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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 July 4, 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)
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 has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). 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 August 4, 2009, 19,443,153 shares of the Company's common stock, $.04 par
value per share, were outstanding.
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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
PART 1
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
July 4, September 27,
2009 2008
---------------- ----------------
ASSETS
------
Current assets:
Cash and equivalents, including restricted cash of $463,774 and $464,745 $ 1,553,109 $ 6,531,588
Accounts receivable, less allowance for doubtful accounts of $206,000 and $190,000 2,805,085 14,345,259
Inventories 4,418,028 9,999,019
Other current assets 1,366,225 1,876,041
---------------- ----------------
Total current assets 10,142,447 32,751,907
Property, plant and equipment, net of accumulated depreciation of $62,541,000 and
$56,599,000 31,049,226 34,437,393
Assets held for sale -- 1,927,318
Other assets 32,329 40,173
---------------- ----------------
$ 41,224,002 $ 69,156,791
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 5,934,148 $ 3,537,803
Line of credit 34,195,455 32,665,016
Accounts payable 14,961,728 23,306,317
Accrued compensation 1,039,463 1,786,275
Other accrued liabilities 3,256,909 2,692,488
---------------- ----------------
Total current liabilities 59,387,703 63,987,899
Long-term debt, less current maturities 15,374,469 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 62,087,597 61,980,333
Accumulated deficit (96,403,493) (76,558,127)
---------------- ----------------
Total stockholders' equity (deficit) (33,538,170) (13,801,042)
---------------- ----------------
$ 41,224,002 $ 69,156,791
================ ================
See accompanying notes to condensed consolidated financial statements.
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
---------------------------------------------------------------------------------------------------------------------------
Three Months Ended
--------------------------------------------
July 4, 2009 June 28, 2008
--------------------- ----------------------
Net sales $ 10,662,671 $ 16,173,873
Costs and expenses:
Cost of sales 13,888,318 18,535,646
Selling, general and administrative 1,633,732 2,083,613
Royalty expense -- --
Engineering 390,817 635,176
Asset impairment and restructuring charges -- 467,636
Net (gain) loss on sale of assets -- --
Interest expense 1,242,268 814,636
Interest income (794) (33,798)
Net other (income) expense 2,208,346 (1,857,438)
--------------------- ----------------------
Net loss before taxes (8,700,016) (4,471,598)
Income taxes -- --
--------------------- ----------------------
Net loss $ (8,700,016) $ (4,471,598)
===================== ======================
Net loss per share:
Basic $ (0.45) $ (0.23)
===================== ======================
Diluted $ (0.45) $ (0.23)
===================== ======================
Weighted average shares outstanding:
Basic 19,443,153 19,410,237
===================== ======================
Diluted 19,443,153 19,410,237
===================== ======================
Nine Months Ended
--------------------------------------------
July 4, 2009 June 28, 2008
--------------------- ----------------------
Net sales $ 33,206,894 $ 50,243,134
Costs and expenses:
Cost of sales 41,905,050 56,576,000
Selling, general and administrative 5,286,115 6,819,287
Royalty expense -- 127,876
Engineering 1,252,629 1,917,332
Asset impairment and restructuring charges 1,311,505 3,438,633
Net (gain) loss on sale of assets -- (124,976)
Interest expense 2,920,329 2,321,368
Interest income (23,083) (118,241)
Net other (income) expense 399,714 821,388
--------------------- ----------------------
Net loss before taxes (19,845,365) (21,535,533)
Income taxes -- 120
--------------------- ----------------------
Net loss $ (19,845,365) $ (21,535,653)
===================== ======================
Net loss per share:
Basic $ (1.02) $ (1.11)
===================== ======================
Diluted $ (1.02) $ (1.11)
===================== ======================
Weighted average shares outstanding:
Basic 19,439,155 19,408,723
===================== ======================
Diluted 19,439,155 19,408,723
===================== ======================
See accompanying notes to condensed consolidated financial statements.
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------------------------
July 4, 2009 June 28, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,845,365) $ (21,535,653)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 5,763,161 5,777,089
Asset impairment charge 700,000 --
Stock compensation expense 108,238 266,076
(Gain) loss on disposal of equipment 2,460 (70,974)
Changes in operating assets and liabilities:
Accounts receivable 11,540,174 193,499
Inventories 5,580,991 1,320,692
Other current assets 509,816 432,682
Other long term assets 7,844 286,536
Accounts payable (8,344,589) (1,003,632)
Accrued compensation and other accrued liabilities (182,393) 3,993
--------------------- ----------------------
Net cash used in operating activities (4,159,663) (14,329,692)
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,150,136) (1,382,443)
Change in restricted cash 971 (469,940)
Proceeds from sale of assets -- 125,775
--------------------- ----------------------
Net cash used in investing activities (1,149,165) (1,726,608)
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,082,308) (6,003,604)
Issuance of long-term debt -- 1,507,779
Effect of currency translation on long-term debt (116,812) 684,229
Net activity on line of credit 1,530,440 14,528,117
Proceeds from exercise of stock options and employee stock purchase plan -- 2,643
--------------------- ----------------------
Net cash provided by financing activities 331,320 10,719,164
--------------------- ----------------------
Decrease in cash and equivalents (4,977,508) (5,337,136)
Cash and equivalents (net of restricted cash) at beginning of period (1) 6,066,843 10,453,803
--------------------- ----------------------
Cash and equivalents (net of restricted cash) at end of period (2) $ 1,089,335 $ 5,116,667
===================== ======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 2,318,000 $ 2,368,000
Income taxes $ -- $ 9,000
(1) Net of restricted cash of $464,745 and $0 respectively.
