UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13143
-------------------------------------
INNOVEX, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1223933
(state or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
530 Eleventh Avenue South, Hopkins, Minnesota 55343-9904
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (612) 938-4155
---------------------------------------
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
(Title of Class)
Common Stock ($.04 par value)
---------------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $328,179,000 at December 9, 1997 when the closing
sale price of such stock, as reported in the Nasdaq National Market System, was
$24.00.
The number of shares outstanding of the Registrant's Common Stock, $.04 par
value, as of December 9, 1997 was 14,641,904 shares.
Documents Incorporated by Reference:
1. Portions of the Company's Proxy Statement to be filed with the Commission
within 120 days after the end of the Registrants fiscal year are incorporated by
reference into Part III of the Form 10-K.
This Form 10-K consists of 44 Pages (including exhibits). The index to exhibits
is set forth on page 22.
<PAGE>
INNOVEX, INC.
1997 FORM 10-K
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Innovex, Inc. (the "Company"), through its largest division during fiscal 1997,
Precision Products, develops and manufactures components, primarily lead wire
assemblies, for the disk drive industry. The Litchfield Precision Components
Division, which was purchased May 16, 1996, develops and manufactures flexible
circuits and chemically etched parts for the medical, computer and
communications industries. The Company also develops and manufactures pacemaker
lead wires and other medical devices and software for document storage retrieval
and management.
The Company was founded in 1972 to acquire the assets of a manufacturer of
needle and wire assemblies used in computer core memories. With the introduction
of solid state memory devices, needle wire assemblies became obsolete and, in
late 1973, the Company moved into related areas of manufacturing utilizing and
expanding its micro-welding and miniature assembly expertise. This expertise is
currently used to manufacture small electromagnetic products which cannot be
economically produced by its customers.
In 1984, the Company expanded its scope to the photo equipment market by
acquiring Lucht Engineering. This made Innovex the nation's largest supplier of
multi-image printers to the professional photo market. The Company discontinued
its photo business in two stages. Effective November 29, 1992, the operating
assets and liabilities, with the exception of the receivables, were sold to
Lucht Acquisition Corporation (LAC), an unrelated third party, for approximately
$4,000,000 cash and a 40 percent interest in LAC. On November 1, 1993, the
Company sold the remaining 40 percent interest in LAC to LAC's majority
shareholder for $2,850,000 in cash.
The InnoMedica Division was formed in late fiscal 1993 to impart a greater
degree of strategic direction and business discipline to the Company's emerging
medical business. In line with this strategy, the Company acquired the
production equipment, patents, trademarks and related assets of Daig
Corporation's permanent pacemaker lead wire and adapter product lines in
September 1993 and Possis Medical, Inc.'s pacemaker lead wire product line in
March 1994. The Division subsequently developed an expertise in the areas of
laser welding and laser machining and is focusing its efforts in these areas.
To further promote the Company's long-term growth, the Iconovex Division was
formed in fiscal 1994 through the purchase of a technologically advanced
software product line in November 1993. This product prepares indexes and
abstracts of electronically stored documents. As the first software of its type,
this high speed system utilizes syntactical analysis to recognize meanings and
relationships among words and phrases in documents. Syntactical analysis is more
accurate than conventional Boolean search systems that only recognize specific
words. In the future, the Company will market the technology through a new joint
venture formed in October 1997 with Solutions Corporation of America. The new
marketing effort will focus on solving information management problems of large
clients instead of the retail approach which had been the direction taken in
prior marketing efforts.
On May 16, 1996, the Company purchased substantially all of the assets of
Litchfield Precision Components, Inc. (LPC), a designer and manufacturer of
highly complex flexible circuits and chemically machined electrical components.
This acquisition reduced the Company's reliance on the disk drive industry while
providing an entry into the large and rapidly growing flexible circuit market. A
large portion of this growth will be providing the highly intricate flexible
circuits required in chip packaging applications. LPC is one of the few
companies world wide which is able to produce these highly intricate flexible
circuits. The acquisition also allows the Company to leverage its existing
manufacturing expertise and customer base and provides new markets for the
Company's existing technology.
Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972.
Its principal executive offices are located at 530 Eleventh Avenue South,
Hopkins, Minnesota 55343-9904 and its telephone number is (612) 938-4155.
Products are developed and manufactured through the Company's wholly owned
subsidiaries, Innovex Precision Products Corporation, Litchfield Precision
Components, Inc. and Iconovex Corporation. These subsidiaries are Minnesota
corporations.
<PAGE>
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company and its subsidiaries operate through four divisions, Precision
Products, Litchfield Precision Components, InnoMedica and Iconovex. Each
division has its own administrative, engineering, manufacturing and marketing
organizations. Precision Products and Litchfield Precision Components are
considered core business segments with financial detail related to their
operations shown in the segment reporting footnote to the Company's financial
statements. Operations of the remaining two divisions, InnoMedica and Iconovex
are not considered core segments as they each comprise less than ten percent of
the Company's net sales, operating profit and identifiable assets. Financial
results for these divisions are included in the Corporate and Other segment in
the financial statements. Topics covered throughout this document are discussed
by divisions where helpful to the reader's understanding.
(c) NARRATIVE DESCRIPTION OF BUSINESS
PRECISION PRODUCTS DIVISION
General
The Precision Products Division produces a variety of small lead wire assemblies
primarily for computer disk drives which cannot be economically produced by its
customers. Manufacture of these products often involves use of such specialized
tasks as miniature wire processing, insulation removal, precision miniature
welding, metal-to-metal bonding, chemical bonding, epoxy encapsulation and
high-resolution optical inspection. These products are manufactured pursuant to
individual customer orders and specifications.
Products
The principal product of the Precision Products Division is a fine wire lead
assembly. Lead assembly sales constituted over 80% of the consolidated revenues
from continuing operations during the past three fiscal years. No other product
constituted more than 10% of the Company's consolidated revenues.
Lead wire assemblies are fine twisted magnet wires that are attached to
inductive or magneto resistive (MR) thin film heads which read or write the
information on the disk in a computer disk drive assembly. MR lead wire
assemblies are comprised of four or five wires while inductive lead wire
assemblies consist of only two wires. The MR assemblies are more difficult to
make and carry a higher selling price. In order to produce a lead assembly, a
portion of the fine magnet wire is stripped of its insulation. Precision
Products developed technology and processes which enables it to strip extremely
fine magnet wire without damaging the wire's gold plating. This process utilizes
a laser to strip the insulation from the wire. This manufacturing process and
the related equipment was designed to be flexible enough to produce both
inductive and MR lead wire assemblies. The MR proportion of Precision Products'
product mix increased significantly during fiscal 1997.
LITCHFIELD PRECISION COMPONENTS
General
Litchfield Precision Components, Inc. is a designer and manufacturer of highly
complex and intricate flexible circuits and chemically machined electrical
components for the medical, computer and communications industries. The Division
focuses on the high end of its markets utilizing its leading edge imaging
technology. The products manufactured by the Division are made to individual
customer orders and specifications.
Products
The Division operates in three primary product areas:
Flexible circuitry - The Division is able to build highly precise flexible
circuits with copper traces as small as .001 inches over long lengths on
flexible base materials. The base materials can also be selectively removed to
expose the circuitry from the front and back to facilitate new assembly
techniques. These products include hard disk drive components and test circuits,
integrated circuit testing probes, paging system components and ultrasound
connections. One new product introduced during fiscal 1997 was the head
interconnect flex (HIF). The HIF is a small flexible circuit that connects the
recording head to the main circuitry of a disk drive. The HIF was developed as a
solution to two of the principle technological challenges facing the disk drive
industry; increasing assembly time and consequent cost increases, and reduction
in recording head size. Also introduced during fiscal 1997 were flexible
circuits used for chip packaging applications.
Chemical machining - Using metals such as stainless steel, titanium, tungsten
and copper, the Division can resolve down to .001 inch features using advanced
imaging techniques. These products include high precision surface mount fuses,
printer components and components for medical implantable devices.
<PAGE>
Film and optical components - Through the application of high resolution images
to glass substrates, the Division can generate sub-micron features in chrome or
other deposited metals on a variety of glass and film substrates.
INNOMEDICA
General
InnoMedica provides contract development and manufacturing services primarily to
the medical device industry as well as pacing/defibrillation leads and adapters
for the implantable bradycardia and tachacardia industry. Manufacture of these
products utilizes silicone rubber molding, similar and dissimilar metal laser
welding, product fabrication and miniature product assembly. Products may be
either proprietary or made to customer specifications.
ICONOVEX
General
Iconovex was established to market and further develop a technologically
advanced software product line which prepares indexes and abstracts of
electronically stored information. The core software utilizes syntactical
analysis to recognize meanings and relationships among words and phrases in
order to prepare indexes and abstracts of documents. Syntactical analysis is
more accurate than conventional Boolean search systems that only recognize
specific words. This core software may be adapted for use in a large number of
applications through the development of appropriate interfaces.
Subsequent to fiscal 1997, Iconovex entered into a joint venture with Solutions
Corporation of America. The new joint venture, Smart Solution, is 51 percent
owned by Iconovex. Smart Solution intends to target the corporate intranet
market by providing a product to organize, analyze, screen and index email and
to eventually perform the same function for corporate databases. Prior to the
joint venture, Iconovex had developed a number of industry award winning
applications for retail distribution which had attracted favorable reviews but
failed to generate a profitable level of sales. One of these applications,
EchoSearch, provided the foundation for the new products under development.
RESEARCH AND DEVELOPMENT
The Company continually engages in research, development and engineering
activities. The Company's goals are to utilize these activities to improve and
enhance existing products and to develop new products in order to expand its
market share. During fiscal years 1997, 1996 and 1995, the Company spent
approximately $1,784,000, $813,000 and $699,000, on research and development.
The Precision Products Division engineering effort is focused on further
automating the lead wire assembly manufacturing processes and developing new
applications for the Division's expertise in laser and micro assembly
automation. The LPC Division effort is concentrated on increasing the long run
flexible circuit manufacturing capabilities primarily as it relates to the new
HIF product and opportunities to produce flexible circuits for new chip
packaging applications. InnoMedica and Iconovex continue to concentrate on
developing products and processes for medical device customers and developing
software products to utilize the purchased document storage retrieval and
management technology.
The Company expects to continue its past practice of acquiring new technology
from outside sources through the payment of cash, Company stock and royalties.
MARKETING AND CUSTOMERS
Precision Products markets a line of products directly to the magnetic head
industry worldwide. With the proliferation of high end personal computers and
the associated requirement for increased storage capacity, the market for disk
drive heads has grown dramatically in recent years. Innovex has benefited from
early entry into this market. This, coupled with the Division's reputation for
high standards of quality and innovative manufacturing processes, has
established Innovex Precision Products as the predominant supplier of lead wire
assemblies for the industry.
A significant percentage of the products offered by the Division are utilized as
components of inductive or magneto resistive (MR) thin film disk drive heads.
The Division has established sales with virtually every manufacturer of disk
drive heads in the world. The rapid growth of the MR segment of the market
during 1997 contributed significantly to the Company's growth as a result of its
low cost, industry leading MR lead wire assembly production capabilities. The
Division had positioned itself for the emergence of MR technology and is
supplying a large portion of the lead wire assemblies for MR disk drive heads.
The Division continues to work closely with virtually all of the world wide disk
drive head manufacturers on new generations of disk drive products. The
Division's principal customers for lead wire assemblies, each accounting for
over 10 percent of the Company's consolidated net sales in at least one of the
last three years are Applied Magnetics, Lafe/Quantum, Read-Rite, Seagate and
Yamaha. See Note K of Notes to Consolidated Financial Statements for additional
information.
<PAGE>
Litchfield Precision Components markets its products to technology companies in
the medical, computer and communications industries through the use of an
internal sales staff. Because of the Division's focus on leading edge imaging
technology, its customers include a number of the leading technology companies
in the world including General Electric, Hewlett Packard, Littelfuse, Medtronic,
Seagate and Siemens.
BACKLOG
The backlog for the Company's continuing operations was $26,101,000, $24,098,000
and $10,950,000 at September 30, 1997, 1996 and 1995. The Company's backlog
fluctuates based on the timing of the receipt of orders from customers.
Backlog is defined by the Company as firm orders which are scheduled to be
delivered within 12 months from the date of the order. While the Company
currently believes substantially all of its September 30, 1997 backlog will be
delivered within 12 months, customers may determine not to release orders into
production, may extend requested delivery dates or cancel orders. In such cases,
the Company may not realize the revenue indicated by the backlog.
COMPETITION
Although there are a large number of companies engaged in the production of
components for the disk drive industry, the lead wire assembly interconnect
products offered by the Company are relatively unique and currently are produced
by a limited number of competitors. The Company believes that it has the
technical capability and the manufacturing capacity to retain market leadership.
In response to the expected growth in the disk drive market, current lead wire
assembly manufacturers have expanded capacity and additional manufacturers may
enter the market. The purchasing decision for the lead wire assemblies produced
by the Company are based on performance, quality, on-time delivery and price.
Although the barriers to market entry by new competitors are not insurmountable,
the Company believes that it is well positioned to compete due to its efficient
production process, capital investment in automation equipment and access to low
cost labor. The emergence of new interconnect technologies such as the Company's
HIF product will impact the future unit growth of the demand for lead wire
assemblies. The Company's HIF product has favorable technological comparisons
over competing integrated interconnect products while also maintaining at least
a 20 percent price advantage over competing technologies. As a result, the
Company believes it is well positioned to compete with other emerging
interconnect technologies.
There are over 200 flexible circuit manufacturers world wide competing for a
share of the flexible circuit market. Most of these companies do not focus on
the highly complex and intricate portions of the medical, computer and
communications segments of the market which are served by Litchfield Precision
Components. Some of the competitors remaining in this high end portion of the
business include IBM and 3M.
EMPLOYEES
At September 30, 1997, the Company had 893 employees as compared to 834 at
September 30, 1996. Precision Products had 578 employees versus 524 one year
ago, Litchfield Precision Components had 257 employees versus 240 one year ago,
InnoMedica had 32 employees versus 38 one year ago, Iconovex had 14 employees
versus 22 one year ago and Corporate had 12 employees versus 10 one year ago.
The Company considers its employee relations to be good.
