SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
AUGUST 9, 1999
Date of Report (Date of earliest event reported)
INNOVEX, INC.
(exact name of registrant as specified in its charter)
MINNESOTA 0-13143 41-1223933
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
530 ELEVENTH AVENUE SOUTH, HOPKINS, MN 55343-9904
(Address of principal executive offices) (Zip Code)
(612-938-4155)
(Registrant's telephone number, including area code)
Page 1 of 33
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On August 9, 1999, Innovex Acquisition Corp. (the "Purchaser"), a wholly owned
subsidiary of Innovex, Inc. ("Innovex"), completed its cash tender offer (the
"Offer") for all outstanding shares of common stock (the "Shares"), including
the associated rights, of ADFlex Solutions, Inc. ("ADFlex"), at a purchase price
of $3.80 per share. The tender offer expired at midnight, New York City time, on
August 3, 1999. The Purchaser accepted for payment 6,804,284 Shares for a
purchase price of approximately $25.9 million. The acceptance of validly
tendered Shares resulted in the Purchaser and Innovex acquiring approximately
76% of the outstanding Shares.
The Offer was made pursuant to the Offer and Agreement and Plan of Merger (the
"Merger Agreement") dated as of July 1, 1999, by and among ADFlex, Innovex and
the Purchaser. Pursuant to the Merger Agreement, a special meeting of ADFlex
shareholders to vote on a proposal to approve and adopt the Merger Agreement was
held on September 14, 1999. Pursuant to the Merger Agreement, the Purchaser was
merged with and into ADFlex (the "Merger") and the Shares (other than Shares
held by ADFlex or by any subsidiary of ADFlex, or owned by Innovex, Purchaser or
any other subsidiary of Innovex, which shall be cancelled, and other than
Shares, if any (collectively, "Dissenting Shares"), held by stockholders who
have properly exercised appraisal rights under Section 262 of the Delaware
General Corporate Law) will be converted into the right to receive $3.80 per
share net in cash. As a result of the Offer, the Purchaser has the right to vote
at the special meeting a sufficient number of Shares to approve and adopt the
Merger Agreement without the affirmative vote of any other stockholder, thereby
assuring such approval and adoption. The Merger was effected September 14, 1999.
The total consideration paid for Shares under the Offer and under the second
step of the Merger is expected to be approximately $34.3 million. Innovex is
financing the Offer and the Merger utilizing internally available funds.
Pursuant to the Merger Agreement, Innovex and the Purchaser was required to pay
off all outstanding balances under that certain Credit Agreement among ADFlex,
BankBoston N.A. and BankBoston N.A., as agent for Lenders, as amended (the
"Credit Agreement"). Innovex obtained a credit facility totaling in principal
amount $40,000,000, that was utilized to refinance amounts owed under the Credit
Agreement, pay down ADFlex's current liabilities and pay related transaction
costs.
ADFlex is 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.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
(1) Audited Financial Statements of ADFlex Solutions, Inc. as of December
27, 1998 and December 31, 1997 and for the years ended December 27,
1998 and December 31, 1997 and 1996 (attached as Appendix A hereto).
(2) Unaudited Financial Statements of ADFlex Solutions, Inc. as of June
27, 1999 and for the six-month periods ended June 27, 1999 and June
30, 1998 (attached as Appendix B hereto).
(b) Pro Forma Financial Information.
(1) Pro Forma Financial Information consisting of an unaudited pro forma
condensed combined balance sheet as of June 30, 1999 and unaudited pro
forma condensed combined statements of operations for the nine month
period ended June 30 ,1999 and the year ended September 30, 1998
(attached as Appendix C Hereto).
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated July 1, 1999, by and among ADFlex
Solutions, Inc., Innovex, Inc. and Innovex Acquisition Corp.
(incorporated by reference to Exhibit (c)(1) of the Innovex Inc.
Schedule 14(d)(1) Tender Offer Statement filed with the Commission on
July 7, 1999).
2
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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 hereunto duly authorized.
INNOVEX INC.
Registrant
Date: October 19, 1999 By: \s\ Thomas W. Haley
Thomas W. Haley
Chairman and Chief Executive Officer
3
<PAGE>
INDEX TO EXHIBITS
Exhibits Page
- -------- ----
2.1 Agreement and Plan of Merger, dated July 1, 1999, by and among
ADFlex Solutions, Inc., Innovex, Inc. and Innovex Acquisition
Corp. Previously
filed
4
<PAGE>
APPENDIX A
ADFLEX SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
DECEMBER 27, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,325 $ 9,092
Accounts receivable, net 24,747 31,581
Other receivables 1,161 1,167
Inventories 9,397 19,297
Deferred tax assets 2,072 1,823
Prepaid taxes -- 647
Prepaid expenses and other current assets 1,952 1,400
- ------------------------------------------------------------------------------------------------------------
Total current assets 44,654 65,007
Property, plant and equipment, net 55,351 42,257
Intangible assets 1,933 2,449
Deferred tax assets 6,326 4,463
Other assets 40 24
$ 108,304 $ 114,200
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 63 $ 2,250
Line of credit 13,000 7,000
Accounts payable 15,927 22,692
Accrued liabilities 7,183 6,162
Current portion of long-term debt and capitalized leases 24,613 1,959
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 60,786 40,063
Long-term debt 69 23,230
Commitments and contingent liabilities
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
None issued and outstanding
Common stock, $.01 par value, 40,000,000 shares authorized;
8,928,249 and 8,768,472 shares issued and outstanding at
December 27, 1998 and December 31, 1997, respectively 89 88
Additional paid-in capital 63,856 62,562
Retained earnings (deficit) (16,496) (11,743)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 47,449 50,907
- ------------------------------------------------------------------------------------------------------------
$ 108,304 $ 114,200
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
ADFLEX SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 27, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 170,097 $ 213,878 $ 156,836
Cost of sales 152,976 175,826 138,273
- -------------------------------------------------------------------------------------------------------------
Gross profit 17,121 38,052 18,563
Operating expenses:
Engineering, research & development 7,437 7,990 7,366
Amortization of intangible assets 516 129 2,386
Selling, general & administrative 12,706 15,353 13,254
Restructuring charges -- -- 29,248
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 20,659 23,472 52,254
- -------------------------------------------------------------------------------------------------------------
Operating income (loss) (3,538) 14,580 (33,691)
Interest income 287 218 223
Interest expense (2,972) (2,102) (1,511)
Other income (loss), net (379) (101) 92
Minority interest in earnings of consolidated joint venture -- (181) 109
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,602) 12,414 (34,778)
Income tax expense (benefit) (1,849) 3,818 (9,754)
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,753) $ 8,596 $ (25,024)
- -------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ (0.54) $ 0.99 $ (2.92)
Diluted $ (0.54) $ 0.97 $ (2.92)
- -------------------------------------------------------------------------------------------------------------
Common and common equivalent shares used
in the calculation of net income (loss) per share:
Basic 8,867 8,712 8,580
Diluted 8,867 8,894 8,580
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
ADFLEX SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
PAID-IN EARNINGS TOTAL
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 8,282,312 $ 83 $ 58,786 $ 4,685 $ 63,554
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock through employee
stock purchase plan and exercise of stock
options, including tax benefit of $665 351,196 3 1,756 -- 1,759
Net loss -- -- -- (25,024) (25,024)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,633,508 86 60,542 (20,339) 40,289
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock through employee
stock purchase plan and exercise of stock
options, including tax benefit of $402 134,964 2 2,020 -- 2,022
Net income -- -- -- 8,596 8,596
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,768,472 88 62,562 (11,743) 50,907
- ------------------------------------------------------------------------------------------------------------------------
Issuance of common stock through employee
stock purchase plan and exercise of stock
options, including tax benefit of $125 159,777 1 1,294 -- 1,295
Net loss -- -- -- (4,753) (4,753)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 27, 1998 8,928,249 $ 89 $ 63,856 $ (16,496) $ 47,449
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
ADFLEX SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 27, DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (4,753) $ 8,596 $ (25,024)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,035 6,622 8,208
Restructuring charges -- -- 29,248
(Gain) loss on disposal of assets (103) -- 184
Minority interest -- 181 --
Deferred taxes (2,112) 5,683 (9,772)
Changes in operating assets and liabilities:
Accounts receivable 6,834 (6,432) (9,557)
Inventories 9,900 (4,307) 1,834
Prepaid expenses and other current assets 101 (2,945) (2,029)
Payables and accrued liabilities (5,744) (2,821) 11,347
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,158 4,577 4,439
Investing activities:
Capital expenditures (21,510) (14,462) (13,763)
(Increase) in other assets (16) -- (10)
Decrease in acquisition payable -- -- (12,375)
Investment in joint venture -- (491) 491
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,526) (14,953) (25,657)
Financing activities:
Issuance of common stock, net of expenses 1,295 2,022 1,759
Net activity on line of credit 6,000 (3,000) 10,000
Payments on capitalized lease obligations (160) (151) (143)
Payments on current notes payable (2,187) (500) --
Payments on long-term debt (5,749) (10,000) --
Issuance of debt 5,402 25,000
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,601 13,371 11,616
Net increase (decrease) in cash and cash equivalents (3,767) 2,995 (9,602)
Cash and cash equivalents at beginning of year 9,092 6,097 15,699
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,325 $ 9,092 $ 6,097
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 2,326 $ 2,714 $ 665
