ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
On August 9, 1999, Innovex, Inc. and its subsidiaries (the "Company") consummated the purchase of approximately 76% of the outstanding shares of ADFlex Solutions, Inc. ("ADFlex") at a purchase price of $3.80 per share subject to a tender offer. The remaining approximately 24% of ADFlex issued and outstanding common stock not tendered in response to the tender offer was acquired by the Company through a merger transaction completed on September 14, 1999. The total ADFlex purchase price, including transaction costs, change in control payments and all of the issued and outstanding common stock was approximately $37 million. The Company also obtained credit facilities totaling in principal amount $40 million, which were utilized to refinance ADFlex's outstanding debt, pay down current liabilities and pay related transaction costs. Prior to the acquisition, ADFlex was a leading supplier of flexible circuit based solutions to the computer, computer peripheral, communications and consumer electronics industries. Applications for these flex-based interconnects include cellular phones, hard disk drives, other storage systems, high-end consumer products, notebook computers, pagers and personal communication systems. ADFlex's diverse customer and industry base has reduced Innovex's reliance on the disk drive industry.
Prior to the ADFlex acquisition, the Company had one primary operating group, Innovex Precision Components. The Company has combined the newly acquired ADFlex operation into its existing operations as both operations design and manufacture flexible circuits.
Prior to fiscal 1999, the Company operated through three divisions, Precision Products (Precision), Litchfield Precision Components (LPC) and Iconovex. Each division had its own administrative, engineering, manufacturing and marketing organizations. During the quarter ending September 30, 1998, the Company combined the operations of its two core operating divisions, Precision and LPC into one operating division, Innovex Precision Components. The combination merged the rapidly growing LPC flexible circuit fabrication and chemical etching operations with Precision's high volume fine wire manufacturing expertise. The combination also allowed Innovex to leverage Precision's disk drive industry market and trade knowledge to disk drive industry flexible circuit applications as the industry transitioned from wire interconnects.
Prior to the divisional combination, the largest division, Precision, developed, engineered and manufactured specialty precision electromagnetic products for original equipment manufacturers ("OEM's"). Lead wire assemblies for the thin film disk drive market were the division's primary product. Lead wire assemblies are fine twisted magnet wires that connect the back end electronics of a disk drive with the inductive or magneto resistive thin film heads that read and write information on the disk. Since the divisional combination, the lead wire assembly revenue declined as anticipated. As a result, during the fiscal 1999 fourth quarter, charges of $2.8 million were recorded to account for the discontinuance of this product line.
LPC, prior to the fiscal 1998 divisional combination, designed and manufactured highly complex flexible circuitry and chemically machined components for computer, computer peripheral, medical and other applications. The Company purchased Litchfield Precision Components, Inc. on May 16, 1996. This acquisition reduced the Company's reliance on the disk drive industry while providing an entry into the large and rapidly growing flexible circuit market. Innovex's flexible circuit operation is one of a limited number of operations in the world able to produce flexible circuits with line and spacing tolerances of less than 2 mils for the high-end portion of the flexible circuit market.
Innovex was founded in 1972 to acquire the assets of a manufacturer of needle and wire assemblies used in computer core memories. With the introduction of solid state memory devices, needle wire assemblies became obsolete and, in late 1973, the Company moved into related areas of manufacturing utilizing and expanding its micro-welding and miniature assembly expertise. In 1984, the Company expanded its scope to the photo equipment market by acquiring Lucht Engineering. The Company sold its photo business in two stages beginning November 29, 1992 with the remaining portion sold November 1, 1993.
In an attempt to diversify, the InnoMedica Division was formed in late fiscal 1993 to develop the Company's emerging medical business. This Division, which produced an immaterial portion of the Company's revenue, was sold on June 1, 1998.
The Iconovex subsidiary was established in fiscal 1994 to market and further develop a technologically advanced software product purchased in November 1993. In October 1997, Iconovex became the 51% owner of a joint venture with Solutions Corporation of
America. The operations of Iconovex and its joint venture, Smart Solution, were discontinued in June 1999 as a result of revenue not developing as expected and the Company recorded a $1.7 million charge related to this disposition.
Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972. Its principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359-9003 and its telephone number is (763) 479-5300. Products are developed and manufactured through the Company's wholly owned subsidiaries, Innovex Precision Components, Inc., Innovex Southwest, Inc., Innovex (Thailand) Ltd. and Innovex Limited. Innovex Precision Components, Inc. and Innovex Ltd. are Minnesota corporations. Innovex Southwest, Inc. is a Delaware corporation and Innovex (Thailand) Ltd. is a Thailand corporation.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Prior to the ADFlex acquisition, the Company had one major operating unit during fiscal 1999. The Company has combined its business lines into one operation that manufactures and markets flexible circuits to various industries. Financial results will be presented as a single segment due to the immaterial nature of the non-core operations. Topics covered throughout this document may be discussed referencing former separate operations where helpful to the reader's understanding.
(c) NARRATIVE DESCRIPTION OF BUSINESS
COMPANY OVERVIEW Innovex is a leading worldwide provider of flexible circuit interconnect solutions to original equipment manufacturers ("OEMs") in the electronics industry. The Company offers 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. The Company targets 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 the Company include notebook computers, portable communication devices such as cellular telephones and pagers, data storage devices such as hard disk drives ("HDDs"), tape drives and arrays and high-end consumer electronics products such as compact disk players. The Company's principal customers include Acer, Alps, Compaq, Dell, Digital Equipment, IBM, Iomega, Maxtor, Motorola, Nokia, Philips, Qualcomm, Quantum, ReadRite, SAE Magnetics, Samsung, Seagate, StorageTek, Xerox and other leading electronic OEMs.
Flexible circuits consist of copper conductive patterns on flexible substrate materials, such as polyimide, and provide electrical connection between components in electronic systems. Flexible circuit interconnects frequently incorporate components such as integrated circuits ("ICs"), connectors, stiffeners, resistors and capacitors mounted directly on a flexible circuit. With proliferation of electronic applications, electronic products have become smaller, lighter and more portable. To meet the challenges represented by the increased complexity of miniaturization, form and weight requirements, OEMs have increasingly turned to flexible circuit interconnect solutions because they decrease the weight and expense of connectors and other packaging components, conform to contoured, ergonomic shapes or small spaces and provide mechanical flexure. The Company's products consist of flexible circuits with high to mid-range tolerances and may include other secondary finishing or assembly operations. The high-end flexible circuits generate the highest gross margin percents. The mid-range or standard flexible circuits with components added through the performance of additional assembly steps garner lower gross margin percents due to higher material costs and the increased number of competitors.
Historically, the Company's wire operations produced a variety of small lead wire assemblies primarily for computer disk drives. The disk drive industry has transitioned away from lead wire assembly interconnects to integrated interconnects such as the Company's Head Interconnect Flex ("HIF"), Flex suspension assembly ("FSA") and BridgeFlex ("BFC") products. This transition has had a significant impact on the Company's operations over the last three years as it has had to manage the rapid increase in its flexible circuit business while controlling the rapid drop in its lead wire assembly operations. Lead wire assembly sales constituted less than 1% of fiscal 2000 consolidated revenues, 26% of fiscal 1999 revenues and over 72% of fiscal 1998 revenues.
While the trend toward miniaturization and portability increases product complexity, electronic OEMs face escalating time to market, cost and global sourcing requirements. In response, the Company has established manufacturing facilities in Thailand that have lower cost structures and closer proximity to the Company's OEM customer base. The Company believes it is a preferred supplier for the majority of its customers' high-end and high-volume flexible circuit interconnect requirements.
INDUSTRY OVERVIEW AND TRENDS Flexible circuit interconnects provide electrical connection between components in electronic systems and are increasingly used as a platform to support the attachment of electronic devices. Flexible circuits offer several advantages over rigid printed circuit boards ("PCBs") and ceramic hybrid circuits, particularly for small, complex electronic systems. Flexible circuits, due to their mechanical flexure and three-dimensional shape, accommodate packaging contours and motion in a manner that traditional two-dimensional rigid PCBs cannot. Flexible circuits also provide improved thermal dissipation and signal propagation as compared to PCBs. In addition, flexible circuits can reduce the size, weight and expense of: (i) the primary substrate for component attachment when flexible circuits are used in place of a PCB; (ii)
connectors, cables and other interconnection schemes when flexible circuits provide the connection to other substrates or subsystems within the system; and (iii) individual IC die packages by bonding an IC directly to a flexible chip carrier rather than a ceramic or plastic package.
These capabilities enable circuits to solve many of the challenges faced by electronic OEMs who currently use traditional interconnection devices. Products which currently use polyimide flexible circuit interconnect assemblies include notebook computers, portable communication devices such as cellular telephones, pagers and personal digital assistants ("PDAs"), printers, scanners and data storage devices such as HDDs, tape drives and arrays, and high-end consumer electronic products such as compact disk players, cameras and camcorders. New, rapidly growing applications for polyimide flexible circuit interconnect assemblies include high-density interposers and other chip carrier packaging applications.
The Company considers the following trends important in understanding the electronic flexible circuit interconnect industry:
MINIATURIZATION, PORTABILITY AND COMPLEXITY OF ELECTRONIC PRODUCTS. Electronics OEMs continue to design and introduce more compact and portable high-performance products with greater functionality. The complexity of these new products requires smaller size, lighter weight, greater circuit and component density, better thermal dissipation properties, higher frequencies and increased reliability as compared to conventional rigid board assemblies. These requirements necessitate greater sophistication in flexible circuit interconnect manufacturing and process technologies. The trend toward increasingly sophisticated products also requires greater engineering expertise and investment in manufacturing and process technology for suppliers to produce high-quality electronic interconnect products on time, in volume and at acceptable cost.
SHORTER PRODUCT LIFE CYCLES AND TIME TO MARKET. Rapid advances in technology have significantly shortened the life cycle of complex electronic products and placed increased pressure on OEMs to quickly develop and introduce new products. These time-to-market challenges have in turn increased OEMs' emphasis on the development, design engineering, prototype development and ramp-to-volume capabilities of their suppliers. In addition, the importance of being first to market with new products has heightened the emphasis on shortening supply channels, reducing the number of suppliers and finding turnkey sourcing capabilities that are supported by technologically advanced manufacturing infrastructure.
