UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13143
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INNOVEX, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1223933
(state or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
530 Eleventh Avenue South, Hopkins, Minnesota 55343-9904
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (612) 938-4155
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
(Title of Class)
----------------
Common Stock ($.04 par value)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $139,898,000 at November 10, 1999 when the closing
sale price of such stock, as reported in the Nasdaq National Market System, was
$10.00.
The number of shares outstanding of the Registrant's Common Stock, $.04 par
value, as of November 10, 1999 was 14,823,704 shares.
Documents Incorporated by Reference:
1. Portions of the Registrant's Proxy Statement to be filed with the Commission
within 120 days after the end of the Registrants fiscal year are incorporated by
reference into Part III of the Form 10-K.
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INNOVEX, INC.
1999 FORM 10-K
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
On July 7, 1999, Innovex, Inc. and its subsidiaries (the "Company") commenced a
tender offer to purchase all of the issued and outstanding stock of ADFlex
Solutions, Inc. ("ADFlex") at a purchase price of $3.80 per share. The tender
offer closed on August 3, 1999. Approximately 76% of the outstanding shares of
ADFlex were tendered in response to the offer. On August 9, 1999, the Company
consummated the purchase of the tendered shares. The remaining approximately 24%
of ADFlex issued and outstanding common stock not tendered in response to the
tender offer was acquired by the Company through a merger transaction completed
on September 14, 1999. The total ADFlex purchase price, including transaction
costs, change in control payments and all of the issued and outstanding common
stock was approximately $37 million. The Company also obtained credit facilities
totaling in principal amount $40 million, which were utilized to refinance
ADFlex's outstanding debt, pay down current liabilities and pay related
transaction costs. Prior to the acquisition, ADFlex was a leading supplier of
flexible circuit based solutions to the computer, computer peripheral,
communications and consumer electronics industries. Applications for these
flex-based interconnects include cellular phones, hard disk drives, other
storage systems, high-end consumer products, notebook computers, pagers and
personal communication systems. ADFlex's diverse customer and industry base will
reduce Innovex's reliance on the disk drive industry.
Prior to the ADFlex acquisition, the Company had one primary operating group,
Innovex Precision Components. The Company is combining the newly acquired ADFlex
operation into its existing operations as both operations design and manufacture
flexible circuits.
Prior to fiscal 1999, the Company operated through three divisions, Precision
Products (Precision), Litchfield Precision Components (LPC) and Iconovex. Each
division had its own administrative, engineering, manufacturing and marketing
organizations. During the quarter ending September 30, 1998, the Company
combined the operations of its two core operating divisions, Precision and LPC
into one operating division, Innovex Precision Components. The combination
merged the rapidly growing LPC flexible circuit fabrication and chemical etching
operations with Precision's high volume fine wire manufacturing expertise. The
combination also allowed Innovex to leverage Precision's disk drive industry
market and trade knowledge to disk drive industry flexible circuit applications
as the industry transitioned from wire interconnects.
Prior to the divisional combination, the largest division, Precision, developed,
engineered and manufactured specialty precision electromagnetic products for
original equipment manufacturers ("OEM's"). Lead wire assemblies for the thin
film disk drive market were the division's primary product. Lead wire assemblies
are fine twisted magnet wires that connect the back end electronics of a disk
drive with the inductive or magneto resistive thin film heads that read and
write information on the disk. Since the divisional combination, the lead wire
assembly revenue declined as anticipated. As a result, during the fiscal 1999
fourth quarter, charges of $2.8 million were recorded to account for the
discontinuance of this product line.
LPC, prior to the fiscal 1998 divisional combination, designed and manufactured
highly complex flexible circuitry and chemically machined components for
computer, computer peripheral, medical and other applications. The Company
purchased Litchfield Precision Components, Inc. on May 16, 1996. This
acquisition reduced the Company's reliance on the disk drive industry while
providing an entry into the large and rapidly growing flexible circuit market.
Innovex's flexible circuit operation is one of a limited number of companies in
the world able to produce flexible circuits with line and spacing tolerances of
less than 2 mils for the high-end portion of the flexible circuit market.
Innovex was founded in 1972 to acquire the assets of a manufacturer of needle
and wire assemblies used in computer core memories. With the introduction of
solid state memory devices, needle wire assemblies became obsolete and, in late
1973, the Company moved into related areas of manufacturing utilizing and
expanding its micro-welding and miniature assembly expertise. In 1984, the
Company expanded its scope to the photo equipment market by acquiring Lucht
Engineering. The Company sold its photo business in two stages beginning
November 29, 1992 with remaining portion sold November 1, 1993.
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In an attempt to diversify, the InnoMedica Division was formed in late fiscal
1993 to impart a greater degree of strategic direction and business discipline
to the Company's emerging medical business. This Division, which produced an
immaterial portion of the Company's revenue, was sold on June 1, 1998.
The Iconovex subsidiary was established in fiscal 1994 to market and further
develop a technologically advanced software product purchased in November 1993.
In October 1997, Iconovex became the 51% owner of a joint venture with Solutions
Corporation of America. The operations of Iconovex and its joint venture, Smart
Solution, were discontinued in June 1999 as a result of revenue not developing
as expected and the Company recorded a $1.7 million charge related to this
disposition.
Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972.
Its principal executive offices are located at 530 Eleventh Avenue South,
Hopkins, Minnesota 55343-9904 and its telephone number is (612) 938-4155.
Products are developed and manufactured through the Company's wholly owned
subsidiaries, Innovex Precision Components, Inc., Innovex Southwest, Inc.,
Innovex (Thailand) Ltd. and Innovex Limited. Innovex Precision Components, Inc.
and Innovex Ltd. are Minnesota corporations. Innovex Southwest, Inc. is a
Delaware corporation and Innovex (Thailand) Ltd. is a Thailand corporation.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Prior to the ADFlex acquisition, the Company had one major operating unit during
fiscal 1999. The Company also had one other subsidiary, Iconovex and its Smart
Solution joint venture, which generated less than 1% of the Company's revenue
and was not considered a core segment due to its immaterial nature. The Company
plans to combine Innovex and ADFlex into one operation that manufactures and
markets flexible circuits to various industries. Financial results will be
presented as a single segment due to the immaterial nature of the non-core
operations. Topics covered throughout this document may be discussed referencing
former separate operations where helpful to the reader's understanding.
(c) NARRATIVE DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
Innovex is a leading worldwide provider of flexible circuit interconnect
solutions to original equipment manufacturers ("OEMs") in the electronics
industry. The Company offers a full range of customized flexible circuit
applications and services from initial design, development and prototype to
fabrication, assembly and test on a global basis. The Company targets
high-volume markets where miniaturization, form and weight are driving factors
and flexible circuits are an enabling technology. Applications for flexible
circuits currently addressed by the Company include notebook computers, portable
communication devices such as cellular telephones and pagers, data storage
devices such as hard disk drives ("HDDs"), tape drives and arrays and high-end
consumer electronics products such as compact disk players. The Company's
principal customers include Acer, Alps, Compaq, Dell, Digital Equipment, IBM,
Iomega, Maxtor, Motorola, Nokia, Philips, Qualcomm, ReadRite, SAE Magnetics,
Samsung, Seagate, Storage Technology, Xerox, Yamaha and other leading electronic
OEMs.
Flexible circuits consist of copper conductive patterns on flexible substrate
materials, such as polyimide, and provide electrical connection between
components in electronic systems. Flexible circuit interconnects frequently
incorporate components such as integrated circuits ("ICs"), connectors,
stiffeners, resistors and capacitors mounted directly on a flexible circuit.
With proliferation of electronic applications, electronic products have become
smaller, lighter and more portable. To meet the challenges represented by the
increased complexity of miniaturization, form and weight requirements, OEMs have
increasingly turned to flexible circuit interconnect solutions because they
decrease the weight and expense of connectors and other packaging components,
conform to contoured, ergonomic shapes or small spaces and provide mechanical
flexure. The Company's products consist of flexible circuits with high to
mid-range tolerances and may include other secondary finishing or assembly
operations. The high-end flexible circuits generate the highest gross margin
percents. The mid-range flexible circuits with components added through the
performance of additional assembly steps garner lower gross margin percents due
to higher material costs and the increased number of competitors.
Historically, the Company's wire operations produced a variety of small lead
wire assemblies primarily for computer disk drives. The disk drive industry has
almost completed its transition away from lead wire assembly interconnects to
integrated interconnects such as the Company's Head Interconnect Flex ("HIF"),
Flex suspension assembly ("FSA") and BridgeFlex ("BFC") products. This
transition has had a significant impact on the Company's operations over the
last two years as it has had to manage the rapid increase in its flexible
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circuit business while controlling the rapid drop in its lead wire assembly
operations. Lead wire assembly sales constituted 26% of fiscal 1999 consolidated
revenues and less than 5% of September's revenue as compared to over 72% of
fiscal 1998 revenues.
While the trend toward miniaturization and portability increases product
complexity, electronic OEMs face escalating time to market, cost and global
sourcing requirements. In response, the Company has established manufacturing
facilities in China and Thailand that have lower cost structures and closer
proximity to the Company's OEM customer base. The Company believes it is a
preferred supplier for the majority of its customers' high-end and high-volume
flexible circuit interconnect requirements.
INDUSTRY OVERVIEW AND TRENDS
Flexible circuit interconnects provide electrical connection between components
in electronic systems and are increasingly used as a platform to support the
attachment of electronic devices. Flexible circuits offer several advantages
over rigid printed circuit boards ("PCBs") and ceramic hybrid circuits,
particularly for small, complex electronic systems. Flexible circuits, due to
their mechanical flexure and three-dimensional shape, accommodate packaging
contours and motion in a manner that traditional two-dimensional rigid PCBs
cannot. Flexible circuits also provide improved thermal dissipation and signal
propagation as compared to PCBs. In addition, flexible circuits can reduce the
size, weight and expense of: (i) the primary substrate for component attachment
when flexible circuits are used in place of a PCB; (ii) connectors, cables and
other interconnection schemes when flexible circuits provide the connection to
other substrates or subsystems within the system; and (iii) individual IC die
packages by bonding an IC directly to a flexible chip carrier rather than a
ceramic or plastic package.
These capabilities enable circuits to solve many of the challenges faced by
electronic OEMs who currently use traditional interconnection devices. Products
which currently use polyimide flexible circuit interconnect assemblies include
notebook computers, portable communication devices such as cellular telephones,
pagers and personal digital assistants ("PDAs"), printers, scanners and data
storage devices such as HDDs, tape drives and arrays, and high-end consumer
electronic products such as compact disk players, cameras and camcorders.
Possible new applications for polyimide flexible circuit interconnect assemblies
include high-density interposers and other chip carrier packaging applications.
The Company considers the following trends important in understanding the
electronic flexible circuit interconnect industry:
MINIATURIZATION, PORTABILITY AND COMPLEXITY OF ELECTRONIC PRODUCTS. Electronics
OEMs continue to design and introduce more compact and portable high-performance
products with greater functionality. The complexity of these new products
requires smaller size, lighter weight, greater circuit and component density,
better thermal dissipation properties, higher frequencies and increased
reliability as compared to conventional rigid board assemblies. These
requirements necessitate greater sophistication in flexible circuit interconnect
manufacturing and process technologies. The trend toward increasingly
sophisticated products also requires greater engineering expertise and
investment in manufacturing and process technology for suppliers to produce
high-quality electronic interconnect products on time, in volume and at
acceptable cost.
SHORTER PRODUCT LIFE CYCLES AND TIME TO MARKET. Rapid advances in technology
have significantly shortened the life cycle of complex electronic products and
placed increased pressure on OEMs to quickly develop and introduce new products.
These time-to-market challenges have in turn increased OEMs' emphasis on the
development, design engineering, prototype development and ramp-to-volume
capabilities of their suppliers. In addition, the importance of being first to
market with new products has heightened the emphasis on shortening supply
channels, reducing the number of suppliers and finding turnkey sourcing
capabilities that are supported by technologically advanced manufacturing
infrastructure.
GLOBALIZATION AND REDUCTION OF MANUFACTURING COSTS. At the same time that
shorter product life cycles increase time-to-market pressures, users continue to
demand increased electronic performance at lower prices. Notable product
examples of this trend are notebook computers, desktop computers, peripherals,
portable communications and consumer electronics. Leading OEMs who often
manufacture products in multiple geographic regions are relying more on
suppliers with global sourcing capabilities which can help to shorten the OEMs'
supply chain and provide regionally competitive pricing. As part of global
sourcing, OEMs increasingly require their suppliers to establish local
infrastructure to provide proximity to engineering, manufacturing and sales
support.
OUTSOURCING. To avoid delays in new product introductions, reduce manufacturing
costs and avoid logistical complexities, OEMs are increasingly turning to fewer
suppliers which are capable of producing electronic interconnect products from
development, design, quick-turn prototype and pre-production through volume
production and assembly. Many OEMs have accelerated this process by outsourcing
their captive component, subsystem and even system manufacturing to focus on
their core competencies. The accelerated time-to-market and time-
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to-volume needs of OEMs have resulted in increased collaboration with qualified
suppliers capable of providing a broad and integrated offering. To meet their
rapidly changing electronic interconnect requirements, many OEMs have moved to
limit their vendor base to a smaller number of technically qualified,
strategically located suppliers capable of providing both quick-turn prototype
and pre-production quantities as well as cost-competitive volume production
quantities.
PROLIFERATION OF ELECTRONICS AND CREATION OF NEW MARKETS. The markets for
electronic products are growing as a result of technological change, increasing
demands for a wider variety of electronic product features and more powerful and
less expensive electronic components. Due to this growth, new markets have
emerged in computing, data communications, telecommunications and multimedia.
Moreover, existing markets such as computer networking and peripherals, digital
and mobile communications, video-on-demand, the Internet, instrumentation and
industrial controls have significantly expanded product applications.
CURRENT PRODUCT APPLICATIONS
The Company provides flexible circuit interconnect products to a diverse group
of markets. Historically, the HDD market has represented the largest component
of the Company's sales at 74%, 85% and 89% of total sales for 1999, 1998 and
1997. Through the ADFlex acquisition and new market expansion efforts, the
Company is continuing its efforts to reduce the impact of cyclicality of the HDD
industry on its business. However, net sales attributable to this market are
expected to continue to represent a large component of total sales for the
foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry has had and may continue to have a material adverse
effect on the Company's operating results.
Current applications addressed by the Company include:
HARD DISK DRIVES. The HDD market uses flexible circuits as the interconnect
between the read/write head and disk drive electronics. In HDD applications,
circuits need to mechanically flex hundreds of millions of times through the
life of the drive. These HDD applications include the Company's head
interconnect flex ("HIF") which provides the electrical interconnect from the
disk drive head to the back end electronics (actuator flex) of the disk drive.
The HIF is bonded to a disk drive suspension by the Company's customers. The
Flex Suspension Assembly ("FSA") is a HIF that is bonded to a suspension for
customers desiring a more complete solution. The Bridge Flex ("BFC") product
completes the connection from the suspension to the actuator flex for competing
disk drive head interconnect solutions that terminate at the back end of the
suspension. Prior to the use of flexible circuits, these disk drive
interconnects were provided by lead wire assemblies which the Company produced.
The Company also produces the actuator flex which provides the back end
electronic interconnect for the disk drive. Mounting an unpackaged die directly
onto the flexible circuit substrate, or flip chip, is becoming the predominant
interconnect technology for these applications.
NETWORK SYSTEMS. Large individual drive storage systems are being replaced by
arrays of less expensive disk drives or tape drives. The growth of personal
computer networks has generated a growth in small arrays for local area network
storage. In addition to the flexible circuit interconnects inside each of the
individual drives, controlled impedance flex interconnects are used to connect
the back of the drives to standard interface boards.
TELECOMMUNICATIONS. The use of polyimide flexible circuits in portable
communications devices is growing as the space, weight and functionality
challenges are becoming more difficult. In some cellular telephones, flexible
circuits replace rigid PCBs, connectors and cables and can thereby reduce space,
weight and cost.
CONSUMER. CD/DVD-ROMS are growing in consumer applications where higher capacity
and quicker access time, compared to tape drives, are needed. These devices use
flexible circuits as the interconnect between the read/write head and CD/DVD-ROM
drive electronics.
COMPUTER AND OTHER. Early applications for flexible circuits in notebooks were
mainly as interconnects from the motherboard to the LCD and as shielded jumpers.
More recently, systems have used as many as ten flexible circuit interconnects
per notebook, including PCMCIA connector/flex jumpers, LED/speaker flexible
circuit assemblies, track ball/mouse button flexible circuit assemblies and
various other shielded jumpers. Flexible circuit substrates are a leading
candidate for use in semiconductor packaging and as interposers for high-density
interconnect applications.
SALES AND SUPPORT
The Company markets its products directly to a number of industries requiring
electronic interconnects through the use of an internal sales staff.
Historically, the Company has sold a substantial portion of its flexible circuit
interconnects to a limited number of customers. Innovex has benefited from early
entry as a supplier to the disk drive industry and has been able to leverage
relationships established through its
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lead wire assembly interconnects to the next generation integrated flexible
circuit interconnects. This, coupled with the Company's reputation for high
standards of quality and innovative manufacturing processes, has established
Innovex as a predominant supplier of interconnects for the industry. The Company
has established sales with virtually every manufacturer of disk drive heads in
the world and continues to work closely with virtually all of the world-wide
disk drive head manufacturers on new generations of disk drive products. The
Company's principal customers, each accounting for over 10 percent of the
Company's consolidated net sales in at least one of the last three years are
Read-Rite, SAE/TDK, Seagate and Yamaha. See Note J of Notes to Consolidated
Financial Statements for additional information.
Because of the Company's focus on leading edge imaging technology, its customers
include a number of the leading technology companies in the world including
Acer, Alps, Compaq, Dell, Digital Equipment, General Electric, Hewlett Packard,
IBM, Iomega, Littelfuse, Maxtor, Medtronic, Motorola, Nokia, Philips, Qualcomm,
ReadRite, SAE Magnetics, Samsung, Seagate, Storage Technology, Xerox, Yamaha and
other leading electronic OEMs.
Even though the Company's customer mix will likely change from period to period
in the future, the Company expects that sales to relatively few customers will
continue to account for a high percentage of its net sales in the foreseeable
future. The loss of a significant customer or a substantial reduction in orders
by any significant customer, including reductions due to market, economic or
competitive conditions in the computer, computer peripheral, communications and
high-end consumer markets has had and may continue to have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows.
RESEARCH AND DEVELOPMENT
The Company continually engages in research, development and engineering
activities. The Company's goals are to utilize these activities to improve and
enhance existing products and to develop new products in order to expand its
market share. During fiscal years 1999, 1998 and 1997, the Company spent
approximately $2,878,000, $2,356,000 and $1,784,000 on research and development.
The Company's research and development effort is concentrated on improving and
increasing the long run flexible circuit manufacturing capabilities for both
adhesiveless and adhesive based flexible circuits, developing a high-quality
source of material for double-sided flexible circuit applications and improving
the attachment process for the new FSA product.
The Company expects to continue its past practice of acquiring new technology
from outside sources through the payment of cash, Company stock and royalties.
ENVIRONMENTAL CONTROLS
Flexible circuit interconnect manufacturing requires the use of chemicals. As a
result, the Company is subject to a variety of environmental laws relating to
the storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Company's products. The Company has conducted
environmental studies of its facility in Chandler, Arizona, which revealed a
limited amount of soil contamination that may require remediation. Based on
these studies, the Company believes that the costs associated with the
remediation of this situation will not have a material adverse effect on its
operations or financial condition. However, given the uncertainties associated
with environmental contamination, there can be no assurance that such costs will
not have a material adverse impact on the Company. Pursuant to the agreements
governing the 1993 ADFlex purchase of certain assets from the Rogers
acquisition, Rogers Corporation has retained all environmental liabilities
relating to the purchased assets prior to the closing date of the acquisition.
While Rogers currently has sufficient assets to fulfill its obligations under
the acquisition agreements, if environmental liabilities requiring remediation
are discovered and the Company were unable to enforce the acquisition agreement
against Rogers, the Company could become subject to costs and damages relating
to such environmental liabilities. Any such costs and damages imposed on the
Company could materially adversely affect the Company.
In mid 1995, ADFlex acquired a manufacturing facility located in Agua Prieta,
Mexico. In connection with this acquisition, ADFlex conducted an environmental
study of the facility which indicated there was contamination by hazardous
materials in the soil and groundwater. Pursuant to the purchase agreement, the
sellers submitted a remediation plan to the appropriate Mexican authorities
which was approved in May 1997. Subsequent remediation was completed in December
1997. The seller is awaiting acknowledgment that the remediation plan has been
approved and no further action is required by the Mexican authorities. The
seller's obligation for the cost of remediation is limited to $2.5 million. A
total of $1.0 million originally was held in escrow pending the seller's
performance of its environmental obligations under the agreement. One third of
the escrow balance was used to conduct the remediation, one third was released
to the seller according to the agreement and one third remains in escrow and
will be released upon closure of the issue by the Mexican authorities with
certification that no further action is required.
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The Company believes it has been operating its facilities in substantial
compliance in all material respects with existing environmental laws and
regulations. However, the Company cannot predict the nature, scope or effect of
legislation or regulatory requirements that could be imposed or how existing or
future laws or regulations will be administered or interpreted with respect to
products or activities to which they have not previously been applied. For this
reason, the Company implemented procedures geared toward minimizing the negative
impacts and reducing potential financial risks arising from environmental
issues. Compliance with more stringent laws or regulations, or more vigorous
enforcement policies of regulatory agencies could require substantial
expenditures by the Company and could adversely affect the results of operations
of the Company. The Company does not anticipate any material amount of
environmental-related capital expenditures in fiscal 2000.
BACKLOG
The backlog for the Company's continuing operations was $36.6 million, $15.2
million and $26.1 million at September 30, 1999, 1998 and 1997. The increase in
the 1999 backlog is due to the ADFlex acquisition. The Company's backlog
fluctuates based on the timing of the receipt of orders from customers. Backlog
is defined by the Company as firm orders that are scheduled to be delivered
within 12 months from the date of the order. While the Company currently
believes substantially all of its September 30, 1999 backlog will be delivered
within 12 months, customers may determine not to release orders into production,
may extend requested delivery dates or cancel orders. In such cases, the Company
may not realize the revenue indicated by the backlog.
COMPETITION
The flexible circuit interconnect market is differentiated by customers, markets
and geography with each niche having its own combination of complex packaging
and interconnection requirements. The Company believes it competes principally
on the basis of design capability, price, quality, flexibility and technological
advancements in underlying applications. During periods of economic slowdown in
the electronics industry and other periods when excess capacity exists,
electronic OEMs become more price sensitive. The Company believes that once a
customer has selected a particular vendor to design and manufacture a flexible
circuit interconnect, the customer generally relies upon that vendor's design
for the life of that specific application and, to the extent possible,
subsequent generations of similar applications. Accordingly, it is difficult to
achieve significant sales to a particular customer with respect to any
application once another vendor has been selected to design and manufacture the
flexible circuit interconnect used in that application. While this market
paradigm may provide a barrier to the Company's competitors in the markets
served by the Company, it also may present an obstacle to the Company's entry
into other markets.
The flexible circuit interconnect market is highly competitive. The Company
experiences competition world-wide from a number of leading foreign and domestic
providers such as Minnesota Mining and Manufacturing ("3M") and Sumitomo for
high-end applications, and Nippon Mektron ("NOK"), Fujikura Ltd. ("Fujikura"),
Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl Inc. ("Sheldahl") and
Parlex Corporation ("Parlex") for mid-range applications. 3M, Sumitomo, NOK and
Fujikura are substantially larger than the Company with greater financial and
other resources. M-Flex, Sheldahl and Parlex are US-based flexible circuit
manufacturers that have lower sales of polyimide flexible circuits than the
Company and have historically targeted suppliers of computers, communication and
automotive services and the military. Expansion of the Company's existing
products or services could expose the Company to new competition. Moreover, new
developments in the electronics industry could render existing technology
obsolete or less competitive and could potentially introduce new competition
into the market. There can be no assurance that the Company's competitors will
not develop enhancements to, or future generations of, competitive products or
services that will offer superior price or performance features to those of the
Company or that new competitors will not enter the Company's markets. Finally,
as many of the Company's competitors are based in foreign countries, they have
cost structures and prices based on foreign currencies. Accordingly, currency
fluctuations could cause the Company's dollar-priced products to be less
competitive than its competitors' products priced in other currencies.
The Company also competes in assembly matters with leading flexible circuit
assembly providers such as Smartflex Systems, Inc. ("Smartflex") and Pemstar.
The Company believes that competition in assembly is primarily driven by
availability of assembly technology, price and cycle time. The Company believes
it competes favorably with these competitors because it offers its customers a
complete flexible circuit interconnect solution including design, fabrication,
assembly and testing.
The Company's competitors can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures often necessitate price
reductions which adversely affect operating results. The Company will be
required to make a continued high level of investment in product development and
research, sales and marketing, and ongoing customer service and support to
remain competitive. There can be no assurance that existing or future
competitors will not be able to duplicate the Company's strategies or that
competitive pressures faced by the Company will not have a material adverse
effect on the Company.
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EMPLOYEES
As of September 30, 1999, the Company had a total of 3,858 employees. Of these
employees, 64 were based at the Company's Hopkins, Minnesota facility; 408 were
based in Chandler, Arizona; 343 were based in Litchfield, Minnesota; 68 were
based in Montevideo, Minnesota; 2,014 were based in Agua Prieta, Mexico and 961
were based in Thailand.
Certain of the Company's employees located in Mexico are represented by a labor
union and covered by a collective bargaining agreement that is subject to
revision annually under Mexican labor laws. The Company has not experienced an
employee-related work stoppage. The Company believes 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 Mexico in
the future. In November 1999, the Company made the determination to close the
Mexican facility and combine its operations with the Thailand facility. Those
Mexican employees impacted by this decision will be paid severance in accordance
with Mexican labor laws.
The Company's future operating results depend in part upon its ability to
attract and retain other qualified management, technical, manufacturing, sales
and support personnel for its operations. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The failure to attract or retain such
persons could materially adversely affect the Company.
INTELLECTUAL PROPERTY
The Company believes that, due to its customers' demands for rapid technological
advances and the resulting limited product life cycles, the success of its
business depends more on the technical and engineering expertise, creativity and
marketing, and service abilities of its employees than on patents, trademarks
and copyrights. Nevertheless, the Company owns patents and has a policy of
seeking patents when appropriate on inventions concerning new products and
improvements as part of its ongoing research, development and manufacturing
activities. There can be no assurance that any patents issued to the Company
will provide a competitive advantage or will not be challenged by third parties,
or that the patents of others will not have an adverse effect on the Company's
ability to do business. Furthermore, there can be no assurance that others will
not independently develop similar products, duplicate the Company's products or
design around the patents issued to the Company. In addition, there can be no
assurance that foreign intellectual property laws or the Company's agreements
will protect the Company's intellectual property rights in any foreign country.
Any failure to protect the Company's intellectual property rights could have a
material adverse effect upon the Company.
SUPPLIERS
The Company purchases raw circuit materials, process chemicals and various
components from multiple outside sources. For components, the Company typically
makes short-term purchasing commitments to key suppliers for specific customer
programs. These commitments are usually made for three to six month periods.
These suppliers commit to providing cooperative engineering, as required, and in
some cases maintain a local inventory to provide shorter lead times and reduced
inventory levels for the Company. In most cases, suppliers are approved, and are
often dictated by the Company's customers. For process chemicals, the Company
relies on a limited number of key suppliers. Alternate chemical products are
available from other sources, but process chemical changes would often require
requalification of the processes, which could take weeks or months to complete.
The Company has attempted to mitigate these risks by identifying stable
companies with leading technology and delivery positions.
The Company currently purchases a number of its components, process chemicals
and other materials from single sources. In the United States, these products
are available only from a limited number of suppliers. There can be no assurance
that these sources will continue to supply the Company with the materials needed
at competitive prices.
While viable alternate suppliers exist, because of the Company's limited
inventory of raw materials, tight manufacturing cycles and the significant
amount of time required to qualify new suppliers, single sourcing is expected to
continue. Consequently, any unanticipated interruption of material supplies or
components would have a short-term material adverse effect on the Company.
TECHNOLOGY
DESIGN TECHNOLOGY. The flexible circuit interconnects manufactured by the
Company are designed specifically for each application, requiring significant
joint design activities between the Company and the customer at the start of a
project. The Company has developed design methodologies that solve difficult
interconnection problems and save the customer time and money. The Company also
designs and produces, in volume, flexible circuits that range from high-density,
single-sided circuits to more complex double-sided and multi-layer circuits. The
Company is continually investing in and improving its computer-based design
tools to more quickly design new flexible circuit interconnects, to enhance
cooperative design and communication with its customers and to more closely link
designs to the manufacturing process. The
8
<PAGE>
Company is recognized as a technology leader in fine-line, single-sided flexible
circuit technology and flexible circuit assembly technology, including advanced
chip-on-flex, flip-chip-on-flex and high-density polyimide assembly
technologies.