Income taxes 212 520 1,409
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing activities:
Equipment acquired under capital lease obligations $ 102 $ -- $ --
Debt issuance costs valued at $0.3 million payable in March 1999 300 -- --
Issuance of note payable in connection with acquisition of Hana
interest in ATL -- 2,750 --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS ADFlex Solutions, Inc. (the Company) is a worldwide
provider of flexible circuit interconnect solutions to original equipment
manufacturers in the electronics industry. The Company offers 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, tape drives and arrays, and high-end
consumer electronics products such as compact disk players. The Company serves
customers located in North America, Europe and Southeast Asia.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has failed
to meet certain provisions of its credit agreement in February 1999 and expects
to fail to meet another covenant at March 31, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying 1998 consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Management is currently negotiating with funding sources to provide additional
capital to the Company. In addition, management of the Company has met with the
lenders in an attempt to restructure the credit facility, or otherwise
satisfactorily resolve the existing defaults. It is not possible, however, to
predict at this time the success of management's efforts. No assurance can be
given that the outcome of the Company's negotiating efforts with the lenders
will not adversely affect the Company's business, financial condition, results
of operations and cash flows.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
On August 27, 1996, the Company announced the establishment of a joint venture
with Hana Microelectronics (Hana), a diversified electronics manufacturer
headquartered in Thailand, to produce and test advanced chip-on-flex and surface
mount technology assemblies. The venture, ADFlex Thailand Limited (ATL), was 80%
owned by the Company. On September 26, 1997, the Company acquired the 20%
interest held by Hana (See Note 3). Hana's 20% interest in ATL's earnings
through September 26, 1997 have been reflected as "Minority interest in earnings
of consolidated joint venture" on the Company's Consolidated Statements of
Operations.
FISCAL YEAR The Company's fiscal year consists of 52 or 53 weeks ending on the
Sunday closest to the last day of December each year. Fiscal year 1998 contained
52 weeks and ended December 27, 1998. Fiscal years 1997 and 1996 contained 52
weeks each and ended on December 28 and December 29, respectively. Activity from
the end of the reporting period to December 31 is immaterial for 1997 and 1996.
FOREIGN CURRENCY TRANSLATION The Company uses the United States Dollar as its
functional currency for its subsidiaries in Mexico, England 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. To date, the effect on income of remeasurement gains and
losses has been immaterial.
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 U.S. Dollars for foreign
currencies at maturity, at
9
<PAGE>
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 December 27, 1998, there were no open forward foreign
currency exchange contracts.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand deposits,
money market accounts and repurchase agreements since they represent highly
liquid investments with maturities of three months or less when purchased.
CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject
the Company to concentration of credit risk, consist principally of trade
receivables. A majority of the Company's trade receivables are derived from
sales in various geographic areas to large companies within the electronics
industry.
The Company has adopted credit policies and standards to accommodate the
electronics industry's growth and inherent risk. The Company performs ongoing
credit evaluations of its customers' financial condition but generally does not
require collateral, such as letters of credit or security agreements.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard basis (which approximates actual cost
on a first-in, first-out basis).
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization is
computed for financial reporting purposes using the straight-line method over
the estimated useful lives of the assets which range from three to 25 years. The
Company uses accelerated methods for computing depreciation for tax purposes.
INTANGIBLE ASSETS In connection with the acquisition of Hana's 20% interest in
ATL in September 1997, the Company recorded goodwill which is being amortized
over its estimated useful life of five years.
The recoverability of intangible assets attributable to the Company's
acquisitions is analyzed periodically based on actual and projected levels of
profitability and cash flows of the operations acquired on an undiscounted
basis. Based on its most recent analysis, the Company believes that no material
impairment of intangible assets exists at December 27, 1998.
REVENUE RECOGNITION Sales are recognized upon shipment. The Company warrants its
products to be free of defects and repairs customer shipments as required. The
Company records a provision for the estimated cost of repairing returns at the
time of shipment.
FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts
receivable, borrowings under the Company's line of credit, notes payable,
accounts payable, accrued liabilities and capitalized leases are carried at
amounts that reasonably approximate their fair values. The Company's long-term
debt bears interest at a variable interest rate which approximates current
market interest rates; therefore, the Company believes that long-term debt
approximates its fair value. The fair value of short-term foreign exchange
contracts is based on exchange rates at the end of the fiscal year.
IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and
certain identifiable intangibles to be held and used or disposed of for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company recognized a
charge in 1996 in connection with the restructuring of its U.K. operations (see
Note 2).
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred.
10
<PAGE>
INCOME TAXES Income taxes are provided using the liability method based upon the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
ACCOUNTING FOR INCOME TAXES.
STOCK BASED COMPENSATION The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for employee stock option grants in
accordance with APB Opinion 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and accordingly, recognizes no compensation expense for stock option
grants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED
FOR INTERNAL-USE, which requires the capitalization of certain costs incurred in
connection with developing or obtaining computer software. The Company elected
to adopt SOP 98-1 effective January 1, 1998 in connection with the purchase of a
manufacturing cost control system. Capitalized costs of $5.4 million are being
amortized on a straight-line basis over a period of five years after completion
of the project in October 1998.
NET INCOME (LOSS) PER SHARE In February, 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS No. 128 requirements. The difference in common equivalent
shares used in the computation of basic and diluted earnings per share is
primarily due to the inclusion of stock options in the dilutive computations,
unless they were anti-dilutive.
COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which establishes standards for reporting and displaying
comprehensive income components in a full set of general-purpose financial
statements. Comprehensive income includes certain non-owner changes in equity
that are currently excluded from net income for certain companies. Because the
Company historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS 130 did not have a material effect on the
consolidated financial position or results of operations or cash flows of the
Company.
SEGMENT REPORTING In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which revises disclosure
requirements about operating segments and establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 requires that public business enterprises report financial and
descriptive information about their reportable operating segments. The Company
operates in one business segment which is the manufacture and sale of flexible
circuit interconnect solutions. Financial information is summarized by
geographic area (see Note 15).
PRIOR PERIOD RECLASSIFICATION Certain prior period amounts have been
reclassified to conform to the current presentation.
NOTE 2 ADFLEX U.K.
On September 29, 1996, the Company's Board of Directors approved a plan to
restructure, over the next twelve months, the Company's assembly operation in
the U.K., and during that time period, transfer production from the U.K. to the
Company's manufacturing facility in Thailand. Accordingly, the Company recorded
the following: $13.5 million write-off of intangible assets, $8.8 million
write-down of property, plant and equipment, $2.5 million in lease termination
charges and $4.4 million in employee termination costs for 507 direct labor,
technical and administrative employees. As of December 31, 1996, $0.3 million of
the employee termination charges related to 13 employees had been paid and
charged against the liability. As of December 31, 1997, production has ceased at
the U.K. facility. During the year ended
11
<PAGE>
December 31, 1997, the Company paid and charged to the liability $5.5 million
related to termination costs for 124 employees and lease termination costs. In
addition, the Company reallocated $0.8 million of the reserve for employee and
lease termination costs to be used for additional write-down of property, plant
and equipment. During the year ended December 27, 1998, the Company paid and
charged to the liability $0.2 million related to termination costs for 3
employees and lease termination costs. The remaining accrual for employee
termination costs is approximately $0.1 million and the Company believes it is
adequate to cover the remaining liabilities. Total revenue and total operating
loss related to this operation for the year ended December 27, 1998 was $2.5
million and $2.0 million, respectively. Total revenue and operating loss related
to this operation for the year ended December 31, 1997 was $38.4 million and
$0.5 million, respectively. Subsequent to the restructuring, the Company
maintains a technology development center and a sales and service organization
in the U.K. to support its European customers.
