UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington,
DC  20549 FORM 10-K xAnnual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended September 30, 2003. oTransition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ______________ to _______________. Commission File
Number 0-13143 Innovex, Inc. (Exact name of registrant
as specified in its charter) Minnesota
  41-1223933(State or other
  jurisdiction of
  (IRS Employerincorporation or
  organization)
  Identification
  No.)
  5540 Pioneer Creek Drive,
Maple Plain, MN  55359 (Address of principal
executive offices) (763) 479-5300 (Registrants telephone
number, including area code) Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to Section 12(g) of
the Act: Common Stock ($.04 par
value) (Title of Class) Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.x
Yes o
No Indicate by check mark if disclosure of delinquent
filers pursuant to Rule 405 of Regulation S-K 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.o Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2)   Yesx  No o The aggregate market value of shares held by
non-affiliates is $92, 884,724 computed by reference to the last sale price of
the Companys Common Stock, as reported in the Nasdaq National Market system,
of $6.49 per share on March 31, 2003, the last business day of the Companys
most recently completed second fiscal quarter. As of November 15, 2003,
the Company had outstanding 18,962,801 shares of Common Stock. DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held January 20, 2004, are incorporated by reference into Part III.


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Index PART IItem 1.
  
  BusinessItem 2.
  
  PropertiesItem 3.
  
  Legal ProceedingsItem 4.
  
  Submission of Matters to a Vote of
  Security HoldersItem
  4A.
  
  Executive
  Officers of RegistrantPART IIItem 5.
  
  Market for Registrants Common
  Equity and Related Stockholder MattersItem 6.
  
  Selected Financial DataItem 7.
  
  Managements Discussion and
  Analysis of Financial Condition and Results of OperationsItem 7A.
  
  Quantitative and Qualitative
  Disclosures about Market RiskItem 8.
  
  Financial Statements and
  Supplementary DataItem
  9.
  
  Changes
  in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A.
  
  Controls and ProceduresPART IIIItem
  10.
  
  Directors
  and Executive Officers of the RegistrantItem 11.
  
  Executive
  CompensationItem
  12.
  
  Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  MattersItem
  13.
  
  Certain
  Relationships and Related TransactionsItem 14.
  
  Principal Accountant Fees and
  Services (Not Applicable)PART IVItem 15.
  