CIRCUIT FABRICATION TECHNOLOGY. The Company has extensive experience in
fine-line polyimide flex and has pioneered manufacturing processes that deliver
high unit volumes at cost-effective yields. At the core of the process is
roll-to-roll subtractive fine-line circuit processing. The starting materials
are flexible laminates composed of a thin dielectric film that is either
adhesive-bonded to treated copper foil or metalized without the use of
adhesives. Very accurate images (down to 0.001") are produced in volume in
photoresist. Circuit conductors are then formed by chemically etching the
underlying copper foil. Coverfilm materials are adhered to the circuitry to
provide an insulative coating and to expose contact pads for surface
metalization. The exposed surfaces are then coated with solder for surface mount
or bondable gold for chip-on-flex applications. Laser processing is then used to
create various openings to drill vias and cut contoured peripheries in substrate
materials.
The Company's key flexible circuit fabrication technologies include:
FINE FEATURE ROLL-TO-ROLL IMAGING AND ETCHING. Allows the fabrication
of circuits with very fine line widths and spaces. This is critical to
meeting complex space constrained interconnection needs. Processing
wide web (up to 24 inches) in a continuous roll-to-roll format (as
opposed to discrete panels) allows fabrication of high circuit volumes
with improved material utilization resulting in lower cost.
LASER PROCESSING. Laser technology is used to produce low cost, very
fine openings, small vias and contoured shapes that solve density
problems while avoiding more expensive traditional alternatives. Also,
using a laser to cut the periphery of parts allows prototypes and low
volume production parts to be built faster and without the cost of
blanking die.
BONDABLE GOLD PLATING. Prepares flexible circuits for chip-on-flex
bonding, a process which saves space and improves electrical
performance (access time) by wire bonding an IC die directly to the
flexible circuit.
COVERFILM, LAY-UP AND LAMINATION. A process where coverfilm materials
are adhered to the circuitry to provide an insulative coating and to
expose contact pads for surface metalization. This process allows
accurate positioning of solder plated pads to support fine pitch
surface mount assembly to the finished circuits.
ASSEMBLY AND TEST TECHNOLOGY. The Company applies advanced assembly and
test technology to provide flexible circuit interconnect assemblies to
its customers. The Company assembles passive electrical and various
mechanical components, including connectors, stiffeners, diodes, formed
metal parts and other devices to its flexible circuits using primarily
manual processes in its plants in Mexico and Thailand. The Company also
performs advanced direct die attach and assembly of integrated circuit
devices as well as the functional testing of these flexible circuit
assemblies. Assembling these components directly onto the flexible
circuit increases performance and reduces space, weight and cost.
MANUFACTURING
The Company has developed a manufacturing process that combines the use of
technology with the deployment of human resources in a geographic and
organizational manner that allows the Company to compete on a pure cost basis,
if necessary, with suppliers of similar products throughout the world. Quality
systems are in place that are certified to standards set by demanding customers
in the electronics industry. The Chandler facility is ISO 9001 certified and the
Thailand and Mexican operations have received ISO 9002 certification.
The Company believes it enjoys a cost advantage based on a manufacturing process
designed to optimize the utilization of automation, labor and capital, and a
manufacturing process and technology with better yield, material utilization and
throughput relative to its competitors. The Company also believes that
integrating assembly technology with manufacturing technology and high-volume
production capabilities will over time provide improvements in its production
costs through higher product yields, faster production ramps, reduced
inventories, shortened production cycle times, improved account control and
increased leverage over expenses. In addition, the Company is expanding its
Thailand manufacturing operation. The Company anticipates that the new Thailand
facility will enable it to attain significant cost reductions that are crucial
to mitigating competitive price pressures in Asia and help sustain the Company's
implementation of a complete flexible circuit interconnect solution including
design, fabrication, assembly and testing.
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FOREIGN SALES AND OPERATIONS
The Company has finishing and assembly facilities located in Agua Prieta, Mexico
and Lamphun, Thailand and subcontractors primarily performing flexible circuit
inspection in Korat, Thailand and China. While the Company believes it has
established good relationships with its local labor forces and the local
governments, the spread of the manufacturing process over multiple countries
subjects the Company to risks inherent in international operations. Those risks
include currency fluctuations, inflationary pressures, unexpected changes in
regulatory requirements, tariffs and barriers, potentially limited intellectual
property protection, potential cross border shipment delays, changes in
political climate, difficulties in coordinating and managing foreign operations,
foreign labor union issues, increases in employee turnover and potentially
adverse tax consequences. Any of the foregoing could have a material adverse
effect on the Company.
While Innovex transacts business predominantly in U.S. Dollars and the majority
of its net sales are collected in U.S. Dollars, a portion of its sales and
expenses are denominated in foreign currencies. Changes in the relation of
foreign currencies to the U.S. Dollar will affect the Company's cost of goods
sold and operating margins and could result in exchange losses. To reduce the
impact of certain foreign currency fluctuations, the Company enters into
short-term forward foreign currency exchange contracts (hedges) in the regular
course of business. The forward exchange contracts generally require the Company
to exchange U.S. dollars for foreign currencies at maturity, at rates agreed to
at inception of the contracts. The gains or losses on hedges of transaction and
remeasurement exposure are included in income in the period in which the
exchange rates change. The gains and losses on unhedged foreign currency
transactions are included in income as incurred. No assurance can be given that
the Company's hedging strategies will prevent future currency fluctuations from
adversely affecting the Company. There were no open hedge contracts at September
30, 1999.
The Thai Baht experienced significant fluctuations in relation to the U.S.
Dollar during 1999. As the majority of the sales and expenses for the Thailand
operation are denominated in U.S. Dollars, the fluctuations did not have a
significant impact on the Company's results of operations for those years.
However, there can be no assurance that future currency fluctuations will not
have a material adverse effect on the Company.
ITEM 2. PROPERTIES
In total, at September 30, 1999, the Company leased or owned approximately
653,000 square feet of manufacturing and other space. The Company's significant
facilities are as follows:
<TABLE>
<CAPTION>
FUNCTIONS LOCATION (NUMBER OF FACILITIES) SQUARE FEET OWNED/LEASED EXPIRATION
- --------- ------------------------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Executive Offices and Hopkins, Minnesota (one) 19,000 Leased February 2002
Research and Development
Sales and Support; Research and Chandler, Arizona (one) 150,000 Leased June 2003
Development: Circuit
Fabrication
Circuit Finishing and Circuit Agua Prieta, Mexico (one) 161,000 Owned N/A
Assembly
15,000 Owned N/A
Circuit Finishing and Assembly; Lamphun Thailand (two) 140,000 Owned N/A
Sales and Support
Circuit Fabrication Litchfield, Minnesota (four) 60,000 Owned N/A
18,000 Owned N/A
10,000 Owned N/A
50,000 Owned N/A
Lead wire manufacturing Montevideo, Minnesota (one) 30,000 Owned N/A
</TABLE>
In addition to these facilities, the Company is currently constructing a new
60,000 square foot building in Maple Plain, Minnesota to be used for the
manufacturing of materials for use in double-sided flexible circuit production,
research and development and the corporate offices. The building is expected to
be completed by March 2000. The Company obtained the Arizona, Mexico and
Thailand facilities during fiscal 1999 as part of the ADFlex acquisition. The
Thailand facility was completed in February 1999 and will be used for circuit
finishing and assembly. In November 1999, the Company made the determination to
close the Mexican facility and combine its operations with those in
10
<PAGE>
Thailand to reduce excess manufacturing capacity. The Company believes that the
facilities in Arizona, Minnesota and Thailand are adequate to meet its current
requirements, and that suitable additional space or substitute space is readily
available as needed.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to, and none of its
property is the subject of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position
- ---- --- --------
Thomas W. Haley 63 Chairman, Chief Executive Officer and Director
of the Company
William P. Murnane 37 President and Chief Operating Officer
Allan J. Chan 49 Senior Vice President, Sales and Marketing
Brian R. Dahmes 39 Vice President, Managing Director, Innovex
(Thailand)
Douglas W. Keller 41 Vice President, Finance
Srinivas Kuchipudi 31 Vice President, Operations
Timothy S. McIntee 41 Senior Vice President, Corporate
Venkatraman B. Rao, Ph.D. 47 Vice President, Research & Development
Mr. Haley served as President of the Company from 1972 to 1988. Since October
1988, Mr. Haley has held the position of Chief Executive Officer. He has been a
Director and Chairman of the Company since its inception in 1972.
Mr. Murnane was promoted to President and Chief Operating Officer in July 1998.
Mr. Murnane joined the Company in July 1995 as Vice President. From June 1993 to
June 1995, Mr. Murnane was Chief Operating Officer of Boutwell, Owens & Co., a
private manufacturer of packaging, in Fitchburg, Massachusetts. From June 1992
to June 1993, Mr. Murnane was Director of Operations for Uniform Printing &
Supply, Inc. in Acton, Massachusetts. Prior to that, he held various operating
and corporate planning positions during a ten-year career at United Parcel
Service.
Mr. Chan joined the Company in June 1988 as Director of Sales and Marketing for
the Precision Products Division. In October 1990 Mr. Chan was promoted to Vice
President of Sales and Marketing of the Precision Products Division. In 1991 his
responsibilities were expanded to include manufacturing. In May 1995, he was
promoted to Vice President and General Manager of Precision Products Division.
In July of 1998, he was promoted to Senior Vice President , Sales and Marketing.
Prior to joining Innovex, Mr. Chan was the Director of Sales and Marketing for
Braemar Computer Corporation a division of Carlysle Corporation.
Mr. Dahmes joined the Company in July 1997 as Plant Manager. Mr. Dahmes was
promoted to Director of Manufacturing in July 1998 and to Vice President,
Quality in March of 1999. In November 1999, he accepted his most recent
promotion to Vice President, Managing Director Innovex (Thailand). From 1992 to
1995, Mr. Dahmes served as Process Engineering Manager for Sheldahl
Interconnect, and from 1995 to 1997 he was an Engineering Manager with Sheldahl
Microproducts.
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<PAGE>
Mr. Keller joined the Company in January 1990 as Corporate Controller. In May
1992, Mr. Keller was made an officer of the corporation and in October 1996 he
was promoted to Vice President, Finance. From July 1988 to January 1990, Mr.
Keller was Manager of Financial Accounting and Tax for UFE, Inc., a manufacturer
of injection molded plastic components. From 1983 to 1988, Mr. Keller was a
Senior Auditor for the Pillsbury Company. From 1980 to 1983, he was a Senior
Accountant with Deloitte Haskins & Sells, a CPA firm.
Mr. Kuchipudi joined the Company in September 1999 as Vice President,
Operations. From July 1996 to August 1999, Mr. Kuchipudi was a management
consultant for Pittiglio Rabin Todd & McGrath. Prior to that, he held various
engineering and marketing positions during a five-year career at Motorola, Inc.
Mr. McIntee joined the Company in August 1997 as Vice President, Corporate
Development and was promoted to Senior Vice President, Corporate in July 1998.
From 1984 to 1997, Mr. McIntee was an attorney for the law firm of Lindquist &
Vennum in the Mergers & Acquisitions Division. Prior to that, he was a CPA for
several years.
Dr. Rao joined the company in December 1998 as the Vice President, Research and
Development. Prior to that he held various senior management R&D positions at
Silicon Graphics Inc., Cray Research Inc., Supercomputer Systems Inc. and
Tektronix. Dr. Rao successfully led teams for the development of advanced
high-density multi-chip modules, integrated circuits, multilayer printed circuit
boards, flex circuits and flip chip assembly for high end super computer
applications.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
COMMON STOCK INFORMATION
The Company's common stock is traded in the over-the-counter market under the
symbol "INVX." The table below sets forth the high and low closing sale prices
as reported by NASDAQ. As of November 17, 1999, the Company had 663 shareholders
of record. Dividends of $.04 per share have been paid for the most recent three
quarters. The Company's intention is to continue this policy.
Price Range of Common Stock 1999 1998
----------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter $17-15/32 $9-5/16 $33-3/8 $18-7/8
Second Quarter 19-1/2 12-3/4 26-7/8 18-3/8
Third Quarter 14-3/8 12-5/8 28-1/8 11-1/4
Fourth Quarter 15-3/8 8-9/16 16-1/2 9-15/16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from the
consolidated financial statements of the Company for each of the years in the
five-year period ended September 30, 1999. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and related notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended September 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $103,197,766 $96,277,930 $142,003,743 $69,570,222 $50,193,952
Net income 6,558,534 15,911,079 35,093,603 13,121,006 10,029,387
Net income per share:
Basic $0.44 $1.08 $2.43 $0.93 $0.73
Diluted $0.44 $1.05 $2.31 $0.91 $0.70
Cash dividends per share $0.155 $0.135 $0.113 $0.088 $0.079
Total assets 178,806,124 109,651,849 97,274,754 58,244,346 41,283,483
Long-term debt, less current maturities 26,375,546 755,024 950,733 1,063,253 1,172,798
Stockholders' equity 107,134,199 102,418,060 86,817,374 48,400,116 36,029,173
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EARNINGS SUMMARY
The Company reported net income of $6,559,000, or $0.44 basic and diluted net
income per share for the fiscal year ended September 30, 1999. This compares to
net income of $15,911,000, $1.08 basic and $1.05 diluted net income per share in
fiscal 1998 and $35,094,000, $2.43 basic and $2.31 diluted net income per share
in 1997. Fiscal 1999 results decreased in comparison to 1998 due to the increase
in flexible circuit sales to the disk drive industry not offsetting the phase
out of lead wire assembly revenue. This was due in part to continued disk drive
industry softness. This softness appears to be the result of an over supply of
disk drives and due to a reduction in the number of disk drives kept in
inventory by computer manufacturers that have adopted a build-to-order business
model. Also contributing to the sales decrease was a reduction in the average
number of heads per disk drive. This reduction is the result of an increasing
number of low-cost disk drives being sold and as a result of the use of magneto
resistive (MR) and Giant Magneto Resistive (GMR) disk drive heads which increase
the storage capacity per disk drive platter and reduce the number of heads
required to provide the same disk drive capacity. The decrease in fiscal 1998
results as compared to 1997 was also due to softness in the cyclical disk drive
industry.
The drop in gross margin percent during 1999 was due to several factors, the
inclusion of 8 weeks of lower margin ADFlex related sales, reduced yields and
costs related to an aggressive new product ramp up in production concurrent with
new flexible circuit capacity installation and due to lower shipments of lead
wire assemblies reducing the leverage of the fixed overhead costs related to
their production. The drop in gross margin percent during 1998 as compared to
1997 resulted principally from lower shipments of disk drive lead wire
assemblies and the start-up costs of the new Litchfield facility.
Operating expenses were 14% of revenue in fiscal 1999 as compared to 12% and 9%
of revenue in fiscal years 1998 and 1997, respectively. The increase in
operating expenses as a percent of sales for 1999 is primarily due to increases
in marketing, professional and legal expenses. The percentage increase in 1998
from 1997 was due to decreased revenues as actual operating expenses dropped by
$815,000.
RESULTS OF OPERATIONS
NET SALES. Net sales for fiscal 1999 were $103,198,000, a 7% increase from 1998
net sales of $96,278,000. The increase in 1999 was primarily due to the fourth
quarter results including eight weeks of operating results related to the
acquisition of ADFlex Solutions, Inc. Excluding the acquisition related revenue,
net sales would have decreased by 14%. Fiscal 1999 revenue continued to be
impacted by the transition of the disk drive industry from traditional lead wire
interconnects to integrated interconnects including the Company's Head
Interconnect Flex (HIF). The large increase in these flexible circuit sales to
the disk drive industry did not offset the phase out of lead wire assembly
revenue. This was due in part to continued disk drive industry softness. This
softness appears to be the result of an over supply of disk drives and due to a
reduction in the number of disk drives kept in inventory by computer
manufacturers that have adopted a build-to-order business model. Also
contributing to the sales decrease was a reduction in the average number of
heads per disk drive. This reduction is the result of an increasing number of
low-cost disk drives being sold and as a result of the use of magneto resistive
(MR) and Giant Magneto Resistive (GMR) disk drive heads which increase the
storage capacity per disk drive platter and reduce the number of heads required
to provide the same disk drive capacity.
Net sales for fiscal 1998 decreased 32% from 1997 net sales of $142,004,000. The
decrease in 1998 sales was related to softness in the disk drive industry. The
softness was primarily the result of an oversupply of disk drives caused by
excess disk drive production in 1997 and the reduction of inventory levels by
computer manufacturers as they adopted a build-to-order business model. Another
contributing factor was a reduction in the average number of heads per disk
drive. This reduction is the result of the conversion to MR heads which
increased the storage capacity per disk drive platter and reduced the number of
heads required to provide the same disk drive capacity. The higher prices
obtained from the sale of MR assemblies which have a higher value added content
and sell for a higher price than the low-end inductive assemblies, have
partially offset the decreased number of assemblies being sold. The fourth
quarter was also impacted by the disk drive industry's transition away from lead
wire assembly interconnects and into alternative interconnect technologies.
Flexible circuit sales continue to increase as a proportion of total sales
providing 74% of fiscal 1999 sales as compared to 25% for fiscal 1998. The
Company exited fiscal 1999 with flexible circuits comprising over 95% of the
Company's net sales. This increase has been primarily due to shipments from the
Company's high volume, flexible circuit production facility placed into service
in fiscal 1998. The facility is currently being utilized to produce the HIF, FSA
and BFC products for the disk drive industry and other high technology flexible
circuits.
13
<PAGE>
Fiscal 2000 should benefit from continued growth in the demand for high
technology flexible circuits including the Company's HIF, FSA and Bridge Flex.
Reductions in lead wire assembly revenue should not have a significant impact on
fiscal 2000 revenue as the transition away from lead wire assembly interconnects
to integrated interconnects was nearly complete at the end of fiscal 1999.
Significant progress was made during fiscal 1999 in gaining customer acceptance
of the Company's FSA product which will be integral to increasing revenue in the
last half of fiscal 2000. Revenue is expected to increase significantly in
fiscal 2000 as a result of the ADFlex acquisition. The acquisition of ADFlex
should also reduce the Company's dependence on the disk drive industry to 50-55%
of total revenue. Sales from Iconovex made up less than 1% of the Company's
total revenue in fiscal 1999.
Export sales accounted for 74% of the Company's revenue in fiscal 1999 as
compared to 83% for 1998 and 86% for 1997, reflecting the high level of
interconnect shipments to disk drive manufacturers in Asia. A significant
portion of the remaining domestic sales are subsequently shipped internationally
by the Company's customers.
GROSS MARGIN. The Company's gross profit margin decreased to 26.1% of sales in
fiscal 1999 as compared to 33.3% in 1998. The decrease in 1999 was partially due
to the fourth quarter results including eight weeks of operating results related
to the acquisition of ADFlex Solutions, Inc. The ADFlex revenue generates a
lower gross margin percent than the existing Innovex flexible circuit revenue
due to the higher material content of the assembly portion of the business and
lower level of technical tolerances required. Gross margins for the existing
flexible circuit revenue were lower in the fourth quarter due to reduced yields
and costs related to an aggressive new product ramp up in production concurrent
with new capacity installation. In addition, the fiscal 1999 gross margin
percent decreased due to lower shipments of lead wire assemblies reducing the
leverage of the fixed overhead costs related to their production.
In 1998, the Company's gross profit as a percentage of sales decreased to 33.3%
as compared to 42.9% in 1997. Gross margin percents decreased primarily due to
the lower demand for lead wire assemblies which reduced the leverage of the
fixed overhead costs related to their production. Also, pricing pressures
returned to normal after being unusually low due to the heavy demand for lead
wire assemblies during 1997. The flexible circuit gross margin percent was
impacted by the increased level of fixed costs relating to the ramp up of the
new high-volume flexible circuit facility.
The increase in fiscal 2000 sales volume related to the ADFlex acquisition
should result in an increase in gross margin dollars while causing a decrease in
the overall gross margin percent. The gross margin percent on the
pre-acquisition Innovex revenue should increase in fiscal 2000 as a result of
improving flexible circuit manufacturing yields and the elimination of the fixed
costs related to the lead wire assembly product line.
OPERATING EXPENSES. Selling, general and administrative expenses were 9.5% of
net sales in 1999 as compared to 7.7% in 1998 and 6.2% in 1997. The increase in
operating expenses as a percent of sales for the current year is primarily due
to the decrease in revenue and an increase in marketing, professional and legal
expenses. Increases in marketing expenses were incurred to expand efforts to
diversify the Company's revenue base and increases in professional services were
due to consultants being retained to improve the manufacturing operation
efficiency. The increase in 1998 expenses as a percent of sales is primarily due
to the decrease in lead wire assembly sales. Total selling, general and
administrative expenses for fiscal 1998 decreased from 1997 primarily due to
reduced headcount, a change in estimated bad debts and lower bonus accruals.
Fiscal 2000 operating expenses as a percent of sales are expected to decrease as
a percent of sales and increase in total as a result of the ADFlex acquisition.
Engineering expense increased to 4.4% of net sales in fiscal 1999 from 4.3% in
1998 and 2.5% in 1997. Engineering spending remained relatively stable in fiscal
1999 as compared to 1998. The 1999 spending was concentrated on FSA development
and the development of a process to manufacture material for use in producing
double sided, plated through-hole flexible circuits. The increase in 1998 was
due both to the decrease in lead wire assembly sales and an increased level of
spending. The actual spending in fiscal 1998 increased 16% over 1997 as a result
of new product development costs for both wire and flexible circuit products and
costs related to the new high-volume, flexible circuit production facility.
Increases in fiscal 2000 engineering spending are expected to concentrate on
technologies related to the material producing capability, FSA capabilities,
semiconductor packaging substrates and other high-end flexible circuit
technology development. The Company will also be increasing high-volume
production capabilities and further automating the ADFlex flexible circuit
fabrication processes.
RESTRUCTURING CHARGES. Restructuring charges for fiscal 1999 included a $2.8
million charge related to the discontinuation of the lead wire assembly product
line and charges of $1.7 million related to the disposition of Iconovex,
Innovex's software division.
14
<PAGE>
INTEREST INCOME (EXPENSE). Interest income increased to $2,035,000 in fiscal
1999 from $2,029,000 and $1,338,000 in 1998 and 1997, respectively. These
increases correspond to increases in average cash and short-term investments.
Interest expense increased to $467,000 in 1999, from $69,000 in 1998 and $96,000
in 1997. Interest is expected to increase substantially in fiscal 2000 related
to the new $40 million credit facility put in place related to the ADFlex
acquisition.
OTHER INCOME (EXPENSE). Net other expense for fiscal 1999 included a $630,000
charge related to the settlement of threatened litigation by a former director
of the Company.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for income
taxes was $9,239,000 for fiscal 1999 as compared to $22,654,000 for 1998 and
$49,978,000 for 1997. As a percent of net sales, income before provision for
income taxes was 9.0% for 1999 as compared to 23.4% and 35.2% for 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments decreased by $31,914,000 to $25,541,000 at
September 30, 1999. Net cash provided by operating activities decreased in 1999
to $26,215,000 from $32,207,000 in 1998 and $30,407,000 in 1997. The reduction
in cash and short-term investments is primarily due to the ADFlex acquisition.
During fiscal 1999, the Company invested approximately $23 million in capital
expenditures. These expenditures include additional equipment to increase the
capacity of the automated flexible circuit production facility and a portion of
the costs to construct and equip a material manufacturing facility. The increase
in 1998 cash and short-term investments was primarily due to cash flows from
operations. During fiscal 1998, the Company invested approximately $13 million
in capital expenditures. These expenditures included a portion of the costs to
construct and equip an automated flexible circuit production facility. This
facility was constructed to meet the expected demand for high-volume
applications including the HIF, FSA and semiconductor packaging related
products.
On September 15, 1999, the Company entered into a new credit facility arranged
by Norwest Bank Minnesota N.A. which includes U.S. Bank N.A. as an additional
lender. The facility was put in place to pay off all outstanding balances
existing at the time of the ADFlex acquisition under the Credit Agreement among
ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended,
as required by the ADFlex merger agreement. The new credit facility consists of
a $15.0 million, five-year revolving line of credit and a $25.0 million,
five-year term loan with equal principal payments due each quarter commencing on
October 1, 2000 and continuing through the September 14, 2004 maturity date.
Working capital decreased by $42,047,000 to $31,021,000 at September 30, 1999.
The Company's current ratio was 1.7 to 1 at fiscal 1999 year-end, compared to
12.7 to 1 at the end of fiscal 1998. The decrease is due to the high level of
current liabilities acquired with or resulting from the ADFlex acquisition.
Net property, plant and equipment increased by $59 million to $87,158,000 at
September 30, 1999. The increase was due to the ADFlex acquisition and capital
expenditures related to increasing the capacity of the automated flexible
circuit production facility and a portion of the costs to construct and equip a
new material manufacturing facility. Intangible assets increased $3 million to
$4.8 million at September 30, 1999 primarily as a result of the ADFlex
acquisition.
Long-term debt, net of current maturities, increased by $26 million as a result
of the new credit facility entered into as a result of the ADFlex acquisition.
The ratio of long-term debt to stockholders' equity was .246 at September 30,
1999 compared to .007 at the end of fiscal 1998.
Management believes that existing credit facilities, cash and investments and
cash generated from operations will provide an adequate source of funds to
support projected working capital, capital expenditures and dividends in fiscal
2000.
YEAR 2000 UPDATE
The Company is taking steps to ensure that it is not adversely affected by the
year 2000 equipment and software failures that may arise in software
applications and equipment with embedded logic where two-year digits are used to
define the applicable year. Our plan of action and current status follows:
15
<PAGE>
YEAR 2000 STATE OF READINESS:
The Company's products do not contain embedded logic and, as such, they do not
pose any direct year 2000 problem. Innovex's internal operations utilize
computer hardware, software and some equipment with embedded logic and the
Company purchases raw materials from external sources. In order to prepare for
the year 2000, Innovex formed an active year 2000 committee charged with the
responsibility of securing year 2000 compliance to the fullest possible extent.
The process was split into six major areas, information system hardware,
information system software, all other equipment with potential embedded logic,
critical vendors, critical customers and critical utilities and service
providers.
INFORMATION SYSTEM HARDWARE: The manufacturers of the Company's computer server
and network hardware have indicated that the equipment is year 2000 compliant.
Comprehensive tests were performed which indicate the computer server and
network hardware are year 2000 compliant. The Company's personal computers have
been tested and computers deemed critical were upgraded if they were not
compliant.
INFORMATION SYSTEM SOFTWARE: The vendors for the Company's primary manufacturing
and financial software systems have indicated that the software is year 2000
compliant. Comprehensive tests verifying the compliance of this software were
performed. Personal computer operating systems and primary application software
were upgraded to vendor specified year 2000 compliant versions as personal
computer hardware was tested.
EQUIPMENT WITH POTENTIAL EMBEDDED LOGIC: A list of all Company equipment with
potential embedded logic was prepared. The equipment was prioritized as Tier I -
mission critical and Tier II - other equipment. Year 2000 date remedies have
been developed and implemented for all Tier I and Tier II equipment which was
not compliant based on information received from the equipment manufacturers.
CRITICAL VENDORS: A list of significant vendors was compiled. Letters were sent
to these vendors to determine the level of their year 2000 compliance. All
critical vendors have replied and indicated that they are currently year 2000
compliant or will become compliant during 1999. Progress toward compliance of
all other vendors that are not yet compliant will be monitored with alternative
vendors being identified if necessary.
CRITICAL CUSTOMERS: A list of customers considered significant to the Company
was compiled. Letters were sent to these customers to determine the level of
their year 2000 compliance. Approximately 50% have responded indicating full
year 2000 compliance or have targeted their compliance by calendar third quarter
1999. Many of the Company's customers are proceeding with their own year 2000
compliance plans as indicated by their request for information from the Company
as a supplier to them. Progress toward compliance of all customers that have not
yet indicated compliance will be monitored.
UTILITIES AND SERVICE PROVIDERS: A list of utilities and service providers
considered critical to the Company's ongoing success was compiled. These
companies have indicated that they are year 2000 compliant. Most of these
companies are in regulated industries with stringent year 2000 compliance
requirements and no significant problems are anticipated.
COSTS TO ADDRESS YEAR 2000 ISSUES:
The Company does not anticipate that the costs related to becoming year 2000
compliant will be material. Total costs incurred for consultants and equipment
and software replacements and upgrades to address the year 2000 issue are
expected to be less than $100,000. Costs of implementing the new manufacturing
and financial software are not considered related to the year 2000 issue.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND CONTINGENCY PLANS:
Based on currently available information, management does not believe that the
year 2000 matters discussed above related to internal systems or products sold
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier, customer or another party would not have a material adverse effect on
the Company's financial condition or overall trends in results of operations
through business interruption or shutdown, financial loss, reputational damage
and legal liability to third parties.
16
<PAGE>
FORWARD-LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, elsewhere in the Annual Report, in the
Company's Form 10-K and in future filings by the Company with the SEC, except
for the historical information contained herein and therein, are
"forward-looking statements" that involve risks and uncertainties. These risks
and uncertainties include the timely availability and acceptance of new
products, the impact of competitive products and pricing, interruptions in the
Company's operations or those of its suppliers or major customers as may be
caused by problems arising from the year 2000 and the successful integration of
the ADFlex acquisition. In addition, a significant portion of the Company's
revenue is generated from the disk drive and telecommunication industries and
any changes in the structure, technology or outlook of these industries could
have a significant impact on the Company's operations. The Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect
subsequent events or circumstances or the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. While the Company transacts business
predominately in U.S. Dollars and most of its net sales are collected in U.S.