PATENTS
Certain equipment, processes, information and knowledge generated by the Company
and utilized in its products and their manufacturing processes, are regarded as
proprietary by the Company and are believed to be prosecutable by applicable
trade secret and unfair competition laws rather than through patents. However,
the Company believes it could derive a competitive advantage from patents which
may be granted on products currently under development. The Company also holds
several medical device patents acquired with the purchases of the Daig
Corporation and Possis Medical Inc. pacemaker lead wire product lines and has
applied for several patents on its Iconovex software products. The Company files
patent applications on its products as deemed necessary.
MANUFACTURING AND SOURCES OF SUPPLY
Although each of the Precision Products Division's products are manufactured in
a different fashion, they all require several processes to ensure the high
degree of precision and process control necessary to meet customer tolerance and
other requirements. The Company has devoted a significant amount of time and
expense to the development of certain sophisticated manufacturing processes and
controls, and related equipment, which are essential to the precision and
reliability of its products. To further enhance its capabilities, the Company
has developed and is continuing to improve an automated lead-wire forming
laser-based process for the production of lead-wire assemblies. This process,
which produces a superior product and has reduced manufacturing costs over
traditional processes, is utilized to manufacture both inductive and MR thin
film lead wire assemblies. A complete quality control program has been
established for production procedures to ensure product specifications are met.
As part of this program, the
<PAGE>
Company has implemented computerized statistical process control ("SPC") which
enables machine operators to continually monitor and control production
processes.
Although Litchfield Precision Components' three main product types have
dissimilar final forms, they have a common manufacturing process based on the
Division's leading edge imaging technology. Images are applied to either glass,
metal or flexible base substrate materials with unwanted material etched away
using chemicals to produce the actual products. The Division is also developing
an automated flexible circuit manufacturing facility capable of maintaining
extremely fine tolerances.
Raw material used by the Company is generally available from several suppliers.
Although the Company does not anticipate any supply shortages or interruptions,
it is seeking to lessen its dependence on existing suppliers by expanding
alternative supply sources. The Company has not experienced any significant
problem in obtaining its required supplies.
The Company's manufacturing operations are conducted at plants in Hopkins,
Montevideo, Litchfield and Bloomington, Minnesota. See "Properties." The Company
also utilizes subcontractors in Thailand and the Peoples Republic of China.
ITEM 2. PROPERTIES
Effective March 1, 1997, the Company leased a 19,000 square foot facility for
its executive offices and the Precision Products Division research and
development facilities and laboratories. This building is located in Hopkins,
Minnesota with annual rent of approximately $155,000 under a lease which expires
February 28, 2002.
The Precision Products administrative and certain of its production facilities
are located in a 30,000 square foot facility in Hopkins, Minnesota. The building
was purchased in 1993 and collateralizes a note used to finance the building.
The note has a remaining principal balance of $565,000 at September 30, 1997.
The Company also owns adjacent 30,000 and 20,000 square foot manufacturing
facilities in Montevideo, Minnesota which are utilized by the Precision Products
Division. A portion of the costs to construct and expand these facilities was
financed through bank financing and public development funds. The financing
notes, which are collateralized by the buildings and manufacturing equipment,
have a remaining principal balance of $485,000 at September 30, 1997.
The Company acquired an 88,000 square foot building in Litchfield , Minnesota as
part of the Litchfield Precision Components acquisition in May 1996. The
building is used for the operation of the Litchfield Precision Components
Division. During fiscal 1997, the LPC Division began construction of a 50,000
square foot automated flexible circuit production facility in Litchfield,
Minnesota. The initial phase of the project, including production equipment, is
expected to cost approximately $13 million and will be financed through
internally generated cash flows. The facility is expected to be placed into
service by January, 1998.
Effective December 1993, the Company leased a 10,500 square foot office and
manufacturing facility in Bloomington, Minnesota utilized by the Company's
InnoMedica operation. The Company pays annual rent of approximately $90,000
under the lease which expires in December 1999.
In March 1995, the Company leased a 7,300 square foot office in Bloomington,
Minnesota for its Iconovex operation. The Company pays $95,000 annually under
the lease which expires on March 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to, and none of its
property is the subject of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this Report.
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position
- ---- --- --------
Thomas W. Haley 61 Chairman, Chief Executive Officer and Director
of the Company
Allan J. Chan 47 Vice President and General Manager of Precision
Products Division
Mary E. Curtin 50 Executive Vice President, Corporate and Director
of the Company
Douglas W. Keller 39 Vice President of Finance
Timothy S. McIntee 39 Vice President of Corporate Development
William P. Murnane 35 Vice President and General Manager of Litchfield
Precision Components
Mr. Haley served as President of the Company from 1972 to 1988. Since October
1988, Mr. Haley has held the position of Chief Executive Officer. He has been a
Director and Chairman of the Company since its inception in 1972.
Mr. Chan joined the Company in June 1988 as Director of Sales and Marketing for
the Precision Products Division. In October 1990 Mr. Chan was promoted to Vice
President of Sales and Marketing of the Precision Products Division. In 1991 his
responsibilities were expanded to include manufacturing. In May 1995, he was
promoted to Vice President and General Manager of Precision Products Division.
Prior to joining Innovex, Mr. Chan was the Director of Sales and Marketing for
Braemar Computer Corporation a division of Carlysle Corporation.
Ms. Curtin was promoted to Executive Vice President, Corporate in April 1997.
Prior to April 1997, Ms. Curtin had been Vice President, General Counsel and
Secretary since joining the Company in January 1996. Ms. Curtin has been a
director of the Company since December 1995. Prior to joining the Company, Ms.
Curtin practiced law for 23 years as an attorney with the United States
Department of Justice, the Board of Governors of the Federal Reserve System, as
a partner at Lindquist & Vennum, and as a partner at Curtin and Barnes.
Mr. Keller joined the Company in January 1990 as Corporate Controller. In May
1992, Mr. Keller was made an officer of the corporation and in October 1996 he
was promoted to Vice President of Finance. From July 1988 to January 1990, Mr.
Keller was Manager of Financial Accounting and Tax for UFE, Inc., a manufacturer
of injection molded plastic components. From 1983 to 1988, Mr. Keller was a
Senior Auditor for the Pillsbury Company. From 1980 to 1983, he was a Senior
Accountant with Deloitte Haskins & Sells, a CPA firm.
Mr. McIntee joined the Company in August 1997 as Vice President, Corporate
Development. From 1984 to 1987, Mr. McIntee was an attorney for the law firm of
Lindquist & Vennum in the Mergers & Acquisitions Division. Prior to that, he was
a CPA for several years.
Mr. Murnane joined the Company in July 1995 as Vice President. From June 1993 to
June 1995, Mr. Murnane was Chief Operating Officer of Boutwell, Owens & Co., a
private manufacturer of packaging, in Fitchburg, Massachusetts. From June 1992
to June 1993, Mr. Murnane was Director of Operations for Uniform Printing &
Supply, Inc. in Acton, Massachusetts. Prior to that, he held various operating
and corporate planning positions during a ten year career at United Parcel
Service.
Mr. Haley and Ms. Curtin are spouses and Ms. Curtin and Mr. Murnane are first
cousins.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
COMMON STOCK INFORMATION
The Company's common stock is traded in the over-the-counter market under the
symbol "INVX". The table below sets forth the high and low closing sale prices
as reported by Nasdaq as adjusted for stock splits. As of October 31, 1997, the
Company had 559 shareholders of record. The Company paid an initial dividend of
$.017 per share in February 1993 and has paid quarterly dividends since that
time. Dividends of $.03 per share have been paid for the most recent four
quarters. The Company's intention is to continue this policy.
1997 1996
Price Range of Common Stock -------------------------------------------------
Fiscal Year: High Low High Low
- --------------------------------------------------------------------------------
First Quarter $30-1/4 $ 8-15/16 $11-5/16 $ 7-5/8
Second Quarter 35-1/4 18-1/2 8-5/16 5-7/8
Third Quarter 42-7/8 24-1/2 12-1/8 6-9/16
Fourth Quarter 36-1/2 27-1/4 9-11/16 6-3/4
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from the
consolidated financial statements of the Company for each of the years in the
five year period ended September 30, 1997. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and related notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $142,003,743 $69,570,222 $50,193,952 $30,564,009 $26,596,997
Income from continuing operations 35,093,603 13,121,006 10,029,387 3,515,283 3,657,066
Net income 35,093,603 13,121,006 10,029,387 3,515,283 3,668,114
Income per share from continuing operations:
Primary $2.31 $0.91 $0.70 $0.26 $0.28
Assuming full dilution $2.30 $0.90 $0.69 $0.26 $0.28
Net income per share:
Primary $2.31 $0.91 $0.70 $0.26 $0.28
Assuming full dilution $2.30 $0.90 $0.69 $0.26 $0.28
Cash dividends per share $0.113 $0.088 $0.079 $0.072 $0.05
Total assets 97,274,754 58,244,346 41,283,483 29,934,424 26,585,276
Long-term debt, less current maturities 950,733 1,063,253 1,172,798 1,532,140 1,882,817
Stockholders' equity 86,817,374 48,400,116 36,029,173 24,716,307 22,247,931
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EARNINGS SUMMARY
The Company reported net income of $35,094,000, or $2.31 primary and $2.30 fully
diluted net income per share for the fiscal year ended September 30, 1997. This
compares to net income of $13,121,000, primary net income per share of $0.91 and
fully diluted net income per share of $0.90 in fiscal 1996 and $10,029,000, or
$0.70 primary and $0.69 fully diluted net income per share in 1995. Fiscal 1997
results, as compared to 1996 and 1995, benefited from an increase in net sales
due to strong demand for disk drive lead wire assemblies and an increasing
portion of high end magneto resistive (MR) lead wire assemblies being included
in the product mix. The MR lead wire assemblies have a higher value added
content and sell for a higher unit price than the low end inductive assemblies.
Also contributing was a full year of sales related to the May 16, 1996
Litchfield Precision Components (LPC) acquisition. Fiscal 1996 as compared to
1995 also benefited from an increased demand for lead wire assemblies and from
better than expected operating results from LPC. Gross margins during most of
fiscal 1997 benefited from the rapid increase in demand for lead wire
assemblies. The fiscal 1996 increased sales volume as compared to 1995 more than
offset the reduction of the gross margin percent for the same period. The fiscal
1996 gross margins were affected by volume related selling price reductions and
initial costs related to the production ramp up of the Precision Products
Division wire alignment tab (WAT) product. Gross margin percentages for both
1997 and 1996 were also affected by the inclusion of sales from the newly
acquired Litchfield Precision Components, which currently generate a lower gross
margin than the Company's overall gross margin.
The increase in sales for fiscal 1997 and 1996 also more than offset increased
operating expenses for these years as operating expenses were 9% of sales in
fiscal 1997 as compared to 12% and 14% of sales in fiscal years 1996 and 1995.
Revenue generated by the Iconovex and InnoMedica
<PAGE>
Divisions continue to make up less than 5% of the Company's total revenue.
Operating losses related to InnoMedica were more than 50% less than they were in
fiscal 1996 and 1995. Fiscal 1997 operating losses related to Iconovex were $2.1
million, relatively unchanged from fiscal 1996. The Company expects a
significant improvement in Iconovex's performance during fiscal 1998 due to a
joint venture agreement signed in October 1997 with a new marketing partner,
Solutions Corporation of America.
RESULTS OF OPERATIONS
NET SALES. Net sales for fiscal 1997 were $142,004,000, an increase of 104% from
$69,570,000 in 1996 and up substantially from sales of $50,194,000 in 1995.
Sales growth in 1997 was generated primarily by increased shipments of lead wire
assemblies for the disk drive industry as has been the trend for the past seven
years. The rapidly increasing shipments of lead wire assemblies for MR disk
drives also contributed to the increased sales revenue. Disk drive industry
projections indicate that disk drive demand will increase from 20 to 25 percent
during 1998 and the Company expects to post record fiscal 1998 sales based on
these projections. During fiscal 1997, the Company benefited from its ability to
manufacture the smaller and more technically precise four wire lead assemblies
required by the new generation MR disk drives and should continue to benefit
from this expertise as the conversion to MR technology continues. Sales growth
in fiscal 1996 over 1995 was also the result of increased shipments of lead wire
assemblies and an increased portion of MR lead wire assemblies in the product
mix.
A significant portion of the sales increases in fiscal 1997 and 1996 is also due
to sales of high end flexible circuits and chemically etched parts generated by
Litchfield Precision Components. These products were sold primarily to the
medical, computer and communication industries. Fiscal 1998 should benefit from
continued growth in the demand for high end flexible circuits including rapidly
increasing shipments of the Company's new Head Interconnect Flex (HIF) product.
The HIF product was developed to meet the high end head interconnect needs of
the disk drive industry. The HIF product provides a technologically advanced
solution for the Company's customers which is significantly more cost effective
than any competing new technologies. The Company expects that an increasing
portion of the world wide growth in demand for disk drive head interconnects
will be met by products such as the HIF. Sales from Iconovex and InnoMedica made
up less than 2% of the Company's total revenue in fiscal 1997. These sales are
expected to grow in fiscal 1998 as their products and markets continue to
develop.
Export sales accounted for 86% of the Company's revenue in fiscal 1997 as
compared to 74% for 1996 and 79% for 1995, reflecting the high level of lead
wire assembly shipments to disk drive manufacturers in Japan and other pacific
rim countries. A significant portion of the remaining domestic sales are
subsequently shipped internationally by the Company's customers.
GROSS MARGIN. The Company's gross profit margin increased to 42.9% of sales in
fiscal 1997 as compared to 38.8% in 1996 and was similar to the 43.0% generated
in 1995. The fiscal 1997 gross margin dollars increased 126% over 1996 and 183%
over 1995 due to the increase in sales volume.
Precision Products Division's increase in gross margin percent during fiscal
1997 was a result of the large increase in units shipped for the year and the
limited pricing pressure for portions of the year due to supply shortages. The
fiscal 1996 gross margin percent was affected by volume related selling price
reductions and initial costs related to the production ramp up of the Wire
Alignment Tab (WAT) product. Gross margin percentages in all three years
benefited from volume related efficiencies which resulted in more efficient use
of the Company's investment in equipment and manufacturing automation technology
and the increased utilization of Thailand and China subcontractors for labor
intensive processes. The high sales volume and increased efficiency of the
manufacturing process allowed the Company to maintain strong margins even while
responding to pricing pressures in the market. Although there will be continued
pricing pressure, gross margins are expected to remain strong due to increases
in volume and continued cost reductions resulting from manufacturing
efficiencies and engineering innovation.