  Exhibits, Financial Statement Schedules and
  Reports on Form 8-K SIGNATURES 2


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PART I Item 1.   BUSINESS We maintain a website at
www.innovexinc.com. Our annual reports on Form 10-K, our quarterly reports
on Form 10-Q and our periodic reports on Form 8-K (and any amendments
to these reports) are available free of charge on our website as soon as
reasonably practical after we file these reports with the SEC. Our Company We are a leading worldwide
provider of flexible circuit interconnect solutions to original equipment
manufacturers (OEMs), in the electronics industry. We offer a full range of
customized flexible circuit applications and services from initial design,
development and prototype to fabrication, assembly and test on a global basis.
We target high volume markets where miniaturization, form and weight are
driving factors and flexible circuits are an enabling technology. Applications
for flexible circuits currently addressed by us include data storage devices
such as hard disk drives (HDDs), liquid crystal displays (LCDs) for mobile
communication devices, tape drives and arrays, flat panel displays and
printers. Our customers include 3M, Dell, Hitachi, HP, Maxtor, Medtronic,
Philips, Quantum, SAE Magnetics (a subsidiary of TDK), Samsung, Seagate,
Staktek, StorageTek, Xerox and other leading electronic OEMs. Our Industry and Market
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 components. Flexible
circuits consist of copper conductive patterns on flexible substrate materials,
such as polyimide. Flexible circuit interconnects frequently incorporate
components, such as integrated circuits (ICs), connectors, stiffeners,
resistors and capacitors mounted directly on a flexible circuit. Generally,
flexible circuits offer several advantages over other technologies such as
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,
particularly in applications involving smaller, more portable and complex
electronic devices where space available to designers is at a premium. We believe that the overall market for high density
flexible circuits is poised for substantial growth over the next several years
as a result of favorable technological and market trends that are expected to
drive increased adoption. These trends include the following: 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 often
necessitate the use of high density flexible circuit interconnects. Outsourcing.OEMs are increasingly focusing
on their core competencies and outsourcing their captive component and
subsystem manufacturing. 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. This allows OEMs to reduce
time to market, avoid delays in new product introductions, reduce manufacturing
costs and avoid logistical complexities. 3 Improved
HDD Industry Dynamics.The
HDD industry has been an early adopter of high density flexible circuits and is
a key end market for high-end, high density flexible circuits. We believe the
HDD industry represented $700 million of the $2.8 billion market for
high density flexible circuits in 2002. HDD applications require flexible
circuits that meet highly demanding technical specifications and can be
produced in high volumes in a cost-effective manner. Although the HDD industry
has experienced price erosion that has negated high growth rates in unit
volume, we believe the industry dynamics are improving. International Data
Consulting (IDC) estimates that the HDD market will exhibit compound annual
revenue growth of 6% from 2002 through 2007 on compound annual unit growth of
11%. Average annual selling price (ASP) erosion is expected to slow
significantly to a compounded annual ASP decline of 5% from 2002 through 2007.
In contrast, from 2001 through 2002 ASPs declined 14%. Trends benefiting the HDD industry, and in conjunction
the increased usage of flexible interconnect circuits required by HDD include: Significant
Industry Consolidation.The number of HDD manufacturers has fallen from 75 in
1984 to 22 in 1997 to seven today, with the top four HDD players (Seagate,
Hitachi, Maxtor and Western Digital) representing over 85% of the market. Less
Rapid Technology Changes and Longer Product Life Cycles.Areal densities (AD), a measure
of the number of units of storage on a specified area of a disk typically
denoted by gigabytes per square inch, which have typically increased 100% or
more per year, are now expected to grow only 50% annually. It is becoming
technically more difficult to make AD advances which should extend product life
cycles. Historically, the average number of heads per drive has declined
quickly due to rapid AD increases, with the rate of decline decreasing in more
recent periods. Increased
Usage of HDD in Consumer and Non-traditional Applications.The emerging consumer electronics
segment that includes devices such as the Xbox gaming console, TV set top
recorders and digital music players such as the iPod, is emerging as a
significant driver of growth for HDDs. According to IDC, this segment will
account for 7-8% of total HDD shipments in 2003, and exhibit a compound
annual unit growth of 43% from 2002 through 2007. Beyond HDD, high density
flexible circuits are increasingly being used in high unit volume consumer
electronic products such as mobile communications devices, flat panel displays,
digital televisions and inkjet printers. This trend is driven by the end
market, which demands consumer products with additional functionality,
availability in lighter weight smaller packages, better performance and lower
cost than previous generations of systems. To meet this demand, OEMs will
need to continually evaluate more complex interconnect solutions that allow
them to continue to enhance their product offerings in a cost-effective manner. Competitive Strengths We believe our industry leadership is the direct
result of our technological innovation and our ability to provide comprehensive
solutions that address our customers specific interconnect needs. Our key
competitive strengths include: Technology
Leadership.Although
there are a large number of flexible circuit manufacturers, only a few compete
with us in high-end, sub-100 micron applications. We believe that technology,
design capability, quality and price are key competitive factors in this segment.
Our manufacturing technology includes proprietary processes and chemical
recipes which, when combined with our design expertise and experience, enable
us to deliver high unit volumes of complex high density flexible circuits at
cost-effective prices. 4 Comprehensive
Product Portfolio.Our
products address a range of applications that include the following: (i) FSA,
which provides the electrical interconnect from the disk drive head to the
back-end electronics of the disk drive; (ii) actuator flex, which provides
the back-end electrical interconnect for hard disk drives; and (iii) a
variety of high-end, high density flexible circuits for markets such as LCD
displays for mobile communication devices, plasma displays, printers,
semiconductor packaging and medical applications. Product
Innovation.We
are recognized as a technology innovator with a history of developing products
that provide better performance at a lower cost than our competitors. For
example, in the HDD industry our FSA technology has been selected by a leading
HDD vendor as the preferred solution for its current generation, higher density
platform. In addition, other HDD vendors are evaluating our proprietary FgSA
technology as additional conductors are required and lower suspension stiffness
is desired. The technical expertise we have developed in serving the highly
demanding HDD industry has enabled us to introduce advanced products in other
rapidly growing markets. Leading
Customer Relationships.We have developed strong relationships with Seagate,
Maxtor, Philips, Samsung, Hitachi and other industry leaders. Our customer
relationships represent significant entry barriers as we believe that once a
customer has selected us to design and manufacture a flexible circuit
interconnect, the customer generally relies on our design for the life of that
specific application and, frequently, subsequent generations of similar
applications. Global
Manufacturing and Supply Chain Efficiency.We maintain manufacturing
facilities in both the U.S. and Asia. Our U.S. facilities provide a high level
of automation while our Asian facilities allow us to consolidate the labor
intensive aspects of production in a low-cost environment. The combination of
these two manufacturing models and our continued attention to manufacturing
processes allows us to continually improve our production yields, shorten our
supply chain and lower the overall costs of our products. Implementation
of Six Sigma.Through
the introduction of the Six Sigma quality management program, we are reducing
the process variation in our manufacturing facilities, resulting in improved
quality, reliability and performance of our flexible circuit products. Six
Sigma is a highly disciplined quality management and process optimization
methodology that relies on the rigorous use of statistical techniques to assess
process variability and defects. Six Sigma has been adopted by many large
industrial companies to significantly improve their business processes. Experienced Management
Team.Our
management team has a demonstrated track record of successfully harnessing and
capitalizing on disruptive technology. They have managed rapid technological
change by successfully transforming our company from a lead wire interconnect
manufacturer to a leading worldwide flexible circuit provider over a two-year
period. While identifying and opening new markets for our flexible circuit
products, our management team has successfully implemented manufacturing
efficiency plans throughout a global manufacturing and sourcing network. Our Strategy To enhance our position as a leading provider of
flexible interconnect solutions we intend to pursue the following business
strategies: Continue
to Expand Our Market Share in Our Core Markets.We believe that we will be able to
continue to capture additional market share from leading OEMs in the HDD
market with our FSA, FgSA and actuator flex solutions. As the HDD industry
continues to transition to higher recording densities, the advantages of our
technology will provide significant benefits to our customers on both a
functional and a cost basis. Certain HDD industry leaders are currently
evaluating our product 5 offerings for potential
future applications. In addition, our FgSA product is well suited for adoption
in a number of next generation HDD applications. Continue
to Penetrate New Markets.We have proven our ability to leverage our expertise
in high volume, high density applications to address emerging growth
opportunities. We believe the technology, research and development and
manufacturing capabilities we have developed to serve our core markets have put
us in a position to target additional high volume applications, such as LCD and
plasma displays, semiconductor packaging applications and inkjet printer
cartridges, which we believe in the aggregate represent a market opportunity
for us of over $1.0 billion. Increase Manufacturing and
Supply Chain Efficiencies and Flexibility.We intend to continue our
manufacturing improvement and cost reduction efforts. Through continued
deployment of our Six Sigma quality management program, we intend to
significantly improve our efficiency, reduce our manufacturing and operating
expenses and enhance the quality of the products we manufacture by decreasing
manufacturing defects and improving product reliability. We expect to realize
cost efficiencies by applying more automation at all of our manufacturing
facilities. In addition, by further integrating our operations with our
suppliers and customers, we believe that we can continue to reduce our working
capital needs and improve our responsiveness to customer requirements. Current Product
Applications We offer our products to a broad range of markets
including the hard disk drive, display, semiconductor packaging and consumer
electronics markets. We believe our products are differentiated by their
advanced process technology, innovative design, low cost and the functional
benefits they provide to our customers. Current markets addressed by our products include: Flex
Suspension Assembly.The
disk drive market uses flexible circuits as the interconnect between the
read/write head and disk drive electronics. These applications include our FSA
product which provides the electrical interconnect from the disk drive head to
the back-end electronics (actuator flex) of the disk drive. FSA is a flexible
circuit that is bonded to a suspension for customers desiring a more complete
solution. As a next generation to our FSA product we have also introduced our
FgSA product. We believe FgSA represents a significant improvement over current
generation suspension technology and provides improved technical performance at
a lower cost than competing products by increasing the utilization of the
flexible circuit mechanical characteristics, which simplifies the suspension
used in the assembly. Data
Storage.Our
products for the data storage market include interconnects used for tape
drives, disk arrays and other interconnects used in hard disk drives. Our
actuator flex product provides the back-end electronic interconnect for hard
disk drives. We are a leading provider of flip chip interconnect solutions for
these applications. Flip chip technology, in which an unpackaged die is mounted
directly onto the flexible circuit substrate, is becoming the predominant interconnect
technology for these applications. We will continue to provide flexible circuit
interconnect solutions to the tape storage industry to address customers
continuing data backup and archiving needs. New Ventures.We continue to apply our technology
and products to new markets. We produce advanced flexible circuits for high-end
consumer electronics markets and other markets that could benefit from the
technological advantages of our flexible interconnect solutions. Based on our
assessment of industry trends and market indicators, we believe these markets
will grow rapidly in the future. We are currently offering or developing new
product offerings for the following applications: LCD displays for mobile
communication devices, large screen plasma and LCD displays, inkjet printer
cartridges, semiconductor packaging and medical applications. 6 Technology We are recognized as a technology leader in fine-line,
single and double-sided flexible circuit technology and flexible circuit
assembly technology, including advanced chip-on-flex, flip chip-on-flex and
precision placement assembly technologies. Our process technology includes
proprietary processes and chemical recipes, which coupled with our design
expertise and experience, enables us to deliver high unit volumes of complex
high density flexible circuits at cost-effective yields. Design
Technology.The
flexible circuit interconnects we manufacture are designed specifically for
each application, requiring significant joint design activities with the
customer at the start of a project. We have developed design methodologies that
solve difficult interconnection problems and save our customers time and money.
We also design and produce, in volume, flexible circuits that range from high
density, single-sided circuits to more complex double-sided and multi-layer
circuits. We are continually investing in and improving our computer-based
design tools to more quickly design new flexible circuit interconnects, to
enhance cooperative design and communication with our customers and to more
closely link designs to our manufacturing process. Circuit
Fabrication Technology.We have extensive experience producing fine-line
polyimide flexible circuits and have pioneered manufacturing processes that
deliver high unit volumes at cost-effective yields. At the core of the process
is roll-to-roll 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 inches) are produced in volume
in photoresist. Circuit conductors are then formed by chemically etching the
underlying copper. Coverfilm and covercoat materials are adhered to the
circuitry to provide an insulative coating and to expose contact pads for
surface metalization. The exposed copper surfaces are then coated with solder,
gold or another surface finish for assembly or bonding applications. Laser
processing is used to create various openings such as vias and to cut contoured
peripheries in substrate materials. Our key flexible circuit fabrication technologies
include: Fine Feature Wide-Width Roll-to-Roll Processing.Our process allows us to fabricate
circuits with very fine line widths and spaces at higher density of parts per
square foot which increases material and equipment utilization. Processing
12-inch to 24-inch wide web (as opposed to the narrower industry standard) in a
continuous roll-to-roll format (as opposed to discrete panels) allows us to
fabricate higher volumes at lower cost. Process Technologies.We utilize the following process
technologies in our circuit fabrication process: Semi-additive
Metallization.Allows
the fabrication of flexible circuits with finer lines and spaces through the
selective metalization of the conductors in the circuit fabrication process. Laser
Processing.Produces
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 a blanking die. Bondable
Gold Plating.Prepares
flexible circuit conductors and pads for various bonding processes including
chip-on-flex, which saves space and improves electrical performance by wire
bonding a semiconductor die directly to the flexible circuit. Coverfilm
and Covercoat Application.Adheres coverfilm and covercoat materials to the
circuitry to provide an insulative coating and to expose contact pads for
surface metalization. This 7 process allows accurate
positioning of solder plated pads to support fine pitch surface mount assembly
to the finished circuits. Assembly and Test Technology.We
differentiate ourselves from our competitors by offering both assembly and test
technology to provide complete flexible circuit interconnect assemblies to our
customers. We assemble passive electrical and various mechanical components,
including connectors, stiffeners, diodes, formed metal parts and other devices
to flexible circuits in our plants in Thailand. We also perform 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. Flex Suspension Assembly.We have
exclusive license rights to a proprietary automated process to attach flexible
circuits to suspensions for disk drive applications. We also have exclusive
license rights to the FgSA product in the HDD industry. The FgSA product
provides improved technical performance at a lower cost than competing products
by increasing the utilization of the flexible circuit mechanical
characteristics, which simplifies the suspension used in the assembly. Research and
Development We continually engage in research, development and
engineering activities. Our goal is to utilize these activities to improve and
enhance existing products and processes and to develop new products and
processes in order to expand our market share. Our research and development
effort is concentrated on improving and increasing long run flexible circuit
manufacturing capabilities for both adhesiveless and adhesive based flexible
circuits, developing processes for manufacturing new products including
flexible circuits for display, integrated circuit substrate and printer
applications, developing new FSA and FgSA generations and improving the FSA
attachment process. We have a 35% investment
in, and work very closely with, Applied Kinetics, Inc. (AKI), the
company that developed the unique manufacturing process technology utilized by
our FSA products and the unique product design technology utilized by our FgSA
products. We have a license to use this technology in our products for disk
drive applications on an exclusive basis through 2009 and on a nonexclusive
basis thereafter until 2012, and we continue to work with AKI as part of our
on-going development efforts. Manufacturing We have developed a manufacturing system that combines
the use of technology with the deployment of human resources in a geographic
and organizational manner that we believe allows us to be a global leader in
providing low-cost, high technology flexible circuits. Quality systems are in
place that are certified to standards set by demanding customers in the
electronics industry. All operations have received ISO 9002 certification. We believe our
manufacturing processes, in particular our 12-inch and 24-inch wide web roll
processing lines, are designed to optimize the utilization of automation, labor
and capital, and deliver better yield, material utilization and throughput
relative to our competitors. Most of our automated circuit fabrication
processes are performed in Minnesota where there is an ample supply of
qualified technical resources with the more labor intensive processes performed
in Thailand to remain competitive with low cost based competitors. Suppliers We purchase raw circuit
materials, process chemicals and various components from multiple outside
sources. For components, we typically make short-term purchasing commitments to
key suppliers for specific customer programs. These commitments are usually
made for three to twelve month periods. 8 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 us. In most cases, suppliers are approved, and are often
dictated by our customers. For process chemicals, we rely on a limited number
of key suppliers. We currently can obtain certain types of photoresist, a
liquid compound used in the photoetching process, certain copper and polyimide
laminate materials and certain specialty chemicals used in our manufacturing
process from only one supplier of each such material. 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. We mitigate these risks by identifying stable companies
with leading technology and delivery positions and by attempting to qualify two
suppliers for all critical raw materials and components. Sales, Marketing
and Customer Support We sell and market our products directly to a number
of industries requiring electronic interconnects through the use of an internal
sales staff. In addition, we utilize sales representatives on a limited basis
in several Asian countries where it is advantageous to be represented locally.
Historically, we have sold a substantial portion of our flexible circuit
interconnects to a limited number of customers. We have benefited from early
entry as a supplier to the disk drive industry and have been able to leverage
our relationships to supply next generation integrated flexible circuit
interconnects. Our relationships combined with our reputation for high
standards of quality and innovative manufacturing processes have established us
as a predominant supplier of interconnects for the HDD industry. We provide our customers product design support from
our manufacturing locations in Minnesota and Thailand and from our sales and
customer support offices in California, China, Singapore and the United
Kingdom. In addition, we provide on-site customer design support for our
customers as required. Even though our customer
mix will change from period to period in the future, we expect that sales to
relatively few customers will continue to account for a high percentage of our
net sales in the foreseeable future. Sales to our two largest customers,
Seagate and Maxtor, constituted 65% and 10% of net sales, respectively, for
fiscal 2003, 64% and 9% of net sales, respectively, for fiscal 2002 and 54% and
8% of net sales, respectively, for fiscal 2001. Sales to our five largest
customers constituted 90% of net sales for fiscal 2003, 86% of net sales for
fiscal 2002 and 77% of net sales for fiscal 2001. 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, mobile communication devices and consumer
markets has had and may continue to have a material adverse effect on our
business, financial condition and results of operations. Environmental
Controls Flexible circuit interconnect manufacturing requires
the use of chemicals. As a result, we are 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 our products. We have
discontinued operations at our Chandler, Arizona location and decommissioned
the facility. Our preliminary review of the facility suggests that no material
remediation costs will be required. However, given the uncertainties associated
with environmental contamination, there can be no assurance that such costs
will not have a material adverse impact on us. Pursuant to the agreements
governing the 1993 ADFlex purchase of certain assets from Rogers Corporation (Rogers),
Rogers has retained all environmental liabilities relating to the purchased
assets prior to the closing date of the acquisition. While we believe Rogers
currently has sufficient assets to fulfill its obligations under the
acquisition agreements, if environmental liabilities requiring remediation are
discovered and we are unable to enforce the acquisition agreement against
Rogers, we could become 9 subject to costs and
damages relating to such environmental liabilities. Any such costs and damages
imposed on us could materially adversely affect our business, financial
condition and results of operations. We believe we have been
operating our facilities in substantial compliance in all material respects
with existing environmental laws and regulations. However, we 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, we 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 us and could adversely affect our business,
results of operations and financial condition. We do not anticipate any
material amount of environmental-related capital expenditures in fiscal 2004. Intellectual
Property We believe that, due to our customers demands for
rapid technological advances and the resulting limited product life cycles, the
success of our business generally depends more on the technical and engineering
expertise, creativity and marketing and service abilities of our employees than
on patents, trademarks and copyrights. Nevertheless, we own patents and have a
policy of seeking patents when appropriate on inventions concerning new
products and improvements as part of our ongoing research, development and
manufacturing activities. We control patents related to the FSA attachment
process and new generation FgSA products for disk drive applications and
believe that these patents give us a competitive advantage in the disk drive
industry. There can be no assurance that any patents issued to us or licensed
by us 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 our
ability to do business. Furthermore, there can be no assurance that others will
not independently develop similar products, duplicate our products or design
around the patents issued to us or licensed by us. In addition, there can be no
assurance that foreign intellectual property laws or our agreements will
protect our intellectual property rights in any foreign country. Any failure to
protect our intellectual property rights could have a material adverse effect
on our business, results of operations and financial condition. We have a 35% investment
in, and work closely with, AKI, the company that developed the unique
manufacturing process technology utilized by our FSA products and the unique
product design technology utilized by our FgSA products. We have a license to
use this technology in our products for disk drive applications on an exclusive
basis through 2009 and on a nonexclusive basis thereafter until 2012. The
rights granted to us by AKI are royalty-bearing and may not be sublicensed without
the consent of AKI. Employees As of September 30,
2003, we had a total of 4,142 employees. Of these employees, 189 were based in
Maple Plain, Minnesota, 227 were based in Litchfield, Minnesota, and 3,726 were
based in Thailand. Our future operating results depend in part upon our ability
to attract and retain other qualified management, technical, manufacturing,
sales and support personnel for our operations. Competition for such personnel
is intense and there can be no assurance that we will be successful in
attracting or retaining such personnel. The failure to attract or retain such
persons could materially adversely affect our business, results of operations
and financial condition. 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. We
believe the market competes principally on the basis of design capability,
price, quality, flexibility and technological advancements in underlying
applications. During periods of economic slowdown in the 10 electronics industry and
other periods when excess capacity exists, electronic OEMs become more
price sensitive. We believe 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, frequently, 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 our
competitors in the markets served by us, it also may present an obstacle to our
entry into other markets. The flexible circuit
interconnect market is highly competitive. We experience competition world-wide
from a number of leading foreign and domestic providers including 3M Company
for high-end technology applications, and NOK (Nippon Mektron),
Fujikura Ltd., Multi-Fineline Electronix, Inc. (M-Flex) and
Sumitomo for standard flex and assembly applications. 3M, Sumitomo, NOK and
Fujikura are substantially larger than we and possess greater financial and
other resources. There are a number of other flexible circuit manufacturers
that target other flexible circuit markets and rarely compete directly with us.
In addition, competitors for disk drive market integrated suspension assembly
applications include Hutchinson Technology Incorporated, KRP, Magnacomp
International Limited, Nihon Hatsujo Kabusikigaisha (NHK) and Optimal
Technology Limited. Expansion of our existing products or services could expose
us to new competition. Moreover, new developments in the consumer 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 our competitors will not develop enhancements to, or future
generations of, competitive products or services that will offer superior price
or performance features to those offered by us or that new competitors will not
enter our markets. Finally, as many of our competitors are based in foreign
countries, they have cost structures and prices based on foreign currencies.
Accordingly, currency fluctuations could cause our U.S. dollar-priced products
to be less competitive than our competitors products priced in other
currencies. Backlog The backlog for our
continuing operations was $20.8 million, $23.9 million and
$20.1 million at September 30, 2003, 2002 and 2001, respectively. Our
backlog fluctuates based on the timing of the receipt of orders from customers.
Backlog is defined by us as firm orders that are scheduled to be delivered
within 12 months from the date of the order. While we believe
substantially all of our current 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, we may not
realize the revenue indicated by the backlog. Risks Related to
Our Business An
investment in our common stock involves a high degree of risk. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties that we are unaware of, or that we may currently deem
immaterial, may become important factors that harm our business, financial
condition or results of operations. If any of the following risks actually
occurs, our business, financial condition or results of operations could
suffer. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. Our operating results are subject to fluctuations. Our past operating results, and our gross margins,
have fluctuated from fiscal period to fiscal period. We expect our future
operating results and gross margins will continue to fluctuate from fiscal
period to fiscal period due to a number of factors, many of which are outside
our control and any of which could cause our stock price to fluctuate. 11 The primary factors
that affect us include the following: changes
in overall demand for our products; technological
changes (such as data density improvements) that reduce the number of
suspension assemblies per disk drive required by disk drive makers; changes
in OEM customer manufacturing yields throughout their products life cycles; changes
in the specific products our customers buy; changes
in our selling prices; changes
in utilization of our production capacity; changes
in our infrastructure costs; changes
in our manufacturing process, or problems related to our manufacturing process; changes
in our manufacturing yields; changes
in our production efficiency; long
disruptions in operations at any of our plants for any reason; and changes
in the cost of, or limits on, available materials and labor. Difficulties in forecasting demand for our products
make it difficult to utilize our capacity efficiently. We continue to have limited visibility for future
demand. If customer demand for our FSAs or our actuator flex, display flex,
stacked memory flex or tape storage flex products weakens, or if one or more
customers reduce, delay or cancel orders, our business, financial condition and
results of operations could be materially adversely affected. We typically allow customers to change or cancel orders
on short notice. We plan our production and inventory based primarily on
forecasts of customer demand, including forecasts of customer pulls of product
out of our just-in-time inventory hubs. Our customers typically prefer a dual
source supply, and therefore allocate their demand among suppliers. Both
customer demand and the resulting forecasts often fluctuate substantially.
These factors, among others, create an environment where scheduled production
and capacity utilization can vary significantly from week to week, leading to
variability in gross margins and difficulty in estimating our position in the
marketplace. The following
factors complicate accurate capacity planning for market demand: changes
in the specific products our customers buy; the
pace of technological change; variability
in our manufacturing yields and productivity; and long lead times
for most of our plant and equipment expenditures, requiring major financial
commitments well in advance of actual production requirements. We have at times increased
our production capacity and the overhead that supports production based on
anticipated market demand which has not always developed as expected. As a
result, we have periodically underutilized our capacity. Our inability to plan
our capacity requirements accurately, or our failure to put in place the
technologies and capacity necessary to meet market demand, could have a
material adverse effect on our business, financial condition and results of
operations. 12 Our sales are
concentrated in a small customer base and in the HDD industry. Sales to our largest
customer constituted 65% of net sales for fiscal 2003, 64% for fiscal 2002 and
54% for fiscal 2001, respectively. Sales to our five largest customers
constituted 90% of net sales for fiscal 2003, 86% of net sales for fiscal 2002
and 77% of net sales for fiscal 2001. The loss of one or more of our major
customers or a substantial reduction in orders by any significant customer, for
any reason, including reductions due to market, economic or competitive
conditions in the computer, computer peripheral, mobile communication device
and high-end consumer markets, the development by a customer of the capability
to produce flexible circuits in high volume for its own products, a transfer of
manufacturing operations by a customer to a lower-cost country, a change in the
type of interconnect or suspension assembly used by our largest customers or
the failure of a customer to pay its account balance with us, could have a
material adverse effect on our business, financial condition and results of
operations. Sales of our FSA and
actuator flex products to the hard disk drive industry accounted for 76%, 74%
and 68% of our net sales in fiscal 2003, 2002 and 2001, respectively. The disk
drive industry is intensely competitive and technology changes rapidly. The
industrys demand for disk drive components also fluctuates. The disk drive
industry experiences periods of increased demand and rapid growth followed by
periods of oversupply and subsequent contraction. These cycles may affect
suppliers to this industry because disk drive manufacturers tend to order more
disk drive components than they may need during growth periods, and reduce
orders for these components during periods of contraction. Our selling prices are subject to
pricing pressure from our customers and market pressure from our competitors. We deal with a limited
number of large customers who are able to exert significant pricing pressure on
our products. Our selling prices are affected by changes in overall demand for
our products, changes in the specific products our customers buy and our
products life cycles. A typical life cycle for our products begins with higher
pricing when a product is introduced and decreasing prices as it matures. To
offset price decreases during a products life, we rely primarily on higher
sales volume and improving our manufacturing yield and productivity to reduce a
products cost. If we cannot reduce our manufacturing costs as prices decline
during our products life cycles, our business, financial condition and results
of operations could be materially adversely affected. The markets in
which we operate are highly competitive. We operate in highly
competitive markets and our competitors can be expected to continue to improve
the design and performance of their products and to introduce new products with
competitive price/performance characteristics. Competitive pressures often
necessitate price reductions that adversely affect operating results. We 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 our strategies or that competitive
pressures faced by us will not have a material adverse effect on our business,
financial condition and results of operations. Competing
technologies may reduce demand for our products. Flexible circuit
interconnects provide electrical connections between components in electrical
systems and are used as a platform to support the attachment of electronic
devices. While flexible circuits offer several advantages over competing
printed circuit board and ceramic hybrid circuit technologies, our customers
may consider changing their designs to use these alternative technologies for
future applications. In particular, our largest customer is considering
increased utilization of alternative interconnect technologies that compete with
the electrical interconnect features of our FSA products. If our customers
switch significant portions of their business to alternative technologies, our
business, financial condition and results of operations could be materially
adversely affected. 13


