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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Period ended March 31, 2003.
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-13143
INNOVEX, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1223933
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359-9003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (763) 479-5300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of April 14, 2003, 15,205,111 shares of the registrant's common stock, $.04
par value per share, were outstanding.
Exhibit Index, page 10
PART 1: ITEM 1 FINANCIAL INFORMATION
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, September 30,
2003 2002
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents $ 3,529,035 $ 2,364,136
Accounts receivable, net 20,983,241 16,773,103
Inventories 9,201,841 9,285,600
Deferred income taxes - current 5,775,552 3,147,691
Other current assets 1,656,477 3,111,291
------------ ------------
Total current assets 41,146,146 34,681,821
Property, plant and equipment, net of accumulated depreciation
of $45,307,000 and $39,316,000 69,889,282 73,691,694
Goodwill 3,000,971 3,000,971
Deferred income taxes - long-term 1,917,445 1,236,038
Other assets 2,429,093 2,317,340
------------ ------------
$118,382,937 $114,927,864
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,751,449 $ 10,798,096
Line of credit 15,818,520 7,302,352
Accounts payable 16,378,087 13,075,040
Accrued compensation 1,833,699 1,653,223
Other accrued liabilities 2,208,235 2,305,858
------------ ------------
Total current liabilities 45,989,990 35,134,569
Long-term debt, less current maturities 11,523,907 15,371,841
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares authorized,
15,163,475 and 15,108,283 shares issued and outstanding 606,539 604,331
Capital in excess of par value 17,924,337 17,815,641
Retained earnings 42,338,164 46,001,482
------------ ------------
Total stockholders' equity 60,869,040 64,421,454
------------ ------------
$118,382,937 $114,927,864
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 2 of 15
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
2003 2002
------------ ------------
Net sales $37,055,736 $34,971,762
Costs and expenses:
Cost of sales 32,822,890 29,946,573
Selling, general and administrative 4,742,491 3,983,798
Engineering 1,641,980 1,228,546
Restructuring charges -- 950,000
Net interest (income) expense 554,063 748,726
Net other (income) expense (89,411) (11,337)
------------ ------------
Income (loss) before taxes (2,616,277) (1,874,544)
Income taxes (1,249,404) (2,216,537)
------------ ------------
Net income (loss) $(1,366,873) $341,993
============ ============
Net income (loss) per share:
Basic ($0.09) $0.02
============ ============
Diluted ($0.09) $0.02
============ ============
Weighted average shares outstanding:
Basic 15,169,585 15,053,349
============ ============
Diluted 15,169,585 15,339,656
============ ============
Six months Ended March 31,
2003 2002
------------ ------------
Net sales $71,580,974 $72,814,621
Costs and expenses:
Cost of sales 63,853,050 62,016,068
Selling, general and administrative 9,365,240 8,212,407
Engineering 3,177,771 2,622,329
Restructuring charges 750,000 950,000
Net interest (income) expense 1,121,898 1,518,472
Net other (income) expense 2,291 (211,924)
------------ ------------
Income (loss) before taxes (6,689,276) (2,292,731)
Income tax benefit (3,025,958) (2,337,807)
------------ ------------
Net income (loss) $(3,663,318) $45,076
============ ============
Net income (loss) per share:
Basic ($0.24) $0.00
============ ============
Diluted ($0.24) $0.00
============ ============
Weighted average shares outstanding:
Basic 15,164,162 15,052,599
============ ============
Diluted 15,164,162 15,281,458
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3 of 15
INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended March 31,
2003 2002
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,663,318) $ 45,076
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,066,967 6,770,660
Restructuring charges 750,000 950,000
Other non-cash items (3,403,420) (102,429)
Changes in operating assets and liabilities:
Accounts receivable (4,210,138) (454,353)
Inventories 83,759 2,449,516
Other current assets 1,454,814 11,454,462
Accounts payable 3,303,047 (2,219,817)
Other liabilities (667,147) (6,533,268)
----------- ------------
Net cash provided by (used in) operating activities (285,436) 12,359,847
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,286,156) (1,499,124)
Other 4,000 2,451 099
----------- ------------
Net cash provided by (used in) investing activities (2,282,156) 951,975
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (4,894,582) (4,478,321)
Issuance of long-term debt -- 414,492
Net activity on line of credit 8,516,169 4,199,817
Proceeds from exercise of stock options 110,904 81,747
----------- ------------
Net cash provided by (used in) financing activities 3,732,491 217,735
Increase (decrease) in cash and equivalents 1,164,899 13,529,557
Cash and equivalents at beginning of period 2,364,136 1,798,272
----------- ------------
Cash and equivalents at end of period $ 3,529,035 $ 15,327,829
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest was $1,153,000 and $1,635,000 in fiscal 2003 and 2002.