While Litchfield Precision Components' sales made a significant contribution to
the Company's gross margins in 1997 and 1996, the Division's gross margin
percent caused a slight reduction in the Company's overall gross margin. In
addition, the InnoMedica and Iconovex divisions reduced the Company's overall
gross margin percent approximately 1% in fiscal 1997 as compared to 1996 and
1995 reductions of 2% and 3%.
OPERATING EXPENSES. Selling, general and administrative expenses decreased to
6.2% of net sales in 1997 as compared to 8.7% in 1996 and 9.4% in 1995. The
decrease in 1997 is primarily due to the increased Precision Product Division
lead wire assembly sales which more than offset the increase in operating
expenses. Total selling, general and administrative expenses for fiscal 1997
increased over 1996 primarily due to a full year of expenses related to
Litchfield Precision Components and the addition of infrastructure required to
handle the higher level of activity within the Precision Products Division and
at the corporate level. The increase in fiscal 1996 expenses over 1995 related
to the addition of Litchfield Precision Components' expenses for a portion of
the year and an increase in corporate expenses.
Engineering expense decreased to 2.5% of net sales in fiscal 1997 from 3.6% in
1996 and 4.9% in 1995. The decreases in 1997 and 1996 are primarily due to the
level of lead wire assembly sales increasing faster than the increase in
spending. The actual spending in fiscal 1997 increased 42% over 1996 after being
virtually unchanged in 1996 as compared to 1995. As in prior years, the spending
at Precision Products continued to relate to efforts to develop new products,
further automate the manufacturing process and develop material alternatives.
Spending at Litchfield Precision Components in 1997 was primarily due to the
development of the new Head Interconnect Flex (HIF) product. Iconovex and
InnoMedica continued to concentrate on new product development. Increases in
fiscal 1998 engineering spending are expected at Precision Products to further
automate its manufacturing processes and explore new product opportunities.
Increased fiscal 1998 spending at Litchfield Precision Components will
concentrate on further HIF and chip packaging technology development and
increases in its high volume production capabilities.
Interest income increased to $1,338,000 in fiscal 1997 from $936,000 and
$789,000 in 1996 and 1995. These increases in the last two years correspond to
the increases in average cash and short-term investments. Interest expense
decreased to $96,000 in 1997, from $113,000 in 1996 and
<PAGE>
from $125,000 in 1995. Net other income (expense) included a $500,000 write off
of intangible assets at InnoMedica in 1996. These intangible assets related to
purchased proprietary technology which was not expected to be supported by
revenue from associated products.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for income
taxes was $49,978,000 for fiscal 1997 as compared to $18,742,000 for 1996 and
$14,818,000 for 1995. As a percent of net sales, income before provision for
income taxes was 35.2% for 1997 as compared to 26.9% and 29.5% for 1996 and
1995. The increase in the 1997 percent over prior years was primarily due to the
Company's improved leverage of its fixed costs as a result of the large increase
in sales. The reduction in the 1996 percent as compared to 1995 is the result of
the lower gross margin percent on the increased level of sales during 1996. The
dollar increase in 1997 over both 1996 and 1995 was due to the large increase in
Precision Product lead wire sales and the inclusion of a full year of Litchfield
Precision Components' operating results. Operating income from all divisions
should improve in fiscal 1998. Precision Products is expected to have increased
revenues due to projected increases in disk drive industry demand particularly
in the rapidly growing MR segment of the market. Litchfield Precision Components
should benefit from increased sales of its HIF and other new products. The
Iconovex joint venture should result in reduced costs and increased revenue and
InnoMedica should show improvements as its markets expand.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased by $16,107,000 to $37,883,000 at
September 30, 1997. Net cash provided by operating activities increased in 1997
to $30,407,000 from $13,108,000 in 1996 and $12,425,000 in 1995. The increase in
the Company's September 30, 1997 cash and short-term investments was primarily
due to cash flow from operations more than offsetting increased capital
expenditures for a new facility at Litchfield Precision Components and equipment
for the Precision Products Division. The increase in fiscal 1997 cash provided
by operating activities over 1996 and 1995 was primarily due to improved
operating results related to the increase in demand for lead wire assemblies.
Accounts receivable at September 30, 1997 increased by $10,018,000 from the
prior year due to the increased level of sales in 1997 as compared to 1996.
Working capital rose by $28,301,000 to $61,843,000 at September 30, 1997. The
Company's current ratio was 7.5 to 1 at fiscal 1997 year-end, compared to 5.0 to
1 at the end of fiscal 1996.
Net property, plant and equipment increased by $11,017,000 to $23,749,000 at
September 30, 1997 primarily due to the capital expenditures at Precision
Products to meet the increased level of lead wire assembly demand and the
construction of a high volume production facility at Litchfield Precision
Components to meet the expected future demand for new high volume applications
including the HIF and chip packaging products. The Company has commitments
totaling approximately $7 million at September 30, 1997 relating to this new
production facility. Intangible assets decreased $459,000 to $1,849,000 at
September 30, 1997.
Long-term debt, net of current maturities, decreased by $113,000 to $951,000 at
September 30, 1997. The ratio of long-term debt to stockholders' equity was .01
at September 30, 1997, compared to .02 at the end of fiscal 1996.
Management believes that existing cash and investments and cash generated from
operations will provide adequate sources of funds to support projected working
capital, capital expenditures and dividends in fiscal 1998.
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the letter to shareholders, elsewhere in
the Annual Report and in the Company's Form 10-K and in future filings by the
Company with the SEC, except for the historical information contained herein and
therein, are "forward-looking statements" that involve risks and uncertainties,
including the timely availability and acceptance of new products, the impact of
competitive products and pricing and a general downturn in the Company's
principal market. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL DATA
Page
Report of Independent Certified Public Accountants 11
Consolidated Balance Sheets at September 30, 1997 and 1996 12
Consolidated Statements of Operations for each of the three years in
the period ended September 30, 1997 13
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended September 30, 1997 14
Consolidated Statements of Cash Flows for each of the three years in
the period ended September 30, 1997 15
Notes to Consolidated Financial Statements 16-21
Quarterly Financial Data (unaudited) 21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Innovex, Inc.
We have audited the accompanying consolidated balance sheets of
Innovex, Inc. and Subsidiaries as of September 30, 1997 and 1996, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Innovex, Inc. and Subsidiaries as of September 30, 1997 and 1996,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
\s\ Grant Thornton LLP
Minneapolis, Minnesota
October 30, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30,
Assets 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 9,442,620 $ 5,635,534
Short-term investments 28,440,000 16,140,000
Accounts receivable, less allowance for doubtful
accounts of $621,000 (1996 - $317,000) 22,052,121 12,034,349
Inventories 7,252,596 5,570,582
Other 4,161,938 2,648,112
--------------------------
Total current assets 71,349,275 42,028,577
Property, plant and equipment - at cost:
Land and land improvements 636,851 556,851
Buildings and leasehold improvements 9,232,030 6,556,840
Machinery and equipment 23,088,606 12,614,217
Office furniture and fixtures 2,993,286 1,746,811
--------------------------
35,950,773 21,474,719
Less accumulated depreciation and amortization 12,202,141 8,742,739
--------------------------
Net property, plant and equipment 23,748,632 12,731,980
Intangible assets, net of accumulated amortization of
$3,099,000 (1996 - $2,317,000) 1,849,381 2,308,737
Other assets 327,466 1,175,052
--------------------------
$97,274,754 $58,244,346
==========================
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 104,000 $ 96,000
Accounts payable 4,662,543 3,581,628
Accrued compensation 2,980,086 2,158,834
Income taxes payable 864,313 1,809,038
Other accrued liabilities 895,705 841,150
--------------------------
Total current liabilities 9,506,647 8,486,650
Long-term debt, less current maturities 950,733 1,063,253
Other long-term liabilities -- 294,327
Commitments -- --
Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares
authorized, 14,619,504 shares issued and outstanding
(1996 - 14,221,254) 584,780 284,425
Capital in excess of par value 14,065,186 9,418,376
Retained earnings 72,167,408 38,697,315
--------------------------
Total stockholders' equity 86,817,374 48,400,116
--------------------------
$97,274,754 $58,244,346
==========================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the years ended September 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 142,003,743 $ 69,570,222 $ 50,193,952
Costs and Expenses:
Cost of sales 81,027,750 42,592,404 28,630,985
Selling, general and administrative 8,764,366 6,066,278 4,726,920
Engineering 3,572,203 2,508,277 2,464,242
Interest expense 95,670 112,531 124,673
Interest income (1,338,421) (935,809) (789,392)
Other expense (income) (95,428) 484,535 218,137
-----------------------------------------------
92,026,140 50,828,216 35,375,565
-----------------------------------------------
Income Before Provision For Income Taxes 49,977,603 18,742,006 14,818,387
Provision For Income Taxes (14,884,000) (5,621,000) (4,789,000)
-----------------------------------------------
Net Income $ 35,093,603 $ 13,121,006 $ 10,029,387
===============================================
Net Income Per Share:
Primary $ 2.31 $ 0.91 $ 0.70
===============================================
Assuming full dilution $ 2.30 $ 0.90 $ 0.69
===============================================
Common and Common Equivalent Shares Outstanding:
Primary 15,161,820 14,475,780 14,321,506
Assuming full dilution 15,228,510 14,526,536 14,455,368
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Capital in Total
Common Excess of Retained Stockholders'
For the years ended September 30, 1997, 1996, and 1995 Stock Par Value Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1994 $ 180,939 $ 6,865,574 $ 17,669,794 $24,716,307
Shares issued through exercise of stock options 8,460 1,082,351 1,090,811
Tax benefits derived from stock option plans 1,076,000 1,076,000
Dividends paid ($0.0785 per share) (1,082,794) (1,082,794)
Change in unrealized loss on available-for-sale securities 200,000 200,000
Three-for-two stock split including $538 paid for
fractional shares 93,086 (93,624) (538)
Net income 10,029,387 10,029,387
--------------------------------------------------------------
Balance at September 30, 1995 282,485 8,930,301 26,816,387 36,029,173
Shares issued through exercise of stock options 1,940 283,075 285,015
Tax benefits derived from stock option plans 205,000 205,000
Dividends paid ($0.0875 per share) (1,240,078) (1,240,078)
Net income 13,121,006 13,121,006
--------------------------------------------------------------
Balance at September 30, 1996 284,425 9,418,376 38,697,315 48,400,116
Shares issued through exercise of stock options 14,126 2,068,039 2,082,165
Tax benefits derived from stock option plans 2,865,000 2,865,000
Dividends paid ($0.1125 per share) (1,623,510) (1,623,510)
Two-for-one stock split 286,229 (286,229) --
Net income 35,093,603 35,093,603
--------------------------------------------------------------
Balance at September 30, 1997 $ 584,780 $ 14,065,186 $ 72,167,408 $86,817,374
==============================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INNOVEX, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the years ended September 30,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,093,603 $ 13,121,006 $ 10,029,387
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,863,417 3,636,327 3,077,366
Deferred income taxes (612,603) (557,816) (190,050)
Other non-cash items 117,206 676,784 (188,547)
Changes in operating assets and liabilities, net of
business acquisition:
Accounts receivable (10,017,772) (4,595,197) (1,065,191)
Inventories (1,682,014) (2,030,030) (409,189)
Other current assets (937,637) (617,547) (527,940)
Accounts payable 1,080,915 1,089,475 466,258
Other current and long-term liabilities 581,480 431,229 203,937
Income taxes payable 1,920,275 1,953,678 1,029,173
----------------------------------------------
Net cash provided by operating activities 30,406,870 13,107,909 12,425,204
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,613,246) (4,226,053) (2,964,212)
Business or product line acquisitions -- (7,389,990) (310,698)
Proceeds from sale of assets 75,327 16,183 2,875
Purchase of held-to-maturity securities (30,730,000) (15,360,000) (16,700,000)
Maturities of held-to-maturity securities 18,430,000 14,350,000 7,820,000
Sale of available-for-sale securities -- -- 5,735,705
Other assets 884,000 (884,000) --
----------------------------------------------
Net cash used in investing activities (26,953,919) (13,493,860) (6,416,330)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (104,520) (407,750) (351,642)
Proceeds from exercise of stock options 2,082,165 285,015 1,090,811
Dividends and stock split fractional shares paid (1,623,510) (1,240,078) (1,083,332)
----------------------------------------------
Net cash provided by (used in) financing activities 354,135 (1,362,813) (344,163)
----------------------------------------------
Increase (decrease) in cash and equivalents 3,807,086 (1,748,764) 5,664,711
Cash and equivalents at beginning of year 5,635,534 7,384,298 1,719,587
----------------------------------------------
Cash and equivalents at end of year $ 9,442,620 $ 5,635,534 $ 7,384,298
==============================================
</TABLE>
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest was $118,000, $125,000 and $118,000 in 1997, 1996 and
1995.
Income tax payments were $13,813,000, $4,225,000 and $3,947,000 in 1997, 1996
and 1995.
Tax benefits derived from stock option plans totaling $2,865,000, $205,000 and
$1,076,000 in 1997, 1996 and 1995, were recorded as a reduction of current
income taxes payable and an increase in capital in excess of par value.
Liabilities of $1,814,000 were assumed as part of the May 1996 acquisition of
Litchfield Precision Components.
The accompanying notes are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
September 30, 1997, 1996 and 1995
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company, through its Innovex Precision Products subsidiary, manufactures
lead wire assemblies for disk drive heads. Its Litchfield Precision Components
subsidiary manufactures flex circuits and chemically etched components for the
medical, computer and communications industries. The Company also manufactures
medical device components and software for document storage retrieval and
management. Company customers are located throughout the United States and the
pacific rim. The Company has manufacturing facilities in Bloomington, Hopkins,
Litchfield and Montevideo, Minnesota.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company considers all highly
liquid temporary investments with an original maturity of three months or less
to be cash equivalents. Cash equivalents, which consist of money market funds
and weekly put bonds, totaled $7,915,000 and $4,124,000 at September 30, 1997
and 1996 and are recorded at cost which approximates market value. Debt and
equity securities have been classified as available-for-sale securities, with
unrealized gains and losses reported within stockholders' equity, or
held-to-maturity securities, which are reported at amortized cost. The Company
uses the specific identification method in determining realized gains and
losses.
ACCOUNTS RECEIVABLE - The Company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs ongoing credit evaluations
of customers. The Company maintains allowances for potential credit losses.
INVENTORIES - Inventories are stated at the lower of cost or market, with cost
determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT Depreciation is provided using the straight-line
method over the estimated useful lives of the assets for financial reporting and
accelerated methods for tax purposes. Estimated service lives range from 2 to 30
years for buildings and leasehold improvements, from 2 to 7 years for machinery
and equipment and from 3 to 7 years for office furniture and fixtures.
