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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 January 3, 2009
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 February 3, 2009, 19,443,153 shares of the Company's common
stock, $.04 par value per share, were outstanding.
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1
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4 Controls and Procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits.
SIGNATURES
2
PART 1
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
January 3, September 27,
2009 2008
---------------- ----------------
ASSETS
Current assets:
Cash and equivalents $ 2,908,827 $ 6,531,588
Accounts receivable, less allowance for doubtful accounts of $230,000 and $190,000 8,030,000 14,345,259
Inventories 7,853,970 9,999,019
Other current assets 1,643,328 1,876,041
---------------- ----------------
Total current assets 20,436,125 32,751,907
Property, plant and equipment, net of accumulated depreciation of $58,552,000 and
$56,599,000 33,348,026 34,437,393
Assets held for sale 1,894,571 1,927,318
Other assets 37,690 40,173
---------------- ------------------
$ 55,716,412 $ 69,156,791
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 4,106,369 $ 3,537,803
Line of credit 33,250,620 32,665,016
Accounts payable 16,676,611 23,306,317
Accrued compensation 714,143 1,786,275
Other accrued liabilities 2,101,356 2,692,488
---------------- ----------------
Total current liabilities 56,849,099 63,987,899
Long-term debt, less current maturities 17,302,296 18,969,934
Stockholders' equity (deficit):
Common stock, $.04 par value; 30,000,000 shares authorized, 19,443,153 and
19,418,799 shares issued and outstanding 777,726 776,752
Capital in excess of par value 62,022,752 61,980,333
Accumulated deficit (81,235,461) (76,558,127)
---------------- ----------------
Total stockholders' equity (deficit) (18,434,983) (13,801,042)
---------------- ----------------
$ 55,716,412 $ 69,156,791
================ ================
See accompanying notes to condensed consolidated financial statements.
3
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
January 3, 2009 December 29, 2007
--------------------- ----------------------
Net sales $ 13,665,000 $ 20,795,159
Costs and expenses:
Cost of sales 15,926,369 21,812,800
Selling, general and administrative 1,617,092 2,547,195
Royalty expense -- 108,031
Engineering 425,004 685,326
Restructuring charges 611,505 2,251,070
Net loss on sale of assets -- 799
Interest expense 911,267 738,004
Interest income (19,137) (55,405)
Net other (income) expense (1,129,765) 584,801
--------------------- ----------------------
Net loss before income taxes (4,677,335) (7,877,462)
Income taxes -- --
------------------- --------------------
Net loss $ (4,677,335) $ (7,877,462)
=================== ====================
Net loss per share:
Basic $ (0.24) $ (0.41)
=================== ====================
Diluted $ (0.24) $ (0.41)
=================== ====================
Weighted average shares outstanding:
Basic 19,431,159 19,407,966
===================== ======================
Diluted 19,431,159 19,407,966
===================== ======================
See accompanying notes to condensed consolidated financial statements.
4
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
January 3, 2009 December 29, 2007
--------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,677,335) $ (7,877,462)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,984,966 1,935,758
Stock compensation expense 43,394 111,767
Other non-cash items 2,460 --
Changes in operating assets and liabilities:
Accounts receivable 6,315,258 (550,422)
Inventories 2,145,049 389,134
Other current assets 232,714 311,988
Other long term assets 2,482 101,204
Accounts payable (6,629,706) (3,396,917)
Accrued compensation and other accrued liabilities (1,663,263) (594,382)
--------------------- ---------------------
Net cash used in operating activities (2,243,981) (9,569,332)
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (865,311) (369,386)
Proceeds from sale of assets -- --
--------------------- ---------------------
Net cash used in investing activities (865,311) (369,386)
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (492,824) (2,748,745)
Issuance of long-term debt -- 1,072,956
Effect of currency translation on long-term debt (606,248) 388,870
Net activity on line of credit 585,603 8,588,052
Proceeds from exercise of stock options and employee stock purchase plan -- 543
--------------------- ---------------------
Net cash provided by (used in) financing activities (513,469) 7,301,676
--------------------- ---------------------
Decrease in cash and equivalents (3,622,761) (2,637,042)
Cash and equivalents at beginning of period 6,531,588 10,453,803
--------------------- ---------------------
Cash and equivalents at end of period $ 2,908,827 $ 7,816,761
-------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,022,000 $ 746,000
Income taxes $ -- $ 6,000
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 either 13 or 14 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 27, 2008.
