-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FlJg9bpjt92VK2YGaQlQqzjmA5P2nnB0as6g7xAR4EwIFx21THtd9j4pN6GPLTb2 6A4x3L4anMcMbm4PCjgQgA== 0000897101-97-001283.txt : 19971223 0000897101-97-001283.hdr.sgml : 19971223 ACCESSION NUMBER: 0000897101-97-001283 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971222 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVEX INC CENTRAL INDEX KEY: 0000050601 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 411223933 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13143 FILM NUMBER: 97742207 BUSINESS ADDRESS: STREET 1: 1313 S FIFTH ST CITY: HOPKINS STATE: MN ZIP: 55343-9904 BUSINESS PHONE: 6129384155 10-K405 1 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. 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. (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. 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. 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 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. 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. 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.
Years Ended September 30, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- 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
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 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 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 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 CONSOLIDATED BALANCE SHEETS INNOVEX, INC. AND SUBSIDIARIES
September 30, Assets 1997 1996 - -------------------------------------------------------------------------------------- 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 ==========================
The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF OPERATIONS INNOVEX, INC. AND SUBSIDIARIES
For the years ended September 30, 1997 1996 1995 - --------------------------------------------------------------------------------------------------- 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
The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY INNOVEX, INC. AND SUBSIDIARIES
Capital in Total Common Excess of Retained Stockholders' For the years ended September 30, 1997, 1996, and 1995 Stock Par Value Earnings Equity - ---------------------------------------------------------------------------------------------------------------------------- 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 ==============================================================
The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF CASH FLOWS INNOVEX, INC. AND SUBSIDIARIES
For the years ended September 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ 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 ==============================================
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. 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 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 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:
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 - ---------------------------------------------------------------------------------------------------- $ 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
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 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 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.
For the years ended September 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- 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 ===============================================
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 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)
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year - ------------------------------------------------------------------------------------------------------ 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
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. 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. 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 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 EX-10.I 2 OPERATING AGREEMENT 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. 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. (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 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 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 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. 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; (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 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 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 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: (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 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"). 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 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 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. 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 ------------------------------- EX-21 3 SUBSIDIARIES OF INNOVEX, INC. 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 EX-23 4 CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS 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 EX-27 5 FINANCIAL DATA SCHEDULE
5 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 1,000 12-MOS SEP-30-1997 SEP-30-1997 9,443 28,440 22,673 621 7,253 71,349 35,951 12,202 97,275 9,507 951 0 0 585 86,233 97,275 142,004 142,004 81,028 81,028 0 329 96 49,978 14,884 35,094 0 0 0 35,094 2.31 2.30
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