INTANGIBLE ASSETS - Intangible assets include goodwill, patents, licenses,
technology and trademarks, which are capitalized at cost and amortized on the
straight-line basis over their estimated useful lives, which range from three to
fifteen years. Management reviews the valuation and amortization of goodwill on
an ongoing basis. As part of this review, management estimates the value and
future benefits of the net income to be generated by the product lines acquired
to determine whether an impairment of goodwill has occurred.
Intangible assets also include computer software development costs which are
capitalized, when applicable, to the extent they are incurred after the
technological feasibility of the software has been determined and until the
software is available for general release to customers. These costs are then
amortized on a per unit sold basis or the straight-line method over the
remaining estimated economic life of the product, whichever amount is greater.
Unamortized capitalized software costs were $713,000 and $1,005,000 as of
September 30, 1997 and 1996. Capitalized software costs of $615,000 and $398,000
were amortized during the fiscal years ending September 30, 1997 and 1996.
NET INCOME PER SHARE - Net income per share is computed based on the weighted
average number of shares of common stock and common stock equivalents, when
dilutive, outstanding during the year.
RECLASSIFICATIONS - Certain 1996 and 1995 amounts have been reclassified to
conform with the 1997 presentation.
REVENUE RECOGNITION - Sales are recorded at the time of shipment and provision
for anticipated returns, net of exchanges, is recorded based on historical
experience.
USE OF ESTIMATES - Preparation of the Company's consolidated financial
statements requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and related revenues and expenses.
Actual results could differ from these estimates.
STOCK BASED COMPENSATION - The Company utilizes the intrinsic value method of
accounting for its employee stock based compensation plans. Pro forma
information related to the fair value based method of accounting is contained in
Note F.
RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting Standards Board
(FASB) has issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", which is effective for financial statements issued for periods
ending after December 15, 1997. Early adoption of the new standard is not
permitted. The new standard eliminates primary and fully diluted earnings per
share and requires presentation of basic and diluted earnings per share together
with disclosure of how the per share amounts were computed. The pro forma effect
of adopting the
<PAGE>
new standard for the years ended September 30, 1997, 1996 and 1995 would be
basic earnings per share of $2.43, $0.93 and $0.73 and diluted earnings per
share of $2.31, $0.91 and $0.70.
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income"
and Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information" which are effective for fiscal years beginning after December 15,
1997. Statement No. 130 will require the Company to display an amount
representing total comprehensive income as part of the Company's basic financial
statements. Comprehensive income will include such items as unrealized gains or
losses on certain investment securities and foreign currency items. Statement
No. 131 will require the Company to disclose financial and other information
about its business segments, their products and services, geographic areas,
major customers, revenues, profits, assets and other information. The adoption
of these two statements is not expected to have a material effect on the
consolidated financial statements of the Company.
NOTE B. - BUSINESS AND PRODUCT LINE ACQUISITIONS
On May 16, 1996, the Company purchased substantially all of the assets of
Litchfield Precision Components, Inc. The purchase price of approximately
$9,178,000 was in the form of $3,500,000 in cash and the assumption of specified
liabilities amounting to $5,678,000. Approximately $4,000,000 of the assumed
debt was paid off at the time of close. The acquisition has been accounted for
as a purchase and, accordingly, the results of operations since acquisition are
included in the accompanying financial statements. The fair value of the assets
acquired were as follows (in thousands of dollars):
Current assets $3,081
Property, plant and equipment 4,773
Intangible assets 1,324
------
$9,178
======
The following unaudited pro forma results of operations for the years ended
September 30, 1996 and 1995, assume the acquisition occurred as of October 1 of
each year. The pro forma information includes adjustments for depreciation based
on the fair market value of the property, plant and equipment acquired,
amortization of intangibles arising from the transaction, the elimination of
interest expense on debt paid off at the transaction close, the reduction of
interest income on cash used to complete the acquisition and related changes in
the provision for income tax expense (in thousands of dollars except per share
amounts):
1996 1995
- -----------------------------------------------------------------
Net sales $77,617 $61,706
Net income 13,190 10,292
Net income per share:
Primary 0.91 0.72
Assuming full dilution 0.91 0.71
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
on the assumed dates, nor are they necessarily indicative of future operating
results.
NOTE C. - SHORT TERM INVESTMENTS
Short term investments consist primarily of a diversified portfolio of tax
exempt municipal bonds which are classified as held-to-maturity securities at
September 30, 1997 and 1996. As of September 30, 1997 and 1996, substantially
all of the short term investments had maturities within one year. Gross realized
and unrealized gains and losses related to these securities were not material.
Sales of available-for-sale securities during fiscal 1995 of $5,736,000 resulted
in the realization of a $278,000 loss. Of this loss, $218,000 was recognized in
fiscal 1995 while the remaining $60,000 was recognized as a loss in fiscal 1994.
NOTE D. - INVENTORIES
Inventories are comprised of the following at September 30:
1997 1996
- ------------------------------------ ----------------------------------
Raw materials and purchased parts $2,652,028 $2,607,488
Work-in-process and finished goods 4,600,568 2,963,094
----------------------------------
$7,252,596 $5,570,582
==================================
NOTE E. - LONG-TERM DEBT
Long-term debt consists of various mortgage, promissory and industrial
development revenue notes which are collateralized by certain buildings,
improvements and equipment. Interest rates on these notes range from 5% to 7.5%.
Aggregate maturities of long-term debt for the next five years are as follows:
1998 - $104,000; 1999 - $113,000; 2000 - $117,200; 2001 - $125,600; 2002 -
$134,400; thereafter - $460,533. The recorded value
<PAGE>
of long-term debt approximates fair market value.
NOTE F. - STOCKHOLDERS' EQUITY
Stock Splits -
On November 23, 1996, the Company's Board of Directors declared a two-for-one
split of the Company's common stock and increased the authorized shares from
15,000,000 to 30,000,000. The additional shares were distributed on December 23,
1996 to stockholders of record on December 16, 1996. On May 3, 1995, the Board
of Directors declared a three-for-two split of the Company's common stock and
increased the authorized shares from 10,000,000 to 15,000,000. The additional
shares were distributed on May 31, 1995 to stockholders of record on May 16,
1995. All share and per share information throughout the financial statements
reflect these splits.
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 at the date of grant. At September 30, 1997, the
Company had 586,600 shares of common stock available for issue under the plans.
Transactions under the plans during each of the three years in the period ending
September 30, 1997 are summarized as follows:
Number of Weighted
Shares Under Average
Option Exercise Price
- ---------------------------------------------------------------------
Outstanding at October 1, 1994 992,688 $2.16
Granted 613,742 6.41
Forfeited (159,600) 1.77
Exercised (553,920) 1.94
- ---------------------------------------------------
Balance at September 30, 1995 892,910 5.29
Granted 348,000 7.05
Forfeited (76,400) 4.76
Exercised (97,000) 2.94
- ---------------------------------------------------
Balance at September 30, 1996 1,067,510 6.11
Granted 387,000 12.18
Forfeited (111,796) 6.55
Exercised 5.23
(398,250)
- ---------------------------------------------------
Balance at September 30, 1997 944,464 8.92
===========
Options exercisable at September 30:
Weighted
Number Average
Exercisable Exercise Price
------------------------------
1995 142,310 $3.10
1996 247,310 4.70
1997 122,865 6.23
The following table summarizes information concerning currently outstanding and
exercisable stock options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.33 -$ 3.46 105,564 6.8 years $ 2.94 56,964 $ 2.44
6.81 - 10.22 800,900 8.5 years 8.70 60,901 8.05
27.44 - 32.44 38,000 9.8 years 30.23 5,000 27.44
- ----------------------------------------------------------------------------------------------------
944,464 122,865
</TABLE>
The Company's 1997 and 1996 pro forma net income and net income per share would
have been $34,694,866 and $13,026,447 or $2.30 and $0.90 per share had the fair
value method been used for valuing options granted during 1997 and 1996. The
impact on net income may differ in future disclosures because they do not take
into effect pro forma compensation expense related to grants made before 1996.
The weighted average value of
<PAGE>
options granted in 1997 and 1996 was $5.56 and $1.43, computed by applying the
following weighted average assumptions to the Black Scholes options pricing
model: volatility of 60% and 20%; dividend yield of 1.7% and 1.1%; risk-free
rate of return of 5.8%; and an average term of 3.5 years for 1997 and 1996.
NOTE G. - COMMITMENTS
At September 30, 1997, the Company had commitments to purchase materials,
services and equipment totaling approximately $7 million related to the
construction of Litchfield Precision Component's state-of-the art flexible
circuit production facility.
NOTE H. - INCOME TAXES
The effective income tax rates differed from the federal statutory income tax
rate as follows for the years ended September 30:
1997 1996 1995
- --------------------------------------------------------------
Federal statutory rate 34.7% 34.0% 34.0%
State income taxes 1.9 2.4 2.3
FSC benefit (5.0) (6.0) (5.6)
Other (1.8) (0.4) 1.6
-------------------------------
29.8% 30.0% 32.3%
===============================
Components of the provision for income taxes are as follows for the years ended
September 30 (thousands of dollars):
1997 1996 1995
- -------------------------------------------------------------
Current:
Federal $14,027 $5,509 $4,451
State 1,470 670 528
-------------------------------
15,497 6,179 4,979
Deferred (613) (558) (190)
-------------------------------
$14,884 $5,621 $4,789
===============================
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):
1997 1996
- ------------------------------------------------------------------------
Current deferred tax assets:
Inventories $ 509 $ 272
Receivables 257 129
Compensation and benefits 364 164
Other 11 -
---------------------
$1,141 $ 565
=====================
Long-term deferred tax assets (liabilities) - net:
Accelerated depreciation $ (81) $ (136)
Intangibles 403 315
Compensation - 107
---------------------
$ 322 $ 286
=====================
NOTE I. - RETIREMENT AND PROFIT-SHARING PLANS
The Company sponsors a 401K retirement plan for all of its employees meeting
minimum eligibility requirements. The plan provides Company matching
contributions of 50% of the first 6% of employee contributions to the plan.
Company contributions were approximately $404,000, $286,000 and $198,000 for the
years ended September 30, 1997, 1996 and 1995.
NOTE J. - RESEARCH AND DEVELOPMENT COSTS
The Company incurred research and development costs of approximately $1,784,000,
$813,000 and $699,000 for the years ended September 30, 1997, 1996 and 1995.
NOTE K. - BUSINESS SEGMENT INFORMATION
The Company currently classifies its operations into two core business segments:
(i) Precision Products manufactures and markets lead wire assemblies and other
related products primarily for the computer disk drive market and (ii)
Litchfield Precision Components manufactures and markets flex circuits and
chemically etched parts for the medical, computer and communications industries.
The remainder of the Company's business includes the operations of its
InnoMedica Division, which manufactures medical device components, and its
Iconovex Division, which
<PAGE>
develops and markets software for document storage retrieval and management. The
identification of the Company's segments was determined principally by the
nature of the products produced and technology utilized.
Net sales represent sales to unaffiliated customers and intersegment sales.
Operating profit is total revenue less operating expenses. Non-operating income
includes interest income and expense and other income and expense. Identifiable
assets are those that are used in the Company's operations in each segment, net
of intercompany balances. Capital expenditures include additions to property,
plant, and equipment and capitalized software.
<TABLE>
<CAPTION>
For the years ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales:
Precision Products $ 123,435,681 $ 62,028,814 $ 48,201,301
Litchfield Precision Components 17,629,514 5,903,704 --
Corporate and Other 2,565,015 2,053,669 1,992,651
less intersegment sales elimination (1,626,467) (415,965) --
-----------------------------------------------
Total net sales $ 142,003,743 $ 69,570,222 $ 50,193,952
===============================================
Operating Profit and Income Before Provision
For Income Taxes:
Precision Products $ 50,878,532 $ 22,876,426 $ 19,043,182
Litchfield Precision Components 2,972,204 1,185,858 --
Corporate and Other (5,196,312) (5,652,021) (4,671,377)
less intersegment elimination (15,000) (7,000) --
-----------------------------------------------
Operating profit 48,639,424 18,403,263 14,371,805
Non-operating income, net 1,338,179 338,743 446,582
-----------------------------------------------
Total income before provision for income taxes $ 49,977,603 $ 18,742,006 $ 14,818,387
===============================================
Identifiable Assets:
Precision Products $ 36,092,711 $ 21,011,764 $ 13,085,777
Litchfield Precision Components 16,690,136 9,405,888 --
Corporate and Other 44,491,907 27,826,694 28,197,706
-----------------------------------------------
Total identifiable assets $ 97,274,754 $ 58,244,346 $ 41,283,483
===============================================
Capital Expenditures:
Precision Products $ 6,554,684 $ 3,515,282 $ 2,366,196
Litchfield Precision Components 8,195,455 214,730 --
Corporate and Other 863,107 496,041 598,016
-----------------------------------------------
Total capital expenditures $ 15,613,246 $ 4,226,053 $ 2,964,212
===============================================
Depreciation and Amortization:
Precision Products $ 3,097,975 $ 2,181,315 $ 1,835,671
Litchfield Precision Components 688,032 237,802 --
Corporate and Other 1,077,410 1,217,210 1,241,695
-----------------------------------------------
Total depreciation and amortization $ 4,863,417 $ 3,636,327 $ 3,077,366
===============================================
</TABLE>
The Company has no foreign-based operations; however, the Company utilizes two
subcontractors in Thailand and one in China to perform certain labor intensive
procedures on a large portion of the products sold by its Precision Products
Division. Management believes that there are alternative subcontractors that
could perform these procedures if such a change should be necessary; however,
any unforeseen change could cause a delay in shipments which could affect
operations adversely. The Company had aggregate export sales of $122,379,000,
$51,467,000 and $39,718,000 for the years ending September 30, 1997, 1996 and
1995, principally to pacific rim customers.
Revenues from five customers made up a significant portion of the Company's
total net sales during the years ending September 30:
1997 1996 1995
----------------------------------
Customer A 28% 31% 29%
Customer B 25 16 11
Customer C 15 18 21
Customer D 9 9 11
Customer E 7 8 10
<PAGE>
Accounts receivable from the above five customers also make up a significant
portion of the Company's accounts receivable at September 30, 1997 and 1996.
Subsequent to September 30, 1997, the Company's Iconovex Division entered into a
joint venture with another corporation, in which Iconovex will own 51%. The
joint venture will develop, market and distribute products that are based on
technology owned by Iconovex.