GLOBALIZATION AND REDUCTION OF MANUFACTURING COSTS. At the same time that shorter product life cycles increase time-to-market pressures, users continue to demand increased electronic performance at lower prices. Notable product examples of this trend are notebook computers, desktop computers, peripherals, portable communications and consumer electronics. Leading OEMs who often manufacture products in multiple geographic regions are relying more on suppliers with global sourcing capabilities which can help to shorten the OEMs' supply chain and provide regionally competitive pricing. As part of global sourcing, OEMs increasingly require their suppliers to establish local infrastructure to provide proximity to engineering, manufacturing and sales support.
OUTSOURCING. To avoid delays in new product introductions, reduce manufacturing costs and avoid logistical complexities, OEMs are increasingly turning to fewer suppliers which are capable of producing electronic interconnect products from development, design, quick-turn prototype and pre-production through volume production and assembly. Many OEMs have accelerated this process by outsourcing their captive component, subsystem and even system manufacturing to focus on their core competencies. The accelerated time-to-market and time-to-volume needs of OEMs have resulted in increased collaboration with qualified suppliers capable of providing a broad and integrated offering. To meet their rapidly changing electronic interconnect requirements, many OEMs have moved to limit their vendor base to a smaller number of technically qualified, strategically located suppliers capable of providing both quick-turn prototype and pre-production quantities as well as cost-competitive volume production quantities.
PROLIFERATION OF ELECTRONICS AND CREATION OF NEW MARKETS. The markets for electronic products are growing as a result of technological change, increasing demands for a wider variety of electronic product features and more powerful and less expensive electronic components. Due to this growth, new markets have emerged in computing, data communications, telecommunications and multimedia. Moreover, existing markets such as computer networking and peripherals, digital and mobile communications, video-on-demand, the Internet, instrumentation and industrial controls have significantly expanded product applications.
CURRENT PRODUCT APPLICATIONS The Company provides flexible circuit interconnect products to a diverse group of markets. Historically, the HDD market has represented the largest component of the Company's sales at 59%, 74% and 85% of total sales for 2000, 1999 and 1998. Through the ADFlex acquisition and new market expansion efforts, the Company is continuing its efforts to reduce the impact of cyclicality of the HDD industry on its business. However, net sales attributable to this market are expected to continue to represent a large component of total sales for the foreseeable future. Accordingly, the occurrence of significant slowdowns or changes in this industry has had and may continue to have a material adverse effect on the Company's operating results.
Current applications addressed by the Company include:
HARD DISK DRIVES. The HDD market uses flexible circuits as the interconnect between the read/write head and disk drive electronics. In HDD applications, circuits need to mechanically flex hundreds of millions of times through the life of the drive. These HDD applications include the Company's head interconnect flex ("HIF") which provides the electrical interconnect from the disk drive head to the back end electronics (actuator flex) of the disk drive. The HIF is bonded to a disk drive suspension by the Company's customers. The Flex Suspension Assembly ("FSA") is a HIF that is bonded to a suspension for customers desiring a more complete solution. The Bridge Flex ("BFC") product completes the connection from the suspension to the actuator flex for competing disk drive head interconnect solutions that terminate at the back end of the suspension. Prior to the use of flexible circuits, these disk drive interconnects were provided by lead wire assemblies which the Company produced. The Company also produces the actuator flex which provides the back end electronic interconnect for the disk drive. Mounting an unpackaged die directly onto the flexible circuit substrate, or flip chip, is becoming the predominant interconnect technology for these applications.
NETWORK SYSTEMS. Large individual drive storage systems are being replaced by arrays of less expensive disk drives or tape drives. The growth of personal computer networks has generated a growth in small arrays for local area network storage. In addition to the flexible circuit interconnects inside each of the individual drives, controlled impedance flex interconnects are used to connect the back of the drives to standard interface boards.
TELECOMMUNICATIONS. The use of polyimide flexible circuits in portable communications devices is growing as the space, weight and functionality challenges are becoming more difficult. In some cellular telephones, flexible circuits replace rigid PCBs, connectors and cables and can thereby reduce space, weight and cost.
CONSUMER. CD/DVD-ROMS are growing in consumer applications where higher capacity and quicker access time, compared to tape drives, are needed. These devices use flexible circuits as the interconnect between the read/write head and CD/DVD-ROM drive electronics.
COMPUTER AND OTHER. Early applications for flexible circuits in notebooks were mainly as interconnects from the motherboard to the LCD and as shielded jumpers. More recently, systems have used as many as ten flexible circuit interconnects per notebook, including PCMCIA connector/flex jumpers, LED/speaker flexible circuit assemblies, track ball/mouse button flexible circuit assemblies and various other shielded jumpers. A growing number of flexible circuit substrates are being used in semiconductor packaging applications and as interposers for high-density interconnect applications.
SALES AND SUPPORT The Company markets its products directly to a number of industries requiring electronic interconnects through the use of an internal sales staff. Historically, the Company has sold a substantial portion of its flexible circuit interconnects to a limited number of customers. Innovex has benefited from early entry as a supplier to the disk drive industry and has been able to leverage relationships established through its lead wire assembly interconnects to the next generation integrated flexible circuit interconnects. This, coupled with the Company's reputation for high standards of quality and innovative manufacturing processes, has established Innovex as a predominant supplier of interconnects for the industry. The Company has established sales with virtually every manufacturer of disk drive heads in the world and continues to work closely with virtually all of the world-wide disk drive head manufacturers on new generations of disk drive products. The Company's principal customers, each accounting for over 10 percent of the Company's consolidated net sales in at least one of the last three years are Read-Rite, SAE/TDK, Seagate and Yamaha. See Note J of Notes to Consolidated Financial Statements for additional information.
Because of the Company's focus on leading edge imaging technology, its customers include a number of the leading technology companies in the world including Acer, Alps, Compaq, Dell, Digital Equipment, General Electric, Hewlett Packard, IBM, Iomega, Littelfuse, Lucent, Maxtor, Medtronic, Motorola, Nokia, Philips, Qualcomm, Quantum, ReadRite, SAE Magnetics, Samsung, Seagate, Staktek, Storage Tek, Xerox and other leading electronic OEMs.
Even though the Company's customer mix will change from period to period in the future, the Company expects that sales to relatively few customers will continue to account for a high percentage of its net sales in the foreseeable future. The loss of a significant customer or a substantial reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the computer, computer peripheral, communications and high-end consumer markets has had and may continue to have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
RESEARCH AND DEVELOPMENT The Company continually engages in research, development and engineering activities. The Company's goals are to utilize these activities to improve and enhance existing products and to develop new products in order to expand its market share. During fiscal years 2000, 1999 and 1998, the Company spent approximately $3,472,000, $2,878,000 and $2,356,000 on research and development. The Company's research and development effort is concentrated on improving and increasing the long run flexible circuit manufacturing
capabilities for both adhesiveless and adhesive based flexible circuits, developing a high-quality source of material for double-sided flexible circuit applications and improving the attachment process for the new FSA product.
The Company expects to continue its past practice of acquiring new technology from outside sources through the payment of cash, Company stock and royalties.
ENVIRONMENTAL CONTROLS Flexible circuit interconnect manufacturing requires the use of chemicals. As a result, the Company is subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture the Company's products. The Company has conducted environmental studies of its facility in Chandler, Arizona, which revealed a limited amount of soil contamination that may require remediation. Based on these studies, the Company believes that the costs associated with the remediation of this situation will not have a material adverse effect on its operations or financial condition. However, given the uncertainties associated with environmental contamination, there can be no assurance that such costs will not have a material adverse impact on the Company. Pursuant to the agreements governing the 1993 ADFlex purchase of certain assets from the Rogers acquisition, Rogers Corporation has retained all environmental liabilities relating to the purchased assets prior to the closing date of the acquisition. While Rogers currently has sufficient assets to fulfill its obligations under the acquisition agreements, if environmental liabilities requiring remediation are discovered and the Company were unable to enforce the acquisition agreement against Rogers, the Company could become subject to costs and damages relating to such environmental liabilities. Any such costs and damages imposed on the Company could materially adversely affect the Company.
In mid 1995, ADFlex acquired a manufacturing facility located in Agua Prieta, Mexico. In connection with this acquisition, ADFlex conducted an environmental study of the facility that indicated there was contamination by hazardous materials in the soil and groundwater. Pursuant to the purchase agreement, the sellers submitted a remediation plan to the appropriate Mexican authorities which was approved in May 1997. Subsequent remediation was completed in December 1997. The seller is awaiting acknowledgment that the remediation plan has been approved and no further action is required by the Mexican authorities. The seller's obligation for the cost of remediation is limited to $2.5 million. A total of $1.0 million originally was held in escrow pending the seller's performance of its environmental obligations under the agreement. One third of the escrow balance was used to conduct the remediation and two thirds has been released to the seller.
The Company believes it has been operating its facilities in substantial compliance in all material respects with existing environmental laws and regulations. However, the Company cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. For this reason, the Company implemented procedures geared toward minimizing the negative impacts and reducing potential financial risks arising from environmental issues. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of regulatory agencies could require substantial expenditures by the Company and could adversely affect the results of operations of the Company. The Company does not anticipate any material amount of environmental-related capital expenditures in fiscal 2001.
BACKLOG The backlog for the Company's continuing operations was $19.1 million, $36.6 million and $15.2 million at September 30, 2000, 1999 and 1998. The increase in the 1999 backlog is due to the ADFlex acquisition. The Company's backlog fluctuates based on the timing of the receipt of orders from customers. Backlog is defined by the Company as firm orders that are scheduled to be delivered within 12 months from the date of the order. While the Company currently believes substantially all of its September 30, 2000 backlog will be delivered within 12 months, customers may determine not to release orders into production, may extend requested delivery dates or cancel orders. In such cases, the Company may not realize the revenue indicated by the backlog.