(2) Net of restricted cash of $463,774 and $469,940 respectively.
INNOVEX, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions on Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The unaudited condensed
consolidated financial statements include the accounts of Innovex, Inc. and its
subsidiaries (the "Company") after elimination of all significant intercompany
transactions and accounts. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of operating results have been made. Operating results for interim periods are
not necessarily indicative of results that may be expected for the year as a
whole.
The Company utilizes a fiscal year that ends on the Saturday nearest to
September 30 which results in a 52 or 53 week year rather than a twelve-month
fiscal year. The Company's actual fiscal quarters end on the Saturday closest to
the end of the calendar quarter. All quarters presented in these financial
statements contain 13 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'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, as well as its ability to secure new customers, generate
significant revenue from existing and new customers, and manage expenses.
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, including restricted
cash, were $1.6 million at July 4, 2009 and $6.5 million at September 27, 2008.
Long-term debt was $15.4 million at July 4, 2009 and $19.0 million at September
27, 2008 excluding current maturities of $5.9 million and $3.5 million,
respectively. During the nine months ended July 4, 2009 and June 28, 2008, the
Company incurred losses from continuing operations of $19.8 million and $21.5
million, respectively. Operating activities used cash of $4.2 million and $14.3
million during the nine months ended July 4, 2009 and June 28, 2008,
respectively. As of July 4, 2009, the Company had a working capital deficit of
$49.2 million.
Total unused debt availability as of July 4, 2009 was approximately $1.0 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. In
addition to resolution of its long-term capital needs, the Company requires
immediate additional working capital to help resolve immediate requirements that
are critical in providing assurance of supply to the Company's customers.
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 to February 27,
2009 the repayment date of certain amounts under the packing credit facilities
that were originally due on December 29, 2008. The sixty day payment date
extension affected 173.1 million Baht, or approximately $5.0 million, owed to
both banks. As required by the credit agreements, as amended, the Company paid
all 173.1 million Baht, or approximately $5.0 million, under the packing credit
facility by the extended repayment date of February 27, 2009.
During the months of February, March and April of 2009, the Company received
verbal approval from its Thai lenders to extend repayment of amounts due under
the packing credit facilities of approximately 563.1 million Baht, or
approximately $16.1 million. Furthermore, in the month of June 2009, the Company
received formal approval from the Bank of Ayudhya to extend repayment dates of
certain amounts under the short term packing credit facilities that were
originally due in the months of April, May and June of 2009 to July 31, 2009.
The extension affected 447.8 million Baht or approximately $13.0 million owed
under the Company's short term packing credit facilities. However, TMB Bank did
not provide the Company with similar extensions on the scheduled repayments due
under its short term packing credit facilities. In addition, both banks did not
provide the Company with formal extensions on the scheduled repayments owing
under the Company's long term loan facility that were originally due during the
fiscal quarter ending July 4, 2009. Although the Company was delinquent with the
repayments required under the long term loan facility with both banks as well as
the short term working capital facility with the TMB Bank, the Company did not
receive any formal written notification of default. The Company believes the
Thai banks will not demand immediate payment of the obligations under the bank
facilities, or apply any foreclosure process until the debt restructuring
process is completed.
In addition, during the month of June 2009, the Company appointed
PricewaterhouseCoopers FAS Limited to act as the Company's financial advisor, to
provide assistance in restructuring the Company's existing debt and to explore
additional capital structure alternatives. The Company is currently working
closely with the appointed financial advisor to complete the debt restructuring
process as soon as possible, within the target completion time, by the end of
the fiscal year. No assurance can be given that the Company's debt will be
restructured on terms acceptable to the Company, if at all or 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.
To secure new customers and generate more revenue, the Company has made
significant changes to the organization of its personnel and changes in the
incentives available to its sales personnel during the fiscal 2009 second
quarter. The Company believes the changes will enable the Company to be more
responsive to customers' requirements and enable the Company to close new
business earlier. In order to better manage its overall cost structure, the
Company will continue to work with key suppliers on volume-based cost reduction
and also further improve on the inventory turns and usage in the future fiscal
quarters.