Dollars, a portion of its sales and expenses are denominated in foreign
currencies. Changes in the relation of foreign currencies to the U.S. Dollar
will affect the Company's cost of goods sold and operating margins and could
result in exchange gains or losses. To reduce the impact of certain foreign
currency fluctuations, the Company enters into short-term forward foreign
currency exchange contracts (hedges) in the regular course of business to manage
its risk exposure, not as speculative instruments. Typically, these contracts
have maturities of 1 month or less. The forward exchange contracts generally
require the Company to exchange U.S. Dollars for foreign currencies at maturity,
at rates agreed to at inception of the contracts. The gains or losses on hedges
of transaction exposure are included in income in the period in which the
exchange rates change. The gains and losses on unhedged foreign currency
transactions are included in income.
The Company periodically reviews the outlook for expected currency exchange rate
movements as well as the policy on desired future foreign currency cash flow
positions (long, short, balanced) for those currencies in which the Company has
significant activity. Expected future cash flow positions and strategies are
continuously monitored. At September 30, 1999, there were no open forward
exchange contracts. No assurance can be given that the Company's hedging
strategies will prevent future currency fluctuations from adversely affecting
the Company's business, financial condition, results of operations and cash
flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL DATA
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 18
Consolidated Balance Sheets at September 30, 1999 and 1998 19
Consolidated Statements of Operations for each of the three years in the period ended September 30, 1999 20
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 1999 21
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1999 22
Notes to Consolidated Financial Statements 23-28
Quarterly Financial Data (unaudited) 28
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Innovex, Inc.
We have audited the accompanying consolidated balance sheets of Innovex, Inc.
and Subsidiaries as of September 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1999. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innovex, Inc. and
Subsidiaries as of September 30, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
We have also audited Schedule II of Innovex, Inc. and Subsidiaries to Form 10-K
for each of the three years in the period ended September 30, 1999. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
\s\ Grant Thornton LLP
Minneapolis, Minnesota
November 11, 1999 (except for the third paragraph of Note L, as to which the
date is November 15, 1999)
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30,
Assets 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 6,231,430 $ 17,021,264
Short-term investments 19,310,000 40,434,000
Accounts receivable, less allowance for doubtful
accounts of $1,825,000 (1998 - $213,000) 28,498,621 10,521,518
Inventories 15,891,945 5,717,330
Income taxes receivable -- 938,447
Other 6,385,053 4,686,504
----------------------------------------
Total current assets 76,317,049 79,319,063
Property, plant and equipment - at cost:
Land and land improvements 3,060,441 679,250
Buildings and leasehold improvements 26,565,421 14,923,082
Machinery and equipment 67,125,169 25,662,596
Office furniture and fixtures 9,147,491 3,053,366
----------------------------------------
105,898,522 44,318,294
Less accumulated depreciation and amortization 18,740,285 15,816,851
----------------------------------------
Net property, plant and equipment 87,158,237 28,501,443
Intangible assets, net of accumulated
Amortization of $506,000 (1998 - $2,236,000) 4,841,025 1,826,343
Deferred income taxes 10,442,908 --
Other assets 46,905 5,000
----------------------------------------
$178,806,124 $109,651,849
========================================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 307,702 $ 83,000
Line of credit 9,163,931 --
Accounts payable 25,104,517 3,688,148
Accrued compensation 932,573 1,604,845
Income taxes payable 592,264 --
Other accrued liabilities 9,195,392 875,140
----------------------------------------
Total current liabilities 45,296,379 6,251,133
Long-term debt, less current maturities 26,375,546 755,024
Deferred income taxes -- 227,632
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares
Authorized, 14,822,104 shares issued and outstanding
(1998 - 14,779,604) 592,884 591,184
Capital in excess of par value 16,181,730 15,732,350
Retained earnings 90,359,585 86,094,526
----------------------------------------
Total stockholders' equity 107,134,199 102,418,060
----------------------------------------
$178,806,124 $109,651,849
========================================
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the years ended September 30,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 103,197,766 $ 96,277,930 $ 142,003,743
Costs and Expenses:
Cost of sales 76,277,451 64,225,956 81,027,750
Selling, general and administrative 9,787,555 7,372,209 8,764,366
Engineering 4,580,774 4,148,895 3,572,203
Restructuring charges 4,460,570 -- --
Interest expense 467,050 68,510 95,670
Interest income (2,034,500) (2,029,496) (1,338,421)
Other (income) expense 420,332 (162,223) (95,428)
----------------------------------------------------------
93,959,232 73,623,851 92,026,140
----------------------------------------------------------
Income Before Provision For Income Taxes 9,238,534 22,654,079 49,977,603
Provision For Income Taxes (2,680,000) (6,743,000) (14,884,000)
----------------------------------------------------------
Net Income $ 6,558,534 $ 15,911,079 $ 35,093,603
==========================================================
Net Income Per Share:
Basic $ 0.44 $ 1.08 $ 2.43
==========================================================
Diluted $ 0.44 $ 1.05 $ 2.31
==========================================================
Common and Common Equivalent Shares Outstanding:
Basic 14,798,442 14,695,214 14,424,427
Diluted 15,071,229 15,125,790 15,161,820
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Capital in Total
Common Excess of Retained Stockholders'
For the years ended September 30, 1999, 1998 and 1997 Stock Par Value Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1996 $284,425 $9,418,376 $38,697,315 $48,400,116
Shares issued through exercise of stock options 14,126 2,068,039 2,082,165
Tax benefits derived from exercise of stock options 2,865,000 2,865,000
Dividends paid ($0.1125 per share) (1,623,510) (1,623,510)
Two-for-one stock split 286,229 (286,229) --
Net income 35,093,603 35,093,603
---------------------------------------------------------
Balance at September 30, 1997 584,780 14,065,186 72,167,408 86,817,374
Shares issued through exercise of stock options 6,404 1,120,359 1,126,763
Tax benefits derived from exercise of stock options 546,805 546,805
Dividends paid ($0.135 per share) (1,983,961) (1,983,961)
Net income 15,911,079 15,911,079
---------------------------------------------------------
Balance at September 30, 1998 591,184 15,732,350 86,094,526 102,418,060
Shares issued through exercise of stock options 1,700 373,451 375,151
Tax benefits derived from exercise of stock options 75,929 75,929
Dividends paid ($0.155 per share) (2,293,475) (2,293,475)
Net income 6,558,534 6,558,534
---------------------------------------------------------
Balance at September 30, 1999 $592,884 $16,181,730 $90,359,585 $107,134,199
=========================================================
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the years ended September 30,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,558,534 $ 15,911,079 $ 35,093,603
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,197,982 6,960,581 4,863,417
Deferred income taxes 742,106 992,927 (612,603)
Other non-cash items 1,639,433 540,564 117,206
Changes in operating assets and liabilities, net of
business acquisition:
Accounts receivable (424,137) 11,121,212 (10,017,772)
Inventories 940,231 1,094,814 (1,682,014)
Other current assets 2,641,389 (609,670) (937,637)
Accounts payable 6,252,826 (921,974) 1,080,915
Other current and long-term liabilities (585,269) (1,626,823) 581,480
Income taxes 1,251,809 (1,255,954) 1,920,275
---------------------------------------------------
Net cash provided by operating activities 26,214,904 32,206,756 30,406,870
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22,598,839) (12,730,141) (15,613,246)
Business acquisition (35,967,038) -- --
Proceeds from sale of assets 2,109,467 1,169,936 75,327
Purchase of held-to-maturity securities (31,090,000) (44,749,000) (30,730,000)
Sales and maturities of held-to-maturity securities 52,214,000 32,755,000 18,430,000
Other assets -- -- 884,000
---------------------------------------------------
Net cash used in investing activities (35,332,410) (23,554,205) (26,953,919)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (669,654) (216,709) (104,520)
Payment of bank debt acquired in business acquisition (33,248,281) -- --
Net proceeds on line of credit 9,163,931 -- --
Issuance of long-term debt 25,000,000 -- --
Proceeds from exercise of stock options 375,151 1,126,763 2,082,165
Dividends paid (2,293,475) (1,983,961) (1,623,510)
---------------------------------------------------
Net cash provided by (used in) financing activities (1,672,328) (1,073,907) 354,135
---------------------------------------------------
Increase (decrease) in cash and equivalents (10,789,834) 7,578,644 3,807,086
Cash and equivalents at beginning of year 17,021,264 9,442,620 5,635,534
---------------------------------------------------
Cash and equivalents at end of year $ 6,231,430 $ 17,021,264 $ 9,442,620
===================================================
</TABLE>
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest was approximately $895,000; $66,000 and $118,000 in 1999,
1998 and 1997.
Income tax payments were approximately $2,181,000; $7,005,000 and $13,813,000 in
1999, 1998 and 1997.
Tax benefits derived from exercise of stock options totaling approximately
$76,000; $547,000 and $2,865,000 in 1999, 1998 and 1997 were recorded as a
reduction of current income taxes payable and an increase in capital in excess
of par value.
A $400,000 note receivable was received as partial consideration for the June
1998 sale of InnoMedica assets.
The accompanying notes are an integral part of these statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
September 30, 1999, 1998 and 1997
NOTE A. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a diversified manufacturer of electrical components for the
computer, network systems, consumer, medical, telecommunications and other
electronic industries. Substantially all of the Company's revenues, operating
profits and assets relate to one operating unit involved in the manufacture of
flexible circuit interconnects. Company customers are located throughout the
United States, Europe and the Pacific Rim. The Company has manufacturing
facilities in Chandler, Arizona; Hopkins, Litchfield and Montevideo, Minnesota;
Mexico and Thailand.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR - The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
The Company utilizes a fiscal year that ends on the Saturday nearest to
September 30. For clarity of presentation, the Company has described all periods
as if the year ended September 30. The fiscal years ended September 30, 1999,
1998 and 1997 include fifty-two weeks, fifty-three weeks and fifty-two weeks of
operations.
FOREIGN CURRENCY TRANSLATION - The Company uses the United States Dollar as its
functional currency for its subsidiaries in Mexico and Thailand. Remeasurement
gains and losses, resulting from the process of remeasuring the financial
statements of these foreign subsidiaries into U.S. Dollars, are included in
operations. 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 rates agreed to at inception of the contracts. The
gains or losses on hedges of transaction exposure are included in income in the
period in which the exchange rates change. The gains and losses on unhedged
foreign currency transactions are included in income. At September 30, 1999,
there were no open forward currency exchange contracts.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company considers all highly
liquid temporary investments with an original maturity of three months or less
to be cash equivalents. Cash equivalents, which consist of money market funds
and weekly put bonds, totaled $1,559,000 and $18,299,000 at September 30, 1999
and 1998 and are recorded at cost, which approximates market value. Debt
securities have been classified as held-to-maturity securities, which are
reported at amortized cost.
ACCOUNTS RECEIVABLE - The Company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs ongoing credit evaluations
of customers. The Company maintains allowances for potential credit
losses.
INVENTORIES - Inventories are stated at the lower of cost or market, with cost
determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Depreciation is provided using the straight-line
method over the estimated useful lives of the assets for financial reporting and
accelerated methods for tax purposes. Estimated service lives range from 5 to 30
years for buildings and leasehold improvements, from 2 to 7 years for machinery
and equipment and from 3 to 7 years for office furniture and fixtures.
INTANGIBLE ASSETS - Intangible assets include goodwill, patents, licenses,
technology and trademarks, which are capitalized at cost and amortized on the
straight-line basis over their estimated useful lives. Useful lives range from 3
to 10 years. Management reviews the valuation and amortization of goodwill on an
ongoing basis. As part of this review, management estimates the value and future
benefits of the net income to be generated by the businesses acquired to
determine whether an impairment of goodwill has occurred.
NET INCOME PER SHARE - The Company's basic net income per share is computed by
dividing net income by the weighted average number of outstanding common shares.
The Company's diluted net income per share is computed by dividing net income by
the weighted average number of outstanding common shares and common share
equivalents related to stock options, when dilutive. Options to purchase
193,650, 196,250 and 38,000 shares of common stock with weighted average
exercise purchase prices of $25.71, $28.76, and $30.23 were outstanding during
1999, 1998 and 1997, but were excluded from the computation of common share
equivalents because they were antidilutive.
REVENUE RECOGNITION - Sales are recorded at the time of shipment and provision
for anticipated returns, net of exchanges, is recorded based on historical
experience.
23
<PAGE>
USE OF ESTIMATES - Preparation of the Company's consolidated financial
statements requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and related revenues and expenses.
Actual results could differ from these estimates.
STOCK BASED COMPENSATION - The Company utilizes the intrinsic value method of
accounting for its employee stock based compensation plans. Pro forma
information related to the fair value based method of accounting is contained in
Note F.
NEW PRONOUNCEMENTS - The Financial Accounting Standards Board has also issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which is effective for fiscal
years beginning after June 15, 2000. SFAS 133 requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS 133 also specifies new methods of accounting for
derivatives used in risk management strategies (hedging activities), prescribes
the items and transactions that may be hedged, and specifies detailed criteria
required to qualify for hedge accounting. Management believes the adoption of
SFAS 133 will not have a material effect on the consolidated financial
statements of the Company.
NOTE B. - BUSINESS ACQUISITION
On August 9, 1999, the Company purchased 76% of the outstanding shares of common
stock of ADFlex Solutions, Inc.("ADFlex"). The remaining 24% of the shares
outstanding were purchased on September 14, 1999. The $37.2 million purchase
price, includes change in control payments of $1.9 million and transaction costs
of $.9 million. The purchase price was paid in the form of cash. Pursuant to the
purchase agreement, the Company was required to pay off all outstanding balances
under that certain Credit Agreement among ADFlex, BankBoston N.A. and Bank
Boston N.A. as Agent for Lenders, as amended (the "Credit Agreement"). Innovex
obtained a credit facility totaling in principal amount $40 million, that was
utilized to refinance amounts owed under the Credit Agreement, pay down ADFlex's
current liabilities and pay related transaction costs. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations since
acquisition are included in the accompanying financial statements. The excess
cost over the fair value of net assets acquired of $3.9 million was allocated to
goodwill and will be amortized on a straight-line basis over 10 years. The
purchase price and fair value of the assets acquired were as follows (in
thousands of dollars):
Current assets $ 33,687
Property, plant and equipment 46,163
Intangible assets 3,856
Deferred tax assets 11,929
Other long-term assets 47
Current liabilities (57,221)
Other long-term liabilities (1,294)
--------
$ 37,167
========
The following unaudited pro forma results of operations for the years ended
September 30, 1999 and 1998 assume the acquisition occurred on October 1, 1997.
The pro forma information includes adjustments for depreciation based on the
fair market value of the property, plant and equipment acquired, amortization of
intangibles arising from the transaction, the reduction of interest expense to
reflect the refinancing of the ADFlex credit facility, the reduction of interest
income on cash used to complete the acquisition, the elimination of salaries of
ADFlex executives terminated in conjunction with the merger and related changes
in the provision for income tax expense (in thousands of dollars except per
share amounts):
Years Ended
1999 1998
- -------------------------------------------------------------------
Net sales $215,975 $281,102
Net income (loss) (6,845) 15,782
Net income (loss) per share:
Basic $(0.46) $1.07
Diluted $(0.46) $1.04
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
on the assumed date, nor are they necessarily indicative of future operating
results.
NOTE C. - SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of tax
exempt municipal bonds that are classified as held-to-maturity securities at
September 30, 1999 and 1998. As of September 30, 1999 and 1998, a significant
portion of the short-term investments had maturities within one year. Gross
realized and unrealized gains and losses related to these securities were not
material. Proceeds from sales of held-to-maturity securities during 1999, with
an amortized cost of $5,119,022, were $5,104,765. Net realized losses on the
sale of these securities were immaterial. These proceeds were used to complete
the ADFlex acquisition on August 9 and September 14, 1999.
24
<PAGE>
NOTE D. - INVENTORIES
Inventories are comprised of the following at September 30:
1999 1998
---------------------------------
Raw materials and purchased parts $8,753,336 $2,237,266
Work-in-process and finished goods 7,138,609 3,480,064
---------------------------------
$15,891,945 $5,717,330
=================================
NOTE E. - LINE OF CREDIT AND LONG-TERM DEBT
On September 15, 1999 the Company entered into a new credit facility arranged by
Norwest Bank Minnesota N.A. which includes U.S. Bank N.A. as an additional
lender. The facility was put in place to pay off all outstanding balances
existing at the time of the ADFlex acquisition under the Credit Agreement among
ADFlex, BankBoston N.A. and Bank Boston N.A. as Agent for Lenders, as amended,
as required by the ADFlex merger agreement. The new credit facility consists of
a $15.0 million, five-year revolving line of credit and a $25.0 million,
five-year term loan with equal principal payments due each quarter commencing on
October 1, 2000 and continuing through the September 14, 2004 maturity date.
Under the terms of the credit facility, any outstanding balance bears interest
at Norwest Minnesota, N.A.'s prime interest rate plus an applicable margin
ranging from 0 to .25% or LIBOR plus an applicable margin ranging from 1.25% to
2.0% based on the Company achieving certain financial objectives at the end of
each quarter. The credit facility is collateralized by all accounts receivable,
inventory, equipment and general intangibles of the Company. The Company is
required, under the credit agreement, to maintain certain financial ratios and
meet certain net worth and indebtedness tests for which the Company is in
compliance at September 30, 1999. At September 30, 1999, $25.0 million was
outstanding under the term loan and $9.2 million was outstanding under the
revolving line of credit. The interest rates for the term loan and revolving
line of credit at September 30, 1999 were 6.76% and 6.61%.
Other long-term debt consists of capitalized leases and industrial development
revenue notes which are collateralized by certain buildings, improvements and
equipment. Interest rates on these range from 6.75% to 7.46%. Aggregate
maturities of long-term debt including capitalized leases for the next five
years are as follows (in thousands) : 2000 - $308; 2001 - $6,666; 2002 - $6,579;
2003 - $6,587; 2004 - $6,543. The recorded value of long-term debt approximates
fair market value.
NOTE F. - STOCKHOLDERS' EQUITY
Stock Splits -
On November 23, 1996, the Company's Board of Directors declared a two-for-one
split of the Company's common stock and increased the authorized shares from
15,000,000 to 30,000,000. The additional shares were distributed on December 23,
1996 to stockholders of record on December 16, 1996. All share and per share
information throughout the financial statements reflect the split.
Stock Option Plans -
The Company has stock option plans that provide for incentive and non-qualified
stock options to be granted to directors, officers and other key employees or
consultants. The stock options granted generally have a ten-year life, vest over
a period of six months to five years, and have an exercise price equal to the
fair market value of the stock on the date of grant. At September 30, 1999, the
Company had 790,050 shares of common stock available for issue under the plans.
Transactions under the plans during each of the three years in the period ending
September 30, 1999 are summarized as follows:
Number of Weighted
Shares Under Average
Option Exercise Price
- ------------------------------------------------------------------------------
Outstanding at October 1, 1996 1,067,510 $ 6.11
Granted 387,000 12.18
Forfeited (111,796) 6.55
Exercised (398,250) 5.23
- -------------------------------------------------------------
Balance at September 30, 1997 944,464 8.92
Granted 187,750 28.52
Forfeited (137,300) 13.39
Exercised (160,100) 7.04
- -------------------------------------------------------------
Balance at September 30, 1998 834,814 12.95
Granted 459,400 12.10
Forfeited (113,300) 18.29
Exercised (42,500) 8.83
- -------------------------------------------------------------
Balance at September 30, 1999 1,138,414 12.23
=============
25
<PAGE>
Options exercisable at September 30:
Weighted
Number Average
Exercisable Exercise Price
------------------------------
1997 122,865 $6.23
1998 270,564 7.97
1999 434,114 9.25
The following table summarizes information concerning currently outstanding and
exercisable stock options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.33 - $3.46 33,164 5.6 years $ 1.90 33,164 $1.90
6.49 - 8.72 327,900 6.2 years 7.30 297,500 7.17
9.13 - 11.50 558,200 8.4 years 11.06 59,800 10.22
13.00 - 16.26 70,500 9.3 years 14.93 -- --
18.88 - 32.44 148,650 8.0 years 28.55 43,650 27.68
- ---------------------------------------------------------------------------------------------------
1,138,414 434,114
========== ========
</TABLE>
The Company's 1999, 1998 and 1997 pro forma net income and diluted net income
per share would have been $5,871,000, $15,307,000, and $34,695,000 or $0.39,
$1.02 and $2.30 had the fair value method been used for valuing options granted
during those years. The impact on net income may differ in future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1996. The weighted average value of options granted in 1999,
1998 and 1997 was $4.68, $12.35 and $5.56. The value was computed by applying
the following weighted average assumptions to the Black Scholes options pricing
model: volatility of 51%, 53% and 60%; dividend yield of 1.2%, 0.4% and 1.7%;
risk-free rate of return of 4.5%, 6.0% and 5.8%; and an average term of 3.5
years for 1999, 1998 and 1997.
NOTE G. - INCOME TAXES
The effective income tax rates differed from the federal statutory income tax
rate as follows for the years ended September 30:
1999 1998 1997
- ------------------------------------------------------------------
Federal statutory rate 34.0% 34.6% 34.7%
State income taxes 3.1 1.8 1.9
FSC benefit (9.2) (6.2) (5.0)
Tax exempt interest (6.8) (2.8) (0.8)
Additional income tax accrual 6.8 1.9 (0.6)
Other 1.1 0.5 (0.4)
----------------------------------
29.0% 29.8% 29.8%
==================================
Components of the provision for income taxes are as follows for the years ended
September 30 (thousands of dollars):
1999 1998 1997
- ------------------------------------------------------------------
Current:
Federal $1,702 $5,128 $14,027
State 236 622 1,470
----------------------------------
1,938 5,750 15,497
Deferred 742 993 (613)
----------------------------------
$2,680 $6,743 $14,884
==================================
26
<PAGE>
The cumulative temporary differences between the tax bases of assets and
liabilities and their carrying amounts for financial statement purposes are as
follows at September 30 (thousands of dollars):
1999 1998
- -------------------------------------------------------------------------
Current deferred tax assets:
Inventories $1,638 $ 331
Receivables 447 140
Compensation and benefits 329 217
Restructuring 893 --
Other 140 10
------------------------
$3,447 $ 698
========================
Long-term deferred tax assets (liabilities) - net:
Accelerated depreciation $(2,914) $ (170)
Intangibles 9,758 (58)
Tax credit and NOL carryforwards 3,599 --
------------------------
$10,443 $ (228)
========================
NOTE H. - RETIREMENT AND PROFIT-SHARING PLANS
The Company sponsors a 401K retirement plan for all of its employees meeting
minimum eligibility requirements. The plan provides Company matching
contributions of 50% of the first 6% of employee contributions to the plan. An
additional 401K retirement plan was also in effect for the last 8 weeks of the
year relating to the ADFlex acquisition. This plan is sponsored for all
employees of the ADFlex's United States operation. Under this plan, the Company
may make contributions each year up to a maximum of 4% of an employee's total
compensation. The Company plans to merge the ADFlex plan into the Company plan
in 2000. Company contributions for both these plans were approximately $385,000,
$435,000 and $404,000 for the years ended September 30, 1999, 1998 and 1997.
NOTE I. - RESEARCH AND DEVELOPMENT COSTS
The Company incurred research and development costs of approximately $2,878,000,
$2,356,000 and $1,784,000 for the years ended September 30, 1999, 1998 and 1997.
NOTE J. - FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
Prior to the ADFlex acquisition, the Company had no foreign-based operations;
however, the Company utilized subcontractors in Thailand and China to perform
certain labor intensive procedures on a large portion of its products. In
October 1999, the Company purchased its Thailand subcontractor, Boron Public
Limited Company, for $3.7 million in order to increase operational control and
reduce foreign operating costs. A preliminary allocation of the purchase price
to net assets results in goodwill of approximately $2.9 million which will be
amortized on a straight- line basis over ten years. In addition, the Company
acquired an Asian operation, located in Lamphun, Thailand, as part of the ADFlex
acquisition. The Company will continue to increase the functions performed at
this location in order to take advantage of the proximity to customers and
favorable labor and operating costs. The Company had aggregate export sales of
$76,607,000, $79,957,000 and $122,379,000 for the years ending September 30,
1999, 1998 and 1997, principally to Pacific Rim customers. With respect to
foreign operations for the year ended September 30, 1999, long-lived assets of
$15,061,000 and $12,308,000 were located in Thailand and Mexico. There were no
foreign operations with long-lived assets for the year ended September 30, 1998.
Revenues from four customers made up a significant portion of the Company's
total net sales during the years ending September 30:
1999 1998 1997
-----------------------------------
Customer A 40% 28% 25%
Customer B 14 20 15
Customer C 10 14 5
Customer D 1 12 28
Accounts receivable from the above four customers are 29% and 80% of the
Company's accounts receivable at September 30, 1999 and 1998.
NOTE K. - COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under operating leases that expire
at various dates through June 30, 2003. As of September 30, 1999, the future
minimum lease commitments under the operating leases are payable as follows (in
thousands): 2000 - $1,217; 2001 - $1,183; 2002 - $1,018; 2003 - $945.
27
<PAGE>
The Company is constructing a new $13 million manufacturing and office building
in Maple Plain, Minnesota. Costs related to the building of approximately $2
million were incurred in fiscal 1999.
The nature of the Company's business exposes the Company to potential
environmental remediation liabilities arising from the manufacture, use and
disposal of hazardous materials used to manufacture flex interconnect products.
Management believes that any cost associated with maintaining the Company's
compliance with current environmental remediation laws will not have a material
adverse effect on the Company's financial statements.
NOTE L. - RESTRUCTURING CHARGES
The 1999 results include a $2,765,000 restructuring charge related to the
discontinuation of the lead wire assembly product line. The charge was recorded
pursuant to a plan announced in September 1999. The charge included
approximately $871,000 related to asset impairment, $156,000 for facility
abandonment costs, $1,403,000 for the write off of inventory and supplies,
$138,000 for increasing the accounts receivable reserve and $197,000 in employee
severance and benefits. As of September 30, 1999, the following amounts were
accrued, facility payments $156,000 and severance $197,000. This exit plan will
be substantially complete by March 2000.
The 1999 results also include a $1,695,000 restructuring charge associated with
the disposition of the Iconovex Division and its 51% owned joint venture, Smart
Solution. This charge was recorded in June 1999 when all operations were ceased
and announced in July 1999. The charge included $801,000 for prepaid expenses,
$779,000 for intangible assets including capitalized software, $14,000 in
employee severance and $101,000 for administrative costs. As of September 30,
1999, all amounts relating to this restructuring have been paid.
On November 15, 1999, subsequent to fiscal 1999, the Company announced its
intention to restructure its manufacturing operations and close its Mexican
facility. The Company expects to record a restructuring charge of up to $14
million in the fiscal year 2000 first quarter. The charges will primarily
consist of severance costs and the write off of excess and obsolete plant and
equipment.
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(Unaudited)
1999 1st Quarter 2nd Quarter 3rd Quarter* 4th Quarter* Year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $22,027,861 $20,703,779 $20,636,068 $39,830,058 $103,197,766
Gross profit 7,076,533 6,785,131 6,322,225 6,736,426 26,920,315
Net income 2,994,767 2,539,101 1,509,671 (485,004) 6,558,535
Net income per share:
Basic $0.20 $0.17 $0.10 $(0.03) $0.44
Diluted $0.20 $0.17 $0.10 $(0.03) $0.44
</TABLE>
* The third-quarter includes restructuring charges of $1,695,000 related to the
disposition of Iconovex, Innovex's software division and the fourth-quarter
includes $2,765,000 related to the discontinuation of the lead wire assembly
product line.
<TABLE>
<CAPTION>
1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $33,008,635 $25,105,195 $20,298,838 $17,865,262 $96,277,930
Gross profit 13,106,642 8,851,552 5,398,125 4,695,655 32,051,974
Net income 7,274,164 4,261,641 2,410,663 1,964,611 15,911,079
Net income per share:
Basic $0.50 $0.29 $0.16 $0.13 $1.08
Diluted $0.48 $0.28 $0.16 $0.13 $1.05
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" in the
Registrant's definitive proxy statement to be mailed to shareholders on or about
December 20, 1999, and filed with the Securities and Exchange Commission.
Information on executive officers is set forth in Part I, Item 4A hereto.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the section entitled "Executive Compensation" and "Election
of Directors" in the Registrant's definitive proxy statement to be mailed to the
Shareholders on or about December 20, 1999, and filed with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the section entitled "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in the
Registrant's definitive proxy statement to be mailed to Shareholders on or about
December 20, 1999, and filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the section entitled "Certain Transactions" in the
Registrant's definitive proxy statement to be mailed to Shareholders on or about
December 20, 1999, and filed with the Securities and Exchange Commission.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS Page(s)
-------
The following Consolidated Financial Statements of the
Registrant, Innovex, Inc. and subsidiaries, are included in Item 8:
* Consolidated Balance Sheets at September 30, 1999 and 1998...... 19
* Consolidated Statements of Operations for each of the three
years in the period ended September 30, 1999.................... 20
* Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1999.......... 21
* Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1999 ................... 22
* Notes to Consolidated Financial Statements...................... 23-28
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the three
years ended September 30, 1999.................................. 32
ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE
APPLICABLE ACCOUNTING REGULATION OF THE SECURITIES AND
EXCHANGE COMMISSION HAVE BEEN OMITTED BECAUSE THEY ARE NOT
REQUIRED, ARE INAPPLICABLE OR THE INFORMATION IS INCLUDED IN
THE CONSOLIDATED FINANCIAL STATEMENTS OR NOTES THERETO.