Income tax payments were $6,000 and $24,000 in fiscal 2003 and 2002.
See accompanying notes to condensed consolidated financial statements.
Page 4 of 15
INNOVEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions on Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The unaudited condensed
consolidated financial statements include the accounts of Innovex, Inc. and its
subsidiaries (the "Company") after elimination of all significant intercompany
transactions and accounts. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of operating results have been made. Operating results for interim periods are
not necessarily indicative of results that may be expected for the year as a
whole. The Company utilizes a fiscal year that ends on the Saturday nearest to
September 30. For clarity of presentation, the Company has described all periods
as if they end at the end of the calendar quarter. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's annual report on Form 10-K for the year ended September 30, 2002.
Preparation of the Company's condensed consolidated financial statements
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and related revenues and expenses. Actual
results could differ from these estimates.
NOTE 2 - RESTRUCTURING CHARGES
Manufacturing operations restructuring-
The fiscal 2001 second quarter included asset impairment and restructuring
charges of $9,754,000 and $10,124,000 related to the restructuring of the
Company's manufacturing operations. The restructuring is primarily related to
moving manufacturing operations from the Company's Chandler, Arizona facility to
the Company's Minnesota locations. During the fiscal 2002 second quarter and the
fiscal 2003 first quarter, additional restructuring charges of $876,000 and
$750,000, respectively, were recorded due to an increase in the estimate of the
leased Chandler facility disposition costs. As of March 31, 2003, the
restructuring is substantially complete. During the second quarter of fiscal
2003, payments of approximately $633,000 were made to buy out the remainder of
the Chandler facility lease through its June 2003 termination.
The remaining restructuring accrual for cash items as of March 31, 2003 totaled
$179,000. Selected information regarding the restructuring follows (in
thousands):
Manufacturing Operations
Restructuring - Arizona
----------------------------
Facility Employee
Abandonment Termination
Charges Benefits Total
------------------------------------
Accrual at October 1, 2002 $ 225 $78 $ 303
Change in estimate 750 -- 750
Payments (874) -- (874)
------------------------------------
Accrual at March 31, 2003 $ 101 $78 $ 179
====================================
NOTE 3 - EARNINGS PER SHARE
The Company's basic net loss per share is computed by dividing net loss by the
weighted average number of outstanding common shares. The Company's diluted net
loss per share is computed by dividing net loss by the weighted average number
of outstanding common shares and common share equivalents relating to stock
options when dilutive. Options to purchase 1,070,800 and 1,214,325 shares of
common stock with weighted average exercise prices of $12.10 and $11.17 were
outstanding during the three and six month periods ending March 31, 2003, but
were excluded from the computation of common share equivalents because they were
not dilutive. Options to purchase 1,287,523 and 1,379,098 shares of common stock
with weighted average exercise prices of $11.68 and $11.25 were outstanding
during the three and six month periods ending March 31, 2002, but were excluded
from the computation of common share equivalents because they were not dilutive.
Page 5 of 15
The Company's fiscal 2003 second quarter and first six months pro forma net loss
would have been ($1,545,000) and ($4,020,000) or ($0.10) and ($0.27) diluted net
loss per share had the fair value method been used for valuing options granted.
The Company's fiscal 2002 second quarter net income and first six months pro
forma net loss would have been $145,000 and ($349,000) or $0.01diluted net
income per share and ($0.02) diluted net loss per share had the fair value
method been used for valuing options granted. The weighted average fair value of
options granted in 2003 and 2002 was $1.47 and $1.46. The value was computed by
applying the following weighted average assumptions to the Black Scholes options
pricing model: volatility of 75% and 90%; dividends yields of 0.0%; risk-free
rate of return of 2.6% and 4.0%; and an average term of 4.5 years for 2003 and
2002. No adjustment was made to the Black Scholes calculation to reflect that
the options are not freely traded.