COMPETITION The flexible circuit interconnect market is differentiated by customers, markets and geography with each niche having its own combination of complex packaging and interconnection requirements. The Company believes it competes principally on the basis of design capability, price, quality, flexibility and technological advancements in underlying applications. During periods of economic slowdown in the electronics industry and other periods when excess capacity exists, electronic OEMs become more price sensitive. The Company believes that once a customer has selected a particular vendor to design and manufacture a flexible circuit interconnect, the customer generally relies upon that vendor's design for the life of that specific application and, to the extent possible, subsequent generations of similar applications. Accordingly, it is difficult to achieve significant sales to a particular customer with respect to any application once another vendor has been selected to design and manufacture the flexible circuit interconnect used in that application. While this market paradigm may provide a barrier to the Company's competitors in the markets served by the Company, it also may present an obstacle to the Company's entry into other markets.
The flexible circuit interconnect market is highly competitive. The Company experiences competition world-wide from a number of leading foreign and domestic providers such as Minnesota Mining and Manufacturing ("3M") and Sumitomo for high-end applications, and Nippon Mektron ("NOK"), Fujikura Ltd. ("Fujikura"), Nitto Denko, Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl Inc. ("Sheldahl") and Parlex Corporation ("Parlex") for mid-range applications. 3M, Sumitomo, NOK and Fujikura are substantially larger than the Company with greater financial and other resources. M-Flex, Sheldahl and Parlex are US-based flexible circuit manufacturers that have lower sales of polyimide flexible circuits than the Company and have historically targeted suppliers of computers, communication and automotive services and the military. Expansion of the Company's existing products or services could expose the Company to new competition. Moreover, new developments in the electronics industry could render existing technology obsolete or less competitive and could potentially introduce new competition into the market. There can be no assurance that the Company's competitors will not develop enhancements to, or future generations of, competitive products or services that will offer superior price or performance features to those of the Company or that new competitors will not enter the Company's markets. Finally, as many of the Company's competitors are based in foreign countries, they have cost structures and prices based on foreign currencies. Accordingly, currency fluctuations could cause the Company's dollar-priced products to be less competitive than its competitors' products priced in other currencies.
The Company also competes in assembly matters with leading flexible circuit assembly providers such as Smartflex Systems, Inc. ("Smartflex") and Pemstar. The Company believes that competition in assembly is primarily driven by availability of assembly technology, price and cycle time. The Company believes it competes favorably with these competitors because it offers its customers a complete flexible circuit interconnect solution including design, fabrication, assembly and testing.
The Company's competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price/performance characteristics. Competitive pressures often necessitate price reductions that adversely affect operating results. The Company will be required to make a continued high level of investment in product development and research, sales and marketing, and ongoing customer service and support to remain competitive. There can be no assurance that existing or future competitors will not be able to duplicate the Company's strategies or that competitive pressures faced by the Company will not have a material adverse effect on the Company.
EMPLOYEES As of September 30, 2000, the Company had a total of 5,251 employees. Of these employees, 120 were based at the Company's Maple Plain, Minnesota facility; 312 were based in Chandler, Arizona; 387 were based in Litchfield, Minnesota; 15 were based in Agua Prieta, Mexico and 4,417 were based in Thailand.
The Company has transferred operations from its Agua Prieta, Mexico facility to Lamphun Thailand. Those Mexican employees impacted by this transfer were paid severance in accordance with Mexican labor laws.
The Company's future operating results depend in part upon its ability to attract and retain other qualified management, technical, manufacturing, sales and support personnel for its operations. Competition for such personnel is intense and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The failure to attract or retain such persons could materially adversely affect the Company.
INTELLECTUAL PROPERTY The Company believes that, due to its customers' demands for rapid technological advances and the resulting limited product life cycles, the success of its business depends more on the technical and engineering expertise, creativity and marketing, and service abilities of its employees than on patents, trademarks and copyrights. Nevertheless, the Company owns patents and has a policy of seeking patents when appropriate on inventions concerning new products and improvements as part of its ongoing research, development and manufacturing activities. There can be no assurance that any patents issued to the Company will provide a competitive advantage or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or design around the patents issued to the Company. In addition, there can be no assurance that foreign intellectual property laws or the Company's agreements will protect the Company's intellectual property rights in any foreign country. Any failure to protect the Company's intellectual property rights could have a material adverse effect upon the Company.
SUPPLIERS The Company purchases raw circuit materials, process chemicals and various components from multiple outside sources. For components, the Company typically makes short-term purchasing commitments to key suppliers for specific customer programs. These commitments are usually made for three to twelve month periods. These suppliers commit to providing cooperative engineering, as required, and in some cases maintain a local inventory to provide shorter lead times and reduced inventory levels for the Company. In most cases, suppliers are approved, and are often dictated by the Company's customers. For process chemicals, the Company relies on a limited number of key suppliers. Alternate chemical products are available from other sources, but process chemical changes would often require requalification of the
processes, which could take weeks or months to complete. The Company has attempted to mitigate these risks by identifying stable companies with leading technology and delivery positions.
The Company currently purchases a number of its components, process chemicals and other materials from single sources. In the United States, these products are available only from a limited number of suppliers. There can be no assurance that these sources will continue to supply the Company with the materials needed at competitive prices.
While viable alternate suppliers exist, because of the Company's limited inventory of raw materials, tight manufacturing cycles and the significant amount of time required to qualify new suppliers, single sourcing is expected to continue. Consequently, any unanticipated interruption of material supplies or components would have a short-term material adverse effect on the Company.
TECHNOLOGY DESIGN TECHNOLOGY. The flexible circuit interconnects manufactured by the Company are designed specifically for each application, requiring significant joint design activities between the Company and the customer at the start of a project. The Company has developed design methodologies that solve difficult interconnection problems and save the customer time and money. The Company also designs and produces, in volume, flexible circuits that range from high-density, single-sided circuits to more complex double-sided and multi-layer circuits. The Company is continually investing in and improving its computer-based design tools to more quickly design new flexible circuit interconnects, to enhance cooperative design and communication with its customers and to more closely link designs to the manufacturing process. The Company is recognized as a technology leader in fine-line, single-sided flexible circuit technology and flexible circuit assembly technology, including advanced chip-on-flex, flip-chip-on-flex and high-density polyimide assembly technologies.
CIRCUIT FABRICATION TECHNOLOGY. The Company has extensive experience in fine-line polyimide flex and has pioneered manufacturing processes that deliver high unit volumes at cost-effective yields. At the core of the process is roll-to-roll subtractive fine-line circuit processing. The starting materials are flexible laminates composed of a thin dielectric film that is either adhesive-bonded to treated copper foil or metalized without the use of adhesives. Very accurate images (down to 0.001") are produced in volume in photoresist. Circuit conductors are then formed by chemically etching the underlying copper foil. Coverfilm materials are adhered to the circuitry to provide an insulative coating and to expose contact pads for surface metalization. The exposed surfaces are then coated with solder for surface mount or bondable gold for chip-on-flex applications. Laser processing is then used to create various openings to drill vias and cut contoured peripheries in substrate materials.
The Company's key flexible circuit fabrication technologies include:
FINE FEATURE ROLL-TO-ROLL IMAGING AND ETCHING. Allows the fabrication of circuits with very fine line widths and spaces. This is critical to meeting complex space constrained interconnection needs. Processing wide web (up to 24 inches) in a continuous roll-to-roll format (as opposed to discrete panels) allows fabrication of high circuit volumes with improved material utilization resulting in lower cost.
LASER PROCESSING. Laser technology is used to produce low cost, very fine openings, small vias and contoured shapes that solve density problems while avoiding more expensive traditional alternatives. Also, using a laser to cut the periphery of parts allows prototypes and low volume production parts to be built faster and without the cost of blanking die.
BONDABLE GOLD PLATING. Prepares flexible circuits for chip-on-flex bonding, a process which saves space and improves electrical performance (access time) by wire bonding an IC die directly to the flexible circuit.
COVERFILM, LAY-UP AND LAMINATION. A process where coverfilm materials are adhered to the circuitry to provide an insulative coating and to expose contact pads for surface metalization. This process allows accurate positioning of solder plated pads to support fine pitch surface mount assembly to the finished circuits.
ASSEMBLY AND TEST TECHNOLOGY. The Company applies advanced assembly and test technology to provide flexible circuit interconnect assemblies to its customers. The Company assembles passive electrical and various mechanical components, including connectors, stiffeners, diodes, formed metal parts and other devices to its flexible circuits using primarily manual processes in its plants in Thailand. The Company also performs advanced direct die attach and assembly of integrated circuit devices as well as the functional testing of these flexible circuit assemblies. Assembling these components directly onto the flexible circuit increases performance and reduces space, weight and cost.
MANUFACTURING The Company has developed a manufacturing process that combines the use of technology with the deployment of human resources in a geographic and organizational manner that allows the Company to compete on a pure cost basis, if necessary, with suppliers of similar
products throughout the world. Quality systems are in place that are certified to standards set by demanding customers in the electronics industry. The Chandler facility is ISO 9001 certified and the Lamphun Thailand operation has received ISO 9002 certification.
The Company believes it enjoys a cost advantage based on a manufacturing process designed to optimize the utilization of automation, labor and capital, and a manufacturing process and technology with better yield, material utilization and throughput relative to its competitors. The Company also believes that integrating assembly technology with manufacturing technology and high-volume production capabilities will over time provide improvements in its production costs through higher product yields, faster production ramps, reduced inventories, shortened production cycle times, improved account control and increased leverage over expenses. In addition, the Company has expanded its Thailand manufacturing operation. The Company anticipates that the expanded Thailand facility will enable it to attain significant cost reductions that are crucial to mitigating competitive price pressures in Asia and help sustain the Company's implementation of a complete flexible circuit interconnect solution including design, fabrication, assembly and testing.
FOREIGN SALES AND OPERATIONS The Company has finishing, assembly and inspection facilities located in Korat and Lamphun, Thailand. While the Company believes it has established good relationships with its local labor forces and the local governments, the spread of the manufacturing process over multiple countries subjects the Company to risks inherent in international operations. Those risks include currency fluctuations, inflationary pressures, unexpected changes in regulatory requirements, tariffs and barriers, potentially limited intellectual property protection, potential cross border shipment delays, changes in political climate, difficulties in coordinating and managing foreign operations, foreign labor issues, increases in employee turnover and potentially adverse tax consequences. Any of the foregoing could have a material adverse effect on the Company.