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 $2.9 million at
January 3, 2009 and $6.5 million at September 27, 2008. Long-term debt was $17.3
million at January 3, 2009 and $19.0 million at September 27, 2008 excluding
current maturities of $4.1 million and $3.5 million, respectively. Short-term
debt was $33.3 million at January 3, 2009 and $32.7 million at September 27,
2008 respectively. During the three months ended January 3, 2009 and December
29, 2007, the Company incurred losses from continuing operations of $4.7 million
and $7.9 million, respectively. Operating activities used cash of $2.2 million
and $9.6 million during the three months ended January 3, 2009 and December 29,
2007, respectively. As of January 3, 2009, the Company had a working capital
deficit of $36.4 million.
Total unused debt availability as of January 3, 2009 was approximately $1.1
million 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. 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, on December 30, 2008, the Company's Thai
lenders provided the Company with an approval to extend the repayment date of
packing credit facilities that were originally due on December 29, 2008 to
February 27, 2009. The sixty day payment date extension affected 173.1 million
Baht or approximately $5.0 million owed to both banks.
The Company will continue to work with its Thai lenders to explore additional
restructuring of its existing debt as well as to consider an additional working
capital facility or long-term financing. The Company has not received any
approval of a further extension of the February 27, 2009 repayment of certain
credit packing facilities and the Company's ability to repay the 173.1 million
Baht or approximately $5.0 million of packing credits due on February 27, 2009
depends on its prevailing cash on hand and its ability to present qualifying
customer purchase orders to the bank for draw down. The Company's ability to
continue as a going concern depends upon its ability to obtain additional
financing or to further restructure its credit facilities with its lenders. The
Company believes that its immediate need for capital to finance its day-to-day
business activities over the next quarter could potentially be provided, if at
all, by its current lenders in the form of a restructuring of its debt to reduce
required payments and to provide additional lending. 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 financing needs and the financing alternatives available to it are
subject to change depending on, among other things, general economic and market
conditions, changes in industry buying patterns, customer demand for its AFC,
stacked memory flex, FPD flex and other new products, the Company's ability to
meet its loan covenant requirements, cash flow from operations and management
estimates as to future revenue and expenses.
6
NOTE 3 - RESTRUCTURING CHARGES
Corporate business functions relocation:
On October 1, 2007, the Company announced a plan to relocate some of its
corporate business functions, including administrative, sales and engineering 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 $174,000 related to the planned
corporate business functions move were recorded in the first quarter of fiscal
2009. These charges were comprised of $171,000 one time termination benefits and
$3,000 for moving and closing costs. The Company expects to incur minimal
expenditure in relation to the restructuring plan for the remaining fiscal year
2009.
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 $2.3
million. The sale is expected to close after the buyer arranges financing. Given
the prior delays in closing, the Company is unable to estimate when, if ever,
the sale will close. Restructuring charges of $438,000 related to the Litchfield
and Eastlake restructuring were recorded in the fiscal 2009 first quarter. These
charges were comprised of $354,000 for costs related to the Eastlake facility
lease and $84,000 for charges incurred to complete the transfer of equipment
from Litchfield to Thailand. Remaining expenditures of approximately $500,000
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 $592,000 at January 3, 2009.
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
1,792,068 shares of common stock were outstanding during the three month period
ending January 3, 2009, but were excluded from the computation of common share
equivalents because they were anti-dilutive. Options to purchase 1,876,212
shares of common stock were outstanding during the three month period ending
December 29, 2007, but were excluded from the computation of common share
equivalents because they were anti-dilutive.
NOTE 5 - STOCK BASED COMPENSATION
The Company recorded $43,000 and $112,000 of related compensation expense for
the three-month periods ended January 3, 2009 and December 29, 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 January 3, 2009,
but increased both basic and diluted net loss per share by $0.01 for the three
months ended December 29, 2007. As of January 3, 2009, $302,000 of total
unrecognized compensation costs related to non-vested awards is expected to be
recognized over a weighted average period of approximately 1.2 years.
The Company uses the Black-Scholes option pricing model to determine the
weighted average fair value of options. The fair value of options at date of
grant and the assumptions utilized to determine such values are indicated in the
following table. No adjustment was made to the Black-Scholes calculation to
reflect that the options are not freely traded:
7
Three Months Ended
January 3, 2009 December 29, 2007
------------------------------------
Risk-free interest rate 0.89% 4.03%
Expected volatility 158% 65%
Expected life (in years) 2.5 2.9
Dividend yield -- --
Weighted average fair value of options
granted $ 0.12 $ 0.41
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
January 3, 2009 the Company had 629,708 shares of common stock available for
issuance under the plans.
