties, such as consultants, suppliers and customers. These agreements may, however, be breached, and we may not have an adequate remedy for any such breach. In addition, our competitors may otherwise learn or independently develop our trade secrets.

 

        We believe that the patents we hold, control and may obtain are valuable, but that they will not independently determine our success. Moreover, we may not receive patents for our pending patent applications, and our issued patents may not be broad enough to protect our technology adequately. We compete in industries with rapid development and technological innovation. We cannot be sure that we will be able to protect our future technology or that any patent issued to us will not be challenged, invalidated, circumvented or infringed. In addition, we have only limited patent rights outside the United States, and the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

 

        Defending against intellectual property claims may have a material adverse effect on our business.

 

        We and certain users of our products, have received, and may receive, communications from third parties asserting patent claims against us or our customers that may relate to our manufacturing equipment or to our products or to products that include our products as a component. If any third party makes a valid infringement claim against us and we are unable to obtain a license on terms acceptable to us, our business, financial condition and results of operations could be materially adversely affected. We expect that, as the number of patents issued continues to increase, the volume of intellectual property claims made against us could increase.

 

        We may have difficulty obtaining an adequate supply of raw materials at reasonable prices.

 

        We currently can obtain certain types of photoresist, a liquid compound used in the photoetching process, certain polyimide materials and certain specialty chemicals used in our manufacturing process from only one supplier of each such material. If we could not obtain the materials referred to above in the necessary quantities, with the necessary quality and at reasonable prices, our business, financial condition and results of operations could be materially adversely affected.

 

        The loss of key personnel could adversely affect our business.

 

 

       Our corporate restructuring plan might have a negative effect on our efforts to maintain our customers and product quality.

 

On October 1, 2007, we announced that we are implementing a corporate restructuring plan intended to reduce costs and improve the efficiency of our operations.   As part of that plan, we relocated some of our corporate business functions, including administrative, sales and engineering, to Lamphun, Thailand.  We retained key Executives, sales, engineering and finance resources in the U.S. and other countries to support our customers as well as the business requirements of being a U.S. publicly listed company.

 

There are several risks inherent in our efforts, including the risk that cost-cutting plans will impair our ability to effectively develop new products, to remain competitive, and to operate effectively, which could have a negative effect on our efforts to maintain our customers or on product quality.  We may not be able to retain key employees and if we are not able to retain key employees, we may not have sufficient resources to successfully manage our business in the U.S. or in other parts of the world.

 

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Our corporate restructuring could have long-term effects on our business, decreasing or slowing product development, making it more difficult for us to respond to customers and maintain product quality, and limiting our ability to hire and retain key personnel. If any of the risks associated with our corporate restructuring plan materialize, our business, financial condition and results of operations could be materially adversely affected.

 

        We face risks from doing business internationally.

 

        We have manufacturing facilities in Thailand and design, sales and customer support operations in the United States, United Kingdom, Taiwan, Singapore, China and South Korea. Our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include:

• changes in local regulatory requirements, including restrictions on product content;

• changes in the laws and policies affecting trade, investment and taxes (including laws and policies relating to the repatriation of funds and to withholding taxes);

• differing degrees of protection for intellectual property;

• foreign labor issues;

• difficulties in coordinating and managing foreign operations;

• potential cross border shipment delays;

• instability of foreign economies and governments;

• cultural barriers; and

• wars and acts of terrorism.

 

 

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm as of September 27, 2008 (regarding Financial Statements)		34
Report of Independent Registered Public Accounting Firm as of September 29, 2007 and September 30, 2006 (regarding Financial Statements)		35
Consolidated Balance Sheets as of September 27, 2008 and September 29, 2007		36
Consolidated Statements of Operations for the years ended September 27, 2008: September 29, 2007 and September 30, 2006		37
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 27, 2008; September 29, 2007 and September 30, 2006		38
Consolidated Statements of Cash Flows for the years ended September 27, 2008; September 29, 2007 and September 30, 2006		39
Notes to Consolidated Financial Statements		40
Quarterly Financial Data (unaudited)		52

 

 

 

33

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Board of Directors and Stockholders

Innovex, Inc.