The Company's financing needs and the financing alternatives available to it are
subject to change depending on, among other things, general economic and market
conditions, changes in industry buying patterns, customer demand for its AFC,
stacked memory flex, FPD flex and other new products, the Company's ability to
meet its loan covenant requirements, cash flow from operations and management
estimates as to future revenue and expenses.
NOTE 3 - RESTRUCTURING CHARGES
Corporate 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 were required for the Company to enhance its
viability. Total restructuring charges related to the corporate business
functions relocation and Korat restructuring for the nine months ended July 4,
2009 were $0.2 million. These charges were mostly comprised of $0.2 million of
one time termination benefits and some minimal charges 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.
The Company accounts for long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144").
Long-lived assets, including property and equipment, are amortized over their
expected lives. The Company also makes estimates of the impairment of long-lives
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, based primarily upon whether expected
future undiscounted cash flows are sufficient to support the asset's recovery.
If the actual useful life of a long-lived asset is shorter than the useful life
estimated by the Company, the asset may be deemed to be impaired, and,
accordingly, a write-down of the value of the asset determined by a discounted
cash flow analysis, or a shorter amortization period, may be required.
The Company entered into a purchase agreement in May 2007 to sell the Litchfield
facility for approximately $2.3 million. In April 2009, the buyer under the
purchase agreement, and also the tenant of this facility, vacated the property
and has not proceeded to close on its purchase of the facility. Based on the
potential cancellation of the purchase agreement, the Company recorded an asset
impairment charge of $0.7 million related to the Litchfield facility in the
fiscal 2009 second quarter.
Management is in the process of performing an impairment analysis, under SFAS
No. 144, for all their long lived assets since the performance of the Company is
falling below previous projections. This analysis is expected to be completed in
the fourth quarter of fiscal 2009.
Total restructuring charges related to the Eastlake and Litchfield
restructuring, excluding asset impairment charges, for the nine months ended
July 4, 2009 were $0.4 million. These charges were comprised of $0.3 million for
costs related to the Eastlake facility lease and $0.1 million for charges
incurred to complete the transfer of equipment from Litchfield to Thailand.
Remaining expenditures of approximately $0.5 million 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 were $0.5
million at July 4, 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
1,477,140 and 1,766,772 shares of common stock were outstanding during the three
month and nine month periods ending July 4, 2009, respectively, but were
excluded from the computation of common share equivalents because they were not
dilutive. Options to purchase 1,403,772 and 1,738,484 shares of common stock
were outstanding during the three and nine month periods ending June 28, 2008,
respectively, but were excluded from the computation of common share equivalents
because they were not dilutive.
NOTE 5 - STOCK BASED COMPENSATION
The Company recorded $25,000 and $108,000 of related compensation expense for
the three and nine month periods ended July 4, 2009, respectively, and $50,000
and $266,000 for the three and nine month periods ended June 28, 2008,
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 and nine months ended July
4, 2009 and three months ended June 28 2008, but increased both basic and
diluted net loss per share by $0.01 for the nine months ended June 28, 2008. As
of July 4, 2009, $249,000 of total unrecognized compensation costs related to
non-vested awards is expected to be recognized over a weighted average period of
approximately 1.6 years.
The Company uses the Black-Scholes option pricing model to determine the
weighted average fair value of options. The fair value of options at date of
grant and the assumptions utilized to determine such values are indicated in the
following table. No adjustment was made to the Black-Scholes calculation to
reflect that the options are not freely traded:
Three Months Ended Nine Months Ended
July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008
Risk-free interest rate 1.60% 1.83% 1.06% 2.56%
Expected volatility 159% 108% 166% 88%
Expected life (in years) 2.5 2.9 2.5 2.9
Dividend yield -- -- -- --
Weighted average fair value of options
granted $0.17 $0.24 $0.13 $0.29
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
July 4, 2009, the Company had 642,203 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 July 4, 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. The common stock grants vest
over three years. At July 4, 2009, the Company had 25,078 shares of common stock
available for issue under the plan.
Transactions under the stock option and restricted stock plans during the nine
months ended July 4, 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
Granted 57,000 0.13
Forfeited (117,995) 0.61
Exercised -- --
----------------
Outstanding at April 4, 2009 2,124,695 1.62
----------------
Granted 265,000 0.22
Forfeited (233,079) 2.32
Exercised -- --
----------------
Outstanding at July 4, 2009 2,156,616 1.37
================
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 1,639,201 9.1 years $ 0.31 312,671 $ 0.48
1.44 - 2.41 185,385 6.2 years 2.21 132,435 2.13
3.06 - 4.84 177,130 5.7 years 3.81 130,450 3.90
5.29 - 7.81 52,500 3.4 years 6.40 52,500 6.40
8.90 - 9.80 79,850 4.4 years 9.23 79,850 9.23
12.59 - 13.03 22,550 1.3 years 13.03 22,550 13.03
---------------- ---------------
2,156,616 1.37 730,456 3.16
================ ===============
NOTE 6 - INVENTORIES
Inventories are comprised of the following (in thousands):
July 4, September 27,
2009 2008
----------------- -----------------
Raw materials and purchased parts $ 3,002 $ 5,569
Work-in-process and finished goods 1,416 4,430
----------------- -----------------
$ 4,418 $ 9,999
================= =================
NOTE 7 - DERIVATIVE INSTRUMENTS - FOREIGN CURRENCY TRANSLATION
The Company had, during the previous fiscal year, 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 July 4, 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 year
have matured and were settled by December 4, 2008 and no additional forward
exchange contracts were purchased during the fiscal quarter ended July 4, 2009.