While Innovex transacts business predominantly in U.S. Dollars and the majority of its net sales are collected in U.S. Dollars, an increasing portion of its sales and expenses are denominated in foreign currencies. Changes in the relation of foreign currencies to the U.S. Dollar will affect the Company's cost of goods sold and operating margins and could result in exchange losses. To reduce the impact of certain foreign currency fluctuations, the Company enters into short-term forward foreign currency exchange contracts (hedges) in the regular course of business. The forward exchange contracts generally require the Company to exchange foreign currencies for U.S. Dollars at maturity, at rates agreed to at inception of the contracts. The gains or losses on hedges of transaction and remeasurement exposure are included in income in the period in which the exchange rates change. The gains and losses on unhedged foreign currency transactions are included in income as incurred. No assurance can be given that the Company's hedging strategies will prevent future currency fluctuations from adversely affecting the Company.
Although a large portion of the sales and expenses for the Thailand operation are denominated in U.S. Dollars, an increasing portion of the sales are denominated in Thai Baht due to the purchase of the Company's Thailand subcontractor in October 1999. The Thai Baht experienced significant fluctuations in relation to the U.S. Dollar during portions of 1999 and 2000. The fluctuations did not have a significant impact on the Company's results of operations for those years. However, there can be no assurance that future currency fluctuations will not have a material adverse effect on the Company.
ITEM 2.
ITEM 2. PROPERTIES
In total, at September 30, 2000, the Company leased or owned approximately 711,000 square feet of manufacturing and other space. The Company's significant facilities are as follows:
The Company constructed the building in Maple Plain, Minnesota to be used for the manufacturing of materials for use in double-sided flexible circuit production, research and development and corporate offices. The Company obtained the Arizona, Mexico and Thailand facilities during fiscal 1999 as part of the ADFlex acquisition. The Lamphun Thailand facility was completed in February 1999 and will be used for circuit finishing and assembly. In November 1999, the Company made the determination to close the Mexican facility and combine its operations with those in Thailand to reduce excess manufacturing capacity. The Korat Thailand facility was obtained in October 1999 with the acquisition of the Company's Thailand subcontractor. The Company believes that the facilities in Arizona, Minnesota and Thailand are adequate to meet its current requirements, and that suitable additional space or substitute space is readily available as needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to, and none of its property is the subject of, any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matter to a vote of its security holders during the fourth quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position - ---- --- --------
Thomas W. Haley 64 Chairman, and Director of the Company
William P. Murnane 38 President and Chief Executive Officer
Allan J. Chan 50 Senior Vice President, Sales and Marketing
Brian R. Dahmes 40 Vice President, Managing Director, Innovex (Thailand)
Douglas W. Keller 42 Vice President, Finance
Srinivas Kuchipudi 32 Vice President, Operations
Timothy S. McIntee 42 Senior Vice President, Corporate
Venkatraman B. Rao, Ph.D. 48 Vice President, Research & Development
Mr. Haley served as President of the Company from 1972 to 1988 and Chief Executive Officer from 1988 through 1999. He has been a Director and Chairman of the Company since its inception in 1972.
Mr. Murnane was promoted to President and Chief Operating Officer in July 1998 and to Chief Executive Officer in January 2000. Mr. Murnane joined the Company in July 1995 as Vice President. From June 1993 to June 1995, Mr. Murnane was Chief Operating Officer of Boutwell, Owens & Co., a private manufacturer of packaging, in Fitchburg, Massachusetts. From June 1992 to June 1993, Mr. Murnane was Director of Operations for Uniform Printing & Supply, Inc. in Acton, Massachusetts. Prior to that, he held various operating and corporate planning positions during a ten-year career at United Parcel Service.
Mr. Chan joined the Company in June 1988 as Director of Sales and Marketing for the Precision Products Division. In October 1990 Mr. Chan was promoted to Vice President of Sales and Marketing of the Precision Products Division. In 1991 his responsibilities were expanded to include manufacturing. In May 1995, he was promoted to Vice President and General Manager of Precision Products Division. In July of 1998, he was promoted to Senior Vice President , Sales and Marketing. Prior to joining Innovex, Mr. Chan was the Director of Sales and Marketing for Braemar Computer Corporation a division of Carlysle Corporation.
Mr. Dahmes joined the Company in July 1997 as Plant Manager. Mr. Dahmes was promoted to Director of Manufacturing in July 1998 and to Vice President, Quality in March of 1999. In November 1999, he accepted his most recent promotion to Vice President, Managing Director Innovex (Thailand). From 1992 to 1995, Mr. Dahmes served as Process Engineering Manager for Sheldahl Interconnect, and from 1995 to 1997 he was an Engineering Manager with Sheldahl Microproducts.
Mr. Keller joined the Company in January 1990 as Corporate Controller. In May 1992, Mr. Keller was made an officer of the corporation and in October 1996 he was promoted to Vice President, Finance. From July 1988 to January 1990, Mr. Keller was Manager of Financial Accounting and Tax for UFE, Inc., a manufacturer of injection molded plastic components. From 1983 to 1988, Mr. Keller was a Senior Auditor for the Pillsbury Company. From 1980 to 1983, he was a Senior Accountant with Deloitte Haskins & Sells, a CPA firm.
Mr. Kuchipudi joined the Company in September 1999 as Vice President, Operations. From July 1996 to August 1999, Mr. Kuchipudi was a management consultant for Pittiglio Rabin Todd & McGrath. Prior to that, he held various engineering and marketing positions during a five-year career at Motorola, Inc.
Mr. McIntee joined the Company in August 1997 as Vice President, Corporate Development and was promoted to Senior Vice President, Corporate in July 1998. From 1984 to 1997, Mr. McIntee was an attorney for the law firm of Lindquist & Vennum in the Mergers & Acquisitions Division. Prior to that, he was a CPA for several years.
Dr. Rao joined the company in December 1998 as the Vice President, Research and Development. Prior to that he held various senior management R&D positions at Silicon Graphics Inc., Cray Research Inc., Supercomputer Systems Inc. and Tektronix. Dr. Rao successfully led teams for the development of advanced high-density multi-chip modules, integrated circuits, multilayer printed circuit boards, flex circuits and flip chip assembly for high end super computer applications.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
COMMON STOCK INFORMATION The Company's common stock is traded in the over-the-counter market under the symbol "INVX." The table below sets forth the high and low closing sale prices as reported by NASDAQ. As of November 24, 2000, the Company had 655 shareholders of record. The Company has not paid a dividend since November 1999. The Company's intention is to continue this policy.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from the consolidated financial statements of the Company for each of the years in the five-year period ended September 30, 2000. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and related notes thereto included elsewhere in this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS SUMMARY The Company reported a net loss of ($11,054,000), or ($0.75) basic and diluted net income per share for the fiscal year ended September 30, 2000. This compares to net income of $6,559,000, $0.44 basic and diluted net income per share in fiscal 1999 and $15,911,000, $1.08 basic and $1.05 diluted net income per share in 1998. Fiscal 2000 results decreased as compared to fiscal 1999 primarily due to charges to restructure the Company's manufacturing operations by eliminating excess capacity, moving operations from Mexico to Thailand and closing the Mexican facility. The decrease is also due to operating losses generated by the acquired ADFlex operation and increased interest expense as a result of the ADFlex acquisition. Revenue related to the acquired ADFlex operation decreased throughout fiscal 2000 as a result of pre-acquisition customer service and quality issues and the operations relatively high cost structure. During fiscal 2000, Innovex took the steps necessary to turn the operation around. The higher cost Mexican facility was closed with operations being transferred to the expanded lower cost Lamphun Thailand facility and the manufacturing, customer service and quality areas were strengthened. At the end of fiscal 2000, the Company began to see a resurgence of orders related to the acquired operation and as a result, expects improving revenue and operating results from the acquired ADFlex operation in fiscal 2001.
Fiscal 1999 results decreased in comparison to 1998 due to the increase in flexible circuit sales to the disk drive industry not offsetting the phase out of lead wire assembly revenue. This was due in part to continued disk drive industry softness. This softness appears to be the result of an over supply of disk drives and due to a reduction in the number of disk drives kept in inventory by computer manufacturers that have adopted a build-to-order business model. Also contributing to the sales decrease was a reduction in the average number of heads per disk drive. This reduction is the result of an increasing number of low-cost disk drives being sold and as a result of the use of magneto resistive (MR) and Giant Magneto Resistive (GMR) disk drive heads which increase the storage capacity per disk drive platter and reduce the number of heads required to provide the same disk drive capacity.
The decrease in gross margin percent in fiscal 2000 was primarily due to the inclusion of lower margin revenue related to the acquired ADFlex operation. The acquisition related revenue generates a lower gross margin percent than Innovex's high-end flexible circuit revenue due to the higher material content of the assembly portion of the business and lower level of technical tolerances required. Gross margins for the acquired ADFlex operation are also lower due the higher level of fixed costs related to the operation. The drop in gross margin percent during 1999 as compared to 1998 was due to several factors, the inclusion of 8 weeks of lower margin ADFlex related sales, reduced yields and costs related to an aggressive new product ramp up in production concurrent with new flexible circuit capacity
installation and due to lower shipments of lead wire assemblies reducing the leverage of the fixed overhead costs related to their production.
Operating expenses were 14.5% of revenue in fiscal 2000 as compared to 13.9% and 12.0% of revenue in fiscal years 1999 and 1998, respectively. The increase in fiscal 2000 operating expenses is a result of amortization of intangibles related to the ADFlex acquisition and the acquisition of the Company's Thailand subcontractor and higher engineering expenses related to the development of a base material manufacturing process at the Company's new Maple Plain facility. The increase in operating expenses as a percent of sales for 1999 over 1998 is primarily due to increases in marketing, professional and legal expenses.
RESULTS OF OPERATIONS NET SALES. The Company's net sales of $164,462,000 for fiscal 2000 increased 59% from fiscal 1999 net sales of $103,198,000. The increase in 2000 over 1999 was due, in part to the increase in flexible circuit revenue from the disk drive industry. In addition, a large portion of the increase was due to revenue generated from the telecommunication, network system, consumer and other industries related to the August 1999 acquisition of ADFlex. These increases offset a reduction in revenue generated from lead wire interconnects as the disk drive industry transitioned to integrated interconnects including the Company's Head Interconnect Flex (HIF) and Flex Suspension Assembly (FSA). Less than 1% of revenue for fiscal 2000 was generated by lead wire assemblies as compared to 26% for fiscal 1999.