NOTE 3 ADFLEX THAILAND
In an effort to increase its global sourcing opportunities and to decrease
its operating costs, the Company established a joint venture, ATL, located in
Lamphun, Thailand with Hana in August 1996. On September 26, 1997, the Company
increased its ownership in ATL from 80% to 100% through the purchase of Hana's
20% equity interest. Under the terms of the Equity Purchase Agreement, the
Company paid $0.5 million at closing and issued a note in the principal amount
of $1.0 million and agreed to pay $1.3 million at various dates through December
31, 1998 in connection with the acquisition of Hana's 20% interest in ATL. The
Company remitted $2.2 million during the year ended December 27, 1998. Funding
for this payment came from the Company's line of credit. At December 27, 1998,
$0.1 million was outstanding under the note. Goodwill related to the excess
purchase price over fair value of the net tangible assets acquired of $1.9
million, net of accumulated amortization of $0.5 million at December 27, 1998,
is being amortized on a straight-line basis over five years.
NOTE 4 SPECIAL CHARGES
During the year ended December 27, 1998, the Company implemented new cost
and productivity improvement measures designed to address current adverse
industry trends such as intense price competition from Asian suppliers and
decreased demand by certain customers supplying the personal computer markets -
in particular the hard disk drive (HDD) segment. These actions included the
consolidation of administrative functions, a 27% reduction in staffing, the
closing of two manufacturing plants in Mexico and the transfer of selected
manufacturing programs from Mexico to Thailand. As a result, the Company
incurred a special charge of approximately $1.6 million: $1.0 million related to
the workforce reduction and $0.6 million related to employee severance and
termination costs associated with the closing of the two plants in Mexico.
During the year ended December 27, 1998, the Company paid and charged to the
liability $0.6 million related to employee severance and lease termination costs
and $0.5 million related to workforce reduction involving 97 employees at its
Chandler facility, 5 employees at its U.K. facility and 77 employees at its
Mexico facility. The remaining accrual related to workforce reduction is
approximately $0.5 million and the Company believes it is adequate to cover the
remaining liabilities.
NOTE 5 ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
December 27, December 31,
1998 1997
- --------------------------------------------------------------------------------
Accounts receivable trade $ 25,748 $ 33,331
Allowance for returns and doubtful accounts (1,001) (1,750)
--------------------------
$ 24,747 $ 31,581
- --------------------------------------------------------------------------------
NOTE 6 INVENTORIES
Inventories consist of the following (in thousands):
12
<PAGE>
December 27, December 31,
1998 1997
- --------------------------------------------------------------------------------
Raw material $ 7,437 $ 12,688
Work-in-process 3,743 8,849
Finished good 1,105 595
- --------------------------------------------------------------------------------
12,285 22,132
Allowance for obsolescence and excess inventory (2,888) (2,835)
------------------------------
$ 9,397 $ 19,297
- --------------------------------------------------------------------------------
NOTE 7 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
December 27, December 31,
1998 1997
- --------------------------------------------------------------------------------
Land $ 2,740 $ 2,740
Buildings 11,923 10,845
Leasehold improvements 4,772 4,312
Manufacturing equipment 47,335 34,279
Computer and office equipment 9,628 2,608
- --------------------------------------------------------------------------------
76,398 54,784
Accumulated depreciation and amortization of
capitalized lease obligations (21,047) (12,527)
------------------------------
$ 55,351 $ 42,257
- --------------------------------------------------------------------------------
Depreciation expense, including the amortization of capitalized lease
obligations, was $8.5 million, $6.5 million and $5.8 million for the years ended
December 27, 1998 and December 31, 1997 and 1996, respectively.
NOTE 8 LINE OF CREDIT AND LONG-TERM DEBT
On June 5, 1997, the Company entered into a new credit facility arranged by
BancBoston Securities, Inc., which included a number of banks as lenders. The
credit facility consisted of a $20.0 million, three-year revolving line of
credit and a $25.0 million, five-year term loan. Under the terms of the credit
facility, any outstanding balance bears interest at BankBoston, N.A.'s prime
interest rate or LIBOR plus an applicable margin ranging from 1.5% to 2.25%
based on the Company achieving certain financial objectives at the end of each
quarter. At December 31, 1997, $25.0 million was outstanding under the term loan
and $7.0 million was outstanding under the revolving line of credit. The
weighted average interest rate at December 31, 1997 for the revolving line of
credit was 8.5%.
In February 1998, the Company amended its existing credit facility to more
adequately meet its working capital requirements by increasing the existing
revolving line of credit from $20.0 million to $25.0 million. In addition, the
existing $25.0 million term loan was replaced with a $35.0 million term loan. In
July 1998, the Company reevaluated its financial needs and determined that
credit facility commitments of a $20.0 million revolving line of credit and a
$30.0 million term loan are sufficient to meet its liquidity requirements.
Accordingly, the Company canceled $10.0 million of existing credit facility
commitments, $5.0 million relating to the revolving line of credit and $5.0
million relating to the term loan.
On October 30, 1998, the Company amended its existing credit facility to
revise certain financial covenants, reduce the term loan by $10.0 million and
revise the debt amortization schedule. Upon closing of the third amendment, the
$30.0 million term loan was reduced by $5.0 million to $25.0 million from
borrowings from the Company's revolving line of credit. The amendment required a
$5.0 million principal payment no later than January 20, 1999 (which was timely
remitted), plus four equal principal payments of $0.8 million each quarter
beginning with the quarter ending December 31, 1998 through the quarter ending
September 30, 1999, increasing to twelve equal principal payments of $1.3
million each quarter thereafter with the last payment due December 31, 2002.
Borrowing under the line of credit is limited to 80% of the aggregate value of
all eligible domestic accounts receivable plus 70% of the aggregate value of all
eligible foreign accounts receivable. Under the terms of the credit facility,
any outstanding balance bears interest at a Base Rate which is defined as
BankBoston N.A.'s prime rate plus 0.50% or LIBOR plus an applicable
13
<PAGE>
margin ranging from 1.50% to 2.25%, based on the Company achieving certain
financial objectives at the end of each quarter. The credit facility is secured
by all assets of the Company and a pledge by the Company of 66 2/3% of the stock
of its subsidiaries. Under the third amendment to the credit agreement, the
Company is required to meet certain minimum revenue and profitability covenants,
maintain certain financial ratios and meet certain net worth and indebtedness
tests for which the Company is was in compliance at December 27, 1998. The
amended credit facility prohibits the payment of dividends. In connection with
the third amendment, the Company issued to its lenders a warrant to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.00 per
share. The warrant vested on March 14, 1999 (subject to certain conditions) and
terminates (if not sooner exercised) on December 29, 2002. The Company also
granted to the lenders certain customary demand and piggyback registration
rights in connection with the warrant. At December 27, 1998, $24.6 million was
outstanding under the term loan and $13.0 million was outstanding under the
revolving line of credit. The weighted average interest rate at December 27,
1998 for the revolving line of credit was 8.6%.
During February 1999, the Company failed to meet certain financial
covenants of the credit agreement discussed above and expects to fail to meet
another covenant at March 31, 1999. The lenders have rights to exercise certain
remedies under the agreement but have not chosen to do so to date. In accordance
with Statement of Financial Accounting Standards Statement No. 78,
CLASSIFICATION OF OBLIGATIONS THAT ARE CALLABLE BY THE CREDITOR, the Company has
classified all of the outstanding balance under the credit agreement as a
current liability. Management of the Company has met with the lenders in an
attempt to restructure the credit facility, or otherwise satisfactorily resolve
the defaults. It is not possible, however, to predict at this time the success
of management's efforts. No assurance can be given that the outcome of the
Company's negotiating efforts with the lenders will not adversely affect the
Company's business, financial condition, results of operations and cash flows.