---

Future technological
innovations may reduce demand for disk drives. Data storage alternatives that
compete with disk drive-based data storage currently exist. These storage
alternatives include semiconductor (flash) memory, tape memory and optical (DVD
and CD) drives. The current core technology for disk drive data storage has
been the dominant technology in the industry for many years. This technology
could be replaced by an alternate technology in the future. Our business,
financial condition and results of operations could be materially adversely
affected if the computer industry adopts technology that replaces disk drives
as a computer data storage medium. We have experienced annual losses from operations in
the fiscal year ended September 30, 2003 and in prior years, and we may
not achieve net income on a consistent basis. While we generated
a $759,000 net profit for the fourth quarter of fiscal 2003, we had a net loss
of $3.0 million for fiscal 2003. We experienced net losses of
$3.8 million in fiscal 2002 and $28.9 million in fiscal 2001. Whether
we achieve net income on a consistent basis will depend on a number of factors,
including: the
level of revenue in any given period; our
expense levels, particularly for manufacturing costs; our
manufacturing efficiency, particularly with respect to new product
introductions and high volume products; cultivating
new FSA/FgSA customers; and the
qualification of new products, including new display flex programs and printer
flex products. Data density improvements have reduced worldwide
demand for suspension assemblies, and these improvements are expected to
continue. Disk drive manufacturers
have been able to steadily increase data density (the amount of data that can
be stored on a disk surface), and we believe that they will continue to do so
for the foreseeable future. Increasing data density permits drive manufacturers
to use fewer disks in each disk drive, which in turn reduces the number of
components they need, including FSA products. We believe that since 1999, the
rate of improvement in data density has exceeded historical rates, and that the
average number of suspension assemblies required per drive has decreased from
approximately 4.2 in 1999 to approximately 3.4 in 2000, approximately 3.0 in 2001
and approximately 2.5 in 2002. If improvements in data density continue to
outpace growth in data storage capacity requirements, then demand for our FSA
products may decline and we may not be able to maintain or grow our FSA product
business. To meet industry requirements and remain competitive,
we must continue to improve our process capabilities and develop and qualify
new products. Our continued success depends on our ability to
continue to develop manufacturing processes that are capable of tighter tolerances
and to develop and rapidly bring to volume production new products that meet
increasingly higher performance specifications. A number of risks are inherent
in this process. Increasingly higher performance specifications, as well as
transitions to new product platforms and materials, initially can lower our
overall manufacturing yields and efficiencies. This in turn can cause us to
delay or miss product shipments. We also may incur higher manufacturing costs
and sales returns or we may need to change or develop new manufacturing
processes. If processes change, we may need to replace, modify or design, build
and install equipment. These changes may require additional capital. 14 We may need to increase our research and development
and engineering expenses to support technological advances and to develop and
manufacture new products and product features. We expect future flexible
circuits to require higher performance specifications and thinner or tighter
lines and spaces and to incorporate new material sets. If we fail to successfully introduce new products or
product features on a regular and timely basis, demand for our existing
products could decline, and our business, financial condition and results of
operations could be materially adversely affected. If higher performance
specifications and tighter lines and spaces are required and we are not able to
meet those requirements, our business, financial condition and results of
operations could be materially adversely affected. We must qualify our
products with our customers. The qualification process for these products can
be time-consuming, complex and difficult. We cannot be sure that our products
will continue to be selected for design into our customers products. If we are
unable to obtain additional customer qualifications, or if we cannot qualify
our products for high volume production quantities, or at all, our business,
financial condition and results of operations could be materially adversely
affected. We may not be able to manufacture our products
efficiently due to changes in demand or technology, or other unforeseen events. We manufacture a wide variety of products with
different selling prices and manufacturing costs. Our product mix varies weekly
as market demand changes. Any substantial variation in product mix can lead to
changes in utilization of our equipment and tooling, inventory obsolescence and
overstaffing in certain areas, all of which could adversely impact our
business, financial condition and results of operations. Rapid technological change in the various electronics
industries we serve has led to numerous design changes and tighter performance
specifications. The resulting new product designs with tighter performance
specifications initially are more difficult to manufacture, could require
additional capital expenditures and may require increased development and
support expenses. Manufacturing yields and efficiencies also vary from product
to product. Newer products typically have lower initial manufacturing yields
and efficiencies as we commence volume manufacturing and thereafter ramp to
full production. We have experienced sales returns in the past and as we
commence volume manufacturing, as new features for our products are introduced
or as new manufacturing processes are implemented, we may experience increased
sales returns in the future. We cannot be sure that we will attain our output
goals and be profitable with regard to any of our new products. We may need to transfer
production of certain products from one manufacturing site to another. In the
past, such transfers have lowered initial yields and/or manufacturing
efficiencies. This results in higher manufacturing costs. Our manufacturing
plants are located in Maple Plain and Litchfield, Minnesota and Korat and
Lamphun, Thailand, all of which can experience severe weather. Severe weather
has, at times, resulted in lower production and decreased our shipments. We may not be able to adequately protect our
intellectual property. We license the technology used to produce our FgSA
product and portions of our FSA products in the HDD industry on an exclusive
basis from Applied Kinetics, Inc. (AKI). Our ability to defend our
rights to this intellectual property depends on the validity and enforceability
of AKIs proprietary technology. Should we be unable to enforce our rights with
respect to such intellectual property, our business, financial condition and
results of operations could be materially adversely affected. We attempt to protect our intellectual property rights
through patents, copyrights, trade secrets and other measures. We may not,
however, be able to protect our technology adequately. In addition, competitors
may be able to develop similar technology independently. Our success depends in
large part 15 on trade secrets relating
to our proprietary manufacturing processes. We seek to protect these trade
secrets and our other proprietary technology in part by requiring each of our
employees to enter into non-disclosure and non-competition agreements. In these
agreements, the employee agrees to maintain the confidentiality of all of our
proprietary information and, subject to certain exceptions, to assign to us all
rights in any proprietary information or technology made or contributed by the
employee during his or her employment. In addition, we regularly enter into
non-disclosure agreements with third parties, such as consultants, suppliers
and customers. These agreements may, however, be breached, and we may not have
an adequate remedy for any such breach. In addition, our competitors may
otherwise learn or independently develop our trade secrets. We believe that the
patents we hold, control and may obtain are valuable, but that they will not
independently determine our success. Moreover, we may not receive patents for
our pending patent applications, and our issued patents may not be broad enough
to protect our technology adequately. We compete in industries with rapid
development and technological innovation. We cannot be sure that we will be
able to protect our future technology or that any patent issued to us will not
be challenged, invalidated, circumvented or infringed. In addition, we have
only limited patent rights outside the United States, and the laws of certain
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. Defending against intellectual property claims may
have a material adverse effect on our business. We and certain users of
our products, have received, and may receive, communications from third parties
asserting patents against us or our customers that may relate to our
manufacturing equipment or to our products or to products that include our
products as a component. If any third party makes a valid infringement claim
against us and we are unable to obtain a license on terms acceptable to us, our
business, financial condition and results of operations could be materially
adversely affected. We expect that, as the number of patents issued continues
to increase, the volume of intellectual property claims made against us could
increase. We may have difficulty obtaining an adequate supply of
raw materials at reasonable prices. We currently can obtain
certain types of photoresist, a liquid compound used in the photoetching
process, certain copper and polyimide laminate materials and certain specialty
chemicals used in our manufacturing process from only one supplier of each such
material. If we could not obtain the materials referred to above in the
necessary quantities, with the necessary quality and at reasonable prices, our
business, financial condition and results of operations could be materially
adversely affected. The loss of key personnel could adversely affect our
business. Our success depends upon
the efforts, contributions and abilities of our senior management. We cannot be
sure that the services of our key personnel will continue to be available to
us. The loss of services of any of these employees could have a material
adverse effect on our business, financial condition and results of operations. We may not be able to obtain the capital we need to
maintain or grow our business. Our ability to execute our long-term strategy may
depend on our ability to obtain additional long-term debt and equity capital.
We have no commitments for additional borrowings, other than our existing
credit facilities, or for sales of equity, other than under our existing
employee benefit plans. We cannot determine the precise amount and timing of
our funding needs at this time. We may be unable to obtain future additional
financing on terms acceptable to us, or at all. If we fail to comply with
certain covenants relating to our indebtedness, we may need to refinance our
indebtedness to repay it. We also may need to refinance 16 our indebtedness at
maturity. We may not be able to obtain additional capital on favorable terms to
refinance our indebtedness. The following factors could affect our ability to
obtain additional financing on favorable terms, or at all: our
results of operations; general
economic conditions and conditions in the disk drive industry; the
perception in the capital markets of our business; our
ratio of debt to equity; our
financial condition; our
business prospects; and changes in
interest rates. In addition, certain
covenants relating to our existing indebtedness impose certain limitations on
additional indebtedness. If we are unable to obtain sufficient capital in the
future, we may have to curtail our capital expenditures and reduce research and
development expenditures. Any such actions could have a material adverse effect
on our business, financial condition and results of operations. Servicing our existing debt may constrain our future
operations. Our ability to satisfy our
obligations to pay interest and to repay debt is dependent on our future
performance. Our performance depends, in part, on prevailing economic
conditions and financial, business and other factors, including factors beyond
our control. To the extent that we use a portion of our cash flow from
operations to pay the principal of, and interest on, our indebtedness, that
cash flow will not be available to fund future operations and capital
expenditures. We cannot be sure that our operating cash flow will be sufficient
to fund our future capital expenditure and debt service requirements or to fund
future operations. Our financing agreements contain restrictive covenants
with which we may not be able to comply. We have entered into a
number of financing agreements that contain restrictive financial covenants.
These covenants require us, among other things, to maintain specified levels of
net income, tangible net worth and interest and leverage ratios, and also
impose certain limitations on additional indebtedness, leases, guarantees and
the payment of dividends. Our ability to comply with restrictive financial
covenants depends upon our future operating performance. Our future operating
performance depends, in part, on general industry conditions and other factors
beyond our control. We cannot be sure that we will be able to comply with these
covenants in the future, and we may not be successful in renegotiating our
financing agreements or otherwise obtaining relief from the covenants. If we
default under some or all of our financing agreements, our lenders may require
that we immediately repay the full outstanding amount we owe to them. In such
event, we may have to pursue alternative financing arrangements. If we are not
in compliance with financial covenants in our financing agreements at the end
of any fiscal quarter, our business, financial condition and results of
operations could be materially adversely affected. We may not be able to successfully address problems
encountered in connection with any future acquisitions. We expect to
consider opportunities to acquire or make investments in other technologies,
products and businesses that could enhance our technical capabilities,
complement our current products and services, or expand the breadth of our
markets. Acquisitions and strategic investments, including if we elect 17 to
exercise our option to acquire shares of KRP in exchange for delivery of shares
of our common stock, involve numerous risks, including: problems
maintaining uniform standards, procedures, controls and policies; unanticipated
costs associated with the acquisition, including accounting charges and
transaction expenses; problems
assimilating the purchased technologies, products or business operations; diversion
of managements attention from our core business; adverse
effects on existing business relationships with suppliers and customers; risks
associated with entering markets in which we have no or limited prior
experience; and potential loss
of key employees of acquired organizations. If we fail to properly
evaluate and execute acquisitions and strategic investments, our management
team may be distracted from our day-to-day operations, our business may be
disrupted and our operating results may suffer. In addition, if we finance
acquisitions by issuing equity or convertible debt securities, including the
exercise of our option to acquire shares of KRP, our existing shareholders
would be diluted. We face risks from doing business internationally. We have
manufacturing facilities in Thailand and design, sales and customer support
operations in the United Kingdom, Singapore, China and South Korea. Our
business is subject to certain risks inherent in international business, many
of which are beyond our control. These risks include: changes
in local regulatory requirements, including restrictions on product content; changes
in the laws and policies affecting trade, investment and taxes (including laws
and policies relating to the repatriation of funds and to withholding taxes); differing
degrees of protection for intellectual property; foreign
labor issues; difficulties
in coordinating and managing foreign operations; potential
cross border shipment delays; instability
of foreign economies and governments; cultural
barriers; wars
and acts of terrorism; and the spread of
severe acute respiratory syndrome, or SARS. Any of these factors could
have a material adverse effect on our business, financial condition and results
of operations. We face risks from fluctuations in the value of
foreign currency versus the U.S. dollar and the cost of currency exchange. While we transact business
predominantly in U.S. dollars, a large portion of our sales and expenses are
denominated in foreign currencies. Changes in the relation of foreign
currencies to the U.S. dollar will affect our cost of sales and operating
margins and could result in exchange losses. To reduce the impact of certain
foreign currency fluctuations, we enter into short-term forward foreign
currency exchange contracts 18 in the
regular course of business. The forward exchange contracts generally require us
to exchange Thailand baht for U.S. dollars or U.S. dollars for Thailand baht at
maturity, at rates agreed to at inception of the contracts. These contracts are
not designed as hedges, therefore, the gains and losses on foreign currency
transactions are included in income as incurred. No assurance can be given that
our strategies will prevent future currency fluctuations from having a material
adverse effect on our business, financial condition and results of operations. A prolonged economic downturn could materially harm
our business. Negative trends in the
general economy, including trends resulting from actual or threatened military
action by the United States and threats of terrorist attacks on the United
States and abroad, could cause a decrease in consumer and business spending in
general. We may not be able to maintain good relations with our
employees. Our ability to conduct
business would be impaired if our workforce were to be unionized or if a
significant number of our specialized employees were to leave and we could not
replace them with comparable personnel. Our business may be adversely affected
if we need to adjust the size of our workforce due to fluctuating demand. The
locations of our plants and the broad span and technological complexity of our
products and processes limit the number of satisfactory engineering and other
candidates for key positions. We could incur substantial costs as a result of
violations of or liabilities under environmental laws. Our operations are subject
to laws and regulations relating to the protection of the environment,
including those governing the discharge of pollutants into the air or water,
the management and disposal of hazardous substances or wastes and the cleanup
of contaminated sites. Some of our operations require environmental permits and
controls to prevent and reduce air and water pollution, and these permits are
subject to modification, renewal and revocation by issuing authorities. We
could incur substantial costs, including cleanup costs, fines and civil or
criminal sanctions and third-party claims for property damage and personal
injury as a result of violations of or liabilities under environmental laws or
non-compliance with environmental permits. Item
2.   PROPERTIES At September 30,
2003, we owned an aggregate of approximately 414,000 square feet of
manufacturing and other space. Our significant facilities are as follows: Functions
  
  
  
  Location (number of facilities)
  
  SquareFeetExecutive
  offices, research and development and circuit fabrication
  
  Maple
  Plain, Minnesota (one)
  
  
  96,000Circuit inspection and finishing
  
  Korat, Thailand (two)
  
  
  12,000
  8,000Circuit finishing and assembly, sales and support
  
  Lamphun, Thailand (two)
  
  
  140,000
  15,000Circuit
  fabrication
  
  Litchfield,
  Minnesota (five)
  
  
  63,000
  15,000
  10,000
  51,000
  4,000  19 Item
3.   LEGALPROCEEDINGS We are party to certain lawsuits in the ordinary
course of business. Other than with respect to the matter set forth below, we
do not believe that these proceedings, individually or in the aggregate, will
have a material adverse effect on our business, financial condition or results
of operations. In July 2000, the
Lemelson Medical, Education & Research Foundation Limited Partnership
(Lemelson) filed suit in the Federal District Court in the District of
Arizona against us and approximately 90 other defendants. The suit alleges that
all of the defendants are violating certain patents owned by Lemelson related
to machine vision technologies. Lemelson alleges that certain of the equipment
used in our business utilizes this type of technology. We purchased this
equipment from vendors whom we believe may have an obligation to indemnify us
in the event that the equipment infringes any third-party patent. The complaint
seeks damages in an unspecified amount. We have answered the complaint denying
that we infringed any of these patents. Since the filing of our answer, the
entire case has been stayed in order to allow an earlier-filed case to proceed.
We cannot be sure that we will prevail in this action and any adverse outcome
could require us, among other things, to pay royalties to Lemelson. We do not
believe it is currently possible to calculate the potential for, or the extent
of, any liabilities resulting from this claim. Item
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS We did not submit any
matter to a vote of our security holders during the fourth quarter of the
fiscal year covered by this Report. Item
4A.   EXECUTIVE OFFICERS OF REGISTRANT Below
are the name, age, position and a brief account of the business experience of
each of our executive officers and key employees as of September 30, 2003. Name
  
  
  