Foreign currency translation gains or (losses) included in net other (income)
expense (in thousands):
Three months ended Nine months ended
------------------------------------ ------------------------------------
July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008
----------------- ----------------- ----------------- ------------------
(Gain) or loss from forward exchange contracts $ -- $ 2,077 $ 353 $ (222)
Other foreign currency (gain) or loss 2,188 (3,913) (30) 1,117
----------------- ----------------- ----------------- ------------------
Net (gain) or loss from foreign currency
transactions $ 2,188 $ (1,836) $ 323 $ 895
================= ================= ================= ==================
NOTE 8 - REVENUE RECOGNITION
The Company makes electronic components (flexible circuits) based on customer
specifications. The Company's revenue recognition policy is consistently applied
regardless of sales channels utilized and product destination. In recognizing
revenue in any period, the Company applies the provisions of SEC Staff
Accounting Bulletin 104, "Revenue Recognition." Revenue from product sales is
recognized when persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed and determinable and collection of the
resulting receivable is reasonably assured.
For all sales, a binding purchase order is used as evidence of an arrangement.
The Company also stores inventory in warehouses (JIT hubs - third party owned
warehouses) that are located close to the customer's manufacturing facilities.
Revenue is recognized on sales from JIT hubs upon the transfer of title and risk
of loss, following the customer's acknowledgement of the receipt of the goods.
The Company has an implied warranty that the products meet the customer's
specification. Credits are issued for customer returns.
NOTE 9 - INCOME TAXES
The Company records income taxes in accordance with the liability method of
accounting. Deferred taxes are provided for temporary differences between the
financial reporting and tax bases of assets and liabilities. A valuation
allowance is established when the realization of a deferred tax asset becomes
less likely than not to occur. The valuation allowance is analyzed periodically
by the Company and may result in income tax expense different than statutory
rates. The Company's current deferred tax asset valuation allowance fully
offsets its deferred tax assets. With the exception of the Alternative Minimum
Tax and certain state taxes, the Company will not use cash for domestic income
taxes until its net operating losses are fully realized on its tax returns.
NOTE 10- RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, or
SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008. The adoption of SFAS No. 141(R) would change the
Company's accounting treatment for business combinations on a prospective basis
beginning in the period it is adopted.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company adopted this statement and determined it did not have a
material 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 adoption of SFAS 157 as it relates to financial assets
and liabilities did not 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 for non-financial assets and non-financial liabilities.
The Company does not expect the adoption of SFAS 157 as it relates to
non-financial assets and non-financial liabilities to have a material impact on
its results of operations or financial condition.
In April 2009, the FASB issued SFAS No. 157-4, "Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly" ("FAS 157-4"). FAS
157-4 provides additional guidance for estimating fair value in accordance with
FASB Statement No. 157, "Fair Value Measurements," when the volume and level of
activity for the asset or liability have significantly decreased. This FSB also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, and is to be applied prospectively. The Company
adopted this statement and determined it did not have a material impact on the
Company's consolidated financial statements.
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.
In April 2009, the FASB issued FAS No. 107-1 and APB 28-1, "Interim disclosures
about Fair Value of Financial Instruments." FAS 107-1 expands current
requirements to require disclosures about the fair value of all financial
instruments within the scope of Statement 107 for interim reporting periods. The
FSP requires entities to disclose the methods and significant assumptions used
to estimate the fair value of financial instruments and describe changes in
method(s) and significant assumptions, if any, during the period. FAS 107-1 and
APB 28-1 is effective for interim and annual reporting periods ending after June
15, 2009, and is to be applied prospectively. The Company adopted FAS 107-1 and
APB 28-1 and determined it did not have a material impact on the Company's
consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (FAS 165). FAS
165 is intended to establish general standards of accounting for and disclosure
of events that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. In particular, FAS 165 sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for a
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. FAS 165 is effective for interim or
annual financial periods ending after June 15, 2009, and is applied
prospectively. The company adopted FAS 165 during the fiscal second quarter of
2009 and determined that it did not have a material impact on the company's
consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles"
("FAS 168"). FAS 168 replaces SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." FAS 168 formally establishes the FASB Accounting
Standards Codification as the single source of authoritative, nongovernmental
GAAP, except for rules and interpretive releases of the SEC, which are sources
of authoritative GAAP for SEC registrants. The Codification did not change GAAP,
but reorganizes the literature. FAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company does not expect that the adoption of FAS 168 will have a material effect
on the Company's consolidated financial statements or related disclosures.