Long-term debt consists of the following (in thousands):
December 27, December 31,
1998 1997
- --------------------------------------------------------------------------------
Term loan agreement; interest at LIBOR + margin
ranging from 1.50% to 2.25% (8.25% at December 27,
1998) $ 24,550 $ 25,000
Capitalized lease obligations 132 189
- --------------------------------------------------------------------------------
24,682 25,189
Less current maturities (24,613) (1,959)
---------------------------
$ 69 $ 23,230
- --------------------------------------------------------------------------------
NOTE 9 ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
December 27, December 31,
1998 1997
- --------------------------------------------------------------------------------
Salaries and benefits $ 1,987 $ 3,259
Accrued interest 769 138
Accrued restructuring charges, current 172 339
Accrued severance costs 500 --
Accrued relocation 92 429
Accrued commissions 304 346
Accrued SAP expenses 917 --
Other 2,442 1,651
---------------------------
$ 7,183 $ 6,162
- --------------------------------------------------------------------------------
NOTE 10 COMMON STOCK AND EQUITY
PREFERRED STOCK The Company's certificate of incorporation authorizes the
issuance of 10 million shares of preferred stock, at $.01 par value,
undesignated as to powers, preferences, rights, limitations or restrictions.
As of December 27, 1998, no shares of preferred stock have been issued.
14
<PAGE>
COMMON STOCK The number of shares of Common Stock reserved for future issuance
at December 27, 1998, was as follows:
Employee and director stock options outstanding 896,122
Reserved for future grants under the 1994 Stock Incentive Plan 7,615
1994 director stock options outstanding 36,000
Reserved for issuance under the Employee Stock Purchase Plan 172,982
1998 outstanding warrants, exercisable March 14, 1999 50,000
----------
Total reserved for future issuance 1,162,719
- --------------------------------------------------------------------------------
In conjunction with the ADFlex U.K. acquisition, the Company issued 1,242,347
shares of restricted Common Stock. The holder agreed not to sell or otherwise
dispose of the shares for a two year period, which ended in January 1998.
In October 1998, in connection with the third amendment to the credit facility
(see Note 8), the Company issued to its lenders a warrant to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.00 per
share. The warrant vested on March 14, 1999 (subject to certain conditions) and
terminates (if not sooner exercised) on December 29, 2002. The Company also
granted to the lenders certain customary demand and piggyback registration
rights in connection with the warrant.
STOCK OPTION PLANS The Company has elected to follow APB No. 25, Accounting for
Stock Issued to Employees, in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation, requires
the use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Under the Company's 1993 Equity Incentive Plan (1993 Plan) adopted June 29,
1993, qualified employees received options to purchase 599,000 shares of Common
Stock. The options granted under this Plan were to vest over approximately four
years, but automatically vested at the time of the Company's initial public
offering on September 27, 1994. The remaining shares available for grant under
the 1993 Plan have been eliminated.
Under the 1994 Stock Incentive Plan (1994 Plan), qualified employees may receive
options to purchase the Company's common stock. The number of shares of Common
Stock available for issuance in any year under the Plan is equal to 3% of the
outstanding shares of Common Stock each January 1 during the term of the Plan.
In 1998, 263,054 shares were reserved for issuance. As part of the same
amendment, the stockholders approved an automatic grant to eligible non-employee
directors of an option to acquire 12,000 shares of Common Stock upon such
directors' initial election to the Company's Board of Directors and 3,000 shares
of Common Stock each year thereafter. Options granted to employees to date under
the 1994 Plan vest over a four year period from either the date of grant or one
year from the date of grant, and automatic options granted to directors vest
over a three year period from the date of grant.
On July 2, 1997, the Company canceled 92,250 options held by certain employees
issued under the 1994 Plan with an exercise price per share of $27.25 and
granted 92,250 options with an exercise price per share of $14.88 to the same
employees. The new options started a new vesting schedule over a four-year
period from the new date of grant. On June 22, 1998, the Company canceled
336,500 outstanding options granted on June 3, 1997, October 1, 1997 and April
7, 1998 (with an original exercise price of $15.50, $22.063 and $17.063 per
share, respectively) and approved the regrant and replacement of these options
with new options at an exercise price per share of $8.50, the fair market value
of the Company's Common Stock on the date of the Company's determination. The
new options vest over a four-year period from the new date of grant.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
pricing model with the following weighted-average assumptions for 1998:
risk-free interest rates of 4.42%, dividend yields of 0%, volatility factor of
the expected market price of the Company's Common Stock of .871 and a
weighted-average expected life of the option of 5 years. The assumptions used in
1997
15
<PAGE>
were: risk-free interest rates of 5.24%, dividend yields of 0%, volatility
factor of the expected market price of the Company's Common Stock of .644 and a
weighted-average expected life of the option of 5 years. The assumptions used in
1996 were: risk-free interest rates of 6.28%, dividend yields of 0%, volatility
factor of the expected market price of the Company's Common Stock of .684 and a
weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years ended
December 27, December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(6,420) $7,262 $(25,962)
Pro forma net income (loss) per basic share (0.72) 0.83 (3.03)
Pro forma net income (loss) per diluted share (0.72) 0.82 (3.03)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The effects of applying SFAS No. 123 for the years ended December 27, 1998 and
December 31, 1997 and 1996 are not likely to be representative of the effects on
reported net income for future years.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
Year ended December 27, Year ended December 31, Year ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 684,761 $ 14.08 555,162 $ 14.52 634,363 $ 12.18
Granted 798,751 12.59 400,750 15.78 317,725 10.55
Exercised (43,873) 6.49 (67,150) 10.74 (260,612) 0.77
Forfeitures/Expirations (543,517) 16.28 (204,001) 19.74 (136,314) 19.74
----------------------- ---------------------- ----------------------
Outstanding - end of year 896,122 11.86 684,761 14.08 555,162 14.52
----------------------- ---------------------- ----------------------
Exerciseable at year end 186,750 $ 13.62 136,460 $ 11.92 149,608 $ 15.31
----------------------- ---------------------- ----------------------
Weighted-average fair value of options granted during the
year:
Incentive Stock Options granted under the 1994 Plan $ 8.88 $ 8.93 $ 6.87
Non-qualified Stock Options granted under the 1994 Plan $ 8.53 $ 10.00 $ 5.93
</TABLE>
Exercise prices for options outstanding as of December 27, 1998 ranged from
$0.50 to $27.25. The weighted-average remaining contractual life of those
options is 8.7 years.
DIRECTOR STOCK OPTIONS On October 31, 1996, the Company granted two outside
directors an option to purchase 6,000 shares of Common Stock each at an exercise
price of $8.75. The options vest over a three-year period. On November 20, 1996,
the Company granted an option to purchase 12,000 shares of Common Stock at an
exercise price of $8.00 per share to a newly appointed outside director. The
option vests over a four-year period. On April 22, 1997, the Company granted two
outside directors an option to purchase 3,000 shares of Common Stock each at an
exercise price of $14.00. The options vest over a three-year period. On April
28, 1998, the Company granted three outside directors an option to purchase
3,000 shares of Common Stock each at an exercise price of $20.00. The options
vest over a three-year period.
16
<PAGE>
All of the above options to directors were granted under the 1994 Plan.
EMPLOYEE STOCK PURCHASE PLAN On June 2, 1994, the Company adopted and the
stockholders approved the 1994 Employee Stock Purchase Plan (the Purchase Plan)
and the Company reserved 200,000 shares of Common Stock for sale to employees.
The Purchase Plan became effective upon the Company's initial public offering.
On April 22, 1997, the Company adopted and the stockholders approved an
amendment to the Purchase Plan and the Company reserved an additional 300,000
shares of Common Stock for sale to employees. The Purchase Plan allows eligible
employees of the Company to purchase shares of Common Stock generally at 85% of
the lower of the fair market value per share of Common Stock on (i) the first
day of the offering period or (ii) the purchase date. Contributions are limited
to 15% of an employee's eligible compensation, subject to a maximum fair value
annual purchase of $25,000. There were 115,904, 67,814 and 90,584 shares issued
under the Purchase Plan during 1998, 1997 and 1996, respectively.