NOTE 4 - INVENTORIES
Inventories are comprised of the following (in thousands):
March 31, September 30,
2003 2002
-------------------------
Raw materials and purchased parts $3,575 $3,939
Work-in-process and finished goods 5,627 5,347
-------------------------
$9,202 $9,286
=========================
NOTE 5 - DERIVATIVE INSTRUMENTS
The Company enters into forward exchange contracts that are recorded at fair
value with related fair value gains or losses recorded in earnings within the
caption other (income) expense. Generally, these contracts have maturities of
six months or less. These contracts are entered into to offset the gains or
losses on foreign currency denominated assets and liabilities. The Company does
not enter into forward exchange contracts for trading purposes and the contracts
are not designated as hedges. At March 31, 2003, the Company had open forward
exchange contracts to buy Thailand baht maturing July 3, 2003 with notional
amounts of 880,000,000. The total open contracts for 880,000,000 baht equates to
approximately $20.5 million U.S. dollars.
NOTE 6 - REVENUE RECOGNITION
Innovex makes electronic components (flexible circuits) based on customer
specifications. The Company's revenue recognition policy is consistently applied
regardless of sales channels utilized and product destination. The Company has
an implied warranty that the products meet the customer's specification. Credits
are only issued for customer returns. In recognizing revenue in any period, the
company applies the provisions of SEC Staff Accounting Bulletin 101, "Revenue
Recognition." Revenue from product sales is recognized when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably assured.
For all sales, a binding purchase order is used as evidence of an arrangement.
The Company also stores inventory in warehouses (JIT hubs - third party owned
warehouses) that are located close to the customer's manufacturing facilities.
Revenue is recognized on sales from JIT hubs upon the transfer of title and risk
of loss, following the customer's acknowledgement of the receipt of the goods.
PART I: ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
Innovex is a leading worldwide provider of flexible circuit interconnect
solutions to 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, LCD displays for portable communication devices, data
storage devices such as hard disk drives ("HDDs"), tape drives and arrays,
high-end consumer electronics products such as digital video disk(DVD) players
and printers. The Company's principal customers include 3M, Alps, Compaq, Dell,
Hewlett Packard, IBM, Littelfuse, Maxtor, Medtronic, Nokia, Philips,
Page 6 of 15
Quantum, ReadRite, SAE Magnetics, Samsung, Seagate, Staktek, 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
percentages. The mid-range or standard flexible circuits with components added
through the performance of additional assembly steps garner lower gross margin
percentages due to higher material costs and the increased number of
competitors.
Prior to 1999, the Company's primary products were small lead wire assemblies
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") and Flex suspension assembly ("FSA")
products. This transition has had a significant impact on the Company's
operations since 1998 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 none of fiscal 2002 and 2001
consolidated revenues and less than 1% of fiscal 2000 revenues after comprising
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, high-volume flexible circuit
interconnect requirements.
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. and Innovex (Thailand) Ltd. Innovex Precision
Components, Inc. is a Minnesota corporation and Innovex (Thailand) Ltd. is a
Thailand corporation.
CRITICAL ACCOUNTING POLICIES
This report on Form 10Q should be read in conjunction with the Company's Annual
Report on Form 10-K for the period ended September 30, 2002 for a full
discussion of our accounting policies.
We believe that the estimates, assumptions and judgments involved in the
accounting policies described below have the greatest potential impact on our
financial statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters, actual results
could differ from the estimates we used in applying the critical accounting
policies. Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely event that would result in materially
different amounts being reported.
Allowance for Excess and Obsolete Inventory:
Inventories, which are composed of raw materials, work in process and finished
goods, are valued at the lower of cost or market with cost being determined by
the first-in, first-out method. On a periodic basis, the Company analyzes the
level of inventory on hand, its cost in relation to market value and estimated
customer requirements to determine whether write-downs for excess or obsolete
inventory are required. Actual customer requirements in any future periods are
inherently uncertain and thus may differ from estimates. If actual or expected
requirements were significantly greater or lower than the established reserves,
a reduction or increase to the obsolescence allowance would be recorded in the
period in which such a determination was made.