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.
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.
Results of Operations
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
For the Three Months Ended For the Nine Months Ended
---------------------------------- --------------------------------
July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008
---------------- --------------- --------------- --------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 130.3 114.6 126.2 112.6
---------------- --------------- --------------- --------------
Gross profit (30.3) (14.6) (26.2) (12.6)
Operating expenses:
Selling, general and administrative and
royalty expense 15.3 12.9 15.9 13.9
Engineering 3.7 3.9 3.8 3.8
Restructuring and asset impairment -- 2.9 3.9 6.8
Net (gain) loss on sale of assets -- -- -- (0.2)
---------------- --------------- --------------- --------------
Total operating expenses 19.0 19.7 23.6 24.3
---------------- --------------- --------------- --------------
Loss from operations (49.3) (34.3) (49.8) (36.9)
---------------- --------------- --------------- --------------
Interest and other expense, net (32.4) 6.7 (9.9) (6.0)
---------------- --------------- --------------- --------------
Loss before provision (benefit) for income taxes (81.7) (27.6) (59.7) (42.9)
Provision (benefit) for income taxes -- -- -- --
---------------- --------------- --------------- --------------
Net loss (81.7)% (27.6)% (59.7)% (42.9)%
================ =============== =============== ==============
Comparison of Three Months Ended July 4, 2009 and June 28, 2008
Net Sales
Our net sales were $10.7 million for the three months ended July 4, 2009,
compared to $16.2 million for the three months ended June 28, 2008, a decrease
of 34%. This decline was primarily driven by a $3.4 million decrease in actuator
flex circuit (AFC) revenue, a $0.9 million decrease in flat panel displays (FPD)
revenue, a $1.1 million decrease in integrated circuit packaging, network system
application and other application revenue and a $0.1 million decrease in flex
suspension assembly (FSA) revenue. The decline in FSA revenue reflects the
completion of our FSA customer's transition to its next generation of disk drive
products which use an alternative technology. The decline in AFC, FPD and other
product lines was due to working capital constraints and operational
inefficiencies experienced during the fiscal third quarter of 2009 which had
impacted our ability to fulfill all of the customers' requirements.
FPD application generated 76% of our net sales for the three months ended
July 4, 2009, compared to 56% for the three months ended June 28, 2008. Sales of
AFC's to the disk drive industry were 20%, compared to 34%, FSA sales to disk
drive industry were 0% compared to 1%, sales from integrated circuit packaging,
network system application and sales from other industry applications were 4%
and 9% for the three months ended July 4, 2009 and June 28, 2008, respectively.
Gross Profit (Loss)
Our gross loss was $3.2 million for the three months ended July 4, 2009
compared to a gross loss of $2.4 million for the three months ended June 28,
2008. Our gross margin for the three months ended July 4, 2009 decreased to
(30.3%), from (14.6%) for the three months ended June 28, 2008. 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.
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the three months ended July 4, 2009 were $1.6 million, compared to $2.1 million
in the three months ended June 28, 2008, a decrease of 23.8%. As a percentage of
net sales, selling, general and administrative expenses were 15.3% for the three
months ended July 4, 2009, an increase of 2.4% from 12.9% from the same period
in the prior year. The increase as a percentage of net sales was primarily due
to the decrease in revenue more than offsetting the decrease in expenses.
Royalty expense was zero for the three months ended July 4, 2009 and three
months ended June 28, 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 July 4, 2009 were $391,000,
compared to $635,000 for the three months ended June 28, 2008, 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 3.7% of sales for the three months ended July 4, 2009 compared to 3.9% for
the same period in the prior year.
Restructuring and Asset Impairment
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 were required for us to enhance our viability.
There were no restructuring charges related to the corporate business
functions relocation and Korat restructuring recorded during the fiscal 2009
third quarter. Restructuring charges of $0.4 million related to the planned
corporate business functions and Korat restructuring were recorded in the third
quarter of fiscal 2008. These charges were comprised of $0.3 million one time
termination benefits and $0.1 million for moving and closing costs. Total
restructuring charges related to the corporate office relocation restructuring
through July 4, 2009 were $3.8 million. These charges were comprised of $3.2
million for one time termination benefits, $0.2 million for moving and closing
costs and $0.4 million 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 July 4,
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.
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. The Company entered into
a purchase agreement in May 2007 to sell the Litchfield facility for
approximately $2.3 million. In April 2009, the buyer under the purchase
agreement, and also the tenant of this facility, vacated the property and has
not proceeded to close on its purchase of the facility. Based on the potential
cancellation of the purchase agreement, the Company recorded an asset impairment
charge of $0.7 million related to the Litchfield facility in the fiscal 2009
second quarter.