Net sales for fiscal 1999 were $103,198,000, a 7% increase from 1998 net sales of $96,278,000. The increase in 1999 over 1998 was primarily due to the fourth quarter results including eight weeks of operating results related to the acquisition of ADFlex Solutions, Inc. Excluding the acquisition related revenue, net sales would have decreased by 14%. Fiscal 1999 revenue was impacted by the transition of the disk drive industry from traditional lead wire interconnects to integrated interconnects including the Company's Head Interconnect Flex (HIF). The large increase in these flexible circuit sales to the disk drive industry did not offset the phase out of lead wire assembly revenue. This was due in part to continued disk drive industry softness as a result of an over supply of disk drives and due to a reduction in the number of disk drives kept in inventory by computer manufacturers that have adopted a build-to-order business model. Also contributing to the sales decrease was a reduction in the average number of heads per disk drive. This reduction is the result of an increasing number of low-cost disk drives being sold and as a result of the use of magneto resistive (MR) and Giant Magneto Resistive (GMR) disk drive heads which increase the storage capacity per disk drive platter and reduce the number of heads required to provide the same disk drive capacity.
Revenue from the disk drive industry generated 59% of fiscal 2000 revenue and is expected to be a similar percentage during fiscal 2001. In addition, during fiscal 2000, 15% of the revenue was generated by flexible circuits for consumer applications, 11% from network system applications, 9% from telecommunications applications and 6% from applications from other industries. The acquisition of ADFlex has reduced the Company's dependence on the disk drive industry significantly from its historical levels of 85-90% of revenue. Fiscal 2001 should benefit from continued growth in the demand for high technology flexible circuit products including the Company's HIF and FSA. Significant progress has been made in gaining customer acceptance of the Company's FSA product that will be integral to increasing revenue in fiscal 2001.
Export sales accounted for 73% of the Company's revenue in fiscal 2000 as compared to 74% for 1999 and 83% for 1998, reflecting the high level of interconnect shipments to electronic manufacturers in Asia. A significant portion of the remaining domestic sales are subsequently shipped internationally by the Company's customers.
GROSS MARGIN. The Company's gross profit as a percent of sales for fiscal 2000 decreased to 15.0%, from the 26.1% reported for fiscal 1999. The decrease was primarily due to fiscal 2000 including lower margin revenue related to the acquired ADFlex operation. The acquisition related revenue generates a lower gross margin percent than the high-end Innovex flexible circuit revenue due to the higher material content of the assembly portion of the business and lower level of technical tolerances required. Gross margins for the acquired ADFlex operation are also lower due the level of fixed costs related to the operation. The Company anticipates growing gross margin percents on the pre-acquisition Innovex revenue during fiscal 2001 through improved yield performance and increased utilization of the high volume manufacturing facility. Gross margins on the revenue generated by the acquired operations are expected to improve as a result of the transfer of manufacturing operations from Mexico to Thailand and other cost saving initiatives.
The Company's gross profit margin decreased to 26.1% of sales in fiscal 1999 as compared to 33.3% in 1998. The decrease in 1999 was partially due to the fourth quarter results including eight weeks of operating results related to the acquisition of ADFlex Solutions, Inc. The ADFlex revenue generates a lower gross margin percent than the existing Innovex flexible circuit revenue due to the higher material content of the assembly portion of the business and lower level of technical tolerances required. Gross margins for the pre-purchase high-end flexible circuit revenue were lower in the fourth quarter due to reduced yields and costs related to an aggressive new product ramp up in production concurrent with new capacity installation. In addition, the fiscal 1999 gross margin percent decreased due to lower shipments of lead wire assemblies reducing the leverage of the fixed overhead costs related to their production.
OPERATING EXPENSES. Selling, general and administrative expenses were 9.8% of net sales in 2000 as compared to 9.5% in 1999 and 7.7% in 1998. The increase in selling, general and administrative expenses in fiscal 2000 over 1999 is the result of the amortization of intangibles related to the ADFlex and the Thailand subcontractor acquisitions. The increase in operating expenses as a percent of sales for 1999 as compared to 1998 is primarily due to the decrease in revenue and an increase in marketing, professional and legal expenses. Increases in marketing expenses were incurred to expand efforts to diversify the Company's revenue base and increases in professional services were due to consultants being retained to improve the manufacturing operation efficiency. Fiscal 2001 operating expenses should decrease as a percent of sales as a result of modest increases in spending offset by the expected increase in revenue from the Company's FSA product and other new product applications.
Engineering expense increased to 4.7% of net sales in fiscal 2000 from 4.4% in 1999 and 4.3% in 1998. The increase in operating expenses as a percent of sales for fiscal 2000 is due to an increase in engineering expense related to the development of base material manufacturing process in the new Maple Plain Minnesota facility. Engineering spending remained relatively stable in fiscal 1999 as compared to 1998. The fiscal 2000 and 1999 spending was concentrated on FSA development and the development of a process to manufacture material for use in producing double sided, plated through-hole flexible circuits. Fiscal 2001 engineering spending is expected to concentrate on technologies related to the material producing capability, FSA capabilities, semiconductor packaging substrates and other high-end flexible circuit technology development.
RESTRUCTURING CHARGES. A restructuring charge of $13,785,000 was recorded during the first quarter of fiscal 2000 related to the restructuring of the Company's manufacturing operations. The restructuring is primarily related to moving operations from the Company's Agua Prieta, Mexico facility to its new facility in Lamphun, Thailand. The majority of this charge includes employee severance, asset impairment of property and equipment and facility abandonment costs. The restructuring is expected to significantly reduce operating costs as a result of consolidating facilities and the lower Thailand cost structure. A change in estimate was made in the fourth quarter to reduce employee termination benefits by $1.5 million and increase facility abandonment charges by $1.5 million. This was the result of higher turnover than projected and higher than expected costs to dispose of the Mexican facility. A $184,000 reduction in estimated restructuring charges was recorded in the third quarter primarily related to the lead wire product line disposition.
Restructuring charges for fiscal 1999 included a $2.8 million charge related to the discontinuation of the lead wire assembly product line and charges of $1.7 million related to the disposition of Iconovex, Innovex's software division.
INTEREST INCOME (EXPENSE). Interest income decreased to $524,000 in fiscal 2000 from $2,035,000 and $2,029,000 in 1999 and 1998, respectively. The decrease in fiscal 2000 corresponds to the reduction in the Company's excess cash as a result of the ADFlex acquisition and the high level of capital expenditures in fiscal 2000. Interest expense increased to $3,193,000 in 2000, from $467,000 in 1999 and $69,000 in 1998. Interest expense increased substantially in fiscal 2000 related to the new $40 million credit facility put in place related to the ADFlex acquisition.
OTHER INCOME (EXPENSE). Net other expense for fiscal 1999 included a $630,000 charge related to the settlement of threatened litigation by a former director of the Company.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES. Income (loss) before provision for income taxes was ($15,570,000) for fiscal 2000 as compared to $9,239,000 for 1999 and $22,654,000 for 1998. As a percent of net sales, income before provision for income taxes was (9.5%) for 2000 as compared to 9.0% and 23.4% for 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments decreased by $23,863,000 to $1,678,000 at September 30, 2000. Net cash provided by operating activities decreased in 2000 to $766,000 from $26,215,000 in 1999 and $32,207,000 in 1998. The reduction in cash and short-term investments and in net cash provided by operating activities during fiscal 2000 was primarily due to charges to restructure the Company's manufacturing operations, temporary increases in inventory as a result of the move from Mexico to Thailand, operating losses generated by the acquired ADFlex operation and increased interest expense. The Company invested approximately $24 million in capital expenditures in both fiscal 2000 and 1999. These capital expenditures in both fiscal 2000 and 1999 include additional equipment to increase the capacity of the automated flexible circuit production facility in Litchfield, Minnesota and the costs to construct and equip a material manufacturing facility. In addition, fiscal 2000 included capital expenditures to increase the capacity of the Lamphun Thailand facility as part of the manufacturing restructuring plan to close the Mexican facility and move the operation to Thailand. The increase in 1998 cash and short-term investments was primarily due to cash flows from operations. During fiscal 1998, the Company invested approximately $13 million in capital expenditures. These expenditures included a portion of the costs to construct and equip an automated flexible circuit production facility. This facility was constructed to meet the expected demand for high-volume applications including the HIF, FSA and semiconductor packaging related products. The Company also acquired the assets and operations of its Thailand subcontractor in October 1999 for $3,750,000.
On September 15, 1999, the Company entered into a new credit facility arranged by Norwest Bank Minnesota N.A. which includes U.S. Bank N.A. as an additional lender. The facility was put in place to pay off all outstanding balances existing at the time of the ADFlex acquisition under the Credit Agreement among ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended, as required by the ADFlex merger agreement. The new credit facility consists of a $15.0 million, five-year revolving line of credit and a $25.0 million, five-year term loan with equal principal payments due each quarter commencing on October 1, 2000 and continuing through the September 14, 2004 maturity date. At September 30, 2000, $25 million was outstanding under the term loan and $9.7 million was outstanding under the revolving line of credit.
Working capital decreased by $24,724,000 to $6,297,000 at September 30, 2000. The Company's current ratio was 1.1 to 1 at fiscal 2000 year-end, compared to 1.7 to 1 at the end of fiscal 1999. The decrease is primarily due to the reduced level of cash and short term investments and the increase in current maturities of long term debt.
Net property, plant and equipment increased by $7 million to $94,520,000 at September 30, 2000. The increase was due to capital expenditures related to increasing the capacity of the automated flexible circuit production facility in Litchfield, Minnesota, capital expenditures to expand the Lamphun Thailand facility capacity and a portion of the costs to construct and equip a new material manufacturing facility in Maple Plain, Minnesota offset by assets disposed of as part of the manufacturing restructuring including the closing of the Agua Prieta Mexico facility. Intangible assets increased $2.2 million to $7.1 million at September 30, 2000 primarily as a result of the acquisition of the Company's Thailand subcontractor.
