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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended MARCH 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ___________________
COMMISSION FILE NUMBER 0-11278
MINNTECH CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1229121
(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
14605 - 28TH AVENUE NORTH
MINNEAPOLIS, MINNESOTA 55447
(Address of principal executive offices)
Registrant's telephone number, including area code: (6L2) 553-3300
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.05 PER SHARE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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
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As of June 2, 1997, 6,731,556 shares of Common Stock, par value $.05 per share,
were outstanding, and the aggregate market value of the shares of Common Stock
(based upon the closing transaction price on such date as reported on the NASDAQ
National Market System) held by non-affiliates of the registrant was
approximately $66,371,562.
DOCUMENTS INCORPORATED BY REFERENCE
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Documents Incorporated by Reference 10-K Part and Item Where Incorporated
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1. Certain portions of the Definitive Proxy Statement for Part III: Items 10,11, 12 and 13
the Annual Meeting of Shareholders of the Registrant
to be held August 27, 1997
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FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Forward Looking
Statements" in Item 7 and "Risk Factors" on pages 14 - 17 of this Annual Report
on Form 10-K, that could cause actual results to differ materially from those
projected. Because actual results may differ, readers are cautioned not to place
undue reliance on these forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
Minntech Corporation (the "Company") was incorporated on January 30, 1974,
under the laws of Minnesota. The Company is engaged in the development,
manufacturing and marketing of medical supplies and devices, sterilants and
water filtration products. The Company's products are used primarily in kidney
dialysis and in open-heart surgery. The trade name of Renal Systems is used for
products sold in the dialysis market, the trade name of Minntech is used for
products sold in the cardiosurgery market, the trade name of Fibercor is used
for marketing water filtration products, and the trade name of Unitrol is used
for products sold in the endoscopy market. The Company has core technologies in
electronics, fibers, plastics, and chemical solutions, all of which were
internally developed.
INDUSTRY SEGMENTS
Through March 31, 1997, the Company has been primarily engaged in a single
industry segment--medical devices and supplies. The Company also markets
filtration devices for industrial water purification applications.
PRODUCTS
The Company has four interrelated product groups:
- Dialysis Supplies and Devices
- Reprocessing Products
- Cardiosurgery Products
- Water Filtration Products
DIALYSIS SUPPLIES AND DEVICES
The Company's main dialysis supply product is a line of concentrates used
by kidney centers to prepare dialysate (a salt solution) for hemodialysis
treatments. The Company provides the industry's most complete line of these
concentrates in both liquid and powder form for use in virtually all types of
kidney dialysis machines. The U.S. hemodialysis patient population consumes
almost 35 million gallons of concentrates annually (estimate based on published
information on patient populations). Sales of concentrate products accounted for
more than 75 percent of all sales in this product group in each of the past
three fiscal years.
The Company introduced its first dialyzer (artificial kidney) - the
Renaflo-Registered Trademark- HDF 1350 dialyzer - in fiscal 1992. In fiscal
1993, the Company introduced the Primus-Registered Trademark- line of second
generation dialyzers in Europe, and in August 1994, the Company received FDA
market clearance to sell the Primus-Registered Trademark- dialyzer in the United
States. Dialyzers are a commodity product that require considerable sales volume
and low cost structure to be profitable. At the close of fiscal 1997, the
Company's share of the highly competitive dialyzer market was less than one
percent. As a result, in March 1997, the Company discontinued the
Primus-Registered Trademark- dialyzer line, taking a one-time restructuring
charge to write off all of the assets employed in the dialyzer business.
The Company's major dialysis electronic products are the
Sonalarm-Registered Trademark- Foam Detector, a device that detects air in blood
during hemodialysis and the Minipump-TM- Hemodialysis Blood Pump which
circulates blood during
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hemodialysis. The Sonalarm-Registered Trademark- and the Minipump-TM- are sold
to end users and in component form to other manufacturers of blood processing
equipment.
These dialysis products accounted for approximately 32 percent of the
Company's sales in fiscal 1997, 29 percent of product sales in fiscal 1996 and
33 percent of product sales in fiscal 1995.
REPROCESSING PRODUCTS
Reprocessing products include the Renatron-Registered Trademark- Dialyzer
Reprocessing System and associated supplies, including Renalin-Registered
Trademark-, a cold sterilant solution that replaces formaldehyde,
gluteraldehyde, and bleach in dialyzer reprocessing, and Actril-Registered
Trademark- Cold Sterilant, a kidney machine disinfectant.
In response to government-mandated cost containment measures, many U.S.
dialysis centers in the late 1970s began reusing dialyzers (artificial kidneys)
instead of discarding them after a single use. In 1982, the Company introduced
the Renatron-Registered Trademark-, a machine that provides an automated method
of rinsing, cleaning, testing, and sterilizing dialyzers for multiple use. In
1985, dialysis centers began using Renalin-Registered Trademark- sterilant for
manual reprocessing of dialyzers. In 1990, the Company began sales of the
Renatron-Registered Trademark- II, a second generation system that includes a
bar code reader, computer and Renalog-Registered Trademark- software for
automated record keeping and analysis. Data released by the Centers for Disease
Control ("CDC") indicate that, as of 1994, 81 percent of all U.S. hemodialysis
patients were treated in centers that reuse dialyzers. The CDC also reported
that 75 percent of all dialysis centers in the United States reuse dialyzers and
52 percent of these centers used Renalin-Registered Trademark- to sterilize
their dialyzers. The other dialysis centers used primarily formaldehyde or
glutaraldehyde disinfectants to reprocess dialyzers.
The Company believes its Renatron-Registered Trademark- system is faster
and easier to use than competitive automated systems. The Company also believes
that the Renatron-Registered Trademark- system is one of the top selling
automated dialyzer reprocessing systems in the world. At March 31, 1997, the
Company had an installed customer base of more than 3,000 Renatron-Registered
Trademark- systems.
Unlike the United States market, dialyzer reuse is in the formative stages
in Europe. The Company has increased its reprocessing product sales in Europe by
employing direct salespersons in major dialysis markets and promoting the
advantages of reuse.
In September 1994, the Company purchased an endoscope reprocessor product
line from Bard Interventional Products, a division of C.R. Bard, Inc. ("Bard")
for $934,000 in cash. Manufacturing of the products was assimilated into the
Company's electronic device production facility in Minneapolis, Minnesota. The
endoscope reprocessing machine provides high level disinfection for flexible
endoscopes and is marketed to gastroenterology units of hospitals and ambulatory
care units.
In fiscal 1997, Peract-TM- 20, a peracetic acid-based liquid cold
sterilant/disinfectant for endoscope reprocessing, was introduced to the
international marketplace. The product was submitted to FDA for 510(k)
registration in February 1996, and the Company was still awaiting clearance as
of March 31, 1997.
The Company began sales of the Cathetron-Registered Trademark- Reprocessing
System in Europe in April 1994. The Cathetron-Registered Trademark- system,
along with its companion cold sterilant CATHx-Registered Trademark-, is an
automated system for cleaning and sterilizing cardiovascular catheters for
subsequent reuse. The product was never introduced in the United States
marketplace. In March 1997, in an effort to reduce expenses and focus resources
on profitable product areas, the Company discontinued the Cathetron-Registered
Trademark- system and CATHx-Registered Trademark- sterilant. Assets related to
the Cathetron-Registered Trademark- business were written off as part of the
Company's restructuring charge.
Reprocessing products accounted for approximately 38 percent of product
sales in fiscal 1997, 34 percent of sales in 1996 and 32 percent of product
sales in fiscal 1995.
CARDIOSURGERY PRODUCTS
The primary products in this group at March 31, 1997, consisted of three
hollow fiber devices.
OXYGENATORS
Since 1987, the Company has manufactured membrane oxygenators based on its
proprietary hollow fiber technology. An oxygenator is used by a perfusionist (a
technician who operates heart-lung bypass equipment) to replace the function of
the lungs during open-heart surgery. To date, the Company's oxygenators have
been used in over 600,000 open-heart procedures worldwide. The Company's first
generation oxygenator was sold exclusively
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through Bard. from 1987 through March 31, 1997. Since March 31, 1997, this first
generation oxygenator has been available from the Company under the trade name
Minntech-TM- 400. In 1995, the Company introduced a second generation oxygenator
- - the Biocor-TM- 200 High Performance Oxygenator.
From 1987 to 1997, the Company manufactured its first generation oxygenator
for exclusive worldwide distribution pursuant to an agreement with Bard. Bard
agreed to purchase certain minimum quantities of the oxygenator through December
31, 1995. These minimum quantities had an annual sales value to the Company of
approximately $10 million, and Bard's annual purchases through March 31, 1995
exceeded such minimums. In April 1995, Bard and the Company entered into a new
agreement for the sale of the oxygenator whereby Bard agreed to purchase certain
minimum quantities of the oxygenator through March 31, 1997. The agreement also
allowed Bard to continue purchasing the oxygenator through June 30, 1997,
without any minimum purchase obligation. Bard had exclusive distribution rights
through March 31, 1997 and nonexclusive rights thereafter, and was restricted
from selling any other oxygenator until January 1, 1997. Bard's minimum purchase
obligation under the agreement for the period April 1, 1995 to March 31, 1997,
had a sales value to the Company of approximately $20 million. The Company does
not anticipate significant orders from Bard in the first quarter of fiscal 1998.
See "Significant Customers."
The Biocor-TM- 200 was introduced in Europe in November 1995, and on March
7, 1997, the Company received FDA 510(k) clearance for the U.S. market for the
Biocor-TM-. The product incorporates the Company's proprietary weaving
technology and offers improved performance over its first generation oxygenator.
The compact design and reduced surface area of the device results in a low
priming volume - a feature that reduces set-up time for the perfusionist and can
reduce the need for donor blood. The Biocor-TM- 200 also provides a high gas
transfer rate with minimal pressure drop. The Company believes that the
consistent high performance characteristics of the device are equal or superior
to competing products.
HEMOCONCENTRATORS
Since 1985, the Company has manufactured and sold hemoconcentrators, a
filtration device that removes excess body fluids during open-heart surgery. In
1988, the Company introduced a second generation product, the Hemocor
Plus-Registered Trademark- hemoconcentrator, a rinse-free device that allows for
faster set-up during surgery. In February 1994, the Company received FDA market
clearance for a third generation product, the Hemocor HPH-Registered Trademark-
line, which contains a higher performance hollow fiber membrane. The Company
estimates that hemoconcentration is currently used in 25 to 30 percent of all
open-heart procedures in the United States and to a lesser extent
internationally, and that such procedures require up to 140,000 hemoconcentrator
devices annually worldwide. At March 31, 1997, the Company believes it holds
more than a 70 percent share of the United States hemoconcentrator market.
HEMOFILTERS
The Renaflo-Registered Trademark- Hemofilter, introduced in fiscal 1985, is
a device that performs continuous arteriovenous hemofiltration (CAVH), an
intensive care therapy that treats acute renal failure and fluid overload in
critically ill patients. CAVH is an alternative to conventional dialysis for
these patients.
In April 1995, the Company completed the acquisition of the
hemoconcentrator, hemofilter and dialysate filter product lines from Amicon
Ireland Ltd., an indirect subsidiary of W.R. Grace & Co. ("Amicon"). The
purchase price was approximately $1.4 million, paid in cash. The Company also
signed a six-month supply agreement with Amicon whereby Amicon manufactured
products for the Company to be sold in Europe. The Company began
manufacturing the hemoconcentrator and hemofilter products in its Minneapolis
facility in the first quarter of fiscal 1997.
Cardiosurgery products accounted for approximately 26 percent of the
Company's product sales in fiscal 1997, 34 percent of product sales in fiscal
1996, and 33 percent of product sales in fiscal 1995.
WATER FILTRATION PRODUCTS
There are two major products in this group: Fiberflo-Registered Trademark-
Microfilter and Minncare-Registered Trademark- Disinfectant. The
Fiberflo-Registered Trademark- Microfilter is a hollow fiber filter that has
"point of use" applications in industrial water purification. These filters are
being used for finer filtration in the pharmaceutical, medical device, and
biotechnology industries. Minncare-Registered Trademark- Disinfectant is used to
disinfect water treatment systems. Through March 31, 1997, water filtration
product sales accounted for 3.6 percent of the Company's product sales in fiscal
1997, 2.5 percent of product sales in fiscal 1996, and 2.2 percent of product
sales in fiscal 1995.
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MARKETS AND DISTRIBUTION
The Company sells its medical products in the United States primarily to
hospitals, clinics, and kidney treatment centers. The Company markets these
products in the United States through direct sales forces and through
independent stocking distributors. At March 31, 1997, the Company employed a
total of seven dialysis sales representatives in the United States, two
cardiosurgery sales representatives, two water filtration sales representatives,
and one endoscope reprocessor sales representative. In addition, a customer
service staff and a technical services department support field activity. The
Company also operates its own trucks to expedite delivery of certain products
and minimize shipping costs.
Starting in 1991, the Company began establishing direct sales operations in
Europe to enhance marketing of its products. The Company's goal is to increase
its revenues in Europe through expanded direct sales activities. The Company's
headquarters for its European operations in the Netherlands employed a total of
15 people in Europe at March 31, 1997.
The Company's dialysis marketing programs are directed at nephrologists
(doctors who specialize in treating kidney disease), nurses, hospital and clinic
administrators, and others who influence purchasing decisions. Cardiosurgery
marketing programs are directed at perfusionists (technicians who operate
heart-lung bypass equipment) and cardiovascular surgeons. Endoscope reprocessing
marketing programs are directed at gastroenterology nurses and physicians,
infection control and central sterile processing personnel, and hospital and
clinic administrators. Water filtration marketing programs are directed at
distributors and large OEMs. The Company supports its field organization and
network of distributors through advertising, distribution of sales materials,
publication of articles in medical journals, and attendance at medical
conferences.
SOURCES AND AVAILABILITY OF MATERIALS
The majority of the materials and components that the Company uses in its
manufacturing operations are readily obtainable from multiple sources worldwide.
In addition, the Company constructs many of its injection molds and also molds
and extrudes many of its component plastic parts.
PATENTS AND TRADEMARKS
The Company holds rights under 151 patents worldwide (including 42 U.S.
patents) covering its products or components thereof. At March 31, 1997, the
Company also had a total of 100 pending patent applications in the United States
and in foreign countries. The Company also holds rights under 191 trademark
registrations worldwide and has 86 applications pending.
The Company believes that patent protection is a significant factor in
maintaining its market position but the rapid changes of technology in kidney
dialysis therapy, cardiosurgery, and the other areas in which the Company
competes may limit the value of the Company's existing patents.
While patents have a presumption of validity under the law, the issuance of
a patent is not conclusive as to its validity or the enforceable scope of its
claims. Accordingly, there can be no assurance that the Company's existing
patents will afford protection against competitors with similar inventions, nor
can there be any assurance that the Company's patents will not be infringed.
Competitors also may obtain patents that the Company would need to license or
design around. These factors also tend to limit the value of the Company's
existing patents. Consequently, in certain instances, the Company may consider
trade secret protection to be a more effective method of maintaining its
proprietary positions.
SEASONALITY OF THE BUSINESS
The Company's business is not seasonal.
WORKING CAPITAL AND BACKLOG
The Company's credit practices and related working capital needs are
comparable to those of other companies in the medical device and supplies
industry. The Company generally fills orders within 30 days of receipt. No
material order backlogs existed at March 31, 1997.
SIGNIFICANT CUSTOMERS
The Company's five largest customers in fiscal 1997 accounted for
approximately 29 percent of total sales. Sales of oxygenators to Bard accounted
for approximately 10 percent of product sales in fiscal year 1997, and 20
percent or more of product sales in fiscal 1996 and 1995. Bard agreed to
purchase certain minimum quantities of the
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oxygenator under a contract that began in fiscal 1988 and was scheduled to
terminate December 31, 1995. In April 1995, a new agreement was reached
extending the term to June 30, 1997. The Company does not anticipate significant
orders from Bard in the first quarter of fiscal 1998 (See
"Products--Cardiosurgery Products--Oxygenators").
RENEGOTIATION OR TERMINATION OF GOVERNMENT CONTRACTS
No material portion of the Company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
Government.
COMPETITION AND MARKET CONDITIONS
The Company's dialysis and reprocessing products are sold in a highly
competitive market, and the Company competes with many other firms. The dialysis
market is dominated by a few firms, including Baxter International Inc., Gambro
(a division of CGH Medical), and Fresenius Medical Care AG. These firms have
substantially greater financial and personnel resources than the Company and
most of them produce and sell a more comprehensive line of dialysis equipment
and supplies. The Company also faces competition from other international
companies and several smaller companies that carry a limited line of products.
The Company's new Biocor-TM- oxygenator and hemoconcentrators are sold by
its own direct sales force and by a network of independent medical distributors.
Bard was the exclusive distributor of the Company's first generation membrane
oxygenator through March 31, 1997, and has nonexclusive distribution rights
through June 30, 1997 (See "Products-Cardiosurgery Products-Oxygenators"). The
first generation oxygenator, now known as the Minntech-TM- 400, has also been
available directly from the Company since March 31, 1997. Besides Bard, the
Company's major competitors in the oxygenator market are Medtronic, Inc., Cobe
Laboratories Inc. (a division of CGH Medical), Baxter International, Inc.,
Terumo Corporation and Avecor Cardiovascular, Inc. The major competitors in the
hemoconcentrator market are CGH Medical and Baxter International, Inc.
The health care industry in the United States operates under cost
containment pressures imposed by the federal government, employers, and health
insurance carriers. One major influence is the Medicare Prospective Payment
System, implemented in 1983, which provides for fixed payments to hospitals for
care of Medicare patients based on diagnosis rather than actual hospital charges
(the DRG system). In addition, the Company's end user customers for its dialysis
and reprocessing products are subject to fixed payments per treatment under
separate Medicare regulations which have been in place for more than 20 years.
Health care providers, in general, have responded by shortening hospital
stays through quicker clinical diagnoses and by employing less invasive medical
procedures and more efficient therapies. In addition, hospitals and other health
care providers have sought to lower their costs by reducing their purchased
supplies costs and by improving their utilization of facilities and equipment.
Dialysis centers, in particular, have also responded by reprocessing and reusing
dialyzers and other supplies and by shortening treatment times.
Under the current cost containment environment, the competitive factors in
the medical markets served by the Company are such that cost reduction is a
prime consideration. Although cost containment may adversely affect some of the
Company's supply products, cost containment pressures may be a positive factor
for certain Company products, such as dialyzer and endoscope reprocessing
products, hemoconcentrators, and the Renapak-Registered Trademark- Concentrate
Manufacturing System.
There is a growing trend in the dialysis industry whereby manufacturers of
supplies are acquiring chains of dialysis treatment centers. These
manufacturers, in effect, have a built-in customer base for their products.
However, the Company views its manufacturer-only status as a competitive market
advantage. The Company believes that many dialysis treatment providers do not
want to purchase hemodialysis supplies from manufacturers who also provide
dialysis services and are, in effect, their competitors.
RESEARCH AND PRODUCT DEVELOPMENT
The Company strives to design and develop technologically advanced products
that are cost effective and, in the case of its medical products, improve the
quality of patient care. The Company emphasizes product development rather than
basic research. The ability of the Company to compete effectively depends upon
its ability to anticipate changing market needs and successfully develop
products to meet those needs.
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As of March 31, 1997, 20 of the Company's employees were engaged in
research and development. In addition to its own research activities, the
Company from time to time obtains experimental and clinical research from
outside investigators, consultants and institutions.
Over the past three years the Company has expended a total of $9,680,000 in
research and development as follows: fiscal 1997 - $3,424,000; fiscal 1996 -
$3,123,000; and fiscal 1995 - $3,133,000. Such costs represented 5.2 percent ,
4.8 percent and 5.6 percent of revenues, respectively, in each such period.