Page 7 of 15
Goodwill:
The Company adopted Statement of Financial Accounting Standards (SFAS) 142,
Goodwill and Intangible Assets effective October 1, 2001 and as a result
discontinued the amortization of goodwill and any other intangible assets
determined to have indefinite lives. The Company has determined goodwill relates
to one reporting unit for purposes of impairment testing. Goodwill and other
intangible assets with indefinite lives are tested for impairment annually or
whenever an impairment indicator arises. If events or circumstances change,
including reductions in anticipated cash flows generated by operations, goodwill
could become impaired and result in a charge to earnings.
Deferred Taxes:
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities. A valuation allowance is set
up where the realization of any deferred taxes becomes less likely than not to
occur. The valuation allowance is analyzed periodically by the Company and may
result in income tax expense different than statutory rates.
RESULTS OF OPERATIONS
NET SALES
The Company's net sales from operations totaled $37,056,000 for the quarter, up
6% from $34,972,000 reported in the same quarter of fiscal 2002. The increase in
net sales for the second quarter of fiscal 2003 as compared to the same quarter
of fiscal 2002 was due to higher revenue generated by disk drive and liquid
crystal display (LCD) applications. The increased disk drive revenue was related
to the Company's improved FSA market share resulting from the disk drive
industry's transition to the 80 GB per platter technology platform. The LCD
revenue improvement was related to the continued ramp-up of the new LCD program
announced during the first quarter of fiscal 2003. Sales of $71,581,000 for the
six months ended March 31, 2003 decreased 2% from the prior year period. The
decrease in net sales for the first half of fiscal 2003 as compared to the same
period of fiscal 2002 was due to lower revenue generated by the disk drive,
consumer optical storage and computer applications as a result of economic
conditions. Revenue from the disk drive industry generated 76% of the Company's
revenue for the fiscal 2003 second quarter as compared to 72% for the fiscal
2002 second quarter, revenue from integrated circuit packaging applications was
7% versus 2% from the prior year quarter, consumer application revenue was 6%
versus 17%, network system application revenue was unchanged at 6% and revenue
from other industry applications was 5% versus 3% from the prior year quarter.
Fiscal 2003 second quarter net sales increased 7% as compared to the first
quarter of fiscal 2003 as a result of the continued ramp-up of a mobile phone
LCD application and increases in revenue generated by FSA applications. Revenue
is expected to show a slight increase in the third quarter of fiscal 2003 as new
LCD and FSA programs continue to ramp up.
GROSS MARGINS
The Company's gross profit as a percent of sales for the quarter ended March 31,
2003 decreased to 11% from the 14% reported for the fiscal 2002 second quarter.
The gross profit as a percent of sales for the first six months decreased to
11%, from the 15% reported for the same period last year. As compared to the
prior year, fiscal 2003 second quarter gross margins were impacted by
incremental start up and tooling costs related to new product introductions and
product mix changes. The company experienced a significant product transition
during the second quarter, converting approximately 70% of its products to new
designs. The current year's product mix also had an increased share of FSA
revenue with higher material pass through content related to the suspension
material used in the FSA product. The prior year's product mix included higher
share of the company's HIF product, which does not include the suspension
related pass through material.
The decreased fiscal 2003 first half gross margin percent as compared to the
prior year period was primarily due to higher new product introduction costs,
lower portion of HIF revenue within the product mix and lower revenue reducing
fixed cost leverage. The Company anticipates that gross margins in the last half
of fiscal 2003 will improve as the new program introductions reach higher
production volumes and revenue levels increase.
Page 8 of 15
OPERATING EXPENSES
Operating expenses were 17% of sales for the current quarter, as compared to 15%
in the prior year's second quarter. Operating expenses for the first six months
of fiscal 2003 were 17.5%, up from 14.9% from the prior year first six months.
Total operating expenses for the second quarter of fiscal 2003 increased by $1.2
million from the fiscal 2002 second quarter. Operating expenses for the first
six months of fiscal 2003 increased by $1.7 million from the same period in
fiscal 2002. The increase in fiscal 2003 second quarter spending was primarily
due to consulting and training costs related to implementation of the company
wide Six Sigma program and increased new product development spending. Start up
costs related to Six Sigma were approximately $300,000 during the March quarter.