Minneapolis, Minnesota

 

We have audited the accompanying consolidated balance sheet of Innovex, Inc. and subsidiaries (the Company) as of September 27, 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the period then ended. In connection with our audit of the financial statements, we have also audited the accompanying Schedule II Valuation and Qualifying Accounts for the period ended September 27, 2008.  These consolidated financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innovex, Inc. at September 27, 2008, and the results of its operations and its cash flows for the period then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note N to the financial statements, the Company has suffered recurring losses from operations, has a working capital deficit, has not provided operating cash flow and has a  net capital deficiency that raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note N.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ BDO SEIDMAN LLP

 

 

 

Milwaukee, Wisconsin

December 22, 2008

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Innovex, Inc.

 

 

36

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INNOVEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

	For the Years Ended,
	September 27, 2008				September 29, 2007				September 30, 2006
Net sales		$	71,039,009			$	87,844,120			$	173,144,366
Costs and expenses:
Cost of sales			80,112,836				90,531,067				154,352,811
Selling, general and administrative			9,135,417				11,694,057				14,561,420
Royalty expense to equity investee			127,876				625,699				1,432,716
Engineering			2,471,550				3,447,821				5,144,156
Restructuring and goodwill impairment charges			3,826,826				9,857,179				14,768,293
Net (gain) loss on sale of assets			(124,976	)			1,266,195				(2,890,314	)
Interest expense			3,179,589				2,564,764				2,274,985
Interest income			(125,186	)			(219,007	)			(127,759	)
Other (income) expense, net			418,228				212,267				589,151
			99,022,160				119,980,042				190,105,459
Loss before provision for income taxes			(27,983,151	)			(32,135,922	)			(16,961,093	)
Benefit (provision) for income taxes			(17,363	)			(10,838	)			(8,916	)
Net loss		$	(28,000,514	)		$	(32,146,760	)		$	(16,970,009	)
Net loss per share:
Basic		$	(1.44	)		$	(1.66	)		$	(0.88	)
Diluted		$	(1.44	)		$	(1.66	)		$	(0.88	)
Weighted average shares outstanding:
Basic			19,408,974				19,389,169				19,299,705
Diluted			19,408,974				19,389,169				19,299,705

 

See accompanying notes to consolidated financial statements.

 

 

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INNOVEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

 

For the Years Ended September 27, 2008, September 29, 2007 and September 30, 2006

 

	Common Stock				Capital in Excess of Par Value				Retained Earnings (Accumulated Deficit)				Total Stockholders' Equity (Deficit)
Balance at October 2, 2005			768,854				60,048,522				559,156				61,376,532
Shares issued through exercise of stock options			5,489				372,084				—				377,573
Stock based compensation expense			—				670,635				—				670,635
Shares issued through employee stock purchase plan			879				53,194				—				54,073
Net loss			—				—				(16,970,009	)			(16,970,009	)
Balance at September 30, 2006			775,222				61,144,435				(16,410,853	)			45,508,804
Shares issued through exercise of stock options			193				2,525				—				2,718
Stock based compensation expense			—				529,397				—				529,397
Shares issued through employee stock purchase plan			904				33,134				—				34,038
Net loss			—				—				(32,146,760	)			(32,146,760	)
Balance at September 29, 2007		$	776,319			$	61,709,491			$	(48,557,613	)		$	13,928,197
Shares issued through vesting of restricted shares			133				(133	)			—				—
Stock based compensation expense			—				268,632				—				268,632
Shares issued through employee stock purchase plan			300				2,343				—				2,643
Net loss			—				—				(28,000,514	)			(28,000,514	)
Balance at September 27, 2008		$	776,752			$	61,980,333			$	(76,558,127	)		$	(13,801,042	)

 

See accompanying notes to consolidated financial statements.