The Company's current research and development efforts are directed toward
reprocessing applications, blood filtration and oxygenation technologies, cold
sterilant/ disinfection applications, and water filtration.
GOVERNMENT REGULATION
The medical products manufactured and marketed by the Company are subject
to the Federal Food, Drug and Cosmetic Act and the Medical Device Amendments of
1976 (collectively, the "FDCA"). These laws give the U.S. Food and Drug
Administration ("FDA") extensive regulatory authority over medical products
developed, manufactured or marketed by the Company in the United States. The
FDCA requires the Company to register with the FDA, provide updated device
listings and submit a premarket notification to FDA when (i) a device is being
introduced into the market for the first time; (ii) the manufacturer makes a
significant change or modification to an already marketed device that could
affect safety or effectiveness; or (iii) there is a major change or modification
in the intended use of the device. The FDCA also requires that the Company
submit a premarket approval application for devices that are life supporting or
sustaining, or present a potential unreasonable risk of injury or illness. In
addition, the FDCA subjects the Company to the Good Manufacturing Practice (GMP)
regulations under which the FDA conducts periodic inspections to verify
compliance. Further, the GMP's impose certain requirements regarding
manufacturing procedures, distribution, advertising, labeling, and record
keeping. The FDA also has the power to order suspension of manufacturing or
marketing or to recall products that are not in compliance with law.
Before introducing its products into the market, the Company must comply
with the premarket approval and/or notification provisions of the FDCA. Data
regarding the product's safety and effectiveness must be submitted to the FDA.
In some instances, clinical studies may be necessary to obtain this data. In
some cases, before commencing clinical trials, the Company must apply for an
Investigational Device Exemption ("IDE"). Under an approved IDE, a device is
exempt from certain FDA provisions including misbranding, registration, listing,
premarket approval, records and reports and good manufacturing practices, thus
enabling the applicant company to test a device clinically. Before an IDE is
granted, sufficient nonclinical data must be submitted to demonstrate that the
device is safe and effective. Significant time and expense may be associated
with the collection of both clinical and nonclinical data, and there are no
assurances, that the necessary FDA premarket approvals or clearances will be
granted.
During 1992 and 1993, the time between submission to the FDA and final
clearance for marketing increased substantially; however, review times by the
FDA are beginning to decrease. Notwithstanding, there are no assurances that
this trend will continue, and the Company is still experiencing delays in
receiving product clearances.
In January 1995, the Company received ISO 9001 certification for its
Minneapolis, Minnesota facilities. This certification allows the Company to
self-certify its products for sale throughout the European Community. In order
to self-certify, the Company must maintain certain records and files which are
reviewed by a "notified body" organization on an annual basis. Many of the
Company's products now display the CE mark.
Certain products of the Company are also subject to registration with the
Environmental Protection Agency (EPA). The registration process generally
entails the collection and submission of data to support the products' label
claims. Considerable time and cost may be involved with the collection of data
to support these submissions, and there are no assurances that the necessary EPA
approvals will be granted for the Company's new products.
Compliance with federal, state, and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, do not have a material adverse effect upon the
capital expenditures, earnings, and competitive position of the Company.
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EMPLOYEES
As of March 31, 1997, the Company employed 364 full-time and 13 part-time
employees, including 227 persons in manufacturing operations. None of the
employees is covered by a collective bargaining agreement, and the Company
believes that its employee relations are good.
GEOGRAPHIC AREA INFORMATION
The major foreign markets for the Company's products are Western Europe and
the Far East. Sales outside the United States for the years ended March 31,
1997, 1996 and 1995 were approximately $12,187,000, $10,462,000 and $7,261,000,
respectively. Sales outside the United States accounted for approximately 18
percent, 16 percent and 13 percent of total sales, respectively, in each such
period.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, and the year they became
executive officers are listed below:
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NAME POSITION WITH COMPANY AGE FIRST ELECTED
AS OFFICER
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Thomas J. McGoldrick President, Chief Executive Officer 56 1985
Daniel H. Schyma Vice President--Sales and Marketing 55 1992
Richard P. Goldhaber Vice President--Research and Development 53 1993
Barbara A. Wrigley Vice President, General Counsel and Secretary 46 1994
Robert W. Johnson Vice President--Regulatory Affairs and Quality Assurance 41 1994
Paul E. Helms Senior Vice President--Operations 51 1996
Jules L. Fisher Vice President and Chief Financial Officer 43 1996
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Executive officers are elected annually by the Board of Directors and serve
until their successors are duly elected and qualified.
Mr. McGoldrick served as Vice President Corporate Development from March
1985 to June 1995 and as Executive Vice President from June 1995 through March
1997.
Mr. Schyma served as Vice President Cardiopulmonary from January, 1992 to
June 1994 and as Vice President International from June 1994 through March
1997.
Ms. Wrigley served as Intellectual Property Counsel from September 1991 to
August 1993, as General Counsel from August 1993 to March 1994 and as Vice
President and General Counsel from March, 1994 to date.
Mr. Goldhaber joined the Company in November 1993, having previously been
employed by Baxter Healthcare Corporation from 1965 to 1993 in various
manufacturing and engineering capacities, including Vice President, New Product
Development for Baxter's European operations.
Mr. Johnson joined the Company in August 1992, having previously been
employed from 1991 to 1992 as Director of Quality Assurance and Regulatory
Affairs at Aortech Inc., a manufacturer of artificial heart valves. From 1989 to
1991, Mr. Johnson was Director of Operations at Specialty Engineering
Corporation, a custom metal fabricator for the computer and medical device
industries.
Mr. Helms joined the company in August 1996, having previously been
employed by Cabot Medical Corporation from 1988 to 1991 as Vice President of
Manufacturing, and from 1991 to 1996 as Vice President of Operations.
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Mr. Fisher joined the Company in November 1996, having previously been
employed by U.S. Surgical Corporation as Director, Operations Accounting, from
1991 to 1996. From 1987 to 1991, Mr. Fisher served in various financial
positions for the Pharmaceutical Group of Bristol-Myers Squibb Company.
ITEM 2. PROPERTIES
UNITED STATES
The Company owns two facilities located on adjacent sites, comprising a
total of 14 acres of land in Plymouth, a suburb of Minneapolis, Minnesota. One
facility is a 65,000 square-foot building, occupied by the Company since 1977,
which is used for manufacturing and warehousing operations. The second facility
is a 110,000 square-foot building, purchased in 1990, that houses the Company's
executive, administrative and sales staffs, and research operations. This
building is also used for manufacturing and warehousing.
The Company also owns two parcels of undeveloped land adjacent to these
facilities comprising a total of 7.8 acres.
EUROPE
The Company owns a 21,000 square-foot building on a 4.4 acre site in
Heerlen, The Netherlands. Occupancy commenced in April 1995. The facility serves
as the Company's European headquarters and is being used as a sales office,
warehouse and manufacturing facility.
The Company believes its facilities are in good condition, being utilized
for their intended purposes, and have sufficient capacity to meet its reasonably
anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened legal proceedings
which it regards as likely to have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1997.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "MNTX." The prices below are the high and low transaction prices as
reported in each quarter of the last two fiscal years.
YEARS ENDED MARCH 31 1997 1996
--------------------------------------
Fiscal Quarter Prices High Low High Low
---------------------------------------------------------------
First Quarter $ 21.500 $ 10.000 $ 15.50 $ 11.50
Second Quarter $ 15.000 $ 9.500 $ 19.25 $ 13.75
Third Quarter $ 13.750 $ 10.375 $ 23.63 $ 16.00
Fourth Quarter $ 12.125 $ 9.625 $ 22.50 $ 17.00
As of June 20, 1997, the Company had approximately 500 shareholders of
record.
The Company paid annual cash dividends of $0.10 per share on its Common
Stock in September 1995 and September 1996. The Board of Directors will consider
annually the payment of dividends. However, any future determination as to
payment of cash dividends will depend upon the financial condition and results
of operations of the Company and such other factors that are deemed relevant by
the Board of Directors.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
<S> <C> <C> <C> <C> <C> <C>
Net sales - product $ 65,906,669 $ 64,769,143 $ 55,882,512 $ 47,487,981 $ 44,016,645 $34,793,390
Contract revenues - - 300,000 300,000 300,000 100,000
------------- ------------- ------------- ------------- ------------- -------------
Total revenues 65,906,669 64,769,143 56,182,512 47,787,981 44,316,645 34,893,390
Cost of product sales 38,492,962 38,108,313 31,774,240 26,620,243 24,799,821 19,709,208
Research and development
Expenses 3,423,764 3,123,065 3,133,075 2,892,514 2,404,838 2,099,375
Selling, general and
administrative expenses 17,404,286 15,319,533 11,939,902 10,053,196 9,552,534 7,013,315
Amortization of Intangibles 855,906 762,552 358,068 197,578 141,473 105,573
Restructuring and other
unusual items 9,569,037 936,000 - - - -
------------- ------------- ------------- ------------- ------------- -------------
Earnings (loss) from operations (3,839,286) 6,519,680 8,977,227 8,024,450 7,417,979 5,965,919
Other income (expense), net (499,095) 42,535 236,630 (44,345) 115,181 (11,519)
------------- ------------- ------------- ------------- ------------- -------------
Earnings (loss) before income taxes (4,338,381) 6,562,215 9,213,857 7,980,105 7,533,160 5,954,400
Provision (benefit) for income taxes (700,249) 2,394,000 3,294,000 3,045,000 2,814,000 2,128,000
Minority interest (266,469) (140,024) - - - -
------------- ------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ (3,371,663) $ 4,308,239 $ 5,919,857 $ 4,935,105 $ 4,719,160 $ 3,826,400
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Earnings per share ($0.51) $0.62 $0.90 $0.78 $0.72 $0.58
Weighted average common and
Common equivalent shares 6,666,804 6,923,821 6,613,391 6,354,348 6,524,277 6,630,797
BALANCE SHEET DATA
Cash, cash equivalents and
Marketable securities $ 3,622,412 $ 5,218,727 $ 4,487,345 $ 7,698,787 $ 6,249,516 $ 7,120,991
Working capital 19,236,773 22,128,080 18,105,889 17,874,988 13,653,062 11,239,365
Property and equipment, net 15,588,606 17,323,495 15,631,510 12,899,800 12,039,244 10,909,692
Total assets 50,001,260 50,046,580 41,273,591 36,029,630 31,352,470 27,943,534
Long term debt - - - 1,905,920 1,942,577 1,961,966
Stockholders' equity 37,434,056 41,210,272 35,052,404 28,704,406 23,066,499 19,131,053
Book value per common shares $ 5.61 $ 6.21 $ 5.49 $ 4.66 $ 3.80 3.26
GENERAL DATA AND RATIOS
Current ratio 2.8 4.2 4.6 5.4 3.7 3.1
Gross margin on net product
Sales 41.6% 41.2% 43.1% 43.9% 43.7% 43.4%
Net Earnings (loss) as a % of
revenues (5.1%) 6.7% 10.5% 10.3% 10.6% 11.0%
Return on average stockholders'
equity (8.6%) 11.3% 18.6% 19.1% 22.4% 22.9%
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Revenues in fiscal year 1997 increased by $1,138,000, or 1.8 percent over
fiscal 1996 revenues due primarily to increased unit sales of reprocessing
products and dialysis supplies and devices. Sales of dialysis reprocessing
products increased by 17 percent for the current fiscal year with endoscope and
catheter reprocessing showing declines. Dialysis supply and device (excluding
dialyzer) sales increased 9 percent for the current fiscal year.
Revenues from cardiosurgery products during fiscal 1997 declined 24 percent
from the prior fiscal year reflecting the gradual phase out under the oxygenator
contract. Sales of oxygenators to Bard accounted for 10 percent of total company
revenues in fiscal year 1997 compared to 20 percent in fiscal year 1996. The
Company's supply contract with Bard expires June 30, 1997, and management does
not anticipate material sales to Bard in fiscal year 1998. Management expects
that sales of the Company's new oxygenator will largely offset the decline in
product sales from the Bard contract. On March 7, 1997, the new Biocor-TM- 200
High Performance Oxygenator received FDA clearance to market, and the Company
began selling it in the U.S. shortly thereafter. Sales of this product commenced
in Europe in November 1995.
Total revenues in fiscal year 1996 increased by $8,587,000, or 15 percent
over fiscal year 1995 revenues due primarily to increased unit sales of
dialyzer reprocessing and endoscope reprocessing products and increased sales of
cardiosurgery products. Sales of cardiosurgery products for the fiscal year 1996
grew 22 percent due to increased unit sales of hemoconcentrators and hemofilters
which more than offset a small decline in oxygenator sales. Product lines
acquired in the first quarter of the 1996 fiscal year contributed to the growth
of cardiosurgery product sales. Product price increases in fiscal year 1996 did
not have a significant impact on revenues.
Changes in foreign currency exchange rates did not have a significant
impact on the Company's revenues in fiscal years 1997, 1996, and 1995.
Product sales have grown at a compound annual rate of 12 percent over the
past three years. The following table indicates sales and percent of total sales
by product group for each of the last three fiscal years:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dialysis supplies and devices $ 21,391,000 32% $ 18,648,000 29% $ 18,552,000 33%
Reprocessing products $ 25,175,000 38% $ 22,220,000 34% $ 17,816,000 32%
Cardiosurgery products $ 16,959,000 26% $ 22,298,000 34% $ 18,263,000 33%
Water filtration products $ 2,382,000 4% $ 1,603,000 2% $ 1,252,000 2%
------------- ---- ------------- ---- ------------- ----
$ 65,907,000 100% $ 64,769,000 100% $ 55,883,000 100%
------------- ---- ------------- ---- ------------- ----
------------- ---- ------------- ---- ------------- ----
</TABLE>
GROSS MARGINS
Gross profit from product sales in fiscal 1997 was $27,414,000, or 41.6
percent of net product sales, compared to $26,661,000, or 41.2 percent, in
fiscal 1996 and $24,108,000, or 43.1 percent, in fiscal 1995. The increase in
gross margin in fiscal 1997 resulted primarily from increased sales of higher
margin reprocessing products. The decrease in gross margin in fiscal 1996 was
due primarily to lower margins on certain hollow fiber products. High dialyzer
manufacturing costs depressed gross margins in each of fiscal years 1997, 1996,
and 1995.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal 1997 were $3,424,000 or 5.2
percent of revenues, compared to $3,123,000, or 4.8 percent of revenues, in
fiscal 1996 and $3,133,000 or 5.6 percent of revenues in fiscal 1995. The
Company intends to continue investing a substantial portion of its revenues in
new product development. The Company expects that total research and development
expenses in fiscal 1998 will approximate 5 1/2 - 6 percent of revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general, and administrative expenses as a percentage of total
revenues were 26.4 percent in fiscal 1997 compared to 23.7 percent in fiscal
1996 and 21.3 percent in fiscal 1995. The higher costs in fiscal years 1997 and
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<PAGE>
1996 were due primarily to increases in sales staffs and expanded marketing
efforts in Europe and Japan (in 1996). Additionally, expenses in the United
States have increased due to the changing marketing requirements in the
Company's cardiosurgery business.
RESTRUCTURING AND UNUSUAL ITEMS
The Company recorded pre-tax charges for restructuring and unusual items of
$9,569,000 in the fourth quarter of fiscal 1997. These charges reflect the
discontinuation of the Primus-Registered Trademark- dialyzer and Cathetron-TM-
catheter reprocessing system combined with expenses associated with the
departure of the Company's founder, Dr. Louis C. Cosentino, as Chairman, Chief
Executive Officer, and President. Management determined that the dialyzer
product line does not fit within the long-term strategy of the Company due to
the competitive nature of the business and high sales volumes required to be
profitable. Key aspects of the dialyzer related charges are fixed asset,
inventory, and intellectual property write-downs to estimated net realizable
values.
INCOME TAXES
The tax provision for fiscal 1997 reflects a benefit of $700,249, an
effective tax rate of 16.1 percent. The Company's effective income tax rate in
fiscal 1996 and 1995 were 36.5 percent and 35.8 percent, respectively. The
company benifited from deductible losses related to investments in foreign
subsidiaries in fiscal years 1996 and 1995. The fiscal 1997 effective rate
is low primarily because no tax benifit was recorded for operating losses at
foreign subsidiaries. The Company's effective income tax rate may vary in fiscal
1998, depending upon the operating results of its foreign subsidiaries.
NET EARNINGS
The Company recorded a net loss in fiscal 1997 of $(3,372,000), or $(0.51)
per share, compared to earnings of $4,308,000, or $0.62 per share, in fiscal
1996 and $5,920,000,or $0.90 per share, in fiscal 1995. The net loss in fiscal
1997 was due restructuring charges related primarily to the discontinuation of
the Primus-Registered Trademark- dialyzer line. Prior to the restructuring
charge, the Company had net income of $2,922,000, or $0.44 per share, in fiscal
1997.
The decrease in earnings and net margin in fiscal 1996 was due to higher
operating expenses, lower gross margin, and fiber production scale-up losses
of $936,000 incurred in the second quarter. The increase in earnings in
fiscal 1995 was due to higher sales revenues.
INFLATION
Management believes inflation has not had a material effect on the
Company's results of operations or on its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain a strong balance sheet, as evidenced by
the following liquidity trends:
MARCH 31 1997 1996 1995
----------------------------------------------------------------------
Cash, cash equivalents and $3,622,412 $5,218,727 $4,487,345
marketable securities
Working capital 19,236,773 22,128,080 18,105,889
Long-term debt
Stockholders Equity 37,434,056 41,210,272 35,052,404
Cash flow from operations 970,450 5,311,968 5,614,677
Cash dividends paid 667,471 652,542 623,250
The decrease in cash, working capital, and cash flow from operations in
fiscal 1997 is primarily attributable to operating the Primus-Registered
Trademark- dialyzer product line at a loss during the year. The Company's
current ratio at March 31, 1997 was 2.8 compared to 4.2 at March 31, 1996. The
Company borrowed $4,000,000 against its $10,000,000 bank line of credit in
September 1996. As of March 31, 1997, the outstanding balance was reduced to
$3,000,000 and to $1,000,000 on June 19, 1997. The bank line of credit allows
the Company to borrow on an unsecured basis at either the prime rate of interest
(8.25 percent as of March 31, 1997) or at an indexed London Interbank Offered
Rate (LIBOR).
The Company expended a total of $5,208,000 for plant improvements and
equipment in fiscal 1997, compared to $4,333,000 in fiscal 1996 and $3,573,000
in fiscal 1995. The Company plans to invest approximately $3,800,000
13
<PAGE>
in capital equipment in fiscal 1998. During the first quarter of fiscal 1996,
the Company acquired a group of hollow fiber product lines for $1,402,000 in
cash. The assets acquired included inventory, equipment, and goodwill.
During the past three years, proceeds from stock options exercised provided
a total of $3,375,259 in equity capital as follows: fiscal 1997--$486,794;
fiscal 1996--$1,979,059; and fiscal 1995--$909,406.
The Company believes that its strong financial condition at March 31, 1997,
along with anticipated cash flows from operations, will be sufficient to meet
its working capital and capital equipment needs in fiscal 1998.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's U.S.-based export sales are invoiced and paid
in U.S. dollars. The transactions of the Company's Netherlands-based subsidiary
are invoiced and paid in several currencies, including Dutch guilders, German
marks and U.S. dollars. The Company does not currently hedge its foreign
currency transactions. Accordingly, the Company is subject to risks associated
with fluctuations in currency exchange rates.
RISK FACTORS
Certain statements made in this Annual Report on Form 10-K, are
forward-looking statements that involve risks and uncertainties, and actual
results may differ. Factors that could cause actual results to differ include
those identified below.