  Age
  
  Position(s)Thomas W. Haley
  
  67
  
  Chairman
  and DirectorWilliam P.
  Murnane
  
  41
  
  President,
  Chief Executive Officer and DirectorThomas Paulson
  
  47
  
  Senior
  Vice President and Chief Financial OfficerBrian R. Dahmes
  
  43
  
  Vice
  President, Research and DevelopmentKeith Foerster
  
  40
  
  Vice
  President, General Manager, Data StorageDennis R. Huber
  
  39
  
  General
  Manager, FSA DivisionDouglas W. Keller
  
  45
  
  Vice
  President, FinanceKelly S. Schuller
  
  38
  
  Vice
  President, General Manager, New VenturesNick Tomashot
  
  40
  
  Vice
  President, Planning and AnalysisVasu Velayuthan
  
  39
  
  Vice President, Asia Operations  Thomas Haley
founded our company and served as President from 1972 to 1988 and Chief
Executive Officer from 1988 through 1999. He has been a director and Chairman
since our inception in 1972. William Murnane
was promoted to President and Chief Operating Officer in July 1998 and to
Chief Executive Officer in January 2000. He has been a director since
1999. Mr. Murnane joined us 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. Murnane
is also a director of KR Precision Public Company Limited, Applied Kinetics, Inc.
and Transport Corporation of America. 20 Thomas Paulson
joined us in February 2001 as Senior Vice President and Chief Financial
Officer. Prior to working with us, Mr. Paulson spent 19 years at The
Pillsbury Company where he held a variety of executive positions managing
complex financial and business issues in multi-operational and multinational
divisions, including Vice President of Finance. Mr. Paulson also serves on
the Board of Directors of Applied Kinetics, Inc. Brian Dahmes
joined us 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 was promoted to Vice President, Managing
Director Innovex (Thailand). In August 2001, Mr. Dahmes was named
Vice President, Research and Development. From 1992 to 1995, Mr. Dahmes
served as Process Engineering Manager for Sheldahl, Inc., and from 1995 to
1997, he was an Engineering Manager with Sheldahl, Inc. Keith Foerster
joined us in May 1992 as a Sales and Marketing Engineer. He has held
the following positions with us: National Sales ManagerMay, 1995 to July 1997;
Director, Hard Disk Drive SalesJuly 1997 to August 1999; Senior
Director, FSA DevelopmentAugust 1999 to May 2000; Senior Director,
Minnesota OperationsMay 2000 to June 2002; Senior Director and
General Manager of the Data Storage DivisionSeptember 2001 to June 2003;
and Vice President and General Manager of the Data Storage Division since June 2003.
Previously, Mr. Foerster held positions as a Sales Engineer at Quannon CAD
Systems from September 1990 to May 1992 and as a Mechanical Design
Engineer at Control Data Corporation from May 1986 to September 1990. Dennis Huber
joined us in January 2001 as a Senior Director and became General Manager
of the FSA Division in September 2001. Prior to working with us, Mr. Huber
held various engineering positions at Seagate Technology from 1993 to January 2001
and also held various engineering positions at Hutchinson Technology from 1987
to 1993. Douglas Keller
joined us in January 1990 as Corporate Controller. In May 1992, Mr. Keller
was made an officer 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. Kelly Schuller
joined us in April 2001 as Vice President, Strategic Marketing and New
Business Development. Prior to joining us, Mr. Schuller spent five years
at McKinsey & Company where he led a number of major strategy and
business development engagements for Fortune 500 companies. Before McKinsey, he
worked for The Pillsbury Company in Strategic and Financial Planning as well as
for Ernst & Young as a certified public accountant. In August 2001,
Mr. Schuller was named General Manager of New Ventures. Nick Tomashot
joined us in April 2001 as Director of Planning and Analysis. In June 2003,
he was promoted to Vice President of Planning and Analysis. Prior to joining
us, Mr. Tomashot was Director of Finance of Rooster.com from 2000 to
March, 2001, and was Senior Finance Manager of Diageo PLC, Pillsbury North
America in the Non-Dough Foods Division from 1999 to 2000. Prior to that, Mr. Tomashot
held various finance positions at Proctor & Gamble from 1993 to 1999
and at The NCR Corporation from 1986 to 1991. Vasu Velayuthan
joined us in March, 2001 as Vice President, Asia Operations. Previously, Mr. Velayuthan
spent six years at Seagate Technology where he held a variety of management
positions in manufacturing and quality. 21


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PART II Item 5.   MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS Common Stock Information Our common stock is traded
in the over-the-counter market under the symbol INVX.  As of September 30, 2003, there were
18,906,739 shares of common stock outstanding, held by approximately 526
shareholders of record. In August 4, 2003,
the Company consummated the sale of 3,450,000 shares of common stock at a
public offering price of $12.25 per share. The net offering proceeds to the
Company were $39,461,750 after deducting total estimated expenses of the
offering. Price Range of Common Stock The
table below sets forth the high and low sale prices as reported on the Nasdaq
National Market for the periods indicated. 2003
  
  2002High
  
  Low
  
  High
  
  LowFirst Quarter
  
  $
  5.200
  
  $
  1.560
  
  $
  4.200
  
  $
  1.260Second Quarter
  
  7.180
  
  4.050
  
  5.170
  
  3.310Third Quarter
  
  11.500
  
  6.310
  
  7.425
  
  3.600Fourth Quarter
  
  15.290
  
  9.560
  
  4.100
  
  1.950  Dividend Policy We have not declared a
dividend on our common stock since November 1999. We currently intend to
retain all available funds, after repayment of the debt, to support our
operations and to finance growth and development of our business. We do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to the dividend policy will be made at the discretion of
our board of directors and will depend on a number of factors, including our
future earnings, credit facility restrictions, capital requirements, financial
condition, future prospects and other factors as the board of directors may
deem relevant. Securities Authorized for Issuance Under Equity
Compensation Plans The
following table sets forth information regarding our equity compensation plans
in effect as of September 30, 2003. Each of our equity compensation plans
is an employee benefit plan as defined by Rule 405 of Regulation C of
the Securities Act of 1933. Plan category
  
  
  
  Number of shares of common 
  stock to be issued upon 
  exercise of outstanding 
  options, warrants and rights
  
  Weighted-average exercise 
  price of outstanding 
  options, warrants and rights
  
  Number of shares of common 
  stock remaining available for 
  future issuance under equity 
  compensation plans(1)Equity compensation
  plans approved by stockholders:
  
  
  1,990,402
  
  
  
  $
  7.11
  
  
  
  195,526Equity compensation
  plans not approved by stockholders:
  
  
  
  
  
  
  
  
  
  
  Total
  
  
  1,990,402
  
  
  
  $
  7.11
  
  
  
  195,526  
 (1)Excludes
shares of stock listed in first column. 22 The equity compensation plans approved by our
shareholders are the 1983 Employee Incentive Stock Option Plan, 1987 Employee
Stock Option Plan, 1994 Stock Option Plan, and the 2000 Restricted Stock Plan. No
shares remain available for future awards under the 1983 Plan. The Company also maintains
an Employee Stock Purchase Plan, participation in which is available to
substantially all of the Companys employees. Participating employees may
purchase the Companys common stock at the end of each participation period at
a purchase price equal to 85% of the lower of the fair market value of the
stock at the beginning or end of the period. The six-month participation period
runs from April 1 to September 30 and from October 1 to March 31
each year. Employees may contribute up to 10% of their base compensation to the
plan subject to certain IRS limits on stock purchases through the plan. This
plan has been approved by the Companys shareholders. Use of Proceeds
from Registered Securities On July 29, 2003, the Securities and Exchange
Commission declared effective the Companys Registration Statement on Form S-3
(File No. 333-106734) registering 3,000,000 shares of its newly issued
common stock (plus an additional 450,000 to cover an overallotment). SG Cowen
Securities Corporation, C.E. Unterberg, Towbin and Craig-Hallum Capital Group
LLC acted as managing underwriters for the offering. On August 4, 2003, the Company consummated the
sale of 3,450,000 shares of common stock at a public offering price of $12.25
per share. Total offering expenses were approximately $2,800,750.
These expenses consisted of $2,535,750 in underwriting discounts and
approximately $265,000 of other offering related expenses including legal and
accounting fees, printing and other expenses. The net offering proceeds to the
Company were $39,461,750 after deducting total estimated expenses of the
offering. On August 4, 2003,
the Company applied $4.7 million of the net offering proceeds to pay down
outstanding debt relating to its credit facilities with Wells Fargo Commercial
Bank. On August 6, 2003, the Company paid down the outstanding balance
under its revolving Thailand packing credit facilities by $15.0 million. The
Company intends to use the remainder of the net proceeds for general corporate
purposes. 23 Item
6.   SELECTED
CONSOLIDATED FINANCIAL DATA The
following selected consolidated financial data as of the end of each fiscal
year has been derived from our consolidated financial statements for each of
the years in the five-year period ended September 30, 2003. 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 and related notes appearing elsewhere in this report. For the Years Ended September 30,1999
  
  2000
  
  2001
  
  2002
  
  2003(In thousands, except per share data)Consolidated Statement of
  Operations Data:Net sales
  
  $
  103,198
  
  $
  164,462
  
  $
  145,635
  
  $
  134,728
  
  $
  153,007Cost of sales
  
  76,277
  
  139,843
  
  128,978
  
  118,671
  
  132,142Gross profit
  
  26,921
  
  24,619
  
  16,657
  
  16,057
  
  20,865Operating
  expenses:Selling, general
  and administrative
  
  9,788
  
  16,089
  
  18,513
  
  16,618
  
  17,941Engineering
  
  4,581
  
  7,731
  
  6,431
  
  5,665
  
  6,459Restructuring
  
  4,461
  
  13,601
  
  20,373
  
  950
  
  750Total operating
  expenses
  
  18,830
  
  37,421
  
  45,317
  
  23,233
  
  25,150Income (loss)
  from operations
  
  8,091
  
  (12,802
  )
  (28,660
  )
  (7,176
  )
  (4,285
  )Interest and
  other income (expense)
  
  1,147
  
  (2,767
  )
  (3,689
  )
  (2,265
  )
  (2,273
  )Income (loss)
  before provision for income taxes
  
  9,238
  
  (15,569
  )
  (32,349
  )
  (9,441
  )
  (6,558
  )Benefit
  (provision) for income taxes
  
  (2,680
  )
  4,515
  
  3,473
  
  5,606
  
  3,599Net income (loss)
  
  $
  6,558
  
  $
  (11,054
  )
  $
  (28,876
  )
  $
  (3,835
  )
  $
  (2,959
  )Net income (loss)
  per shareBasic
  
  $
  0.44
  
  $
  (0.75
  )
  $
  (1.93
  )
  $
  (0.25
  )
  $
  (0.19
  )Diluted
  
  $
  0.44
  
  $
  (0.75
  )
  $
  (1.93
  )
  $
  (0.25
  )
  $
  (0.19
  )Cash dividends per share
  
  $
  0.16
  
  $
  0.04
  
  $
  
  
  $
  
  
  $
  As of September 30,1999
  
  2000
  
  2001
  
  2002
  
  2003(In
  thousands)Consolidated Balance Sheet
  Data:Total assets
  
  $
  178,806
  
  $
  167,680
  
  $
  142,667
  
  $
  114,928
  
  $
  137,583Long-term debt,
  less current maturities
  
  26,376
  
  21,003
  
  26,403
  
  15,372
  
  9,087Stockholders equity
  
  107,134
  
  96,396
  
  68,175
  
  64,421
  
  103,547  Item 7.   MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our
financial condition and results of operations in conjunction with the
consolidated financial statements and notes to those statements included
elsewhere in this report. This discussion may contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, such as those set forth under BusinessRisks
Related to Our Business and elsewhere in this report. We
utilize a fiscal year that ends on the Saturday nearest to September 30.
For clarity of presentation, we have described all periods as if they end at
the end of the calendar quarter. 24 Overview We are a leading worldwide provider of flexible
circuit interconnect solutions to original equipment manufacturers (OEMs) in
the electronics industry. We offer a full range of customized flexible circuit
applications and services from initial design, development and prototype to
fabrication, assembly and test on a global basis. We target high volume markets
where miniaturization, form and weight are driving factors and flexible
circuits are an enabling technology. Applications for flexible circuits
currently addressed by us include data storage devices such as hard disk drives
(HDDs), liquid crystal displays (LCDs) for mobile communication devices,
tape drives and arrays, flat panel displays and printers. Our customers include
3M, Dell, Hitachi, HP, Maxtor, Medtronic, Philips, Quantum, SAE Magnetics (a
subsidiary of TDK), Samsung, Seagate, Staktek, StorageTek, Xerox and other
leading electronic OEMs. Prior to 1999, our primary
products were small lead wire assemblies for computer disk drives. The disk
drive industry has transitioned away from lead wire assembly interconnects to
integrated interconnects such as our Flex Suspension Assembly (FSA) products.
This transition has had a significant impact on our operations since 1998 as we
have had to manage the rapid increase in our flexible circuit business while
controlling the rapid drop in our lead wire assembly operations. Lead wire
assembly sales constituted none of fiscal 2003, 2002 and 2001 consolidated net
sales after comprising over 72% of fiscal 1998 net sales. Net Sales and Revenue Recognition We manufacture flexible
circuits and perform certain additional assembly and test functions on these
flexible circuits based on customer specifications. We sell our products
directly throughout the world, primarily in North America, Europe and the
Pacific Rim countries. We use non-exclusive sales representatives to augment
our direct sales efforts, with sales through distributors representing less
than 5% of our total net sales for fiscal years 2003, 2002 and 2001. We
recognize revenue from the sale of our products upon shipment or delivery of
our product to our customers, depending on the customer agreement or shipping
terms. We store some inventory in third party owned warehouses that are located
close to customers manufacturing facilities. Sales from third party warehouses
are recognized upon the transfer of title and risk of loss, following the
customers acknowledgment of the receipt of the goods. Costs and Expenses Cost of sales
consists primarily of: material
costs for raw materials and semi-finished components used for assembly of our
products; labor
costs directly related to manufacture, assembly and inspection of our products; costs
of general utilities, production supplies and chemicals consumed in the
manufacturing processes; costs
related to the maintenance of our manufacturing equipment and facilities; costs
related to material and product handling and shipment; depreciation
costs related to facilities, machinery and equipment used to manufacture,
assemble and inspect our products; and salaries and
overhead attributed to our supply chain, process engineering and manufacturing
personnel. 25 Selling, general
and administrative expenses primarily consist of: salaries
and related selling (commissions, travel, business development and program
management), administrative, finance, human resources, regulatory, information
services and executive personnel expenses; other
significant expenses related to external accounting, software maintenance and
legal and regulatory fees; and overhead
attributed to our selling, general and administrative personnel. Engineering
expenses include costs associated with the design, development and testing of
our products and processes. These costs consist primarily of: salaries
and related development personnel expenses; overhead
attributed to our development and test engineering personnel; and prototyping
costs related to the development of new products. Restructuring charges are
those costs primarily related to manufacturing facility closures, severance and
product discontinuations. In fiscal 2000, we closed our Agua Prieta, Mexico
facility and moved the operations to our facility in Lamphun, Thailand and
recorded the associated restructuring charges. In fiscal 2001, we recorded
restructuring charges related to closing our Chandler, Arizona facility and
transferring manufacturing operations to our Minnesota and Thailand locations.
Because we initially underestimated the costs relating to these restructurings,
we recorded additional restructuring charges in fiscal 2001 and 2002 and in our
current fiscal year. As of September  30, 2003, we believe that the
restructuring related to the closing of these two facilities has been
substantially completed. Results of Operations The
following table sets forth certain operating data as a percentage of net sales
for the periods indicated: For the Years Ended
  September 30,2001
  
  2002
  
  2003Net sales
  
  100.0
  %
  100.0
  %
  100.0
  %Cost of sales
  
  88.6
  
  88.1
  
  86.4Gross profit
  
  11.4
  
  11.9
  
  13.6Operating expenses:Selling, general and administrative
  
  12.7
  
  12.3
  
  11.7Engineering
  
  4.4
  
  4.2
  
  4.2Restructuring
  
  14.0
  
  0.7
  
  0.5Total operating expenses
  
  31.1
  
  17.2
  
  16.4Income (loss)
  from operations
  
  (19.7
  )
  (5.3
  )
  (2.8
  )Net interest and
  other expense
  
  (2.5
  )
  (1.7
  )
  (1.5
  )Income (loss)
  before provision for income taxes
  
  (22.2
  )
  (7.0
  )
  (4.3
  )Benefit
  (provision) for income taxes
  
  2.4
  
  4.2
  
  2.4Net income (loss)
  