 

 

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INNOVEX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the Years Ended

		September 27, 2008				September 29, 2007				September 30, 2006
Cash Flows From Operating Activities:
Net income (loss)		$	(28,000,514	)		$	(32,146,760	)		$	(16,970,009	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			7,729,116				8,259,393				10,321,059
Asset impairment changes			—				4,159,296				11,183,087
Stock based compensation			268,632				529,397				670,634
Other non-cash items			(70,974	)			1,266,195				(3,312,583	)
Changes in operating assets and liabilities:
Accounts receivable, net			(602,782	)			408,928				18,434,102
Inventories			1,056,063				954,206				5,279,291
Income taxes			4,050				—				—
Other current assets			584,158				84,727				(1,231,299	)
Other long-term assets			727,193				301,092				2,676,852
Accounts payable			8,441,143				(859,369	)			(7,254,612	)
Other current and long-term liabilities			939,754				(553,963	)			(1,661,097	)
Net cash provided (used in) operating activities			(8,924,161	)			(17,596,858	)			18,135,425
Cash Flows From Investing Activities:
Capital expenditures			(3,267,133	)			(4,738,287	)			(8,124,748	)
Proceeds from sale of assets			125,775				4,746,037				5,337,954
Net cash provided by (used in) investing activities			(3,141,358	)			7,750				(2,786,794	)
Cash Flows From Financing Activities:
Principal payments on long-term debt			(6,035,438	)			(13,734,851	)			(7,807,809	)
Net (payments) proceeds on line of credit			12,231,058				20,433,958				(13,881,178	)
Issuance of long-term debt			1,945,041				11,488,003				2,813,645
Proceeds from exercise of stock options			—				2,718				377,573
Proceeds from employee stock purchase plans			2,643				34,038				54,073
Net cash provided by (used in) financing activities			8,143,304				18,223,866				(18,443,696	)
Increase (decrease) in cash and equivalents			(3,922,215	)			634,758				(3,095,065	)
Cash and equivalents at beginning of year			10,453,803				9,819,045				12,914,110
Cash and equivalents at end of year		$	6,531,588			$	10,453,803			$	9,819,045

 

Supplemental Disclosures:

 

Cash paid for interest was approximately $2,991,000; $2,661,000; and $2,306,000 in 2008, 2007 and 2006.

 

Income tax payments were approximately $13,000; $11,000; and $20,000 in 2008, 2007 and 2006.

 

See accompanying notes to consolidated financial statements.

 

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INNOVEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 27, 2008, September 29, 2007 and September 30, 2006

 

 

Note A.—Summary of Significant Accounting Policies

 

 

        Innovex, Inc. and Subsidiaries (the "Company") is a diversified manufacturer of electrical components for the computer, data storage, consumer, medical, telecommunications and other electronic industries. Substantially all of the Company's revenues, operating profits and assets relate to one operating segment involved in the manufacture of flexible circuit interconnects. Company customers are located throughout the United States, Europe and the Pacific Rim. The Company has manufacturing facilities in Lamphun, Thailand.  The Company operates in one business segment.

 

 

        A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

 

 

        Principles of Consolidation and Fiscal Year—The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

 

       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.  Fiscal years ended September 27, 2008, September 29, 2007 and September 30, 2006 included 52 weeks of operations.

 

        Foreign Currency Translation—The Company uses the United States dollar as its functional currency for its subsidiary in Thailand. Re-measurement gains and losses, resulting from the process of re-measuring the foreign currency denominated assets and liabilities of these foreign subsidiaries into U.S. dollars, are included in operations.