There were no restructuring charges related to Litchfield and Eastlake
restructuring recorded in the fiscal 2009 third quarter. Restructuring charges
of $0.1 million related to the Litchfield and Eastlake restructuring were
recorded in the fiscal 2008 third quarter. Total restructuring charges related
to the Eastlake and Litchfield restructuring excluding asset impairments charges
through July 4, 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 contract termination costs related to the Eastlake
facility lease. Remaining expenditures of approximately $0.5 million 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 three months ended July 4,
2009 and June 28, 2008.
Net Interest and Other (Income) Expense
Net interest expense was $1.2 million for the three months ended July 4,
2009 and $0.8 million for the three months ended June 28, 2008. Other net
expenses were $2.2 million in the three months ended July 4, 2009 as compared to
other net income of $1.9 million in the three months ended June 28, 2008. The
change was related to a foreign currency valuation loss of approximately $2.2
million being recorded during the fiscal 2009 third quarter which was driven by
the strengthening of the Thai baht against the value of the U.S. dollar,
resulting in an increase in the value of our baht denominated debt. The foreign
valuation gain of $3.9 million in the three months ended June 28, 2008 was
partly offset by the loss of approximately $2.1 million associated with the
forward contracts that were 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 of July
4, 2009, there were no forward exchange contracts outstanding. 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 July 4, 2009 and June 28, 2008. The deferred tax assets continue to be
fully reserved.
Comparison of Nine Months Ended July 4, 2009 and June 28, 2008
Net Sales
Our net sales were $33.2 million for the nine months ended July 4, 2009,
compared to $50.2 million for the nine months ended June 28, 2008, a decrease of
34%. This decrease primarily reflects an $8.7 million decrease in flex
suspension assembly (FSA) revenue, $6.8 million decrease in actuator flex
circuit (AFC) revenue and a $1.4 million decrease in integrated circuit
packaging, network system application and other application revenue. The decline
in FSA revenue reflects the completion of our FSA customer's transition to its
next generation of disk drive products which use an alternative technology. The
decline in the revenue for the other product lines was primarily related to low
demand experienced during the fiscal first and second quarter of 2009 and partly
due to working capital constraints and operational inefficiencies experienced
during the fiscal third quarter of 2009 which had impacted our ability to
fulfill all of the customers' requirements.
FPD application generated 60% of our net sales for the nine months ended
July 4, 2009, compared to 40% for the nine months ended June 28, 2008. Sales of
AFC's to the disk drive industry were 34%, compared to 37%, FSA sales to disk
drive industry were 0% compared to 17%, sales from integrated circuit packaging,
network system application and sales from other industry applications were 6%
for both nine months ended July 4, 2009 and June 28, 2008.
Gross Profit (Loss)
Our gross loss was $8.7 million for the nine months ended July 4, 2009
compared to a gross loss of $6.3 million for the nine months ended June 28,
2008. Our gross margin for the nine months ended July 4, 2009 decreased to
(26.2%), from (12.6%) for the nine months ended June 28, 2008. 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.
Selling, General and Administrative and Royalty Expense
Selling, general and administrative expenses including royalty expenses for
the nine months ended July 4, 2009 were $5.3 million, compared to $6.8 million
in the nine months ended June 28, 2008, a decrease of 22%. As a percentage of
net sales, selling, general and administrative expenses were 15.9% for the nine
months ended July 4, 2009, an increase from 13.9% in the same period in the
prior year. The increase as a percentage of net sales was primarily due to the
decrease in revenue more than offset the decrease in expenses, partially offset
by no royalty expense for the nine months ended July 4, 2009, as compared to
$128,000 for the nine months ended June 28, 2008. Royalty expense was zero for
the nine months ended July 4, 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 nine months ended July 4, 2009 were $1.3
million, compared to $1.9 million for the nine months ended June 28, 2008, a
decrease of 32%. The decrease was primarily the result of reducing or
transferring engineering positions to our lower salary base Thailand facility as
a result of closing our U.S. facilities. As a percentage of net sales,
engineering expenses were 3.8% of sales for the nine months ended July 4, 2009
and June 28, 2008.
Restructuring and Asset Impairment
Corporate business functions relocation:
As discussed above, 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. Restructuring charges of $0.2 million
were recorded during the first nine months of fiscal 2009 were related to the
corporate business functions relocation. These charges were mostly comprised of
$0.2 million of one time employee termination benefits and some minimal charges
relating to moving and closing costs. Restructuring charges of $3.0 million were
recorded during the first nine months of fiscal 2008 related to the corporate
office restructuring. These charges were comprised of $2.8 million of one time
employee termination benefits and $0.2 million for moving and closing costs.