Additionally, on November 25, 2008, the Company granted Mr. Dauenhauer an option
to purchase 250,000 shares of the Company's common stock outside of any existing
shareholder-approved plan. The November 25, 2008 option was issued in
consideration of the cancellation by the Company of an option granted to Mr.
Dauenhauer in April 2008. The November 25, 2008 option was structured to have
substantially the same terms as the cancelled April 2008 option, including an
exercise price of $0.365 per share and vesting with respect to one-third of the
option shares on April 16, 2009, 2010 and 2011. On November 25, 2008, the
Company also approved a grant to Mr. Dauenhauer of an option to purchase 25,000
shares of the Company's common stock outside of any existing
shareholder-approved plan, but with substantially the same terms as an option
granted on October 23, 2008, including an exercise price of $0.165 per share and
vesting with respect to one-third of the underlying shares on October 23, 2009,
2010 and 2011. At January 3, 2009, there were options to purchase a total of
275,000 shares of the Company's common stock outstanding that were granted
outside any existing shareholder-approved plan.
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 January 3, 2009, the
Company had 8,499 shares of common stock available for issue under the plan.
Transactions under the stock option and restricted stock plans, as well as
grants outside of such plans, during the three months ended January 3, 2009 are
summarized as follows:
Number of Weighted
Shares Under Average
Option Exercise Price
--------------- ----------------
Outstanding at September 27, 2008 1,637,842 2.29
Granted 890,050 0.22
Forfeited 317,848 1.38
Exercised 24,354 --
---------------
Outstanding at January 3, 2009 2,185,690 1.60
---------------
8
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 1,556,280 9.4 years $ 0.33 128,336 $ 0.70
1.44 - 2.41 217,810 6.7 years 2.22 149,410 2.13
2.71 - 4.84 226,850 6.2 years 3.75 166,630 3.81
5.29 - 7.81 59,250 4.0 years 6.53 57,250 6.51
8.90 - 9.80 96,950 5.0 years 9.33 96,950 9.33
12.59 - 13.08 28,550 2.3 years 13.04 28,550 13.04
----------------- -----------------
2,185,690 1.60 627,126 4.29
----------------- -----------------
NOTE 6 - INVENTORIES
Inventories are comprised of the following (in thousands):
January 3, September 27,
2009 2008
----------------- -----------------
Raw materials and purchased parts $ 4,078 $ 5,569
Work-in-process and finished goods 3,776 4,430
----------------- -----------------
$ 7,854 $ 9,999
================= =================
NOTE 7 - DERIVATIVE INSTRUMENTS - FOREIGN CURRENCY TRANSLATION
The Company had, during the previous fiscal quarters, entered into forward
exchange contracts. These forward exchange contracts were recorded at fair value
with related fair value gains or losses recorded in income within the caption
net other (income) expense. Generally, these contracts had maturities of six
months or less. These contracts were 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. As at end of January 3, 2009, the Company did not have
any open forward exchange contracts to buy Thai baht in return for U.S. dollars.
All remaining forward exchange contracts purchased during the previous fiscal
quarters have matured and were settled by December 4, 2008 and no additional
forward exchange contracts were purchased during the fiscal quarter ended
January 3, 2009.
Foreign currency translation (gains) or losses included in net other (income)
expense (in thousands):
Three months ended
January 3, 2009 December 29, 2007
----------------- -----------------
(Gain) or loss from forward exchange contracts $ 353 $ (206)
Other foreign currency (gain) or loss (1,526) 809
----------------- -----------------
Net (gain) or loss from foreign currency $ (1,173) $ 603
transactions
------------------------------------
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.
9
NOTE 9 - INCOME TAXES
The Company records income taxes in accordance with the liability method of
accounting. Deferred taxes are provided for temporary differences between the
financial reporting and tax bases of assets and liabilities. A valuation
allowance is established when the realization of a deferred tax asset becomes
less likely than not to occur. The valuation allowance is analyzed periodically
by the Company and may result in income tax expense different than statutory
rates. The Company's current deferred tax asset valuation allowance fully
offsets its deferred tax assets. With the exception of the Alternative Minimum
Tax and certain state taxes, the Company will not use cash for domestic income
taxes until its net operating losses are fully realized on its tax returns.