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. The markets in which the
Company competes are highly competitive and are characterized by innovation and
technological change. The Company currently competes in each area of the
Company's business with a number of companies that have capital resources,
research and development staffs, facilities, experience in conducting clinical
trials and obtaining regulatory approvals, and experience in manufacturing and
marketing medical supplies and devices that are significantly greater than those
of the Company. In addition, there are several companies developing new
technologies which may reduce the demand for the Company's existing products,
such as minimally invasive techniques in open heart surgery which may not
require the use of oxygenators. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any that are being developed by the Company or that would
render the Company's products obsolete or noncompetitive. In addition, certain
of the Company's competitors may achieve patent protection, regulatory approval
or product commercialization that would limit the Company's ability to compete.
The Company's inability to compete successfully could have a material adverse
effect on its business, financial condition, and results of operations.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company relies heavily
on proprietary technology, which it protects primarily through licensing
arrangements, patents, trade secrets, and proprietary know-how. The Company
holds patents and has pending patent applications that cover certain aspects of
its technology. There can be no assurance that any pending or future patent
applications will be granted or that any current or future patents, regardless
of whether the Company is an owner or a licensee of such patent, will not be
challenged, rendered unenforceable, invalidated or circumvented or that the
rights granted thereunder or under its licensing agreements will provide a
competitive advantage to the Company. There can also be no assurance that the
Company's trade secrets or non-disclosure agreements will provide meaningful
protection of the Company's proprietary information. Furthermore, there can
also be no assurance that others will not independently develop similar
technologies or duplicate any technology developed by the Company or that the
Company's technology will not infringe upon patents or other rights owned by
others. The Company's inability to maintain its proprietary rights would have a
material adverse effect on its business, financial condition, and results of
operations.
LACK OF MARKET ACCEPTANCE. The Company's principal products are based upon
innovative medical concepts. The Company believes that market acceptance of
these products will depend, in part, on the Company's ability to convince the
medical community of the safety, efficacy, convenience, and cost effectiveness
of these products as compared to existing competitive products. Market
acceptance will further depend on the Company's ability to gain acceptance by
the medical community of the use of its products. There can be no assurance that
medical professionals will readily adopt new products or approaches,
particularly when certain competitors of the Company provide a more complete
product mix than that offered by the Company. The Company's inability to gain
market acceptance for its recently introduced Biocor-TM- 200 oxygenator and
other products would have a material adverse effect on the Company's business,
financial condition, and results of operations.
14
<PAGE>
LITIGATION; POTENTIAL FOR ADVERSE OUTCOMES. The medical supply and device
market is characterized by frequent and substantial intellectual property
litigation. Intellectual property litigation is complex and expensive, and the
outcome of such litigation is difficult to predict. A finding against the
Company could have a material adverse effect on the Company's business,
financial condition, and results of operations.
GOVERNMENT REGULATION. In the United States, the United States Food and
Drug Administration (the "FDA") regulates the sale of medical supplies and
devices as well as manufacturing procedures, labeling, and recordkeeping with
respect to such products. The process of obtaining marketing clearances and
approvals from the FDA for new products can be time consuming and expensive, and
there is no assurance that such clearances or approvals will be granted or that
FDA review will not involve delays that would adversely affect the Company's
ability to commercialize its products. The FDA requires that a new product
secure either a 510(k) clearance or an approved PMA, depending upon its
classification, prior to marketing in the United States. The Company's products
are currently sold under a 510(k) clearance, which is available for products
demonstrated to be substantially equivalent to products that are already
commercially available. The 501(k) clearance process typically takes several
months and may require the submission of supporting laboratory or clinical data.
No assurance can be given that the Company will receive FDA marketing approval
for new products on a timely basis, or at all. Even if regulatory approvals to
market a product are obtained from the FDA, such approvals may entail
limitations on the indicated uses of the product. Product approvals by the FDA
can also be withdrawn due to failure to comply with regulatory requirements or
the occurrence of unforeseen problems following initial approval. The FDA could
also limit or prevent the manufacture or distribution of the Company's products
and has the power to require the recall of such products. A product recall,
whether voluntary or mandated by the FDA, would have a material adverse effect
on the Company, particularly at the early stage of market introduction. FDA
regulations depend heavily on administrative interpretation, and there can be no
assurance that future interpretations made by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.
The FDA, various state agencies, and foreign regulatory agencies inspect
the Company from time to time to determine whether the Company is in compliance
with various regulations relating to manufacturing practices, validation,
testing, quality control and product labeling. For example, the United States
Environmental Protection Agency regulates the chemical sterilants used in the
Company's water filtration product line. A determination that the Company is in
violation of such regulations could lead to imposition of civil penalties,
including fines, product recall orders or product seizures, and, in extreme
cases, criminal sanctions.
International regulatory bodies often establish varying regulations
governing products standards, packaging requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax requirements. As a
result of the Company's sales in Europe, the Company was required to be
certified as ISO 9001 compliant and to receive CE mark certification. Failure to
maintain CE mark certification would have a material adverse effect on the
Company's business, financial condition, and results of operations.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The Company's ability to sell
its products depends in part on the extent to which reimbursement for the cost
of such products and related treatments are available to patients under domestic
and foreign governmental health programs, private health insurance, managed care
organizations, workers' compensation insurers, and other similar programs. Over
the past decade, the cost of health care has risen significantly, and there have
been numerous proposals by legislators, regulators, and third-party health care
payors to curb these costs. In addition, certain health care providers are
moving towards a managed care system in which such providers contract to provide
comprehensive health care for a fixed cost per person. The Company is unable to
predict what changes will be made in the reimbursement methods utilized by
third-party health care payors. In addition, hospitals and other health care
providers have become increasingly price competitive and, in some instances,
have put pressure on medical suppliers to lower their prices. Any reductions in
coverage or price limitations by third-party payors could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
PRODUCT LIABILITY. The medical supply and device industry has been
historically litigious and the Company faces an inherent business risk of
financial exposure to product liability claims in the event that the use of its
products results in personal injury. Since the Company's principal products are
designed to be used in connection with medical procedures on the human body,
manufacturing errors or design defects could result in an unsafe condition,
injury or death to the patient, and could result in a recall of the Company's
products and substantial
15
<PAGE>
monetary damages. There can be no assurance that the Company will not experience
losses due to product liability claims in the future. Although the Company
currently maintains liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain, and may not be available in the
future on acceptable terms, or at all. Any claims against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect upon the Company's business financial condition, and results of
operations.
ACQUISITION OF CUSTOMERS BY COMPETITORS OF THE COMPANY. A significant
percentage of dialysis treatment centers nationwide are owned by competitors of
the Company. Accordingly, the Company may face difficulty in selling its
dialysis products to these centers. Additionally, a competitor has recently
acquired a number of companies that provide contract perfusion services to
hospitals. Although the Company believes that it is too early to assess the
long-term effects of these acquisitions on its business, the Company may face
difficulty in selling its cardiosurgery products to perfusionists employed by
these companies or to hospitals or clinics that contract with them. These
acquisitions (or other acquisitions by the Company's competitors) could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
DEPENDENCE ON DISTRIBUTOR SALES. Sales to distributors constitute a
significant portion of the Company's business both in the U.S. and foreign
markets. There can be no assurance that the Company will be able to maintain its
relationship with distributors, or, if these relationships terminate, that new
distributors will be found. The loss of a significant distributor could have a
material adverse effect on the Company's business, financial condition and
results of operations if a new distributor (or other suitable sales
organization) could not be found on a timely basis.
INTERRUPTION IN SOURCES OF SUPPLY. The fiber used in the Company's
oxygenators is purchased from a single source. If this source of supply becomes
unavailable, then there can be no assurance that the Company would be able to
find an acceptable substitute supplier. In addition, high demand for
polycarbonate products by various industries has at times caused temporary
shortages of their supply. Any significant interruption in the supply of these
products could have a material adverse effect on the Company's business,
financial condition, and results of operations.
ENVIRONMENTAL COMPLIANCE. In the ordinary course of its manufacturing
process, the Company uses various chemical solvents and other regulated
substances. Although the Company is not aware of any claim involving violation
of environmental or occupational health and safety laws or regulations, there
can be no assurance that such a claim may not arise in the future, which could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
CURRENCY RISK. Approximately 20 percent of the Company's business is
transacted in foreign markets. Long-term changes or short-term fluctuations in
currency exchange rates could have a material adverse effect on the Company's
business, financial condition, and results of operations.
DEPENDENCE ON SIGNIFICANT CUSTOMERS. The Company's five largest customers
in fiscal 1997 accounted for 29 percent of its total sales. The loss of one or
more of these customers could have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company's
oxygenator supply contract with Bard ended June 30, 1997. Although the Company
plans to supplant the lost revenues from Bard under this contract with sales of
its recently introduced Biocor TM 200 oxygenator, there can be no assurance that
these plans will be realized.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part
on its ability to attract and retain highly qualified scientific, technical,
management, and marketing personnel. Competition for such personnel is intense
and there can be no assurance that the Company will be able to attract and
retain the personnel necessary for the development and operation of its
business. The loss of the services of key personnel could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
POSSIBLE VOLATILITY OF SHARE PRICE. Market prices for securities of medical
technology companies are highly volatile and the trading price of the Company's
Common Stock could be subject to significant fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations by the Company or its competitors, government regulation, and other
events or factors, including the various risk actors discussed herein. In
addition, market prices of securities of medical technology companies have from
time to time experienced extreme price and volume fluctuations, which may be
unrelated to the operating performance of particular
16
<PAGE>
companies. These broad market fluctuations may materially adversely affect the
market price of the Company's Common Stock.
ANTI-TAKEOVER CONSIDERATIONS. The Board of Directors of the Company has
the authority, without any action by the shareholders, to fix the rights and
preferences of any shares of the Company's Preferred Stock to be issued from
time to time. In addition, as a Minnesota corporation, the Company is subject to
certain anti-takeover provisions of the Minnesota Business Corporation Act (the
"MBCA"). The authority of the Board with regard to the Preferred Stock and the
provisions of the MBCA could have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the then prevailing market price of the
Common Stock, and may adversely effect the market price of, and the voting and
other rights of the holders of, Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Reports of Independent Certified Public
Accountants are contained on pages 20 through 30 of this report.
QUARTERLY FINANCIAL DATA
Quarterly financial data has not been submitted because the Company has
less than 800 shareholders of record.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Grant Thornton LLP, the Company's independent accountants since 1974, was
dismissed on January 30, 1995, and Price Waterhouse LLP was appointed as the
Company's new independent accountants. Grant Thornton's report on the financial
statements for the year ended March 31, 1994, was unqualified. Price
Waterhouse's report on the financial statements for the years ended March 31,
1995 and 1996 were unqualified. There have been no disagreements with Grant
Thornton LLP or Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
There have occurred no "reportable events" as defined in Item 304(a) of
Regulation S-K. The decision to change accountants was recommended by the
Audit Committee of the Company's Board of Directors and approved by the Board
of Directors.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item with respect to directors will be
included under the heading "Election of Directors" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held August 27,
1997, and is incorporated herein by reference.
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, information as
to executive officers of the Company is set forth in Part I of this Form 10-K
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item will be included under the heading
"Executive Compensation and Other Information" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held August 27, 1997, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item will be included under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held August 27, 1997, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF REPORT
1 Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this Form 10-K:
(i) Consolidated Balance Sheets for the years ended March 31, 1997
and 1996
(ii) Consolidated Statements of Earnings three years ended March 31,
1997, 1996 and 1995
(iii) Consolidated Statements of Stockholder's Equity three years ended
March 31, 1997, 1996, and 1995
(iv) Consolidated Statements of Cash Flows three years ended March 31,
1997, 1996 and 1995
(v) Notes to Consolidated Financial Statements
(vi) Report of Independent Accountants
2 Schedules filed as part of this Form 10-K: none
All schedules are omitted because they are not applicable to the
Company or because the information required is included in the
consolidated financial statements and notes thereto.
3 Exhibits included herein:
3(a) Articles of Incorporation, as amended (1)
3(b) Amendment of By-Laws in March 1986 (2)
3(c) Restated By-Laws(2)
4 Form of Specimen Common Stock Certificate(3)
10(a) 1989 Stock Plan, as amended
10(b) Form of Employment Agreement dated September 1, 1996 with certain
officers of the Company
10(c) Separation and Consulting Agreement with Dr. Louis C. Cosentino
dated April 1, 1997
10(d) 1990 Employee Stock Purchase Plan, as amended June 1, 1993 (3)
10(e) Supplemental Executive Retirement Plan effective April 1, 1996(4)
10(f) Director Emeritus Consulting Plan (5), as amended (6)
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
________________________________
(1) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1988, File No.
0-11278.
(2) Incorporated by reference to the specified exhibit filed as part of the
Company's report on Form 8-K on March 12, 1986, File No. 0-11278.
(3) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1993, File No.
0-11278.
(4) Incorporated by reference to the specified exhibit filed as part of the
Company's Annual Report on Form 10-K for the year ended March 31, 1995, File No.
0-11278.
(5) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
File No. 0-11278.
(6) Incorporated by reference to the specified exhibit filed as part of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 0-11278.
19
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MARCH 31 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,222,412 $ 4,064,391
Marketable securities 400,000 1,154,336
Accounts receivable, less allowance for
doubtful accounts of $409,000 and $215,000 11,581,958 11,261,603
Inventories 11,833,416 11,435,335
Prepaid expenses and other current assets 2,945,073 1,196,796
------------- -------------
TOTAL CURRENT ASSETS 29,982,859 29,112,461
PROPERTY AND EQUIPMENT, AT COST
Land, buildings and improvements 9,647,082 9,325,804
Machinery and equipment 19,809,065 18,366,494
Office and sales equipment 3,634,984 2,658,104
------------- -------------
33,091,131 30,350,402
Less accumulated depreciation (17,444,254) (13,026,907)
------------- -------------
15,646,877 17,323,495
OTHER ASSETS
Patent costs, net of accumulated amortization of $1,133,000 and $734,400 710,991 801,961
Goodwill, net of accumulated amortization of $1,024,000 and $603,000 1,327,899 1,769,542
Deferred income taxes 1,407,731 150,001
Other 924,903 889,120
------------- -------------
TOTAL ASSETS: $ 50,001,260 $ 50,046,580
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Term loan $ 3,241,440 -
Accounts payable 3,921,172 5,188,951
Accrued compensation 2,697,436 1,170,454
Other accrued expenses 886,038 624,976
------------- -------------
TOTAL CURRENT LIABILITIES 10,746,086 6,984,381
DEFERRED INCOME TAXES 1,553,208 1,412,000
DEFERRED COMPENSATION 223,907 129,455
MINORITY INTEREST 44,003 310,472
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - 5,000,000 shares authorized, none outstanding
Common stock - $.05 par value; 10,000,000 shares authorized
6,675,713 and 6,635,134 shares issued and outstanding 333,786 331,757
Additional paid-in-capital 12,142,631 11,646,498
Retained earnings 24,957,639 29,232,017
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS EQUITY: $ 50,001,260 $ 50,046,580
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
YEARS ENDED MARCH 31 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Net sales - products $ 65,906,669 $ 64,769,143 $ 55,882,512
Contract revenues - - 300,000
------------ ------------ ------------
Total revenues 65,906,669 64,769,143 56,182,512
OPERATING COSTS AND EXPENSES
Cost of product sales 38,492,962 38,108,313 31,774,240
Research and development 3,423,764 3,123,065 3,133,075
Selling, general and administrative 17,404,286 15,319,533 11,939,902
Amortization of intangible assets 855,906 762,552 358,068
Restructuring and other unusual items 9,569,037 936,000 -
------------ ------------ ------------
Total operating costs and expenses 69,745,955 58,249,463 47,205,285
EARNINGS (LOSS) FROM OPERATIONS (3,839,286) 6,519,680 8,977,227
OTHER INCOME (EXPENSES)
Interest expense (174,030) (1,849) (192,009)
Interest income and other expenses, net (325,065) 44,384 428,639
------------ ------------ ------------
(499,095) 42,535 236,630
EARNINGS (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (4,338,381) 6,562,215 9,213,857
Provision for income taxes (benefit) (700,249) 2,394,000 3,294,000
Minority interest (266,469) (140,024) -
------------ ------------ ------------
NET (LOSS) EARNINGS $ (3,371,663) $ 4,308,239 $ 5,919,857
------------ ------------ ------------
------------ ------------ ------------
NET EARNINGS (LOSS) PER SHARE $ (0.51) $ 0.62 $ 0.90
------------- ------------ ------------
------------- ------------ ------------
Weighted average common and common
equivalent shares 6,666,804 6,923,821 6,613,391
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------
Shares Issued Additional
and Paid-In Retained
Outstanding Amount Capital Earnings Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES APRIL 1, 1994 6,163,757 $ 308,187 $ 8,161,543 $ 20,234,676 $ 28,704,406
Exercise of stock options, net of 25,465
shares surrendered in payment 221,001 11,051 898,355 - 909,406
Tax benefit from exercise of stock
options - - 64,200 - 64,200
Dividend paid - - - (623,250) (623,250)
Increase of unrealized holding losses
on investments - - - (153,803) (153,803)
Foreign currency translation adjustment - - - 231,588 231,588
Net earnings - - - 5,919,857 5,919,857
--------- ---------- ------------- ------------- -------------
BALANCES MARCH 31, 1995 6,384,758 319,238 9,124,098 25,609,068 35,052,404
Exercise of stock options, net of 40,555
shares surrendered in payment 250,376 12,519 1,966,540 - 1,979,059
Tax benefit from exercise of stock
options - - 555,860 - 555,860
Dividend paid - - - (652,542) (652,542)
Reduction of unrealized holding losses
on investments - - - 80,120 80,120
Foreign currency translation adjustment - - - (112,868) (112,868)
Net earnings - - - 4,308,239 4,308,239
--------- ---------- ------------- ------------- -------------
BALANCES MARCH 31, 1996 6,635,134 331,757 11,646,498 29,232,017 41,210,272
Exercise of stock options 40,579 2,029 484,765 - 486,794
Tax benefit from exercise of stock
options - - 11,368 - 11,368
Dividend paid - - - (667,471) (667,471)
Reduction of unrealized holding losses
on investments - - - 51,703 51,703
Foreign currency translation adjustment - - - (286,947) (286,947)
Net Loss - - - (3,371,663) (3,371,663)
--------- ---------- ------------- ------------- -------------
BALANCES MARCH 31, 1997 6,675,713 $ 333,786 $ 12,142,631 $ 24,957,639 $ 37,434,056
--------- ---------- ------------- ------------- -------------
--------- ---------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
MINNTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) ($3,371,663) $4,308,239 $5,919,857
Adjustments to reconcile net earnings to net cash
provided by operating activities
Restructuring charges 7,780,806 - -
Depreciation and amortization 4,633,950 3,406,339 2,775,352
Provision for losses in accounts receivable 222,769 - -
Tax benefit from stock option exercises 11,368 555,860 64,200
Deferred contract revenue - - (300,000)
Foreign currency exchange (gain) loss 561,670 159,150 (204,146)
Deferred income taxes - current/noncurrent (2,000,339) (143,600) 31,800
Minority interest (266,469) (140,024) -
Changes in assets and liabilities:
Accounts receivable (945,751) (1,059,931) (2,429,575)
Inventories (3,586,910) (3,658,623) (1,198,859)
Prepaid expenses (75,455) 135,348 (157,777)
Accounts payable (1,154,292) 2,399,860 432,485
Accrued expenses 95,457 (513,618) 837,459
Income taxes payable (814,552) (71,855) (246,647)
Other (120,139) (65,177) 90,528
---------- ---------- ----------
Total adjustments 4,342,113 1,003,729 (305,180)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 970,450 5,311,968 5,614,677
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,207,877) (4,333,385) (5,111,925)
Purchase of undeveloped land - - (529,842)
Proceeds from sale of equipment - - 18,772
Patent application costs (307,430) (543,464) (385,725)
Proceeds from sale of marketable securities 742,606 - -
Acquisition of product lines - (1,402,087) (933,600)
Other - (2,387) (1,742)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (4,772,701) (6,281,323) (6,944,062)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 4,241,440 - -
Payment of note payable (1,000,000)
Payments of long-term debt - - (1,942,384)
Proceeds from exercise of stock options 486,794 1,979,059 909,406
Minority interest capital contribution - 450,496 -
Payment of cash dividends (667,471) (652,542) (623,250)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,060,763 1,777,013 (1,656,228)
Effects of exchange rate changes on foreign currency
cash balances (100,491) (68,005) 103,533
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (841,979) 739,653 (2,882,080)
Cash and cash equivalents at beginning of year 4,064,391 3,324,738 6,206,818
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $3,222,412 $4,064,391 $3,324,738
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
MINNTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Minntech Corporation is a leader in developing, manufacturing and marketing
medical devices, sterilants and water filtration products. The Company's
products are used in kidney dialysis, open-heart surgery, endoscopy, and in the
preparation of pure water for medical, industrial and laboratory use.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company,
its majority-owned subsidiary and its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Sales are recognized at the time products are shipped. The Company allows
customers to return products for credit upon written authorization from the
Company.