QUARTERLY FINANCIAL DATA
(Unaudited)
<TABLE>
<CAPTION>
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $29,311,887 $38,388,938 $41,960,060 $32,342,858 $142,003,743
Gross profit 12,107,647 17,581,853 18,362,927 12,923,566 60,975,993
Net income 6,338,346 10,056,369 10,942,318 7,756,570 35,093,603
Net income per share:
Primary $0.42 $0.66 $0.72 $0.51 $2.31
Assuming full dilution $0.42 $0.66 $0.72 $0.51 $2.30
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- ------------------------------------------------------------------------------------------------------
Net sales $13,111,707 $14,674,457 $19,254,632 $22,529,426 $69,570,222
Gross profit 5,516,232 6,014,066 7,294,617 8,152,903 26,977,818
Net income 2,751,191 2,956,264 3,562,134 3,851,417 13,121,006
Net income per share:
Primary $0.19 $0.21 $0.25 $0.27 $0.91
Assuming full dilution $0.19 $0.21 $0.25 $0.26 $0.90
</TABLE>
Net income per share amounts reflect a two-for-one stock split distributed
December 23, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" in the
Registrant's definitive proxy statement to be mailed to shareholders on or about
December 17, 1997, and filed with the Securities and Exchange Commission.
Information on executive officers is set forth in Part I, Item 4A hereto.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the section entitled "Executive Compensation" and "Election
of Directors" in the Registrant's definitive proxy statement to be mailed to the
Shareholders on or about December 17, 1997, and filed with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the section entitled "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in the
Registrant's definitive proxy statement to be mailed to Shareholders on or about
December 17, 1997, and filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the section entitled "Certain Transactions" in the
Registrant's definitive proxy statement to be mailed to Shareholders on or about
December 17, 1997, and filed with the Securities and Exchange Commission.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements Page Numbers
-------------------- ------------
The following Consolidated Financial Statements of
the Registrant, Innovex Inc. and subsidiaries, are
S included in Item 8.
Consolidated Balance Sheets at September 30, 1997
and 1996 12
Consolidated Statements of Operations for each of
the three years in the period ended
September 30, 1997 13
Consolidated Statements of Stockholders' Equity for
each of the three years in the period ended
September 30, 1997 14
Consolidated Statements of Cash Flows for each of
the three years in the period ended
September 30, 1997 15
Notes to Consolidated Financial Statements 16-21
(2) Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission have been omitted
because they are not required, are inapplicable or the information is
included in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits Page Numbers
-------- ------------
3(a) Articles of Incorporation, as amended are
incorporated by reference to Exhibit 3 of the
Registrant's Form 10Q for the Quarter Ended December
31, 1996.
3(b) Bylaws, as amended are incorporated by reference to
Exhibit 3(b) of the Registrant's Form S-1
Registration Statement dated June 19, 1986,
(Commission File No. 33-6594).
10(a) 1983 Employee Incentive Stock Option Plan is
incorporated by reference to Exhibit 4(a) of the
Registrant's Form S-8 dated June 3, 1987 (Commission
File No. 33-14776).
10(b) 1987 Employee Stock Option Plan, as amended, is
incorporated by reference to Exhibit 4(a) of the
Registrant's Form S-8 dated March 17, 1989
(Commission File No. 33-27530).
10(c) Innovex, Inc. & 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) Office/Warehouse Lease dated November 2, 1993 for
Bloomington building between the Northwestern Mutual
Life Insurance Company as lessor and Innovex, Inc.
is incorporated by reference to Exhibit 10(g) of the
Registrant's Form 10-K for the Year Ended September
30, 1993.
10(e) 1994 Stock Option Plan is incorporated by reference
to Exhibit 10.1 of the Registrant's Form 10-Q for
the Quarter Ended March 31, 1995.
10(f) Sublease dated March 29, 1995 for Bloomington office
space between John Alden Life Insurance Company and
Innovex, Inc. is incorporated by reference to
Exhibit 10(f) of the Registrant's Form 10-K for the
Year Ended September 30, 1995.
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.
10(h) Lease Agreement between Karon-Baronbaum LLC,
Landlord and Innovex, Inc., tenant for Hopkins
facility is incorporated by reference to Exhibit
10.1 to Registrant's Form 10-Q for the quarter ended
March 31, 1997
10(i) Operating Agreement of Smart Solution, LLC 25-41
21 Subsidiaries of Registrant. 42
23 Consent of Grant Thornton LLP. 43
27 Financial Data Schedule. 44
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
Reference is made to Item 14(a) 3.
(d) SCHEDULES
Reference is made to Item 14(a) 2.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INNOVEX, INC.
By /s/ Thomas W. Haley
-------------------------------------
Thomas W. Haley
Chairman and Chief Executive Officer
Date December 22, 1997 By /s/ Douglas W. Keller
-------------------------------------
Douglas W. Keller
Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 22nd day of December, 1997.
/s/ Thomas W. Haley Chairman and Chief Executive Officer
- --------------------------- and Director
Thomas W. Haley (principal executive officer)
/s/ Douglas W. Keller Vice President, Finance
- --------------------------- (principal financial officer)
Douglas W. Keller
/s/ Gerald M. Bestler Director
- ---------------------------
Gerald M. Bestler
/s/ Mary E. Curtin Executive Vice President, Corporate and Director
- ---------------------------
Mary E. Curtin
/s/ Willis K. Drake Director
- ---------------------------
Willis K. Drake
/s/ William J. Miller Director
- ---------------------------
William J. Miller
/s/ Michael C. Slagle Director
- ---------------------------
Michael C. Slagle
/s/ Bernt M. Tessem Director
- ---------------------------
Bernt M. Tessem
<PAGE>
UNITIED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
INNOVEX, INC.
FOR
FISCAL YEAR ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------
EXHIBITS
EXHIBIT 10(i)
OPERATING AGREEMENT
OF
SMART SOLUTION, LLC
A DELAWARE LIMITED LIABILITY COMPANY
This Operating Agreement ("Agreement") is made as of this 7th day of
October, 1997, by and between Iconovex Corporation, a Minnesota corporation with
its principal office located at 7900 Xerxes Avenue South, Suite 550,
Bloomington, Minnesota 55431 ("Iconovex") and Solutions Corporation of America,
Inc. a Tennessee corporation with its principal office located at 631 Second
Avenue South, Suite 2F, Nashville, Tennessee 37210 ("Solutions"). Iconovex and
Solutions are referred to in this Agreement as a "Member" or the "Members."
ARTICLE I
FORMATION, PURPOSE, SCOPE, EFFECTIVE DATE AND TERM
Section 1.01 Formation
The Members agree to organize and associate themselves as members in a
Delaware limited liability company to be known as Smart Solution, LLC (the
"Company") in accordance with the LLC Act, this Agreement and the Company's
Certificate of Formation attached as Exhibit 1.01. The Members shall form the
Company pursuant to the LLC Act by causing such Certificate of Formation to be
filed with the Delaware Secretary of State. The Members hereby authorize an
agent of Iconovex to execute and deliver the Certificate of Formation in the
form attached hereto as Exhibit 1.01 and to cause the same to be filed with the
Delaware Secretary of State.
Section 1.02 Purpose of the Company
The Company is formed for the purpose of engaging in the business of
developing, marketing, distributing and selling computer software, information
products and services which search, screen, summarize and index information
content for the corporate intranet, database and Internet markets (the "Core
Business") and any other lawful business its Members choose to pursue. The
Company may engage in all activities and transactions as the Committee or
Members may deem necessary or advisable to carry out the foregoing objects and
purposes. The Company shall not engage in any business other than its Core
Business without the unanimous written consent of the Members.
Section 1.03 Effective Date; Term
The Company shall commence on the date of filing of the Company's
Certificate of Formation with the Delaware Secretary of State (the "Effective
Date") and shall continue until the tenth (10th) anniversary date of such date
(the "Initial Term"), or the date of termination of the Company in accordance
with this Agreement; provided, if neither Member provides written notice to the
other Member at least six (6) months prior to end of the Initial Term or any
renewal term and the Company is not earlier terminated in accordance with this
Agreement, the Company shall continue for three successive five (5) year terms
beyond the Initial Term, subject to earlier termination as provided in this
Agreement (or further extension by agreement of the Members).
Section 1.04 Authorization of this Agreement
This Agreement is made under the Delaware Limited Liability Company Act
as set forth in Delaware Code ss.ss. 18-101, et seq. ("LLC Act").
Section 1.05 Foreign Company Filings; Other Certificates
The officers of the Company shall, from time to time, register the
Company as a foreign limited liability company in such jurisdictions and such
offices as the Committee considers necessary or appropriate.
Section 1.06 Registered Agent; Registered Office
The initial registered agent of the Company is The Corporation Trust
Company. The address of the initial registered office of the Company is The
Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle, Delaware 19801. The registered agent and
registered office may be changed from time to time by action of the officers of
the Company following approval by the Committee in accordance with the LLC Act.
<PAGE>
Section 1.07 Liability to Third Parties
Except as otherwise provided by the LLC Act, the debts, obligations and
liabilities of the Company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of the Company, and no
Member, member of the Committee or officer of the Company shall be obligated
personally for any such debt, obligation or liability of the Company solely by
reason of being a Member, or acting as a member of the Committee or as an
officer of the Company.
Section 1.08 Conflicting Services and Products
Except as provided in Schedule 1.08, each Member agrees that, so long
as it is a Member of the Company, it shall not, directly or indirectly, develop,
market, distribute or sell any product similar to or in competition with a
product sold or under development by the Company, except as consented to in
writing by all Members. Nothing in this Section 1.08 shall modify, limit or
waive any obligations of either Member set forth in Article XII.
ARTICLE II
DEFINITIONS
Section 2.01 Definitions
For purposes of this Agreement, the terms defined in this section have
the following meanings:
(a) "Affiliate" shall mean, as to any Person, any other Person
that, directly or indirectly, controls, is under common
control with or is controlled by that Person.
(b) "Capital Account" shall mean, with respect to any Member, the
capital account established and maintained for such Member by
the Company pursuant to Section 3.03.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Committee" shall mean the Members' Committee provided for in
Section 6.02 of this Agreement.
(e) "Financial Rights" shall mean a Member's financial interest in
the Member's Capital Account and any rights to share in
profits and losses of the Company and to receive
distributions.
(f) "Fiscal Year" shall mean the period specified in Section
10.04.
(g) ""GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
(h) "Initial Period" shall mean a period of two years after the
Effective Date.
(i) "Membership Interest" shall mean, as to any Member, such
Member's Capital Account and all other rights which such
Member has in the Company.
(j) "Net Cash Flow" shall mean, for any period of determination,
the net income (or net loss) of the Company determined in
accordance with GAAP, plus depreciation, amortization and
other non-cash expenses deducted in calculating net income,
less capital expenditures and any other cash disbursements not
resulting in a current period expense and less additions to
net income not resulting from cash receipts.
(k) "Percentage Interest" shall mean the undivided interest of a
Member in the Company, expressed as a percentage of the whole,
as provided in Section 3.02.
(l) "Person" shall include any natural person, domestic or foreign
limited liability company, corporation, partnership, limited
partnership, joint venture, association, business trust,
estate, trust, enterprise, or any other legal or commercial
entity.
<PAGE>
(m) "Section 704(b) Regulations" shall mean the final Treasury
Regulations under Section 704(b) of the Code relating to the
determination of a Member's distributive share of the
Company's income, gain, loss, deduction or credit (or items
thereof), and any outstanding proposed Treasury Regulations
under Section 704(b) of the Code.
(n) "Subsidiary" shall mean, with respect to any Person, any
corporation of which more than fifty percent (50%) of the
outstanding voting securities are owned, directly or
indirectly, by such Person.
(o) "Tax Matters Member" shall have the meaning set forth in
Section 10.03.
(p) "Transfer" shall mean an assignment, sale, conveyance, lease,
mortgage, security interest, deed, encumbrance, or gift.
(q) "Treasury Regulations" shall mean the outstanding final,
temporary, or proposed income tax regulations promulgated
under the Code from time to time. References in this Agreement
to specific sections of the Treasury Regulations shall also
refer to the corresponding sections of succeeding Treasury
Regulations as they may be amended from time to time.
ARTICLE III
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS;
ALLOCATIONS; LOANS
Section 3.01 Capital Contributions
(a) Initial Capital Contributions. On the Effective Date, Iconovex and
Solutions shall contribute to the capital of the Company the property specified
below ("Initial Capital Contributions"):
(i) Iconovex shall contribute to the Company those items
specified in Schedule 3.01 hereto and designated "Iconovex
Intangibles."
(ii) Solutions shall contribute to the Company those items
specified in Schedule 3.01 hereto and designated "Solutions
Intangibles."
Iconovex and Solutions each acknowledge and agree that the fair market value of
the rights contributed by Iconovex pursuant to subsection (i) above is $51,000,
and the fair market value of the intangibles contributed by Solutions pursuant
to subsection (ii) above is $49,000.
(b) Additional Capital Contributions. Except as hereinafter provided,
no Member shall be required to contribute any capital to the Company in addition
to the contribution required by Section 3.01(a). Additional contributions to the
capital of the Company that any Member may elect to make may be made only at
such times, in such amounts and in such form and manner as the Members shall
approve.
Section 3.02 Percentage Interests
Upon receipt by the Company of the initial capital contributions
contemplated by Section 3.01(a), the Members shall have the following respective
undivided interests in the Company, expressed as a percentage of the whole
(each, a "Percentage Interest") which Percentage Interest shall not change for
any reason:
Member Percentage Interest
------ -------------------
Iconovex 51%
Solutions 49%
Section 3.03 Capital Accounts
(a) The Company shall establish and maintain a separate capital account
(each a "Capital Account") for each Member. The Capital Accounts of the Members
shall in all events be determined and maintained by the Members throughout the
full term of the Company in accordance with the capital accounting rules of
Treasury Regulation ss. 1.704-1(b)(2)(iv) (relating to the maintenance
<PAGE>
of capital accounts). The initial Capital Account balance of Iconovex and
Solutions, following the initial capital contributions contemplated by Section
3.01(a), shall be $51,000 and $49,000, respectively.