(3) EXHIBITS
3(a) Articles of Incorporation, as amended, are incorporated by
reference to Exhibit 3 of the Registrant's Form 10Q for the
Quarter Ended December 31, 1996................................
3(b) Bylaws, as amended, are incorporated by reference to Exhibit
3(b) of the Registrant's Form S-1 Registration Statement dated
June 19, 1986 (Commission File No. 33-6594)....................
10(a) 1983 Employee Incentive Stock Option Plan is incorporated
by reference to Exhibit 4(a) of the Registrant's Form S-8
dated June 3, 1987 (Commission File No. 33-14776)..............
10(b) 1987 Employee Stock Option Plan, as amended, is
incorporated by reference to Exhibit 4(a) of te Registrant's
Form S-8 dated March 17, 1989 (Commission File No. 33-27530)...
10(c) Innovex, Inc. and Subsidiaries Employees' Retirement Plan
is incorporated by reference to Exhibit 10(i) of the
Registrant's Form 10-K for the Year Ended September 30, 1992...
10(d) 1994 Stock Option Plan, as amended, is incorporated by
reference to Exhibit 4.1 of the Registrant's Form S-8 dated
May 27, 1999 (Commission File No. 333-79427)...................
10(e) Form of Employment Agreement between certain executive
officers and the Company is incorporated by reference to
Exhibit 10(g) of the Registrant's Form 10-K for the year
ended September 30, 1996.......................................
10(f) Lease Agreement between Karon-Baronbaum LLC, Landlord, and
Innovex, Inc., Tenant, for Hopkins facility is incorporated
by reference to Exhibit 10.1 of the Registrant's Form 10-Q
for the quarter ended March 31, 1997...........................
10(g) Agreement and Plan of Merger, dated July 1, 1999, by and
among ADFlex Solutions, Inc. and Innovex, Inc. and Innovex
Acquisition Corp. is incorporated by reference to Exhibit
(c)(1) of the Registrant's Schedule 14(d)(1) filed on July
7, 1999........................................................
10(h) Lease dated June 28, 1993 between ADFlex Solutions, Inc.
and TL Properties, Inc. and the First Amendment to Lease,
dated June 1994, incorporated by reference to the ADFlex
Solutions, Inc. Registration Statement on Form S-1 (SEC file
No. 33-80324) or amendments thereto, filed on June 16, 1994....
10(i) Credit Agreement dated as of September 15, 1999 among
Innovex, Inc. as Borrower and the Banks Named Herein, as
Banks, and Norwest Bank Minnesota, N.A., as Agent..............E1-E58
21 Subsidiaries of Registrant...................................... E59
23 Consent of Grant Thornton LLP................................... E60
27 Financial Data Schedule......................................... E61
(b) REPORTS ON FORM 8-K
Form 8K and 8K/A were filed on August 20, 1999 and October
19, 1999 relating to the acquisition of ADFlex Solutions, Inc...
(c) EXHIBITS
Reference is made to Item 14(a)3................................
(d) SCHEDULES
Reference is made to Item 14(a)2................................
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INNOVEX, INC.
By \s\ Thomas W. Haley
Thomas W. Haley
Chairman and Chief Executive Officer
Date December 10, 1999 By \s\ Douglas W. Keller
Douglas W. Keller
Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 8th day of December, 1999.
\s\ Thomas W. Haley Chairman and Chief Executive Officer
Thomas W. Haley and Director
(principal executive officer)
\s\ Douglas W. Keller Vice President, Finance
Douglas W. Keller (principal financial officer)
\s\ Gerald M. Bestler Director
Gerald M. Bestler
\s\ Frank L. Farrar Director
Frank L. Farrar
\s\ Elick Eugene Hawk Director
Elick Eugene Hawk
\s\ William J. Miller Director
William J. Miller
\s\ William P. Murnane President and Chief Operating Officer
William P. Murnane and Director
\s\ Michael C, Slagle Director
Michael C. Slagle
\s\ Bernt M. Tessem Director
Bernt M. Tessem
31
<PAGE>
Innovex Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For The Three Years Ended September 30, 1999
<TABLE>
<CAPTION>
Charged to
Balance at Charged to Other Balance at
Beginning of Costs and Accounts - Deductions - End of
DESCRIPTION Period Expenses Describe Describe Period
------ -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Miscellaneous valuation and qualifying accounts (a)
Year ended September 30, 1999 $ 445,000 $ -- $ -- $ -- $2,151,000
Year ended September 30, 1998 $ 903,000 $ -- $ -- $ -- $ 445,000
Year ended September 30, 1997 $ 640,000 $ -- $ -- $ -- $ 903,000
</TABLE>
(a) Additions, deductions and balances were not individually significant.
32
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
INNOVEX, INC.
FOR
FISCAL YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------
EXHIBITS
EXHIBIT 10(I)
CREDIT AGREEMENT
DATED AS OF SEPTEMBER 15, 1999
AMONG
INNOVEX, INC.,
AS BORROWER
AND
THE BANKS NAMED HEREIN,
AS BANKS
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
AS AGENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS.............................................................................................1
SECTION 1.1. DEFINITIONS..................................................................................1
ARTICLE II CREDIT FACILITIES.....................................................................................14
SECTION 2.1. COMMITMENT AS TO REVOLVING FACILITY.........................................................14
SECTION 2.2. COMMITMENT AS TO TERM FACILITY..............................................................14
SECTION 2.3. PROCEDURES FOR BORROWING UNDER THE REVOLVING FACILITY.......................................14
SECTION 2.4. CONVERTING FLOATING RATE FUNDINGS TO EURODOLLAR FUNDINGS; PROCEDURES........................15
SECTION 2.5. PROCEDURES AT END OF AN INTEREST PERIOD.....................................................15
SECTION 2.6. SETTING AND NOTICE OF RATES.................................................................15
SECTION 2.7. INTEREST ON OBLIGATIONS.....................................................................16
SECTION 2.8. OBLIGATION TO REPAY ADVANCES; REPRESENTATIONS...............................................16
SECTION 2.9. NOTES; AMORTIZATION.........................................................................17
SECTION 2.10. INTEREST DUE DATES..........................................................................18
SECTION 2.11. COMPUTATION OF INTEREST AND FEES............................................................18
SECTION 2.12. FEES........................................................................................18
SECTION 2.13. USE OF PROCEEDS.............................................................................19
SECTION 2.14. VOLUNTARY REDUCTION OR TERMINATION OF THE COMMITMENTS; PREPAYMENTS..........................19
SECTION 2.15. PAYMENTS....................................................................................20
SECTION 2.16. TAXES.......................................................................................22
SECTION 2.17. INCREASED COSTS; CAPITAL ADEQUACY; FUNDING EXCEPTIONS.......................................23
SECTION 2.18. FUNDING LOSSES..............................................................................27
SECTION 2.19. RIGHT OF BANKS TO FUND THROUGH OTHER OFFICES................................................27
SECTION 2.20. DISCRETION OF BANKS AS TO MANNER OF FUNDING.................................................27
SECTION 2.21. CONCLUSIVENESS OF STATEMENTS; SURVIVAL OF PROVISIONS........................................28
ARTICLE III CONDITIONS OF LENDING................................................................................28
SECTION 3.1. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE.................................................28
SECTION 3.2. CONDITIONS PRECEDENT TO ALL ADVANCES........................................................30
ARTICLE IV REPRESENTATIONS AND WARRANTIES........................................................................30
SECTION 4.1. CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE.................................30
SECTION 4.2. AUTHORIZATION FOR BORROWINGS; NO CONFLICT AS TO LAW OR
AGREEMENTS..................................................................................30
SECTION 4.3. LEGAL AGREEMENTS............................................................................31
SECTION 4.4. SUBSIDIARIES................................................................................31
SECTION 4.5. FINANCIAL CONDITION; NO ADVERSE CHANGE......................................................31
SECTION 4.6. LITIGATION..................................................................................32
SECTION 4.7. REGULATION U................................................................................32
SECTION 4.8. TAXES.......................................................................................32
SECTION 4.9. TITLES AND LIENS............................................................................32
</TABLE>
-i- Exhibit 10(i)
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 4.10. PLANS.......................................................................................33
SECTION 4.11. DEFAULT.....................................................................................33
SECTION 4.12. ENVIRONMENTAL COMPLIANCE....................................................................33
SECTION 4.13. SUBMISSIONS TO BANKS........................................................................34
SECTION 4.14. FINANCIAL SOLVENCY..........................................................................34
ARTICLE V AFFIRMATIVE COVENANTS OF THE BORROWER..................................................................34
SECTION 5.1. REPORTING REQUIREMENTS......................................................................35
SECTION 5.2. BOOKS AND RECORDS; INSPECTION AND EXAMINATION...............................................37
SECTION 5.3. COMPLIANCE WITH LAWS........................................................................37
SECTION 5.4. PAYMENT OF TAXES AND OTHER CLAIMS...........................................................37
SECTION 5.5. MAINTENANCE OF PROPERTIES...................................................................37
SECTION 5.6. INSURANCE...................................................................................38
SECTION 5.7. PRESERVATION OF CORPORATE EXISTENCE.........................................................38
SECTION 5.8 YEAR 2000...................................................................................38
SECTION 5.9. INTEREST COVERAGE RATIO.....................................................................39
SECTION 5.10 LEVERAGE RATIO..............................................................................39
SECTION 5.11 MINIMUM NET WORTH...........................................................................39
ARTICLE VI NEGATIVE COVENANTS....................................................................................40
SECTION 6.1. LIENS.......................................................................................40
SECTION 6.2. INDEBTEDNESS................................................................................41
SECTION 6.3. GUARANTIES..................................................................................41
SECTION 6.4. INVESTMENTS.................................................................................41
SECTION 6.5. RESTRICTED PAYMENTS.........................................................................42
SECTION 6.6. SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS...............................42
SECTION 6.7. CONSOLIDATION AND MERGER; ASSET ACQUISITIONS................................................42
SECTION 6.8. SALE AND LEASEBACK..........................................................................42
SECTION 6.9. RESTRICTIONS ON NATURE OF BUSINESS..........................................................43
SECTION 6.10. ACCOUNTING..................................................................................43
SECTION 6.11. HAZARDOUS SUBSTANCES........................................................................43
SECTION 6.12. CAPITAL EXPENDITURES........................................................................43
ARTICLE VII EVENTS OF DEFAULT; RIGHTS AND REMEDIES...............................................................43
SECTION 7.1. EVENTS OF DEFAULT...........................................................................43
SECTION 7.2. RIGHTS AND REMEDIES.........................................................................45
ARTICLE VIII AGREEMENT AMONG BANKS AND AGENT.....................................................................46
SECTION 8.1. AUTHORIZATION; POWERS; AGENT FOR COLLATERAL PURPOSES........................................46
SECTION 8.2. APPLICATION OF PROCEEDS.....................................................................47
SECTION 8.3. EXCULPATION.................................................................................48
SECTION 8.4. USE OF THE TERM "AGENT".....................................................................48
SECTION 8.5. REIMBURSEMENT FOR COSTS AND EXPENSES........................................................48
SECTION 8.6. PAYMENTS RECEIVED DIRECTLY BY BANKS.........................................................48
SECTION 8.7. INDEMNIFICATION.............................................................................49
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 8.8. AGENT AND AFFILIATES........................................................................49
SECTION 8.9. CREDIT INVESTIGATION........................................................................49
SECTION 8.10. DEFAULTS....................................................................................50
SECTION 8.11. OBLIGATIONS SEVERAL.........................................................................50
SECTION 8.12. SALE OR ASSIGNMENT; ADDITION OF BANKS.......................................................50
SECTION 8.13. PARTICIPATION...............................................................................51
SECTION 8.14. WITHHOLDING TAX EXEMPTION...................................................................52
SECTION 8.15. BORROWER NOT A BENEFICIARY OR PARTY.........................................................52
ARTICLE IX MISCELLANEOUS.........................................................................................52
SECTION 9.1. NO WAIVER; CUMULATIVE REMEDIES..............................................................52
SECTION 9.2. AMENDMENTS, REQUESTED WAIVERS, ETC..........................................................53
SECTION 9.3. ADDRESSES FOR NOTICES, ETC..................................................................53
SECTION 9.4. COSTS AND EXPENSES..........................................................................53
SECTION 9.5. INDEMNITY...................................................................................54
SECTION 9.6. EXECUTION IN COUNTERPARTS...................................................................55
SECTION 9.7. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL...........................................55
SECTION 9.8. INTEGRATION; INCONSISTENCY..................................................................56
SECTION 9.9. AGREEMENT EFFECTIVENESS.....................................................................56
SECTION 9.10. ADVICE FROM INDEPENDENT COUNSEL.............................................................56
SECTION 9.11. JUDICIAL INTERPRETATION.....................................................................56
SECTION 9.12. BINDING EFFECT; NO ASSIGNMENT BY BORROWER...................................................56
SECTION 9.13. SEVERABILITY OF PROVISIONS..................................................................56
SECTION 9.14. HEADINGS....................................................................................56
</TABLE>
-iii-
<PAGE>
LIST OF EXHIBITS
Exhibit A Form of Revolving Note
Exhibit B Form of Term Note
Exhibit C Notice of Borrowing under Revolving Facility
Exhibit D Notice of Conversion to Eurodollar Rate
Exhibit E Notice of Rollover to Eurodollar Rate
Exhibit F Form of Certificate of Chief Financial Officer as to Annual
Financial Statements
Exhibit G Form of Certificate of Chief Financial Officer as to Fiscal
Quarter Financial Statements
Exhibit H Form of Assignment Certificate
LIST OF SCHEDULES
Schedule 4.1 Name under which Borrower and its Subsidiaries Have Done
Business
Schedule 4.4 Subsidiaries of the Borrower
Schedule 4.6 Litigation
Schedule 4.8 Unpaid Taxes and Assessments
Schedule 4.9 Intellectual Property
Schedule 4.10 Description of Pension Plans of the Borrower
Schedule 4.12 Environmental Disclosures of the Borrower
Schedule 6.1 Outstanding Liens of the Borrower and its Subsidiaries
Schedule 6.2 Outstanding Indebtedness of the Borrower and its Subsidiaries
Schedule 6.3 Outstanding Guaranties of the Borrower and its Subsidiaries
-iv-
<PAGE>
CREDIT AGREEMENT
This Credit Agreement is dated as of September 15, 1999, by
and among INNOVEX, INC., a Minnesota corporation (the "Borrower"), and each of
the banks appearing on the signature pages hereof, together with such other
banks as may from time to time become a party to this Agreement pursuant to the
terms and conditions of Article VIII hereof (herein collectively called the
"Banks" and individually each called a "Bank"), and NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, a national banking association ("Norwest"), in its
separate capacity as administrative agent for itself and all other Banks (in
such capacity, the "Agent").
ARTICLE I
Definitions
Section 1.1. Definitions. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in the preamble have the meanings
therein assigned to them;
(b) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP; and
(d) all accounting terms, unless otherwise specified, shall be
deemed to refer to Persons and their Subsidiaries on a consolidated
basis in accordance with GAAP.
"Adjustment Date" has the meaning specified in Section 8.12.
"Administrative Fee" has the meaning specified in Section
2.12(c).
"Advance" means a loan of funds by a Bank to the Borrower
under a Facility.
"Affiliate" means, with respect to any Person, (a) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, (i) ten percent (10%) or more of a Person
that is publicly held or (ii) fifty percent (50%) or more of a Person that is
privately held, of the stock having ordinary voting power in the election of
directors of such Person, (b) each Person that controls, is controlled by or is
under common control with such Person or (c) each of such Person's, officers,
directors, joint venturers and partners. For purpose of this definition,
"control" of a Person shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of its
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management or policies, whether through the ownership of voting securities, by
contract or otherwise; provided, however, that the term "Affiliate" shall in no
event include the Agent or a Lender.
"Agent" has the meaning specified in the preamble.
"Agreement" means this Credit Agreement and all exhibits,
amendments and supplements hereto and all restatements thereof.
"Applicant" has the meaning specified in Section 8.12.
"Assignment Certificate" has the meaning specified in Section
8.12.
"Bank" or "Banks" has the meaning specified in the preamble.
"Base Rate" on any day means the higher of (i) the Prime Rate
in effect on that day, or (ii) the Federal Funds Rate in effect on that day plus
.50%.
"Borrower" has the meaning specified in the preamble.
"Borrowing" means a borrowing by the Borrower under the
Revolving Facility, consisting of the aggregate of all Revolving Advances made
by the Banks to the Borrower pursuant to a request under Section 2.3.
"Business Day" means any day other than a Saturday or Sunday
on which national banks are required to be open for business in Minneapolis,
Minnesota, and, in addition, if such day relates to a Eurodollar Funding or
fixing of a Eurodollar Rate, a day on which dealings in U.S. dollar deposits are
carried on in the London interbank eurodollar market.
"Capital Adequacy Rule" has the meaning specified in Section
2.17(b)(ii).
"Capital Adequacy Rule Change" has the meaning specified in
Section 2.17(b)(iii).
"Capital Expenditures" of any Person means, with respect to
the applicable Covenant Computation Period, the sum of:
(a) the aggregate amount of all expenditures of such Person
for fixed or capital assets made during such period which, in
accordance with GAAP, would be classified as capital expenditures; and
(without duplication)
(b) the aggregate amount of all Capitalized Lease Liabilities
of such Person incurred during such Covenant Computation Period.
E-2 Exhibit 10(i)
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"Capitalized Lease Expenditures" of any Person means, with
respect to the applicable Covenant Computation Period, the total expenditures
made by such Person on account of its Capitalized Lease Liabilities, determined
in accordance with GAAP.
"Capitalized Lease Liabilities" of any Person means, with
respect to the applicable Covenant Computation Period, all monetary obligations
of such Person under any leasing or similar arrangement which, in accordance
with GAAP, would be classified as capitalized leases, and, for purposes of this
Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
"Cash Flow Available for Interest" of any Person means, with
respect to the applicable Covenant Computation Period, such Person's Pre-Tax
Earnings, plus such Person's Interest Expense, plus such Person's rental expense
with respect to operating leases.
"Change of Control" means, with respect to any corporation,
either (i) the acquisition by any "person" or "group" (as those terms are used
in Sections 13(d) and 14(d) of the Exchange Act) of beneficial ownership (as
defined in Rules 13d-3 and 13d-4 of the Securities and Exchange Commission,
except that a Person shall be deemed to have beneficial ownership of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of 30% or more of the then-outstanding voting capital stock of such
corporation; or (ii) a change in the composition of the board of directors of
such corporation or any corporate parent of such corporation such that
continuing directors cease to constitute more than 50% of such board of
directors. As used in this definition, "continuing directors" means, as of any
date, (i) those members of the board of directors of the applicable corporation
who assumed office prior to such date, and (ii) those members of the board of
directors of the applicable corporation who assumed office after such date and
whose appointment or nomination for election by that corporation's shareholders
was approved by a vote of at least 50% of the directors of such corporation in
office immediately prior to such appointment or nomination.
"Closing Date" means the date of this Agreement.
"Collateral" means all real and personal property of the
Borrower and/or any of its Subsidiaries in which the Banks have been granted a
security interest pursuant to any Security Document, together with all
substitutions and replacements for and products of any of the foregoing.
"Commitment" means, with respect to each Bank, such Bank's
Revolving Commitment or Term Commitment, as the context may require.
"Commitment Fee" has the meaning specified in Section 2.12(b).
"Commitment Fee Percentage" means, with respect to the
computation of the applicable Commitment Fee under Section 2.12(b), the
percentage as set forth and described
E-3 Exhibit 10(i)
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in the table below, calculated according to the Borrower's then applicable
Status; provided, however, that (i) notwithstanding the table set forth below
during the period from the Closing Date through March 31, 2000, the applicable
Commitment Fee Percentage shall be .25% and (ii) for all periods from and after
April 1, 2000, any adjustment in the applicable Commitment Fee Percentage shall
not become effective until the first day of the first month following the date
on which the Agent and the Banks shall have received the financial statements
relating to the last day of the relevant fiscal quarter pursuant to Section
5.1(b) hereof. If financial statements of the Borrower necessary to establish
the appropriate Commitment Fee Percentage hereunder are not received by the
Agent and the Banks with respect to the relevant fiscal quarter on or prior to
the date required pursuant to Section 5.1(b) hereof, the applicable Commitment
Fee Percentage shall be determined as if Level IV Status were in effect and such
Level IV Status shall remain in effect until the first day of the first month
following the date on which the required financial statements are received by
the Agent and the Banks:
COMMITMENT FEE
PERCENTAGE
Level I Status .25%
Level II Status .25%
Level III Status .30%
Level IV Status .40%
"Commitment Letter" means that certain commitment letter dated
July 22, 1999 between Norwest and the Borrower, as the same may be amended or
modified from time to time.
"Covenant Computation Date" means the last day of each fiscal
quarter of the Borrower, commencing with the fiscal quarter ending on September
30, 1999.
"Covenant Computation Period" means the twelve (12)
consecutive calendar months immediately preceding and ending on a Covenant
Computation Date.
"Debt" of any Person means, without duplication (a) all
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes, reimbursement agreements, recourse
agreements or other similar instruments, (c) all obligations of such Person to
pay the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business, (d) all Capitalized Lease
Liabilities of such Person, (e) all debt of others secured by a lien on any
asset of such Person, whether or not such debt is assumed by such Person, (f)
all debt of others guaranteed by such other Person, (g) all obligations of such
Person to pay a specified purchase price for goods or services, whether or not
delivered or accepted (i.e., take-or-pay
E-4 Exhibit 10(i)
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and similar obligations), (h) all obligations of such Person under any interest
rate swap program or any similar agreement, arrangement or undertaking relating
to fluctuations in interest rates and (i) all obligations of such Person to
advance funds to, or purchase assets, property or services from, any other
Person in order to maintain the financial condition of such Person and (j) all
obligations of such Person under a letter of credit reimbursement agreement with
respect to letters of credit issued thereunder.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Percentage" means, as to any Bank, a fraction
determined as of the termination of the Revolving Commitments following the
occurrence of an Event of Default, the numerator of which equals the principal
amount of all Obligations owed to such Bank on such date and the denominator of
which equals the principal amount of all Obligations owed to all Banks on such
date.
"Default Rate" shall have the meaning specified in Section
2.7(c).
"EBITDA" of a Person means, with respect to the applicable
Covenant Computation Period, such Person's Pre-Tax Earnings plus its Interest
Expense and Non-Cash Charges.
"Environmental Laws" has the meaning specified in Section
4.12.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Eurodollar Advance" means any Advance which bears interest at
a rate determined by reference to a Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to an Interest
Period, the rate per annum equal to the rate (rounded up if necessary to the
nearest one-sixteenth of one percent (1/16%)) determined by the Agent in
accordance with Section 2.6 to be a rate at which U.S. dollar deposits are
offered to major banks in the London interbank eurodollar market for funds to be
made available on the first day of such Interest Period and maturing at the end
of such Interest Period, as determined by the Agent between the opening of
business and 12:00 Noon, Minneapolis, Minnesota time, on the second Business Day
prior to the beginning of such Interest Period.
"Eurodollar Funding" means any Funding which bears interest at
a rate determined by reference to a Eurodollar Rate, including Eurodollar
Advances.
"Eurodollar Rate" means, with respect to an Interest Period,
the rate obtained by adding (a) the applicable Margin to (b) the rate obtained
by dividing (i) the applicable Eurodollar Base Rate by (ii) a percentage equal
to one (1.00) minus the applicable percentage
E-5 Exhibit 10(i)
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(expressed as a decimal) prescribed by the Board of Governors of the Federal
Reserve System (or any successor thereto) for determining the maximum reserve
requirements applicable to eurodollar fundings (currently referred to as
"Eurocurrency Liabilities" in Regulation D) or any other maximum reserve
requirements applicable to a member bank of the Federal Reserve System with
respect to such eurodollar fundings.
"Event of Default" has the meaning specified in Section 7.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Facility" means the Revolving Facility or the Term Facility,
as the context requires.
"Federal Funds Rate" means at any time an interest rate per
annum equal to the weighted average of the rates for overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for such day for such transactions received by the
Agent from three Federal funds brokers of recognized standing selected by it; it
being understood that the Federal Funds Rate for any day which is not a Business
Day shall be the Federal Funds Rate for the next preceding Business Day.
"Floating Rate" means an annual rate at all times equal to the
sum of (a) the Base Rate and (b) the applicable Margin, which Floating Rate
shall change when and as the Base Rate changes.
"Floating Rate Advance" means any Advance which bears interest
at a rate determined by reference to the Floating Rate.
"Floating Rate Funding" means any Funding which bears interest
at a rate determined by reference to the Floating Rate, including Floating Rate
Advances.
"Funded Debt" of any Person means all interest bearing Debt of
such Person, and shall include all interest-bearing Debt created, assumed or
guaranteed by such Person either directly or indirectly, including obligations
secured by liens upon property of such Person and upon which such Person
customarily pays the interest, and all Capitalized Lease Liabilities.
"Funding" means a designated portion of outstanding principal
indebtedness evidenced by a Note which bears interest at a rate determined by
reference to a particular Eurodollar Rate or Floating Rate, as the case may be.
"GAAP" means generally accepted accounting principles as in
effect from time to time applied on a basis consistent with the accounting
practices applied in the financial statements of the Borrower and its
Subsidiaries referred to in Section 4.5.
E-6 Exhibit 10(i)
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"Guarantor" means Innovex Precision Components, Innovex
Southwest and each and every other domestic Subsidiary of the Borrower having
assets with an aggregate fair market value at any time in excess of $200,000 and
each and every domestic Subsidiary of a Subsidiary of the Borrower having assets
with an aggregate fair market value at any time in excess of $200,000, whether
now existing or hereafter created or acquired.
"Guarantor Security Agreement" or "Guarantor Security
Agreements" means the security agreement of a Guarantor, or all of the security
agreements of the Guarantors, collectively, as the context may require.
"Guaranty" or "Guaranties" means the guaranty of a Guarantor,
or all of the guaranties of the Guarantors, collectively, as the context may
require.
"Hazardous Substance" means any asbestos, urea-formaldehyde,
polychlorinated biphenyls, nuclear fuel or material, chemical waste, radioactive
material, explosives, known carcinogens, petroleum products and by-products and
other dangerous, toxic or hazardous pollutants, contaminants, chemicals,
materials or substances listed or identified in, or regulated by, any
Environmental Laws.
"Indemnitees" has the meaning specified in Section 9.5.
"Innovex Precision Components" means Innovex Precision
Components, Inc., a Minnesota corporation, a wholly-owned Subsidiary of the
Borrower.
"Innovex Southwest" means Innovex Southwest, Inc., a Delaware
corporation, a wholly-owned Subsidiary of the Borrower, formerly known as ADFlex
Solutions, Inc., a Delaware corporation, which is the surviving entity following
the merger of Innovex Acquisition Corp., a Delaware corporation, and ADFlex
Solutions, Inc., a Delaware corporation.
"Interest Coverage Ratio" of any Person means, with respect to
the applicable Covenant Computation Period, the ratio of (a) such Person's Cash
Flow Available for Interest to (b) such Person's Interest Expense, plus such
Person's rental expense with respect to operating leases.
"Interest Expense" of any Person means, with respect to the
applicable Covenant Computation Period, the total gross interest expense on all
Debt of such Person during such period, and shall in any event include, without
limitation and without duplication, (a) accrued interest (whether or not paid)
on all Debt, (b) the amortization of Debt discounts, (c) the amortization of all
fees payable in connection with the incurrence of Debt to the extent included in
interest expense, and (d) the interest portion of any Capitalized Lease
Expenditure (determined in accordance with GAAP).
"Interest Period" means, relative to any Eurodollar Funding,
the period beginning on (and including) the date on which such Eurodollar
Funding is made, or
E-7 Exhibit 10(i)
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continued as, or converted into, a Eurodollar Funding pursuant to Sections 2.3,
2.4 or 2.5 and shall end on (but exclude) the day which numerically corresponds
to such date one (1), two (2), three (3) or six (6) months thereafter (or, if
such month has no numerically corresponding day, on the last Business Day of
such month), as the Borrower may select in its relevant notice pursuant to
Sections 2.3, 2.4, or 2.5; provided, however, that:
(a) no more than five (5) different Interest Periods may be
outstanding at any one time with respect to a Facility;
(b) if an Interest Period would otherwise end on a day which
is not a Business Day, such Interest Period shall end on the next
following Business Day (unless such next following Business Day is the
first Business Day of a month, in which case such Interest Period shall
end on the next preceding Business Day);
(c) no Interest Period applicable to a Funding for a Facility
may end later than the applicable Maturity Date for such Facility; and
(d) in no event shall the Borrower select Interest Periods
with respect to Fundings under the Term Facility which, in the
aggregate, would require payment of funding losses under Section 2.18
in order to make payments of regularly scheduled installments of
principal under such Facility.
"Inventory" means all inventory of the Borrower, as such term
is defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or materials,
whether acquired, held or furnished for sale, for lease or under service
contracts or for manufacture or processing, and wherever located.
"Lessor's Agreement" means a Landlord's Disclaimer and Consent
entered into by a Person leasing real estate to the Borrower or a Guarantor
pursuant to which such Person makes certain agreements for the benefit of the
Agent and the Banks with respect to the locations covered thereby.
"Level I Status" means that period of time during which the
Borrower's Leverage Ratio is less than or equal to 1.75 to 1.00.
"Level II Status" means that period of time during which the
Borrower's Leverage Ratio is greater than 1.75 to 1.00, but less than or equal
to 2.25 to 1.00.