Contract revenues derived from development and marketing agreements are
recorded as earned based on the performance requirements of the contract.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents consisted of:
FY ENDED MARCH 31 1997 1996
----------------------------- ------------ -------------
Cash $ 1,676,471 $ 2,117,793
Money market mutual funds 1,545,941 1,946,598
------------ ------------
$ 3,222,412 $ 4,064,391
------------ ------------
------------ ------------
A substantial portion of the Company's cash balances are held in one
financial institution.
Money market mutual funds are stated at fair value, which approximates cost
at March 31, 1997 and 1996.
MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Marketable securities consisted of investments in bond funds. At March 31,
1997 and 1996, the adjusted cost of the funds exceed fair market value. The
unrealized holding losses, net of income taxes, are reported as a reduction in
stockholders' equity.
Marketable securities consisted of:
------------------------------------------------------------
FY ENDED MARCH 31 1997 1996
------------------------------------------------------------
Adjusted cost $ 442,974 $ 1,269,019
Unrealized holding loss $ (42,974) $ (114,683)
---------- ------------
Fair market value $ 400,000 $ 1,154,336
---------- ------------
---------- ------------
24
<PAGE>
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
by the first-in, first-out method.
Inventories consisted of:
------------------------------------------------------------
FY ENDED MARCH 31 1997 1996
------------------------------------------------------------
Finished Goods $ 6,181,128 $ 4,768,680
Materials and work-in process $ 5,652,288 $ 6,666,655
------------ ------------
$ 11,833,416 $ 11,435,335
------------ ------------
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis over their
estimated service lives. Accelerated and straight-line methods are used for
income tax reporting purposes.
PATENT COSTS
Patent application costs consist principally of legal and filing fees, and
are capitalized and amortized over five years.
GOODWILL
Goodwill represents the cost in excess of the fair value of net assets
acquired and is amortized using the straight-line method over five to seven
years. The Company periodically evaluates the existence of goodwill impairment
on the basis of whether the goodwill is fully recoverable from projected,
undiscounted net cash flows of the related business unit.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
FOREIGN CURRENCY TRANSLATION
Foreign assets and liabilities are translated to U.S. dollars at year-end
exchange rates. Revenues and expenses are translated at the average exchange
rates in effect for the year. Unrealized translation adjustments are reported as
a component of stockholders' equity.
ADOPTION OF FAS 123
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation," requires companies to measure employee stock
compensation plans based on the fair value method of accounting. However, the
Statement allows the alternative of continued use of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with pro forma
disclosure of net income and earnings per share determined as if the fair-value
based method had been applied in measuring compensation cost. The Company
adopted the new standard in fiscal 1996 and elected the continued use of APB
Opinion No. 25.
NOTE 2--RESTRUCTURING AND UNUSUAL ITEMS
In the fourth quarter of fiscal 1997, the Company adopted a restructuring
plan designed to reduce its cost structure and improve its competitive position
primarily through the discontinuation of two unprofitable product lines--the
Primus-Registered Trademark- dialyzer and Cathetron-Registered Trademark-
catheter reprocessing system. In addition, the charge provided for costs
associated with the departure of the Company's founder as Chairman, Chief
Executive Officer and President. The restructuring charge totaled $9,569,000
before taxes and $6,294,000 after taxes.
The Primus-Registered Trademark- dialyzer related charges totaled
$7,282,000 and consist of write-downs of inventory, $4,191,000; fixed assets,
$2,930,000; and intellectual property, $161,000. Charges related to the
Cathetron-Registered Trademark- catheter reprocessing system total, $574,000;
and relate to a provision for anticipated sales returns and write-down of
inventory. Included in the charge is $1,229,000 to provide for severance and
anticipated future pension costs related to the departure of the Company's
founder as Chairman, Chief Executive Officer, and President. The balance of the
25
<PAGE>
charge, $484,000; relates primarily to severance and other costs to downsize the
organization. The majority of the restructuring charges were non-cash in nature.
NOTE 3--LINE OF CREDIT
At March 31, 1997, the Company had a line of credit with a commercial bank
which allows the Company to borrow up to $10,000,000 on an unsecured basis at
the prime rate of interest (8.25 percent at March 31, 1997) or the indexed
London Interbank Offered Rate (LIBOR). At March 31, 1997, the Company had
$3,000,000 of outstanding borrowings under the line of credit. This line of
credit expires August 31, 1997, and the Company plans to extend the bank line at
that time.
NOTE 4--SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to one unaffiliated customer accounted for approximately 10 percent, 23
percent, and 25 percent of sales in fiscal years 1997, 1996 and 1995,
respectively. The Company has a corresponding concentration of accounts
receivable due from this customer. Sales to this customer are made under a
contract which is scheduled to expire June 30, 1997.
Consolidated sales outside the United States, principally to customers in
Western Europe and the Far East, amounted to $12,187,000, $10,462,000 and
$7,261,000 in fiscal years 1997, 1996 and 1995, respectively.
NOTE 5--INCOME TAXES
The provision for income taxes consisted of the following:
FY ENDED MARCH 31 FEDERAL STATE TOTAL
---------------------------- ------------ ---------- ------------
1997
Currently Payable $ 1,237,156 $ 62,934 $ 1,300,090
Deferred (1,822,733) (177,606) (2,000,339)
------------ ---------- ------------
$ (585,577) $ (114,672) $ (700,249)
------------ ---------- ------------
------------ ---------- ------------
1996
Currently Payable $ 2,375,600 $ 162,000 $ 2,537,600
Deferred (146,100) 2,500 (143,600)
------------ ---------- ------------
$ 2,229,500 $ 164,500 $ 2,394,000
------------ ---------- ------------
------------ ---------- ------------
1995
Currently Payable $ 3,016,300 $ 245,900 $ 3,262,200
Deferred 25,800 6,000 31,800
------------ ---------- ------------
$ 3,042,100 $ 251,900 $ 3,294,000
------------ ---------- ------------
------------ ---------- ------------
The provision for income taxes differs from the statutory U.S. federal tax
rate of 34 percent applied to earnings before income taxes as follows:
FY ENDED MARCH 31 1997 1996 1995
---------------------------- ------------ ---------- ------------
Income tax expense at statutory
federal income tax rates $(1,475,100) $ 2,254,700 $ 3,132,700
Foreign subsidiary losses 848,800 671,600 261,800
State income taxes,
net of federal benefit (75,700) 108,500 166,300
Exempt income attributable to
foreign sales (53,400) (51,000) (59,200)
Loss on investment in foreign
subsidiary - (593,800) (189,700)
Other, net 55,151 4,000 (17,900)
------------ ---------- ------------
$ (700,249) $ 2,394,000 $ 3,294,000
------------ ---------- ------------
------------ ---------- ------------
26
<PAGE>
The tax effects of cumulative temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are as follows:
FY ENDED MARCH 31 1997 1996
----------------------------------------- ------------ ------------
Deferred tax asset
Foreign subsidiary net operating losses $ 1,100,000 $ 1,525,000
Deferred compensation and severance 569,500 -
Fixed asset reserve 707,500 -
Allowance for doubtful accounts 54,800 50,700
Inventories 1,044,900 230,900
Unrealized holding losses on investments 130,800 40,900
Accrued vacation pay 107,500 152,500
Amortization of goodwill 189,000 100,700
Other, net 46,000 179,000
------------ ------------
Gross deferred tax asset 3,950,000 2,279,700
Valuation allowance (1,100,000) (1,525,000)
------------ ------------
Net deferred tax asset 2,850,000 754,700
------------ ------------
------------ ------------
Deferred tax liability
Plant and equipment depreciation $ 1,553,208 $ 1,412,000
------------ ------------
------------ ------------
The Company recorded valuation allowances related to foreign subsidiary net
operating losses which are not recognized until their ultimate realization is
considered to be more likely than not. The current portion of the deferred tax
asset is included in the prepaid expenses and other current assets component of
the balance sheet.
Cash payments for income taxes were approximately $2,151,000, $2,345,000, and
$3,452,000 in fiscal years 1997, 1996 and 1995, respectively.
NOTE 6--COMMITMENTS
OPERATING LEASES
Total rental expense for operating leases for fiscal years 1997, 1996 and
1995 was approximately $804,000, $905,000, and $808,000, respectively.
Future minimum lease payments for operating leases, net of cancellation
clauses, consist of the following at March 31, 1997:
FISCAL YEAR AMOUNT
--------------------------------------- ------------
1998 $ 486,752
1999 397,893
2000 140,255
2001 12,650
-----------
$ 1,037,550
-----------
-----------
SEVERANCE AGREEMENTS
The Company revised employment agreements with all officers that provide 3
years of severance pay benefits if there is a change in control of the Company.
Under the agreements, these officers receive 100 percent of such severance
benefits if they are involuntarily terminated and 50 percent of such severance
benefits if they voluntarily terminate. The maximum contingent liability under
these agreements at March 31, 1997 was approximately $3,600,000.
27
<PAGE>
NOTE 7--STOCK OPTIONS
At March 31, 1997, the Company had 1,865,020 shares of common stock reserved
under its 1982 Incentive Stock Option Plan and 1989 Stock Plan. The plans
provide for incentive stock options and other options to be granted to
directors, officers, key employees, and consultants at an exercise price not
less than fair market value of the common stock at the date of grant.
Option transactions under these plans during the three years ended March 31,
1997 are summarized as follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES OPTION PRICE
Outstanding at March 31, 1994 1,565,522 $ 9.87
Granted 96,150 14.45
Exercised (231,421) 4.89
Cancelled (121,035) 12.60
----------- -----------
Outstanding at March 31, 1995 1,309,216 10.84
Granted 677,010 17.29
Exercised (273,058) 8.94
Cancelled (88,753) 13.27
----------- -----------
Outstanding at March 31, 1996 1,624,415 13.97
Granted 1,209,783 10.54
Exercised (23,124) 12.55
Cancelled (1,013,724) 14.33
----------- -----------
Outstanding at March 31, 1997 1,797,350 $ 10.67
----------- -----------
----------- -----------
In January 1997, 824,883 options granted in fiscal years 1992 through 1997
with exercise prices ranging from $10.75 to $20.50, were repriced to $10.625 per
share, the market price at the time of repricing. The January 1997 repricing is
reflected in the above roll forward as a grant cancellation and a new grant
issuance.
Options to purchase 1,099,769 shares were exercisable at March 31, 1997.
The Company adopted an employee stock purchase plan on June 1, 1990. Under
the plan, 562,500 shares of common stock were reserved for issuance to eligible
employees. The plan allows employees to designate up to 10 percent of their base
salaries for purchase of common stock at 85 percent of fair market value.
A total of 98,818 shares have been issued under the plan since inception as
follows:
NUMBER
MAY 31 OF SHARES
------------------------------------------- ----------
1996 17,455
1995 17,873
1994 15,045
1993 15,552
1992 14,787
1991 18,106
At March 31, 1997, the Company held a total of $127,403 in payroll
withholdings for the purchase of stock under the plan.
The estimated weighted average grant-date fair value of stock options granted
during 1997 was $5.06 per option and $6.72 per option for 1996. The Company
applies Accounting Principles Board Opinion No. 25 and related Interpretations
in accounting for its stock option and purchase plans. Had the Company's stock
option plans and its stock purchase plans compensation costs been determined
based on the fair value at the option grant dates for
28
<PAGE>
awards consistent with the accounting provision of FAS 123 "Accounting for Stock
Based Compensation," the Company's net income (loss) and earnings (loss) per
share for fiscal years 1997 and 1996 would have been adjusted to the pro forma
amounts indicated below:
FY ENDED MARCH 31 1997 1996
-------------------------------------------------------------------------
Net Income (Loss) As reported ($3,371,663) $4,308,239
Pro-Forma ($5,309,816) $3,811,895
Net Income (Loss) per share As reported ($ .51) $ .62
Pro-Forma ($ .80) $ .55
The following table summarizes stock options outstanding and exercisable at
March 31, 1997.
<TABLE>
<CAPTION>
Outstanding Exercisable
- ---------------------------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
Exercise Contractual Average Average
Price Range Options Life Remaining Exercise Price Options Exercise Price
- ----------------------------------------------- -------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$2.03 - $9.05 122,447 3.0 $4.47 119,947 $4.36
$10.25 - $13.75 1,555,393 7.5 10.63 860,312 10.76
$15.00 - $20.50 119,510 7.5 17.60 119,510 17.60
-------------------------------------------- ----------------------------
1,797,350 7.2 $10.67 1,099,769 $10.81
-------------------------------------------- ----------------------------
-------------------------------------------- ----------------------------
</TABLE>
The fair value of options granted under the Company's fixed stock option
plans during fiscal 1997 and 1996 was estimated on the dates of grant using the
Black-Scholes options-pricing model. The assumptions for fiscal 1997 and 1996
were as follows:
FY ENDED MARCH 31 1997 1996
-------------------------------------------------------------------------
Risk free interest rates 6.0 - 6.6% 5.4 - 6.9%
Expected life 5.1 years 5.1 years
Expected volatility 50% 36%
Expected dividends 1% 1%
Pro forma compensation cost related to shares purchased under the Employee
Stock Purchase Plan is measured based on the discount from market value. The
effects of applying FAS 123 in this pro forma disclosure are not indicative of
future pro forma effects. FAS 123 does not apply to awards granted prior to
fiscal 1996 nor to awards anticipated in future years with exception to the
fiscal 1997 pricing.
NOTE 8--PROFIT SHARING AND RETIREMENT SAVINGS
The Company has a 401(k) retirement savings and profit sharing plan under
which eligible employees may contribute up to 10 percent of their salaries. The
Company matches 10 percent of employee contributions to a maximum of 6/10ths of
1 percent of compensation. The Company also makes annual profit sharing
contributions to the plan at the discretion of the Board of Directors. The
Company's contributions are as follows:
FY ENDED MARCH 31 1997 1996 1995
------------------------------------------------------------------------
Matching 401 (k) contributions $ 49,867 $ 42,800 $ 38,800
Profit sharing contributions - - 363,600
--------- --------- ---------
$ 49,867 $ 42,800 $ 402,400
--------- --------- ---------
--------- --------- ---------
29
<PAGE>
NOTE 9--PREFERRED STOCK
The Company's Board of Directors is authorized to issue five million shares
of no par value preferred stock in one or more series. The board can determine
voting, conversion, dividend and redemption rights, and other preferences of
each series. No shares have been issued under this authorization.
NOTE 10--FOREIGN OPERATIONS
Amounts attributable to foreign operations, primarily in Europe, included in
the consolidated financial statements are as follows:
FY ENDED MARCH 31 1997 1996
----------------------------------------------------------------------
Net sales of consolidated subsidiaries $7,518,042 $6,439,973
Operating losses of consolidated foreign
subsidiaries ($1,921,588) ($1,582,564)
Total assets of consolidated foreign
subsidiaries $7,130,937 $7,307,790
NOTE 11--Net Earnings per Share
Net earnings per share are computed based on the weighted average number of
common shares and common equivalent shares outstanding. Common share equivalents
include potentially dilutive stock options using the "modified treasury stock"
method. Shares used in the computations are as follows:
FY ENDED MARCH 31 1997 1996 1995
------------------------------------------ --------- --------- ---------
Weighted average common shares outstanding 6,667,755 6,517,123 6,274,270
Weighted average common equivalent shares
for stock options (951) 406,695 339,121
--------- --------- ---------
6,666,804 6,923,818 6,613,391
--------- --------- ---------
--------- --------- ---------
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Minntech Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Minntech
Corporation and its subsidiaries at March 31, 1997 and 1996 and the results of
their operations and their cash flows for the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
May 23, 1997
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MINNTECH CORPORATION
(Registrant)
By
----------------------------------------
Thomas J. McGoldrick
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: June 26, 1997
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 and on the dates indicated
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------
President, Chief Executive Officer and
- ----------------------------- Director (Principal Executive Officer)
Thomas J. McGoldrick
Chief Financial Officer (Principal
- ----------------------------- Accounting and Financial Officer)
Jules L. Fisher
- ----------------------------- Director
Fred L. Shapiro, M.D.
- ----------------------------- Director
Louis C. Cosentino, Ph.D.
- ----------------------------- Director
George Heenan
- ----------------------------- Director
Amos Heilicher
- ----------------------------- Director
Norman Dann
- ----------------------------- Director
Donald H. Soukup
32
<PAGE>
EXHIBITS
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT FORM OF FILING
----------- ------- --------------
<S> <C> <C>
3(a) Articles of Incorporation, as amended(1)
3(b) Amendment of By-Laws in March 1986(2)
3(c) Restated By-Laws(2)
4 Form of Specimen Common Stock Certificate(3)
10(a) 1989 Stock Plan, as amended Electronic Submission
10(b) Form of Employment Agreement dated Electronic Submission
September 1, 1996 with certain officers
of the Company
10(c) Separation and Consulting Agreement with Electronic Submission
Dr. Louis C. Cosentino dated April 1, 1997
10(d) 1990 Employee Stock Purchase Plan, as amended
June 1, 1993(3)
10(e) Supplemental Executive Retirement Plan effective
April 1, 1996(4)
10(f) Director Emeritus Consulting Plan(5), as amended(6)
23 Consent of Price Waterhouse LLP Electronic Submission
27 Financial Data Schedule Electronic Submission
(1) Incorporated by reference to the specified exhibit filed as part of the Company's Annual
Report on Form 10-K for the year ended March 31, 1988, File No. 0-11278.
(2) Incorporated by reference to the specified exhibit filed as part of the Company's report
on Form 8-K on March 12, 1986, File No. 0-11278.
(3) Incorporated by reference to the specified exhibit filed as part of the Company's Annual
Report on Form 10-K for the year ended March 31, 1993, File No. 0-11278.
(4) Incorporated by reference to the specified exhibit filed as part of the Company's Annual
Report on Form 10-K for the year ended March 31, 1995, File No. 0-11278.
(5) Incorporated by reference to the specified exhibit filed as part of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, File No. 0-11278.
(6) Incorporated by reference to the specified exhibit filed as part of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-11278.