Long-term debt, net of current maturities, decreased by $5 million as a portion of the credit facility entered into in 1999 as a result of the ADFlex acquisition is payable in fiscal 2001 and was transferred to current maturities of long-term debt. The ratio of long-term debt to stockholders' equity was .218 at September 30, 2000 compared to .246 at the end of fiscal 1999.
Management has entered into negotiations for obtaining additional credit facilities that would be secured by the receivables, inventory and assets held by the Company in Thailand. Management believes the establishment of a credit facility secured by Thailand assets, existing credit facilities, cash and investments and cash generated from operations will provide an adequate source of funds to support projected working capital and capital expenditures in fiscal 2001.
FORWARD-LOOKING INFORMATION Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in the Annual Report, in the Company's Form 10-K 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 timely availability and acceptance of new products including the FSA and semiconductor packaging substrates, the impact of competitive products and pricing, the development and implementation of a materials manufacturing process, the transfer of Mexican operations to Thailand and the associated rapid expansion of the Thailand manufacturing capabilities, interruptions in the operations the Company's single source suppliers, changes in manufacturing efficiencies and other risks detailed from time to time in the Company's reports filed with the Securities and Exchange Commission. In addition, a significant portion of the Company's revenue is generated from the disk drive, consumer electronics, network system and telecommunication industries and any changes in the structure, technology or outlook of these industries could have a significant impact on the Company's operations. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect subsequent events or circumstances or the occurrence of unanticipated events.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. While the Company transacts business predominately in U.S. Dollars and a majority of its net sales are collected in U.S. Dollars, a material portion of its sales and expenses are denominated in foreign currencies. Changes in the relation of foreign currencies to the U.S. Dollar will affect the Company's cost of goods sold and operating margins and could result in exchange gains or losses. To reduce the impact of certain foreign currency fluctuations, the Company enters into short-term forward foreign currency exchange contracts (hedges) in the regular course of business to manage its risk exposure, not as speculative instruments. Typically, these contracts have maturities of 2 months or less. The forward exchange contracts generally require the Company to exchange foreign currencies for U.S. Dollars at maturity, at rates agreed to at inception of the contracts. The gains or losses on hedges of transaction exposure are included in income in the period in which the exchange rates change. The gains and losses on unhedged foreign currency transactions are included in income.
The Company periodically reviews the outlook for expected currency exchange rate movements as well as the policy on desired future foreign currency cash flow positions (long, short, balanced) for those currencies in which the Company has significant activity. Expected future cash flow positions and strategies are continuously monitored. At September 30, 2000, the Company had three open forward exchange contracts to sell Thai Baht for a total of 280,000,000 Thai Baht. No assurance can be given that the Company's hedging
strategies will prevent future currency fluctuations from adversely affecting the Company's business, financial condition, results of operations and cash flows.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL DATA
Page Report of Independent Certified Public Accountants 18 Consolidated Balance Sheets at September 30, 2000 and 1999 19 Consolidated Statements of Operations for each of the three years in the period ended September 30, 2000 20 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2000 21 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 2000 22 Notes to Consolidated Financial Statements 23-31 Quarterly Financial Data (unaudited) 31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Innovex, Inc.
We have audited the accompanying consolidated balance sheets of Innovex, Inc. and Subsidiaries as of September 30, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innovex, Inc. and Subsidiaries as of September 30, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule II of Innovex, Inc. and Subsidiaries to Form 10-K for each of the three years in the period ended September 30, 2000. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
\s\ Grant Thornton LLP
Minneapolis, Minnesota November 3, 2000
CONSOLIDATED BALANCE SHEETS INNOVEX, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS INNOVEX, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY INNOVEX, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS INNOVEX, INC. AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURES: Cash paid for interest was approximately $2,743,000; $895,000 and $66,000 in 2000, 1999 and 1998.
Income tax payments were approximately $0; $2,181,000 and $7,005,000 in 2000, 1999 and 1998.
Tax benefits derived from exercise of stock options totaling approximately $179,000; $76,000 and $547,000 in 2000, 1999 and 1998 were recorded as a reduction of current income taxes payable and an increase in capital in excess of par value.
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INNOVEX, INC. AND SUBSIDIARIES September 30, 2000, 1999 and 1998
NOTE A. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a diversified manufacturer of electrical components for the computer, network systems, consumer, medical, telecommunications and other electronic industries. Substantially all of the Company's revenues, operating profits (losses) and assets relate to one operating unit involved in the manufacture of flexible circuit interconnects. Company customers are located throughout the United States, Europe and the Pacific Rim. The Company has manufacturing facilities in Chandler, Arizona; Litchfield and Maple Plain, Minnesota and Thailand.
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company utilizes a fiscal year that ends on the Saturday nearest to September 30. For clarity of presentation, the Company has described all periods as if the year ended September 30. The fiscal years ended September 30, 2000, 1999 and 1998 include fifty-two weeks, fifty-two weeks and fifty-three weeks of operations.
FOREIGN CURRENCY TRANSLATION - The Company uses the United States Dollar as its functional currency for its subsidiaries in Mexico and Thailand. Remeasurement gains and losses, resulting from the process of remeasuring the financial statements of these foreign subsidiaries into U.S. Dollars, are included in operations.
FOREIGN EXCHANGE INSTRUMENTS - The Company enters into short-term forward foreign currency exchange contracts in the regular course of business to manage its exposure against foreign currency fluctuations, primarily relating to nonfunctional currency monetary assets and liabilities. The forward exchange contracts generally require the Company to exchange Thailand Baht for U.S. dollars or U.S. Dollars for foreign currencies at maturity, at rates agreed to at inception of the contracts. The gains or losses on hedges of transaction exposure are included in income in the period in which the exchange rates change. The gains and losses on unhedged foreign currency transactions are included in income. At September 30, 2000, the Company had open forward exchange sale contracts totaling 280,000,000 Thailand Baht, approximately $6.4 million, maturing through October 27, 2000. At September 30, 1999, there were no open forward currency exchange contracts. The Company does not enter into forward contracts for trading purposes.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company considers all highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Cash equivalents, which consist of money market funds and weekly put bonds, totaled $1,559,000 at September 30, 1999 and are recorded at cost, which approximates market value. Debt securities have been classified as held-to-maturity securities, which are reported at amortized cost.
ACCOUNTS RECEIVABLE - The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of customers. The Company maintains allowances for potential credit losses.
INVENTORIES - Inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Depreciation is provided using the straight-line method over the estimated useful lives of the assets for financial reporting and accelerated methods for tax purposes. Estimated service lives range from 5 to 30 years for buildings and leasehold improvements, from 2 to 7 years for machinery and equipment and from 3 to 7 years for office furniture and fixtures.
INTANGIBLE ASSETS - Intangible assets include goodwill, patents, licenses, technology and trademarks, which are capitalized at cost and amortized on the straight-line basis over their estimated useful lives. Useful lives range from 3 to 10 years. Management reviews the valuation and amortization of goodwill on an ongoing basis. As part of this review, management estimates the value and future benefits of the net income to be generated by the businesses acquired to determine whether an impairment of goodwill has occurred.
NET INCOME (LOSS) PER SHARE - The Company's basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares. The Company's diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents related to stock options, when dilutive. Options to purchase 631,543, 193,650 and 196,250 shares of common stock with weighted average exercise purchase
prices of $15.20, $25.71 and $28.76 were outstanding during 2000, 1999 and 1998, but were excluded from the computation of common share equivalents because they were antidilutive.
REVENUE RECOGNITION - Sales are recorded at the time of shipment and provision for anticipated returns, net of exchanges, is recorded based on historical experience.
USE OF ESTIMATES - Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses and disclosure about contingent assets and liabilities at the date of financial statements. Actual results could differ from these estimates.
STOCK BASED COMPENSATION - The Company utilizes the intrinsic value method of accounting for its employee stock based compensation plans. Pro forma information related to the fair value based method of accounting is contained in Note F.
RECLASSIFICATIONS - Certain 1999 amounts have been reclassified to conform with 2000 presentation.
NEW PRONOUNCEMENTS - The Financial Accounting Standards Board ("FASB") issued FASB Interpretation 44, INTERPRETATION OF APB OPINION 25 ("FIN 44") in March 2000. FIN 44 provides an interpretation of APB Opinion 25 on accounting for employee stock compensation and describes its application to certain transactions. FIN 44 was effective on July 1, 2000. It applies on a prospective basis to events occurring after that date, except for certain transactions involving options granted to non-employees, repriced options, and modifications to add reload option features, which apply to awards granted after December 31, 1998. The provisions of FIN 44 did not have a material effect on options entered into through September 30, 2000.
The FASB has also issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS 133 also specifies new methods of accounting for derivatives used in risk management strategies (hedging activities), prescribes the items and transactions that may be hedged, and specifies detailed criteria required to qualify for hedge accounting. Management believes the adoption of SFAS 133 will not have a material effect on the consolidated financial statements of the Company.
NOTE B. - BUSINESS ACQUISITION
On October 3, 1999, the Company purchased the assets of its Thailand subcontractor for a total of $3,750,000. The purchase price included $757,000 allocated to property, plant and equipment and $2,993,000 allocated to goodwill and amortized on a straight line basis over 10 years.