  (19.8
  )%
  (2.8
  )%
  (1.9
  )%  26  Comparison of the
Fiscal Years Ended September 30, 2003 and 2002 Net Sales Our net sales were $153.0 million for the year
ended September 30, 2003, compared to $134.7 million for the year ended
September 30, 2002, an increase of 14%. Our net sales from operations were
$41.5 million in the fourth quarter of fiscal 2003, compared to
$30.1 million in the fourth quarter of fiscal 2002, an increase of 38%. These
increases were due to higher sales generated by disk drive, semiconductor
packaging and LCD display applications. The increased disk drive sales were
related to our improved FSA market share as our largest customer in the disk
drive industry transitioned to the 80 gigabyte (GB) per platter
technology platform. Semiconductor packaging net sales increased due to higher
demand from our stacked memory customers. The LCD sales improvement was related
to the continued ramp-up of the new LCD program announced during the first
quarter of fiscal 2003. Sales from the disk drive industry generated 76% of
our net sales for the year ended September 30, 2003, compared to 74% for
the year ended September 31, 2002, sales from semiconductor packaging
applications were 7%, compared to 3%, network system application sales were 6%
for both years, display application net sales were 5% versus 0%, consumer
application sales were 5% versus 14% and sales from other industry applications
were 1% for the year ended September 30, 2003 versus 3% for the year ended
September 30, 2002. We expect net sales for
fiscal 2004 to improve as we continue to benefit from the qualification of our
FSA product on 80 GB per platter disk drive programs, additional program
qualifications for our disk drive actuator flex products, increases in demand
for our stacked memory flex product and additional LCD flex programs enter
production. Gross Profit Our gross profit was $20.9 million for the fiscal
year ended September 30, 2003, compared to $16.1 million for the
fiscal year ended September 30, 2002, an increase of 30%. Our gross margin
for the fiscal year ended September 30, 2003 increased to 14%, compared to
12% for the fiscal year ended September 30, 2002. The increase in gross
margin was primarily due to higher net sales increasing our fixed cost leverage
and efficiency improvements related to Six Sigma and other initiatives. These
improvements offset the incremental start-up and tooling costs related to new
product introductions and product mix changes resulting from a lower portion of
sales from HIF, one of our older products, within our product mix that impacted
the first half of fiscal 2003. We experienced a significant product transition
during the second quarter of fiscal 2003, converting approximately 70% of our
products to new designs. The product mix for the first half of fiscal 2003 also
had an increased share of FSA sales with higher material pass through content
related to the suspension material used in the FSA product. The fiscal 2002
product mix included a higher share of our HIF product, which does not include
the suspension related pass through material. We anticipate that gross
margins in fiscal 2004 will improve as net sales are expected to increase and
the efficiency improvements benefiting the fourth quarter of fiscal 2003
continue to have a positive impact. Selling, General and Administrative Selling, general and administrative expenses for the
fiscal year ended September 30, 2003 were $17.9 million, compared to
$16.6 million in the fiscal year ended September 30, 2002, an
increase of 8%. As a percentage of net sales, selling, general and
administrative expenses were 12% for both the fiscal year ended September 30,
2003 and 2002. The increase in fiscal 2003 spending was primarily due to
increased commissions and royalties resulting from the increase in net sales,
consulting and training costs related to implementation of the company-wide Six
Sigma program and severance costs of approximately $400,000 27 recorded during the first
quarter of fiscal 2003 related to efforts to increase operational efficiency by
consolidating from four marketing groups to three. Selling, general and
administrative expenses for fiscal 2004 are expected to decrease as a
percentage of net sales due to a reduced level of Six Sigma spending and
anticipated increased net sales in fiscal 2004. Engineering Engineering expenses for the fiscal year ended September 30,
2003 were $6.5 million, compared to $5.7 million for the fiscal year
ended September 30, 2002, an increase of 14%. The increase in fiscal 2003
engineering expenses was primarily due to increased spending on new product
development, further spending related to FSA and FgSA technology improvements,
qualifying products and processes for new applications including LCD displays,
printers, semiconductor packaging substrates and other high-end flexible
circuit technology development related to new products. As a percentage of net
sales, engineering expenses were 4% of sales for both the fiscal year ended September 30,
2003 and 2002. Engineering expenses for
fiscal 2004 are expected to decrease as a percentage of net sales due to an
expected increase in sales while engineering expenses are expected to remain
flat. Restructuring Restructuring charges for
the fiscal year ended September 30, 2003 were $750,000, compared to
$950,000 for the fiscal year ended September 30, 2002. In fiscal 2003, the
charges were recorded due to an increase in the estimate of the leased
Chandler, Arizona facility disposition costs, primarily to buy out the
remainder of the Chandler, Arizona facility lease through its June 2003
termination. In the fiscal year ended September 30, 2002, the charges were
also recorded due to an increase in the estimate of the leased Chandler,
Arizona facility disposition costs and an additional accrual was recorded to
complete the restructuring related to the closing of our Mexican facility. As
of September 30, 2003, the restructuring was substantially complete. Net Interest and Other Expense Net interest expenses were $2.0 million in the
fiscal year ended September 30, 2003, compared to $2.6 million for
the fiscal year ended September 30, 2002, a decrease of 22%. Interest
expense decreased in 2003 primarily due to average interest-bearing debt being
$11.0 million lower for the twelve months ended September 30, 2003
compared to the twelve months ended September 30, 2002. Net other expense
was $234,000 in the fiscal year ended September 30, 2003 as compared to
net other income of $351,000 in the fiscal year ended September 30, 2002. The
decrease was the result of foreign currency exchange losses being incurred in
fiscal 2003 while a foreign currency gain was generated in fiscal 2002 and the
write off of the loan origination fees related to the U.S. based credit
facility which was paid off in the fourth quarter of fiscal 2003. Income Taxes Income tax benefit for the
fiscal year ended September 30, 2003 was $3.6 million, compared to
$5.6 million for the fiscal year ended September 30, 2002. The fiscal
2003 tax benefit was calculated as the change in the deferred tax asset from
2002. We have determined that it is more likely than not that we will be able
to utilize the tax benefit in the future. During the second quarter of fiscal 2002,
approximately $1.7 million of the tax benefit recorded was due to a
reduction of the deferred tax allowance. The deferred tax allowance was reduced
as a result of the estimated improvement in deferred tax asset recoverability
in light of the receipt of a $13.2 million tax refund resulting from the
carry-back of the fiscal 2001 net operating loss. 28


---

Comparison of the
Fiscal Years Ended September 30, 2002 and 2001 Net Sales Our net sales were $134.7 million in fiscal 2002,
compared to $145.6 million in fiscal 2001, a decrease of 7%. The largest
portion of the decline was due to a reduction in flexible circuit sales for
high-end tape library, tape backup and array applications as a result of lower
worldwide information technology infrastructure spending. In addition, fiscal
2002 did not include any sales of our bridge flex product as the product was phased
out in early fiscal 2001. The bridge flex was a transitional product that
completed the connection from the suspension to the actuator flex for disk
drive head interconnect solutions that terminated at the back of the
suspension. The need for bridge flex products was eliminated as the conductors
from subsequent versions of these disk drive head interconnect solutions
extended beyond the suspension. In fiscal 2002, we also experienced a continued
decline in flexible circuit sales from mobile communications devices as the
telecommunications market continued to be less active. The decline in sales was
partially offset through increased sales in other areas including disk drive
actuator flex, DVD, semiconductor packaging and solid ink printer applications.
Sales from disk drive actuator flex products increased as the result of market
share gains. DVD related sales increased due to a customers new product
introduction. Semiconductor packaging sales improved as a result of increased
demand for stacked memory for high-end server applications. Our sales from the disk
drive industry generated 74% of fiscal 2002 net sales compared to 68% in fiscal
2001. Consumer application sales were 14% of net sales in fiscal 2002 as
compared to 10% in fiscal 2001 due to DVD and solid ink printer sales
increases. Sales generated from network system applications were 6% in fiscal
2002 down from 13% in fiscal 2001 due to the decrease in tape storage related
sales. Sales from other applications were 6% in fiscal 2002 compared to 9% in
fiscal 2001. Gross Profit Our gross profit was
$16.1 million for fiscal 2002, compared to $16.7 million for fiscal
2001, a decrease of 4%. However, our gross margin for fiscal 2002 increased
slightly to 12%, from the 11% reported for fiscal 2001. The improved gross
margin percentage was primarily due to a lower fixed cost basis resulting from
cost reduction measures we took in fiscal 2001. This cost reduction was
partially offset by lower fixed cost leverage caused by the reduction in sales.
The cost reduction measures included the transfer of manufacturing operations
from Chandler, Arizona to our Minnesota and Thailand facilities and a reduction
of our workforce. The benefit of the lower cost base was also partially offset
by an increase in variable material costs caused by an increased proportion of
FSA products in the product mix. FSA products have a higher variable material
cost component than products including only flexible circuits due to the cost
of the purchased suspension to which the flexible circuit is attached. Selling, General and Administrative Selling, general and
administrative expenses were $16.6 million in fiscal 2002, compared to
$18.5 million in fiscal 2001, a decrease of 10%. The decrease in fiscal
2002 expenses was a result of the fiscal 2001 restructuring that closed our
Chandler, Arizona facility and reduced our overall workforce size combined with
general cost-cutting measures. As a percentage of net sales, selling, general
and administrative expenses were 12% for the fiscal year ended September 30,
2002 as compared to 13% for the prior year. Engineering Engineering expenses were
$5.7 million in fiscal 2002, compared to $6.4 million in fiscal 2001,
a decrease of 12%. The decline in our fiscal 2002 expenses was partially a
result of a reduced workforce related to the fiscal 2001 restructuring that
closed our Chandler, Arizona facility. Engineering expenses 29 were 4%
of sales for the fiscal year ended September 30, 2002, unchanged from the
prior year. Fiscal 2002 engineering expenses were focused on manufacturing
process improvements, further FSA and FgSA technology improvements, qualifying
products and processes for new applications including LCD displays, printers,
semiconductor packaging substrates and other high-end flexible circuit technology
development related to new products. Restructuring Restructuring and asset
impairment charges for fiscal 2002 were $950,000, compared to
$20.4 million in fiscal 2001. In fiscal 2002 the charges were recorded due
to an increase in the estimate of the leased Chandler, Arizona facility
disposition costs and for costs to complete the disposal of the Agua Prieta,
Mexico facility. The fiscal 2001 costs included asset impairment and
restructuring charges of $9.8 million and $10.1 million related to
the restructuring of our manufacturing operations. The restructuring was
related to closing our Chandler, Arizona facility and moving manufacturing
operations to our Minnesota and Thailand locations. The charges included
approximately $6.4 million related to asset impairment of property and
equipment and $3.4 million for the impairment of the remaining unamortized
balance of the goodwill recorded at the time of our September 1999
acquisition of ADFlex Solutions, Inc. The charge also includes
$1.6 million of inventory write-offs related to discontinued product
lines, accrued liabilities of $2.2 million for employee severance and
benefits and $6.3 million for facility abandonment costs. The
restructuring was substantially complete as of September 30, 2002 with the
exception of the costs accrued to maintain the leased Chandler facility until
its disposition. The fiscal 2001 costs also included a $495,000 charge relating
to an increase in the estimate of the facility abandonment charges relating to
the length of time required to complete the disposition of our facility located
in Agua Prieta, Mexico. The facility was sold during the fiscal 2002 second
quarter. Net Interest and Other Expense Net interest expenses were
$2.6 million for fiscal 2002, compared to $3.4 million for fiscal
2001, a decrease of 24%. The net interest decrease in fiscal 2002 was due to
lower interest rates on our U.S. based debt facilities which have floating
interest rates and the reduction in interest-bearing debt by over
$14.0 million during fiscal 2002. Fiscal 2002 net other income of $351,000
was primarily income from our 35% investment in Applied Kinetics, Inc. (AKI).
Net other expense in fiscal 2001 of $266,000 was primarily due to increased
foreign currency transaction costs as a result of the high level of sales
recorded in Thailand baht and foreign currency translation losses related to
the volatility of the Thailand baht/U.S. dollar relationship during the year. Income Taxes The income tax benefit for
fiscal 2002 was $5.6 million reflecting an effective tax rate of 59.4%.
The effective tax benefit rate was higher than the statutory federal rate
primarily due to the exclusion of income generated from our foreign operating
corporation and a reduction in our deferred tax allowance. The deferred tax
allowance was reduced as a result of the estimated improvement in deferred tax
asset recoverability in light of the receipt of a $13.2 million tax refund
resulting from the carry-back of the fiscal 2001 net operating loss. The
carry-back was allowed as part of the economic relief act that was passed into
law during the second quarter of fiscal 2002. The fiscal 2001 income tax
benefit was $3.5 million, resulting in an effective tax rate of 10.7%. The
effective tax benefit rate was lower than the statutory federal rate primarily
due to an increase in the deferred tax allowance. Critical Accounting
Policies Managements Discussion and Analysis of Financial
Condition and Results of Operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting 30 principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, sales and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, estimates are
evaluated based on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates. We apply the
following critical accounting policies in the preparation of our consolidated
financial statements: Allowance for Excess and Obsolete Inventory.Inventories,
which are composed of raw materials, work in process and finished goods, are
valued at the lower of cost or market with cost being determined by the
first-in, first-out method. On a periodic basis, we analyze the level of
inventory on hand, our cost in relation to market value and estimated customer
requirements to determine whether write-downs for excess or obsolete inventory
are required. Actual customer requirements in any future periods are inherently
uncertain and thus may differ from estimates. If actual or expected
requirements were significantly different than the established reserves, a
revision to the obsolescence allowance would be recorded in the period in which
such a determination was made. Goodwill.We adopted Statement of
Financial Accounting Standards 142, Goodwill
and Intangible Assets effective October 1, 2001 and as a result
discontinued the amortization of goodwill and any other intangible assets
determined to have indefinite lives. We have determined goodwill relates to one
reporting unit for purposes of impairment testing. Goodwill and other
intangible assets with indefinite lives are tested for impairment annually or
whenever an impairment indicator arises. If events or circumstances change,
including reductions in anticipated cash flows generated by operations,
goodwill could become impaired and result in a charge to earnings. Deferred Taxes.We account for income
taxes using the liability method. Deferred income taxes are provided for
temporary differences between the financial reporting and tax bases of assets
and liabilities. A valuation allowance is set up where the realization of any
deferred taxes becomes less likely than not to occur. We analyze the valuation
allowance periodically which may result in income tax expense being different
than statutory rates. Liquidity and
Capital Resources We have historically financed our operations primarily
through cash from operating activities, bank credit facilities and employee
stock option exercises. Cash and equivalents were $21.6 million at September 30,
2003 and $2.4 million at September 30, 2002. Net cash provided by operating activities was $1.3
million in the fiscal year ended September 30, 2003, compared to net cash
provided by operating activities of $15.9 million in the fiscal year ended
September 30, 2002. For the fiscal year ended September 30, 2003, net
cash provided by operating activities was primarily due to non-cash charges for
restructuring and depreciation more than offsetting the pre-tax loss for the
period and the increase in accounts receivable at September 30, 2003 from September 30,
2002 as a result of the increased level of sales at the end of September 30,
2003. Net cash provided by operating activities was also benefited from an
increase in accounts payable for the same period as a result of the increased
manufacturing activity levels and by decreases in inventory and the receipt of
a tax refund. A decrease in 31 accrued liabilities
resulting from the payment of accrued restructuring charges during the period
reduced the net cash provided by operating activities. For fiscal 2002, net cash provided by operating
activities was primarily due to the receipt of a $13.2 million tax refund
and non-cash charges for depreciation and deferred tax benefits more than
offsetting the net loss for the period. Net cash provided by operating
activities was also benefited by decreases in inventory and accounts receivable
more than offsetting a decrease in accounts payable for the period. A decrease
in accrued liabilities resulting from the payment of accrued restructuring
charges during the period significantly reduced the net cash provided by
operating activities. For fiscal 2001, net cash provided by operating
activities was primarily due to non-cash charges for restructuring,
depreciation and deferred tax benefits more than offsetting the net loss for
the period. Net cash provided by operating activities was also benefited by decreases
in inventory and accounts receivable more than offsetting a decrease in
accounts payable for the period. A decrease in accrued liabilities resulting
from the payment of accrued restructuring charges during the period
significantly reduced the net cash provided by operating activities. Net cash used in investing activities was
$4.9 million in the fiscal year ended September 30, 2003, compared to
$1.1 million in fiscal 2002 and $11.8 million in fiscal 2001. In the
fiscal year ended September 30, 2003, net cash used in investing
activities was attributed to the purchase of test equipment and equipment to
expand capacity in selected areas. Fiscal 2002 net cash used in investing
activities was due to capital expenditures of $3.5 million being partially
offset by proceeds from the sale of our Mexican facility. Fiscal 2002 capital
expenditures primarily included technological upgrades, selected capacity
increases and facility improvements. Fiscal 2001 net cash used in investing
activities was primarily related to capital expenditures for additional FSA
attachment equipment and the Minnesota and Thailand facility additions related
to the move of operations from Arizona to Minnesota and Thailand. Net cash provided by financing activities was
$22.9 million in the fiscal year ended September 30, 2003, compared
to net cash used in financing activities of $14.2 million in fiscal 2002 and
net cash provided by financing activities was $10.5 million in fiscal
2001. During the fiscal year ended September 30, 2003, net cash provided
by financing activities was primarily the result of net proceeds from a
follow-on stock offering of $39.5 million partially offset by the pay down of
interest bearing debt. Fiscal 2002 net cash used by financing activities was
due to reductions in the outstanding balances under our Thailand packing credit
facilities, scheduled payments under our U.S. and Thailand long-term credit
facilities and an additional $1.6 million payment made under our U.S.
long-term credit facility. Fiscal 2001 net cash provided by financing
activities was primarily due to proceeds from our new Thailand long and
short-term credit facilities more than offsetting scheduled payments made under
our U.S. based credit facilities. In April 2001, we entered into a 1.2 billion
Thailand baht (approximately $28.0 million) credit facility agreement with
Bank of Ayudhya Public Company Limited and The Industrial Finance Corporation
of Thailand. The facility is comprised of a 590 million baht long-term
facility, a 530 million baht packing credit facility, a 70 million
baht short-term working capital facility and a 10 million baht overdraft
facility. The Thailand based facility is secured by certain receivables,
inventory and assets held by us in Thailand. In June 2002, we completed a
300 million Thailand baht (approximately $6.8 million) expansion of
our Thailand credit facilities also secured by certain receivables and
inventory held by us in Thailand. In February 2003, we completed a
220 million baht (approximately $5.1 million) expansion of our
Thailand credit facilities, increased our working capital facility by
150 million baht and reduced our packing credit facility by
150 million baht. The new long-term debt is secured by specified equipment
held by Innovex Thailand, our wholly owned subsidiary. As of September 30,
2003 we had approximately $11.9 million outstanding under our Thailand credit
facilities. 32 On August 4, 2003, the entire remaining balance
of a credit facility with Wells Fargo Commercial Bank was paid off. There are
no remaining obligations under this facility. We are currently in compliance
with covenants under our Thailand based financing agreements. We believe that with the
existing U.S. and Thailand credit facilities, cash generated from operations
and the proceeds from a stock offering received on August 4, 2003, we will
have adequate funds to support projected working capital and capital
expenditures for the next twenty-four months. We are considering alternatives
for generating additional working capital and long-term financing and will
continue to pursue financing opportunities to better leverage our assets. Our
financing needs and the financing alternatives available to us are subject to
change depending on, among other things, general economic and market conditions,
changes in industry buying patterns, customer acceptance of our FSA, actuator
flex, stacked memory flex and display flex products and cash flow from
operations. Recent Accounting
Pronouncements In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 clarifies the accounting for costs
associated with exit or disposal activities. We adopted this statement
effective in January 2003, which did not have a material effect on our
consolidated financial statements. Effective for the period ended March 31, 2003, we
adopted SFAS 148, Accounting for
Stock-based CompensationTransition and Disclosure. SFAS 148
amends the disclosure and certain transition provisions of Statement 123, Accounting for Stock-Based Compensation.
The disclosure requirements of this pronouncement are included in our
consolidated financial statements for the period ended September 30, 2003. In May 2003, the FASB issued Statement 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Statement 150 changes the statement of financial
position classification of certain financial instruments from either equity or
mezzanine presentation to liabilities and requires an issuer of those financial
statements to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after December 15,
2003. Adoption of Statement 150 is not anticipated to have an impact on the
Companys financial position or results of operations. In November 2002, the
FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 addresses the disclosure requirements of a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. FIN 45 also requires a guarantor
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN 45 were effective for the Company beginning with its
quarter ended December 31, 2002. The liability recognition requirements
will be applicable prospectively to all guarantees issued or modified after December 31,
2002. This pronouncement did not have a material effect on the Companys consolidated
financial position or results of operations. Forward Looking
Statements Statements included in
this Managements Discussion and Analysis of Financial Condition and Results of
Operations, elsewhere in this report and in future filings by the Company with
the SEC, except for the historical information contained herein and therein,
are forward-looking statements that involve risks and uncertainties. These
risks and uncertainties are set forth under BusinessRisks Related to Our
Business  in this Annual Report and
include the timely availability and acceptance of new products including the
FgSA, LCD flexible circuits and semiconductor packaging substrates, the impact
of 33 competitive
products and pricing, interruptions in the operations of the Companys single
source suppliers, changes in manufacturing efficiencies and other risks
detailed from time to time in the Companys reports filed with the Securities
and Exchange Commission. In addition, a significant portion of the Companys
revenue is generated from the disk drive, integrated circuit substrates,
consumer electronics and data storage industries and the global economic
downturn has had and a continued economic downturn will continue to have an
adverse impact on the Companys operations. The Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect
subsequent events or circumstances or the occurrence of unanticipated events. ITEM
7A:   QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discusses our exposure to market risk
related to changes in interest rates and foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on our business, financial condition and results of
operations. Our earnings and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates. While we
transact business predominately in U.S. dollars a portion of our sales and
expenses are denominated in foreign currencies. Changes in the relation of
foreign currencies to the U.S. dollar will affect our cost of sales and
operating margins and could result in exchange gains or losses. To reduce the
impact of certain foreign currency fluctuations, we enter into short-term
forward foreign currency exchange contracts in the regular course of business
to manage our risk exposure, not as speculative instruments. Typically, these
contracts have maturities of 6 months or less. The forward exchange
contracts generally require us to exchange Thailand baht for U.S. dollars or
U.S. dollars for Thailand baht at maturity, at rates agreed to at inception of
the contracts. These contracts are not designated as hedges, therefore, the
gains and losses on foreign currency transactions are included in income. We periodically review the outlook for expected
currency exchange rate movements as well as the policy on desired future
foreign currency cash flow positions (long, short or balanced) for those
currencies in which we have significant activity. Expected future cash flow
positions and strategies are continuously monitored. At September 30,
2003, we had open forward exchange contracts to buy Thailand baht maturing October 3,
2003 with a notional amount of 100 million Thailand baht, (approximately
$2.5 million) and contracts to buy Thailand baht maturing January 9,
2004 with a notional amount of 150 million baht, (approximately $3.8 million).
No assurance can be given that our strategies will prevent future currency
fluctuations from adversely affecting our business, financial condition and
results of operations. We are exposed to interest rate risk as a large
portion of our interest-bearing debt is subject to interest rates which
fluctuate with changes in market interest rates or are periodically reset based
on market interest rates. A large change in market interest rates could have an
adverse impact on our business, financial condition and results of operations. 34