</TABLE>
<PAGE>
MINNTECH CORPORATION
1989 STOCK PLAN, AS AMENDED*
*Reflecting Amendments through September 26, 1996
<PAGE>
SECTION CONTENTS PAGE
- ------- -------- ----
1. General Purpose of Plan; Definitions 1
2. Administration 3
3. Stock Subject to Plan 4
4. Eligibility 5
5. Stock Options 5
6. Stock Appreciation Rights 12
7. Restricted Stock 14
8. Deferred Stock Awards 16
9. Transfer, Leave of Absence, etc. 18
10. Amendments and Termination 19
11. Unfunded Status of Plan 19
12. General Provisions 19
13. Effective Date of Plan 23
<PAGE>
MINNTECH CORPORATION
1989 STOCK PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Minntech Corporation 1989 Stock Plan (the
"Plan"). The purpose of the Plan is to enable Minntech Corporation (the
"Company") and its Subsidiaries to retain and attract executives and other key
employees and non-employee directors who contribute to the Company's success by
their ability, ingenuity and industry, and to enable such individuals to
participate in the long-term success and growth of the Company by giving them a
proprietary interest in the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
a. "Board" means the Board of Directors of the Company.
b. "Cause" means a felony conviction of a participant or the failure of a
Participant to contest prosecution for a felony, or a participant's
willful misconduct or dishonesty, any of which is directly and
materially harmful to the business or reputation of the Company.
c. "Code" means the Internal Revenue Code of 1986, as amended.
d. "Committee" means the Committee referred to in Section 2 of the Plan.
If at any time no Committee shall be in office, then the functions of
the Committee specified in the Plan shall be exercised by the Board,
unless the Plan specifically states otherwise.
e. "Company" means the Minntech Corporation, a corporation organized
under the laws of the State of Minnesota (or any successor
corporation).
f. "Deferred Stock" means an award made pursuant to Section 8 below of
the right to receive stock at the end of a specified deferral period.
g. "Disability" means permanent and total disability as determined by the
Committee.
h. "Early Retirement" means retirement, with consent of the committee at
the time of retirement, from active employment with the Company and
any Subsidiary or Parent Corporation of the Company.
1
<PAGE>
i. "Fair Market Value" means the value of the Stock on a given date as
determined by the Committee in accordance with the applicable Treasury
Department regulations under Section 422 of the Code with respect to
"incentive stock options."
j. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of
Section 422 of the Code.
k. "Non-Employee Director" shall have the meaning set forth in Rule
16b-3(b)(3) under the Exchange Act, or any successor rule thereto.
l. "Non-qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option, and is intended to be and is designated as a
"Non-Qualified Stock Option."
m. "Normal Retirement" means retirement from active employment with the
Company and any Subsidiary or Parent Corporation of the Company on or
after age 60.
n. "Parent Corporation" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if each of
the corporations (other than the Company) owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one
of the other corporations in the chain.
o. "Restricted Stock" means an award of shares of Stock that are subject
to restrictions under Section 7 below.
p. "Retirement" means Normal Retirement or Early Retirement.
q. "Stock" means the Common Stock, $.05 par value per share, of the
Company.
r. "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 below to surrender to the Company all or a
portion of a Stock option in exchange for an amount equal to the
difference between (i) the Fair Market Value, as of the date such
Stock Option or such portion thereof is surrendered, of the shares of
Stock covered by such Stock option or such portion thereof, and (ii)
the aggregate exercise price of such Stock Option or such portion
thereof.
2
<PAGE>
s. "Stock Option" means any option to purchase shares of Stock granted
pursuant to Section 5 below.
t. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of
the corporations (other than the last corporation in the unbroken
chain) owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in the
chain.
u. "Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute thereto.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Board of Directors or a Committee of
not less than three Non-Employee Directors, who shall be appointed by the Board
of directors of the Company and who shall serve at the pleasure of the Board.
The Committee shall have the power and authority to grant to eligible
employees, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock, or (iv) Deferred Stock awards.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the
Company and its Subsidiaries to whom Stock Options, Stock
Appreciation Rights, Restricted Stock and/or Deferred Stock
awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock options, Stock Appreciation Rights,
Restricted Stock or Deferred Stock awards, or a combination of
the foregoing, are to be granted hereunder;
(iii) to determine the number of shares to be covered by each such
award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including,
but not limited to, any restriction on any Stock Option or other
award and/or the shares of Stock relating thereto), which
authority shall be exclusively vested in the Committee (and not
the Board) for purposes of
3
<PAGE>
establishing performance criteria used with Restricted Stock and
Deferred Stock awards; and
(v) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or
at the election of the participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan. The Committee may
delegate its authority to officers of the Company for the purpose of selecting
employees who are not officers of the Company for purposes of (i) above.
All decisions made by the Committee pursuant to the provisions of the Plan
shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for distribution
under the Plan shall be 2,203,125. Such shares may consist, in whole or in
part, of authorized and unissued shares. No more than 150,000 shares of stock,
in the aggregate, may be issued pursuant to Restricted Stock or Deferred Stock
awards.
Subject to paragraph (b)(iv) of Section 6 below, if any shares that have
been optioned ceased to be subject to options, or if any shares subject to any
Restricted Stock or Deferred Stock award granted hereunder are forfeited or such
award otherwise terminates without a payment being made to the participant, such
shares shall again be available for distribution in connection with future
awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, other change in corporate structure
affecting the Stock, or spin-off or other distribution of assets to
shareholders, such substitution or adjustment shall be made in the aggregate
number of shares reserved for issuance under the Plan, in the number and
option price of shares subject to outstanding options granted under the
Plan, and in the number of shares subject to Restricted Stock or Deferred
Stock awards granted under the Plan as may be determined to be appropriate
by the Committee, in its sole discretion, provided that the number
4
<PAGE>
of shares subject to any award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Option.
SECTION 4. ELIGIBILITY.
Officers, other key employees of the Company and Subsidiaries and
Non-Employee Directors, and consultants and other persons having a contractual
relationship with the Company or its Subsidiaries who are responsible for or
contribute to the management, growth and/or profitability of the business of
the Company and its Subsidiaries are eligible to be granted Stock Options,
Stock Appreciation Rights, Restricted Stock or Deferred Employee Stock awards
under the Plan. Except for Non-Employee Directors, whose participation in the
Plan shall be limited as provided in paragraph (k) of Section 5, the optionees
and participants under the Plan shall be selected from time to time by the
Committee, in its sole discretion, from among those eligible, and the Committee
shall determine, in its sole discretion, the number of shares covered by each
award.
SECTION 5. STOCK OPTIONS.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
The Stock options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive
Stock Options shall be granted under the Plan after July 25, 1999.
The Committee shall have the authority to grant any optionee Incentive
Stock options, Non-Qualified Stock options, or both types of options (in each
case with or without Stock Appreciation Rights). To the extent that any option
does not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock option.
Anything in the Plan to the contrary notwithstanding, no term of this Plan
relating to Incentive Stock Options shall be interpreted, amended or altered,
nor shall any discretion or authority granted under the Plan be so exercised,
so as to disqualify either the Plan or any Incentive Stock Option under
Section 422 of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether or
not such modification or amendment results in disqualification of such Option
as an Incentive Stock Option, provided the optionee consents in writing to the
modification or amendment.
5
<PAGE>
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) OPTION PRICE. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Committee at the time of grant. In
no event shall the option price per share of Stock purchasable under an
Incentive Stock Option or a Non-Qualified Stock Option be less than 100% of
the Fair Market Value of the Stock on the date of the grant of the option.
If an employee owns or is deemed to own (by reason of the attribution rules
applicable under Section 425(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company or any Parent
Corporation or Subsidiary and an Incentive Stock Option is granted to such
employee, the option price shall be no less than 110% of the Fair Market
Value of the Stock on the date the option is granted.
(b) OPTION TERM. The term of each Stock option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed
to own (by reason of the attribution rules of Section 425(d) of the Code) more
than 10% of the combined voting power of all classes of stock of the Company
or any Parent Corporation or Subsidiary and an Incentive Stock Option is
granted to such employee, the term of such option shall be no more than five
years from the date of grant.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time or times as
determined by the Committee at or after grant. If the Committee provides,
in its discretion, that any option is exercisable only in installments, the
Committee may waive such installment exercise provisions at any time.
Notwithstanding the foregoing or any other provision of this Plan, unless
the Stock Option Agreement provides otherwise, (1) any Stock Option granted
under this Plan on or prior to September 26, 1996 (including options
granted to Non-Employee Directors), that shall not have previously expired
shall be immediately exercisable in full, without regard to any installment
exercise provisions, for a period specified by the Company, but not to
exceed sixty (60) days, prior to the occurrence of any of the following
events: (i) dissolution or liquidation of the Company other than in
conjunction with a bankruptcy of the Company or any similar occurrence,
(ii) any merger, consolidation, acquisition, separation, reorganization, or
similar occurrence, where the Company will not be the surviving entity or
(iii) the transfer of substantially all of the
6
<PAGE>
assets of the Company or 75% or more of the outstanding Stock of the
Company and, in addition, (2) any Stock Option granted under this Plan,
whether prior to, on or after September 26, 1996 (including options granted
to Non-Employee Directors), that shall not have previously expired shall be
immediately exercisable in full, without regard to any installment exercise
provisions, upon the occurrence of a Change in Control. For purposes of
this Plan, a "Change in Control" of the Company shall be deemed to occur if
any of the following occur:
(1) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) acquires or becomes a "beneficial owner"
(as defined in Rule 13d-3 or any successor rule under the Exchange
Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's
then outstanding securities entitled to vote generally in the election
of directors ("Voting Securities"), provided, however, that the
following shall not constitute a Change in Control pursuant to this
paragraph (c)(1):
(A) any acquisition or beneficial ownership by the Company
or a Subsidiary;
(B) any acquisition or beneficial ownership by any employee
benefit plan (or related trust) sponsored or maintained by the
Company or one or more of its Subsidiaries;
(C) any acquisition or beneficial ownership by any
corporation with respect to which, immediately following such
acquisition, more than 70% of both the combined voting power of
the Company's then outstanding Voting Securities and the Stock of
the Company is then beneficially owned, directly or indirectly,
by all or substantially all of the persons who beneficially owned
Voting Securities and Stock of the Company immediately prior to
such acquisition in substantially the same proportions as their
ownership of such Voting Securities and Stock, as the case may
be, immediately prior to such acquisition;
(2) A majority of the members of the Board of Directors of the
Company shall not be Continuing Directors. "Continuing Directors"
shall mean: (A) individuals who, on the date hereof, are directors
7
<PAGE>
of the Company, (B) individuals elected as directors of the Company
subsequent to the date hereof for whose election proxies shall have
been solicited by the Board of Directors of the Company or (C) any
individual elected or appointed by the Board of Directors of the
Company to fill vacancies on the Board of Directors of the Company
caused by death or resignation (but not by removal) or to fill
newly-created directorships;
(3) Approval by the shareholders of the Company of a
reorganization, merger or consolidation of the Company (other than a
merger or consolidation with a subsidiary of the Company) or a
statutory exchange of outstanding Voting Securities of the Company,
unless immediately following such reorganization, merger,
consolidation or exchange, all or substantially all of the persons who
were the beneficial owners, respectively, of Voting Securities and
Stock of the Company immediately prior to such reorganization, merger,
consolidation or exchange beneficially own, directly or indirectly,
more than 70% of, respectively, the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors and the then outstanding shares of common stock,
as the case may be, of the corporation resulting from such
reorganization, merger, consolidation or exchange in substantially the
same proportions as their ownership, immediately prior to such
reorganization, merger, consolidation or exchange, of the Voting
Securities and Stock of the Company, as the case may be; or
(4) Approval by the shareholders of the Company of (x) a
complete liquidation or dissolution of the Company or (y) the sale or other
disposition of all or substantially all of the assets of the Company (in one or
a series of transactions), other than to a corporation with respect to which,
immediately following such sale or other disposition, more than 70% of,
respectively, the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors and the then outstanding shares of common stock of such corporation is
then beneficially owned, directly or indirectly, by all or substantially all of
the persons who were the beneficial owners, respectively, of the Voting
Securities and Stock of the Company immediately prior to such sale or other
disposition in substantially the same proportions as their ownership,
immediately prior to such sale or other disposition, of the Voting Securities
and Stock of the Company, as the case may be.
8
<PAGE>
(d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in
part at any time during the option period by giving written notice of exercise
to the Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, either by
certified or bank check, or by any other form of legal consideration deemed
sufficient by the Committee and consistent with the Plan's purpose and
applicable law, including promissory notes or a properly executed exercise
notice together with irrevocable instructions to a broker acceptable to the
Company to promptly deliver to the Company the amount of sale or loan proceeds
to pay the exercise price. As determined by the Committee, in its sole
discretion, payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee or, in the case of the exercise
of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to
an award hereunder (based, in each case, on the Fair Market Value of the Stock
on the date the option is exercised, as determined by the Committee),
provided, however, that, in the case of an Incentive Stock Option, the right to
make a payment in the form of already owned shares may be authorized only at
the time the option is granted, and provided further that in the event payment
is made in the form of shares of Restricted Stock or a Deferred Stock award,
the optionee will receive a portion of the option shares in the form of, and in
an amount equal to, the Restricted Stock or Deferred Stock award tendered as
payment by the optionee. If the terms of an option so permit, an optionee may
elect to pay all or part of the option exercise price by having the Company
withhold from the shares of Stock that would otherwise be issued upon exercise
that number of shares of Stock having a Fair Market Value equal to the aggregate
option exercise price for the shares with respect to which such election is
made. No shares of Stock shall be issued until full payment therefor has been
made. An optionee shall generally have the rights to dividends and other rights
of a shareholder with respect to shares subject to the option when the optionee
has given written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in paragraph (a) of Section
12.
9
<PAGE>
(e) NON-TRANSFERABILITY OF OPTIONS. No Stock Options shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution, and all Stock Options shall be exercisable during the optionee's
lifetime, only by the optionee; provided, however, that any optionee may
transfer any Non-Qualified Stock Option, whether granted prior to, on or after
September 26, 1996 (including any such options granted to Non-Employee
Directors), to members of his or her immediate family (i.e., his or her
children, grandchildren and spouse) or to one or more trusts for the benefit of
such family members or partnerships in which such family members are the only
partners, if the optionee does not receive any consideration for the transfer.
Any Non-Qualified Stock Options held by any such transferee shall continue to be
subject to the same terms and conditions that were applicable to such
Non-Qualified Stock Options immediately prior to their transfer.
(f) TERMINATION BY DEATH. If an optionee's employment by the company and
any Subsidiary or Parent Corporation terminates by reason of death, the Stock
Option may thereafter be immediately exercised, to the extent then exercisable
(or on such accelerated basis as the Committee shall determine at or after
grant), by the legal representative of the estate or by the legatee of the
optionee under the will of the optionee, for a period of three years (or such
shorter period as the Committee shall specify at grant) from the date of such
death or until the expiration of the stated term of the option, whichever
period is shorter.
(g) TERMINATION BY REASON OF DISABILITY. If an optionee's employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent it was exercisable at the time of termination due to Disability
(or on such accelerated basis as the Committee shall determine at or after
grant), but may not be exercised after three years (or such shorter period as
the Committee shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the option, whichever period
is the shorter. In the event of termination of employment by reason of
Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.
(h) TERMINATION BY REASON OF RETIREMENT. If an optionee's employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Retirement, any Stock option held by such optionee may thereafter be exercised
to the extent it was exercisable at the time of such Retirement, but may not
10
<PAGE>
be exercised after three years (or such shorter period as Committee shall
specify at grant) from the date of such termination of employment or the
expiration of the stated term of the option, whichever period is the shorter.
In the event of termination of employment by reason of Retirement, if an
Incentive Stock option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422 of the Code, the option will
thereafter be treated as a Non-Qualified Stock option.
(i) OTHER TERMINATION. Unless otherwise determined by the Committee, if
an optionee's employment by the Company and any Subsidiary or Parent
Corporation terminates for any reason other than death, Disability or
Retirement, the Stock Option shall thereupon terminate, except that the
option may be exercised to the extent it was exercisable at such termination
for the lesser of three months or the balance of the option's term if the
optionee is involuntarily terminated without Cause by the Company and any
Subsidiary or Parent Corporation.
(j) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. The aggregate Fair Market
Value (determined as of the time the Option is granted) of the Common Stock with
respect to which an Incentive Stock Option under this Plan or any other plan of
the Company and any Subsidiary or Parent Corporation is exercisable for the
first time by an optionee during any calendar year shall not exceed $100,000.
(k) NON-EMPLOYEE DIRECTORS. Each Non-Employee Director who (a) is serving
an unexpired term as a director of the Company as of the date of the last
regularly scheduled meeting of the Board during any fiscal year of the Company,
and (b) at the time of such meeting, has served as a director for at least six
(6) months of the twelve (12) month period preceding the date of such meeting,
shall as of the date of such meeting automatically be granted an option to
purchase 7,031 shares of Stock at an option price per share equal to 100% of the
Fair Market Value of a share of Stock on such date. All such Options shall be
designated as Non-Qualified options and shall be subject to the same terms and
provisions as are then in effect with respect to the granting of Non-Qualified
options to officers and key employees of the Company, except that (i) the term
of each such option shall be equal to ten (10) years, which term shall not
expire upon the termination of service as a director, (ii) the Option shall
become exercisable as to all or any part of the shares subject to the Option
beginning six (6) months after the date the option is granted, and (iii) no
Stock Appreciation Rights may be granted to any Non-Employee Director under this
paragraph (k) or in any other manner under this Plan. Subject to the foregoing,
all provisions of this Plan not inconsistent with the foregoing shall
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<PAGE>
apply to Options granted to Non-Employee Directors. The maximum number of
shares as to which Options may be granted to any Non-Employee Director under
this Plan shall be 140,625 shares. The maximum aggregate number of shares as to
which Options may be granted to Non-Employee Directors under this Plan shall be
421,875 shares.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) GRANT AND EXERCISE. Except as set forth in paragraph (k) of Section
5, Stock Appreciation Rights may be granted in conjunction with all or part of
any Stock Option granted under the Plan. In the case of a Non-Qualified Stock
Option, such rights may be granted either at or after the time of the grant of
such Option. In the case of an Incentive Stock Option, such rights may be
granted only at the time of the grant of the option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock option, except that a
Stock Appreciation Right granted with respect to less than the full number of
shares covered by a related stock Option shall not be reduced until the exercise
or termination of the related Stock Option exceeds the number of shares not
covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in accordance
with paragraph (b) of this Section 6, by surrendering the applicable portion of
the related Stock option. Upon such exercise and surrender, the optionee shall
be entitled to receive an amount determined in the manner prescribed in
paragraph (b) of this Section 6. Stock Options which have been so surrendered,
in whole or in part, shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan,
as shall be determined from time to time by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate
shall be exercisable in accordance with the provisions of Section 5 and
this Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive up to, but not more
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<PAGE>
than, an amount in cash or shares of Stock equal in value to the excess of
the Fair Market Value of one share of Stock over the option price per share
specified in the related option multiplied by the number of shares in
respect of which the Stock Appreciation Right shall have been exercised,
with the Committee having the right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only when and to
the extent that the underlying Stock Option would be transferable under
Section 5 of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is related
shall be deemed to have been exercised for the purpose of the limitation
set forth in Section 3 of the Plan on the number of shares of Stock to be
issued under the Plan, but only to the extent of the number of shares
issued or issuable under the Stock Appreciation Right at the time of
exercise based on the value of the Stock Appreciation Right at such time.
(v) A Stock Appreciation Right granted in connection with an Incentive
Stock Option may be exercised only if and when the market price of the
Stock subject to the Incentive Stock Option exceeds the exercise price of
such Option.
SECTION 7. RESTRICTED STOCK.