(b) The Capital Account of each Member shall from time to time be
increased by:
(i) the amount of cash contributed or deemed contributed
by such Member to the Company and the agreed fair
market value of property other than cash contributed
by such Member to the Company (net of liabilities
secured by such contributed property that the Company
is considered to have assumed or taken subject to for
purposes of Section 752 of the Code);
(ii) the amount of the Company's profits or items thereof
allocated to such Member in accordance with the
Member's Percentage Interest; and
(iii) any other increases required to be made to the
Capital Account of such Member by the Section 704(b)
Regulations, to the extent not otherwise provided for
herein;
and shall from time to time be decreased by:
(i) the amount of the Company's losses or items thereof
allocated to such Member in accordance with the
Member's Percentage Interest;
(ii) the amount of cash paid, distributed or deemed
distributed by the Company to such Member pursuant to
Section 4.01 and the fair market value of property
other than cash distributed by the Company to such
member (net of liabilities secured by such
distributed property that the Member is considered to
have assumed or taken subject to for purposes of
Section 752 of the Code); and
(iii) any other reductions required to be made to the
Capital Account of such Member by the Section 704(b)
Regulations, to the extent not otherwise provided for
herein.
Section 3.04 Negative Capital Account
A negative or deficit balance in any Member's Capital Account shall not
be deemed to be an asset of the Company, and no Member with a negative or
deficit balance in such Member's Capital Account shall have any obligation to
the Company, to any other Member or to any third party or creditor to restore or
repay such negative or deficit balance.
Section 3.05 Allocation of Profit and Losses
The Company's profits and losses shall be allocated between the Members
in accordance with their Percentage Interests.
Section 3.06 Tax Allocations
Except as otherwise provided in Section 704(c) of the Code and the
Treasury Regulations, all items of income, gain, loss and deduction shall be
allocated to the Members for federal income tax purposes in the same manner as
the corresponding allocation of each such item for book purposes.
Section 3.07 Interest on and Return of Capital
No Member shall be liable for the return of the capital contributions
(or any portion thereof) of any other Member, it being expressly understood that
such return, to the extent permitted by this Agreement, shall be made solely
from the assets of the Company. No Member shall be entitled to withdraw any part
of such Member's capital contributions or Capital Account, to receive interest
on such Member's capital contributions or Capital Account, or to receive any
distribution from the Company, except as expressly provided for in this
Agreement. Any loan by a Member to the Company shall not be considered a
contribution to the capital of the Company and shall not increase the Capital
Account of the Member making the loan.
Section 3.08 Transfers of Membership Interests
In the event of a transfer by a Member of all or any portion of its
Membership Interest in the Company as permitted by and
<PAGE>
in accordance with the terms of this Agreement, the transferee of such
Membership Interest shall succeed to the transferring Member's Capital Account
attributable to such transferred Membership Interest.
Section 3.09 Loans
(a) To ensure that the Company has sufficient funds during the Initial
Period, each Member shall loan the funds necessary to provide the cash
requirements of the employees, operations and facilities for which it is
responsible as provided in Article V. All loans shall be unsecured and shall
bear a rate of interest at prime as published in The Wall Street Journal and
shall be evidenced by a Master Note issued by the Company in the form of Exhibit
3.09. The principal amount of and accrued interest on all such loans shall be
repaid by the Company in the manner set forth in Section 4.01.
(b) Each Member agrees to make such funds readily available to the
Company. Each Member shall provide to the Company and the other Members a
reconciliation of the loan balance and interest accrued within ten business days
following the close of each month, together with a reconciliation of the
expenses paid for or on behalf of the Company. Each Member shall be provided
access to such books and records of the other Member reasonably necessary to
verify all expenses paid or incurred and the loan balance.
ARTICLE IV
DISTRIBUTIONS
Section 4.01 Distributions of Net Cash Flow
(a) Repayment of Member Loans. Any positive Net Cash Flow shall be
applied by the Company first to repay the outstanding principal amount of and
any accrued and unpaid interest on any loans which the Members have caused to be
made to the Company pursuant to Section 3.09. All loan payments shall be applied
first to any Member's funded loan balance (to include principal and accrued
interest) which, as a percentage of the Company's then total Member funded loan
balance, is greater than such Member's Percentage Interest and thereafter to all
Member funded loans pro rata in accordance with such Member's Percentage
Interest. The Company shall be prohibited from making any distributions of
positive Net Cash Flow to the Members with respect to their Membership Interests
until such time as all loans made to the Company directly by the Members
pursuant to Section 3.09 have been repaid in full.
(b) Distributions to the Members after the Payment of Loans. At any
time after all loans made by Members have been repaid, any positive Net Cash
Flow (after the establishment of such reserves as the Committee shall deem
necessary for anticipated Company needs, taking into account existing and
potential liabilities, obligations and other cash requirements) shall be
distributed to the Members on a quarterly basis or at such other times as the
Committee shall determine. All such distributions shall be made to the Members
in proportion to and in accordance with their respective Percentage Interests in
the Company.
Section 4.02 Method of Payment of Cash Distributions
All cash distributions to the Members shall be made directly to each
member in U.S. dollars at its respective address for notices pursuant to Section
12.04, or to such other address (or by wire transfer to an account of such
Member with any reputable financial institution) as such Member may specify to
the Company pursuant to a notice in accordance with Section 12.04.
Section 4.03 No Distributions in Kind
Unless otherwise approved by the Committee in each specific instance or
as provided in Section 8.02(d), no Member shall be entitled to demand and
receive property other than cash in return for its capital contributions to the
Company, the balance in its Capital Account or its Membership Interest.
Section 4.04 Distributions Subject to Set-Off by the Company
All distributions are subject to set-off by the Company
(a) in the case of a Member, for any past-due obligation of the Member
to make capital contribution to the Company; and
(b) in the case of an assignee of Financial Rights, for any past-due
obligation owed to the Company by the Member
<PAGE>
who originally owned the Financial Rights.
ARTICLE V
OFFICE, FACILITIES, PERSONNEL, ADMINISTRATION
AND TECHNOLOGY
Section 5.01 Office
The principal places of business of the Company shall be located at the
leased facilities referenced in Section 5.02, or such other place as determined
by the Committee.
Section 5.02 Facilities
Until the Members may otherwise determine during the Initial Period,
Iconovex shall provide the Company the use of its leased facility at 7900 Xerxes
Avenue South, Suite 550, Bloomington, Minnesota and Solutions shall provide the
Company the use of its leased facility at 631 Second Avenue South, Suite 2F,
Nashville, Tennessee. The Company agrees that its use shall be subject to the
additional terms set forth in Schedule 5.02.
Section 5.03 Leased Employees
(a) During the Initial Period, the Company desires to utilize, and
Iconovex and Solutions agree to make available on a leased basis, the services
of those employees at Iconovex and Solutions listed on Schedule 5.05, including
any additional or replacement employees of Iconovex and Solutions necessary to
carry out the Company's Core Business (the "Leased Employees"). Each Leased
Employee not subject to an existing Employment/Non-Compete Agreement with
Iconovex shall be required to execute and deliver to the Company a Non-Compete
Agreement in the form of Schedule 5.05.
(b) During the Initial Period, the Company shall reimburse each Member
(which amount shall be considered loans under Section 3.09) for all wages,
fringe benefits and other obligations paid by such Member to or on behalf of its
respective Leased Employees. These expenses shall include salaries, wages, FICA,
worker's and unemployment compensation premiums or charges, together with all
health insurance premiums and charges and other fringe benefits incurred.
(c) The Company shall at all times supervise and direct the work
activities of all Leased Employees, which employees shall devote substantially
all of their full time business activities to the Core Business of the Company.
(d) All Leased Employee expenses shall be pro rated by the parties on
and as of the Effective Date. All Leased Employee expenses or benefits to which
a Leased Employee would be entitled on or prior to the Effective Date shall be
for the account of the Member, while all such expenses which arise as a result
of service rendered by a Leased Employee to the Company during the Initial
Period shall be for the account of the Company.
(e) After the Initial Period, the Company shall make offers of
employment to such Leased Employees as determined by the Committee and will
provide such employee benefit plans as determined by the Committee.
Section 5.04 Administration and Direct Expenses
Until the Members may otherwise determine, Iconovex shall provide
accounting services to the Company at Iconovex' cost. Solutions shall invoice
customers of the Company for products sold or services provided by the Company.
Such invoice shall direct payment to Iconovex, which shall deposit such funds in
a bank account established for the benefit of the Company. In addition, all
direct expenses, including, without limitation, phone, travel and general
liability insurance shall be provided in advance by each Member. All such
administration and direct expenses will be considered loans under Section 3.09.
Section 5.05 Technology
Any discovery, idea, invention, improvement or development related to
the Iconovex Intangibles or the Solutions Intangibles and conceived by the
Company (the "Developments") shall be owned by the Company. The Company shall be
responsible for the payment of royalties, including minimum royalties, due to
any third party after the Effective Date under that Computer Program Purchase
Agreement dated November 8, 1993 by and between ZH Computer, Inc., Syntactic
Analyzer, Inc. and Innovex, Inc.. If the Company fails to pay such royalties,
Iconovex may, at its option, terminate the license to the Iconovex Intangibles
set forth on Schedule 3.01.
<PAGE>
ARTICLE VI
GOVERNANCE BY MEMBERS
Section 6.01 General
Except as otherwise expressly provided in this Article VI, the
management and control of the business of the Company shall be vested in the
Members. No Member has the authority to make any contracts, to act or enter into
any transactions, or make any commitments on behalf of the Company, whether or
not in the ordinary course of the business of the Company without the prior
consent of the other Members, unless specifically authorized by this Agreement.
Subject to the provisions of Section 6.03, the day to day operations shall be
managed by such officers as the Members may from time to time appoint, subject,
however, to the control of the Members. The Members shall act in good faith in
performing their respective obligations under this Agreement.
Section 6.02 Members' Committee
(a) Member Designees. The Members shall manage the Company through a
five-person Members' Committee (the "Committee"), of whom three shall be
designated by Iconovex and two shall be designated by Solutions.
(b) Approval of Actions. Affirmative written consent of a majority of
the Member Designees is required to approve any action of the Committee.
Affirmative written consent of both Members is required to approve any action of
the Members. Consent of all Member Designees shall constitute consent of the
Members. The Committee will meet as often as the Members deem appropriate. In
lieu of meetings, business may be transacted via conference call or other means
of communication, as long as actions are approved by the written consent set
forth above. Any Member Designee may call a meeting of the Committee.
(c) Budget. The Committee shall cause to be prepared on or before the
first day of each Fiscal Year a budget for the Company's operations (the
"Budget"). The Budget shall cover one Fiscal year and shall include, among other
things, anticipated revenues, capital expenditures, operating expenses, and net
income for the Fiscal Year. The Budget may be revised by approval of the
Committee per Section 6.02(b).
(d) Expenses. Member Designees shall serve without remuneration. Each
Member shall bear the expenses of its respective Member Designees.
Section 6.03 Limitations on Managerial Authority
(a) Actions Which Require Member Approval. The following actions shall
not be taken by the Company without prior approval of the Members:
(i) amendment of this Agreement or the Company's
Certificate of Formation;
(ii) the sale, lease or exchange of all or substantially
all of the Company's property or assets;
(iii) the acquisition, merger with or into or consolidation
with another business or entity;
(iv) the admission of a Member or substitute Member or any
Transfer of a Member's Membership Interest or
Financial Rights;
(v) the undertaking of or participation in any activity
by the Company outside the Core Business;
(vi) any increase or decrease in the capital of the
Company;
(vii) adoption, approval and amendment of the budget and
forecast;
(viii) adoption or termination of any employee benefit plan;
(x) the establishment of or change in financial policies,
including balance sheet reserves;
(xi) capital expenditures in excess of any approved
capital expenditure plan;
<PAGE>
(xii) guarantee of or act as surety for a Member's or a
third party's liability;
(xiii) except as provided in Section 3.09, the making or
acceptance of loans, other than trade payables or
trade receivables made in the ordinary course of
business;
(xiv) the granting or placing of any mortgage, pledge or
other encumbrance on assets of the Company;
(xv) bonuses for employees and salaries of key employees;
(xvi) distributions in excess of the amounts permitted in
Section 4.01;
(xvii) selection of independent auditors;
(xviii) commencement, defense or settlement of material
litigation;
(xix) any purchase of real estate;
(xx) creation of any subsidiaries;
(xxi) contracts or commitments involving licensing of
technology or other rights or restricting the Company
to compete;
(xxii) change in Fiscal Year; or
(xxiii) any determination to indemnify any person.
(b) Notwithstanding any provision of this Agreement to the contrary, no
amendment to this Agreement that adversely affects the Financial Rights of a
Member shall be made without the written consent of the affected Member or
Members.
Section 6.04 Officers of the Company
The Committee shall appoint such officers as they deem necessary. The
duties of the officers shall be as the Committee may from time to time
determine. All officers shall serve at the will of the Committee unless there is
an express written agreement to the contrary. The Company shall bear the
expenses of its officers.
ARTICLE VII
ADMISSION OF ADDITIONAL MEMBERS;
RESTRICTIONS ON TRANSFER; DEFAULT;
RIGHT OF FIRST REFUSAL; PUT RIGHT
Section 7.01 Admission of New Members
Except as provided to the contrary in this Agreement, new or additional
Members may be admitted from time to time only with the consent of all of the
Members. Each such admission of an additional Member shall be evidenced by a
supplemental written agreement amending this Agreement, containing the written
consent of the additional Member to be bound by the provisions of this Agreement
and such other terms and conditions as may be agreed upon by the Members.
Section 7.02 Limitations on Transfer
No Member shall Transfer its Membership Interest or Financial Rights or
a part thereof to any Person, whether voluntarily, by operation of law or
otherwise, without the prior written consent of all of the Members. Any
permitted transferee shall agree in writing to take the Membership Interest or
Financial Rights subject to this Agreement and subject to the rights and
obligations of the transferor Member.
Section 7.03 Further Restrictions on Transfer
Notwithstanding the other provisions of this Article VII, no Transfer
of any Member's Membership Interest shall be made if such Transfer (a) would
violate the then applicable Federal and state securities laws or rules and
regulations of the Securities and
<PAGE>
Exchange Commission, any state securities commission or any other governmental
authorities with jurisdiction over such Transfer, or (b) would result in the
Company being treated as an association taxable as a corporation for Federal
income tax purposes (including Section 7704 of the Code) or being terminated
under Section 708(b) of the Code, unless in the case of a termination under
Section 708(b) of the Code, such termination would not have a material adverse
effect on any non-transferring Member's present or future allocable share of
profits or losses with respect to its Membership Interest (also taking into
account any recapture of credits) as compared to its present or future allocable
share of profits or losses if there had not been such a termination.