Six Sigma start up costs will continue through the June quarter, at which time
Six Sigma start up costs are expected to end and savings generated by the
program are expected to begin.
The increased operating expenses during the fiscal 2003 first six months as
compared to the prior year period were Six Sigma consulting and training
expenses, increased new product development spending and severance costs of
$400,000 included in the fiscal 2003 first quarter resulting from efforts to
increase operational efficiency by consolidating from four to three marketing
groups. Operating expenses for the remainder of fiscal 2003 are expected to
decrease as a percent of sales due to a reduced level of Six Sigma spending and
anticipated increased revenue in the last half of the year.
RESTRUCTURING CHARGES
The fiscal 2001 second quarter included asset impairment
and restructuring charges of $9,754,000 and $10,124,000 related to the
restructuring of the Company's manufacturing operations. The restructuring was
primarily related to moving manufacturing operations from the Company's
Chandler, Arizona facility to the Company's Minnesota locations. The charges
included $6,332,000 for Chandler facility abandonment costs. During the fiscal
2002 second quarter and the fiscal 2003 first quarter, additional restructuring
charges of $876,000 and $750,000, respectively, were recorded due to an increase
in the estimate of the leased Chandler facility disposition costs. During the
second quarter of fiscal 2003, payments of approximately $633,000 were made to
buy out the remainder of the Chandler facility lease through its June 2003
termination. As of March 31, 2003, the restructuring is substantially complete.
OPERATING PROFIT (LOSS)
The consolidated operating loss of ($2,152,000) in the current quarter was up
from the operating loss of ($1,137,000) for the prior year second quarter.
Consolidated operating loss for the fiscal 2003 first six months was
($5,565,000) versus ($986,000) for the same period last year. The fiscal 2003
decrease is primarily due to lower revenue and related gross margin, higher new
product introduction expenses, higher operating expenses due to Six Sigma
implementation costs and increased new product development spending for the
periods as compared to the prior year.
INCOME TAXES
Income tax benefit for the fiscal 2003 second quarter was $1,249,000 as compared
to $2,217,000 for the same quarter in fiscal 2002. Income tax benefit for the
first six months of fiscal 2003 was $3,026,000 as compared to $2,338,000 for the
same period in the prior year. The fiscal 2003 tax benefit was calculated by
applying an effective tax rate of 36.7% to the Company's U.S. based pretax loss.
The Company has determined that it is more likely than not that the Company will
be able to utilize the tax benefit in the future. During the fiscal 2002 second
quarter, approximately $1.7 million of the tax benefit recorded was due to a
reduction of the deferred tax allowance. The deferred tax allowance was reduced
as a result of the estimated improvement in deferred tax asset recoverability in
light of the receipt of a $13 million tax refund resulting from the carry-back
of the fiscal 2001 net operating loss.
NET INCOME(LOSS)
Consolidated net loss for the fiscal 2003 second quarter was ($1,367,000) as
compared to net income of $342,000 for the prior year. The net loss per share
was ($0.09) as compared to basic and diluted net income per share of $0.02 for
the prior year second quarter. Consolidated net loss for the first six months of
fiscal 2003 was ($3,663,000) as compared to net income of $45,000 for the prior
year. The net loss per share was ($0.24) as compared to basic and diluted net
income per share of $0.00 for the same period last year.
Page 9 of 15
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased to $3.5 million at March 31, 2003 from
$2.4 million at September 30, 2002.
Accounts receivable at March 31, 2003 increased by $4.2 from September 30, 2002
due to the higher level of revenue in the current quarter as compared to at the
quarter ended September 30, 2002. Inventories at March 31, 2003 decreased by
$100,000 from September 30, 2002 due to a focused effort to reduce inventory
levels. Other current assets decreased by $1.4 million from September 30, 2002
primarily due to the receipt of a tax refund related to the fiscal 2002 tax loss
carryback.
Accounts payable at March 31, 2003 increased by $3.3 million primarily due to
higher level of revenue in the current quarter as compared to the quarter ended
September 30, 2002. Other liabilities at March 31, 2003 decreased by $667,000
from September 30, 2002 primarily due to payments made to buy out the remaining
portion of the Chandler facility lease reducing the restructuring reserve.