NOTE 11 EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee salary deferral plan that allows voluntary
contributions by all full-time employees of the Company's United States and
Mexico operations upon commencement of employment. Under the plan, eligible
employees may contribute up to 18% of their pre-tax earnings, not to exceed the
Internal Revenue Service annual contribution limit ($10,000 for 1998). The
Company may make contributions each year up to a maximum of 4% of an employee's
total compensation. Total Company contributions were $0.1 million for each of
the years ended December 27, 1998 and December 31, 1997 and 1996.
The Company has adopted a profit sharing plan for its United States and Mexico
employees to provide a financial incentive. The Company makes contributions to
the profit sharing plan in an amount equal to 5% of pre-tax profits. Total
expenses pursuant to this plan for the year ended December 31, 1997 were $0.7
million. No expenses were recorded pursuant to this plan for the years ended
December 27, 1998 and December 31, 1996.
The Company has adopted a management bonus plan to provide an additional
financial incentive for management. No expenses were recorded pursuant to this
plan for the year ended December 27, 1998. Total expenses pursuant to this plan
for the years ended December 31, 1997 and 1996 were $1.3 million and $0.1
million, respectively.
NOTE 12 SHAREHOLDER RIGHTS PLAN
On July 10, 1996, the Board of Directors adopted a Shareholder Rights Plan (the
Plan). Under the terms of the Plan, each shareholder of record at the close of
business on July 22, 1996, received as a dividend one Preferred Share purchase
right (Right) for each share of Common Stock of the Company. Each Right entitles
the registered holder to purchase from the Company one one-hundredth of a share
of Series A Participating Preferred Stock of the Company at a price of $100.00
per share, subject to adjustment. The Rights will separate from the Common Stock
and become exerciseable following the twentieth day after a person or group
acquires beneficial ownership of more than 20.5% of the Company's Common Stock
or announces a tender or exchange offer, the consummation of which would result
in ownership by a person or group of more than 20.5% of the Company's Common
Stock. Upon such events, the Company's Board of Directors may exchange the
Rights for one share of Common Stock per Right. Any unexercised Rights not
exchanged will have the right to receive Common Stock having a value of two
times the purchase price of the Right. The Rights expire on July 21, 2006,
unless redeemed at the Company's option for $0.001 per Right at any time on or
prior to the twentieth day after public announcement that a person or group has
acquired beneficial ownership of more than 20.5% of the Common Stock. Preferred
shares purchasable upon exercise of the right will not be redeemable. Each
Preferred Share will be entitled to an aggregate dividend of 100 times the
dividend declared per share of Common Stock. Preferred shares will have 100
votes.
NOTE 13 INCOME TAXES
Income taxes include the following (in thousands):
17
<PAGE>
<TABLE>
<CAPTION>
Years ended
December 27, December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ -- $ (305) $ (77)
Deferred (2,079) 3,452 (9,623)
- --------------------------------------------------------------------------------------------------
(2,079) 3,147 (9,700)
State:
Current -- -- 54
Deferred (33) 313 (149)
- --------------------------------------------------------------------------------------------------
(33) 313 (95)
Foreign, current 263 358 41
- --------------------------------------------------------------------------------------------------
$ (1,849) $ 3,818 $ (9,754)
==================================================================================================
</TABLE>
The tax benefits associated with certain stock options reduced taxes currently
payable by $0.1 million, $0.4 million and $0.7 million for 1998, 1997 and 1996,
respectively. Such benefits are credited to additional paid-in capital when
realized.
Income tax expense (benefit) differs from the amount computed by applying the
federal statutory rate for the years ended December 27, 1998 and December 31,
1997 and 1996, respectively, as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 27, December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense (benefit) calculated at the
statutory rate $ (2,245) $ 4,219 $ (12,172)
State income tax (benefit), net of federal effect (218) 409 (62)
Foreign losses (income) with no tax benefit (charge) (416) (648) 2,438
In-process technology (346) (346) (54)
Research and development credit -- -- (100)
Other, net 1,376 184 196
- --------------------------------------------------------------------------------------------------
Income tax expense (benefit) $ (1,849) $ 3,818 $ (9,754)
- --------------------------------------------------------------------------------------------------
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of deferred tax
assets and liabilities as of December 27, 1998 and December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
December 27, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Tax benefits related to restructuring $ 3,327 $ 5,279
Inventory valuation 1,148 1,118
Accrued liabilities 781 519
Allowance for returns and doubtful accounts 254 358
State tax NOL carryforward 131 14
Federal tax NOL carryforward 3,243 --
Alternative minimum tax credit 443 443
Other state credits 29 29
- --------------------------------------------------------------------------------------------------
9,356 7,760
Deferred tax liabilities:
Tax versus financial reporting depreciation 847 1,302
Prepaid expenses and other 111 172
- --------------------------------------------------------------------------------------------------
958 1,474
- --------------------------------------------------------------------------------------------------
Net deferred tax asset 8,398 6,286
Plus (minus) deferred tax liability (asset) - current (2,072) (1,823)
- --------------------------------------------------------------------------------------------------
Deferred tax asset, non-current $ 6,326 $ 4,463
- --------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Management has concluded that no valuation allowance is required based on its
assessment that future levels of taxable income will, more likely than not, be
sufficient to realize the tax benefits.
At December 27, 1998, the Company has a federal and state net operating loss of
$9.5 million and $4.0 million, respectively, which are available for carryover
to future periods. The federal net operating loss begins expiring in the year
2019 while the state net operating loss begins expiring in 2003. In addition,
the Company has $0.4 million of alternative minimum tax credit carryovers at
December 27, 1998 which do not expire.
The Internal Revenue Service (IRS) has concluded a field audit of the Company's
income tax returns for the tax year 1993. In connection with this audit, the IRS
issued a 90-day letter in January 1998 proposing adjustments to the Company's
income and tax credits for the year, which would result in an additional
assessment of $1.6 million, excluding interest. The major proposed adjustment,
which relates to the allocation of the purchase price of assets obtained from
Rogers Corporation (Rogers) pursuant to acquisition agreements between the
Company and Rogers, would extend the period over which the tax benefit for the
purchase price would be recovered. The Company and the IRS have reached a
tentative agreement to settle all outstanding issues relating to this audit. The
terms of the agreement would require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax provision is
adequate to cover the estimated liability and the final disposition of these
matters will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
Pre-tax income (loss) from foreign operations was $1.8 million, $3.2 million and
($38.8) million for the years ended December 27, 1998 and December 31, 1997 and
1996, respectively. The residual United States tax liability for unremitted
foreign earnings is immaterial.
NOTE 14 COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS The Company leases its facilities and equipment under capital
and operating leases which expire at various dates through January 15, 2008. As
of December 27, 1998, the future minimum lease commitments under these leases
are payable as follows (in thousands):
Capitalized Operating
Leases Leases
- --------------------------------------------------------------------------------
1999 $ 74 $ 1,451
2000 40 1,198
2001 36 1,175
2002 -- 1,105
2003 -- 624
2004 and thereafter 526
- --------------------------------------------------------------------------------
Total minimum lease payments 150 $ 6,079
Less amounts representing interest (18)
- --------------------------------------------------------------------------------
Present value of future net minimum lease payments $ 132
- --------------------------------------------------------------------------------
Rent expense for all operating leases for the years ended December 27, 1998 and
December 31, 1997 and 1996 was $2.3 million, $3.9 million and $4.2 million,
respectively. At December 27, 1998 and December 31, 1997, the Company had
capitalized $0.8 million and $0.7 million, respectively, related to assets
acquired under capitalized lease agreements in the accompanying balance sheet.
ENVIRONMENTAL REMEDIATION CONTINGENCY 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.
MEXICAN UNION RELATIONS At December 27, 1998, 1,990 of the Company's employees
located in Mexico were represented by a labor union and covered by a collective
bargaining agreement expiring December 31, 1999 that is subject to revision
annually under Mexican labor laws. The Company has not experienced any
employee-related work stoppage and believes that its relationship with its union
and other employees is good, but there can be no assurance that the Company will
be able to successfully negotiate with the labor union in the future.