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified
  Public Accountants
  
  36Consolidated Balance Sheets as of
  September 30, 2003 and 2002
  
  37Consolidated Statements of
  Operations for the years ended September 30, 2003, 2002 and 2001
  
  38Consolidated Statements of
  Stockholders Equity for the years ended September 30, 2003, 2002 and
  2001
  
  39Consolidated Statements of Cash
  Flows for the years ended September 30, 2003, 2002 and 2001
  
  40Notes
  to Consolidated Financial Statements
  
  41Quarterly Financial Data (unaudited)
  
  52  35


---

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, 2003 and
2002, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended September 30,
2003. These financial statements are the responsibility of the companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Innovex, Inc. and Subsidiaries as of September 30, 2003
and 2002, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 2003, in
conformity with accounting principles generally accepted in the United States
of America. /s/  GRANT
THORNTON LLP Minneapolis, Minnesota
October 27, 2003 36


---

INNOVEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of
  September 30,2003
  
  2002ASSETSCurrent assets:Cash and equivalents
  
  $
  21,606,761
  
  $
  2,364,136Accounts receivable, less allowance for doubtful
  accounts of 
  $343,000 (2002$425,000)
  
  24,449,708
  
  16,773,103Inventories
  
  8,634,976
  
  9,285,600Income taxes receivable
  
  59,223
  
  1,362,329Deferred income taxescurrent
  
  3,883,473
  
  3,147,691Other current assets
  
  1,897,219
  
  1,748,962Total current assets
  
  60,531,360
  
  34,681,821Property, plant
  and equipmentat cost:Land and land improvements
  
  3,620,545
  
  3,620,545Buildings and leasehold improvements
  
  38,882,762
  
  38,829,134Machinery and equipment
  
  73,035,365
  
  69,078,164Office furniture and fixtures
  
  1,504,856
  
  1,479,936117,043,528
  
  113,007,779Less accumulated depreciation and amortization
  
  50,162,884
  
  39,316,085Net property, plant and equipment
  
  66,880,644
  
  73,691,694Goodwill
  
  3,000,971
  
  3,000,971Deferred income
  taxeslong-term
  
  4,829,068
  
  1,236,038Other assets
  
  2,341,108
  
  2,317,340Total assets
  
  $
  137,583,151
  
  $
  114,927,864LIABILITIES
  AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
  
  $
  5,190,580
  
  $
  10,798,096Line of credit
  
  
  
  7,302,352Accounts payable
  
  15,805,111
  
  13,075,040Accrued compensation
  
  2,261,101
  
  1,653,223Other accrued liabilities
  
  1,692,625
  
  2,305,858Total current liabilities
  
  24,949,417
  
  35,134,569Long-term debt, less current maturities
  
  9,086,977
  
  15,371,841Commitments and
  contingencies
  
  
  
  Stockholders
  equity:Common stock, $.04 par value; 30,000,000 shares
  authorized, 18,906,739 shares issued and outstanding (200215,108,283)
  
  756,270
  
  604,331Capital in excess of par value
  
  59,748,421
  
  17,815,641Retained earnings
  
  43,042,066
  
  46,001,482Total stockholders equity
  
  103,546,757
  
  64,421,454Total liabilities
  and stockholders equity
  
  $
  137,583,151
  
  $
  114,927,864  See accompanying notes to consolidated financial
statements. 37


---

INNOVEX, INC. AND
SUBSIDIARIES CONSOLIDATED
STATEMENTS OF OPERATIONS For the Years Ended September 30,2003
  
  2002
  
  2001Net sales
  
  $
  153,007,469
  
  $
  134,727,529
  
  $
  145,635,446Costs and
  expenses:Cost of sales
  
  132,141,805
  
  118,671,425
  
  128,977,986Selling, general and administrative
  
  17,941,200
  
  16,617,803
  
  18,513,296Engineering
  
  6,459,015
  
  5,665,207
  
  6,430,505Restructuring charges
  
  750,000
  
  950,000
  
  20,372,939Interest expense
  
  2,069,539
  
  2,734,750
  
  3,550,295Interest income
  
  (29,752
  )
  (119,356
  )
  (126,786
  )Other (income) expense, net
  
  233,877
  
  (351,345
  )
  265,841159,565,684
  
  144,168,484
  
  177,984,076Income (loss) before provision for income taxes
  
  (6,558,215
  )
  (9,440,955
  )
  (32,348,630
  )Benefit
  (provision) for income taxes
  
  3,598,799
  
  5,605,890
  
  3,472,950Net income (loss)
  
  $
  (2,959,416
  )
  $
  (3,835,065
  )
  $
  (28,875,680
  )Net income (loss)
  per share:Basic
  
  $
  (0.19
  )
  $
  (0.25
  )
  $
  (1.93
  )Diluted
  
  $
  (0.19
  )
  $
  (0.25
  )
  $
  (1.93
  )Weighted average
  shares outstanding:Basic
  
  15,735,510
  
  15,080,441
  
  14,987,395Diluted
  
  15,735,510
  
  15,080,441
  
  14,987,395  See accompanying notes to consolidated financial
statements. 38


---

INNOVEX, INC.
AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY For
the Years Ended September 30, 2003, 2002 and 2001 Common
  Stock
  
  Capital in
  Excess of
  Par Value
  
  Retained
  Earnings
  
  Total
  Stockholders
  EquityBalance
  at October  1, 2000
  
  $
  597,211
  
  $
  17,086,609
  
  $
  78,712,227
  
  $
  96,396,047Shares issued
  through exercise of stock options
  
  2,358
  
  260,472
  
  
  
  262,830Tax benefits
  derived from exercise of stock options
  
  
  
  142,983
  
  
  
  142,983Shares issued
  through employee stock purchase plan
  
  2,201
  
  246,391
  
  
  
  248,592Net loss
  
  
  
  
  
  (28,875,680
  )
  (28,875,680
  )Balance at September 30, 2001
  
  601,770
  
  17,736,455
  
  49,836,547
  
  68,174,772Shares issued
  through exercise of stock options
  
  364
  
  16,562
  
  
  
  16,926Shares issued
  through employee stock purchase plan
  
  2,197
  
  62,624
  
  
  
  64,821Net loss
  
  
  
  
  
  (3,835,065
  )
  (3,835,065
  )Balance at September 30, 2002
  
  604,331
  
  17,815,641
  
  46,001,482
  
  64,421,454Shares issued
  through exercise of stock options
  
  10,788
  
  1,964,496
  
  
  
  1,975,284Tax benefits
  derived from exercise of stock options
  
  
  
  490,326
  
  
  
  490,326Shares issued
  through employee stock purchase plan
  
  3,151
  
  154,208
  
  
  
  157,359Shares issued
  through follow-on offering
  
  138,000
  
  39,323,750
  
  
  
  39,461,750Net loss
  
  
  
  
  
  (2,959,416
  )
  (2,959,416
  )Balance
  at September 30, 2003
  
  $
  756,270
  
  $
  59,748,421
  
  $
  43,042,066
  
  $
  103,546,757  39


---

INNOVEX, INC.
AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS For the Years Ended September 30,2003
  
  2002
  
  2001Cash Flows From Operating
  Activities:Net income (loss)
  
  $
  (2,959,416
  )
  $
  (3,835,065
  )
  $
  (28,875,680
  )Adjustments to reconcile
  net income (loss) to net 
  cash provided by operating activities:Depreciation and amortization
  
  11,709,258
  
  13,359,337
  
  13,155,347Restructuring charges
  
  750,000
  
  950,000
  
  20,372,939Other non-cash items
  
  (8,722
  )
  (123,983
  )
  288,462Changes in
  operating assets and liabilities, net of business acquisition:Accounts receivable
  
  (7,676,605
  )
  2,542,203
  
  4,519,232Inventories
  
  650,624
  
  4,496,595
  
  6,152,929Deferred income taxes
  
  (4,328,812
  )
  9,036,801
  
  (1,609,744
  )Income taxes
  
  1,303,106
  
  685,842
  
  2,166,609Other current assets
  
  (148,257
  )
  (1,281,147
  )
  870,023Accounts payable
  
  2,730,071
  
  (3,363,845
  )
  (8,433,257
  )Other current and long-term liabilities
  
  (755,355
  )
  (6,600,678
  )
  (7,194,652
  )Net cash provided
  by operating activities
  
  1,265,892
  
  15,866,060
  
  1,412,208Cash
  Flows From Investing Activities:Capital expenditures
  
  (4,946,222
  )
  (3,535,356
  )
  (11,743,419
  )Business acquisition
  
  
  
  
  
  (256,000
  )Proceeds from sale of assets
  
  32,968
  
  2,451,499
  
  192,460Other
  
  
  
  
  
  (3,548
  )Net cash used in
  investing activities
  
  (4,913,254
  )
  (1,083,857
  )
  (11,810,507
  )Cash
  Flows From Financing Activities:Principal payments on long-term debt
  
  (11,892,380
  )
  (10,167,262
  )
  (7,651,057
  )Net (payments) proceeds on line of credit
  
  (7,302,352
  )
  (4,597,648
  )
  2,200,000Issuance of long-term debt
  
  
  
  466,824
  
  15,319,737Proceeds from follow on offering
  
  39,461,750
  
  
  
  Proceeds from exercise of stock options
  
  2,465,610
  
  16,926
  
  405,813Proceeds from employee stock purchase plans
  
  157,359
  
  64,821
  
  248,592Net cash provided
  by (used in) financing activities
  
  22,889,987
  
  (14,216,339
  )
  10,523,085Increase
  (decrease) in cash and equivalents
  
  19,242,625
  
  565,864
  
  124,786Cash and equivalents
  at beginning of year
  
  2,364,136
  
  1,798,272
  
  1,673,486Cash and equivalents at
  end of year
  
  $
  21,606,761
  
  $
  2,364,136
  
  $
  1,798,272  Supplemental
Disclosures: Cash paid for interest was
approximately $2,343,000; $2,834,000; and $3,508,000 in 2003, 2002 and 2001. Income tax payments were
approximately $6,000; $29,000; and $86,000 in 2003, 2002 and 2001. Tax benefits derived from
exercise of stock options totaling approximately $490,000, $0 and $143,000 in
2003, 2002 and 2001 were recorded as a reduction of current income taxes
payable and an increase in capital in excess of par value. See accompanying notes to consolidated financial
statements. 40