Litchfield and Eastlake restructuring:
As discussed above, on January 16, 2006, we announced a plan to move
prototyping and high volume manufacturing from our Litchfield, Minnesota
facilities to our Lamphun, Thailand facilities. On September 25, 2006, we
expanded the previously announced Litchfield restructuring to close the entire
Litchfield facility and our Eastlake, Ohio facility. Restructuring charges
related to the Eastlake and Litchfield restructuring, excluding asset impairment
charges, of $0.4 million were recorded during the first nine months of fiscal
2009. These charges were comprised of $0.1 million related to the transfer of
equipment to Thailand and $0.3 million pertained mostly to the one-time
provision made in relation to the remaining lease expenses for Eastlake
property. Restructuring charges related to the Eastlake and Litchfield
restructuring, excluding asset impairment charges, of $0.5 million were recorded
during the first nine months of fiscal 2008. These charges were comprised of
$0.3 million for moving and closing costs and $0.2 million contract termination
costs related to the Eastlake facility lease.
In addition, based on a potential cancellation of the Litchfield purchase
agreement, an asset impairment charge of $0.7 million was recorded in the fiscal
2009 second quarter. There was no asset impairment charge recorded during the
first nine months of fiscal 2008.
Net (Gain) Loss on the Sale of Assets
There were no sales of assets recorded during the nine months ended July 4,
2009 compared to a net gain on the sale of assets of $125,000 for the nine
months ended June 28, 2008.
Net Interest and Other Expense
Net interest expense was $2.9 million for the nine months ended July 4,
2009 and $2.2 million for the nine months ended June 28, 2008. Other net
expenses were $0.4 million in the nine months ended July 4, 2009 as compared to
other net expenses of $0.8 million in the nine months ended June 28, 2008. The
change was related to a foreign currency revaluation gain or loss that was
driven by the value of the U.S. dollar against the Thai Baht, resulting in the
change in value of our Baht denominated debt. The foreign currency valuation
gain of approximately $30,000 in the nine months ended July 4, 2009 was offset
by the loss of approximately $350,000 associated with our forward contracts
placed previously. The foreign currency valuation loss of approximately $1.1
million in the nine months ended June 28, 2008 was partly offset by the gain of
$0.2 million associated with our forward contracts placed previously. Our
Thailand debt is denominated in Thai baht, and as a result, we have a
significant short position in Thai baht. We made the decision in fiscal 2007 to
reduce the level of forward contracts we place to purchase Thai baht to offset
this short position because of the short term cash risks associated with placing
these contracts. As of July 4, 2009, there were no forward exchange contracts
outstanding. 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 nine months ended
July 4, 2009 and minimal net income tax expense was recorded in the nine months
ended June 28, 2008 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 and Estimates
Our significant accounting policies and estimates 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, including restricted
cash, were $1.6 million at July 4, 2009 and $6.5 million at September 27, 2008.
Cash and equivalents, net of restricted cash, were $1.1 million at July 4, 2009
and $6.1 million at September 27, 2008. As of July 4, 2009, the Company had a
working capital deficit of $49.2 million.
For the nine months ended July 4, 2009, net cash used in operating
activities of $4.2 million primarily resulted from the net loss for the period
net of non-cash charges and a $8.5 million decrease in accounts payable and
liabilities, partially offset by a $5.6 million reduction in inventory and $11.5
million decrease in accounts receivable. The reduction in inventory level was
primarily driven by improved inventory turns and usage during the quarters. 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 quarters. The
decrease in accounts receivable was partly driven by the lower revenue and
partly due to the improvement in our Days Sales Outstanding (DSO) from 62 days
in the fiscal 2008 fourth quarter to 24 days in the fiscal 2009 third quarter.
Net cash used in investing activities was $1.1 million in the first nine
months of fiscal 2009, compared to $1.7 million in the first nine months of
fiscal 2008. In fiscal 2009, net cash used in investing activities mostly
pertained to capital spending related to process improvements at our Thailand
facility. In fiscal 2008, net cash used in investing activities was attributed
to the capital spending of $1.4 million for process improvements at our Thailand
facility, a $0.4 million increase in restricted cash balance and partly offset
by the gain on the sale of assets of $0.1 million.
Net cash provided by financing activities was $0.3 million in the first
nine months of fiscal 2009, compared to net cash provided by financing
activities of $10.7 million in the first nine months of fiscal 2008. For the
first nine months of fiscal 2009, net cash provided in financing activities was
the result of $1.5 million borrowed under our short-term Thailand packing credit
facilities, and partially offset by the scheduled debt repayments of $1.1
million on our existing long-term Thailand debt facilities and U.S. based debt
and a $0.1 million decrease in the U.S. dollar foreign exchange valuation of the
Thai baht denominated debt. For the first nine months of fiscal 2008, net cash
provided by financing activities was primarily related to the $14.5 million
borrowed under our short-term Thailand packing credit facilities, a $1.5 million
draw down under our long-term Thailand credit facilities and a $0.7 million
increase in the U.S. dollar foreign exchange valuation of the Thai baht
denominated debt partially offset by the normally scheduled debt payments of
approximately $6.0 million on our existing long-term 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 $1.5 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 July 4, 2009, we had approximately $21.3 million
(or 724 million baht) outstanding under our long-term Thailand credit facilities
and a $34.2 million (or 1,167 million baht) outstanding balance under our
packing and short-term Thailand credit facilities. Total unused availability as
of July 4, 2009 was approximately $1.0 million (or 33 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 to February 27, 2009 the repayment date of certain amounts under the
packing credit facilities that were originally due on December 29, 2008. The
sixty day payment date extension affected approximately 173.1 million baht or
$5.0 million owed to both banks. As required by the credit agreements, as
amended, the Company paid 173.1 million Baht, or approximately $5.0 million,
under the packing credit facility by the extended repayment date of February 27,
2009.