On August 9, 1999, the Company purchased 76% of the outstanding shares of common stock of ADFlex Solutions, Inc.("ADFlex"). The remaining 24% of the shares outstanding were purchased on September 14, 1999. The $37.2 million purchase price, includes change in control payments of $1.9 million and transaction costs of $.9 million. The purchase price was paid in the form of cash. Pursuant to the purchase agreement, the Company was required to pay off all outstanding balances under that certain Credit Agreement among ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended (the "Credit Agreement"). Innovex obtained a credit facility totaling in principal amount $40 million, that was utilized to refinance amounts owed under the Credit Agreement, pay down ADFlex's current liabilities and pay related transaction costs. The acquisition has been accounted for as a purchase and, accordingly, the results of operations since acquisition are included in the accompanying financial statements. The excess cost over the fair value of net assets acquired of $3.9 million was allocated to goodwill and will be amortized on a straight-line basis over 10 years. The purchase price and fair value of the assets acquired were as follows (in thousands of dollars):
Current assets $33,687 Property, plant and equipment 46,163 Intangible assets 3,856 Deferred tax assets 11,929 Other long-term assets 47 Current liabilities (57,221) Other long-term liabilities (1,294) ------- $37,167 =======
The following unaudited pro forma results of operations for the years ended September 30, 1999 assume the acquisition occurred on October 1, 1998. The pro forma information includes adjustments for depreciation based on the fair market value of the property, plant and equipment acquired, amortization of intangibles arising from the transaction, the reduction of interest expense to reflect the
refinancing of the ADFlex credit facility, the reduction of interest income on cash used to complete the acquisition, the elimination of salaries of ADFlex executives terminated in conjunction with the merger and related changes in the provision for income tax expense (in thousands of dollars except per share amounts):
Year Ended - --------------------------------------------------------- Net sales $215,975 Net loss (6,845) Net loss per share: Basic $(0.46) Diluted $(0.46)
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated on the assumed date, nor are they necessarily indicative of future operating results.
NOTE C. - SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of tax exempt municipal bonds that are classified as held-to-maturity securities at September 30, 1999. As of September 30, 1999, a significant portion of the short-term investments had maturities within one year. Gross realized and unrealized gains and losses related to these securities were not material. Proceeds from sales of held-to-maturity securities during 2000, with an amortized cost of $5,684,000, were $5,651,000. During 1999, held-to-maturity securities with an amortized cost of $5,119,022, were sold for proceeds of $5,104,765. Net realized losses on the sale of these securities were immaterial. These proceeds were used to fund capital expenditures during fiscal 2000 and to complete the ADFlex acquisition on August 9 and September 14, 1999.
NOTE D. - INVENTORIES
Inventories are comprised of the following at September 30:
2000 1999 -------------------------------- Raw materials and purchased parts $11,803,667 $8,753,336 Work-in-process and finished goods 9,766,886 7,138,609 -------------------------------- $21,570,553 $15,891,945 ================================
NOTE E. - LINE OF CREDIT AND LONG-TERM DEBT
On September 15, 1999 the Company entered into a new credit facility arranged by Norwest Bank Minnesota N.A. which includes U.S. Bank N.A. as an additional lender. The facility was put in place to pay off all outstanding balances existing at the time of the ADFlex acquisition under the Credit Agreement among ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended, as required by the ADFlex merger agreement. The credit facility consists of a $15.0 million, five-year revolving line of credit and a $25.0 million, five-year term loan with equal principal payments due each quarter commencing on October 1, 2000 and continuing through the September 14, 2004 maturity date. Under the terms of the credit facility, any outstanding balance bears interest at Norwest Minnesota, N.A.'s prime interest rate plus an applicable margin ranging from 0 to .25% or LIBOR plus an applicable margin ranging from 1.25% to 3.0% based on the Company achieving certain financial objectives at the end of each quarter. The credit facility is collateralized by all accounts receivable, inventory, equipment and general intangibles of the Company. The Company is required, under the credit agreement, to maintain certain financial ratios and meet certain net worth and indebtedness tests for which the Company is in compliance at September 30, 2000. At September 30, 2000, $25.0 million was outstanding under the term loan and $9.7 million was outstanding under the revolving line of credit. At September 30, 1999, $25.0 million was outstanding under the term loan and $9.2 million was outstanding under the revolving line of credit. The interest rate for the term loan was 9.69% at September 30, 2000 and the rates for the revolving line of credit ranged from 9.65% to 10.75% at September 30, 2000.
Other long-term debt consists of capitalized leases of equipment. Net assets under capital lease as of September 30, 2000 are approximately $2.8 million. Interest rates on these range from 7.7% to 10.5%. Aggregate maturities of long-term debt including capitalized leases for the next five years are as follows (in thousands): 2001 - $7,198; 2002 - $6,859; 2003 - $6,854; 2004 - $6,859; 2005 - $431. The recorded value of long-term debt approximates fair market value.
NOTE F. - STOCKHOLDERS' EQUITY
Stock Option Plans -
The Company has stock option plans that 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 periods from six months to five years, and have an exercise price equal to the fair market value of the stock on the date of grant. At September 30, 2000, the Company had 439,870 shares of common stock available for issue under the plans.
Transactions under the plans during each of the three years in the period ending September 30, 2000 are summarized as follows:
Number of Weighted Shares Average Under Exercise Option Price - -------------------------------------------------------------------------------- Outstanding at October 1, 1997 944,464 8.92
Granted 187,750 28.52 Forfeited (137,300) 13.39 Exercised (160,100) 7.04 - ------------------------------------------------------------- Balance at September 30, 1998 834,814 12.95
Granted 459,400 12.10 Forfeited (113,300) 18.29 Exercised (42,500) 8.83 - ------------------------------------------------------------- Balance at September 30, 1999 1,138,414 12.23
Granted 546,750 8.33 Forfeited (196,570) 10.86 Exercised (97,646) 6.38 - ------------------------------------------------------------- Balance at September 30, 2000 1,390,948 11.30 ============
Options exercisable at September 30: Weighted Average Number Exercise Exercisable Price ------------------------------- 1998 270,564 $7.97 1999 434,114 9.25 2000 499,908 11.20
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 - -------------------------------------------------------------------------------- $0.33 - $3.46 20,598 3.9 years $ 2.01 20,598 $2.01 6.49 - 8.72 602,200 7.5 years 7.65 233,700 7.37 8.91 - 11.50 550,450 7.5 years 10.96 168,510 10.70 11.53 - 16.26 82,300 9.0 years 14.20 10,700 14.84 18.88 - 32.44 135,400 7.0 years 28.60 66,400 28.19 - -------------------------------------------------------------------------------- 1,390,948 499,908 =========== ==========
The Company's 2000, 1999 and 1998 pro forma net income (loss) and diluted net income (loss) per share would have been ($11,927,000), $5,871,000, and $15,307,000 or ($0.82), $0.39 and $1.02 had the fair value method been used for valuing options granted during those years. The impact on net income may differ in future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1996. The weighted average value of options granted in 2000, 1999 and 1998 was $4.26, $4.68 and $12.35. The value was computed by applying the following weighted average assumptions to the Black Scholes options pricing model: volatility of 54%, 51% and 53%; dividend yield of 0.0%, 1.2% and 0.4%; risk-free rate of return of 6.1%, 4.5% and 6.0%; and an average term of 4.5 for 2000 and 3.5 years for 1999 and 1998.
Employee Stock Purchase Plan -
During fiscal 2000, the Company established an Employee Stock Purchase Plan (ESPP) which is available to eligible employees. Under terms of the plan, eligible employees may designate from 1% to 10% of their compensation to be withheld through payroll deductions for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering period. Under the plan, 250,000 shares of common stock have been reserved for issuance. As of September 30, 2000, 10,636 shares have been issued under the plan. Fair value disclosures under SFAS No. 123 have not been disclosed for shares under the ESPP as such values are immaterial.
NOTE G. - INCOME TAXES
The effective income tax rates differed from the federal statutory income tax rate as follows for the years ended September 30:
2000 1999 1998 - ---------------------------------------------------------------- Federal statutory rate (34.0%) 34.0% 34.6% State income taxes (5.6) 3.1 1.8 FSC benefit (4.4) (9.2) (6.2) Foreign operating income benefit (4.0) -- -- Tax exempt interest (0.8) (6.8) (2.8) Allowances 16.2 -- -- Additional income tax accrual 1.6 6.8 1.9 Other 2.0 1.1 0.5 ---------------------------- (29.0%) 29.0% 29.8% ============================
The Company was able to apply a portion of its current year loss before income taxes against prior years' income. The additional loss carryforward of approximately $9.2 million which expires 2020 has been reflected as deferred assets, and is partially off-set by a valuation allowance, because its realization is not assured.
Components of the provision for income taxes are as follows for the years ended September 30 (thousands of dollars):
2000 1999 1998 - -------------------------------------------------------------------- Current: Federal ($5,284) $1,702 $5,128 State (1,310) 236 622 ---------------------------------- (6,594) 1,938 5,750 Deferred 2,079 742 993 ---------------------------------- ($4,515) $2,680 $6,743 ==================================
The cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes are as follows at September 30 (thousands of dollars):
2000 1999 - --------------------------------------------------------------------- Current deferred tax assets: Inventories $ 948 $ 1,638 Receivables 47 447 Compensation and benefits 331 329 Restructuring 738 893 Other 302 140 ----------------------- $ 2,366 $ 3,447 ======================= Long-term deferred tax assets (liabilities) - net: Accelerated depreciation $(5,330) $(2,914) Intangibles 10,299 9,758 Tax credit and NOL carryforwards 9,857 3,599 Allowances (5,381) -- ----------------------- $ 9,445 $10,443 =======================
In connection with the ADFlex acquisition, the Company previously recognized deferred tax assets representing net operating losses of $9.9 million expiring in 2018. During the current year, the Company recognized $7.9 million of additional net operating losses off-set by valuation allowances because the utilization of the losses is not assured.
NOTE H. - RETIREMENT AND PROFIT-SHARING PLANS
The Company sponsors a 401K retirement plan for all of its employees meeting minimum eligibility requirements. The plan provides Company matching contributions of 50% of the first 6% of employee contributions to the plan. An additional 401K retirement plan was also in effect for the last 8 weeks of fiscal 1999 and the first 13 weeks of fiscal 2000 relating to the ADFlex acquisition. This plan was sponsored for all employees of the ADFlex's United States operation. Under this plan, the Company made contributions each year up to a maximum of 4% of an employee's total compensation. The Company merged the ADFlex plan into the Company plan on December 31, 1999. Company contributions for both these plans were approximately $547,000, $385,000 and $435,000 for the years ended September 30, 2000, 1999 and 1998.
NOTE I. - RESEARCH AND DEVELOPMENT COSTS
The Company incurred research and development costs of approximately $3,472,000, $2,878,000 and $2,356,000 for the years ended September 30, 2000, 1999 and 1998.