"Level III Status" means that period of time during which the
Borrower's Leverage Ratio is greater than 2.25 to 1.00, but less than or equal
to 2.75 to 1.00.
"Level IV Status" means that period of time during which the
Borrower's Leverage Ratio is greater than 2.75 to 1.00.
E-8 Exhibit 10(i)
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"Leverage Ratio" of any Person means, with respect to the
applicable Covenant Computation Date, the ratio of (a) such Person's Funded Debt
to (b) such Person's EBITDA.
"Loan Documents" means this Agreement, the Notes and the
Security Documents.
"Margin" means, with respect to computation of the applicable
interest rate on Fundings under a Facility, the increment payable by the
Borrower with respect thereto, as set forth and described in the table below,
calculated according to the Borrower's then applicable Status; provided,
however, that (i) notwithstanding the table set forth below, during the period
from the Closing Date through March 31, 2000, the applicable Margin on Fundings
under the Revolving Facility shall be 0% for Floating Rate Advances and shall be
1.25% for Eurodollar Rate Advances, (ii) notwithstanding the table set forth
below, during the period from the Closing Date through March 31, 2000, the
applicable Margin on Fundings under the Term Facility shall be 0% for Floating
Rate Advances and shall be 1.25% for Eurodollar Rate Advances, and (iii) for all
periods from and after April 1, 2000, any adjustment in the applicable Margin
shall not become effective until the first day of the first month following the
date on which the Agent and the Banks shall have received the financial
statements relating to the last day of the relevant fiscal quarter pursuant to
Section 5.1(b) hereof. If financial statements of the Borrower necessary to
establish the appropriate Margin hereunder are not received by the Agent and the
Banks with respect to the relevant fiscal quarter on or prior to the date
required pursuant to Section 5.1(b) hereof, the applicable Margin shall be
determined as if Level IV Status were in effect and such Level IV Status shall
remain in effect until the first day of the first month following the date on
which the required financial statements are received by the Agent and the Banks:
MARGIN FOR MARGIN FOR
REVOLVING FACILITY TERM FACILITY
FUNDINGS FUNDINGS
Floating Rate Eurodollar Rate Floating Rate Eurodollar Rate
Level I Status 0% 1.25% 0% 1.25%
Level II Status 0% 1.50% 0% 1.50%
Level III Status 0% 1.75% 0% 1.75%
Level IV Status .25% 2.00% .25% 2.00%
"Material Adverse Effect" means, with respect to any event or
circumstance, a material adverse effect on:
E-9 Exhibit 10(i)
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(a) the business, financial condition, operations or prospects
of the Borrower and/or any of its Subsidiaries;
(b) the ability of the Borrower or any of its Subsidiaries to
perform its obligations under any Loan Document to which it is a party;
(c) the validity, enforceability or collectibility of any Loan
Document; or
(d) the status, existence, perfection, priority or
enforceability of any lien or security interest granted to the Banks
pursuant to the Loan Documents.
"Maturity Date" means (a) September 15, 2004 with respect to
the Revolving Facility and (b) September 15, 2004 with respect to the Term
Facility.
"Net Income" of a Person means, with respect to the applicable
Covenant Computation Period, such Person's after-tax net income as determined in
accordance with GAAP, before any extraordinary or non-recurring items.
"Net Worth" of any Person means, with respect to the
applicable Covenant Computation Date, the aggregate capital and retained
earnings of such Person, as determined in accordance with GAAP.
"Non-Cash Charges" of a Person means, with respect to the
applicable Covenant Computation Period, such Person's depreciation,
amortization, deferred taxes and other non-cash charges which have the effect of
reducing Pre-Tax Earnings or Net Income, as the case may be, all as determined
in accordance with GAAP.
"Norwest" has the meaning specified in the preamble.
"Note" or "Notes" means a Revolving Note or a Term Note, or
all such Notes, collectively, as the context may require.
"Obligations" means each and every Debt, liability and other
obligation of every type and description arising under or in connection with any
of the Loan Documents which the Borrower may now or at any time hereafter owe to
a Bank or to the Banks or to the Agent, whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it is direct
or indirect, due or to become due, absolute or contingent, primary or secondary,
liquidated or unliquidated, or sole, joint, several or joint and several, and
including specifically, but not limited to, all indebtedness, liabilities and
obligations of the Borrower arising under this Agreement or evidenced by the
Notes.
"Origination Fee" has the meaning specified in Section
2.12(a).
"Outstanding Obligations" means, as of the date of
determination, the outstanding principal amount of all Obligations.
E-10 Exhibit 10(i)
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"Payee" has the meaning specified in Section 2.16.
"Percentage" means, with respect to a Facility and as to any
Bank, the percentage set forth opposite such Bank's signature on the execution
pages of this Agreement, or below such Bank's signature on any Assignment
Certificate executed by such Bank, in relation to such Facility, representing
the ratio of such Bank's Revolving Commitment or Term Commitment, as the case
may be, to the Revolving Commitment Amount or Term Commitment Amount,
respectively.
"Permitted Liens" has the meaning specified in Section 6.1.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Plan" means an employee benefit plan maintained for employees
of the Borrower or any of its Subsidiaries and covered by Title IV of ERISA.
"Pre-Tax Earnings" of any Person means, with respect to the
applicable Covenant Computation Period, such Person's Net Income, plus any
provision for income taxes, plus any extraordinary or non-cash loss or expense
paid or incurred by such Person, less any extraordinary, non-operating and
non-cash income claimed or earned by such Person, all as determined in
accordance with GAAP.
"Prime Rate" means the rate of interest publicly announced
from time to time by the Agent as its "base rate" or "prime rate", or, if the
Agent ceases to announce a rate so designated, any similar successor rate
designated by the Agent. The Prime Rate is not necessarily the most favored rate
of the Agent and the Agent may lend to its customers at rates that are at, above
or below the Prime Rate.
"Reportable Event" has the meaning assigned to that term in
Title IV of ERISA, but does not include any such event for which advance
notification to the Pension Benefit Security Corporation is waived under ERISA
or applicable regulations.
"Required Banks" means, at any time, two or more of the Banks
holding at least sixty-six and sixty-seven hundredths percent (66.67%) of the
Commitments, or, if the Commitments have been terminated or have expired, two or
more of the Banks having at least sixty-six and sixty-seven hundredths percent
(66.67%) of the Outstanding Obligations.
"Required Net Worth Amount" has the meaning specified in
Section 5.11.
"Required Payment" has the meaning specified in Section
2.15(c).
"Return" has the meaning specified in Section 2.17(b)(i).
E-11 Exhibit 10(i)
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"Revolving Advance" means a loan of funds by a Bank to the
Borrower under the Revolving Facility, including both Floating Rate Advances and
Eurodollar Advances made thereunder.
"Revolving Commitment" means, with respect to each Bank, the
amount of the Revolving Commitment set forth opposite such Bank's name on the
execution pages of this Agreement, or below such Bank's signature on an
Assignment Certificate executed by such Bank, unless such amount is reduced
pursuant to Section 2.14(a) hereof, in which event it means the amount to which
said amount is reduced pursuant thereto, or as the context may require, the
obligation of such Bank to make Revolving Advances, as contemplated in Section
2.1.
"Revolving Commitment Amount" shall mean Fifteen Million
Dollars ($15,000,000), being the maximum amount of the Revolving Commitments of
all Banks, in the aggregate, to make Revolving Advances to the Borrower pursuant
to Section 2.1, subject to reduction in accordance with Section 2.14(a).
"Revolving Commitment Termination Date" means the earlier of
(a) the Maturity Date with respect to the Revolving Facility or (b) the date on
which the Revolving Commitments are terminated pursuant to Section 7.2 or
reduced to zero pursuant to Section 2.15(a).
"Revolving Facility" means the revolving credit facility being
made available to the Borrower by the Banks pursuant to Section 2.1.
"Revolving Facility Outstanding Amount" means, as of the date
of determination, the aggregate principal amount of all outstanding Revolving
Advances.
"Revolving Note" means a promissory note of the Borrower
payable to a Bank in the amount of such Bank's Revolving Commitment, in
substantially the form of Exhibit A (as such promissory note may be amended,
extended or otherwise modified from time to time), evidencing the aggregate
indebtedness of the Borrower to such Bank resulting from such Bank's Percentage
of each Borrowing under the Revolving Facility, and also means each promissory
note accepted by such Bank from time to time in substitution therefor or in
renewal thereof.
"Security Agreement" means the Security Agreement of the
Borrower of even date herewith pursuant to which the Borrower grants the Banks a
security interest in all personal property assets of the Borrower to secure
payment of the Obligations.
"Security Documents" means the Security Agreement and the
Guarantor Security Agreements, as amended from time to time, and each and every
additional agreement entered into by the Borrower and/or any Guarantor for the
benefit of the Banks to secure payment of the Obligations.
E-12 Exhibit 10(i)
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"Status" means the financial condition of the Borrower
determined in accordance with the definitions of "Level I Status," "Level II
Status", "Level III Status" and "Level IV Status".
"Subsidiary" of a Person means any corporation, limited
liability company, partnership or other entity of which more than fifty percent
(50%) of the outstanding equity or membership interests or shares of capital
stock having general voting power under ordinary circumstances to elect a
majority of the board of directors (or other governing body) of such entity,
(irrespective of whether or not at the time stock or membership interests of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned by
such Person, by such Person and one or more Subsidiaries of such Person, or by
one or more other Subsidiaries of such Person.
"Taxes" has the meaning specified in Section 2.16.
"Term Advance" means a loan of funds by a Bank to the Borrower
under the Term Facility, including both Floating Rate Advances and Eurodollar
Advances thereunder.
"Term Commitment" means, with respect to each Bank, the amount
of the Term Commitment set forth opposite such Bank's name on the execution
pages of this Agreement, or below such Bank's signature on an Assignment
Certificate, or as the context may require, the obligation of such Bank to make
Term Advances to the Borrower under Section 2.2 hereof.
"Term Commitment Amount" means Twenty-Five Million Dollars
($25,000,000), being the maximum amount of the Term Commitments of all Banks, in
the aggregate, to make Term Advances to the Borrower pursuant to Section 2.2.
"Term Facility" means the term loan facility being made
available to the Borrower by the Banks pursuant to Section 2.2.
"Term Note" means a promissory note of the Borrower payable to
a Bank in the amount of such Bank's Term Commitment, in substantially the form
of Exhibit B (as such promissory note may be amended, extended or otherwise
modified from time to time), evidencing the aggregate indebtedness of the
Borrower to such Bank resulting from such Bank's Percentage of the Term
Facility, and also means each other promissory note accepted from time to time
in substitution therefor or in renewal thereof.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.7 (a) as the state whose laws shall
govern this Agreement, or in any other state whose laws are held to govern this
Agreement or any portion hereof.
"Year 2000 Compliant" has the meaning specified in Section
5.8.
E-13 Exhibit 10(i)
<PAGE>
ARTICLE II
CREDIT FACILITIES
Section 2.1. Commitment as to Revolving Facility. Each Bank
hereby agrees, on the terms and subject to the conditions herein set forth, to
make Revolving Advances to the Borrower from time to time during the period from
the date hereof to and including the Revolving Commitment Termination Date, in
an aggregate amount at any time outstanding not to exceed such Bank's Percentage
of each Borrowing from time to time requested by the Borrower under the
Revolving Facility; provided, however, that (a) the Revolving Facility
Outstanding Amount shall at no time exceed the Revolving Commitment Amount and
(b) no Bank's Percentage of the Revolving Facility Outstanding Amount shall at
any time exceed such Bank's Revolving Commitment. Within the above limits, the
Borrower may obtain Revolving Advances, prepay Revolving Advances in accordance
with the terms hereof and reborrow Revolving Advances in accordance with the
applicable terms and conditions of this Article II.
Section 2.2. Commitment as to Term Facility. Each Bank hereby
agrees, on the terms and subject to the conditions herein set forth, to make a
single Term Advance to the Borrower on the Closing Date in an amount equal to
such Bank's Term Commitment. The Term Facility is not a revolving facility and,
once the initial Term Advance is made by a Bank, such Bank shall have no further
obligation to make any additional Term Advances to the Borrower under the Term
Facility, whether or not any amounts are repaid thereunder.
Section 2.3. Procedures for Borrowing Under the Revolving
Facility. Each Borrowing under the Revolving Facility shall be funded by the
Banks as either Floating Rate Advances or Eurodollar Advances, as the Borrower
shall specify in the related notice of proposed Borrowing. Floating Rate
Advances and Eurodollar Advances may be outstanding at the same time. It is
understood, however, that (i) in the case of a Borrowing which is to bear
interest at a Floating Rate, the principal amount of the Borrowing shall be in
an amount equal to or greater than $500,000 or a higher integral multiple of
$100,000 and (ii) in the case of a Borrowing which is to bear interest at a
Eurodollar Rate, the principal amount of the Borrowing shall be in an amount
equal to $1,000,000 or a higher integral multiple of $100,000. The Borrower
shall give notice to the Agent of each proposed Borrowing not later than 10:30
a.m., Minneapolis, Minnesota time, on a Business Day which, in the case of a
Borrowing that is to bear interest initially at a Floating Rate, is the proposed
date of such Borrowing or, in the case of a Borrowing that is to bear interest
initially at a Eurodollar Rate, is at least two (2) Business Days prior to the
proposed date of such Borrowing. Each such notice shall be effective upon
receipt by the Agent, shall be in writing or by telephone or telecopy
transmission, to be confirmed in writing by the Borrower if so requested by the
Agent (in the form of Exhibit C), and shall specify whether the Borrowing is to
bear interest initially at a Floating Rate or a Eurodollar Rate, and in the case
of a Borrowing that is to bear interest initially at a Eurodollar Rate, shall
specify the Interest Period to be applicable thereto. Promptly upon receipt of
such notice (but in no event later than 12:00 Noon,
E-14 Exhibit 10(i)
<PAGE>
Minneapolis, Minnesota time, with respect to a Floating Rate Advance, and the
close of business, with respect to a Eurodollar Advance, in each case on the
Business Day of receipt of such notice), the Agent shall advise each Bank of the
proposed Borrowing. At or before 2:00 p.m., Minneapolis, Minnesota time, on the
date of the requested Borrowing, each Bank shall provide the Agent at the
principal office of the Agent in Minneapolis, Minnesota with immediately
available funds covering such Bank's Percentage of such Borrowing. Subject to
satisfaction of the conditions precedent set forth in Article III with respect
to such Borrowing, the Agent shall pay over such funds to the Borrower prior to
the close of business on the date of the requested Borrowing.
Section 2.4. Converting Floating Rate Fundings to Eurodollar
Fundings; Procedures. So long as no Default or Event of Default shall exist, the
Borrower may convert all or any part of any outstanding Floating Rate Funding
into a Eurodollar Funding by giving notice to the Agent of such conversion not
later than 10:30 a.m., Minneapolis, Minnesota time, on a Business Day which is
at least two (2) Business Days prior to the date of the requested conversion.
Each such notice shall be irrevocable, shall be effective upon receipt by the
Agent, shall be in writing or by telephone or telecopy transmission, to be
confirmed in writing by the Borrower if so requested by the Agent (in the form
of Exhibit D), shall specify the date and amount of such conversion, the total
amount of the Funding to be so converted and the Interest Period therefor. Each
conversion of a Funding shall be on a Business Day, and the aggregate amount of
each such conversion of a Floating Rate Funding to a Eurodollar Funding shall be
in an amount equal to $1,000,000 or a higher integral multiple of $100,000.
Section 2.5. Procedures at End of an Interest Period. Unless
the Borrower requests a new Eurodollar Funding in accordance with the procedures
set forth below, or prepays the principal of an outstanding Eurodollar Funding
at the expiration of an Interest Period, each Bank shall automatically and
without request of the Borrower convert each Eurodollar Funding to a Floating
Rate Funding on the last day of the relevant Interest Period. So long as no
Default or Event of Default shall exist, the Borrower may cause all or any part
of any outstanding Eurodollar Funding to continue to bear interest at a
Eurodollar Rate after the end of the then applicable Interest Period by
notifying the Agent not later than 10:30 a.m., Minneapolis, Minnesota time, on a
Business Day which is at least two (2) Business Days prior to the first day of
the new Interest Period. Each such notice shall be in writing or by telephone or
telecopy transmission, to be confirmed in writing by the Borrower if so
requested by the Agent (in the form of Exhibit E), shall be irrevocable,
effective when received by the Agent, and shall specify the first day of the
applicable Interest Period, the amount of the expiring Eurodollar Funding to be
continued and the Interest Period therefor. Each new Interest Period shall begin
on a Business Day and the amount of each Funding bearing a new Eurodollar Rate
shall be in an amount equal to $1,000,000 or a higher integral multiple of
$100,000.
Section 2.6. Setting and Notice of Rates. The applicable
Eurodollar Rate for each Interest Period shall be determined by the Agent on the
second Business Day prior to
E-15 Exhibit 10(i)
<PAGE>
the beginning of such Interest Period, whereupon notice thereof (which may be by
telephone) shall be given by the Agent to the Borrower and each Bank. Each such
determination of the applicable Eurodollar Rate shall be conclusive and binding
upon the parties hereto, in the absence of demonstrable error. The Agent, upon
written request of the Borrower or any Bank, shall deliver to the Borrower or
such requesting Bank a statement showing the computations used by the Agent in
determining the applicable Eurodollar Rate hereunder.
Section 2.7. Interest on Obligations. The Borrower hereby
agrees to pay interest on the unpaid principal amount of each unpaid Obligation
for the period commencing on the date of this Agreement until the unpaid
principal amount thereof is paid in full, in accordance with the following:
(a) Floating Rate Fundings. Subject to subsection (c) below,
while any outstanding principal of a Note constitutes a Floating Rate
Funding, the outstanding principal balance thereof shall bear interest
at an annual rate at all times equal to the Floating Rate applicable to
such Floating Rate Funding.
(b) Eurodollar Fundings. Subject to subsection (c) below,
while any outstanding principal of a Note constitutes a Eurodollar
Funding, the outstanding principal balance thereof shall bear interest
for the applicable Interest Period at an annual rate equal to the
Eurodollar Rate established with respect such Eurodollar Funding in
accordance with Section 2.3, 2.4 or 2.5 hereof.
(c) Default Rate. From and after the occurrence of an Event of
Default and continuing thereafter until such Event of Default shall be
remedied to the written satisfaction of the Required Banks, the
outstanding principal balance of each Note shall bear interest, until
paid in full, at a rate equal to the sum of (i) the interest rate
otherwise in effect with respect to such outstanding principal and (ii)
two percent (2%). In addition, all fees, indemnification obligations
and other Obligations not paid when due hereunder shall bear interest,
until paid in full, at an annual rate equal to the sum of (i) the
Floating Rate (with the then applicable Revolving Facility Margin) and
(ii) two percent (2%) (each rate described in this subsection (c)
herein a "Default Rate").
Section 2.8. Obligation to Repay Advances; Representations.
The Borrower shall be obligated to repay all Advances under this Article II
notwithstanding the failure of the Agent to receive any written request therefor
or written confirmation thereof and notwithstanding the fact that the person
requesting the same was not in fact authorized to do so. Any request for a
Borrowing under Section 2.3, whether written, telephonic, telecopy or otherwise,
shall be deemed to be a representation by the Borrower that (a) the amount of
the requested Borrowing, when added to the Revolving Facility Outstanding
Amount, would not exceed the Revolving Commitment Amount and (b) the statements
set forth in Section 3.2 are correct as of the time of the request.
E-16 Exhibit 10(i)
<PAGE>
Section 2.9. Notes; Amortization.
(a) Revolving Facility. All Revolving Advances made by a Bank
hereunder shall be evidenced by and repayable in accordance with a
Revolving Note issued by the Borrower to such Bank. The aggregate
unpaid principal amount of each Revolving Note shall bear interest at
the applicable Floating Rate unless a Eurodollar Rate shall become
applicable thereto pursuant to Sections 2.3, 2.4 or 2.5, and shall be
payable on the applicable Maturity Date with respect thereto or earlier
in accordance with Section 7.2.
(b) Term Facility. All Term Advances made by a Bank hereunder
shall be evidenced by and repayable in accordance with a Term Note
issued by the Borrower to such Bank. The aggregate unpaid principal
amount of each Term Note shall bear interest at the applicable Floating
Rate unless a Eurodollar Rate shall become applicable thereto pursuant
to Sections 2.3, 2.4 or 2.5, shall be payable in quarterly
installments, commencing on October 1, 2000, and continuing on the
first day of each January, April, July and October thereafter until the
final Maturity Date, when all unpaid principal thereof shall be finally
due and payable. Principal due with respect to the Term Facility on
each such quarterly installment date shall be in an aggregate amount of
One Million Five Hundred Sixty-Two Thousand Five Hundred Dollars
($1,562,500). In addition to the required quarterly installments of
principal on the Term Note described above, in the event that the
Borrower or any Subsidiary sells the stock of any Subsidiary or the
Borrower and/or its Subsidiaries sell any assets (other than the sale
of Inventory in the ordinary course of business) or the Borrower and/or
its Subsidiaries engage in any similar transactions which result in net
cash proceeds received by the Borrower and/or its Subsidiaries and the
aggregate amount of net cash proceeds received by the Borrower and/or
its Subsidiaries from all such sales and transactions in any fiscal
year of the Borrower exceed $5,000,000, then, on the last day of the
fiscal quarter in which such net cash proceeds for such fiscal year
exceeds $5,000,000 and on the last day of each subsequent fiscal
quarter of such fiscal year in which such net cash proceeds are
received, the Borrower shall make a prepayment of the unpaid principal
balance of the Term Note in an amount equal to one hundred percent
(100%) of such net cash proceeds in excess of such $5,000,000 annual
amount. Any mandatory prepayment of the Term Note occasioned by any
such sale of stock, assets or other similar transactions shall be in
addition to the required quarterly installments of principal of the
Term Note and shall be applied against such remaining quarterly
installments of principal of the Term Note in inverse order of their
maturity. The Borrower acknowledges that Article VI of this Agreement
contains provisions which restrict the ability of the Borrower and its
Subsidiaries to sell stock, to sell assets and to engage in similar
transactions without the prior written consent of the Required Banks
and the Borrower acknowledges that it must obtain such prior written
consent before engaging in any restricted sale or similar transaction.
E-17 Exhibit 10(i)
<PAGE>
Section 2.10. Interest Due Dates. Accrued interest on each
Eurodollar Funding shall be payable on the last day of the Interest Period
relating to such Eurodollar Funding; provided, however, that if any Interest
Period is longer than three (3) months, interest shall be payable in arrears (3)
three months, or a whole multiple thereof, after the first day of such Interest
Period and on the last day of the Interest Period. Accrued interest on each
Floating Rate Funding shall be payable in arrears on the last day of each
calendar quarter and at maturity or conversion of such Floating Rate Funding to
a Eurodollar Funding.
Section 2.11. Computation of Interest and Fees. Interest
accruing on the Notes and all other fees described in Section 2.13 shall be
computed on the basis of actual number of days elapsed in a year of three
hundred sixty (360) days.
Section 2.12. Fees. The Borrower hereby agrees to pay fees to
the Agent and the Banks, commencing on the date hereof and continuing until all
Obligations are paid in full, in accordance with the following:
(a) Origination Fee. The Borrower agrees to pay to the Agent a
non-refundable origination fee (the "Origination Fee") in accordance
with the fee letter between the Borrower and the Agent.
(b) Commitment Fee. The Borrower agrees to pay to the Agent
for the pro rata account of the Banks a commitment fee (the "Commitment
Fee") computed at the rate of the applicable Commitment Fee Percentage
per annum on the daily average amount by which the Revolving Commitment
Amount exceeds the Revolving Facility Outstanding Amount, from the
Closing Date to and including the Revolving Commitment Termination
Date, payable quarterly in arrears on the last day of each September,
December, March and June, commencing September 30, 1999. Any such
Commitment Fee remaining unpaid on the Revolving Commitment Termination
Date shall be due and payable on such date. The Commitment Fee shall be
shared by the Banks on the basis of their respective Percentages of the
Revolving Facility.
(c) Administrative Fee. The Borrower agrees to pay the Agent,
for the Agent's sole account, an annual administrative fee (the
"Administrative Fee") equal to the greater of (A) $2,500 or (B) $2,500
plus the product of (x) $2,500 and (y) the number of Banks (other than
the Agent) which are a party to this Agreement, from the first
anniversary of the Closing Date until the date on which the Commitments
are terminated and all of the Notes are paid in full, payable in
advance, with the first annual Administrative Fee being due and payable
on the first anniversary of the Closing Date and with subsequent
Administrative Fees being due and payable on each anniversary of such
date thereafter. The Administrative Fee shall be adjusted (on an
annualized basis) from time to time over the course of a year if and to
the extent Banks are added to or deleted from this Agreement.
E-18 Exhibit 10(i)
<PAGE>
(d) Audit Fees. Following the occurrence of an Event of
Default, the Borrower agrees to pay to the Agent, on written demand,
reasonable fees charged by the Agent in connection with any audits or
inspections by the Agent (or by the employees, agents, consultants or
auditors of the Agent) of any Collateral or the operations or
businesses of the Borrower and its Subsidiaries, together with actual
out-of-pocket costs and expenses incurred in conducting any such audit
or inspection.
Section 2.13. Use of Proceeds. The Proceeds of each Borrowing
under the Revolving Facility shall be used by the Borrower solely for its
working capital purposes. The Proceeds of the Term Facility shall be used by the
Borrower to finance a portion of the purchase price paid by the Borrower for the
acquisition of Innovex Southwest.
Section 2.14. Voluntary Reduction or Termination of the
Commitments; Prepayments.
(a) Reduction or Termination of Revolving Commitments. The
Borrower, from time to time upon not less than five (5) Business Days'
prior written notice to the Agent, may permanently reduce the Revolving
Commitment Amount; provided, however, that no such reduction shall
reduce the Revolving Commitment Amount to an amount less than the
Revolving Facility Outstanding Amount. Any such voluntary reduction
shall be pro rata as to all Revolving Commitments according to each
Bank's Percentage of the Revolving Facility and shall be in an
aggregate amount equal to $5,000,000 or a higher integral multiple of
$1,000,000. The Borrower at any time prior to the Revolving Commitment
Termination Date may terminate the Revolving Commitments by (i)
providing to the Agent not less than five (5) Business Days prior
written notice of its intention to so terminate the Revolving
Commitments and (ii) making payment in full of all principal and
interest on the Revolving Notes.
(b) Prepayments. The Borrower from time to time may
voluntarily prepay the Notes in whole or in part. In the event of any
voluntary prepayment hereunder (i) any prepayment of a Facility shall
be applied against outstanding Advances of each Bank under that
Facility pro rata according to each Bank's Percentage of that Facility,
(ii) each prepayment of the Notes shall be made to the Agent not later
than 12:00 Noon, Minneapolis, Minnesota time, on a Business Day, and
funds received after that hour shall be deemed to have been received by
the Agent on the next following Business Day, (iii) each partial
prepayment of Fundings which, at the time of such prepayment, bear
interest at a Eurodollar Rate shall be accompanied by accrued interest
on such partial prepayment through the date of prepayment and
additional compensation calculated in accordance with Section 2.18,
(iv) each partial prepayment of Fundings with respect to a Facility
which, at the time of such prepayment, bear interest at a Eurodollar
Rate, shall be in an aggregate amount equal to the applicable minimum
Funding amount specified in Section 2.5 for such Facility and, after
application of any such prepayment, shall not result in a Eurodollar
Funding remaining outstanding in an amount less than such minimum
Funding amount, (v)
E-19 Exhibit 10(i)
<PAGE>
each partial prepayment of Fundings with respect to a Facility which,
at the time of such prepayment, bear interest at a Floating Rate, shall
be in an aggregate amount equal to $500,000 or a higher integral
multiple of $100,000, unless (in either case) the aggregate outstanding
balance of all Notes under the Facility being prepaid is less than such
minimum Funding amount, in which event any such prepayment may be in
such lesser amount, (vi) unless notified by the Borrower in writing to
the contrary, the Agent shall apply all partial prepayments to
outstanding Revolving Advances and, if no Revolving Advances are then
outstanding, to outstanding Term Advances and (vii) each partial
prepayment of the Term Facility shall be applied to principal
installments becoming due under such Facility in inverse order of their
respective maturities.
Section 2.15. Payments.
(a) Making of Payments. All payments of principal of and
interest due with respect to a Facility shall be made to the Agent for
the account of the Banks pro rata according to their respective
Percentages of such Facility; provided, that any such payments so
received by the Agent after the termination of the Revolving
Commitments following the occurrence of an Event of Default hereunder
shall be allocated among the Banks pro rata according to their Default
Percentages. All payments of fees pursuant to Section 2.12 shall be
made to the Agent (i) for the account of the Agent as to all amounts
specified in Section 2.12 as payable for the exclusive account of the
Agent and (ii) for the account of the Banks pro rata according to their
respective Percentages as to all fees specified in Section 2.12 as
payable for the account of the Banks. All payments to the Agent shall
be made to the Agent at its office in Minneapolis, Minnesota, not later
than 12:00 Noon, Minneapolis, Minnesota time, on the date due, in
immediately available funds, and funds received after that hour shall
be deemed to have been received by the Agent on the next following
Business Day. The Borrower hereby authorizes the Agent to charge the
Borrower's demand deposit account maintained with the Agent (or with
any other Bank) for the amount of any Obligation on its due date, but
the Agent's failure to so charge any such account shall in no way
affect the obligation of the Borrower to make any such payment. The
Agent shall remit to each Bank in immediately available funds on the
same Business Day as received by the Agent its share of all such
payments received by the Agent for the account of such Bank. If the
Agent fails to remit any payment to any Bank when required hereby, the
Agent shall pay interest on demand to that Bank for each day during the
period commencing on the date such remittance was due until the date
such remittance is made at an annual rate equal to the Federal Funds
Rate for such day. All payments under Section 2.16, 2.17 or 2.18 shall
be made by the Borrower directly to the Bank entitled thereto.