 

        Foreign Exchange Instruments—The Company enters into short-term forward foreign currency exchange contracts in the regular course of business to manage its exposure against foreign currency fluctuations, primarily relating to nonfunctional currency monetary assets and liabilities. The forward exchange contracts generally require the Company to exchange Thailand baht for U.S. dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to at the inception of the contracts. The contracts are not designated as hedges, therefore, the gains and losses on foreign currency exchange contracts are included in other income (expense). The Company does not enter into forward exchange contracts for trading purposes.  The Company carries these contracts on the balance sheet at fair value, determined by reference to quoted market prices.

 

        Cash and Cash Equivalents—The Company considers all highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at September 27 2008 and September 29, 2007.  Cash of approximately $636,000 and $8.3 million was on deposit in foreign financial institutions at September 27, 2008 and September 29, 2007 respectively. The Company maintains cash balances at several financial institutions, and at times, such balances exceed insured limits.  The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

 

        Accounts Receivable—The Company grants credit to customers in the normal course of business and generally does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of customers. The Company maintains allowances for potential credit losses.

 

        Inventories—Inventories which are composed of raw materials, work-in-progress and finished goods are stated at the lower of cost or market, with cost determined by the first-in, first-out method.

 

        Property, Plant and Equipment—Depreciation is provided using the straight-line method over the estimated useful lives of the assets for financial reporting and accelerated methods for tax purposes. Estimated service lives range from 5 to 30 years for buildings and leasehold improvements, from 2 to 7 years for machinery and equipment and from 3 to 7 years for office furniture and fixtures.

 

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        Goodwill—Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill and any other intangible assets determined to have indefinite useful lives are not amortized. The Company has determined goodwill relates to one reporting unit for purposes of impairment testing. Goodwill and other intangible assets with indefinite lives are tested for impairment annually or whenever an impairment indicator arises.  The Company’s goodwill was considered impaired and written down to a value of $-0- as of September 29, 2007.

 

        Fair Values of Financial Instruments—Due to their short-term nature, the carrying value of current financial assets and liabilities approximates their fair values. The fair value of borrowings, if recalculated based on current interest rates, would not significantly differ from the recorded amounts.

 

        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 related to stock options, when dilutive. Options to purchase 1,521,315, 1,976,815 and 1,416,536 shares of common stock were outstanding during 2008, 2007 and 2006, but were excluded from the computation of common share equivalents because they were antidilutive.

 

        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..

 

        Use of Estimates—Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Actual results could differ from these estimates.

 

        Income Taxes—The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. The Company establishes a valuation allowance to reduce the deferred tax asset to an amount that is more likely than not to be realizable. Changes in enacted tax rates are reflected in the tax provision as they occur. The Company adopted Financial Accounting Standards Board Interpretation No. 48 in Fiscal 2008 and it did not have an impact on the financial statements.

 

Comprehensive Income—Comprehensive income equaled net income for the fiscal year ended September 27, 2008, September 29, 2007 and September 30, 2006.

 

Stock Based Compensation—Statement of Financial Accounting Standard  No. 123R, “Share Based Payment” (“SFAS 123R”), requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period.  The Company recorded $269,000, $529,000 and $671,000 of related compensation expense in fiscal years 2008, 2007 and 2006.  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 per share by $0.01, $0.03 and $0.03 for fiscal years 2008, 2007 and 2006, respectively.

 

The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The weighted average fair value of options granted in 2008, 2007 and 2006 were $0.34, $0.85 and $1.17, respectively. The total intrinsic value of options exercised during the years ended September 27, 2008, September 29, 2007 and September 30, 2006, was $2,000; $6,000, and $366,000, respectively. The assumptions utilized to determine the fair value of options at the date of grant are indicated in the following table. No adjustment was made to the Black Scholes calculation to reflect that the options are not freely traded. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock, and other factors.  The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.  The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.  The Company uses its actual forfeiture rate.

 

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	2008		2007		2006
Risk-free interest rate	2.6%		4.5%		4.3%
Expected volatility	104%		50%		48%
Expected life (in years)	2.9		3.0		3.0
Dividend yield	—		—		—