Working capital totaled ($4.8) million and ($0.5) million at March 31, 2003 and
September 30, 2002.
Since September 30, 2002, the Company has invested $2.3 million in capital
expenditures primarily for test equipment and capacity increases in selected
areas. Capital expenditures of approximately $4 million are expected during the
remainder of fiscal 2003. These expenditures will include technological upgrades
and capacity increases in specific areas.
In April 2001 the Company entered into a 1.2 billion Thailand baht
(approximately $27 million) credit facility agreement with Bank of Ayudhya
Public Company Limited and The Industrial Finance Corporation of Thailand. The
facility is comprised of a 590 million baht long-term facility, a 530 million
baht packing credit facility, a 70 million baht short term working capital
facility and a 10 million baht overdraft facility. The Thailand based facility
is secured by certain receivables, inventory and assets held by the Company in
Thailand. In June 2002, the Company completed a 300 million Thailand baht
(approximately $6.8 million) expansion of its Thailand credit facilities also
secured by certain receivables and inventory held by the Company. In February
2003, the Company completed a 220 million baht (approximately $5.1 million)
expansion of its Thailand credit facilities. The new long term debt is secured
by specified equipment held by Innovex Thailand. As of March 31, 2003, the
Company had $11 million of borrowing capacity available under the existing
credit facilities. The Company is in compliance with covenants under its U.S.
and Thailand based financing agreements as of March 31, 2003.
Long-term debt, including current maturities, decreased by $4.9million from
September 30, 2002 to March 31, 2003. The decrease is primarily the result of
two regularly scheduled $1.6 million quarterly payments made on the existing
Wells Fargo facility with the remainder being scheduled principal payments made
on the Thailand credit facilities and other long term lease financing. The ratio
of long-term debt, net of current maturities, to stockholders' equity was .19 at
March 31, 2003 compared to .24 at the end of fiscal 2002.
The Company believes that with the existing U.S. and Thailand credit facilities
and cash generated from operations, it will have adequate funds to support
projected working capital and capital expenditures for fiscal 2003. The Company
is considering alternatives for generating additional working capital and long
term financing and will continue to pursue financing opportunities primarily in
the U.S to better leverage its assets. The Company's financing needs and the
financing alternatives available to it are subject to change depending on, among
other things, general economic and market conditions, changes in industry buying
patterns, customer acceptance of the FSA product and cash flow from operations.
NEW PRONOUNCEMENTS
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 clarifies the accounting for costs
associated with exit or disposal activities. The Company adopted this statement
effective in January 2003.
Effective for the period ended March 31, 2003 the Company adopted SFAS 148,
Accounting for Stock-based Compensation-Transition and Disclosure. SFAS 148
amends the disclosure and certain transition provisions of
Page 10 of 15
statement 123, Accounting for Stock-Based Compensation. The disclosure
requirements of this pronouncement are included in the consolidated financial
statements for the period ended March 31, 2003.
FORWARD LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, elsewhere in this report and in future
filings by the Company with the SEC, except for the historical information
contained herein and therein, are "forward-looking statements" that involve
risks and uncertainties. These risks and uncertainties include the timely
availability and acceptance of new products including the FgSA, LCD flexible
circuits and semiconductor packaging substrates, the impact of competitive
products and pricing, interruptions in the operations of 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, integrated circuit substrates, consumer
electronics and data storage industries and the global economic downturn has had
and a continued economic downturn will continue to have an adverse 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 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's market risk during the
three-month period ended March 31, 2003.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer, William P. Murnane, and Chief Financial
Officer, Thomas Paulson, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls during the quarter
covered by this report or from the end of the reporting period to the date of
this Form 10-Q.