(b) Effect of Payments. Each payment by the Borrower to the
Agent for the account of any Bank pursuant to Section 2.15(a) shall be
deemed to constitute payment by the Borrower directly to such Bank,
provided, however, that in the event
E-20 Exhibit 10(i)
<PAGE>
any such payment by the Borrower to the Agent is required to be
returned to the Borrower for any reason whatsoever, then the Borrower's
obligation to such Bank with respect to such payment shall be deemed to
be automatically reinstated.
(c) Distributions by Agent. Unless the Agent shall have been
notified by a Bank or the Borrower prior to the date on which such Bank
or the Borrower is scheduled to make payment to the Agent of (in the
case of a Bank) the proceeds of an Advance to be made by it hereunder
or (in the case of the Borrower) a payment to the Agent for the account
of one or more of the Banks hereunder (such payment by a Bank or the
Borrower (as the case may be) being herein called a "Required
Payment"), which notice shall be effective upon receipt, that it does
not intend to make the Required Payment to the Agent, the Agent may
assume that the Required Payment has been made and may, in reliance
upon such assumption (but shall not be required to), make the amount
thereof available to the intended recipient(s) on such date and, if
such Bank or the Borrower (as the case may be) has not in fact made the
Required Payment to the Agent, the recipient(s) of such payment shall,
on demand, repay to the Agent the amount so made available together
with interest thereon for each day during the period commencing on the
date such amount was so made available by the Agent until the date the
Agent recovers such amount at a rate (i) equal to the Federal Funds
Rate for such day, in the case of a Required Payment owing by a Bank,
or (ii) equal to the applicable rate of interest as provided in this
Agreement, in the case of a Required Payment owing by the Borrower.
(d) Setoff. The Borrower agrees that each Bank, subject to
such Bank's sharing obligations set forth in Section 8.6, shall have
all rights of setoff and bankers' lien provided by applicable law, and
in addition thereto, the Borrower agrees that if at any time any
Obligation is due and owing by the Borrower under this Agreement or the
other Loan Documents to any Bank at a time when an Event of Default has
occurred and is continuing hereunder, any Bank may apply any and all
balances, credits, and deposits, accounts or moneys of the Borrower
then or thereafter in the possession of such Bank (excluding, however,
any trust or escrow accounts held by the Borrower for the benefit of
any third party) to the payment thereof.
(e) Due Date Extension. If any payment of principal of or
interest on any Floating Rate Funding or any fees payable hereunder
falls due on a day which is not a Business Day, then such due date
shall be extended to the next following Business Day, and (in the case
of principal) additional interest shall accrue and be payable for the
period of such extension.
(f) Application of Payments. Except as otherwise provided
herein, so long as no Default or Event of Default has occurred and is
continuing hereunder, each payment received from the Borrower shall be
applied to such Obligation as the Borrower shall specify by notice to
be received by the Agent on or before the date of such payment, or in
the absence of such notice, as the Agent shall determine in its
E-21 Exhibit 10(i)
<PAGE>
discretion. Concurrently with each remittance to any Bank of its
appropriate share of any such payment (based upon such Bank's
Percentage of the Facility to which such payment relates), the Agent
shall advise such Bank as to the application of such payment. Except as
otherwise provided in Article VIII, after the termination of the
Revolving Commitments following the occurrence of a Default or Event of
Default, all payments received by the Agent or any Bank from the
Borrower shall be shared on the basis of each Bank's Default Percentage
thereof.
Section 2.16. Taxes. All payments made by the Borrower to the
Agent or any Bank (herein any "Payee") under or in connection with this
Agreement or the Notes shall be made without any setoff or other counterclaim,
and shall be free and clear of and without deduction for or on account of any
present or future taxes now or hereafter imposed by any governmental or other
authority, except to the extent that any such deduction or withholding is
compelled by law. As used herein, the term "Taxes" shall include all income,
excise and other taxes of whatever nature (other than taxes generally assessed
on the overall net income of a Payee by the government or other authority of the
country, state or political subdivision in which such Payee is incorporated or
in which the office through which such Payee is acting is located) as well as
all levies, imposts, duties, charges, or fees of whatever nature. "Taxes" shall
not include, however, any foreign withholding taxes or similar deductions
imposed solely as a result of a Bank's election to fund an Advance through a
foreign office of such Bank. If the Borrower is compelled by law to make any
deductions or withholdings on account of any Taxes (including any foreign
withholding) it will:
(a) pay to the relevant authorities the full amount required
to be so withheld or deducted;
(b) pay such additional amounts (including, without
limitation, any penalties, interest or expenses) as may be necessary in
order that the net amount received by the Payee after such deductions
or withholdings (including any required deduction or withholding on
such additional amounts) shall equal the amount the Payee would have
received had no such deductions or withholdings been made; and
(c) promptly forward to the Agent (for delivery to the
appropriate Payee) an official receipt or other documentation
satisfactory to the Agent evidencing such payment to such authorities.
The amount that the Borrower shall be required to pay to any Payee pursuant to
the foregoing clause (b) shall be reduced, to the extent permitted by applicable
law, by the amount of any offsetting tax benefit which such Payee receives as
the result of the Borrower's payment to the relevant authorities as reasonably
determined by such Payee; provided, however, that if such Payee shall
subsequently determine that it has lost the benefit of all or a portion of such
tax benefit, the Borrower shall promptly remit to such Payee the amount
certified by such Payee to be the amount necessary to restore such Payee to the
position it would have been in if no payment had been made pursuant to this
sentence. If any Taxes otherwise payable by
E-22 Exhibit 10(i)
<PAGE>
the Borrower pursuant to the foregoing are directly asserted against a Payee,
such Payee may pay such taxes and the Borrower promptly shall reimburse such
Payee to the full extent otherwise required under this Section 2.16. The
obligations of the Borrower under this Section 2.16 shall survive any
termination of this Agreement.
If circumstances arise in respect of any Bank which would, or
would upon the giving of notice, result in any liability of the Borrower under
this Section 2.16 then, without in any way limiting, reducing or otherwise
qualifying the Borrower's obligations under this Section 2.16 such Bank shall
promptly, upon becoming aware of the same, notify the Agent and the Borrower
thereof and shall, in consultation with the Agent and the Borrower and to the
extent that it can do so without, in its reasonable judgment, disadvantaging
itself, take such reasonable steps as may be available to it to mitigate the
effects of such circumstances (including, without limitation, the designation of
an alternate office or the transfer of its Eurodollar Fundings to another
office). If and so long as a Bank has been unable to take, or has not taken,
steps reasonably acceptable to the Borrower to mitigate the effect of the
circumstances in question, such Bank shall be obliged, at the request of the
Borrower, to assign all its rights and obligations hereunder to another Person
designated by the Borrower with the approval of the Agent (which shall not be
unreasonably withheld) which is willing to participate in the Revolving Facility
in place of such Bank; provided that such Person satisfies all of the
requirements of this Agreement, including, but not limited to, providing the
forms and documents required by Section 8.14 and any such Person shall cover all
costs incurred in connection with effecting such replacement.
Section 2.17. Increased Costs; Capital Adequacy; Funding
Exceptions.
(a) Increased Costs on Eurodollar Advances. If Regulation D of
the Board of Governors of the Federal Reserve System or after the date
of this Agreement the adoption of any applicable law, rule or
regulation, or any change in any existing law, or any change in the
interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by a Bank with any request or
directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall:
(i) subject a Bank to or cause the withdrawal or
termination of any exemption previously granted to a Bank with
respect to, any tax, duty or other charge with respect to its
Eurodollar Fundings or its obligation to make Eurodollar
Fundings, or shall change the basis of taxation of payments to
a Bank of the principal of or interest under this Agreement in
respect of its Eurodollar Fundings or its obligation to make
Eurodollar Fundings (except for changes in the rate of tax on
the overall net income of a Bank imposed by the jurisdictions
in which a Bank's principal executive office is located); or
E-23 Exhibit 10(i)
<PAGE>
(ii) impose, modify or deem applicable any reserve
(including, without limitation, any reserve imposed by the
Board of Governors of the Federal Reserve System, but
excluding any reserve included in the determination of
interest rates pursuant to Section 2.6), special deposit or
similar requirement against assets of, deposits with or for
the account of, or credit extended by, a Bank; or
(iii) impose on a Bank any other condition affecting
its making, maintaining or funding of its Eurodollar Fundings
or its obligation to make Eurodollar Fundings;
and the result of any of the foregoing is to increase the cost to an
affected Bank of making or maintaining any Eurodollar Funding, or to
reduce the amount of any sum received or receivable by such Bank under
this Agreement or under its Notes with respect to a Eurodollar Funding,
then the affected Bank will notify the Borrower and the Agent of such
increased cost and within fifteen (15) days after demand by such Bank
(which demand shall be accompanied by a statement setting forth the
basis of such demand) the Borrower shall pay to such Bank such
additional amount or amounts as will compensate the Bank for such
increased cost or such reduction; provided, however, that no such
increased cost or such reduction shall be payable by the Borrower for
any period longer than forty-five (45) days prior to the date on which
notice thereof is delivered to the Borrower. Each Bank will promptly
notify the Borrower of any event of which it has knowledge, occurring
after the date hereof, which will entitle such Bank to compensation
pursuant to this Section 2.17. If the Borrower receives notice from a
Bank of any event which will entitle such Bank to compensation pursuant
to this Section 2.17 the Borrower may prepay any then outstanding
Eurodollar Fundings or notify the affected Bank that any pending
request for a Eurodollar Funding shall be deemed to be a request for a
Floating Rate Funding, in each case subject to the provisions of
Section 2.18.
(b) Capital Adequacy. If a Bank determines at any time that
such Bank's Return has been reduced as a result of any Capital Adequacy
Rule Change, such Bank may require the Borrower to pay to such Bank the
amount necessary to restore such Bank's Return to what it would have
been had there been no Capital Adequacy Rule Change. For purposes of
this Section 2.17b), the following definitions shall apply:
(i) "Return", for any calendar quarter or shorter
period, means the percentage determined by dividing (A) the
sum of interest and ongoing fees earned by a Bank under this
Agreement during such period by (B) the average capital such
Bank is required to maintain during such period as a result of
its being a party to this Agreement, as determined by such
Bank based upon its total capital requirements and a
reasonable attribution formula that takes account of the
Capital Adequacy Rules then in effect. Return may be
calculated for a Bank for each calendar quarter and for the
shorter period
E-24 Exhibit 10(i)
<PAGE>
between the end of a calendar quarter and the date of
termination in whole of this Agreement.
(ii) "Capital Adequacy Rule" means any law, rule,
regulation or guideline regarding capital adequacy that
applies to a Bank, or the interpretation thereof by any
governmental or regulatory authority. Capital Adequacy Rules
include rules requiring financial institutions to maintain
total capital in amounts based upon percentages of outstanding
loans, binding loan commitments and letters of credit.
(iii) "Capital Adequacy Rule Change" means any change
in any Capital Adequacy Rule occurring after the date of this
Agreement, but does not include any changes in applicable
requirements that at the date hereof are scheduled to take
place under the existing Capital Adequacy Rules or any
increases in the capital that a Bank is required to maintain
to the extent that the increases are required due to a
regulatory authority's assessment of such Bank's financial
condition.
The initial notice sent by a Bank shall be sent as promptly as
practicable after such Bank learns that its Return has been reduced,
shall include a demand for payment of the amount necessary to restore
such Bank's Return for the quarter in which the notice is sent, and
shall state in reasonable detail the cause for the reduction in such
Bank's Return and such Bank's calculation of the amount of such
reduction. Thereafter, a Bank may send a new notice during each
calendar quarter setting forth the calculation of the reduced Return
for that quarter and including a demand for payment of the amount
necessary to restore such Bank's Return for that quarter. A Bank's
calculation in any such notice shall be conclusive and binding absent
demonstrable error.
(c) Basis for Determining Interest Rate Inadequate or Unfair.
If with respect to any Interest Period:
(i) the Agent determines that, or the Required Banks
determine and advise the Agent that, deposits in U.S. dollars
(in the applicable amounts) are not being offered in the
London interbank eurodollar market for such Interest Period;
or
(ii) the Agent otherwise determines, or the Required
Banks determine and advise the Agent (which determination
shall be binding and conclusive on all parties), that by
reason of circumstances affecting the London interbank
eurodollar market adequate and reasonable means do not exist
for ascertaining the applicable Eurodollar Rate; or
E-25 Exhibit 10(i)
<PAGE>
(iii) the Agent determines, or the Required Banks
determine and advise the Agent, that the Eurodollar Rate as
determined by the Agent will not adequately and fairly reflect
the cost to the Banks of maintaining or funding a Eurodollar
Funding for such Interest Period, or that the making or
funding of Eurodollar Fundings has become impracticable as a
result of an event occurring after the date of this Agreement
which in the opinion of such Banks materially affects such
Eurodollar Fundings;
then the Agent shall promptly notify the affected parties and (A) in
the event of any occurrence described in the foregoing clause (i) the
Borrower shall enter into good faith negotiations with each affected
Bank in order to determine an alternate method to determine the
Eurodollar Rate for such Bank, and during the pendency of such
negotiations with any Bank, such Bank shall be under no obligation to
make any new Eurodollar Fundings, and (B) in the event of any
occurrence described in the foregoing clauses (ii) or (iii), for so
long as such circumstances shall continue, no Bank shall be under any
obligation to make any new Eurodollar Fundings.
(d) Illegality. In the event that any change in (including the
adoption of any new) applicable laws or regulations, or any change in
the interpretation of applicable laws or regulations by any
governmental authority, central bank, comparable agency or any other
regulatory body charged with the interpretation, implementation or
administration thereof, or compliance by a Bank with any request or
directive (whether or not having the force of law) of any such
authority, central bank, comparable agency or other regulatory body,
should make it or, in the good faith judgment of the affected Bank,
shall raise a substantial question as to whether it is unlawful for
such Bank to make, maintain or fund Eurodollar Fundings, then (i) the
affected Bank shall promptly notify the Borrower and the Agent, (ii)
the obligation of the affected Bank to make, maintain or convert into
Eurodollar Fundings shall, upon the effectiveness of such event, be
suspended for the duration of such unlawfulness, and (iii) for the
duration of such unlawfulness, any notice by the Borrower pursuant to
Sections 2.3, 2.4 or 2.5 requesting the affected Bank to make or
convert into Eurodollar Fundings shall be construed as a request to
make or to continue making Floating Rate Fundings.
(e) Procedures to Mitigate. If circumstances arise in respect
of any Bank which would or would upon the giving of notice result in
any liability of the Borrower under this Section 2.17 then, without in
any way limiting, reducing or otherwise qualifying the Borrower's
obligations under this Section 2.17, such Bank shall promptly, upon
becoming aware of the same, notify the Agent and the Borrower thereof
and shall, in consultation with the Agent and the Borrower and to the
extent that it can do so without, in its reasonable judgment,
disadvantaging itself, take such reasonable steps as may be available
to it to mitigate the effects of such circumstances (including, without
limitation, the designation of an alternate office or the transfer of
E-26 Exhibit 10(i)
<PAGE>
its Eurodollar Fundings to another office). If and so long as a Bank
has been unable to take, or has not taken, steps reasonably acceptable
to the Borrower to mitigate the effect of the circumstances in
question, such Bank shall be obliged, at the request of the Borrower,
to assign all its rights and obligations hereunder to another Person
designated by the Borrower with the approval of the Agent (which shall
not be unreasonably withheld) and willing to participate in the
Revolving Facility in place of such Bank; provided that such Person
satisfies all of the requirements of this Agreement, including, but not
limited to, providing the forms and documents required by Section 8.14
and any such Person shall cover all costs incurred in connection with
effecting such replacement.
Section 2.18. Funding Losses. The Borrower hereby agrees that
upon demand by any Bank (which demand shall be accompanied by a statement
setting forth the basis for the calculations of the amount being claimed) the
Borrower will indemnify such Bank against any loss or expense which such Bank
may have sustained or incurred (including, without limitation, any net loss or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such Bank to fund or maintain Eurodollar Fundings) or
which such Bank may be deemed to have sustained or incurred, as reasonably
determined by such Bank, (i) as a consequence of any failure by the Borrower to
make any payment when due of any amount due hereunder in connection with any
Eurodollar Fundings, (ii) due to any failure of the Borrower to borrow or
convert any Eurodollar Fundings on a date specified therefor in a notice thereof
or (iii) due to any payment or prepayment of any Eurodollar Funding on a date
other than the last day of the applicable Interest Period for such Eurodollar
Funding. For this purpose, all notices under Sections 2.3, 2.4 and 2.5 shall be
deemed to be irrevocable.
Section 2.19. Right of Banks to Fund through Other Offices.
Each Bank, if it so elects, may fulfill its agreements hereunder with respect to
any Eurodollar Funding by causing a foreign branch or affiliate of such Bank to
make such Eurodollar Funding; provided, that in such event the obligation of the
Borrower to repay such Eurodollar Funding shall nevertheless be to such Bank and
such Eurodollar Funding shall be deemed held by such Bank for the account of
such branch or affiliate.
Section 2.20. Discretion of Banks as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, each Bank shall
be entitled to fund and maintain all or any part of its Eurodollar Fundings in
any manner it deems fit, it being understood, however, that for the purposes of
this Agreement (specifically including, without limitation, Section 2.18 hereof)
all determinations hereunder shall be made as if each Bank had actually funded
and maintained each Eurodollar Funding during each Interest Period for such
Eurodollar Funding through the purchase of deposits having a maturity
corresponding to such Interest Period and bearing an interest rate equal to the
appropriate Eurodollar Rate for such Interest Period.
E-27 Exhibit 10(i)
<PAGE>
Section 2.21. Conclusiveness of Statements; Survival of
Provisions. Determinations and statements of a Bank pursuant to Section 2.16,
2.17, or 2.18 shall be conclusive absent demonstrable error. Each Bank may use
reasonable averaging and attribution methods in determining compensation
pursuant to such Sections 2.16, 2.17 or 2.18 and the provisions of Sections
2.16, 2.17 and 2.18 shall survive termination of this Agreement.
ARTICLE III
CONDITIONS OF LENDING
Section 3.1. Conditions Precedent to the Initial Advance. The
obligation of the Banks to fund the initial Advances is subject to the condition
precedent that the Agent shall have received the following, each in form and
substance satisfactory to the Agent:
(a) The Notes, properly executed on behalf of the Borrower.
(b) The Guaranties, each properly executed on behalf of the
appropriate Guarantor.
(c) The Security Documents, properly executed on behalf of the
Borrower and the Guarantors.
(d) Financing statements sufficient when filed to perfect the
security interests granted under the Security Documents, to the extent
such security interests are capable of being perfected by filing.
(e) A true and correct copy of the lease between Innovex
Southwest and TL Properties, Inc. pursuant to which Innovex Southwest
is leasing the facilities in which it operates in Chandler, Arizona,
together with Lessor's Agreement in which TL Properties, Inc. disclaims
any interest in the Collateral and grants the Agent and the Banks
certain rights, properly executed by TL Properties, Inc.
(f) Current searches of appropriate filing offices showing
that no state or federal tax liens have been filed and remain in effect
against the Borrower or any of its Subsidiaries (including, without
limitation, against Innovex Southwest (under its current and past
names)), and that no financing statements or other notifications or
filings have been filed and remain in effect against the Borrower or
any of its Subsidiaries (including, without limitation, against Innovex
Southwest (under its current and past names)), other than those for
which the Agent has received an appropriate release, termination or
satisfaction or those permitted in accordance with Section 6.1.
E-28 Exhibit 10(i)
<PAGE>
(g) A certified copy of the resolutions of the board of
directors of the Borrower and each Guarantor evidencing approval of all
Loan Documents to which the Borrower or such Guarantor is a party and
the other matters contemplated hereby.
(h) Copies of the Articles of Incorporation and Bylaws of the
Borrower and each Guarantor (including evidence of the merger of
Innovex Acquisition Corp. into ADFlex Solutions, Inc., with ADFlex
Solutions, Inc. as the surviving entity and the name change of ADFlex
Solutions, Inc. to Innovex Southwest, Inc.), certified by the Secretary
or Assistant Secretary of the Borrower and such Guarantor as being true
and correct copies thereof.
(i) A certificate of good standing of the Borrower and each
Guarantor, dated not more than thirty (30) days prior to the date
hereof, and evidence satisfactory to the Agent that the Borrower and
each Guarantor is qualified to conduct its business in each state where
it presently conducts such business if failure to obtain any such
qualification or licensing would have a Material Adverse Effect.
(j) A signed copy of a certificate of the Secretary or an
Assistant Secretary of the Borrower and each Guarantor which shall
certify the names of the officers of the Borrower and each Guarantor
authorized to sign the Loan Documents and the other documents or
certificates to be delivered pursuant to this Agreement, including
requests for Advances and Eurodollar Fundings, together with the true
signatures of such officers. The Agent and each Bank may conclusively
rely on such certificates until they shall receive a further
certificate of the Secretary or an Assistant Secretary of the Borrower
and each Guarantor canceling or amending the prior certificate and
submitting the signatures of the officers named in such further
certificate.
(k) Certificates of the insurance required under the Security
Documents, naming the Agent, as collateral agent for all Banks, as loss
payee thereunder, together with an acceptable lender's loss payable
endorsement.
(l) Audited financial statements acceptable to the Banks for
the period ended September 30, 1998 for the Borrower and for the period
ended December 27, 1998 for ADFlex Solutions, Inc. and unaudited
financial statements for the period ended March 31, 1999 for the
Borrower and for the period ended March 28, 1999 for ADFlex Solutions,
Inc. and the pro forma financial statements entitled "Project Canyon"
and "Canyon and Lake Combined" prepared by the Borrower.
(m) A signed copy of an opinion of counsel for the Borrower
and the Guarantors, addressed to the Banks.
(n) Payment of all fees and expenses then due and payable
pursuant to Sections 2.12 and 9.4 hereof.
E-29 Exhibit 10(i)
<PAGE>
(o) A UCC Release (or a payoff letter acceptable to the Agent)
relating to UCC Filing No. 922456 filed with the Arizona Secretary of
State, properly executed by the secured party thereunder.
(p) Such other items as the Agent or the Required Banks shall
reasonably require.
Section 3.2. Conditions Precedent to All Advances. The
obligation of the Banks to make each Advance shall be subject to the further
conditions precedent that on such date:
(a) the representations and warranties contained in Article IV
hereof are correct in all material respects on and as of the date of
such Advance as though made on and as of such date; and
(b) no event has occurred and is continuing, or would result
from such Advance, which constitutes a Default or an Event of Default.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Banks as follows:
Section 4.1. Corporate Existence and Power; Name; Chief
Executive Office. The Borrower and each of its Subsidiaries is a corporation
duly incorporated, validly existing and in good standing under the laws of its
respective state of incorporation, and is duly licensed or qualified to transact
business in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing or
qualification necessary and where failure to obtain such licensing or
qualification would have a Material Adverse Effect. The Borrower and each of its
Subsidiaries has all requisite power and authority, corporate or otherwise, to
conduct its business, to own its properties and to execute and deliver, and to
perform all of its obligations under, the Loan Documents. Within the last twelve
(12) months, the Borrower and each of its Subsidiaries has done business solely
under the names set forth in Schedule 4.1 hereto. The chief executive office and
principal place of business of the Borrower and each of its Subsidiaries is
located at the address set forth in Schedule 4.1 hereto, and all of Borrower's
records relating to its businesses are kept at that location.
Section 4.2. Authorization for Borrowings; No Conflict as to
Law or Agreements. The execution, delivery and performance by the Borrower and
each of its Subsidiaries of the Loan Documents to which it is a party, and the
Advances from time to time obtained hereunder, have been duly authorized by all
necessary corporate action and do not and will not (i) require any consent or
approval which has not been obtained prior to the
E-30 Exhibit 10(i)
<PAGE>
date hereof, (ii) require any authorization, consent or approval by, or
registration, declaration or filing (other than filing of financing statements
as contemplated hereunder) with, or notice to, any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or
any third party, except such authorization, consent, approval, registration,
declaration, filing or notice as has been obtained, accomplished or given prior
to the date hereof, (iii) violate any provision of any law, rule or regulation
(including, without limitation, Regulation X of the Board of Governors of the
Federal Reserve System) or of any order, writ, injunction or decree presently in
effect having applicability to the Borrower or any of its Subsidiaries or of the
articles of incorporation, bylaws or other organizational documents of the
Borrower or any of its Subsidiaries, (iv) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other material
agreement, lease or instrument to which the Borrower or any of its Subsidiaries
is a party or by which it or its properties may be bound or affected, or (v)
result in, or require, the creation or imposition of any mortgage, deed of
trust, pledge, lien, security interest or other charge or encumbrance of any
nature upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower or other organizational documents (other than as
required hereunder in favor of the Banks).
Section 4.3. Legal Agreements. Each of the Loan Documents to
which the Borrower or any of its Subsidiaries is a party constitutes the legal,
valid and binding obligations and agreements of the Borrower or such Subsidiary,
as applicable, enforceable against the Borrower or such Subsidiary, as
applicable, in accordance its terms, except to the extent that enforcement
thereof may be limited by an applicable bankruptcy, insolvency or similar laws
now or hereafter in effect affecting creditors' rights generally and by general
principles of equity.
Section 4.4. Subsidiaries. All Subsidiaries of the Borrower
are set forth and described in Schedule 4.4.
Section 4.5. Financial Condition; No Adverse Change. The
Borrower has heretofore furnished to the Agent audited consolidated financial
statements of the Borrower and its Subsidiaries for its fiscal year ended
September 30, 1998, and unaudited financial statements of the Borrower and its
Subsidiaries for the period ended March 31, 1999, and those statements fairly
present the financial condition of the Borrower and its Subsidiaries on the
dates thereof and the results of operations and cash flows for the periods then
ended (subject to year-end audit adjustments) and were prepared in accordance
with GAAP. The Borrower has heretofore furnished to the Agent audited
consolidated financial statements of ADFlex Solutions, Inc. and its Subsidiaries
for its fiscal year ended December 27, 1998, and unaudited financial statements
of ADFlex Solutions, Inc. and its Subsidiaries for the period ended March 28,
1999, and, to the best of the Borrower's knowledge, these statements fairly
present the financial condition of ADFlex Solutions, Inc. and its Subsidiaries
on the dates thereof and the results of operations and cash flows for the
periods then ended (subject to year-end audit adjustments) and were prepared in
accordance with GAAP. Since the date of
E-31 Exhibit 10(i)
<PAGE>
the financial statements described above, there has not occurred any event or
circumstance that would have a Material Adverse Effect.
Section 4.6. Litigation. There are no actions, suits or
proceedings pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower or any of its Subsidiaries or the properties of the
Borrower or any of its Subsidiaries before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
which, if determined adversely to the Borrower or any of its Subsidiaries, could
reasonably be expected to have a Material Adverse Effect, except as set forth
and described in Schedule 4.6.
Section 4.7. Regulation U. Neither the Borrower nor any of its
Subsidiaries has engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System), and no part of the proceeds
of any Advance will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin stock.
Section 4.8. Taxes. Except as set forth and described on
Schedule 4.8, the Borrower and each of its Subsidiaries has paid or caused to be
paid to the proper authorities when due all federal, state and local taxes
required to be withheld by it. The Borrower and each of its Subsidiaries has
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower, are required to be filed, and the Borrower and each of
its Subsidiaries has paid or caused to be paid to the respective taxing
authorities all taxes as shown on said returns or on any assessment received by
it to the extent such taxes have become due, except (a) for any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested by the Borrower or any such Subsidiary, as applicable, in good faith
and by proper proceedings and for which the Borrower or any such Subsidiary, as
applicable, shall have set aside adequate reserves, and (b) as set forth and
described on Schedule 4.8.
Section 4.9. Titles and Liens. The Borrower or one of its
Subsidiaries has good and absolute title to all properties and assets reflected
in the latest consolidated balance sheet referred to in Section 4.5, free and
clear of all mortgages, security interests, liens and encumbrances, except for
(a) mortgages, security interests and liens permitted by Section 6.1, and (b)
covenants, restrictions, rights, easements and minor irregularities in title
which do not (i) materially interfere with the business or operations of the
Borrower and its Subsidiaries as presently conducted and (ii) materially impair
the value of the property to which they attach. In addition, no financing
statement naming the Borrower or any of its Subsidiaries (including, without
limitation, Innovex Southwest (under any of Innovex Southwest, Inc., Innovex
Acquisition Corp. or ADFlex Solutions, Inc.)) as debtor is on file in any office
except to perfect only security interests permitted by Section 6.1. Each patent,
trademark, copyright and other intellectual property interest having a fair
market value in excess of
E-32 Exhibit 10(i)
<PAGE>
$200,000 in which the Borrower and/or any of its Subsidiaries has a legal or
equitable interest are set forth in Schedule 4.9 attached hereto.