During the months of February, March and April of 2009, we received verbal
approval from both Thai lenders to extend repayment of amounts due under the
packing credit facilities of approximately 563.1 million Baht, or approximately
$16.1 million. Furthermore, in the month of June 2009, we received formal
approval from the Bank of Ayudhya to extend repayment dates of certain amounts
under the short term packing credit facilities that were originally due in the
months of April, May and June of 2009 to July 31, 2009. The extension affected
447.8 million Baht or approximately $13.0 million owed under our short term
packing credit facilities. However, TMB Bank did not provide us with similar
extensions on the scheduled repayments due under our short term packing credit
facilities. In addition, both banks did not provide us with formal extensions on
the scheduled repayments owing under our long term loan facility that were
originally due during the fiscal quarter ending July 4, 2009. Although we were
delinquent with the repayments required under the long term loan facility with
both banks as well as the short term packing credit facility with the TMB Bank,
we believe the Thai banks will not demand immediate payment of the obligations
under the bank facilities, or apply any foreclosure process until the debt
restructuring process is completed.
In addition, during the month of June 2009, we appointed
PricewaterhouseCoopers FAS Limited to act as our financial advisor, to provide
assistance in restructuring the existing debt and to explore additional capital
structure alternatives. We are currently working closely with
PricewaterhouseCoopers to complete the debt restructuring process as soon as
possible, within the estimated target completion time, by the end of the fiscal
year.
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 July 4,
2009, $0.1 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.
We will require additional capital resources for our business. Our ability
to continue as a going concern depends mainly on our ability to obtain
additional financing or to further restructure our credit facilities with our
lenders, as well as our ability to secure new customers, generate significant
revenue from existing and new customers and manage expenses.
To secure new customers and generate more revenue, the management made
significant changes to the organization of the internal team structure starting
from the fiscal 2009 second quarter. The new organizational structure, which
includes the implementation of a pay-for-performance system for the
customer-facing teams, will be more customer-focused, making us more responsive
to customers' requirements which we believe will enable us to close new business
earlier. In order to better manage overall cost structure, we will continue to
work with key suppliers on volume based cost reduction and also further improve
on inventory turns and usage in future fiscal quarters. We will also continue to
work with our financial advisor and Thai lenders to explore additional
restructuring of our existing debt as well as to consider an additional working
capital facility or long-term financing. While we work with the financial
advisor and Thai lenders to restructure existing debt and to obtain additional
working capital, we anticipate that we may also require additional extensions
with respect to payments which otherwise become due and are not paid pending the
resolution of the restructuring discussions. 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 Thai 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 conditions acceptable to us or our shareholders, if at all. If we are
unable to obtain additional financing or restructure our credit facilities
(including additional extensions for the amounts that become due and are not
paid pending the resolution of the restructuring discussions), 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 July 4, 2009 (in thousands):
Under 1 Year 1 to 3 Years 3 to 5 Years After 5 Years Total
-------------- -------------- -------------- --------------- ---------------
Long-term Debt Obligations (1) $ 5,934 $ 13,437 $ 1,937 -- $ 21,308
Operating Leases 349 452 154 -- 955
-------------- -------------- -------------- --------------- ---------------
Total $ 6,283 $ 13,889 $ 2,091 -- $ 22,263
============== ============== ============== =============== ===============
(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. The adoption of SFAS 157 did not have a material effect on
the financial condition or results of operations. 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 for non-financial assets and
non-financial liabilities. The Company does not expect the adoption of SFAS 157
as it relates to non-financial assets and non-financial liabilities to have a
material impact on its 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: our need
for significant additional working capital and our need to restructure of our
existing indebtedness to continue as a going concern, continued cash
availability under our credit facilities, any interruption in the operations of
the Company's single source suppliers or any failure of any of the Company's
single source suppliers to timely deliver an adequate supply of components, the
timely availability and acceptance of new products, the impact of competitive
products and pricing, changes in our customers' market share, impact of
restructuring charges, changes in manufacturing efficiencies, fluctuations in
currency rates, ability of the Company to restructure its credit facilities and
obtain a short term working capital facility, continued forbearance by the
Company's banks from declaring default and demanding immediate payment or
applying any foreclosure process, 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 July 4, 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.
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 of 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 Certification pursuant to 18 U.S.C. Section 1350.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVEX, INC.
Date: August 18, 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