NOTE J. - FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
Prior to the September 1999 ADFlex acquisition, the Company had no foreign-based operations; however, the Company utilized subcontractors in Thailand and China to perform certain labor intensive procedures on a large portion of its products. As part of the ADFlex acquisition, the Company acquired an Asian operation, located in Lamphun, Thailand. The Company will continue to increase the functions performed at this location in order to take advantage of the proximity to customers and favorable labor and operating costs. In addition, the Company purchased the assets of its Thailand subcontractor in October 1999. The Company had aggregate export sales of approximately $119,603,000, $76,607,000 and $79,957,000 for the years ending September 30, 2000, 1999 and 1998, principally to Pacific Rim customers. With respect to foreign operations for the years ended September 30, 2000 and 1999, long-lived assets of approximately $27,658,000 and $15,061,000 were located in Thailand and $4,313,000 and $12,308,000 were located Mexico, respectively.
Revenues from four customers made up a significant portion of the Company's total net sales during the years ending September 30:
2000 1999 1998 ----------------------------------- Customer A 33% 40% 28% Customer B 8 10 14 Customer C 6 14 20 Customer D - 1 12
Accounts receivable from the above four customers are 54% and 29% of the Company's accounts receivable at September 30, 2000 and 1999.
NOTE K. - COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under operating leases that expire at various dates through November 2003. As of September 30, 2000, the future minimum lease commitments under the operating leases are payable as follows (in thousands): 2001 - $1,052; 2002 - $953; 2003 - $734; 2004 - $128; 2005 - $2. The Company also entered into a $5.7 million six year term operating lease facility which is expected to begin in December 2000.
The nature of the Company's business exposes the Company to potential environmental remediation liabilities arising from the manufacture, use and disposal of hazardous materials used to manufacture flex interconnect products. Management believes that any cost associated with maintaining the Company's compliance with current environmental remediation laws will not have a material adverse effect on the Company's financial statements.
NOTE L. - RESTRUCTURING CHARGES
Manufacturing operations restructuring- The fiscal 2000 first quarter includes a $13,785,085 restructuring charge related to restructuring the Company's manufacturing operations. The restructuring is primarily related to moving operations from the Company's Agua Prieta, Mexico facility to its new facility in Lamphun, Thailand. The charge was recorded pursuant to a plan announced in November 1999. The charge included approximately $6,605,000 related to asset impairment of property and equipment, $356,000 for the write off of inventory and supplies, $176,000 for increasing the accounts receivable reserve, and accrued liabilities of $2,101,000 for facility abandonment costs and $4,547,000 in employee severance and benefits. The company expected approximately 2,100 employees to be terminated as a result of the restructuring, primarily in the Agua Prieta, Mexico facility. The restructuring was substantially complete as of September 2000 with the exception of completing the disposition of the Mexico facility. During the fourth quarter of fiscal 2000, the Company had a change in estimate of employee termination benefits. The change from the original estimate is due to higher turnover than projected. The Company believes the accrual at September 30, 2000 is adequate to finalize severance payments. The Company also increased its facility abandonment charges due to additional costs relating to the disposition of the facility located in Agua Prieta, Mexico.
Lead wire assembly product line disposition- During the fourth quarter of fiscal 1999, the Company recorded a charge of approximately $2,765,000 related to the discontinuation of the lead wire assembly product line. The charge included approximately $871,000 related to asset impairment, $1,403,000 for the write off of inventory and supplies, $197,000 in employee severance, $156,000 in facility abandonment costs and $138,000 to increase the accounts receivable reserve. The disposition was substantially completed by June 30, 2000. The restructuring charge was reduced by $184,000 in the third quarter of fiscal 2000 as a result of a change in the estimated liability.
Iconovex Division disposition- The 1999 results also include a $1,695,000 restructuring charge associated with the disposition of the Iconovex Division and its 51% owned joint venture, Smart Solution. This charge was recorded in June 1999 when all operations were ceased and announced in July 1999. The charge included $801,000 for prepaid expenses, $779,000 for intangible assets including capitalized software, $14,000 in employee severance and $101,000 for administrative costs. As of September 30, 1999, all amounts relating to this restructuring had been paid.
The remaining restructuring accrual as of September 30, 2000 totaled $1,726,000. Selected information regarding the restructuring follows (in thousands):
*The first quarter includes restructuring charges of $13,785,000 related to the restructuring of the Company's manufacturing operations.
**The third-quarter includes restructuring charges of $1,695,000 related to the disposition of Iconovex, Innovex's software division and the fourth-quarter includes $2,765,000 related to the discontinuation of the lead wire assembly product line.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" in the Registrant's definitive proxy statement to be mailed to shareholders on or about December 15, 2000, and filed with the Securities and Exchange Commission. Information on executive officers is set forth in Part I, Item 4A hereto.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the section entitled "Executive Compensation" and "Election of Directors" in the Registrant's definitive proxy statement to be mailed to the Shareholders on or about December 15, 2000, and filed with the Securities and Exchange Commission.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the section entitled "Security Ownership of Certain Beneficial Owners and Management" and "Election of Directors" in the Registrant's definitive proxy statement to be mailed to Shareholders on or about December 15, 2000, and filed with the Securities and Exchange Commission.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the section entitled "Certain Transactions" in the Registrant's definitive proxy statement to be mailed to Shareholders on or about December 15, 2000, and filed with the Securities and Exchange Commission.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS Page(s) -------------------- ------- The following Consolidated Financial Statements of the Registrant, Innovex, Inc. and subsidiaries, are included in Item 8: * Consolidated Balance Sheets at September 30, 2000 and 1999................................................... 19 * Consolidated Statements of Operations for each of the three years in the period ended September 30, 2000 .... 20 * Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2000............................................... 21 * Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 2000 .... 22 * Notes to Consolidated Financial Statements ............23-31
(2) FINANCIAL STATEMENT SCHEDULES ----------------------------- Schedule II - Valuation and Qualifying Accounts for the three years ended September 30, 2000 ...................... 35 ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE ACCOUNTING REGULATION OF THE SECURITIES AND EXCHANGE COMMISSION HAVE BEEN OMITTED BECAUSE THEY ARE NOT REQUIRED, ARE INAPPLICABLE OR THE INFORMATION IS INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR NOTES THERETO.
(3) EXHIBITS -------- 3(a) Articles of Incorporation, as amended, are incorporated by reference to Exhibit 3 of the Registrant's Form 10Q for the Quarter Ended December 31, 1996. 3(b) Bylaws, as amended, are incorporated by reference to Exhibit 3(b) of the Registrant's Form S-1 Registration Statement dated June 19, 1986 (Commission File No. 33-6594).................... 10(a) 1983 Employee Incentive Stock Option Plan is incorporated by reference to Exhibit 4(a) of the Registrant's Form S-8 dated June 3, 1987 (Commission File No. 33-14776).................................... 10(b) 1987 Employee Stock Option Plan, as amended, is incorporated by reference to Exhibit 4(a) of the Registrant's Form S-8 dated March 17, 1989 (Commission File No. 33-27530)................... 10(c) Innovex, Inc. and Subsidiaries Employees' Retirement Plan is incorporated by reference to Exhibit 10(i) of the Registrant's Form 10-K for the Year Ended September 30, 1992......................... 10(d) 1994 Stock Option Plan, as amended, is incorporated by reference to Exhibit 4.1 of the Registrant's Form S-8 dated May 27, 1999 (Commission File No. 333-79427)....................................... 10(e) Innovex, Inc. Employee Stock Purchase Plan is incorporated by reference to Exhibit 4.1 of the Registrant's Form S-8 dated May 19, 2000 (Commission File No. 333-37380).................. 10(f) Form of Employment Agreement between certain executive officers and the Company is incorporated by reference to Exhibit 10(g) of the Registrant's Form 10-K for the year ended September 30, 1996.. 10(g) Agreement and Plan of Merger, dated July 1, 1999, by and among ADFlex Solutions, Inc. and Innovex, Inc. and Innovex Acquisition Corp. is incorporated by reference to Exhibit (c)(1) of the Registrant's Schedule 14(d)(1) filed on July 7, 1999 10(h) Lease dated June 28, 1993 between ADFlex Solutions, Inc. and TL Properties, Inc. and the First Amendment to Lease, dated June 1994, incorporated by reference to the ADFlex Solutions, Inc. Registration Statement on Form S-1 (SEC file No. 33-80324) or amendments thereto, filed on June 16, 1994......................................... 10(i) Credit Agreement dated as of September 15, 1999 among Innovex, Inc. as Borrower and the Banks Named Herein, as Banks, and Norwest Bank Minnesota, N.A., as Agent is incorporated by reference to Exhibit 10(i) of the Registrant's Form 10-K for the Year Ended September 30, 1999................ 10(j) First Amendment to Credit Agreement...................... E36-61 21 Subsidiaries of Registrant............................... E62 23 Consent of Grant Thornton LLP............................ E63 27 Financial Data Schedule.................................. E64
(b) REPORTS ON FORM 8-K None
(c) EXHIBITS Reference is made to Item 14(a) 3................................
(d) SCHEDULES Reference is made to Item 14(a) 2................................
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By \s\ William P. Murnane William P. Murnane President and Chief Executive Officer
Date December 14, 2000 By \s\ Timothy S. McIntee Timothy S. McIntee Secretary and Senior Vice President, Corporate
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 14th day of December, 2000.
\s\ William P Murnane President, Chief Executive Officer and Director William P. Murnane (principal executive officer)
\s\ Timothy S. McIntee Secretary and Senior Vice President, Corporate Timothy S. McIntee (principal financial officer)
\s\ Thomas W. Haley Chairman and Director Thomas W. Haley
\s\ Gerald M. Bestler Director Gerald M. Bestler
\s\ Frank L. Farrar Director Frank L. Farrar
\s\ Elick Eugene Hawk Director Elick Eugene Hawk
\s\ William J. Miller Director William J. Miller
\s\ Michael C, Slagle Director Michael C. Slagle
\s\ Bernt M. Tessem Director Bernt M. Tessem
Innovex Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For The Three Years Ended September 30, 2000
(a) Additions, deductions and balances were not individually significant.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
INNOVEX, INC.
FOR
FISCAL YEAR ENDED SEPTEMBER 30, 2000
----------------------------------------------------
EXHIBITS
E-33