Section 4.10. Plans. Except as set forth and described in
Schedule 4.10, neither the Borrower nor any of any Subsidiaries currently
maintains and has not in the past maintained any Plan. Neither the Borrower nor
any of its Subsidiaries has received any notice, nor has it received any
knowledge to the effect, that it is not in full compliance in all material
respects with any of the requirements of ERISA. No Reportable Event or other
fact or circumstance which would reasonably be expected to have an adverse
effect on the Plan's tax qualified status exists in connection with any Plan.
Neither the Borrower nor any of its Subsidiaries has:
(a) any accumulated funding deficiency within the meaning of
ERISA; or
(b) any liability or know of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued
benefits which are or which may become payable to participants or
beneficiaries of any such Plan).
Section 4.11. Default. The Borrower and each of its
Subsidiaries is in compliance with all provisions of all agreements,
instruments, decrees and orders to which it is a party or by which it or its
property is bound or affected, the breach or default of which could reasonably
be expected to have a Material Adverse Effect.
Section 4.12. Environmental Compliance. The Borrower and each
of its Subsidiaries has obtained all permits, licenses and other authorizations
which are required under federal, state and local laws and regulations relating
to emissions, discharges, releases of pollutants, contaminants, hazardous or
toxic materials, or wastes into ambient air, surface water, ground water or
land, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants
or hazardous or toxic materials or wastes ("Environmental Laws") at the
facilities of the Borrower or any of its Subsidiaries or in connection with the
operation of such facilities. Except as disclosed in Schedule 4.12, the Borrower
and each of its Subsidiaries and all activities of the Borrower and each of its
Subsidiaries at its respective facilities comply with all Environmental Laws and
with all terms and conditions of any required permits, licenses and
authorizations applicable to the Borrower or any such Subsidiary with respect
thereto. Except as disclosed in Schedule 4.12, the Borrower and each of its
Subsidiaries is in compliance with all limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in Environmental Laws or contained in any plan, order, decree,
judgment or notice of which the Borrower or such Subsidiary is aware and with
respect to which noncompliance would have a Material Adverse Effect. Except as
disclosed in Schedule 4.12, the Borrower is not aware of, nor has the Borrower
received notice of, any events, conditions, circumstances, activities,
practices,
E-33 Exhibit 10(i)
<PAGE>
incidents, actions or plans which may interfere with or prevent continued
compliance with, or which may give rise to any liability under, any
Environmental Laws.
Section 4.13. Submissions to Banks. All financial and other
information provided to the Agent or any Bank by or on behalf of the Borrower
and its Subsidiaries in connection with the Borrower's request for the credit
facilities contemplated hereby is true and correct in all material respects and,
as to projections, valuations or pro forma financial statements, present a good
faith opinion as of the date made as to such projections, valuations and pro
forma condition and results.
Section 4.14. Financial Solvency. Both before and after giving
effect to all of the transactions contemplated in the Loan Documents, the
Borrower:
(a) was and will not be insolvent, as that term is used and
defined in Section 101(32) of the United States Bankruptcy Code and
Section 2 of the Uniform Fraudulent Transfer Act;
(b) does not have unreasonably small capital and is not
engaged or about to engage in a business or a transaction for which any
remaining assets of the Borrower are unreasonably small;
(c) does not, by executing, delivering or performing its
obligations under the Loan Documents or by taking any action with
respect thereto, intend to, nor believe that it will, incur debts
beyond its ability to pay them as they mature;
(d) does not, by executing, delivering or performing its
obligations under the Loan Documents or by taking any action with
respect thereto, intend to hinder, delay or defraud either its present
or future creditors; and
(e) does not contemplate filing a petition in bankruptcy or
for an arrangement or reorganization or similar proceeding under any
law any jurisdiction or country, and, to the best knowledge of the
Borrower, is not the subject of any bankruptcy or insolvency
proceedings or similar proceedings under any law of any jurisdiction or
country threatened or pending against the Borrower.
ARTICLE V
AFFIRMATIVE COVENANTS OF THE BORROWER
So long as any Note shall remain unpaid or any Commitment
shall be outstanding, the Borrower will comply with the following requirements,
unless the Required Banks shall otherwise consent in writing:
E-34 Exhibit 10(i)
<PAGE>
Section 5.1. Reporting Requirements. The Borrower will
deliver, or cause to be delivered, to each Bank each of the following, which
shall be in form and detail reasonably acceptable to the Required Banks:
(a) as soon as available, and in any event within ninety (90)
days after the end of each fiscal year of the Borrower, audited annual
financial statements of the Borrower and its Subsidiaries with the
unqualified opinion of independent certified public accountants
selected by the Borrower and acceptable to the Agent, which annual
financial statements shall include the balance sheets of the Borrower
and its Subsidiaries as at the end of such fiscal year and the related
statements of income, retained earnings and cash flows of the Borrower
and its Subsidiaries for the fiscal year then ended, prepared on a
consolidated and consolidating basis, all in reasonable detail and
prepared in accordance with GAAP, together with a certificate of the
chief financial officer of the Borrower, substantially in the form of
Exhibit F, stating that such financial statements have been prepared in
accordance with GAAP and whether or not such officer has knowledge of
the occurrence of any Default or Event of Default hereunder and, if so,
stating in reasonable detail the facts with respect thereto;
(b) as soon as available and in any event within forty-five
(45) days after the end of each fiscal quarter of the Borrower, an
unaudited/internal balance sheet and statement of income, cash flow and
retained earnings of the Borrower and its Subsidiaries as at the end of
and for such month and for the year-to-date period then ended, prepared
on a consolidated and consolidating basis, in reasonable detail and the
figures for the corresponding date and periods in the previous year,
all prepared in accordance with GAAP hereof, subject to year-end audit
adjustments; and accompanied by a certificate of the chief financial
officer of the Borrower, substantially in the form of Exhibit G,
stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, (ii)
whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to (A) the Status of the Borrower for
purposes of establishing the appropriate Margins and Commitment Fee
Percentage and (B) whether or not the Borrower is in compliance with
the requirements set forth in Sections 5.9 through 5.11 and 6.12;
(c) not later than thirty (30) days after the beginning of
each fiscal year of the Borrower, the projected balance sheets, income
statements, Capital Expenditures budget, and cash flow statements for
the Borrower and its Subsidiaries for each month of such year, each in
reasonable detail, representing the good faith projections of the
Borrower for each such month, and certified by the Borrower's chief
financial officer as being the most accurate projections available and
identical to the projections used
E-35 Exhibit 10(i)
<PAGE>
by the Borrower for internal planning purposes, together with such
supporting schedules and information as the Agent from time to time may
reasonably request;
(d) immediately after the commencement thereof, notice in
writing of all uninsured litigation and of all proceedings before any
governmental or regulatory agency affecting the Borrower or any of its
Subsidiaries of the type described in Section 4.6 or which (i) seek a
monetary recovery against the Borrower or any of its Subsidiaries in
excess of $1,000,000; or (ii) if determined adversely to the Borrower
or any of its Subsidiaries, could reasonably be expected to have a
Material Adverse Effect.
(e) as promptly as practicable (but in any event not later
than five (5) Business Days) after an officer of the Borrower obtains
knowledge of the occurrence of a Default or Event of Default hereunder,
notice of such occurrence, together with a detailed statement by a
responsible officer of the Borrower setting forth the steps being taken
by the Borrower to cure the effect of such Default or Event of Default;
(f) as soon as possible and in any event within thirty (30)
days after the Borrower knows or has reason to know that any Reportable
Event with respect to any Plan has occurred, the statement of the chief
financial officer of the Borrower setting forth details as to such
Reportable Event and the action which the Borrower proposes to take
with respect thereto, together with a copy of the notice of such
Reportable Event to the Pension Benefit Guaranty Corporation;
(g) as soon as possible, and in any event within ten (10) days
after the Borrower fails to make any quarterly contribution required
with respect to any Plan under Section 4.12(m) of the Internal Revenue
Code of 1986, as amended, the statement of the chief financial officer
of the Borrower setting forth details as to such failure and the action
which the Borrower proposes to take with respect thereto, together with
a copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation;
(h) promptly upon obtaining knowledge thereof, notice of the
violation by the Borrower or any of its Subsidiaries of any law, rule
or regulation, the non-compliance with which could reasonably be
expected to have a Material Adverse Effect;
(i) promptly upon their distribution, copies of all financial
statements, reports, proxy statements and other communications which
the Borrower shall have sent to its stockholders;
(j) promptly after the sending or filing thereof, copies of
all regular and periodic financial reports which the Borrower shall
file with the Securities and Exchange Commission or any national
securities exchange; and
E-36 Exhibit 10(i)
<PAGE>
(k) such other information respecting the financial conditions
and results of operation of the Borrower and/or any of its Subsidiaries
as the Agent or the Required Banks may from time to time reasonably
request.
Section 5.2. Books and Records; Inspection and Examination.
The Borrower will, and will cause each of its Subsidiaries to, keep accurate
books of record and account for itself pertaining its business and financial
condition and such other matters as the Agent may from time to time request in
which true and complete entries will be made in accordance with GAAP
consistently applied and, upon request of and reasonable notice by the Agent,
will permit any officer, employee, attorney or accountant for any Bank to audit,
review, make extracts from or copy any and all of its corporate and financial
books and records at all reasonable times during ordinary business hours and to
discuss its affairs with any of its directors, officers, employees or agents.
The Borrower will, and will cause each of its Subsidiaries to, permit any Bank
or its employees, accountants, attorneys or agents, to examine and inspect any
of its property at any time during ordinary business hours; provided, that each
Bank will use reasonable efforts to conduct (or have conducted) any such
examination or inspection so as to minimize disruptions to operations.
Section 5.3. Compliance with Laws. The Borrower will, and will
cause each of its Subsidiaries to, (a) comply with the requirements of
applicable laws and regulations, the noncompliance with which would have a
Material Adverse Effect, (b) use and keep its assets, and will require that
others use and keep its assets, only for lawful purposes, without violation of
any federal, state or local law, statute or ordinance, the noncompliance with
which could reasonably be expected to have a Material Adverse Effect.
Section 5.4. Payment of Taxes and Other Claims. The Borrower
will pay or discharge, when due, and will cause each of its Subsidiaries to pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it prior to the date on which penalties attach thereto, (b) all
federal, state and local taxes required to be withheld by it, and (c) all lawful
claims for labor, materials and supplies which, if unpaid, might by law become a
lien or charge upon any of its properties; provided, the Borrower and its
Subsidiaries shall not be required to pay any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which the Borrower or such Subsidiary, as
applicable, has set aside adequate reserves in accordance with GAAP.
Section 5.5. Maintenance of Properties. The Borrower will, and
will cause each of its Subsidiaries to, keep and maintain, all of its properties
necessary or useful in its business in good condition, repair and working order
(normal wear and tear excepted); provided, however, that nothing in this Section
5.5 shall prevent the Borrower or any of its Subsidiaries from discontinuing the
operation and maintenance of any of its properties if such discontinuance is, in
the reasonable judgment of the Borrower or such Subsidiary, as
E-37 Exhibit 10(i)
<PAGE>
applicable, desirable in the conduct of the its business and not disadvantageous
in any material respect to the Banks. The Borrower and/or its Subsidiaries will
at all times own or hold a valid, irrevocable and exclusive license to use all
patents, trademarks, copyrights and other intellectual property interests which
are utilized in the operations of the Borrower and/or its Subsidiaries or which
are being developed by or on behalf of the Borrower and/or its Subsidiaries for
use in the operations of the Borrower and/or its Subsidiaries, including without
limitation those set forth on Schedule 4.9 attached hereto, and the Borrower
and/or its Subsidiaries will have the full and exclusive right to control and
manage all such intellectual property interests. The Borrower will, and will
cause each of its Subsidiaries to, protect, defend and maintain all such
intellectual property interests, including without limitation prosecution of all
patent, trademark and copyright applications and timely payment of all necessary
maintenance and other fees. The Borrower will promptly notify the Agent if the
Borrower and/or any of its Subsidiaries owns, creates or acquires any legal or
equitable interest in any patent, trademark, copyright or other intellectual
property interest having a fair market value in excess of $200,000. Upon request
of the Agent, the Borrower will, or will cause each of its Subsidiaries to,
execute and deliver to the Agent all such security agreements, financing
statements and other documents required by the Agent related to patents,
trademarks, copyrights and other intellectual property interests of the Borrower
and/or its Subsidiaries.
Section 5.6. Insurance. The Borrower will, and will cause each
of its Subsidiaries to, obtain and all times maintain, insurance with insurers
believed by it to be responsible and reputable in such amounts and against such
risks as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which it operates. Without
limiting the foregoing, at all times the Borrower shall, and shall cause each of
its Subsidiaries to, keep all tangible Collateral insured against risks of fire
(including so-called extended coverage), theft, collision (in case of Collateral
consisting of motor vehicles) and such other risks and in such amounts as the
Agent may reasonably request, with lender's loss payable clauses or endorsements
in favor of the Agent as collateral agent on behalf of the Banks, in form
reasonably acceptable to the Agent (including, without limitation a provision
requiring at least thirty (30) days prior written notice to the Agent of any
cancellation or modification of such insurance) and, upon request of the Agent,
deliver policies or certificates of such insurance to the Agent.
Section 5.7. Preservation of Corporate Existence. The Borrower
will, and will cause each of its Subsidiaries to, preserve and maintain its
corporate existence and all of its rights, privileges and franchises necessary
or desirable in the normal conduct of its business and shall conduct its
business in an orderly, efficient and regular manner.
Section 5.8 Year 2000. The Borrower will, and will cause each
of its Subsidiaries to, proceed with reasonable diligence to evaluate all of the
data processing systems necessary to the conduct of its business (including
computer hardware, software and firmware, and including data processing systems
embedded within equipment) and will
E-38 Exhibit 10(i)
<PAGE>
implement such hardware and software modifications and upgrades as may be
necessary for such systems to be Year 2000 Compliant, and all such systems shall
be Year 2000 Compliant, by no later than September 30, 1999. For purposes
hereof, "Year 2000 Compliant" means with respect to any data processing system,
(i) that such system accurately records, stores, processes and presents date
data with respect to dates on and after January 1, 2000 in the same manner, and
with substantially the same functionality, as such system records, stores,
processes and presents date data with respect to dates on and before December
31, 1999; and (ii) that such system accurately records, stores, processes and
presents date ranges beginning on or before December 31, 1999 and ending on or
after January 1, 2000, or occurring entirely on or after January 1, 2000, in the
same manner, and with substantially the same functionality, as such system
records, stores, processes and presents date ranges occurring entirely on or
before December 31, 1999.
Section 5.9. Interest Coverage Ratio. As of each Covenant
Computation Date, the Borrower will maintain its Interest Coverage Ratio at not
less than 1.75 to 1.00.
Section 5.10 Leverage Ratio. As of each Covenant Computation
Date, the Borrower will maintain its Leverage Ratio at not less than 3.00 to
1.00.
Section 5.11 Minimum Net Worth. As of each Covenant
Computation Date, the Borrower will maintain its Net Worth at an amount not less
than the amount set forth below opposite the applicable Covenant Computation
Date set forth below:
Applicable Covenant Minimum Net
Computation Date Worth Amount
---------------- ------------
Closing Date $91,850,000
September 30, 1999 and each Required Net Worth Amount
subsequent Covenant
Computation Date
As used in this Section 5.11, the "Required Net Worth Amount" for any given
Covenant Computation Date is an amount equal to the sum of the minimum Net Worth
required as of the immediately preceding Covenant Computation Date, plus
seventy-five percent (75%) of the Net Income realized by the Borrower since such
immediately preceding Covenant Computation Date (with any net loss counting as
zero in such calculation), plus one hundred percent (100%) of the net cash
proceeds received by the Borrower and/or its Subsidiaries from any equity
offering made by the Borrower and/or its Subsidiaries since such immediately
preceding Covenant Computation Date.
E-39 Exhibit 10(i)
<PAGE>
ARTICLE VI
NEGATIVE COVENANTS
So long as any Note shall remain unpaid or any Commitment
shall be outstanding, the Borrower will comply with the following requirements,
unless the Required Banks shall otherwise consent in writing:
Section 6.1. Liens. The Borrower will not, and will not permit
any of its Subsidiaries to, create, incur or suffer to exist any mortgage, deed
of trust, pledge, lien, security interest, assignment or transfer upon or of any
assets of the Borrower or any of its Subsidiaries, now owned or hereafter
acquired, to secure any indebtedness; excluding from the operation of the
foregoing (herein "Permitted Liens"):
(a) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in
Schedule 6.1;
(b) liens for taxes or assessments or other governmental
charges to the extent not required to be paid by Section 5.4; and any
extension, renewal or replacement thereof (so long as such indebtedness
is not increased above the amount outstanding as of the date of any
such extension, renewal or replacement;
(c) materialmen's, merchants', carriers', worker's,
repairer's, or other like liens arising in the ordinary course of
business to the extent not required to be paid by Section 5.4;
(d) pledges or deposits to secure obligations under worker's
compensation laws, unemployment insurance and social security laws, or
to secure the performance of bids, tenders, contracts (other than for
the repayment of borrowed money) or leases or to secure statutory
obligations or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds in the ordinary course of business;
(e) zoning restrictions, easements, licenses, restrictions on
the use of real property or minor irregularities in title thereto,
which do not materially impair the use of such property in the
operation of the business of the Borrower or its Subsidiaries or the
value of such property for the purpose of such business;
(f) liens and security interests granted to the Banks pursuant
to any of the Loan Documents; and
(g) purchase money mortgages, liens or security interests,
including conditional sale agreements or other title retention
agreements and leases which are in the nature of title retention
agreements, upon or in property acquired after the Closing Date by the
Borrower or its Subsidiaries, or mortgages, liens or security interests
existing in such property at the time of the acquisition thereof,
provided that:
E-40 Exhibit 10(i)
<PAGE>
(i) no such mortgage, lien or security interest
extends or shall extend to or cover any property of the
Borrower or any of its Subsidiaries other than the property
then being acquired; and
(ii) the aggregate principal amount of the
indebtedness secured by any such mortgage, lien or security
interest shall not exceed the cost of such property so
acquired in connection therewith.
Section 6.2. Indebtedness. The Borrower will not, and will not
permit any of its Subsidiaries to, incur, create, assume, permit or suffer to
exist, any indebtedness or liability on account of deposits or advances or any
indebtedness for borrowed money, or any other indebtedness or liability
evidenced by notes, bonds, debentures or similar obligations, except:
(a) Obligations arising hereunder;
(b) indebtedness in existence on the date hereof and listed in
Schedule 6.2; and
(c) Capitalized Lease Liabilities and indebtedness of the
Borrower or its Subsidiaries secured by security interests permitted by
Section 6.1(g) incurred after the Closing Date.
Section 6.3. Guaranties. The Borrower will not, and will not
permit any of its Subsidiaries to, assume, guarantee, endorse or otherwise
become directly or contingently liable in connection with any obligations of any
other Person, except:
(a) guaranties of the Obligations arising hereunder;
(b) the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
and
(c) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons in
existence on the date hereof and listed in Schedule 6.3.
Section 6.4. Investments. The Borrower will not, and will not
permit any of its Subsidiaries to, purchase or hold beneficially any stock or
other securities or evidences of indebtedness of, make or permit to exist any
loans or advances to, or create or acquire any Subsidiary or make any investment
or acquire any interest whatsoever in, any other Person, except:
(a) investments in (i) direct obligations of the United States
of America or any agency or instrumentality thereof whose obligations
constitute the full faith and credit obligations of the United States
of America having a maturity of eighteen (18)
E-41 Exhibit 10(i)
<PAGE>
months or less, (ii) bonds issued by states, state agencies or
municipalities which are rated "A-" or better by Standard & Poors
Corporation or "A3" or better by Moody's Investors Service, (iii) bonds
issued by states, state agencies or municipalities which are rated
below "A-" by Standard & Poors Corporation or below "A3" by Moody's
Investors Service or which are unrated; provided, however, that
investments under this Section 6.4(a)(iii) will not at any time exceed
five percent (5%) of the Borrower's Net Worth, (iv) commercial paper
issued by a U.S. corporation rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service, (v) money
market mutual funds whose underlying assets are exclusively investments
which would otherwise be permitted investments under this Section
6.4(a), or (vi) repurchase agreements, certificates of deposit or
bankers' acceptances having a maturity of eighteen (18) months or less
issued by members of the Federal Reserve System having deposits in
excess of $500,000,000 (which certificates of deposit or bankers'
acceptances are fully insured by the Federal Deposit Insurance
Corporation);
(b) advances or loans to officers and employees of the
Borrower or its Subsidiaries not exceeding at any one time an aggregate
of $100,000; and
(c) advances in the form of progress payments, prepaid rent or
security deposits.
Section 6.5. Restricted Payments. The Borrower will not
declare or pay any dividends on any shares of any class of stock of the
Borrower, or directly or indirectly apply any assets to the redemption,
retirement, purchase or other acquisition of any shares of any class of stock of
the Borrower; provided, however, the Borrower may pay dividends on its stock so
long as prior to and immediately after giving effect to any such dividend no
Default or Event of Default shall exist.
Section 6.6. Sale or Transfer of Assets; Suspension of
Business Operations. The Borrower will not, and will not permit any of its
Subsidiaries to, sell, lease, assign, transfer or otherwise dispose of all or a
substantial part of its assets (whether in one transaction or in a series of
transactions) to any other Person, other than the sale of Inventory in the
ordinary course of business, and will not liquidate, dissolve or suspend its
business operations.
Section 6.7. Consolidation and Merger; Asset Acquisitions. The
Borrower will not, and will not permit any of its Subsidiaries to, consolidate
with or merge into any Person, or permit any other Person to merge into it, or
acquire (in a transaction analogous in purpose or effect to a consolidation or
merger) all or substantially all the assets of any other Person, except for the
merger of any Subsidiary of the Borrower into the Borrower, provided the
Borrower survives as the sole remaining entity.
Section 6.8. Sale and Leaseback. The Borrower will not, and
will not permit any of its Subsidiaries to, enter into any arrangement, directly
or indirectly, with any other
E-42 Exhibit 10(i)
<PAGE>
Person whereby the Borrower or any Subsidiary shall sell or transfer any real or
personal property, whether now owned or hereafter acquired, and then or
thereafter rent or lease as lessee such property or any part thereof or any
other property which the Borrower or any Subsidiary intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 6.9. Restrictions on Nature of Business. The Borrower
will not, and will not permit any of its Subsidiaries to, engage in any line of
business materially different from that in which it is presently engaged and
will not purchase, lease or otherwise acquire assets not related to its
business.
Section 6.10. Accounting. The Borrower will not, and will not
permit any of its Subsidiaries to, adopt any material change in accounting
principles, other than as required by GAAP, and will not adopt, permit or
consent to any change in its fiscal year.
Section 6.11. Hazardous Substances. The Borrower will not, and
will not permit any of its Subsidiaries to, cause or permit any Hazardous
Substances to be disposed of in any manner which might result in any material
liability to the Borrower or any Subsidiary, on, under or at any real property
which is operated by the Borrower or any Subsidiary or in which the Borrower or
any Subsidiary has any interest.
Section 6.12. Capital Expenditures. The Borrower will not, and
will not permit any of its Subsidiaries to, make Capital Expenditures during any
fiscal year, in an aggregate amount in excess of the amount set forth opposite
the applicable period below:
Maximum Aggregate Amount
of Capital Expenditures Fiscal Year
----------------------- -----------
$35,000,000 Fiscal Year Ended September 30, 2000
$25,000,000 Fiscal Year Ended September 30, 2001
$25,000,000 Fiscal Year Ended September 30, 2002
$20,000,000 Fiscal Year Ended September 30, 2003
$20,000,000 Fiscal Year Ended September 30, 2004
ARTICLE VII
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
Section 7.1. Events of Default. "Event of Default", wherever
used herein, means any one of the following events:
(a) default in the payment of any principal of any Note when
it becomes due and payable; or
E-43 Exhibit 10(i)
<PAGE>
(b) default in the payment of any interest on any Note or any
fees, costs or expenses required to be paid by the Borrower or any
Guarantor under this Agreement or any other Loan Document and the
continuation of such default for more than five (5) calendar days; or
(c) default in the performance, or breach, of any covenant or
agreement on the part of the Borrower contained in Sections 5.8 through
5.11 or in Article VI; or
(d) default in the performance, or breach, of any covenant or
agreement of the Borrower in this Agreement (other than a covenant or
agreement a default in whose performance or whose breach is elsewhere
in this Section 7.1 specifically dealt with) and the continuance of
such default or breach for a period of thirty (30) calendar days after
the Borrower has or should reasonably have had notice thereof; or
(e) default in the performance, or breach, of any covenant or
agreement of the Borrower or any Guarantor in any Loan Document other
than this Agreement (other than a covenant or agreement a default in
whose performance or whose breach is elsewhere in this Section 7.1
specifically dealt with) and the continuance of such default or breach
beyond the applicable period of grace, if any specified in such Loan
Document; or
(f) the Borrower or any of its Subsidiaries shall be or become
insolvent, or admit in writing its inability to pay its debts as they
mature, or make an assignment for the benefit of creditors; or the
Borrower or any of its Subsidiaries shall apply for or consent to the
appointment of any receiver, trustee, or similar officer for it or for
all or any substantial part of its property; or such receiver, trustee
or similar officer shall be appointed without the application or
consent of the Borrower or any such Subsidiary; or the Borrower or any
of its Subsidiaries shall institute (by petition, application, answer,
consent or otherwise) any insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding
relating to it under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower or any of its Subsidiaries; or any judgment, writ,
warrant of attachment or execution or similar process shall be issued
or levied against a substantial part of the property of the Borrower or
any of its Subsidiaries and such judgment, writ, or similar process
shall not be released, vacated or fully bonded within thirty (30)
calendar days after its issue or levy; or
(g) a petition naming the Borrower or any of its Subsidiaries
as debtor shall be filed under the United States Bankruptcy Code; or
(h) any representation or warranty made by the Borrower or any
of its Subsidiaries in any Loan Document or by the Borrower (or any of
its officers) in any request for a Borrowing, or in any other
certificate, instrument, or statement
E-44 Exhibit 10(i)
<PAGE>
contemplated by or made or delivered pursuant to or in connection with
any Loan Document, shall prove to have been incorrect in any material
respect when made; or
(i) the rendering against the Borrower or any of its
Subsidiaries a final judgment, decree or order for the payment of money
in excess of $1,000,000 (unless the payment of such judgment is fully
insured) and the continuance of such judgment, decree or order
unsatisfied and in effect for any period of thirty (30) consecutive
calendar days without a stay of execution; or
(j) a default under any bond, debenture, note, securitization
agreement or other evidence of indebtedness or similar obligation of
the Borrower or any of its Subsidiaries or under any indenture or other
instrument under which any such evidence of indebtedness or similar
obligation has been issued or by which it is governed and the
expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness, indenture or other instrument; or
(k) any Reportable Event, which the Agent determines in good
faith could reasonably be expected to constitute grounds for the
termination of any Plan or for the appointment by the appropriate
United States District Court of a trustee to administer any Plan, shall
have occurred and be continuing thirty (30) days after written notice
to such effect shall have been given to the Borrower by the Agent; or
any Plan shall have been terminated (other than a standard termination
which is not reasonably expected to have a Material Adverse Effect), or
a trustee shall have been appointed by an appropriate United States
District Court to administer any Plan, or the Pension Benefit Guaranty
Corporation shall have instituted proceedings to terminate any Plan or
to appoint a trustee to administer any Plan; or
(l) the Borrower or any of its Subsidiaries shall liquidate,
dissolve, terminate or suspend its business operations or otherwise
fail to operate its business in the ordinary course, or shall sell all
or substantially all of its assets; or
(m) Any Guarantor shall repudiate, purport to revoke or fail
to perform any of such Guarantor's obligations under any Loan Document
to which such Guarantor is a party; or
(n) a Change of Control shall occur with respect to the
Borrower.
Section 7.2. Rights and Remedies. Upon the occurrence of an
Event of Default or at any time thereafter until such Event of Default is cured
or waived to the written satisfaction of the Required Banks, the Agent or the
Required Banks may (and, upon written request of the Required Banks the Agent
shall) exercise any or all of the following rights and remedies:
E-45 Exhibit 10(i)
<PAGE>
(a) by notice to the Borrower, declare the Revolving
Commitments, the Term Commitments or all Commitments to be terminated,
whereupon the same shall forthwith terminate;
(b) by notice to the Borrower, declare the entire unpaid
principal amount of the Notes, all interest accrued and unpaid thereon,
and all other Obligations to be forthwith due and payable, whereupon
the Notes, all such accrued interest and all such other Obligations
shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby
expressly waived by the Borrower;
(c) without notice to the Borrower and without further action,
apply any and all monies owing by any Bank to the Borrower or to any
Subsidiary of the Borrower to the payment of the Notes, including
interest accrued thereon, and to payment to payment of all other
Obligations then owing by the Borrower;
(d) exercise and enforce the rights and remedies available to
the Banks or to any Bank under any Loan Document; and
(e) exercise any other rights and remedies available to the
Banks or to any Bank by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 7.1(g) hereof, the entire unpaid principal amount of the
Notes, all interest accrued and unpaid thereon, and all other amounts payable
under this Agreement shall be immediately due and payable without presentment,
demand, protest or notice of any kind.