19
<PAGE>
NOTE 15 GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company operates in one business segment which is the manufacture and sale
of flexible circuit interconnect solutions. Financial information summarized by
geographic area for the years ended December 27, 1998 and December 31, 1997 is
as follows (in thousands) :
Years Ended
December 27, December 31,
1998 1997
- --------------------------------------------------------------------------------
Revenue:
North America $ 135,000 $ 157,743
Europe 2,509 38,410
Southeast Asia 47,350 28,430
Eliminations (14,762) (10,705)
- --------------------------------------------------------------------------------
Total 170,097 213,878
Operating Income (loss):
North America $ (5,096) $ 11,292
Europe (1,974) 392
Southeast Asia 3,364 2,927
Eliminations 168 (31)
- --------------------------------------------------------------------------------
Total (3,538) 14,580
Total Assets:
North America $ 139,354 $ 141,473
Europe 12,570 13,721
Southeast Asia 9,582 9,672
Eliminations (53,202) (50,666)
- --------------------------------------------------------------------------------
Total 108,304 114,200
At any given time, sales to certain customers may account for a significant
portion of the Company's business. Customers who individually represent 10% or
more of net sales for the respective year are as follows:
Years ended
December 27, December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
IBM 16.0% 11.5% 11.7%
Seagate 12.4% 21.9% 34.9%
Export sales during the years ended December 27, 1998 and December 31, 1997
and 1996 were $56.2 million, $66.6 million and $26.6 million, respectively.
NOTE 16 RELATED PARTY TRANSACTIONS
ACQUISITION AGREEMENTS WITH ROGERS CORPORATION Pursuant to the asset purchase
agreements entered into on June 28, 1993 between the Company and Rogers
Corporation (Rogers) whereby the Company purchased the Flexible Interconnect
Division (the Predecessor) of Rogers, Rogers retained certain existing and
potential liabilities. In particular, Rogers retained all liabilities resulting
from, among other things, the creation, storage, discharge, use or handling of
hazardous or toxic substances by the Predecessor that may exist on or about the
Company's facilities in Arizona and Mexico prior to the acquisition.
In connection with the acquisition, the Company entered into a building lease
with an affiliate of Rogers to lease the Predecessor's corporate headquarters
and U.S. manufacturing facility. The lease agreement for the Company's U.S.
facility was for five years and provided for fixed payments of $0.5 million per
annum for the first three years and mutually agreed market rates for the
remaining two years. As provided for in the lease agreement, the Company
exercised its option to renew the lease for an additional five years in June
1997, twelve months prior to the lease expiration date. The renewed lease
provides for fixed payments of
20
<PAGE>
$0.8 million per annum for years four through eight and mutually agreed-upon
market rates adjusted for the Consumer Price Index for years nine and ten. Total
rent expense paid to Rogers was $0.8 million for the year ended December 27,
1998 and $0.6 million and $0.5 million for each of the years ended December 31,
1997 and 1996, respectively.
AFFILIATION WITH XYRATEX The Company derived 0.1% and 1.1% of its net sales in
1998 and 1997, respectively from sales to Xyratex, a major shareholder of the
Company with a representative on the Company's Board of Directors. Through
September 30, 1997, the Company leased the ADFlex U.K. manufacturing facility
from Xyratex. Total lease payments made to Xyratex in 1997 totaled $1.5 million.
In addition, $0.5 million was paid to Xyratex in 1997 for administrative
services.
AFFILIATION WITH HANA MICROELECTRONICS In August 1996, the Company established a
joint venture located in Lamphun, Thailand with Hana. The joint venture was 80%
owned by the Company and 20% owned by Hana. The Company purchased the remaining
20% equity interest in ATL from Hana in September 1997. The Company entered into
a building lease with Hana on October 1, 1996 to lease the Thailand
manufacturing facility. The lease term expires on March 31, 1999. Total lease
payments made to Hana in 1998 and 1997 totaled $0.6 million and $0.4 million,
respectively. In addition, $0.3 million was paid to Hana in 1997 for
administrative services. No administrative service payments were made in 1998.
NOTE 17 QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales
1998 $ 50,023 $ 44,304 $ 36,142 $ 39.628 $ 170,097
1997 48,221 56,244 55,058 54,355 213,878
1996 38,082 35,031 36,898 46,825 156,836
Gross profit
1998 10,518 1,153 1,586 3,864 17,121
1997 7,432 9,090 10,145 11,385 38,052
1996 7,198 5,244 (295) 6,416 18,563
Net income (loss)
1998 2,631 (3,574)(2) (2,610) (1,200)(2) (4,753)(2)
1997 873 1,880 2,597 3,246 8,596
1996 840 (660) (25,663)(1) 459 (25,024)(1)
Net income (loss) per basic share
1998 .30 (.40) (.29) (.13) (.54)
1997 .10 .22 .30 .37 . 99
1996 .10 (.08) (2.98) .05 (2.92)
Net income (loss) per diluted share
1998 .30 (.40) (.29) (.13) (.54)
1997 .10 .21 .29 .36 .97
1996 .10 (.08) (2.98) .05 (2.92)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes charges of $29.2 million related to restructuring of the Company's
U.K. operations, see Note 2.
(2) During the quarter ended June 30, 1998, $1.1 million charges were incurred
related to work force reduction and the closing of two plants in Mexico in an
effort to address current adverse industry trends and during the quarter ended
December 27, 1998, charges of $0.5 million were incurred related to work force
reduction. See Note 4.
21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders and Board of Directors of ADFlex Solutions, Inc.
We have audited the accompanying consolidated balance sheets of ADFlex
Solutions, Inc. (the Company) at December 27, 1998 and December 31, 1997, and
the related consolidated statements of operations, equity and cash flows for
each of the three years in the period ended December 27, 1998. 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 generally accepted auditing
standards. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of the Company referred to
above present fairly, in all material respects, the consolidated financial
position of ADFlex Solutions, Inc. at December 27, 1998 and December 31, 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 27, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has failed
to meet certain provisions of its credit agreement in February 1999 and expects
to fail to meet another covenant at March 31, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying 1998 consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Phoenix, Arizona
January 25, 1999, except as to
basis of presentation in Note 1
to the consolidated financial statements
as to which the date is April 2, 1999.
22
<PAGE>
APPENIX B
ADFlex Solutions, Inc.
Condensed Consolidated Balance Sheet
(In thousands)
June 27, June 27,
1999 1999
---------------------------
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash & cash equivalents $ 2,641 $ 5,325
Accounts receivable, net 22,704 24,747
Other receivables 795 1,161
Inventories 9,021 9,397
Deferred tax assets -- 2,072
Other current assets 675 1,952
---------------------------
Total current assets 35,836 44,654
Property, plant & equipment, net 47,736 55,351
Intangible Assets 1,710 1,933
Deferred tax assets -- 6,326
Other assets 46 40
---------------------------
$ 85,328 $ 108,304
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 16,400 $ 13,000
Notes payable -- 63
Accounts payable 16,422 15,927
Accrued liabilities 9,872 7,183
Current portion of long-term debt and
Capitalized leases 16,865 24,613
---------------------------
Total current liabilities 59,559 60,786
Long-term debt and capitalized leases 1,311 69
Stockholders' equity 24,458 47,449
---------------------------
$ 85,328 $ 108,304
===========================
See accompanying notes to condensed consolidated financial statements
23
<PAGE>
ADFlex Solutions, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Six Months Ended
June 27, June 30,
----------------------------
1999 1998
----------------------------
Net sales $ 62,825 $ 94,327
Cost of sales 58,576 82,656
----------------------------
Gross profit 4,249 11,671
Operating expenses:
Engineering, research & development 2,443 4,100
Selling, general & administrative 5,994 7,037
Restructuring charges 7,806 --
Amortization of intangible assets 258 258
----------------------------
Total operating expenses 16,501 11,395
----------------------------
Operating income (loss) (12,252) 276
Interest income 58 197
Interest expense (1,826) (1,424)
Other income (expense), net (658) (360)
----------------------------
Income (loss) before income taxes (14,678) (1,311)
Income taxes 8,874 (368)
----------------------------
Net income (loss) $ (23,552) $ (943)
============================
Net income (loss) per share:
Basic $ (2.62) $ (0.11)
============================
Diluted $ (2.62) $ (0.11)
============================
Number of shares used in computing
net income (loss) per share:
Basic 8,975 8,820
============================
Diluted 8,975 8,820
============================
See accompanying notes to condensed consolidated financial statements
24
<PAGE>
ADFlex Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 27, June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (23,552) $ (943)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,412 4,339
Deferred taxes 8,398 391
Restructuring charges 7,806 --
Net gain/loss on disposal of assets 35 (103)
Changes in operating assets and liabilities:
Accounts receivable 2,043 7,691
Other receivables 366 219
Inventories 376 2,931
Other current assets 1,277 (236)
Accounts payable and accrued liabilities 3,184 (6,366)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,345 7,923
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures (5,415) (13,733)
(Increase)/decrease in other assets (6) 2
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (5,421) (13,731)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net activity on line of credit 3,400 (3,500)
Proceeds from issuance of long-term debt 1,600 5,000
Payments on long-term debt (7,985) --
Payments on note payable (63) (875)
Payments on capitalized lease obligations (121) (85)
Issuance of common stock, net of expenses 561 703
------------ ------------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,608) 1,243
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,684) (4,565)
Cash and cash equivalents at beginning of period 5,325 9,092
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,641 $ 4,527
============ ============
</TABLE>
25
<PAGE>
ADFLEX SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Preparing financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results may differ from these estimates. Operating results
for the six month period ended June 27, 1999 are not necessarily indicative of
the results that may be expected for the year ending January 2, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 27, 1998.