(a) ADMINISTRATION. Shares of Restricted Stock may be issued either
alone or in addition to other awards granted under the Plan. The Committee
shall determine the officers and key employees of the Company and
Subsidiaries to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares to be awarded, the time or times
within which such awards may be subject to forfeiture, and all other
conditions of the awards. The Committee may also condition the grant of
Restricted Stock upon the attainment of specified performance goals. The
provisions of Restricted Stock awards need not be the same with respect to
each recipient.
(b) AWARDS AND CERTIFICATES. The prospective recipient of an award of
shares of Restricted Stock shall not have any rights with respect to such
award, unless and until such recipient has executed an agreement evidencing
the award and has delivered a fully executed copy thereof to the Company, and
has otherwise complied with the then applicable terms and conditions.
(i) Each participant shall be issued a stock certificate in respect of
shares of Restricted Stock awarded
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<PAGE>
under the Plan. Such certificate shall be registered in the name of the
participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, substantially in the
following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Minntech Corporation 1989 Stock Plan and an
Agreement entered into between the registered owner and Minntech
Corporation. Copies of such Plan and Agreement are on file in the
offices of Minntech Corporation, 14605 28th Avenue North, Minneapolis,
Minnesota 55447.
(ii) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such award.
(c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock awarded
pursuant to the Plan shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of this Plan and the award agreement,
during a period set by the Committee commencing with the date of such award
(the "Restriction Period"), the participant shall not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock awarded under the
Plan; provided, however, that the participant may transfer any Restricted
Stock, whether granted prior to, on or after September 26, 1996, to members
of his or her immediate family (i.e., his or her children, grandchildren
and spouse) or to one or more trusts for the benefit of such family members
or partnerships in which such family members are the only partners, if the
participant does not receive any consideration for the transfer. Any
Restricted Stock held by any such transferee shall continue to be subject
to the same terms and conditions that were applicable to such Restricted
Stock immediately prior to its transfer. In no event shall the Restriction
Period be less than one (1) year. Within these limits, the Committee may
provide for the lapse of such restrictions in installments where deemed
appropriate.
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(ii) Except as provided in paragraph (c)(i) of this Section 7, the
participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a shareholder of the Company, including the right to vote
the shares and the right to receive any cash dividends. The Committee, in
its sole discretion, may permit or require he payment of cash dividends to
be deferred and, if the Committee so determines, reinvested in additional
shares of Restricted Stock (to the extent shares are available under
Section 3 and subject to paragraph (f) of Section 12). Certificates for
shares of unrestricted Stock shall be delivered to the grantee promptly
after, and only after, the period of forfeiture shall have expired without
forfeiture in respect of such shares of Restricted Stock.
(iii) Subject to the provisions of the award agreement and paragraph
(c)(iv) of this Section 7, upon termination of employment for any reason
during the Restriction Period, all shares still subject to restriction
shall be forfeited by the participant.
(iv) In the event of special hardship circumstances of a participant
whose employment is terminated (other than for Cause), including death,
Disability or Retirement, or in the event of an unforeseeable emergency of
a participant still in service, the Committee may, in its sole discretion,
when it finds that a waiver would be in the best interest of the Company,
waive in whole or in part any or all remaining restrictions with respect to
such participant's shares of Restricted Stock.
(v) Notwithstanding the foregoing, all restrictions with respect to
any participant's shares of Restricted Stock that shall not previously have
been forfeited shall lapse immediately upon the occurrence of a Change in
Control.
SECTION 8. DEFERRED STOCK AWARDS.
(a) ADMINISTRATION. Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the officers and key employees of the Company and Subsidiaries to whom and the
time or times at which Deferred Stock shall be awarded, the number of Shares of
Deferred Stock to be awarded to any participant or group of participants, the
duration of the period (the "Deferral Period") during which, and the conditions
under which, receipt of the Stock will be deferred, and the terms and conditions
of the award in addition to those contained in paragraph (b) of this Section 8.
The Committee may also condition the grant of Deferred Stock upon the attainment
of specified performance goals. The provisions of
15
<PAGE>
Deferred Stock awards need not be the same with respect to each recipient.
16
<PAGE>
(b) TERMS AND CONDITIONS.
(i) Subject to the provisions of this Plan and the award agreement,
Deferred Stock awards may not be sold, assigned, transferred, pledged or
otherwise encumbered during the Deferral Period; provided, however, that
any participant may transfer any Deferred Stock, whether granted prior to,
on or after September 26, 1996, to members of his or her immediate family
(i.e., his or her children, grandchildren and spouse) or to one or more
trusts for the benefit of such family members or partnerships in which such
family members are the only partners if the participant does not receive
any consideration for the transfer. Any Deferred Stock held by any such
transferee shall continue to be subject to the same terms and conditions
that were applicable to such Deferred Stock immediately prior to its
transfer and the transferee shall be deemed to be the participant for
purposes of making the election referred to in paragraph (b)(v) of this
Section 8. In no event shall the Deferral Period be less than one (1)
year. At the expiration of the Deferral Period (or elective Deferral
Period, where applicable), share certificates shall be delivered to the
participant, transferee, or their respective legal representative, in a
number equal to the shares covered by the Deferred Stock award.
(ii) Amounts equal to any dividends declared during the Deferral
Period with respect to the number of shares covered by a Deferred Stock
award will be paid to the participant currently or deferred and deemed to
be reinvested in additional Deferred Stock or otherwise reinvested, all as
determined at the time of the award by the Committee, in its sole
discretion.
(iii) Subject to the provisions of the award agreement and paragraph
(b)(iv) of this Section 8, upon termination employment for any reason
during the Deferral Period for a given award, the Deferred Stock in
question shall be forfeited by the participant.
(iv) In the event of special hardship circumstances of a participant
whose employment is terminated (other than for Cause) including death,
Disability or retirement, or in the event of an unforeseeable emergency of
a participant still in service, the Committee may, in its sole discretion,
when it finds that a waiver would be in the best interest of the Company,
waive in whole or in part any or all of the
17
<PAGE>
remaining deferral limitations imposed hereunder with respect to any or all
of the participant's Deferred Stock.
(v) A participant may elect to further defer receipt of the award for
a specified period or until a specified event (the "Elective Deferral
Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee, all in its sole discretion.
Subject to any exceptions adopted by the Committee, such election must
generally be made prior to completion of one half of the Deferral Period
for a Deferred Stock award (or for an installment of such an award).
(vi) Each award shall be confirmed by, and subject to the terms of, a
Deferred Stock agreement executed by the Company and the participant.
(vii) Notwithstanding the foregoing, the Deferral Period (or
Elective Deferred Period, where applicable) with respect to a participant's
Deferred Stock that shall not previously have been forfeited shall expire
and share certificates shall be delivered to the participant, or his legal
representative, in a number equal to the shares covered by the Deferred
Stock award upon the occurrence of a Change in Control.
SECTION 9. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent Corporation or
Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from
one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for military
service or sickness, or for any other purpose approved by the Company if the
period of such leave does not exceed ninety (90) days (or such longer period as
the Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in writing
by the Committee, but only if the employee's right to reemployment is guaranteed
either by a statute or by contract, and provided that, in the case of any leave
of absence, the employee returns to work within thirty (30) days after the end
of such leave.
SECTION 10. AMENDMENTS AND TERMINATION.
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<PAGE>
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee or participant under a Stock Option, Stock Appreciation Right,
Restricted Stock, Deferred Stock or other Stock-based award theretofore granted,
without the optionee's or participant's consent, or (ii) which without the
approval of the stockholders of the Company would cause the Plan to no longer
comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of
the Code or any other regulatory requirements.
The Committee may amend the terms of any award or option theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without his consent. The
Committee may also substitute new Stock Options for previously granted options,
including previously granted options having higher option prices.
SECTION 11. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the company. In its sole discretion, the Committee may authorize
the creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan.
SECTION 12. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to a
Stock option under the Plan to represent to and agree with the Company in
writing that the optionee is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan pursuant to
any Restricted Stock, Deferred Stock or other Stock-based awards shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
securities and Exchange Commission, any stock exchange upon which the Stock is
then listed, and any applicable Federal or state securities laws, and the
Committee may cause a legend or legends to be put
19
<PAGE>
on any such certificates to make appropriate reference to such restrictions.
(b) Subject to paragraph (d) below, recipients of Restricted Stock,
Deferred Stock and other Stock-based awards under the Plan (other than Stock
Options) are not required to make any payment or provide consideration other
than the rendering of services.
(c) Nothing contained in this Plan shall prevent the Board of Directors
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company or any Subsidiary
any right to continued employment with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(d) Each participant shall, no later than the date as of which any part of
the value of an award first becomes includible as compensation in the gross
income of the participant for Federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Committee regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company and Subsidiaries
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the participant. With respect to
any award under the Plan, if the terms of such award so permit, a participant
may elect by written notice to the Company to satisfy part or all of the
withholding tax requirements associated with the award by (i) authorizing the
Company to retain from the number of shares of Stock that would otherwise be
deliverable to the participant, or (ii) delivering to the Company from shares of
Stock already owned by the participant, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the
participant under this Section 12(d). Any such election shall be in accordance
with, and subject to, applicable tax and securities laws, regulations and
rulings.
(e) At the time of grant, the Committee may provide in connection with any
grant made under this Plan that the shares of Stock received as a result of such
grant shall be subject to a repurchase right in favor of the Company, pursuant
to which the participant shall be required to offer to the Company upon
termination of employment for any reason any shares that the
20
<PAGE>
participant acquired under the Plan, with the price being the then Fair Market
Value of the Stock or, in the case of a termination for Cause, an amount equal
to the cash consideration paid for the Stock, subject to such other terms and
conditions as the Committee may specify at the time of grant. The Committee
may, at the time of the grant of an award under the Plan, provide the Company
with the right to repurchase, or require the forfeiture of, shares of Stock
acquired pursuant to the Plan by any participant who, at any time within two (2)
years after termination of employment with the Company, directly or indirectly
competes with, or is employed by a competitor of, the Company.
(f) The reinvestment of dividends in additional Restricted Stock (or in
Deferred Stock or other types of Plan awards) at the time of any dividend
payment shall only be permissible if the Committee (or the Company's Chief
Financial Officer) certifies in writing that under Section 3 sufficient shares
are available for such reinvestment (taking into account then outstanding Stock
Options and other Plan awards).
(g) In the event of (a) the proposed dissolution or liquidation of the
Company, (b) a proposed sale of substantially all of the assets of the Company
or (c) a proposed merger or consolidation of the Company with or into any other
entity, regardless of whether the Company is the surviving corporation, or a
proposed statutory share exchange with any other entity (the actual effective
date of the dissolution, liquidation, sale, merger, consolidation or exchange
being herein called an "Event"), the Committee may, but shall not be obligated
to, either (i) if the Event is a merger, consolidation or statutory share
exchange, make appropriate provision for the protection of outstanding Stock
Options, Stock Appreciation Rights, Restricted Stock and Deferred Stock awards
granted under this Plan by the substitution, in lieu of such Stock Options,
Stock Appreciation Rights, Restricted Stock or Deferred Stock awards, of options
to purchase, or stock appreciation rights with respect to, appropriate voting
common stock (or of restricted voting common stock or, with respect to Deferred
Stock Awards, voting common stock), as the case may be (the "Survivor's Stock")
of the corporation surviving any such merger or consolidation or, if
appropriate, the parent corporation of the Company or such surviving
corporation, or, alternatively with respect to Stock Options or Stock
Appreciation Rights, by the delivery of a number of shares of the Survivor's
Stock which has a Fair Market Value as of the effective date of such merger,
consolidation or statutory share exchange equal to the product of (x) the excess
of (A) the Event Proceeds per Share (as hereinafter defined) covered by the
Stock Options or Stock Appreciation Rights as of such effective date over
(B) the exercise price per share of the
21
<PAGE>
shares of Stock subject to such Stock Options or used to measure the value of
such Stock Appreciation Rights, times (y) the number of shares covered by such
Stock Options or Stock Appreciation Rights, as the case may be, or (ii) declare,
at least twenty days prior to the Event, and provide written notice to each
optionee of the declaration, that each outstanding Stock Option and Stock
Appreciation Right, whether or not then exercisable, shall be canceled at the
time of, or immediately prior to the occurrence of, the Event (unless it shall
have been exercised prior to the occurrence of the Event). In connection with
any declaration pursuant to clause (ii) of the preceding sentence, the Committee
may, but shall not be obligated to, cause payment to be made, within twenty days
after the Event, in exchange for each canceled Stock Option and Stock
Appreciation Right, of cash equal to the amount (if any), for each share of
Stock covered by the canceled option or used to measure the value of a Stock
Appreciation Right, by which the Event Proceeds per share of Stock (as
hereinafter defined) exceeds the exercise price per Share covered by such Stock
Option or used to measure the value of a Stock Appreciation Right. At the time
of any declaration pursuant to clause (ii) of the first sentence of this
paragraph (g), each Stock Option and Stock Appreciation Right that has not
previously expired or have been terminated or canceled pursuant to this Plan
shall immediately become exercisable in full and each optionee or holder of a
stock appreciation right shall have the right, during the period preceding the
time of cancellation of the Stock Option or Stock Appreciation Right, to
exercise his or her Stock Option or Stock Appreciation Right as to all or any
part of the Shares covered thereby or used to measure the value thereof. In the
event of a declaration pursuant to clause (ii) of the first sentence of this
paragraph (g), each outstanding Stock Option and Stock Appreciation Right
granted pursuant to this Plan that shall not have been exercised prior to the
Event shall be canceled at the time of, or immediately prior to, the Event, as
provided in the declaration, subject to the payment obligations of the Company,
if any, provided in this paragraph (g). Notwithstanding the foregoing, no
person holding a Stock Option or Stock Appreciation Right shall be entitled to
the payment provided in this paragraph (g) if a Stock Option or Stock
Appreciation Right shall have expired pursuant to this Plan. For purposes of
this paragraph (g), "Event Proceeds per Share" shall mean the cash plus the fair
market value, as determined in good faith by the Committee, of the non-cash
consideration to be received per share of Stock by the shareholders of the
Company upon the occurrence of the Event. Nothing stated in this paragraph (g)
shall impair the rights of an optionee (unless the consent of the optionee shall
have been obtained) under a Stock Option granted to such optionee on or prior to
September 26, 1996, the date of adoption of the Amendment to this Plan to add
paragraph (g).
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SECTION 13. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is approved by a vote of the
holders of a majority of the Stock present and entitled to vote at a meeting of
the Company's shareholders.
[END]
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MANAGEMENT AGREEMENT
AGREEMENT made as of this 1st day of September, 1996 by and between
Minntech Corporation, a Minnesota corporation, with its principal executive
office at Plymouth, Minnesota ("Company") and __________________ residing at
____________________________ (the "Executive").
WHEREAS, Company considers the establishment and maintenance of a
sound and vital management to be essential to protecting and enhancing the best
interests of Company and its shareholders; and
WHEREAS, the Executive is expected to continue to make a significant
contribution to the profitability, growth and financial strength of Company; and
WHEREAS, Company, as a publicly held corporation, recognizes that the
possibility of a Change in Control may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of the Executive in the performance of the Executive's
duties to the detriment of Company and its shareholders; and
WHEREAS, the Executive is willing to continue to be an employee of
Company upon the understanding that Company will provide income security if the
Executive's employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of Company and its shareholders
to reinforce and encourage the continued attention and dedication of management
personnel, including the Executive, to their assigned duties without distraction
and to increase the likelihood of the continued availability to Company of the
Executive in the event of a Change in Control.
THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until such time as Company notifies the
Executive or the Executive notifies Company of termination of this Agreement;
provided, however, that in no event may this Agreement be terminated prior to
two years from the date hereof, and notice of termination on the second or any
subsequent anniversary date hereof must be given by Company in writing mailed to
the Executive at his or her last known address within 60 days prior to such
anniversary date or by the Executive by notice in writing mailed to Company at
the principal executive office of Company within 60 days prior to such
anniversary date. If no
<PAGE>
such notice is given, then the term of this Agreement shall be extended for
additional periods of one year. Notwithstanding the preceding sentence, if a
Change in Control occurs during the term of this Agreement (including any
extension hereof), this Agreement shall continue in effect for a period of 36
months from the date of the occurrence of a Change in Control. Except as
provided in Section 2(b) or Section 3(e) of this Agreement, nothing stated
herein shall limit the right of the Executive or Company to terminate the
employment of the Executive with Company at any time prior to the expiration of
the term of this Agreement, with or without Cause (as defined in Section 3(b) of
this Agreement) and for any reason whatsoever, subject to the right of the
Executive to receive any payment and other benefits that may be due pursuant to
the terms and conditions of Section 4 of this Agreement.
2. CHANGE IN CONTROL. No amounts shall be payable hereunder unless
a Change in Control, as set forth below, shall occur during the term of this
Agreement.
(a) For purposes of this Agreement, a "Change in Control" of
Company shall be deemed to occur if any of the following occur:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended, or
any successor statute thereto (the "Exchange Act")) acquires or
becomes a "beneficial owner" (as defined in Rule 13d-3 or any
successor rule under the Exchange Act), directly or indirectly,
of securities of Company representing 30% or more of the combined
voting power of Company's then outstanding securities entitled to
vote generally in the election of directors ("Voting
Securities"), provided, however, that the following shall not
constitute a Change in Control pursuant to this Section 2(a)(i):
(A) any acquisition or beneficial ownership by Company
or a subsidiary of Company;
(B) any acquisition or beneficial ownership by any
employee benefit plan (or related trust) sponsored or
maintained by Company or one or more of its subsidiaries;
(C) any acquisition or beneficial ownership by any
corporation with respect to which, immediately following
such acquisition, more than 70% of both the combined voting
power of Company's then outstanding Voting Securities and
the common stock of Company is then beneficially owned,
directly or indirectly, by all or substantially all of the
persons who beneficially owned Voting Securities and common
stock of Company immediately prior to such acquisition in
substantially
2
<PAGE>
the same proportions as their ownership of such Voting
Securities and common stock, as the case may be, immediately
prior to such acquisition;
(ii) A majority of the members of the Board of Directors of
Company shall not be Continuing Directors. For purposes of this
subsection 2(a)(ii), "Continuing Directors" shall mean: (A)
individuals who, on the date hereof, are directors of Company,
(B) individuals elected as directors of Company subsequent to the
date hereof for whose election proxies shall have been solicited
by the Board of Directors of Company or (C) any individual
elected or appointed by the Board of Directors of Company to fill
vacancies on the Board of Directors of Company caused by death or
resignation (but not by removal) or to fill newly-created
directorships;
(iii) Approval by the shareholders of Company of a
reorganization, merger or consolidation of Company (other than a
merger or consolidation with a subsidiary of Company) or a
statutory exchange of outstanding Voting Securities of Company,
unless immediately following such reorganization, merger,
consolidation or exchange, all or substantially all of the
persons who were the beneficial owners, respectively, of Voting
Securities and common stock of Company immediately prior to such
reorganization, merger, consolidation or exchange beneficially
own, directly or indirectly, more than 70% of, respectively, the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors and the
then outstanding shares of common stock, as the case may be, of
the corporation resulting from such reorganization, merger,
consolidation or exchange in substantially the same proportions
as their ownership, immediately prior to such reorganization,
merger, consolidation or exchange, of the Voting Securities and
common stock of Company, as the case may be;
(iv) Approval by the shareholders of Company of (x) a
complete liquidation or dissolution of Company or (y) the sale or
other disposition of all or substantially all of the assets of
Company (in one or a series of transactions), other than to a
corporation with respect to which, immediately following such
sale or other disposition, more than 70% of, respectively, the
combined voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the election of
directors and the then outstanding shares of common stock of such
corporation is then beneficially owned, directly or indirectly,
by all or substantially all of the persons who were the
3
<PAGE>
beneficial owners, respectively, of the Voting Securities and
common stock of Company immediately prior to such sale or other
disposition in substantially the same proportions as their
ownership, immediately prior to such sale or other disposition,
of the Voting Securities and common stock of Company, as the case
may be; or
(v) Company enters into a letter of intent, an agreement in
principle or a definitive agreement relating to a Change in
Control described in Section 2(a)(i), 2(a)(ii), 2(a)(iii) or
2(a)(iv) above that ultimately results in such a Change in
Control or a tender or exchange offer or proxy contest is
commenced which ultimately results in a Change in Control
described in Section 2(a)(i) or 2(a)(ii) hereof.