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INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003, 2002 and 2001 Note A.Summary of
Significant Accounting Policies Innovex, Inc. and Subsidiaries (the Company) is
a diversified manufacturer of electrical components for the computer, data
storage, consumer, medical, telecommunications and other electronic industries.
Substantially all of the Companys revenues, operating profits and assets
relate to one operating segment 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
Litchfield and Maple Plain, Minnesota and Lamphun and Korat, 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, 2003, 2002 and 2001 all include fifty-two weeks
of operations. Foreign Currency TranslationThe
Company uses the United States dollar as its functional currency for its
subsidiary in Thailand. Re-measurement gains and losses, resulting from the
process of re-measuring the foreign currency denominated assets and liabilities
of these foreign subsidiaries into U.S. dollars, are included in operations.
Net foreign currency re-measurement and foreign exchange instrument gains
(losses) of ($321,000), $71,000 and ($457,000) were included in other income (expense)
in the fiscal years ended September 30, 2003, 2002 and 2001. Foreign Exchange InstrumentsThe
Company enters into short-term forward foreign currency exchange contracts in
the regular course of business to manage its exposure against foreign currency
fluctuations, primarily relating to nonfunctional currency monetary assets and
liabilities. The forward exchange contracts generally require the Company to
exchange Thailand baht for U.S. dollars or U.S. dollars for Thailand baht at
maturity, at rates agreed to at the inception of the contracts. The contracts
are not designated as hedges, therefore, the gains and losses on foreign
currency transactions are included in other income (expense). The Company does
not enter into forward exchange contracts for trading purposes. Cash EquivalentsThe
Company considers all highly liquid temporary investments with an original
maturity of three months or less to be cash equivalents. The Company had cash
equivalents of $10.2 million at September 30, 2003, and no cash
equivalents at September 30, 2002. Cash of approximately $11.1 million and
$1.7 million were on deposit in foreign financial institutions at September 30,
2003 and 2002. Accounts ReceivableThe
Company grants credit to customers in the normal course of business and
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
which are composed of raw materials, work-in-progress and finished goods are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method. 41 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note A.Summary
of Significant Accounting Policies (Continued) 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. GoodwillPrior to October 1,
2001, goodwill was amortized on the straight-line basis over 10 years. On October 1,
2001, the Company adopted Statement of Financial Accounting Standards (SFAS)
142, Goodwill and Intangible Assets.
As a result, the Company discontinued the amortization of goodwill and any
other intangible assets determined to have indefinite useful lives. For the
twelve-month period ended September 30, 2001, the Company would have
reported adjusted net loss and diluted net loss per share of $28,509,000 and
$1.90, respectively, had it discontinued amortization of intangibles at October 1,
2000. Adjusted net loss and diluted net loss per share excludes, from
previously reported financial information, goodwill amortization of $366,000,
net of tax, for the twelve-month period ended September 30, 2001. The
Company has determined goodwill relates to one reporting unit for purposes of
impairment testing. Goodwill and other intangible assets with indefinite lives
are tested for impairment annually or whenever an impairment indicator arises. Fair Values of Financial InstrumentsDue
to their short-term nature, the carrying value of current financial assets and
liabilities approximates their fair values. The fair value of borrowings, if
recalculated based on current interest rates, would not significantly differ
from the recorded amounts. Net Income (Loss) Per ShareThe
Companys basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of outstanding common shares. The Companys
diluted net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of outstanding common shares and common share
equivalents related to stock options, when dilutive. Options to purchase
859,125, 1,312,812 and 1,226,222 shares of common stock with weighted average
exercise purchase prices of $12.46, $11.19 and $12.34 were outstanding during
2003, 2002 and 2001, but were excluded from the computation of common share
equivalents because they were antidilutive. Revenue Recognition
The Company makes electronic components (flexible circuits) based on customer
specifications. The Companys revenue recognition policy is consistently
applied regardless of sales channels utilized and product destination. In
recognizing revenue in any period, the company applies the provisions of SEC
Staff Accounting Bulletin 101, Revenue Recognition. Revenue from product
sales is recognized when persuasive evidence of an arrangement exists, the
product has been delivered, the fee is fixed and determinable and collection of
the resulting receivable is reasonably assured. For all sales, a binding purchase order is used as evidence
of an arrangement. The Company also stores inventory in warehouses (JIT hubsthird
party owned warehouses) that are located close to the customers manufacturing
facilities. Revenue is recognized on sales from JIT hubs upon the transfer of
title and risk of loss, following the customers acknowledgement of the receipt
of the goods. The Company has an implied warranty that the products meet the
customers specification. Credits are only issued for customer returns. 42 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note A.Summary
of Significant Accounting Policies (Continued) 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 and disclosure about contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from these estimates. Income TaxesThe
Company records income taxes in accordance with the liability method of
accounting. Deferred taxes are recognized for the estimated taxes ultimately
payable or recoverable based on enacted tax law. Changes in enacted tax rates
are reflected in the tax provision as they occur. Stock Based CompensationThe
Company utilizes the intrinsic value method of accounting for its employee
stock based compensation plans. The Companys 2003, 2002 and 2001 pro forma net
income (loss) and diluted net income (loss) per share would have been
($3,671,000), ($4,623,000) and ($29,868,000) or ($0.23), ($0.32) and ($2.06) had
the fair value method been used for valuing options granted during those years.
The weighted average fair value of options granted in 2003, 2002 and 2001 was
$1.60, $1.46 and $5.11. The value was computed by applying the following
weighted average assumptions to the Black Scholes options pricing model:
volatility of 66%, 90% and 72%; dividend yields of 0.0%; risk-free rate of
return of 2.6%, 4.0% and 5.2%; and an average term of 4.5 years for 2003,
2002 and 2001. No adjustment was made to the Black Scholes calculation to
reflect that the options are not freely tradable. New Pronouncements In May 2003,
the Financial Accounting Standards Board (FASB) issued Statement 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Statement 150 changes the statement of financial
position classification of certain financial instruments from either equity or
mezzanine presentation to liabilities and requires an issuer of those financial
statements to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company adopted Statement 150 beginning July 1, 2003 which had no impact
on the Companys financial statements. In November 2002, the
FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 addresses the disclosure requirements of a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. FIN 45 also requires a guarantor
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN 45 were effective for the Company beginning with its
quarter ended December 31, 2002. The liability recognition requirements
will be applicable prospectively to all guarantees issued or modified after December 31,
2002. This pronouncement did not have a material effect on the Companys
consolidated financial position or results of operations. 43 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note B.Inventories Inventories
are comprised of the following at September 30: 2003
  
  2002Raw materials and
  purchased parts
  
  $
  4,361,355
  
  $
  3,938,671Work-in-process
  and finished goods
  
  4,273,621
  
  5,346,929$
  8,634,976
  
  $
  9,285,600  Note C.Line
of Credit and Long-Term Debt On April 23, 2001, the Company entered into a
1.2 billion Thailand baht (approximately $28 million) credit facility
agreement with Bank of Ayudhya Public Company Limited (BAY) and The Industrial
Finance Corporation of Thailand (IFCT). The facility is comprised of a
590 million baht term loan, a 530 million baht packing credit
facility, a 70 million baht short term working capital facility, and a
10 million baht overdraft facility. On March 1, 2002 the Company
entered into a supplemental agreement with BAY and IFTC, increasing the packing
credit facility to 830 million baht. On February 28, 2003, the
Company completed a 220 million baht (approximately $5.1 million)
expansion of its Thailand term loan, increased the working capital facility by
150 million baht and reduced the packing credit facility by
150 million baht. As of September 30, 2003, 81 million baht of the
additional term loan facility had been utilized. Under the terms of the Thailand based credit facility,
any outstanding balance on the original term loan bears interest at the average
MLR rate, 5.88% at September 30, 2003. The original term loan is serviced
by quarterly payments continuing through December 30, 2005. Payments will
be 35 million baht per quarter for fiscal 2004, 40 million baht per
quarter for the following year, and 47 million baht for the remaining two
quarterly payments. Under the terms of the February 28, 2003 agreement,
any outstanding balance on the additional term loan bears interest at 6.00%
annually until February 28, 2004, at which time the outstanding balance
will bear interest at the average MLR rate, 5.88% at September 30, 2003. The
additional term loan is serviced by quarterly payments commencing March 31,
2004 and continuing through December 31, 2007. Payments will be 10 million
baht per quarter for the first year, 12.5 million baht per quarter for the
second year, 15 million baht per quarter for the third year, and 17.5 million
baht per quarter for the fourth year. The payment term may be shortened if the
entire 220 million baht term loan facility is not utilized. The packing credit facility bears interest at the
Thailand market rate, 4.25% at September 30, 2003. The original working
capital facility bears interest at IFCT MOR, 6.25% at September 30, 2003. The
additional working capital facility bears interest at average MLR less 1%,
4.88% on September 30, 2003. The overdraft facility bears interest at BAY
MOR, 6.00% at September 30, 2003. The Thailand based facility is secured
by certain receivables, inventory and assets held by the Company in Thailand.
The Company is required to maintain certain financial ratios and meet certain
net worth levels. At September 30, 2003, 394 million baht or
$9.9 million was outstanding under the original term loan, 81 million baht
or $2.0 million was outstanding under the additional term loan, and there were
no outstanding balances under the packing credit, working capital and overdraft
facilities. At September 30, 2002, 502 million baht or $11.6 million
was outstanding under the term loan, 317 million baht or $7.3 million
was outstanding under the packing credit facility and there were no outstanding
balances 44 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note C.Line
of Credit and Long-Term Debt (Continued) under the working capital
and overdraft facilities. At September 30, 2002, the interest rate for the
term loan was 7.00% and the interest rate for the packing credit facility was
5.00%. On August 4, 2003, the entire remaining balance
of a credit facility with Wells Fargo Commercial Bank was paid off. There are
no remaining obligations with this facility. Other long-term debt consists of capitalized equipment
leases. Assets under capital lease as of September 30, 2003 had an
acquisition cost of $6.8 million and a net book value of $3.8 million.
Interest rates on these leases range from 7.5% to 9.1%. Aggregate maturities of
long-term debt including capitalized leases for the next five years are as
follows (in thousands): 2004$5,193; 2005$6,200; 2006$2,860; 2007$25. The
recorded value of long-term debt approximates fair market value. Note D.Stockholders
Equity Common Stock On August 4, 2003, the Company consummated the
sale of 3,450,000 shares of common stock at a public offering price of $12.25
per share. The net offering proceeds to the Company were  $39,461,750 after deducting total estimated
expenses of the offering. 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, 2003, the Company had 82,576 shares of common
stock available for issuance under the plans. Restricted Stock Plan The Company also has a restricted stock plan that
provides for grants of common stock to key employees of the Company other than
the Chief Executive Officer and the four highest paid executives of the Company
other than the Chief Executive Officer. The common stock grants generally vest
over five years. At September 30, 2003, the Company had 112,950 shares of
common stock available for issue under the plan. 45 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note D.Stockholders
Equity (Continued) Transactions
under the plans during each of the three years in the period ending September 30,
2003 are summarized as follows: Number of
  Shares Under
  Option
  
  Weighted
  Average
  Exercise PriceOutstanding
  at October 1, 2000
  
  
  1,390,948
  
  
  
  $
  11.30Granted
  
  
  535,100
  
  
  
  8.42Forfeited
  
  
  (291,550
  )
  
  
  11.11Exercised
  
  
  (58,139
  )
  
  
  6.63Balance at September 30, 2001
  
  
  1,576,359
  
  
  
  10.54Granted
  
  
  521,850
  
  
  
  2.91Forfeited
  
  
  (303,598
  )
  
  
  9.55Exercised
  
  
  (9,100
  )
  
  
  1.86Balance at September 30, 2002
  
  
  1,785,511
  
  
  
  8.35Granted
  
  
  542,550
  
  
  
  2.89Forfeited
  
  
  (68,331
  )
  
  
  5.33Exercised
  
  
  (269,328
  )
  
  
  7.29Balance
  at September 30, 2003
  
  
  1,990,402
  
  
  
  7.11  Options
exercisable at September 30: Number
  Exercisable
  
  Weighted
  Average
  Exercise Price2001
  
  
  587,849
  
  
  
  $
  11.812002
  
  
  754,745
  
  
  
  11.322003
  
  
  785,837
  
  
  
  11.29  The
following table summarizes information concerning currently outstanding and
exercisable stock options: Options Outstanding
  
  Options ExercisableRange of Exercise Prices
  
  
  
  Number
  Outstanding
  
  Weighted
  Average
  Remaining
  Contractual
  Life
  
  Weighted
  Average
  Exercise
  Price
  
  Number
  Exercisable
  
  Weighted
  Average
  Exercise
  Price$0.00 - $2.71
  
  769,730
  
  
  8.5 years
  
  
  
  $
  1.82
  
  
  
  46,095
  
  
  
  $
  1.793.35 - 4.60
  
  216,550
  
  
  7.7 years
  
  
  
  3.97
  
  
  
  110,650
  
  
  
  3.935.04 - 9.38
  
  360,272
  
  
  6.2 years
  
  
  
  6.89
  
  
  
  161,272
  
  
  
  7.1110.16 - 11.53
  
  356,800
  
  
  4.6 years
  
  
  
  11.14
  
  
  
  295,140
  
  
  
  11.0812.59 - 15.00
  
  182,050
  
  
  7.0 years
  
  
  
  13.11
  
  
  
  67,680
  
  
  
  13.2018.87 - 31.31
  
  105,000
  
  
  4.0 years
  
  
  
  29.01
  
  
  
  105,000
  
  
  
  29.011,990,402
  
  
  
  
  
  
  
  
  
  
  785,837  46 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note D.Stockholders
Equity (Continued) Employee Stock
Purchase Plan The Company has an Employee Stock Purchase Plan (ESPP)
which is available to eligible employees. Under terms of the plan, eligible
employees may designate from 1% to 10% of their compensation to be withheld
through payroll deductions for the purchase of common stock at 85% of the lower
of the market price on the first or last day of the offering period. Under the
plan, 250,000 shares of common stock have been reserved for issuance. As of September 30,
2003, 199,529 shares have been issued under the plan. Fair value disclosures
under SFAS No. 123 have not been disclosed for shares under the ESPP as
such values are immaterial. Note E.Income
Taxes The
effective income tax rates differed from the federal statutory income tax rate
as follows for the years ended September 30: 2003
  
  2002
  
  2001Federal statutory
  rate
  
  (34.0
  )%
  (34.0
  )%
  (34.0
  )%State income
  taxes
  
  (0.6
  )
  (3.3
  )
  (0.5
  )Foreign operating
  income benefit
  
  (16.8
  )
  (11.7
  )
  Allowances
  
  6.4
  
  (9.0
  )
  20.1Adjustments to
  income tax provision accruals
  
  (8.0
  )
  (1.8
  )
  Permanent
  differences
  
  (0.7
  )
  0.4
  
  3.0Other
  
  (1.2
  )
  
  
  0.7(54.9
  )%
  (59.4
  )%
  (10.7
  )%  Components
of the (benefit) provision for income taxes are as follows for the years ended September 30
(thousands of dollars): 2003
  
  2002
  
  2001Current:Federal
  
  $
  671
  
  $
  (14,165
  )
  $
  (1,647
  )State
  
  59
  
  (478
  )
  (216
  )730
  
  (14,643
  )
  (1,863
  )Deferred
  
  (4,329
  )
  9,037
  
  (1,610
  )$
  (3,599
  )
  $
  (5,606
  )
  $
  (3,473
  )  During fiscal year 2002, the Company received an
income tax refund for approximately $13.2 million as part of an economic relief
act that was passed into law. Deferred taxes recognize the impact of temporary
differences between the amounts of assets and liabilities recorded for
financial statement purposes and such amounts measured in accordance with tax
laws. Realization of net operating loss carryforward and other deferred tax
temporary differences are contingent on future taxable earnings. The Companys
deferred tax asset was reviewed for expected 47


---

INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note E.Income
Taxes (Continued) utilization using a more
likely than not approach as required by SFAS 109 by assessing the
available positive and negative evidence surrounding its recoverability.
Accordingly, the Company recorded a valuation allowance of $18,833,000 and
$18,415,000 on the deferred tax asset at September 30, 2003 and 2002. The
Company continues to assess and evaluate strategies that will enable the
deferred tax asset, or portion thereof, to be utilized, and will reduce the
valuation allowance appropriately at such time when it is determined that the more
likely than not approach is satisfied. The net operating loss and tax credit
carry-forwards of $75,100,000 expire at various dates from September 2018
through September 2023. 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): 2003
  
  2002Current deferred tax
  assets:Inventories
  
  $
  237
  
  $
  405Receivables
  
  85
  
  68Compensation and benefits
  
  333
  
  266Restructuring
  
  24
  
  113NOL carryforwards
  
  3,204
  
  2,046Other
  
  
  
  250$
  3,883
  
  $
  3,148Long-term deferred tax
  assets (liabilities)net:Accelerated depreciation
  
  $
  (6,081
  )
  $
  (4,953
  )Intangibles
  
  5,289
  
  6,171Restructuring
  
  
  