PART II - OTHER INFORMATION
Responses to Items 1 through 3 and 5 are omitted since these items are either
inapplicable or the response thereto would be negative.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of the shareholders of Innovex, Inc. was held on
January 16, 2002. There were 15,151,975 shares of common stock entitled to
vote at the meeting and a total of 14,474,417 shares were represented at
the meeting.
b) Six directors were elected at the meeting to serve for one year or until
their successors are elected and qualified. Shares were voted as follows:
For Withheld
--- --------
Allen Andersen 14,369,426 104,991
Thomas W. Haley 13,845,077 629,340
Elick Eugene Hawk 14,373,803 100,614
William P. Murnane 13,928,304 546,113
Raj K. Nooyi 14,375,735 98,682
Michael C. Slagle 14,364,919 109,498
Page 11 of 15
c) Other matters voted on at the meeting:
Proposal #2. A proposal was made to approve the selection of the
Company's independent public accountants for the current fiscal
year. Shares were voted as follows:
For Against Abstain
--- ------- -------
14,376,989 40,745 56,684
Accordingly, each nominee was elected as a director and the appointment of Grant
Thorton LLP was approved.
ITEM 5: OTHER INFORMATION
On November 27, 2002, the Company entered into an Option Agreement with
Concorde Pape II ("Concorde"), pursuant to which Concorde granted to the Company
an option to acquire shares of KRP Precision Public Company Limited ("KRP")
representing 24.9% of the issued and outstanding shares of KRP. As of date of
the Option Agreement, Concorde owned approximately 55.7% of the shares of KRP.
The option is exercisable in the discretion of the Company at any time on or
prior to December 31, 2003; however, the Company is under no obligation to
exercise this option. Payment of the exercise price is due in shares of Company
common stock. The number of Innovex shares to be issued to Concorde for the KRP
shares in payment of the exercise price of this option will be determined by the
following formula: [A x B] / C=D, where A is the number of KRP shares to be
transferred equal to 24.9% of the outstanding KRP shares at the time the option
is exercised; B is the KRP Share Value as defined below; C is the Innovex Share
Value as defined below; and D is the number of Innovex shares to be issued. The
KRP Share Value shall be determined by the following formula: X x [1-Y] = B,
where X is the average daily closing price of KRP shares as reported on the
Stock Exchange of Thailand for each trading day in the twelve week period ending
on the exercise notice date and Y is a fraction (which shall not be greater than
1/4), the numerator of which is the revenue of KRP for that twelve week period
generated directly or indirectly from a designated customer's FSA/FgSA business
and the denominator of which is total revenue of KRP for that twelve week
period. The Innovex Share Value shall equal the average daily closing price for
Innovex shares for each trading day in the twelve week period ending on the
exercise notice date. If the Company does not exercise this option by December
31, 2003, the option agreement terminates.
If the Company exercises this first option, Concorde will grant the
Company a second option to purchase the remaining shares of KRP owned by
Concorde between twelve and twenty-four months from the closing of the first
option. The exercise price for this second option would be payable to Concorde
in cash with the value of the remaining KRP shares determined by the average
daily closing price of KRP shares for each trading day in the twelve week period
ending on the second call option exercise notice date. Further, in the event the
Company exercises its second option, the Company may be required to make a
general offer to purchase KRP shares from KRP shareholders.
In the event the second option is not exercised, Concorde may require the
Company to purchase its remaining KRP shares under certain circumstances within
the next twelve month period with the purchase price payable in shares of the
Company's common stock and the number of Innovex shares to be issued calculated
using the same formula as for the first option.
Michael C. Slagle -- Michael Slagle, a member of the Company's Board of
Directors, passed away May 8, 2003. Mr. Slagle had served on Innovex's Board
since 1972. He was retired and the former owner of Minnesota Benefit Planners,
an insurance brokerage consulting firm.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Second Supplemental Agreement dated February 28, 2003 to Credit
Facilities Agreement dated April 23, 2001 among Innovex (Thailand)
Limited, Bank Of Ayudhya Public Company Limited and The Industrial
Finance Corporation of Thailand.
99.1 Certification pursuant to 18 U.S.C. ss.1350.
b) Reports on Form 8-K
None.
Page 12 of 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVEX, INC.
Registrant
Date: May 14, 2003
By \s\ William P. Murnane
William P. Murnane
President and Chief Executive Officer
By \s\ Thomas Paulson
Thomas Paulson
Chief Financial Officer
Page 13 of 15
CERTIFICATIONS
I, William P. Murnane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Innovex, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003 /s/ William P. Murnane
----------------------------------------
President and
Chief Executive Officer
Page 14 of 15
I, Thomas Paulson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Innovex, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003 /s/ Thomas Paulson
----------------------------------------
Chief Financial Officer
Page 15 of 15