Notwithstanding the above, a Change in Control shall not be deemed to
occur with respect to the Executive if (x) the acquisition or
beneficial ownership of the 30% or greater interest referred to in
Section 2(a)(i) is by the Executive or by a group, acting in concert,
that includes the Executive or (y) if a majority of the then combined
voting power of the then outstanding voting securities (or voting
equity interests) of the surviving corporation or of any corporation
(or other entity) acquiring all or substantially all of the assets of
Company shall, immediately after a reorganization, merger,
consolidation, statutory share exchange or disposition of assets
referred to in Section 2(a)(iii) or 2(a)(iv), be beneficially owned,
directly or indirectly, by the Executive or by a group, acting in
concert, that includes the Executive.
(b) The Executive agrees that, subject to the terms and
conditions of this Agreement, in the event of a Change in Control of
Company described in Section 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv),
occurring after the date hereof, the Executive, if employed by Company
immediately prior to such a Change in Control, will not voluntarily
terminate employment with Company except for Good Reason for a period
of 90 days after the occurrence of such a Change in Control of
Company.
(c) For purposes of this Agreement, a "subsidiary" of Company
shall mean any entity of which securities or other ownership interests
having general voting power to elect a majority of the board of
directors or other persons performing similar functions are at the
time directly or indirectly owned by Company.
3. TERMINATION FOLLOWING CHANGE IN CONTROL. If a Change in Control
shall occur during the term of this Agreement, the Executive shall be entitled
to the payments and other benefits provided in subsection 4(d) in the event of
the termination of the Executive's employment with Company unless the
Executive's termination is (A) because of the
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Executive's death, (B) by Company for Cause or Disability, or (C) by the
Executive other than for Good Reason.
(a) DISABILITY. If, as a result of incapacity due to physical
or mental illness, the Executive shall have been absent from the
full-time performance of the Executive's duties with Company for six
consecutive months, and within 30 days after written Notice of
Termination is given, the Executive shall not have returned to the
full-time performance of the Executive's duties, Company may terminate
the Executive's employment for "Disability". Any question as to the
existence of the Executive's Disability upon which the Executive and
Company cannot agree shall be determined by a qualified independent
physician selected by the Executive (or, if the Executive is unable to
make such selection, it shall be made by any adult member of the
Executive's immediate family), and approved by Company. The
determination of such physician made in writing to Company and to the
Executive shall be final and conclusive for all purposes of this
Agreement.
(b) CAUSE. Termination of the Executive's employment for
"Cause" shall mean termination upon the conviction of the Executive by
a court of competent jurisdiction for felony criminal conduct.
(c) GOOD REASON. Termination by the Executive for "Good Reason"
shall mean termination by the Executive if, without the Executive's
express written consent, any of the following shall occur:
(i) the assignment to the Executive of any duties
inconsistent with the Executive's status or position with
Company, or a substantial alteration in the nature or status of
the Executive's responsibilities from those in effect immediately
prior to the Change in Control;
(ii) a reduction by Company in the Executive's annual base
salary in effect immediately prior to a Change in Control;
(iii) the relocation of Company's principal executive
offices to a location more than fifty miles from Plymouth,
Minnesota or Company requiring the Executive to be based anywhere
other than Company's principal executive office (or if the
Executive is based at a location other than Company's principal
executive office immediately prior to the first Change in
Control, anywhere other than such location) except for required
travel on Company's business to an extent substantially
consistent with the Executive's prior business travel
obligations;
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(iv) the failure by Company to continue to provide the
Executive with benefits at least as favorable to those enjoyed by
the Executive under any of Company's pension, life insurance,
medical, health and accident, disability, deferred compensation,
incentive awards, employee stock options, or savings plans in
which the Executive was participating at the time of the Change
in Control, the taking of any action by Company which would
directly or indirectly materially reduce any of such benefits or
deprive the Executive of any material fringe benefit enjoyed at
the time of the Change in Control, or the failure by Company to
provide the Executive with the number of paid vacation days to
which the Executive is entitled at the time of the Change in
Control, provided, however, that Company may amend any such plan
or programs as long as such amendments do not reduce any benefits
to which the Executive would be entitled upon termination;
(v) a termination pursuant to Section 3(d) of this
Agreement;
(vi) the failure of Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this
Agreement, as contemplated in Section 6; or
(vii) any purported termination of the Executive's
employment which is not made pursuant to a Notice of Termination
satisfying the requirements of subsection (e) below; for purposes
of this Agreement, no such purported termination shall be
effective.
(d) VOLUNTARY TERMINATION DEEMED GOOD REASON. Notwithstanding
anything herein to the contrary, during the period commencing on the
91st day following a Change in Control under Section 2(a)(i),
2(a)(ii), 2(a)(iii) or 2(a)(iv) of this Agreement and ending on the
180th day following such a Change in Control, the Executive may
voluntarily terminate his or her employment for any reason, and such
termination shall be deemed "Good Reason" for all purposes of this
Agreement. In the event of such voluntary termination pursuant to
this subsection 3(d)), the multiple applied to the Severance Payment
(as defined in Section 4(d)), if any, payable to the Executive
pursuant to subsection 4(d)(ii) below shall be reduced by 50%.
(e) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by Company or by the Executive shall be
communicated by written Notice of Termination to the other party
hereto in accordance with Section 7. For purposes of this Agreement,
a "Notice of Termination" shall mean a notice which shall indicate the
specific termination provision in this Agreement relied upon and shall
set forth the facts and
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circumstances claimed to provide a basis for termination of the
Executive's employment.
(f) DATE OF TERMINATION. For purposes of this Agreement, "Date
of Termination" shall mean:
(i) if the Executive's employment is terminated for
Disability, 30 days after Notice of Termination is given
(provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such 30
day period); and
(ii) if the Executive's employment is terminated pursuant to
subsections (b), (c) or (d) above or for any other reason (other
than Disability), the date specified in the Notice of Termination
(which, in the case of a termination pursuant to subsection (b)
above, shall not be less than 10 days, and, in the case of a
termination pursuant to subsection (c) or (d) above, shall not be
less than 10 nor more than 30 days, respectively, from the date
such Notice of Termination is given).
(g) DISPUTE OF TERMINATION. If, within 10 days after any Notice
of Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement
of the parties, or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time for appeal
therefrom having expired and no appeal having been perfected);
provided, that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such
dispute, Company shall continue to pay the Executive full compensation
in effect when the notice giving rise to the dispute was given
(including, but not limited to, base salary) and continue the
Executive as a participant in all compensation, benefit and insurance
plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the dispute is finally resolved
in accordance with this subsection. Amounts paid under this
subsection are in addition to all other amounts due under this
Agreement and, except as provided in Section 4(d)(v), shall not be
offset against or reduce any other amounts under this Agreement.
4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Upon
termination of the Executive's employment (or, with respect to Section 4(a),
during a period of Disability) following a Change in Control, as defined in
Section 2(a), of Company or if
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there shall be a termination by Company of the Executive's employment prior to a
Change in Control, or the Executive shall terminate employment with Company for
Good Reason prior to a Change in Control (for which purpose the references in
Section 3(c) to changes from circumstances existing immediately prior to or at
the time of a Change in Control that constitute Good Reason for termination
shall instead be deemed to be references to circumstances existing immediately
prior to or at the time that the Change in Control is first anticipated), and
the Executive reasonably demonstrates that such termination by Company or event
constituting Good Reason for termination by the Executive (x) was requested by a
third party that had previously taken other steps reasonably calculated to
result in a Change in Control described in Section 2(a)(i), 2(a)(ii), 2(a)(iii)
or 2(a)(iv) and ultimately resulting in such a Change in Control following
termination of the Executive's employment or (y) otherwise arose in connection
with or in anticipation of a Change in Control described in Section 2(a)(i),
2(a)(ii), 2(a)(iii) or 2(a)(iv) that ultimately occurs following termination of
the Executive's employment, the Executive shall be entitled to the following
benefits:
(a) Except as provided in Section 4(b), during any period that
the Executive fails to perform full-time duties with Company as a
result of Disability, Company shall pay the Executive the base salary
of the Executive at the rate in effect at the commencement of any such
period, until such time as the Executive is determined to be eligible
for long term disability benefits in accordance with Company's
insurance programs then in effect.
(b) If the Executive's employment shall be terminated by Company
for Cause or Disability or by the Executive, following a Change in
Control, other than for Good Reason, Company shall pay to the
Executive his or her full base salary through the Date of Termination
at the rate in effect at the time Notice of Termination is given and
Company shall have no further obligation to the Executive under this
Agreement.
(c) If the Executive's employment shall be terminated by Company
for Cause or Disability, or is terminated by reason of death, Company
shall immediately cause to be commenced payment to the Executive (or
the Executive's designated beneficiaries or estate, if no beneficiary
is designated) of any and all benefits to which the Executive is
entitled, if any, under Company's insurance programs then in effect.
(d) Except for termination of the Executive's employment with
Company by reason of death, if the Executive's employment with Company
shall be terminated (A) by Company other than for Cause or Disability
or (B) by the Executive for Good Reason, then the Executive shall be
entitled to the benefits provided below:
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(i) Company shall pay the Executive the Executive's full
base salary through the Date of Termination at the rate in effect
at the time the Notice of Termination is given.
(ii) In lieu of any further salary payments for periods
subsequent to the Date of Termination, Company shall pay as a
severance payment (the "Severance Payment") an amount equal to
(A) three (3) times (subject to reduction pursuant to Section
3(d) in the event of a termination of employment by the Executive
pursuant to Section 3(d)) the average of the annual compensation
which was paid to the Executive by Company (or any corporation
affiliated with Company within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended (the "Code")) and
includible in the Executive's gross income for federal income tax
purposes for the shorter of the period consisting of (1) the five
most recently completed taxable years of the Executive ending
before the earlier of the first Change in Control (for which
purpose the first Change in Control shall not be deemed to be a
Change in Control pursuant to Section 2(a)(v) unless the
Executive's termination of employment with Company occurs prior
to the first Change in Control pursuant to Section 2(a)(i),
2(a)(ii), 2(a)(iii) or 2(a)(iv)) or (2) that portion of such
five-year period during which the Executive was employed by
Company, less (B) $1.00. Such average shall be determined in
accordance with temporary or final regulations promulgated under
Section 280G(d) of the Code or any successor provision thereto.
The Severance Payment shall be made in full within 60 days after
termination of employment. Such Severance Payment shall be
reduced by any severance pay that the Executive receives from
Company, any subsidiary of Company or any successor thereof under
any other policy or agreement of Company in the event of
involuntary termination of the Executive's employment.
(iii) For a 36 month period after the Date of
Termination, Company shall arrange to provide the Executive with
life, disability, accident and health insurance benefits
substantially similar to those which the Executive is receiving
or entitled to receive immediately prior to the Notice of
Termination. Benefits otherwise receivable by the Executive
pursuant to this paragraph (iii) shall be reduced to the extent
comparable benefits are actually received by the Executive from
another employer or other third party during such 36 month
period, and any such benefits actually received by the Executive
shall be reported to Company.
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(iv) Company shall also pay to the Executive all legal fees
and expenses incurred by the Executive as a result of such
termination (including all such fees and expenses, if any,
incurred in contesting or disputing any such termination or in
seeking to obtain or enforce any right or benefit provided by
this Agreement).
(v) Notwithstanding any provision to the contrary contained
herein except the last sentence of this Section 4(d)(v), if the
lump sum cash payment due and the other benefits to which the
Executive shall become entitled under this Section 4 hereof,
either alone or together with other payments in the nature of
compensation to the Executive which are contingent on a change in
the ownership or effective control of Company or in the ownership
of a substantial portion of the assets of Company or otherwise,
would constitute a "parachute payment" as defined in Section 280G
of the Code or any successor provision thereto, such lump sum
payment and/or such other benefits and payments shall be reduced
(but not below zero) to the largest aggregate amount as will
result in no portion thereof being subject to the excise tax
imposed under Section 4999 of the Code (or any successor
provision thereto) or being non-deductible to Company for federal
income tax purposes pursuant to Section 280G of the Code (or any
successor provision thereto). The Executive in good faith shall
determine the amount of any reduction to be made pursuant to this
Section 4(d)(v) and shall select from among the foregoing
benefits and payments those which shall be reduced. No
modification of, or successor provision to, Section 280G or
Section 4999 subsequent to the date of this Agreement shall,
however, reduce the benefits to which the Executive would be
entitled under this Agreement in the absence of this Section
4(d)(v) to a greater extent than they would have been reduced if
Section 280G and Section 4999 had not been modified or superseded
subsequent to the date of this Agreement, notwithstanding
anything to the contrary provided in the first sentence of this
Section 4(d)(v).
(e) The Executive shall not be required to mitigate the amount
of any payment provided for in this Section 4 by seeking other
employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Section 4 be reduced by any compensation
earned by the Executive as the result of employment by another
employer or by retirement benefits after the Date of Termination, or
otherwise except as specifically provided in this Section 4.
(f) In addition to all other amounts payable to the Executive
under this Section 4, the Executive shall be entitled to receive all
benefits payable to the Executive under any other plan or agreement
relating to retirement benefits except as specifically provided in
this Section 4.
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(g) If Company fails to make any payment at the times and in the
amounts specified herein, or with respect to any fringe benefits,
fails to provide such benefit as specified herein, within 10 days from
the date of written notice from the Executive to Company of such
failure, Company shall be deemed to have waived any right to enforce
any restriction on employment or non-competition provision contained
in any agreement between Company and the Executive then in existence
which limits the ability of the Executive to accept other employment
and, thereafter, the Executive may work or consult for any person or
business organization which is engaged in the design, development,
assembly, manufacture, marketing or sale of any product which competes
with any product of Company, or for any person or business
organization which is in competition with Company, without liability
to Company for such acts. A waiver of such restrictive covenant or
non-competition provision shall not in any way restrict or limit the
Executive's right to enforce the provisions of this Agreement,
including any legal or equitable action to enforce any and all
payments, rights or benefits under this Agreement, it being the
intention of this subsection that such waiver shall be in addition to,
not in substitution of, any other rights to which the Executive is
entitled hereunder. Once waived, any such restrictive covenant or
non-competition provision shall not thereafter be enforceable even
though the Executive may later receive the payment, right or benefit
which was the basis of the waiver of such restrictive covenant or
non-competition provision.
5. FUNDING OF PAYMENTS. In order to assure the performance of
Company or its successor of its obligations under this Agreement, Company may
deposit in trust an amount equal to the maximum payment that will be due the
Executive under the terms hereof. Under a written trust instrument, the Trustee
shall be instructed to pay to the Executive (or the Executive's legal
representative, as the case may be) the amount to which the Executive shall be
entitled under the terms hereof, and the balance, if any, of the trust not so
paid or reserved for payment shall be repaid to Company. If Company deposits
funds in trust, payment shall be made no later than the occurrence of the first
Change in Control described in Section 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv).
Company shall give notice of such a Change in Control to any such trustee upon
any occurrence as defined herein. If and to the extent that the Executive
becomes a beneficiary of any such funds deposited in trust, Company shall give
prompt notice to the Executive, which shall include a copy of the trust
instrument and amendments from time to time. The rights of the Executive under
such trust instrument shall be enforceable against Company and any trustees
named therein, as though the provisions of said trust were incorporated into
this Agreement. If and to the extent there are not amounts in trust sufficient
to pay the Executive under this Agreement, Company shall remain liable for any
and all payments due to the Executive. In accordance with the terms of such
trust, at all times during the term of this Agreement, the Executive shall have
no rights, other than as an
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unsecured general creditor of Company, to any amounts held in trust and all
trust assets shall be general assets of Company and subject to the claims of
creditors of Company.
6. SUCCESSORS; BINDING AGREEMENT.
(a) Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Company to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that Company would be required to
perform it if no such succession had taken place. Failure of Company
to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall
entitle the Executive to compensation from Company in the same amount
and on the same terms as he would be entitled hereunder if he
terminated his employment for Good Reason following a Change in
Control, except that for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed
the Date of Termination.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
successors, heirs, and designated beneficiaries. If the Executive
should die while any amount would still be payable to the Executive
hereunder if the Executive had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's designated beneficiaries,
or, if there is no such designated beneficiary, to the Executive's
estate.
7. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive or in the case of
Company, to its principal executive office to the attention of each of the then
directors of Company with a copy to its Secretary, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
8. MISCELLANEOUS.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the parties. No waiver by either party
hereto at any time of any breach by the other party to this Agreement
of, or compliance with, any condition or provision of this Agreement
to be performed by such other party
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shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior to similar time. No legally
binding or enforceable agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof that remain in effect have been made by either party which are
not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Minnesota.
(b) This Agreement supersedes in all respects the Employment
Agreement between the Executive and Company dated April 22, 1986 (the
"Superseded Change in Control Agreement"), which Superseded Change in
Control Agreement is hereby terminated and shall be of no further
force or effect.
9. VALIDITY. The invalidity or unenforceability or any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
MINNTECH CORPORATION EXECUTIVE:
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[End]
<PAGE>
CONFIDENTIAL
SEPARATION AND CONSULTING AGREEMENT
This Separation and Consulting Agreement (this "Agreement") is made
and entered into on April ___, 1997 by and between Dr. Louis C. Cosentino
("Cosentino"), a Minnesota resident, and Minntech Corporation (the "Company"), a
Minnesota corporation.
BACKGROUND
A. Cosentino is a founder of the Company and was employed by the
Company for approximately 23 years.
B. During his tenure with the Company Cosentino has been a Director
and served as Chairman of the Board, President and Chief Executive Officer.
C. On January 30, 1997 Cosentino resigned as Chairman of the Board,
President and Chief Executive Officer effective immediately.
D. By agreement of the parties Cosentino's separation from the
Company occurred as of March 31, 1997.
E. The parties have agreed that Cosentino will continue to render
services to the Company as a consultant and will not enter into competition with
the Company for certain time periods thereafter.
F. Cosentino will continue to serve as a Director of the Company in
accordance with the charter documents of the Company.
<PAGE>
CONFIDENTIAL
G. The parties are concluding their employment relationship
amicably, but mutually recognize that any employment relationship may give rise
to potential claims or liabilities.
H. The parties expressly deny that they may be liable to each other
on any basis or that they have engaged in any improper or unlawful conduct or
wrongdoing against each other.
I. Cosentino and the Company desire to resolve all issues
potentially in dispute between them.
J. Cosentino and the Company have agreed to a full settlement of all
issues potentially in dispute between them.
K. Under the circumstances, it is one of the purposes of this
Agreement to provide for the exchange of consideration between the parties, to
provide for the exchange of releases of claims and potential claims between the
parties, and to consolidate within one document the parties' continuing
obligations to each other.