  126Tax credit and NOL carryforwards
  
  24,455
  
  18,307Valuation allowances
  
  (18,833
  )
  (18,415
  )$
  4,830
  
  $
  1,236  Note F.Retirement
and Profit-Sharing Plans The Company sponsors a
401(k) 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. Company contributions for this
plan were approximately $330,000, $301,000 and $621,000 for the years ended September 30,
2003, 2002 and 2001. Note G.Research
and Development Costs The Company incurred
research and development costs of approximately $5,012,000, $4,786,000 and
$4,518,000 for the years ended September 30, 2003, 2002 and 2001. 48 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note H.Foreign
Operations and Significant Customers As part of the September 1999 ADFlex acquisition,
the Company acquired an Asian operation, located in Lamphun, Thailand. The
Company has continued to increase the functions performed in Thailand in order
to take advantage of the proximity to customers and favorable labor and
operating costs. The Company had aggregate export sales of $129,065,000,
$110,751,000, and $116,405,000 for the years ending September 30, 2003,
2002 and 2001, principally to Pacific Rim customers. With respect to foreign
operations for the years ended September 30, 2003 and 2002, long-lived
assets of $25,402,000 and $27,683,000 were located in Thailand. International
revenue concentrations in excess of 10% were: 2003
  
  2002
  
  2001Thailand
  
  
  61
  %
  
  
  59
  %
  
  
  53
  %Republic of China
  
  
  19
  
  
  
  20
  
  
  
  12  Revenues
from two customers made up a significant portion of the Companys total net
sales during the years ending September 30: 2003
  
  2002
  
  2001Seagate
  
  
  65
  %
  
  
  64
  %
  
  
  54
  %Maxtor
  
  
  10
  
  
  
  9
  
  
  
  8  Accounts receivable from
the above two customers are 54% and 75% of the Companys accounts receivable at
September 30, 2003 and 2002. Note I.Commitments
and Contingencies The Company paid rent of $2,063,000, $2,113,000 and
$2,146,000 in fiscal 2003, 2002 and 2001 under facility and equipment operating
leases that expire at various dates through September 2007. As of September 30,
2003, the future minimum lease commitments under the operating leases are
payable as follows (in thousands): 2004$1,261; 2005$1,142; 2006$1,142;
2007$285. 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. In July 2000, the Lemelson Medical, Education &
Research Foundation Limited Partnership (Lemelson) filed suit in the Federal
District Court in the District of Arizona against Innovex, Inc. and
approximately 90 other defendants. The suit alleges that all of the defendants
are violating certain patents owned by Lemelson related to machine vision
technologies. Lemelson alleges that certain of the equipment used in Innovex
Inc.s business utilizes this type of technology. The equipment was purchased
from vendors whom the Company believes may have an obligation to indemnify the
Company in the event that the equipment infringes any third-party patent. The
complaint seeks damages in an unspecified amount. The Company has answered the
complaint denying that the Company infringed any of these 49 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note I.Commitments
and Contingencies (Continued) patents. Since the filing
of the Companys answer, the entire case has been stayed in order to allow an
earlier-filed case to proceed. The Company cannot be sure that it will prevail
in this action and any adverse outcome could require, among other things, to
pay royalties to Lemelson. The Company believes that there will be no material
impact as a result of this litigation. The Company is party to
certain other lawsuits in the ordinary course of business. Management does not
believe that these proceedings, individually or in the aggregate, will have a
material adverse effect on the Companys business, financial condition, results
of operations or cash flows. Note J.Derivative
Instruments The Company enters into
forward exchange contracts that are recorded at fair value with related fair
value gains or losses recorded in earnings within the caption other (income)
expense. Generally, these contracts have maturities of six months or less.
These contracts are entered into to offset the gains or losses on foreign currency
denominated assets and liabilities. The Company does not enter into forward
exchange contracts for trading purposes and the contracts are not designated as
hedges. At September 30, 2003, the Company had open forward exchange
contracts to buy Thailand baht maturing October 3, 2003 with notional
amounts totaling 100,000,000 Thailand baht (approximately $2.5 million
U.S. dollars) and another forward exchange contract to buy Thailand baht
expiring January 9, 2004 with a notional amount of 150,000,000 Thailand
baht (approximately $3.8 million U.S. dollars). At September 30, 2002, the
Company had open forward exchange contracts to buy Thailand baht maturing January 3,
2003 with notional amounts totaling 550,000,000 Thailand baht (approximately
$12.7 million U.S. dollars). Note K.Restructuring
Charges During fiscal 2001, the Company recorded asset
impairment and restructuring charges of $9,754,000 and $10,124,000 related to
the restructuring of the Companys manufacturing operations. The restructuring
was primarily related to moving manufacturing operations from the Companys
Chandler, Arizona facility to the Companys Minnesota locations. During the
fiscal 2002 second quarter and the fiscal 2003 first quarter, additional
restructuring charges of $876,000 and $750,000, respectively, were recorded due
to an increase in the estimate of the leased Chandler facility disposition
costs. As of March 31, 2003, the restructuring was substantially complete.
During the second quarter of fiscal 2003, payments of approximately $633,000
were made to buy out the remainder of the Chandler facility lease through its June 2003
termination. The fiscal 2000 first quarter includes a $13,785,000
restructuring charge related to restructuring the Companys manufacturing
operations. The restructuring was primarily related to closing the Companys
Agua Prieta, Mexico facility and moving operations to its facility in Lamphun,
Thailand. The restructuring was substantially complete as of September 2000
with the exception of completing the disposition of the Mexican facility.
During the fiscal 2001 second quarter, the Company recorded a $495,000 increase
in the estimate of the facility abandonment charges relating to the length of
time required to complete the disposition of the facility located in Agua
Prieta, Mexico. The facility was sold during the fiscal 2002 second quarter
with an additional $74,000 restructuring charge recorded at that time due to
the cost of disposition. 50 INNOVEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2003, 2002 and 2001 Note K.Restructuring
Charges (Continued) The
remaining restructuring accrual as of September 30, 2003 totaled $84,000.
Selected information regarding the restructuring follows (in thousands): Manufacturing Operations
  RestructuringArizona
  
  Manufacturing Operations
  RestructuringMexicoFacility
  Abandonment
  Charges
  
  Employee
  Termination
  Benefits
  
  Facility
  Abandonment
  Charges
  
  Employee
  Termination
  Benefits
  
  TotalAccrual at
  October 1, 2001
  
  
  $
  2,193
  
  
  
  $
  824
  
  
  
  $
  386
  
  
  
  $
  136
  
  
  $
  3,539Payments
  
  
  (2,737
  )
  
  
  (853
  )
  
  
  (475
  )
  
  
  (121
  )
  
  (4,186
  )Change in
  estimate
  
  
  769
  
  
  
  107
  
  
  
  89
  
  
  
  (15
  )
  
  950Accrual at
  September 30, 2002
  
  
  225
  
  
  
  78
  
  
  
  
  
  
  
  
  
  
  303Payments
  
  
  (916
  )
  
  
  (53
  )
  
  
  
  
  
  
  
  
  
  (969
  )Change in
  estimate
  
  
  750
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  750Accrual at
  September 30, 2003
  
  
  $
  59
  
  
  
  $
  25
  
  
  
  $
  
  
  
  
  $
  
  
  
  $
  84  51


---

QUARTERLY FINANCIAL
DATA (Unaudited) Fiscal 2003
  
  
  
  1st Quarter
  
  2nd Quarter*
  
  3rd Quarter
  
  4th Quarter
  
  YearNet sales
  
  $
  34,525,238
  
  $
  37,055,736
  
  $
  39,943,486
  
  $
  41,483,009
  
  $
  153,007,469Gross profit
  
  3,495,078
  
  4,232,846
  
  5,876,890
  
  7,260,850
  
  20,865,664Net income loss
  
  (2,296,445
  )
  (1,366,873
  )
  (55,061
  )
  758,963
  
  (2,959,416
  )Net income loss per
  share:Basic
  
  $
  (0.15
  )
  $
  (0.09
  )
  $
  (0.00
  )
  $
  0.04
  
  $
  (0.19
  )Diluted
  
  $
  (0.15
  )
  $
  (0.09
  )
  $
  (0.00
  )
  $
  0.04
  
  $
  (0.19
  )  
 *The
second quarter includes restructuring charges of $750,000 related to the
restructuring of the Companys manufacturing operations. Fiscal 2002
  
  
  
  1st Quarter
  
  2nd Quarter**
  
  3rd Quarter
  
  4th Quarter
  
  YearNet sales
  
  $
  37,842,859
  
  $
  34,971,762
  
  $
  31,823,731
  
  $
  30,089,177
  
  $
  134,727,529Gross profit
  
  5,773,364
  
  5,025,189
  
  3,556,788
  
  1,700,763
  
  16,056,104Net income (loss)
  
  (296,917
  )
  341,993
  
  (1,277,516
  )
  (2,602,625
  )
  (3,835,065
  )Net income (loss) per
  share:Basic
  
  $
  (0.02
  )
  $
  0.02
  
  $
  (0.08
  )
  $
  (0.17
  )
  $
  (0.25
  )Diluted
  
  $
  (0.02
  )
  $
  0.02
  
  $
  (0.08
  )
  $
  (0.17
  )
  $
  (0.25
  )  
 **The
second quarter includes restructuring charges of $950,000 related to the
restructuring of the Companys manufacturing operations and a $1.7 million tax
benefit related to the reduction of the deferred tax allowance due to receipt
of a $13.2 million income tax refund received as part of the economic
relief act that was passed into law during the quarter. 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES (a)
  
  Evaluation of Disclosure Controls and Procedures The Companys Chief
Executive Officer, William P. Murnane, and Chief Financial Officer, Thomas
Paulson, have evaluated the Companys disclosure controls and procedures as of
the end of the period covered by this report. Based upon that review, they have
concluded that these controls and procedures are effective in ensuring that
material information related to the Company is made known to them by others
within the Company. (b)
  
  Changes in Internal Control Over Financial Reporting There have been no significant changes in internal
control over financial reporting that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, the registrants internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT Reference is made to the
sections entitled Election of Directors, 
Other Information Regarding the Board and Section 16(a) Beneficial
Ownership Reporting Compliance in our definitive proxy statement to be mailed
to shareholders on or about December 15, 2003, and to be filed with the
Securities and Exchange Commission within 120 days after September 30,
2003 (the 2003 Proxy Statement). Except as set forth at Item 4A of this
Annual Report, the information required by Item 10 is incorporated herein by
reference from the sections noted above of the 2003 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the
section entitled Executive Compensation and Other Information and Other
Information Regarding the BoardCompensation of Directors in the 2003 Proxy
Statement. The information required by Item 11 is incorporated herein by
reference from the sections noted above of the 2003 Proxy Statement. 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 in 2003 Proxy Statement. The information required by Item 12 is
incorporated herein by reference from the sections noted above of the 2003
Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS Reference is made to the
section entitled Certain Relationships and Related Transactions in the 2003
Proxy Statement. The information required by Item 13 is incorporated herein by
reference from the sections noted above of the 2003 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Not yet applicable. 53 PART IV ITEM 15. 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, 2003 and 2002
  
  37Consolidated
  Statements of Operations for each of the three years in the period ended
  September 30, 2003
  
  38Consolidated
  Statements of Stockholders Equity for each of the three years in the period
  ended September 30, 2003
  
  39Consolidated
  Statements of Cash Flows for each of the three years in the period ended
  September 30, 2003
  
  40Notes to
  Consolidated Financial Statements
  
  41-51  (2)
  
  Financial Statement SchedulesAll 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)
  
  Exhibits3(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, 19963(b)
  
  Bylaws, as amended, are
  incorporated by reference to Exhibit 4.2 of the Registrants
  Form S-3 Registration Statement dated July 2, 2003 (File
  No. 333-106734).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 (File No. 33-14776)10(b)
  
  * 1987 Employee Stock
  Option Plan, as amended, is incorporated by reference to
  Exhibit 4(a) of the Registrants Form S-8 dated March 17,
  1989 (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 February 27, 2002 (File
  No. 333-83452)10(e)
  
  * Innovex, Inc.
  Employee Stock Purchase Plan is incorporated by reference to Exhibit 4.1
  of the Registrants Form S-8 dated May 19, 2000 (File
  No. 333-37380)10(f)
  
  * Innovex, Inc.
  Restricted Stock Plan is incorporated by reference to Exhibit 4.1 of the
  Companys Registration Statement on Form S-8 dated August 23,
  2001 (File No. 333-68228)10(g)
  
  * 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   54  10(h)
  
  Credit Facilities
  Agreement between Innovex (Thailand) Limited as the Borrower and The
  Industrial Finance Corporation of Thailand and Bank of Ayudhya Public Company
  Limited as the Creditor is incorporated by reference to
  Exhibit 10(b) of the Companys Quarterly Report on Form 10-Q
  for the quarter ended March 31, 2001.10(i)
  
  Supplemental Agreement
  to Credit Facilities Agreement Dated 23 April 2001 is incorporated by
  reference to Exhibit 10.5 of Amendment No. 1 to the Companys
  Registration Statement on Form S-3 (File No. 333-106734).10(j)
  
  Second Supplemental
  Agreement to Credit Facilities Agreement Dated 23 April 2001 is
  incorporated by reference to Exhibit 10.6 of Amendment No. 1 to the
  Companys Registration Statement on Form S-3 (File No. 333-106734).10(k)
  
  ** License and
  Development Agreement dated October 12, 1999 between Innovex Precision
  Components, Inc. and Applied Kinetics, Inc. is incorporated by
  reference to Exhibit 10.1 of the Companys Registration Statement on
  Form S-3 (File No. 333-106734).10(l)
  
  ** First Amendment to
  the License and Development Agreement dated July 1, 2001 between Innovex
  Precision Components, Inc. and Applied Kinetics, Inc. is incorporated by
  reference to Exhibit 10.2 of the Companys Registration Statement on
  Form S-3 (File No. 333-106734).10(m)
  
  ** Second Amendment to
  the License and Development Agreement dated October 4, 2002 between
  Innovex Precision Components, Inc. and Applied Kinetics, Inc. is
  incorporated by reference to Exhibit 10.3 of the Companys Registration
  Statement on Form S-3 (File No. 333-106734).10(n)
  
  Option Agreement dated
  as of November 27, 2002 between Innovex, Inc. and Concorde
  PAPE II is incorporated by reference to Exhibit 10(u) of the
  Companys Annual Report on Form 10-K for the year ended
  September 30, 2002.21
  
  Subsidiaries of
  Registrant23
  
  Consent of Grant
  Thornton LLP31.1
  
  Certification of Chief
  Executive Officer pursuant to 13a-14 and 15d-14 of the Exchange Act31.2
  
  Certification of Chief
  Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange Act32
  
  Certificate pursuant to
  18 U.S.C. § 1350(b)
  
  REPORTS ON FORM 8-KThe Company furnished a
  Current Report on Form 8-K dated July 8, 2003 to the Securities and
  Exchange Commission, reporting under Items 7 and 9 the Companys July 9,
  2003 earnings release for the results of operations for the quarter ended June 30,
  2003.(c)
  
  EXHIBITSReference is made to
  Item 15(a)3.(d)
  
  SCHEDULESReference is made to
  Item 15(a)2.* Indicates a management
  contract or compensatory plan or arrangement.** Certain portions of
  this Exhibit have been deleted and filed separately with the Commission
  pursuant to a request for confidential treatment under Rule 406.  55


---

SIGNATURES Pursuant
to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. INNOVEX, INC.By
  /s/ William P. MurnaneWilliam P. MurnanePresident and Chief Executive OfficerDate December 10, 2003
  
  By
  /s/ Thomas PaulsonThomas PaulsonChief Financial Officer Pursuant to the
requirements of the Securities Exchange Act of 1934, the following persons on
behalf of the Registrant and in the capacities and on the dates indicated have
signed this report below. Each
of the undersigned hereby constitutes and appoints William P. Murnane and
Thomas Paulson as the undersigneds true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for the undersigned and in the undersigneds name, place and
stead, in any and all capacities, to sign any of all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or may lawfully do or cause to be done by virtue thereof. /s/ William P
  Murnane
  
  President, Chief Executive Officer and DirectorWilliam P.
  Murnane
  
  (principal executive officer)/s/ Thomas
  Paulson
  
  Chief Financial OfficerThomas Paulson
  
  (principal financial officer)/s/ Thomas W.
  Haley
  
  Chairman and DirectorThomas W. Haley/s/ Allen
  Anderson
  
  DirectorAllen Anderson/s/ Elick Eugene
  Hawk
  
  DirectorElick Eugene Hawk/s/ Raj K. Nooyi
  
  DirectorRaj K. Nooyi   56


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