ARTICLE VIII
AGREEMENT AMONG BANKS AND AGENT
Section 8.1. Authorization; Powers; Agent for Collateral
Purposes. Each Bank irrevocably appoints and authorizes the Agent to act as
administrative agent for and on behalf of such Bank to the extent provided
herein, in any Loan Documents or in any other document or instrument delivered
hereunder or in connection herewith, and to take such other actions as may be
reasonably incidental thereto. The Agent agrees to act as administrative agent
for each Bank upon the express conditions contained in this Article VIII, but in
no event shall the Agent constitute a fiduciary of any Bank, nor shall the Agent
have any fiduciary responsibilities in respect of any Bank. In furtherance of
the foregoing, and not in limitation thereof, each Bank irrevocably (a)
authorizes the Agent to execute and deliver and perform those obligations under
each of the Loan Documents to which the Agent is a party as are specifically
delegated to the Agent, and to exercise all rights, powers and remedies as may
be specifically delegated hereunder or thereunder, together with such additional
powers as may be reasonably incidental thereto, (b) appoints the Agent as
nominal
E-46 Exhibit 10(i)
<PAGE>
beneficiary or nominal secured party, as the case may be, under the Loan
Documents and all related UCC financing statements, and (c) authorizes the Agent
to act as agent of and for such Bank for purposes of holding, perfecting and
disposing of Collateral under the Loan Documents. As to any matters not
expressly provided for by the Loan Documents, the Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Required Banks or, if so required
pursuant to Section 9.2, upon the instructions of all Banks; provided, however,
that except for action expressly required of the Agent hereunder, the Agent
shall in all cases be fully justified in failing or refusing to act hereunder
unless it shall be indemnified to its satisfaction by the Banks against any and
all liability and expense which may be incurred by it by reason of taking or
continuing to take any such action, and the Agent shall not in any event be
required to take any action which is contrary to the Loan Documents or
applicable law.
Section 8.2. Application of Proceeds. The Agent, after
deduction of any costs of collection, as provided in Section 8.5, shall remit to
each Bank (to the extent a Bank is to share therein) that Bank's pro rata share
of all payments of principal, interest and fees payable hereunder in accordance
with such Bank's appropriate Percentage with respect to the Facility under which
such payments are received; provided, however, that all payments received after
the termination of the Revolving Commitments following the occurrence of an
Event of Default, after application to the costs and expenses incurred by the
Agent or any Bank in collection thereof (as contemplated in Section 8.5), shall
be allocated to the Banks in accordance with their Default Percentages. Each
Bank's interest under the Loan Documents shall be payable solely from payments,
collections and proceeds actually received by the Agent under the Loan
Documents; and the Agent's only liability to a Bank with respect to any such
payments, collections and proceeds shall be to account for such Bank's
Percentage (or Default Percentage, as the case may be) of such payments,
collections and proceeds in accordance with this Agreement. If the Agent is
required for any reason to refund any such payments, collections or proceeds,
each Bank will refund to the Agent, upon demand, its Percentage (or Default
Percentage, as the case may be) of such payments, collections or proceeds,
together with its Percentage (or Default Percentage, as the case may be) of
interest or penalties, if any, payable by the Agent in connection with such
refund. If any Bank has wrongfully refused to fund its Percentage of any
Borrowing, or if the outstanding principal balance of the Advances made by any
Bank under a Facility is for any other reason less than its respective
Percentage of the aggregate principal balance of all Advances under that
Facility, the Agent may remit payments received by it to the other Banks until
such payments have reduced the aggregate amounts owed by the Borrower to the
extent that the aggregate amount of the Advances owing to such Bank hereunder
are equal to its Percentage of the aggregate amounts of the Advances owing under
the applicable Facility to all of the Banks hereunder. The foregoing provision
is intended only to set forth certain rules for the application of payments,
proceeds and collections in the event that a Bank has breached its obligations
hereunder and shall not be deemed to excuse any Bank from such obligations.
E-47 Exhibit 10(i)
<PAGE>
Section 8.3. Exculpation. The Agent shall not be liable for
any action taken or omitted to be taken by the Agent in connection with the Loan
Documents, except for its own gross negligence or willful misconduct. The Agent
shall be entitled to rely upon advice of counsel concerning legal matters, the
advice of independent public accountants with respect to accounting matters and
advice of other experts as to any other matters and upon any Loan Document and
any schedule, certificate, statement, report, notice or other writing which it
reasonably believes to be genuine or to have been presented by a proper Person.
Neither the Agent nor any of its directors, officers, employees or agents shall
be responsible or in any way liable for (a) any recitals, representations or
warranties contained in, or for the execution, validity, genuineness,
effectiveness or enforceability of any Loan Document, or any other instrument or
document delivered hereunder or in connection herewith, (b) the validity,
genuineness, perfection, effectiveness, enforceability, existence, value of
enforcement of any Collateral or (c) any action taken or omitted by it. The
designation of Norwest as Agent hereunder shall in no way impair or affect any
of the rights and powers of, or impose any duties or obligations upon, Norwest
in its individual capacity as Bank hereunder.
Section 8.4. Use of the Term "Agent". The term "Agent" is used
herein in reference to the Agent merely as a matter of custom. It is intended to
reflect only an administrative relationship between the Agent and the Banks, in
each case as independent contracting parties. However, the obligations of the
Agent shall be limited to those expressly set forth herein and in no event shall
the use of such term create or imply any fiduciary relationship or any other
obligation arising under the general law of agency.
Section 8.5. Reimbursement for Costs and Expenses. All
payments, collections and proceeds received or effected by the Agent may be
applied first to pay or reimburse the Agent for all reasonable costs and
expenses at any time incurred by or imposed upon the Agent in connection with
this Agreement or any other Loan Document (including but not limited to all
reasonable attorney's fees (including allocated costs of in-house counsel),
foreclosure expenses and advances made to protect the security of any
Collateral, but excluding any costs, expenses, damages or liabilities arising
from the gross negligence or willful misconduct of the Agent). If the Agent does
not receive payments, collections or proceeds sufficient to cover any such costs
and expenses within five (5) days after their incurrence or imposition, each
Bank shall, upon demand, remit to the Agent such Bank's Percentage of the
difference between (i) such costs and expenses and (ii) such payments,
collections and proceeds, together with interest on such amount for each day
following the thirtieth day after demand therefor until so remitted at a rate
equal to the Federal Funds Rate for each such day.
Section 8.6. Payments Received Directly by Banks. If any Bank
shall obtain any payment or other recovery (whether voluntary, involuntary, by
application of offset or otherwise) on account of any Facility or on account of
any fees under this Agreement (other than through distributions made in
accordance with Section 8.2 hereof) in excess of such
E-48 Exhibit 10(i)
<PAGE>
Bank's applicable Percentage with respect to such Facility (or such Bank's
Default Percentage, if applicable), such Bank shall promptly give notice of such
fact to the Agent and shall promptly remit to the Agent such amount as shall be
necessary to cause the remitting Bank to share such excess payment or other
recovery ratably with each of the Banks in accordance with their respective
Percentages, (or Default Percentages, as the case may be) together with interest
for each day on such amount until so remitted at a rate equal to the Federal
Funds Rate for each such day; provided, however, that if all or any portion of
the excess payment or other recovery is thereafter recovered from such remitting
Bank or holder, the remittance shall be restored to the extent of such recovery.
Section 8.7. Indemnification. Each Bank severally (but not
jointly) hereby agrees to indemnify and hold harmless the Agent, as well as the
Agent's agents, employees, officers and directors, ratably according to their
respective Percentages from and against any and all losses, liabilities
(including liabilities for penalties), actions, suits, judgment, demands,
damages, costs, disbursements, or expenses (including attorneys' fees and
expenses)(including allocated costs of in-house counsel)) of any kind or nature
whatsoever, which are imposed on, incurred by, or asserted against the Agent or
its agents, employees, officers or directors in any way relating to or arising
out of the Loan Documents, or as a result of any action taken or omitted to be
taken by the Agent; provided, however, that no Bank shall be liable for any
portion of any such losses, liabilities (including liabilities for penalties),
actions, suits, judgments, demands, damages, costs disbursements, or expenses
resulting from the gross negligence or willful misconduct of the Agent.
Notwithstanding any other provision of the Loan Documents, the Agent shall in
all cases be fully justified in failing or refusing to act hereunder unless it
shall be indemnified to its satisfaction by the Banks against any and all
liability and expense that may be incurred by it by reason of taking or
continuing to take any such action.
Section 8.8. Agent and Affiliates. Norwest shall have the same
rights and powers in its capacity as a Bank hereunder as any other Bank, and may
exercise or refrain from exercising the same as though it were not the Agent,
and Norwest and its affiliates may accept deposits from and generally engage in
any kind of business with the Borrower and its Subsidiaries or any affiliate of
the Borrower and its Subsidiaries as fully as if Norwest were not the Agent
hereunder.
Section 8.9. Credit Investigation. Each Bank acknowledges that
it has made such inquiries and taken such care on its own behalf as would have
been the case had its Commitments been granted and its Advances made directly by
such Bank to the Borrower without the intervention of the Agent or any other
Bank. Each Bank agrees and acknowledges that the Agent makes no representations
or warranties about the creditworthiness of the Borrower or any other party to
this Agreement or with respect to the legality, validity, sufficiency or
enforceability of this Agreement, any Loan Document, any Collateral or any other
instrument or document delivered hereunder or in connection herewith.
E-49 Exhibit 10(i)
<PAGE>
Section 8.10. Defaults. The Agent shall have no duty to
inquire into any performance or failure to perform by the Borrower and shall not
be deemed to have knowledge of the occurrence of a Default or an Event of
Default (other than under Sections 7.1(a) or 7.1(b)) hereof unless the Agent has
received notice from a Bank or the Borrower specifying the occurrence of such
Default or Event of Default. In the event that the Agent receives such a notice
of the occurrence of a Default or an Event of Default, the Agent shall give
prompt notice thereof to the Banks. In the event of any Default, the Agent shall
(subject to Section 8.7 hereof) (a) in the case of a Default that constitutes an
Event of Default, not take any the actions referred to in Section 7.2(b) hereof
unless so directed by the Required Banks, and (b) in the case of any Default,
take such actions with respect to such Default as shall be directed by the
Required Banks; provided that, unless and until the Agent shall have received
such directions, the Agent may take any action, or refrain from taking any
action, with respect to such Default as it shall deem advisable in the best
interest of the Banks.
Section 8.11. Obligations Several. The obligations of each
Bank hereunder are the several obligations of such Bank, and neither any Bank
nor the Agent shall be responsible for the obligations of any other Bank
hereunder, nor will the failure by the Agent or any Bank to perform any of its
obligations hereunder relieve the Agent or any other Bank from the performance
of its respective obligations hereunder. Nothing contained in this Agreement,
and no action taken by any Bank or the Agent pursuant hereto or in connection
herewith or pursuant to or in connection with the Loan Documents shall be deemed
to constitute the Banks, together or with or without the Agent, as a
partnership, association, joint venture, or other entity.
Section 8.12. Sale or Assignment; Addition of Banks. Except as
permitted under the terms and conditions of this Section 8.12 or, with respect
to participations, under Section 8.13, no Bank may sell, assign or transfer its
rights or obligations under this Agreement or its interest in any Note. Any
Bank, at any time upon at least five (5) Business Days' prior written notice to
the Agent and the Borrower (unless the Agent and the Borrower consent to a
shorter period of time), may assign all or a portion (provided such portion is
not less than $5,000,000) of such Bank's Notes, Advances, and Commitments to a
domestic or foreign bank (having a branch office in the United States), an
insurance company or other financial institution (an "Applicant") on any date
(the "Adjustment Date") selected by such Bank, but only so long as the Borrower
and the Agent shall have provided their prior written approval of such proposed
Applicant. Notwithstanding the foregoing, (i) the Borrower will not unreasonably
withhold its consent to any such assignment, (ii) no such consent of the
Borrower shall be required after the occurrence and during the continuance of an
Event of Default, and (iii) no such consent of the Borrower or the Agent shall
be required in connection with an assignment to the Federal Reserve Bank for
purposes of satisfying a Bank's capital requirements. Upon receipt of such
approval and to confirm the status of each additional Bank as a party to this
Agreement and to evidence the assignment in accordance herewith:
E-50 Exhibit 10(i)
<PAGE>
(a) the Agent, the Borrower (if the Borrower's consent is
required), the assigning Bank and such Applicant shall, on or before
the Adjustment Date, execute and deliver to the Agent an Assignment
Certificate in substantially the form of Exhibit H (an "Assignment
Certificate");
(b) if requested by the Agent, the Borrower will execute and
deliver to the Agent, for delivery by the Agent in accordance with the
terms of the Assignment Certificate, (i) new Notes payable to the order
of the Applicant in amounts corresponding to the applicable Commitments
acquired by such Applicant and (ii) new Notes payable to the order of
the assigning Bank in amounts corresponding to the retained
Commitments. Such new Notes shall be in an aggregate principal amount
equal to the aggregate principal amount of the Notes to be replaced by
such new Notes, shall be dated the effective date of such assignment
and shall otherwise be in the form of the Notes to be replaced thereby.
Such new Notes shall be issued in substitution for, but not in
satisfaction or payment of, the Notes being replaced thereby and such
new Notes shall be treated as Notes for purposes of this Agreement; and
(c) the assigning Bank shall pay to the Agent an
administrative fee of $3,000.
Upon the execution and delivery of such Assignment Certificate and such new
Notes, and effective as of the effective date thereof (i) this Agreement shall
be deemed to be amended to the extent, and only to the extent, necessary to
reflect the addition of such additional Bank and the resulting adjustment of the
Percentages arising therefrom, (ii) the assigning Bank shall be relieved of all
obligations hereunder to the extent of the reduction of the assigning Bank's
Percentage, and (iii) the Applicant shall become a party hereto and shall be
entitled to all rights, benefits and privileges accorded to a Bank herein and in
each other Loan Document or other document or instrument executed pursuant
hereto and subject to all obligations of a Bank hereunder, including, without
limitation, the right to approve or disapprove actions which, in accordance with
the terms hereof, require the approval of the Required Banks or all Banks. In
order to facilitate the addition of additional Banks hereto, the Borrower
(subject to is approval rights hereunder, if any) and the Banks shall cooperate
fully with the Agent in connection therewith and shall provide all reasonable
assistance requested by the Agent relating thereto, including, without
limitation, the furnishing of such written materials and financial information
regarding the Borrower as the Agent may reasonably request, the execution of
such documents as the Agent may reasonably request with respect thereto, and the
participation by officers of the Borrower, and the Banks in a meeting or
teleconference call with any Applicant upon the request of the Agent.
Section 8.13. Participation. In addition to the rights granted
in Section 8.12, each Bank may grant participations in all or a portion of its
Notes, Advances and Commitments to any domestic or foreign commercial bank
(having a branch office in the United States), insurance company, financial
institution or an affiliate of such Bank. No
E-51 Exhibit 10(i)
<PAGE>
holder of any such participation shall be entitled to require any Bank to take
or omit to take any action hereunder. The Banks shall not, as among the
Borrower, the Agent and the Banks, be relieved of any of their respective
obligations hereunder as a result of any such granting of a participation. The
Borrower hereby acknowledges and agrees that any participation described in this
Section 8.13 may rely upon, and possess all rights under, any opinions,
certificates, or other instruments or documents delivered under or in connection
with any Loan Document. Except as set forth in this Section 8.13, no Bank may
grant any participation in the Notes, Advances or Commitments.
Section 8.14. Withholding Tax Exemption. At least five (5)
Business Days prior to the first date on which interest or fees are payable
hereunder for the account of any Bank, each Bank that is not incorporated under
the laws of the United States of America, or a state thereof, agrees that it
will deliver to each of the Borrower and the Agent two duly completed copies of
United States Internal Revenue Service Form 1001 or 4224, certifying in either
case that such Bank is entitled to receive payments under this Agreement and the
Notes without deduction or withholding of any United States federal income
taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to
deliver to each of the Borrower and the Agent two additional copies of such form
(or a successor form) on or before the date that such form expires (currently,
three successive calendar years for Form 1001 and one calendar year for Form
4224) or becomes obsolete or after the occurrence of any event requiring a
change in the most recent forms so delivered by it, and such amendments thereto
or extensions or renewals thereof as may be reasonably requested by the Borrower
or the Agent, in each case certifying that such Bank is entitled to receive
payments under this Agreement and the Notes without deduction or withholding of
any United States federal income taxes, unless an event (including without
limitation any change in treaty, law or regulation) has occurred prior to the
date on which any such delivery would otherwise be required which renders all
such forms inapplicable or which would prevent such Bank from duly completing
and delivering any such form with respect to it and such Bank advises the
Borrower and the Agent that it is not capable of receiving payments without any
deduction or withholding of United States federal income tax.
Section 8.15. Borrower not a Beneficiary or Party. Except with
respect to the limitation of liability applicable to the Banks under Section
8.11 and the Borrower's right to approve additional Banks in accordance with
Section 8.12, the provisions and agreements in this Article VIII are solely
among the Banks and the Agent and the Borrower shall not be considered a party
thereto or a beneficiary thereof.
ARTICLE IX
MISCELLANEOUS
Section 9.1. No Waiver; Cumulative Remedies. No failure or
delay on the part of the Agent or any Bank in exercising any right, power or
remedy under the Loan Documents shall operate as a waiver thereof; nor shall any
single or partial exercise of any
E-52 Exhibit 10(i)
<PAGE>
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.
Section 9.2. Amendments, Requested Waivers, Etc. No amendment,
modification, termination or waiver of any provision of any Loan Document or
consent to any departure by the Borrower or any Guarantor therefrom shall be
effective unless the same shall be in writing and signed by the Required Banks
and, if the rights or duties of the Agent are affected thereby, by the Agent;
provided that no amendment, modification, termination, waiver or consent shall
do any of the following unless the same shall be in writing and signed by all
Banks: (a) change the amount of any Commitment (except as permitted in
accordance with Section 8.12), (b) increase the Term Commitment Amount or the
Revolving Commitment Amount, (c) reduce the amount of any principal of or
interest due on any Advances or the Commitment Fees payable to the Banks
hereunder, (d) postpone any date fixed for any payment of principal of or
interest on any outstanding Advances or the Commitment Fees payable to the Banks
hereunder, (e) change the definition of "Required Banks," (f) amend this Section
9.2 or any other provision of this Agreement requiring the consent or other
action of the Required Banks or all Banks, (g) release any Guaranty or (h)
release, subordinate or terminate any security interest in or mortgage lien on
any Collateral (other than the sale of Inventory in the ordinary course of
business) if the fair market value of all Collateral so affected during any
fiscal year of the Borrower exceeds $1,000,000 in the aggregate. Any waiver or
consent given hereunder shall be effective only in the specific instance and for
the specific purpose for which given. No notice to or demand on the Borrower in
any case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3. Addresses for Notices, Etc. Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
mailed or delivered to the applicable parties at their respective addresses set
forth on the execution pages hereto, or, as to each party, at such other address
as shall be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section 9.3. All such notices,
requests, demands and other communications, when delivered, shall be effective
upon actual delivery and when mailed, shall be effective when sent by nationally
recognized overnight mail courier or delivery service, addressed as aforesaid,
except that notices or requests to the Agent or any Bank pursuant to any of the
provisions of Article II shall not be effective until received by the Agent or
such Bank.
Section 9.4. Costs and Expenses. The Borrower will reimburse
the Agent for (a) any and all out-of-pocket costs and expenses, including
without limitation attorneys' fees and expenses (including allocated costs of
in-house counsel), lien and UCC searches, title and recording expenses and other
similar expenses, paid or incurred by the Agent in connection with the
preparation, filing or recording of the Loan Documents and any other
E-53 Exhibit 10(i)
<PAGE>
document or agreement related hereto or thereto, and the transactions
contemplated hereby (which amount shall be paid on the Closing Date or as soon
thereafter as demand is made therefor) and the negotiation of any amendments,
modifications or extensions to or of any of the foregoing documents, instruments
or agreements and the preparation of any and all documents necessary or
desirable to effect such amendments, modifications or extensions, (b) customary
transaction fees of the Agent incurred in connection with the loans contemplated
hereby, (c) fees in connection with any audits or inspections by the Agent of
any Collateral or the operations or business of the Borrower and/or its
Subsidiaries, whether conducted at the premises of the Borrower and/or its
Subsidiaries or at the Agent's premises, and (d) any and all other out-of-pocket
costs and expenses incurred by the Agent in connection with any of the
transactions contemplated hereby. The Borrower will reimburse the Agent and each
Bank for any and all costs and expenses incurred by the Agent or any Bank in
connection with the enforcement of any of the rights or remedies of the Agent or
the Banks under any of the Loan Documents or under applicable law, whether or
not suit is filed with respect thereto.
Section 9.5. Indemnity. In addition to the payment of expenses
pursuant to Section 9.4, the Borrower agrees to indemnify, defend and hold
harmless the Agent, each Bank and each of their respective participants, parent
corporations, subsidiary corporations, affiliated corporations, successor
corporations, and all present and future officers, directors, employees and
agents (the "Indemnitees"), from and against (i) any claim, loss or damage to
which any Indemnitee may be subjected as a result of any past, present or future
existence, use, handling, storage, transportation or disposal of any Hazardous
Substance by the Borrower or any of its Subsidiaries or with respect to any
property owned, leased or controlled by the Borrower or any of its Subsidiaries,
(ii) any and all transfer taxes, documentary taxes, assessments or charges made
by any governmental authority (excluding income or gross receipts taxes) by
reason of the execution and delivery of this Agreement and the other Loan
Documents or the making of any Advances and (iii) any and all liabilities,
losses, damages, penalties, judgments, suits, claims, costs and expenses of any
kind or nature whatsoever (including, without limitation, the reasonable fees
and disbursements of counsel) in connection with any investigative,
administrative or judicial proceedings, whether or not such Indemnitee shall be
designated a party thereto, which may be imposed on, incurred by or asserted
against such Indemnitee, in any manner relating to or arising out of or in
connection with, the making of any Advances or entering into this Agreement or
any other Loan Documents or the use or intended use of the proceeds of the
Advances, excepting, however, from the foregoing any such liabilities, losses,
damages, penalties, judgments, suits, claims, costs and expenses resulting
solely from the willful misconduct or gross negligence of any Indemnitee. If any
investigative, judicial or administrative proceeding arising from any of the
foregoing is brought against any Indemnitee, upon request of such Indemnitee,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole cost and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing
E-54 Exhibit 10(i)
<PAGE>
undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the Borrower shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the indemnified liabilities contemplated hereby which is permissible
under applicable law. The obligations of the Borrower under this Section 9.5
shall survive termination of this Agreement and the discharge of the
Obligations.
Section 9.6. Execution in Counterparts. This Agreement and
other Loan Documents may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
Section 9.7. Governing Law; Jurisdiction; Waiver of Jury
Trial.
(a) Governing Law. The Loan Documents shall be governed by,
and construed in accordance with, the laws of the State of Minnesota,
except to the extent the law of any other jurisdiction applies as to
the perfection or enforcement of the any security interest in any
Collateral and except to the extent expressly provided to the contrary
in any Loan Document.
(b) Jurisdiction. The Borrower hereby irrevocably submits to
the jurisdiction of any state or federal court sitting in the State of
Minnesota in any action or proceeding arising out of or relating to
this Agreement or any of the other Loan Documents, and the Borrower
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such state or federal court.
The Borrower hereby irrevocably waives, to the fullest extent it may
effectively do so, the defense of an inconvenient forum to the
maintenance of such action or proceeding. The Borrower irrevocably
consents to the service of copies of the summons and complaint and any
other process which may be served in any such action or proceeding by
the mailing of copies of such process to the Borrower at its addresses
specified in Section 9.3 above. The Borrower agrees that a final
judgment in any such action or proceeding may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided
by law. Nothing in this Section 9.7(b) shall affect the right of the
Agent or any Bank to serve legal process in any other manner permitted
by law or affect the right of the Agent or any Bank to bring any action
or proceeding against the Borrower or its property in the courts of
other jurisdictions.
(c) WAIVER OF JURY TRIAL. THE BORROWER, THE BANKS AND THE
AGENT HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY
LOAN DOCUMENT OR ANY INSTRUMENT OR DOCUMENT DELIVERED THEREUNDER.
E-55 Exhibit 10(i)
<PAGE>
Section 9.8. Integration; Inconsistency. This Agreement,
together with the Loan Documents, comprise the final and complete integration of
all prior expressions by the parties hereto with respect to the subject matter
hereof and shall constitute the entire agreement among the parties hereto with
respect to such subject matter, superseding all prior oral or written
understandings. If any provision of a Loan Document is inconsistent with or
conflicts with a comparable or similar provision appearing in this Agreement,
the comparable or similar provision in this Agreement shall govern.
Section 9.9. Agreement Effectiveness. This Agreement shall
become effective upon delivery of fully executed counterparts hereof to each of
the parties hereto.
Section 9.10. Advice from Independent Counsel. The parties
hereto understand that this Agreement is a legally binding agreement that may
affect such party's rights. Each party hereto represents to the other that it
has received legal advice from counsel of its choice regarding the meaning and
legal significance of this Agreement and that it is satisfied with its legal
counsel and the advice received from it.
Section 9.11. Judicial Interpretation. Should any provision of
this Agreement require judicial interpretation, it is agreed that a court
interpreting or construing the same shall not apply a presumption that the terms
hereof shall be more strictly construed against any person by reason of the rule
of construction that a document is to be construed more strictly against the
person who itself through its agent prepared the same, it being agreed that all
parties hereto have participated in the preparation of this Agreement.
Section 9.12. Binding Effect; No Assignment by Borrower. This
Agreement shall be binding upon and inure to the benefit of the Borrower, the
Banks, the Agent and their respective successors and assigns; provided, however,
the Borrower may not assign any or all of its rights or obligations hereunder or
any of its interest herein without the prior written consent of all Banks.
Section 9.13. Severability of Provisions. Any provision of
this Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.14. Headings. Article and Section headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGES FOLLOW]
E-56 Exhibit 10(i)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
Address: INNOVEX, INC.
530 11th Avenue South
Hopkins, Minnesota 55343
Attn: Douglas W. Keller By
Telecopy No. (612) 938-7718 ------------------------------------
Its
--------------------------------
Address: NORWEST BANK MINNESOTA,
7900 Xerxes Avenue South NATIONAL ASSOCIATION, as Bank
Bloomington, Minnesota 55431-2206 and as Agent
Attn: Sharlyn G. Rekenthaler
Telecopy No. (612) 316-4203 By
------------------------------------
Its
--------------------------------
Revolving Commitment: $9,375,000
Revolving Percentage: 62.50%
Term Commitment: $15,625,000
Term Percentage: 62.50%
SIGNATURE PAGE TO CREDIT AGREEMENT Exhibit 10(i)
<PAGE>
Address: U.S. BANK NATIONAL ASSOCIATION
U.S. Bank Place
601 Second Avenue South By
MPFO0602 ------------------------------------
Minneapolis, Minnesota 55402-4302 Its
Attn: Michael J. Staloch --------------------------------
Telecopy No. (612) 973-0823
Revolving Commitment: $5,625,000
Revolving Percentage: 37.50%
Term Commitment: $9,375,000
Term Percentage: 37.50%
SIGNATURE PAGE TO CREDIT AGREEMENT Exhibit 10(i)
EXHIBIT 21. SUBSIDIARIES OF INNOVEX, INC.
State or other jurisdiction of
Name Incorporation or Organization
- ---- -----------------------------
Innovex Precision Components, Inc. Minnesota
Innovex Southwest, Inc. Delaware
ADFlex Cayman Ltd. Cayman Island
Innovex (Thailand) Ltd. Thailand
ADFlex Solutions Ltd. Delaware and United Kingdom
ADFlex Mexico S.A. de C.V. Mexico
ADFlex Solutions FSC Inc. Barbados
Iconovex Corporation Minnesota
Innovex Limited Minnesota
Mar Engineering, Inc. Minnesota
Innovex Sales Limited Jamaica
Smart Solution, LLC Delaware
E-59 Exhibit 21
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated November 11, 1999(except for the third paragraph
of Note L, as to which the date is November 15, 1999), accompanying the
consolidated financial statements included in the Annual Report of Innovex, Inc.
on Form 10-K for the year ended September 30, 1999. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Innovex, Inc. on Forms S-8 (File No. 33-14776, effective June 3, 1987, File No.
33-27530, effective March 17, 1989, File No. 33-59035, effective May 2, 1995,
File No. 333-10045, effective August 12, 1996, File No. 333-10047, effective
August 12, 1996 and File No. 333-79427, effective May 27, 1999.)
\s\ GRANT THORNTON LLP
Minneapolis, Minnesota
December 10, 1999
E-60 Exhibit 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,231
<SECURITIES> 19,310
<RECEIVABLES> 30,324
<ALLOWANCES> 1,825
<INVENTORY> 15,892
<CURRENT-ASSETS> 76,317
<PP&E> 105,898
<DEPRECIATION> 18,740
<TOTAL-ASSETS> 178,806
<CURRENT-LIABILITIES> 45,296
<BONDS> 26,376
0
0
<COMMON> 593
<OTHER-SE> 106,541
<TOTAL-LIABILITY-AND-EQUITY> 178,806
<SALES> 103,198
<TOTAL-REVENUES> 103,198
<CGS> 76,277
<TOTAL-COSTS> 76,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 107
<INTEREST-EXPENSE> 467
<INCOME-PRETAX> 9,239
<INCOME-TAX> 2,680
<INCOME-CONTINUING> 6,559
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,559
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
</TABLE>