Section 7.04 Rights of Holders of Financial Rights
No holder of Financial Rights shall have the right to become a
substitute or additional Member except upon admission to the Company as a Member
pursuant to the provisions of Section 7.01. An assignment of Financial Rights
made in accordance with Section 7.02 shall only transfer to the assignee thereof
the assignor's right to the profits, losses, distributions and capital of the
Company with respect to the related Membership Interest and shall not transfer
to such assignee any interest in a Member's governance rights or any other
rights hereunder.
Section 7.05 Transfer During Taxable Year
In the case of the Transfer of a Member's Membership Interest (or
portion thereof or interests therein) at any time other than the end of a Fiscal
Year, all of the various items of the Company's income, gain, loss, deduction,
credit or allowance, (other than from sale of real property) shall be allocated
in accordance with Section 3.06. The effective date of a transfer shall be the
effective date stated in the assignment or such other date as is mutually agreed
between transferor and transferee.
Section 7.06 No Resignation
No Member shall resign from the Company prior to the dissolution and
winding up of the Company.
Section 7.07 Effect of Non-Permitted Transfer
No Transfer of all or any portion of any Membership Interests or
Financial Rights in violation of any provisions of this Agreement shall be
effective to pass any title to, or create any interest in favor of, any Person,
and the purported transferee shall have no right to participate in the
management of the business and affairs of the Company, but the Member who
attempted to so effect such Transfer or who otherwise violated any provision of
this Article VII shall be deemed to have committed a material breach of its
obligation to the other Member hereunder.
Section 7.08 Securities Laws
(a) Each Member understands and hereby acknowledges that (i) in
reliance upon their representations, warranties and covenants, the issuance of
the Membership Interests to them has not been and may not be registered with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon Section 4(2) of the Securities Act or
under any state securities or Blue Sky laws; and (ii) as a result, each Member
must hold its Membership Interest indefinitely, unless such Membership Interest
is transferred in a transaction subsequently registered under the Securities Act
or such laws, or an exemption from such registration is available with respect
to the transfer of such Membership Interest.
(b) Each Member hereby represents that it is acquiring its Membership
Interest pursuant to this Agreement for its own account and not with the view
to, or for resale in connection with, any distribution or public offering
thereof within the meaning of the Securities Act. Each Member is a sophisticated
investor for purposes of the Securities Act and has such knowledge and
experience in financial and business matters that is capable of evaluating the
merits and risks of the Membership Interest being acquired pursuant to this
Agreement.
Section 7.09 Default During Initial Period
(a) In the event a Member (the "Defaulting Member") shall be in default
of a material provision of this Agreement during the Initial Period and such
default shall continue for thirty (30) days after receiving notice of such
default from the other Member (the "Non-Defaulting Member") without cure, and
the Non-Defaulting Member does not waive the default, then the Non-Defaulting
Member shall be entitled at its sole option, and without limiting any other
remedies available to it to purchase the Defaulting Member's interest in the
Company. The Non-Defaulting Member may elect to purchase the Defaulting Member's
interest in the Company by written notice given to the Defaulting Member within
five (5) days following expiration of the 30-day cure period from its original
notice of default. If the Non-Defaulting Member elects to purchase the
Defaulting Member's interest in the
<PAGE>
Company under this Section 7.09, the definitive agreements governing such
transfer and the transfer shall be completed within the 15-day period following
expiration of the 30-day cure period. The purchase price for the Defaulting
Member's interest shall be equal to a multiple of five (5) times the net income
of the Company determined in accordance with GAAP. The net income shall be
determined on a 12-month rolling average basis ending the end of the month
immediately prior to the notice of default (the "Determination Date"). If the
Determination Date is less than 12 months from the Effective Date, the net
income shall be determined on an annualized basis. The Defaulting Member shall
also be granted by the Company a non-exclusive, royalty-free right and license
to any Developments derived from such Member's respective Intangibles. Payment
of the purchase price shall be in cash at the closing.
(b) For purposes of this Agreement, during the Initial Period, the
following shall constitute a default for purposes of Section 7.09(a) above by
the Member specified below:
(i) by Iconovex, if a product is not developed meeting
the specifications as agreed to in writing by the
Members;
(ii) by Solutions, if the Company fails to meet at least
60% of the cumulative monthly revenue projections
(determined on a monthly basis) set forth in Schedule
7.09 during the year ended September 30, 1998 and 90%
thereafter.
Section 7.10 Right of First Refusal
(a) In the event at any time after the date which is two years from the
Effective Date, a Member receives from a third party a bona fide offer to
purchase its Membership Interest which that Member (the "Selling Member") is
willing to accept, the Selling Member shall provide the other Member notice in
writing specifying the price and other terms and conditions of the proposed
sale. For a period of thirty (30) days from and after receipt of such notice,
the other Member shall have the right to purchase the Selling Member's
Membership Interest upon the terms and conditions and for the price set forth in
the Selling Member's notice. In order for the terms of this Section 7.10 to
apply, the Selling Member must demonstrate to the other Member the third party's
financial ability to perform the Selling Member's obligations under this
Agreement.
(b) If the other Member exercises its right to purchase the Selling
Member's Membership Interest, it shall provide written notice of such exercise
within the 30-day period provided in Section 7.10(a). Closing of sale shall be
no more than thirty (30) days from the date of the exercise notice.
(c) If the other Member does not exercise its right to purchase the
Selling Member's Membership Interest within the 30-day period provided in
Section 7.10(a), the Selling Member may sell its Membership Interest to the
third party at a price and on terms no more favorable to the third party than
those specified in the Selling Member's notice. If the sale is not consummated
within sixty (60) days after expiration of the 30-day period provided in Section
7.10(a), the right to transfer under Section 7.10 shall terminate and any
subsequent sale shall again require compliance with this Section 7.10.
Section 7.11 Put Right
(a) In the event at any time after the date which is two years from the
Effective Date, a Member desires to sell its Membership Interest (the "Put
Member"), it shall provide the other Member notice in writing at least ninety
(90) days prior to the proposed transfer date.
(b) Upon receipt of such notice by the other Member, the Put Member
shall be obligated to sell and the other Member shall be obligated to purchase,
the Put Member's Membership Interest. Closing of the sale shall be the date
specified in the Put Member's notice, unless agreed to by the Members.
(c) The purchase price for the Put Member's Membership Interest shall
be the greater of (i) six (6) times the net income of the Company determined in
accordance with GAAP on a 12-month rolling average basis ending the month
immediately prior to the notice described in Section 7.11(a); or (ii) the price
determined by appraisal as provided in Section 7.11(d) below (the "Appraised
Value"). Payment of the purchase price shall be in cash at closing.
(d) The Appraised Value of the Membership Interest will be determined
by a recognized independent appraisal company agreeable by the Members (the
"Appraiser"). If the Members cannot agree on an Appraiser within fifteen (15)
days after notice required in Section 7.11(a), each Member shall select an
Appraiser and the two Appraisers shall select an independent
<PAGE>
Appraiser to determine the fair market value of such Membership Interest,
without premium for control or discount for minority interest, illiquidity or
restriction on transfer. Such independent Appraiser shall be directed to
determine the fair market value of the Membership Interest as soon as
practicable, but in no event later than thirty (30) days from the date of its
selection. The determination by the Appraiser of the fair market value will be
conclusive and binding on all parties to this Agreement. The costs of the
Appraiser will be borne 50% by each Member.
ARTICLE VIII
DISSOLUTION, WINDING UP AND TERMINATION
Section 8.01 Events of Dissolution
The Company shall be dissolved upon the occurrence of any of the
following events:
(a) Expiration of the term of the Company as stated in Section 1.03
unless such term is extended as provided in said Section;
(b) Any order of court of competent jurisdiction requiring dissolution;
(c) The unanimous agreement of the Members; or
(d) Subject to Section 8.03, the bankruptcy (as defined in Sections
18-101(1) and 18-304 of the LLC Act) of a Member.
Section 8.02 Winding Up
In the event that the Company is dissolved and the remaining Members do
not or cannot unanimously consent to the continuation of the business of the
Company without the dissolution as provided in Section 8.03 hereof:
(a) No further business shall be done in the Company's name except the
completion of incomplete transactions and the taking of such action as may be
necessary to wind up the affairs of the Company.
(b) The affairs of the Company shall be wound up in accordance with the
following provisions:
(i) a full and general accounting of the Company's
financial affairs shall be prepared;
(ii) the Company shall attempt to collect all of its
accounts receivable;
(iii) the Company shall pay or provide for all debts and
liabilities to creditors of the Company, including
debts from loans by Members in the manner provided in
Section 4.01, in order of priority as provided by
law;
(iv) if a Member shall have any obligation to the Company
as of the effective date of the dissolution, such
obligation shall promptly be paid to the Company. In
lieu of such payment, the Company shall be entitled
to offset any such obligation against any payment or
distribution to be made to such Member hereunder; and
(v) if the Members deem it reasonably necessary, a
reserve shall be set up for any contingent or
unforeseen liabilities or obligations of the Company
arising out of or in connection with the Company's
business. Such reserve shall be paid over to an
escrow agent selected by the Members for such period
of time as the Members shall reasonably determine, to
be held for the purpose of disbursing such reserve in
payment of any such contingencies. At the expiration
of such period the balance of such funds shall be
distributed in the manner provided in Section 8.02.
A reasonable time as determined by the Members, not to exceed 12
months, shall be allowed for the orderly winding up of affairs of the Company,
including the liquidation or distribution of its assets and the discharge of its
liabilities to creditors, so as to enable the Company to minimize any losses
attendant upon such liquidation. Each Member shall be furnished with a statement
setting forth the assets and liabilities of the Company as of the date of
dissolution and the manner in which the assets of the Company are to be
distributed.
(c) The assets of the Company shall be applied in the following order:
<PAGE>
(i) to the payment of the debts and liabilities of the
Company owing to creditors of the Company, including
debts from loans by Members in the manner provided in
Section 4.01, in the order of priority as provided by
law;
(ii) to the payment to the Members having positive
balances in their respective Capital Accounts, pro
rata, in proportion to such positive balances; and
(iii) to the payments to the Members of any surplus
remaining after the payments described in (i) and
(ii) above, in proportion to and in accordance with
their respective Percentage Interests in the Company.
No Member shall have any obligation to the Company, to any other Member
or to any third party or creditor to restore or repay any negative or deficit
balance in the Member's Capital Account or to make any additional capital
contributions to the capital of the Company in the event that the assets of the
Company are insufficient to make any of the payments provided for in this
Section 8.02(c). Any gains or losses on disposition of the Company's properties
in the process of liquidation shall be credited or charged to the Members in
accordance with their respective Percentage Interests.
(d) In winding up the affairs of the Company, the Members may either
sell the Company's assets and distribute the net proceeds therefrom, after the
payment of the Company's liabilities, or distribute the Company's assets to the
Members in kind. Notwithstanding the foregoing, the rights contributed to the
Company by Iconovex pursuant to Section 3.01(a)(i) shall be distributed in kind
to Iconovex and, for purposes of Section 8.02(c)(ii), Iconovex shall be credited
with receiving a payment in the amount of $51,000. In addition, the intangibles
contributed to the Company by Solutions pursuant to Section 3.01(a)(ii) shall be
distributed in kind to Solutions and, for purposes of Section 8.02(c)(ii),
Solutions shall be credited with receiving a payment in the amount of $49,000.
Section 8.03 Dissolution Avoidance
Upon the occurrence of an event described in Section 8.01(d) (a
"Terminating Event"), the Company shall promptly (but in any event within
fourteen (14) days after the Company has knowledge of such event), send a notice
of such fact to each Member. If the Members consent to the continuation of the
business of the Company without dissolution within ninety (90) days after the
Terminating Event, then the Company shall not dissolve and shall not be required
to be wound up.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
Section 9.01 Representations of Iconovex and Solutions
In order to induce the other to enter into and perform this Agreement,
Iconovex and Solutions (each constituting a "Representing Party" for purposes of
this Article IX) each hereby represents and warrants to the other as follows:
(a) Organization. The Representing Party is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its organization and has full corporate power and authority to own and operate
its assets and properties and carry on its business as presently being conducted
and as presently proposed to be conducted (including in the manner contemplated
by this Agreement) and is duly qualified to do business and is in good standing
in all jurisdictions in which the ownership or occupancy of its properties or
its proposed activities make such qualification necessary.
(b) Authority. The Representing Party's Board of Directors has duly
authorized the execution and delivery of this Agreement and the transactions
contemplated hereby, and shareholder approval of this Agreement and the
transactions contemplated hereby is not required. The Representing Party has
full power and authority to execute and deliver, and to perform its obligations
under, this Agreement. This Agreement constitutes a valid and binding obligation
of the Representing Party, enforceable against the Representing Party in
accordance with its terms.
(c) No Violations. Neither the execution or delivery by the
Representing Party of this Agreement, nor the consummation by the Representing
Party of the transactions herein contemplated, nor the fulfillment by the
Representing Party of the terms and provisions hereof (i) will conflict with,
violate or result in a breach of any of the terms, conditions or provisions of
any law, regulation, order, writ, injunction, decree, determination or award of
any court, governmental department, board, agency or instrumentality or any
arbitrator, applicable to the Representing Party; (ii) will conflict with,
violate or result in a breach of, or
<PAGE>
constitute a default under any terms, conditions or provisions of its charter
documents or by-laws or of any loan agreement, indenture, trust deed or other
agreement or instrument to which it is a party or by which it is bound; or (iii)
result in a creation or imposition of any lien, charge, security interest or
encumbrance of any nature whatsoever upon any of its property or assets. The
Representing Party is not in default under any agreement to which it is a party
which default could impair its ability to perform its obligations under this
Agreement.
(d) Litigation. There is no action, suit or proceeding pending or, to
the best of the Representing Party's knowledge, threatened (nor, to the best of
its knowledge, is there any pending investigation) against or affecting the
Representing Party or any of its properties in any court or before or by any
governmental department, board, agency or instrumentality or arbitrator which,
if adversely determined, would materially impair its ability to perform its
obligations under this Agreement, and it is not in default under any applicable
order, writ, injunction, decree or award of any court, any governmental
department, board, agency or instrumentality, or any arbitrator, other than such
violations, if any, which individually or in the aggregate, do not impair in any
material way or involve any substantial possibility, so far as it can foresee,
of impairing in any material way its ability to perform its obligations under
this Agreement.
Section 9.02 Survival
All representations and warranties made herein shall survive the
execution and delivery of this Agreement.