The accompanying consolidated financial statements have been prepared on
the basis that the Company will continue as a going concern. The Company has
failed to meet certain provisions of its credit agreement during the six months
ended June 27, 1999 and in June 1999, the lenders notified the Company that the
financing commitments under the existing credit facility had been terminated and
the lenders were no longer obligated to loan funds to the Company pursuant to
the credit agreement. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements for the period ended June 27, 1999 do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
On July 1, 1999, the Company announced that it had entered into a
definitive merger agreement with Innovex, Inc. whereby Innovex's acquisition
subsidiary would commence a cash tender offer to purchase outstanding shares of
Company common stock for $3.80 per share. As of August 3, 1999, the tender offer
was successfully completed. Following the expiration of the tender offer,
Innovex's acquisition subsidiary purchased 6,804,284 shares of the Company's
issued and outstanding common stock, representing approximately 75.5% of such
shares. One member of the four members of the Company's Board of Directors,
under the provisions of the merger agreement, resigned and four persons
designated by such Innovex subsidiary were appointed as members of the Company's
Board of Directors. As a result, Innovex has voting control of the Company. At
the effective time of the merger that is subject to shareholder approval, the
Company will become a wholly-owned subsidiary of Innovex.
The tender offer and the merger are described in detail in the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 dated July 7, 1999 and
filed with the Securities and Exchange Commission ("SEC") July 8, 1999, as
amended by the Company's First Amended and Restated Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on July 27, 1999 and as further
amended by the Company's Amendment No. 2 to its Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on August 9, 1999.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
26
<PAGE>
(2) ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following (in thousands):
June 27, December 27,
1999 1998
------------ ------------
Accounts receivable trade $ 23,944 $ 25,748
Allowance for doubtful accounts and returns (1,240) (1,001)
------------ ------------
$ 22,704 $ 24,747
============ ============
(3) INVENTORIES
Inventories consist of the following (in thousands):
June 27, December 27,
1999 1998
------------ ------------
Raw materials $ 6,416 $ 7,437
Work-in-process 4,934 3,743
Finished goods 1,147 1,105
Allowance for obsolescence (3,476) (2,888)
------------ ------------
$ 9,021 $ 9,397
============ ============
(4) ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
June 27, December 27,
1999 1998
------------ ------------
Salaries and benefits $ 2,187 $ 1,987
Accrued interest 1,003 769
Accrued severance costs 383 500
Accrued professional fees 800 --
Accrued SAP costs 408 917
Other 5,091 3,010
------------ ------------
$ 9,872 $ 7,183
============ ============
(5) LINE OF CREDIT AND LONG-TERM DEBT
Prior to October 30, 1998, the Company's credit facility consisted of a
$35.0 million term loan and a $25.0 million revolving line of credit arranged by
BankBoston N.A. and a group of other lenders, secured by the Company's assets
and 66-2/3% of the stock of its subsidiaries. On October 30, 1998, the Company
and the banks amended the credit facility to reduce the term loan to $30.0
million, change the amortization schedule of the term loan, reduce the revolver
to $20.0 million, and change the financial covenants. In addition, a required
$5.0 million principal reduction on the term loan was paid from the revolver, as
was a required $5.0 million principal payment due January 20, 1999 and a
required $0.8 million principal payment due March 31, 1999. An additional
principal payment of $0.8 million was paid during the three
27
<PAGE>
month period ended June 27, 1999 and an additional payment of $0.8 million is
due next quarter ending September 30, 1999, followed by quarterly principal
payments of 1.3 million through maturity at December 31, 2002. Borrowing under
the revolver is limited to 80% of the aggregate value of eligible domestic
accounts receivable and 70% of the aggregate value of eligible foreign accounts
receivable. Outstanding balances bear interest at prime plus 0.5% or LIBOR plus
an applicable margin ranging from 1.5% to 2.25% based on the Company achieving
certain financial objectives at the end of each quarter. In order to obtain the
amendment, the Company granted the lenders a warrant to purchase an aggregate of
50,000 shares of common stock at an exercise price of $5.00 per share. The
warrant is now fully vested and expires on December 29, 2002. The lenders have
customary demand and piggyback registration rights in connection with the
warrant. At June 27, 1999, $16.6 million was outstanding under the term loan
(less warrant discount of $0.2 million) and the Company had $12.9 million
available for borrowing based on collateral requirements under the revolving
line of credit, subject to the discussion in the next paragraph regarding the
lenders notification that the financing commitments under the existing credit
facility had been terminated, with an outstanding balance of $16.4 million. In
addition, the Company is in default under its amended credit agreement by
failing to comply with its obligation to make a mandatory prepayment of such
excess amount of revolver borrowings over the borrowing base amount.
As of June 27, 1999, the Company was in default under certain financial
covenants of the credit facility and in June 1999, the lenders notified the
Company that the financing commitments under the existing credit facility had
been terminated and the lenders were no longer obligated to loan funds to the
Company pursuant to the credit agreement. Therefore, the Company has classified
the entire outstanding balance of the facility as a current liability. Further,
the audit of the Company's consolidated financial statements for the year ended
December 27, 1998 included a going-concern qualification from the Company's
independent auditors.
On July 1, 1999, the Company announced that it had entered into a
definitive merger agreement with Innovex, Inc. whereby Innovex's acquisition
subsidiary would commence a cash tender offer to purchase outstanding shares of
Company common stock for $3.80 per share. As of August 3, 1999, the tender offer
was successfully completed. Following the expiration of the tender offer,
Innovex's acquisition subsidiary purchased 6,804,284 shares of the Company's
issued and outstanding common stock, representing approximately 75.5% of such
shares. One member of the four members of the Company's Board of Directors,
under the provisions of the merger agreement, resigned and four persons
designated by such Innovex subsidiary were appointed as members of the Company's
Board of Directors. As a result, Innovex has voting control of the Company. At
the effective time of the merger that is subject to shareholder approval, the
Company will become a wholly-owned subsidiary of Innovex. As outlined in the
definitive merger agreement, Innovex has agreed to pay in full the Company's
indebtedness to its lenders at the effective time of the merger.
The tender offer and the merger are described in detail in the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 dated July 7, 1999 and
filed with the Securities and Exchange Commission ("SEC") July 8, 1999, as
amended by the Company's First Amended and Restated Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on July 27, 1999 and as further
amended by the Company's Amendment No. 2 to its Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the SEC on August 9, 1999.
(6) RESTRUCTURING AND SPECIAL CHARGES
During 1998 and through the second quarter of 1999, the Company experienced
a substantial decline in sales levels which decreased capacity utilization. In
April 1999, the Company's Board approved a reorganization plan which includes
closing the Company's U.K. facility, downsizing the Company's Mexico facility
and transferring programs from Mexico to the Company's new Thailand facility.