NOTE 10- RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or
SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008. The adoption of SFAS No. 141(R) would change the
Company's accounting treatment for business combinations on a prospective basis
beginning in the period it is adopted.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently evaluating the provisions of FASB 161 to
determine the impact on the company's consolidated financial statements.
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. The Company does not expect the implementation of SFAS 157
will have a material impact on its results of operations or financial condition.
The FASB approved the issuance of FASB Staff Position 157-2, which defers the
effective date of SFAS 157 until Fiscal Years beginning after November 15, 2008
and for non-financial assets and non-financial liabilities.
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. The adoption of SFAS 159 did not have a material
effect on our financial condition or results of operations.
10
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 27, 2008, as well as others not now anticipated.
We utilize a fiscal year that ends on the Saturday nearest to September 30. The
fiscal 2009 first quarter contains 14 weeks while the remaining quarters contain
13 weeks each.
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, 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.
Costs and Expenses
Cost of sales consists primarily of:
o material costs for raw materials and semi-finished components
used for assembly of our products;
o labor costs directly related to manufacture, assembly and
inspection of our products;
o costs of general utilities, production supplies and chemicals
consumed in the manufacturing processes;
o costs related to the maintenance of our manufacturing equipment
and facilities;
o costs related to material and product handling and shipment;
o depreciation costs related to facilities, machinery and equipment
used to manufacture, assemble and inspect our products; and
o salaries and overhead attributed to our supply chain, process
engineering and manufacturing personnel.
Selling, general and administrative expenses primarily consist of:
o salaries and related selling (commissions, travel, business
development and program management), administrative, finance,
human resources, regulatory, information services and executive
personnel expenses;
o other significant expenses related to external accounting,
software maintenance and legal and regulatory fees; and
o overhead attributed to our selling, general and administrative
personnel.
Engineering expenses include costs associated with the design, development
and testing of our products and processes. These costs consist primarily
of:
o salaries and related development personnel expenses;
o overhead attributed to our development and test engineering
personnel; and
o prototyping costs related to the development of new products.
11
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 some of our corporate business functions,
including administrative, sales and engineering, to Lamphun, 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.
12
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
----------------------------------
January 3, December 29,
2009 2007
---------------- ---------------
Net Sales 100% 100%
Cost of goods sold 116.6 104.9
---------------- ---------------
Gross profit (16.6) (4.9)
Operating expenses:
Selling, general and administrative and
royalty expense 11.8 12.8
Engineering 3.1 3.3
Restructuring and asset impairment 4.5 10.8
Net (gain) loss on sale of assets -- --
---------------- ---------------
Total operating expenses 19.4 26.9
---------------- ---------------
Income (loss) from operations (36.0) (31.8)
---------------- ---------------
Interest and other expense, net 1.8 (6.1)
---------------- ---------------
Income (loss) before provision (benefit) for
income taxes (34.2) (37.9)
Provision (benefit) for income taxes -- --
---------------- ---------------
Net income (loss) (34.2)% (37.9)%
================ ===============
Comparison of Three Months Ended January 3, 2009 and December 29, 2007
Net Sales
Our net sales were $13.7 million for the three months ended January 3,
2009, compared to $20.8 million for the three months ended December 29, 2007, a
decrease of 34%. The decline was primarily driven by a $7.1 million decrease in
flex suspension assembly (FSA) revenue and $0.9 million decrease in actuator
flex circuit (AFC) revenue, offset by a $0.9 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. As a result of overall market uncertainty
experienced during the fiscal 2009 first quarter as well as customer shutdowns
during the holiday season, our AFC and FPD product demand were negatively
impacted and the revenue growth from these products was insufficient to cover
the shortfall in FSA revenue.
FPD applications generated 50% of our net sales for the three months ended
January 3, 2009, compared to 29% for the three months ended December 29, 2007.
Sales of AFC's to the disk drive industry were 44%, compared to 34%, FSA sales
to disk drive industry were 0% compared to 34%, sales from integrated circuit
packaging, network system application and sales from other industry applications
were 6% and 3% for the three months ended January 3, 2009 and December 29, 2007,
respectively.
Gross Profit (Loss)
Our gross profit (loss) was ($2.3 million) for the three months ended
January 3, 2009 compared to a gross profit (loss) of ($1.0 million) for the
three months ended December 29, 2007. Our gross margin for the three months
ended January 3, 2009 decreased to (16.6%), from (4.9%) for the three months
ended December 29, 2007. The decrease in 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 labor.