ARTICLE X
TAX MATTERS
Section 10.01 Tax Characterization and Returns
(a) The Members intend for the Company to be treated as a "partnership"
for Federal and state tax purposes. All provisions of this Agreement and the
Company's certificate of formation are to be construed so as to preserve that
tax status.
(b) Within ninety (90) days after the end of each Fiscal Year, the
Committee will cause to be delivered to each Person who was a Member at any time
during such Fiscal Year the balance sheets of the Company as at the end of each
such Fiscal Year and statements of income and changes in financial condition of
the Company for such Fiscal Year all prepared in accordance with GAAP and
accompanied by a report thereon of the Company's accounting firm.
(c) The Tax Matters Member shall arrange for the preparation and timely
filing for each Fiscal Year or other period of all federal, state and local tax
or information returns required to be filed by or on behalf of the Company. As
soon as practicable after the end of each Fiscal Year and in no event later than
December 15 of the immediately following Fiscal Year, the Tax Matters Member
shall cause to be furnished to each Member all information required by such
Member for federal and state income tax reporting purposes with respect to the
Company, including without limitation a copy of Schedule K-1 to the federal tax
return of the Company on Form 1065 (or any similar successor schedule or return)
showing the taxable income and loss of the Company for such Fiscal Year just
ended and the allocation thereof to each Member. The Members shall each take
reporting positions on their respective federal, state and local income tax
returns consistent with the positions determined for the Company.
Section 10.02 Accounting Decisions
(a) The Members will make all decisions as to accounting matters, and
(b) The Tax Matters Member shall, upon consent of Solutions, make all
applicable elections, determinations and decisions under the Code on behalf of
the Company, including the election referred to in Section 754 of the Code to
adjust the basis of Company assets.
Section 10.03 Tax Matters Member
The Members will designate Iconovex to act on behalf of the Company as
the "tax matters partner" within the meaning of Section 6231(a)(7) of the Code
(the "Tax Matters Member").
Section 10.04 Accounting
The fiscal year of the Company shall end on September 30 of each year
(the "Fiscal Year").
<PAGE>
Section 10.05 Books of Account
True and accurate books of account of the Company shall be kept and
maintained at all times at its principal offices unless an alternative location
shall be approved in writing by the Members. The books of account of the Company
shall be maintained on an accrual basis in accordance with GAAP.
Section 10.06 Contents and Location of Required Records; Access to Accounts
The Company will maintain at its principal place of business, or at
some other location chosen by the Members, the records that Section 18-305 of
the LLC Act requires the Company to maintain. In addition to the requirements of
Section 18-305 of the LLC Act and subject to the provisions of Section 12.01,
the Company shall afford to each of the Members and their respective counsel,
accountants and other representatives, access to all properties of the Company,
books, records and other documents of the Company and shall furnish to each of
the Members such information concerning the Company and copies of such documents
as each of the Members in their respective reasonable judgment may request. Each
Member shall be entitled, at its own expense, to have a firm of independent
certified public accountants designated by it, or its own internal auditors,
review all properties, books, records and other documents of the Company as well
as all accountant's work papers with respect to any audit of the Company. The
Company shall provide on a timely basis to each of Iconovex and Solutions such
financial information as may be required for its consolidated financial
statements.
Section 10.07 Independent Auditors
The Company's independent certified public accountants shall be
selected and retained by the Members.
ARTICLE XI
INDEMNIFICATION
Section 11.01 Limitation on Liability; Indemnification - Member Designees,
Officers, Etc.
(a) No Member Designee or officer of the Company shall be liable,
responsible or accountable in damages or otherwise to the Company or any of the
Members for any act or omission performed or omitted by him or her in good faith
on behalf of the Company and in a manner reasonably believed by him or her to be
(i) within the scope of the authority granted to him or her pursuant to this
Agreement or by resolution of the Committee and (ii) in, or not opposed to, the
best interests of the Company. For purposes of this Section 11.01, any action or
omission taken on advice of counsel to the Company or the independent public
accountants for the Company shall be deemed to have been taken in good faith.
(b) Member Designees and any officer of the Company shall be entitled
to indemnification from the Company for any loss, damage or claim, (including
any attorney's fees incurred by such Member Designee or officer in connection
therewith that shall be advanced by the Company) due to any act or omission made
by him or her in good faith on behalf of the Company and in a manner reasonably
believed by him or her to be (i) within the scope of the authority conferred on
him or her pursuant to this Agreement or by resolution of the Committee and (ii)
in, or not opposed to, the best interests of the Company.
(c) The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person did not
act in good faith, in a manner reasonably believed to be in or not opposed to
the best interests of the Company, and in a manner reasonably believed to be
with the scope of the authority conferred on him or her by this Agreement or a
resolution of the Committee.
(d) Member Designees and the officers of the Company are intended to be
third party beneficiaries of the provisions of this Section 11.01. The
provisions of this Section 11.01 shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any agreement,
determination of the Committee or the Members or otherwise, and shall continue
as to any person who has ceased to be a Member Designee or an officer of the
Company and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(e) Any repeal or modification of this Section 11.01 by the Members
shall not adversely affect any right or protection of a Member Designee or
officer of the Company existing at the time of such repeal or modification.
Section 11.02 Insurance
<PAGE>
The Company may purchase and maintain insurance against any liability
that may be asserted against any Person entitled to indemnification pursuant to
Section 11.01.
Section 11.03 Cross Indemnification
Each Member shall indemnify and hold harmless the Company and the other
Member, or any of them, from and against any and all claims, demands, actions,
suits, damages, liabilities, losses, costs and expenses (including attorney's
fees) caused by, resulting from or arising out of, resulting from or arising out
of (a) any failure by such Member to perform, or any default under, any
obligations required to be performed by such Member hereunder or (b) any breach
of the representations and warranties made by such Member hereunder or (c) any
tortious or unlawful act or omission related to the operation of the Company
caused by such Member. The foregoing indemnity shall survive any termination of
this Agreement.
ARTICLE XII
MISCELLANEOUS
Section 12.01 Confidential Information
At all times during the Term of this Agreement and for a period of ten
(10) years thereafter, each Member shall keep strictly confidential and not
disclose, use, divulge, publish or otherwise reveal, directly or through another
Person, any confidential information regarding the Company or any other Member
including, but not limited to, documents and/or information regarding customers,
costs, profits, markets, sales, products, product development, key personnel,
pricing policies, operational methods, technology, know-how, technical
processes, formulae, or plans for future development of or concerning the
Company or any other Member or their respective Affiliates (collectively
"Confidential Information") except as may be necessary for the directors,
employees or agents to perform their respective obligations under this Agreement
or in connection with filings with governmental agencies or courts or otherwise
required under applicable law, unless the other Member gives prior written
consent to the disclosure. To the extent that such Confidential Information is
revealed, each party shall use its best efforts to have the Persons receiving
such information retain it in confidence. Upon termination of this Agreement,
each Member shall return to the other all memoranda, notes, records, reports and
other documents (including all copies thereof) relating to such Confidential
Information of the other which such Member may then possess or have under its
control.
For purposes of this Section 12.01, Confidential Information shall not
include any information which (a) is or become generally known to the public
other than as a result of disclosure by a Member (or any Affiliate, officer,
employee or agent of a Member), (b) is lawfully obtained from a third party
under no duty of confidentiality to the other party, or (c) is developed by a
Member or an Affiliate of a Member independently of the Company or the other
Member without reference to the disclosing party's Confidential Information.
Section 12.02 Entire Agreement; Waiver, Modifications
This Agreement shall constitute the entire agreement of the Members
with respect to the subject matter of this Agreement. No modification or any
claimed waiver of any of the provisions of this Agreement shall be effective
unless in writing and signed by a duly authorized officer of the Member against
whom such a modification or waiver is sought.
Section 12.03 Assignment; Successors
This Agreement shall inure to the benefit of, and be binding upon, the
Members hereto and any Person that acquires a Capital Account, Membership
Interest or Financial Rights of a Member as permitted by the terms hereof.
Otherwise, a Capital Account, Membership Interest or Financial Right of a Member
is not assignable.
Section 12.04 Notice
All notices and other communications hereunder shall be in writing and
shall be given, transmitted and delivered by telecopy, telex, or telegram, and a
copy thereof shall be mailed postage prepaid, return receipt requested, to the
parties at the addresses listed on the first page hereof (or such other address
as shall be specified by such party by like notice).
Section 12.05 Counterparts
This Agreement may be executed in two or more counterparts, each of
which when so executed shall be deemed an original
<PAGE>
and all of which taken together shall constitute one and the same instrument.
Section 12.06 Interpretation
Titles of articles and section are for convenience only and shall be
given no effect in the construction or interpretation of this Agreement. Unless
the context otherwise requires the singular includes the plural, and the plural
includes the singular.
Section 12.07 Severability
In the event that any provision of this Agreement is declared by a
court of competent jurisdiction to be void or unenforceable, the remainder of
this Agreement shall not be affected thereby and shall remain in full force and
effect to the extent feasible in the absence of the void and unenforceable
provision.
Section 12.08 Equitable Remedies
The rights and remedies of the Members under this Agreement shall not
be mutually exclusive i.e., the exercise of one or more of the rights under this
Agreement shall not preclude the exercise of rights under any other provision.
Each Member acknowledges that no adequate remedy of law would be available for a
breach of this Agreement, and that a breach of this Agreement by one would
irreparably injure the other and accordingly agrees that in the event of a
breach of any provision, the respective rights and obligations of the parties
hereunder shall be enforceable by specific performance, injunction or other
equitable remedy (without bond or security being required), and each Member
waives the defense in any action and/or proceeding brought to enforce this
Agreement that there exists an adequate remedy or that the other Member is not
irreparably injured. Nothing herein contained, however, is intended to, nor
shall it, limit or affect any rights at law or by statute or otherwise of any
Member as against the other for a breach of any provision, it being the
intention of this Section 12.08 to make clear the agreement of the Members that
the respective rights and obligations of the Members shall be enforceable in
equity as well as at law or otherwise.
Section 12.09 Expenses
The parties agree that the Company shall pay all of the fees and
expenses incurred in connection with its organization (other than legal and
accounting fees). Each Member shall pay all of its own fees and expenses
incurred in connection with this Agreement, the transactions contemplated
hereby, the negotiations leading to the same, the preparations made for carrying
the same into effect, including without limitation its organization and
registration costs and expenses, if any.
Section 12.10 Arbitration
Without prejudice to the rights of the parties to seek injunctive or
equitable relief in any appropriate court of law having jurisdiction over the
matter and the persons involved, all claims, disputes or disagreements arising
under or in connection with this Agreement shall be finally settled under the
then applicable rules of the American Arbitration Association by three (3)
arbitrators, as follows:
(a) The arbitrators shall apply the law (including the procedural law)
specified in Section 12.11 of this Agreement.
(b) The arbitration shall be held in Minneapolis, Minnesota; and
(c) The arbitrators shall award legal fees and costs (including
administrative expenses and arbitrators' fees and legal fees incurred in
connection with the arbitration) to each party in the proportion lost by each
party in the proceeding.
Section 12.11 Governing Law
This Agreement shall be governed by and construed in accordance with
the internal law of the State of Delaware without regard to its conflict of law
principles.
Section 12.12 Affiliate Transactions
All transactions between the Company and either Iconovex (or an
Affiliate of Iconovex) or Solutions (or an Affiliate of Solutions) shall be
conducted on an arm's-length basis.
<PAGE>
Section 12.13 Further Assurances
Each Member shall perform all other acts and execute and deliver all
other documents as may be necessary or appropriate to carry out the purposes and
intent of this Agreement.
Section 12.14 No Impairment
Nothing in this Agreement is intended to impair or lessen the fiduciary
duties of the Members to each other as they may exist at law or in equity.
Section 12.15 Survival
In the event that a Member ceases to be a Member in the Company, the
terms and provisions of this Agreement shall apply for a period of ten (10)
years unless, by the express provisions of this Agreement, an obligation or
covenant of a Member is intended to terminate on an earlier date.
Section 12.16 Third Party Rights
Nothing in this Agreement, either express or implied, is intended or
shall be construed to confer, directly or indirectly, upon or give to any Person
other than the Company, the Members and their Affiliates any legal or equitable
right, remedy or claim under or in respect of this Agreement or any covenant,
condition or other provisions contained herein, except that the Persons entitled
to indemnification under Section 11.01 are intended beneficiaries of Section
11.01.
Section 12.17 Relationship Between This Agreement and the Certificate of
Formation
If a provision of this Agreement differs from a provision of the
Company's certificate of formation, then to the extent allowed by law, this
Agreement shall govern.
IN WITNESS WHEREOF, the parties hereto intending to be legally bound,
have caused this Agreement to be duly executed as of the day and year first
above written.
ICONOVEX CORPORATION
By
-------------------------------
Its
-------------------------------
SOLUTIONS CORPORATION OF AMERICA, INC.
By
-------------------------------
Its
-------------------------------
ACCEPTED AND AGREED TO BY:
SMART SOLUTION, LLC
By
-------------------------------
Its
-------------------------------
Exhibit 21
EXHIBIT 21. SUBSIDIARIES OF INNOVEX, INC.
State or other jurisdiction of
Name Incorporation or Organization
- ---- -----------------------------
Innovex Precision Products Corporation Minnesota
Iconovex Corporation Minnesota
Litchfield Precision Components, Inc. Minnesota
Mar Engineering, Inc. Minnesota
Innovex Sales Limited Jamaica
Innovex Prairie West, Inc. Minnesota
Smart Solution, LLC Delaware
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated October 30, 1997, accompanying the consolidated
financial statements included in the Annual Report of Innovex, Inc. on Form 10-K
for the year ended September 30, 1997. We hereby consent to the incorporation by
reference of said report in the Registration Statements of Innovex, Inc. on
Forms S-8 (File No. 33-14776, effective June 3, 1987, File No. 33-27530,
effective March 17, 1989, File No. 33-59035, effective May 2, 1995, File No.
333-10045, effective August 12, 1996 and File No. 333-10047, effective August
12, 1996.)
\s\ GRANT THORNTON LLP
Minneapolis, Minnesota
December 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
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<RECEIVABLES> 22,673
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<INVENTORY> 7,253
<CURRENT-ASSETS> 71,349
<PP&E> 35,951
<DEPRECIATION> 12,202
<TOTAL-ASSETS> 97,275
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0
0
<COMMON> 585
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<TOTAL-LIABILITY-AND-EQUITY> 97,275
<SALES> 142,004
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<CGS> 81,028
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