Because of this impairment event, the Company evaluated the ongoing value of the
plant and equipment associated with its Chandler and Mexico facilities as
required by Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
Based on this evaluation, the Company determined that assets with a carrying
amount of $10.9 million were impaired and wrote them down to their fair value,
as determined by an appraisal of the plant and
28
<PAGE>
equipment completed in March 1999. During the three month period ended March 28,
1999, the Company recorded restructuring charges of $6.9 million related to the
write-down of property, plant and equipment as discussed above. In addition, the
Company recorded restructuring charges of $0.9 million and special charges
totaling $1.7 million during the three month period ending June 27, 1999 in
connection with the reorganization plan and certain merger-related expenses:,
$0.2 million for the U.K. facility shut down costs, $0.7 million related to the
write-off of certain obsolete property, plant and equipment, $0.5 million
related to employee termination costs, $0.4 million related to write-off of
unamortized bank fees and $0.8 million related to professional fees. As of June
27, 1999, the Company paid and charged $0.2 million to the employee termination
liability. The remaining accrual for employee termination costs is approximately
$0.3 million, which the Company believes is adequate to cover the remaining
liabilities.
(7) INCOME TAXES
During the six month period ended June 27, 1999, the Company revised its
projection of future levels of income, and the anticipated jurisdictions in
which this income would be earned caused a reevaluation of the criteria of
future tax benefits. In the determination of management, it was no longer more
likely than not that the deferred tax assets could be fully utilized during the
carryforward period. Accordingly, the Company established a valuation reserve
for all its existing deferred tax assets which totaled $8.9 million and the
Company did not record an income tax benefit for the three and six month period
ended June 27, 1999. The effective tax rate for the three and six month period
ended June 27, 1998 was 28%.
The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS issued a 90-day letter in January 1998 proposing adjustments to
the Company's income and tax credits for the year, which would result in an
additional assessment of $1.6 million, excluding interest. The major proposed
adjustment, which relates to the allocation of the purchase price of assets
obtained from Rogers Corporation (Rogers) pursuant to acquisition agreements
between the Company and Rogers, would extend the period over which the tax
benefit for the purchase price would be recovered. The Company and the IRS have
reached an agreement to settle all outstanding issues relating to this audit.
The terms of the agreement will require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax accrual is
adequate to cover this liability and the final disposition of these matters will
not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
29
<PAGE>
APPENDIX C
INNOVEX INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Financial Statements
The following pro forma unaudited condensed combined balance sheet as of June
30, 1999 combines the June 30, 1999 balance sheet of Innovex, Inc. ("Innovex")
with the June 27, 1999 balance sheet of ADFlex Solutions, Inc. ("ADFlex") as if
the acquisition had become effective on June 30, 1999.
The following pro forma unaudited condensed combined statement of operations for
the nine months ended June 30, 1999 combines the historical results of Innovex
for the nine month period ended June 30, 1999 with the historical results of
ADFlex for the nine month period ended June 27, 1999. This statement reflects
the acquisition of ADFlex as if it occurred on October 1, 1998. The acquisition
was accounted for as a purchase.
The following pro forma unaudited condensed combined statement of operations for
the year ended September 30, 1998 combines the historical results of Innovex for
the year ended September 30, 1998 with the twelve month period ended September
30, 1998 for ADFlex. This statement reflects the acquisition of ADFlex as if it
occurred on October 1, 1997. The acquisition was accounted for as a purchase.
Assumptions underlying the pro forma adjustments are described in the
accompanying notes which should be read in conjunction with these statements.
These statements should also be read in conjunction with the other financial
statements and notes thereto included elsewhere herein. The following pro forma
adjustments are based on Innovex's preliminary review of ADFlex. Actual
adjustments will be made on the basis of a more detailed valuation analysis and
may differ from the pro forma adjustments presented herein. The pro forma
statements do not purport to be indicative of the actual results of operations
that would have occurred had the operations of the companies been combined
during the periods shown, or of results of future operations.
30
<PAGE>
INNOVEX INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Balance Sheet
June 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
ASSETS Innovex ADFlex Adjustments Combined
-----------------------------------------------------
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents $ 24,463 $ 2,641 $ (27,100)(a) $ 4
Short-term investments 34,485 -- (10,000)(a) 24,485
Accounts receivable 12,110 22,704 34,814
Inventories 6,326 9,021 15,347
Other current assets 2,839 1,470 4,309
--------- --------- --------- ---------
Total current assets 80,223 35,836 (37,100) 78,959
Property, plant and equipment, net 36,830 47,736 (1,000)(a) 83,566
Intangible and other assets 904 1,756 13,642 (a) 16,302
--------- --------- --------- ---------
$ 117,957 $ 85,328 $ (24,458) $ 178,827
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,193 $ 16,422 $ 21,615
Other accrued liabilities 3,873 43,137 $ (33,265)(b) 13,745
--------- --------- --------- ---------
Total current liabilities 9,066 59,559 (33,265) 35,360
Long-term debt 606 1,311 33,265 (b) 35,182
Other long-term liabilities 228 -- -- 228
Stockholders' equity 108,057 24,458 (24,458)(a) 108,057
--------- --------- --------- ---------
$ 117,957 $ 85,328 $ (24,458) $ 178,827
========= ========= ========= =========
</TABLE>
See notes to unaudited Pro Forma Condensed Combined Financial Statements.
31
<PAGE>
INNOVEX INC.AND SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Statements of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended June 30, 1999
Innovex ADFlex Adjustments Combined
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 63,368 $ 102,453 $ 165,821
Costs and expenses:
Cost of sales 43,183 94,320 $ (250)(c) 137,253
Selling, general and administrative 6,539 9,309 (675)(d) 15,173
Engineering 2,868 4,105 6,973
Net interest (income) expense (1,425) 2,610 65 (e) 1,250
Net other (income) expense 2,281 8,453 10,734
--------- --------- --------- ---------
Income (loss) before income taxes 9,922 (16,344) 860 (5,562)
Provision for income taxes 2,878 8,408 (12,642)(f) (1,356)
--------- --------- --------- ---------
Net income (loss) $ 7,044 $ (24,752) $ 13,502 $ (4,206)
========= ========= ========= =========
Net income (loss) per share:
Basic $0.48 $(0.28)
===== =======
Diluted $0.47 $(0.28)
===== =======
Weighted average shares outstanding:
Basic 14,792 14,792
Diluted 15,086 14,792
<CAPTION>
For the Year Ended September 30, 1998
Innovex ADFlex Adjustments Combined
--------- --------- ----------- ---------
Net sales $ 96,278 $ 184,824 $ 281,102
Costs and expenses:
Cost of sales 64,226 160,203 $ (333)(c) 224,096
Selling, general and administrative 7,372 14,362 (900)(d) 20,834
Engineering 4,149 7,778 11,927
Net interest (income) expense (1,961) 2,343 976 (e) 1,358
Net other (income) expense (162) 307 145
--------- --------- --------- ---------
Income (loss) before income taxes 22,654 (169) 257 22,742
Provision for income taxes 6,743 142 75 (g) 6,960
--------- --------- --------- ---------
Net income (loss) $ 15,911 $ (311) $ 182 $ 15,782
========= ========= ========= =========
Net income per share:
Basic $1.08 $1.07
===== =====
Diluted $1.05 $1.04
===== =====
Weighted average shares outstanding:
Basic 14,695 14,695
Diluted 15,126 15,126
</TABLE>
See notes to unaudited Pro Forma Condensed Combined Financial Statements.
32
<PAGE>
INNOVEX INC. AND SUBSIDIARIES
Notes to unaudited Pro Forma Condensed Combined Financial Statements
(a) To reflect the purchase of ADFlex Solutions, Inc. based on the assumption
that the transaction was completed as of June 30, 1999. The acquisition
will be accounted for under the purchase method and, accordingly, the
purchase price has been allocated to the assets acquired and liabilities
assumed based on their fair values. The property, plant and equipment net
book value has been reduced $1,000,000 to its fair value and other assets
have been increased to reinstate $12,642,000 of deferred tax assets and to
record goodwill of $1,000,000.
(b) To reflect the refinancing of the ADFlex credit facility pursuant to the
terms of the merger agreement.
(c) To decrease depreciation expense to reflect the restatement to fair value
and adjustment in estimated useful lives of the property, plant and
equipment as a result of the acquisition.
(d) To deduct the salaries of the former ADFlex executives terminated in
conjunction with the merger and record amortization expense over 10 years
relating to goodwill.
(e) To reduce interest expense to reflect the refinancing of the ADFlex credit
facility and to eliminate interest income on the short term investments
used to complete the purchase.
(f) To adjust the provision for income taxes to reflect the reinstatement of
ADFlex deferred tax assets and to record the tax effect of the pro forma
adjustments.
(g) To record the tax effect of the pro forma statement of operation
adjustments.
33