13
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the three months ended January 3, 2009 were $1.6 million, compared to $2.7
million in the three months ended December 29, 2007, a decrease of 41%. As a
percentage of net sales, selling, general and administrative expenses were 12%
for the three months ended January 3, 2009, down from 13% from the same period
in the prior year. Royalty expense was zero for the three months ended January
3, 2009 due to the end of life cycle for the FSA product which was 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 January 3, 2009 were
$425,000, compared to $685,000 for the three months ended December 29, 2007, a
decrease of 38%. 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 3.1% of sales for the three months ended January 3,
2009 compared to 3.3% for the same period in the prior year.
Restructuring
Corporate business functions relocation:
On October 1, 2007, we announced a plan to relocate some of our corporate
business functions, including administrative, sales and engineering, 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.
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. Restructuring charges of $174,000
related to the planned corporate business functions relocation and Korat
restructuring were recorded in the first quarter of fiscal 2009. These charges
were comprised of $171,000 in one time termination benefits and $3,000 for
moving and closing costs. Total restructuring charges related to the corporate
office relocation restructuring through January 3, 2009 were $3.8 million. These
charges were comprised of $3.2 million for one time termination benefits,
$200,000 for moving and closing costs and $400,000 of asset impairment charges.
Future expenditures expected to be incurred in relation to the restructuring
plan are anticipated to be minimal.
The restructuring plan called 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 January 3,
2009, all 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.
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.
14
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 $2.3 million. The sale is
expected to close after the buyer arranges financing. Given the prior delays in
closing, the Company is unable to estimate when, if ever, the sale will close.
Restructuring charges of $438,000 related to the Litchfield and Eastlake
restructuring were recorded in the fiscal 2009 first quarter. Total
restructuring charges related to the Eastlake and Litchfield restructuring
excluding asset impairments charges through January 3, 2009 were $8.7 million.
These charges were comprised of $3.3 million for one time termination benefits,
$4.0 million for moving and closing costs and $1.4 million costs incurred
related to the Eastlake facility lease. Remaining expenditures of approximately
$500,000 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 sales of assets recorded in the fiscal 2009 first quarter
compared to a net loss on the sale of assets of $800 for the three months ended
December 29, 2007.
Net Interest and Other (Income) Expense
Net interest expense was $0.9 million for the three months ended January 3,
2009 and $0.7 million for the three months ended December 29, 2007. The increase
was driven by higher level of debt outstanding in fiscal 2009. Net other income
was $1.1 million in the three months ended January 3, 2009 as compared to net
other expenses of $585,000 in the three months ended December 29, 2007. The
change was related to a foreign currency valuation gain being recorded in the
fiscal 2009 first 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 $1.5 million in the three months ended January 3, 2009 was
partly offset by the loss of approximately $350,000 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 January 3, 2009 and December 29, 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 27, 2008. The accounting policies used in preparing
our interim 2009 Consolidated Financial Statements is 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 $2.9 million at
January 3, 2009 and $6.5 million at September 27, 2008. As of January 3, 2009,
the Company had a working capital deficit of $36.4 million.
For the three months ended January 3, 2009, net cash used in operating
activities of $2.2 million primarily resulted from the net loss for the period
net of non-cash charges and a $6.6 million decrease in accounts payable,
partially offset by a $2.1 million decrease in inventory and $6.3 million
decrease in accounts receivable. The decrease in inventory level was primarily
driven by the overall soft demand. The decline in accounts payable was mainly
due to the pay down of our liabilities and partly due to the lower inventory
purchases made during the quarter. The decrease in accounts receivable was
partly driven by the lower revenue as well as partly due to the improvement in
our Days Sales Outstanding (DSO) from 62 days in the fiscal 2008 first quarter
to 59 days in the fiscal 2009 first quarter.
15
Net cash used in investing activities was $865,000 in the first three
months of fiscal 2009, compared to $369,000 in the first three months of fiscal
2008. The net cash used in investing activities pertained to capital spending
related to process improvements at our Thailand facility.
Net cash used in financing activities was $513,000 in the first three
months of fiscal 2009, compared to net cash provided by financing activities of
$7.3 million in the first three months of fiscal 2008.
For the first three months of fiscal 2009, net cash used in financing
activities was the result of scheduled debt repayments of $493,000 on our
existing Thailand debt facilities and U.S. based debt, a $606,000 decrease in
the U.S. dollar foreign exchange valuation of the Thai baht denominated debt and
partially offset by the $586,000 borrowed under our short-term Thailand packing
credit facilities. For the first three months of fiscal 2008, net cash provided
by financing activities was primarily related to the $8.6 million borrowed under
our short-term Thailand packing credit facilities, a $1.1 million draw down
under our long term Thailand credit facilities and a $0.4 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.
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 January 3, 2009, we had approximately $21.0
million (or 735 million baht) outstanding under our long-term Thailand credit
facilities and a $33.3 million (or 1,161 million baht) outstanding balance under
our packing and short-term Thailand credit facilities. Total unused availability
as of January 3, 2009 was approximately $1.1 million (or 39 million baht) 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. No gain or
loss was recorded as a result of the restructuring because it was determined by
the Company to be a modification under EITF-96-19.
On December 30, 2008, both Thai lenders provided us with an approval to
extend the repayment date of packing credit facilities that were originally due
on December 29, 2008 to February 27, 2009. The sixty day payment date extension
affected approximately 173.1 million baht owed to both banks. We have not
received any approval of a further extension of the February 27, 2009 payment of
certain credit packing facilities and our ability to repay the 173.1 million
Baht or approximately $5.0 million of packing credits due on February 27, 2009
depends on our prevailing cash on hand and our ability to present qualifying
customer purchase orders to the bank for draw down.
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 January 3,
2009, $0.4 million was outstanding under our US Federal credit facility. While
the note is due February 1, 2010, the final payment is scheduled to be made
during the fourth quarter of fiscal 2009 as a result of the prepayments.
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.
16
We will require additional capital resources for our business. Our ability
to continue as a going concern depends primarily on our ability to obtain
additional financing or to further restructure our credit facilities with our
lenders. We will continue to work with our Thai lenders to explore additional
restructuring of our existing debt as well as to consider an additional working
capital facility or long-term financing. We believe that our immediate need for
capital to finance our day-to-day business activities over the next quarter
could potentially be provided, if at all, by our current lenders in the form of
a restructuring of our debt to reduce required payments and to provide
additional lending. 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 us or our shareholders. If we
are unable to obtain additional financing or restructure our credit facilities
(including an extension for the February 27, 2009 repayment or restructuring of
the amounts owed), our ability to make the 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, cessation of business or bankruptcy. Our financial
statements have been prepared assuming that we will continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Contractual Obligations
The table below discloses a summary of the Company's specified contractual
obligations at January 3, 2009 (in thousands):
Under 1 Year 1 to 3 Years 3 to 5 Years After 5 Years Total
-------------- -------------- -------------- --------------- ---------------
Long-term Debt Obligations (1) $ 4,106 $ 11,613 $ 5,690 -- $ 21,409
Operating Leases 348 577 204 -- 1,129
-------------- -------------- -------------- --------------- ---------------
Total $ 4,454 $ 12,190 $ 5,894 -- $ 22,538
============== ============== ============== =============== ===============
(1) Includes interest at a fixed rate of 7% on a portion of the debt and
excludes interest on all debt with variable interest rates.
Recent Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently evaluating the provisions of FASB 161 to
determine the impact on the company's consolidated financial statements.
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. The adoption of SFAS 159
did not 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
17
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 27, 2008. 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 may 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 January 3, 2009, the Company did not have any open
forward exchange contracts to buy Thai baht in return for U.S. dollars. All
remaining forward exchange contracts purchased during previous fiscal quarters
have matured and were settled by December 4, 2008. No assurance can be given
that our strategies will prevent future currency fluctuations from adversely
affecting our business, financial condition and results of operations.
We are exposed to interest rate risk as a large portion of our
interest-bearing debt is subject to interest rates which fluctuate with changes
in market interest rates or are periodically reset based on market interest
rates. A large change in market interest rates could have an adverse impact on
our business, financial condition and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer, Terry M. Dauenhauer, and Chief Financial
Officer, Randy L. Acres, have evaluated the Company's disclosure controls and
procedures (as 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.
18
PART II - OTHER INFORMATION
Responses to Items 1A, 2, 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 6. EXHIBITS
The following exhibits are included herein:
31.1 Certification of Chief Executive Officer pursuant Rules 13a-14 and 15d-14 of the Exchange Act.
31.2 Certification of Principal Financial Officer pursuant Rules 13a-14 and 15d-14 of the Exchange Act.
32 Certificate pursuant to 18 U.S.C. Section 1350.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVEX, INC.
Date: February 17, 2009
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
20