NOW, THEREFORE, in consideration of the mutual promises and provisions
contained in this Agreement and the Releases referred to below, the parties
agree as follows:
AGREEMENTS
1. RELEASE OF CLAIMS BY COSENTINO. At the same time Cosentino
executes this Agreement, he also will execute a Release, in the form attached to
this Agreement as Exhibit A ("Cosentino Release"), in favor of the Company, its
insurers, affiliates, divisions,
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CONFIDENTIAL
committees, directors, officers, employees, agents, successors, and assigns.
This Agreement will not be interpreted or construed to limit the Cosentino
Release in any manner. The existence of any dispute respecting the
interpretation of this Agreement or the alleged breach of this Agreement will
not nullify or otherwise affect the validity or enforceability of the Cosentino
Release.
2. RELEASE OF CLAIMS BY THE COMPANY. At the same time the Company
executes this Agreement, the Company also will execute a Release, in the form
attached to this Agreement as Exhibit B ("Minntech Release"), in favor of
Cosentino and his heirs, successors, representatives, and assigns. This
Agreement will not be interpreted or construed to limit the Minntech Release in
any manner. The existence of any dispute respecting the interpretation of this
Agreement or the alleged breach of this Agreement will not nullify or otherwise
affect the validity or enforceability of the Minntech Release.
3. CONSULTANCY. Cosentino will become consultant to the Company and
will perform such services for the Company as set forth in this paragraph 3.
a. TERM. Cosentino's consultancy with the Company will begin
on April 1, 1997 and end on March 31, 2000, unless the consultancy ends earlier
in accordance with subparagraph 3.i. below (the "Consultancy Period").
b. STATUS. As a consultant to the Company, Cosentino will be
an independent contractor and not an employee of the Company. Cosentino's work
as a
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<PAGE>
Consultant will be independent from his role as a Director and will neither add
to nor subtract from his duties and responsibilities as a Director.
c. REPORTING RELATIONSHIP. Cosentino will receive work
assignments from and report to the Company's President and Chief Executive
Officer (the "CEO").
d. DUTIES. Cosentino will perform work for the Company related
to Minntech Products (defined in subparagraph 8.a.iii. below). In general,
Cosentino will: (i) consult with the Company's senior managers and other
Directors at their request; (ii) advise the Company's senior managers at their
request concerning research and development, product development, and
manufacturing operations efforts; and (iii) monitor industry trends through
attendance at industry trade shows (not to exceed six such trade shows outside
the Twin Cities metropolitan area during any 12-month period), review of
scientific literature and competitors' publications, and review of patents and
other relevant publications. In addition, the CEO may assign to Cosentino or
Cosentino may obtain the CEO's approval in advance to work on other special
projects, in which event the parties will agree on: (i) the scope and
objectives of the project; (ii) whether the project will result in a report or
other tangible product; and (iii) the deadline for completion of the project.
During the Consultancy Period the Company will provide Cosentino with limited
access to Company-provided on-line information services and will furnish him
with the files and other information that he reasonably requires to perform his
duties as a consultant to the Company.
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<PAGE>
CONFIDENTIAL
e. TIME. Cosentino will devote up to 20 hours per week on
average to his duties as a consultant.
f. LOCATION. Cosentino will perform his duties as a consultant
at any location chosen by him (including his residence), but will not perform
work or render other services as a consultant at any Company location except as
approved in advance by the CEO.
g. EXPENSES. The Company will reimburse Cosentino for his
actual operating expenses as a consultant, such as the charges he incurs for his
use of telephones, fax machines, copiers, and computer equipment, in an amount
not to exceed a total of $2,000.00 per month. The Company will reimburse
Cosentino for an item of operating expense in excess of the total of $2,000.00
per month only if the CEO has approved such item in advance in writing. In
addition, the Company will reimburse Cosentino for his actual travel expenses,
such as registration fees, air fare, hotel, meals, ground transportation, and
incidentals, for his attendance at industry trade shows outside the Twin Cities
metropolitan area, so long as Cosentino's attendance at a given trade show is
approved in advance by the CEO. Cosentino will be responsible for submitting to
the CEO a report on a form provided by the Company showing all of his monthly
operating expenses and travel expenses as a consultant to the Company with
supporting documentation. The Company will make reimbursement payments to
Cosentino within 30 days following the Company's receipt of an expense report
from him.
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<PAGE>
CONFIDENTIAL
h. INTELLECTUAL PROPERTY.
i. All Inventions related to Minntech Products (defined in
subparagraph 8.a.iii below) made by Cosentino during the
Consultancy Period are the exclusive property of the Company
unless released to Cosentino in writing by the CEO.
ii. Except as otherwise provided in subparagraph h.iii.B. below,
the Company will not be required to designate Cosentino as
inventor of any invention or author or any related
documentation distributed publicly or otherwise. Cosentino
waives and releases, to the extent permitted by law, all
rights to the foregoing.
iii. Cosentino further agrees that he will:
A. promptly and fully disclose all Inventions in writing
to the CEO; such disclosure will include, if requested,
a detailed report of the procedures employed and the
results achieved by Cosentino; and
B. give the Company all assistance it requires to perfect,
protect, and use its rights to Inventions,
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<PAGE>
CONFIDENTIAL
including, but not limited to, signing all documents,
doing all things, and supplying all information that
the Company may deem necessary or desirable to: (1)
transfer or record the transfer of Cosentino's entire
right, title, and interest in Inventions to the
Company, and (2) enable the Company to obtain and
maintain patent, copyright, or trademark protection for
Inventions anywhere in the world.
iv. The obligations of this subparagraph 3.h. will continue
beyond the end of the Consultancy Period with respect to
Inventions conceived or made by Cosentino during the
Consultancy Period. For purposes of this Agreement, any
Invention relating to the existing or reasonable foreseeable
Minntech Products for which Cosentino files a patent
application within one year after the end of the Consultancy
Period will be presumed to be an Invention conceived by
Cosentino during the Consultancy Period, subject to proof to
the contrary that such Invention was
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<PAGE>
CONFIDENTIAL
conceived and made following termination of the Consultancy
Period.
v. For purposes of this subparagraph 3.h., "Invention" means
any invention, discovery, improvement, concept, or idea,
whether or not patentable (including those which may be
subject to copyright protection), including, but not limited
to, computer software and hardware technology, machines,
devices, processes, methods, techniques, and formulae which
are generated, conceived, or reduced to practice by
Cosentino along or in conjunction with others, during or
after working hours, while serving as a consultant to the
Company.
vi. Cosentino is hereby notified that this Agreement does not
apply to any invention for which no equipment, supplies,
facility, trade secret information, or Confidential
Information (defined in subparagraph 8.a.iv. below) of the
Company was used and which was developed entirely on
Cosentino's own time, and (1) which does not relate (a)
directly to the business of the Company or (b) to the
Company's actual or demonstrably anticipated research
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or development; or (2) which does not result from any work
performed by Cosentino for the Company.
i. TERMINATION. Cosentino's consultancy with the Company will end
immediately upon:
i. receipt by the Company of Cosentino's resignation (whether
written or oral) as a consultant;
ii. Cosentino's receipt of written notice from the Company of
the termination of Cosentino's consultancy;
iii. Cosentino's death or disability; or
iv. expiration of the term of the consultancy.
The date on which the consultancy ends will be the "Consultancy Termination
Date."
j. PAYMENTS UPON TERMINATION.
i. If Cosentino's consultancy ends by reason of:
A. Cosentino's resignation as a consultant, or
B. termination of Cosentino's consultancy by the Company
for Cause, or
C. expiration of the term of the consultancy,then the
Company will pay Cosentino's Consultant's Fee through the
end of the month in which the Consultancy Termination Date
occurs, and Cosentino will not accrue
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any further rights to receive Supplemental Retirement
Benefits after the end of the month in which the Consultancy
Termination Date occurs.
ii. If Cosentino's consultancy ends by reason of termination by
the Company for any reason other than for Cause, or if
Cosentino dies or becomes disabled prior to March 31, 2000,
then the Company will continue to pay Cosentino's Consulting
Fee through March 31, 2000, and Cosentino will continue to
accrue rights to receive Supplemental Retirement Benefits
through March 31, 2000.
iii. Termination of the consultancy by either party for any
reason will not terminate Cosentino's right to receive
Severance Pay from the Company.
iv. "Termination of Cosentino's consultancy by the Company for
Cause" means termination for:
A. Cosentino's failure or refusal to perform his duties as
a consultant under this Agreement, or his neglect of
such duties, as determined by the Company's Board of
Directors (the "Board") in its sole discretion,
provided that the Company first
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gives Cosentino written notice of such failure or
refusal and allows him 30 days thereafter to remedy or
correct such failure or refusal;
B. Cosentino's failure or refusal to limit his activities
as a consultant to those duties specified under this
Agreement, or to abide by the reporting relationship
established under this Agreement, as determined by the
Board in its sole discretion, provided that the Company
first gives Cosentino written notice of such failure or
refusal and allows him 10 days thereafter to remedy or
correct such failure or refusal;
C. conduct by Cosentino that is disruptive to or otherwise
interferes with the work of Company employees or the
Company's operations, as determined by the Board in its
sole discretion;
D. material breach of the Agreement by Cosentino;
E. dishonesty on the part of Cosentino;
F. violation of any fiduciary duty, including the duty of
loyalty or the duty of due care, owed by
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Cosentino to the Company in his capacity as a Director
of the Company; or
G. commission of a crime by Cosentino or other public
misconduct by him detrimental to the reputation of the
Company.
v. "Disability" means the inability of Cosentino to perform his
duties as a consultant by reason of illness or other
physical or mental impairment or condition, if such
inability continues for an uninterrupted period of 90 days
or more. A period of inability will be "uninterrupted"
unless and until Cosentino is able to work as a consultant
for a continuous period of at least 30 days.
k. NOTICE. If Cosentino decides to resign as a consultant to the
Company for any reason, then he will give the Company written notice of his
resignation six months in advance of the effective date of his resignation. If
the Company decides to terminate Cosentino's consultancy for any reason other
than for Cause, then the Company will give Cosentino written notice of such
termination six months in advance of the effective date of the termination.
Neither party will be required to give notice to the other party of the party's
decision not to seek an extension of the term of this Agreement beyond the term
specified in subparagraph 3.a. above.
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4. PAYMENTS. In consideration of Cosentino's past services to the
Company as an employee and officer of the Company and his agreements to continue
to render services to the Company as a consultant and not to enter into
competition with the Company as provided in this Agreement, the Company will
make the payments set forth in subparagraphs 4.a. through 4.f. below to
Cosentino or for his benefit, but only if: (i) Cosentino has not rescinded this
Agreement or the Cosentino Release within the applicable rescission period; and
(ii) the Company has received written confirmation from Cosentino, in the form
attached to this Agreement as Exhibit C, dated not earlier than the day after
the expiration of the applicable rescission period, that Cosentino has not
rescinded and will not rescind this Agreement or the Cosentino Release. Payment
of any amount set forth below will not modify or terminate the parties'
obligations to each other as established by this Agreement. The payments set
forth below will be sent by first-class mail to Cosentino's last known residence
address, unless he advises the Company in writing that he wants the payments
sent to a different address.
a. SEVERANCE PAY. The Company will pay Cosentino (or his
designated beneficiary or estate, as the case may be) Severance Pay of
$800,000.00, less all applicable payroll and legal withholding, in 78
approximately equal bi-weekly installments during the period between April 1,
1997 and March 31, 2000; provided, however, that no installment will be paid to
Cosentino before the second business day following the expiration of the
applicable rescission period (the "Payment Date"). Any installments otherwise
due
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prior to the Payment Date will not be forfeited but will be paid to Cosentino
on the Payment Date.
b. CONSULTANT'S FEE. The Company will pay Cosentino a
Consultant's Fee of $2,777.78 per month on or about the last business day of
each month during the Consultancy Period. The first payment will be made to
Cosentino on the later of April 30, 1997 or the Payment Date.
c. SUPPLEMENTAL RETIREMENT BENEFIT. The Company will pay
Cosentino (or his designated beneficiary or estate, as the case may be) a
Supplemental Retirement Benefit. The Company will pay the Supplemental
Retirement Benefit in monthly installments of $31,250.00 on or about the last
business day of each month commencing in the month during which Cosentino turns
age 65 (or would have turned age 65 if he were then still living) over a number
of months equal to the total number of full months of the Consultancy Period.
d. BENEFICIARY DESIGNATION. Any designation of a beneficiary
for purposes of subparagraphs 4.a. and 4.c. above must be made by Cosentino in
writing and must be furnished to the Company's Vice President and General
Counsel. If no effective beneficiary designation is on file with the Company at
the time of Cosentino's death, then any remaining Severance Pay and the
Supplemental Retirement Benefit will be paid to his estate.
e. HEALTH INSURANCE. During the Consultancy Period the Company
will either make group health insurance available to Cosentino on the same basis
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and on the same terms that such insurance is made available to senior managers
of the Company or will provide him with an individual health insurance policy,
provided that Cosentino is able to comply with all requirements respecting
insurability. So long as Cosentino is covered under the Company's group health
insurance program, the Company will pay the same portion of the premium as the
Company pays for its senior managers for such coverage, and any portion of the
premium for such coverage payable by Cosentino will be paid by him at least
monthly on or before the last day of each month during which he is subject to
such coverage. So long as Cosentino is covered by an individual health
insurance policy provided by the Company, he will pay the Company at least
monthly on or before the last day of each month during which he has such
coverage the same amount that he last paid to the Company for his portion of the
premium for coverage under the Company's group health insurance program, and the
Company will pay the balance of the premium for such individual coverage up to a
maximum of $340.56 per month. The Company will have no obligation to pay any
portion of any premiums for either group health insurance coverage or for an
individual health insurance policy provided by the Company after the month in
which the Consultancy Period ends.
f. AUTO LEASE. The Company will continue to make the monthly
lease payments on the 1995 leased Lexus LS-400 automobile provided to Cosentino
by the Company until the end of the lease or the end of the Consultancy Period,
whichever is earlier. If the Company makes such lease payments until the end of
the lease, then Cosentino will
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have the option to purchase the automobile from the leasing company for the
residual value of approximately $26,810.00. If the Consultancy Period ends
before all of the monthly lease payments are made by the Company, then the
automobile will be returned to the Company by Cosentino no later than the last
business day of the month in which the Consultancy Period ends.
g. ATTORNEYS' FEES. The Company will pay to the law firm of
Leonard, Street & Deinard PA ("Leonard-Street") an amount not to exceed
$25,000.00 for the attorneys' fees and costs that Cosentino incurs in connection
with his separation from the Company and the establishment of his consultancy
with the Company. Leonard-Street will submit its detailed invoice for fees and
costs, showing each date on which the legal services were rendered, the hours
spent by each time biller on each date, and the hourly billing rate of each time
biller, directly to the Company's Vice President and General Counsel, and the
Company will make payment of the amount of the invoice, subject to the maximum
limitation specified above, within 30 days after receipt of the invoice.
5. STOCK OPTIONS. Cosentino is a participant in the Company's 1982
Stock Plan and 1989 Stock Plan (the "Stock Plans"). Under the terms of the
Stock Plans and Cosentino's agreements relating to options to purchase shares of
the Company's common stock, Cosentino is fully vested in options to purchase
380,842 shares of Company common stock, which are listed in Schedule 1 attached
to this Agreement. Cosentino must exercise his incentive stock options to
purchase 55,843 shares of Company common stock on or before
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April 10, 1997; if he does not exercise such options by that date, then such
options will lapse. If Cosentino rescinds this Agreement and the Cosentino
Release prior to the termination of the applicable rescission period, then he
must exercise his incentive stock options to purchase 9,416 shares of Company
common stock on or before April 10, 1997, and he must exercise his nonqualified
stock options to purchase the remaining 315,583 shares of Company common stock
on or before June 29, 1997; if he does not exercise his incentive stock options
to purchase 9,416 shares of Company common stock (the "9,416 Shares") on or
before April 10, 1997, then the 9,416 Shares will become nonqualified stock
options, and Cosentino must exercise them on or before June 29, 1997. If
Cosentino does not rescind this Agreement and the Cosentino Release, then the
Board will take the required action to extend the time for Cosentino to exercise
any nonqualified stock options held by him (including the 9,416 Shares) that
were not previously exercised until the earlier of March 31, 2001 or three
months after the Company has given Cosentino notice in writing that he is in
violation of terms of subparagraphs 8.a., 8.b., or 8.c. below.
6. INSURANCE CONTINUATION.
a. HEALTH INSURANCE. Cosentino acknowledges that his
separation from the Company as of March 31, 1997 was a qualifying event under
COBRA and that his right to elect under COBRA health insurance coverage provided
by the Company will terminate no later than September 30, 1998 as provided by
current law. If the Consultancy Period ends for any reason prior to September
30, 1998, then Cosentino will have the right to
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elect under COBRA group health insurance coverage provided by the Company under
such terms as are made available to similarly-situated former employees of the
Company, provided that Cosentino pays 102 percent of the cost of the lowest-cost
group health insurance option provided by the Company as provided by law until
September 30, 1998, or until he obtains other qualifying group coverage or his
COBRA rights terminate for some other reason, if earlier.
b. LIFE INSURANCE. Cosentino will have the right to continue
his group life insurance coverage after March 31, 1997 under Minnesota law under
such terms as are made available to similarly-situated former employees of the
Company, provided that Cosentino pays 102 percent of the cost of that insurance
as provided by law, for 18 months, or until he obtains other qualifying group
coverage or his statutory rights terminate for some other reason, if earlier.
7. RETIREMENT PLANS. Cosentino is a participant in the Minntech
Profit Sharing and Retirement Plan and in the Supplemental Executive Retirement
Plan (the "Retirement Plans"). Cosentino will be entitled to begin drawing his
retirement benefits at the times and under the terms and conditions set forth in
the Retirement Plans.
8. NO-COMPETITION, NON-SOLICITATION, AND NON-DISCLOSURE AGREEMENTS.
a. AGREEMENT NOT TO COMPETE.
i. Cosentino will not, on or before April 1, 2001, without
the prior written consent of the Company, either
directly
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or indirectly, on his own account or in the service of
others, engage in the design, development, assembly,
manufacture, marketing, or sale of a Competitive
Product in any area or territory in which the Company
engages or will have engaged in business during the
Consultancy Period.
ii. For purposes of this Agreement "Competitive Product"
means any product, process, or service (including any
component thereof or research to develop information
useful in connection with a product or service) that is
being designed, developed, assembled, manufactured,
marketed, or sold by anyone other than the Company and
which is of the same general type, performs similar
functions, competes with, or is used for the same
purposes as a Minntech Product.
iii. For purposes of this Agreement "Minntech Product" means
any product, process, or service (including any
component thereof or research to develop information
useful in connection with a product or service) that,
within three years prior to the termination or
expiration of
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the Consultancy Period, was being designed, developed,
assembled, manufactured, marketed, or sold by the
Company, or with respect to which the Company had
acquired Confidential Information which it intends to
use in the design, development, manufacture, assembly,
or sale of a product or service.
iv. For purposes of this Agreement "Confidential
Information" means information not generally known,
including trade secrets, about the Company's methods,
processes, and products, including, but not limited to,
information relating to such matters as research and
development, manufacturing methods, processes,
techniques, chemical composition of materials,
applications for particular technologies, materials or
designs, vendor names, customer lists, management
systems, and sales and marketing plans. All
information disclosed to Cosentino or to which
Cosentino has access during the Consultancy Period or
had access during the time of his employment with the
Company, which he has a reasonable basis to believe is
Confidential Information
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or which is treated by the Company as Confidential
Information, will be presumed to be Confidential
Information.
B. AGREEMENT NOT TO SOLICIT EMPLOYEES. Cosentino will not, on
or before April 1, 2001, without the prior written consent of the Company,
solicit any person who is then employed by or otherwise engaged to perform
services for the Company to terminate his or her relationship with the Company
or interfere with the Company's relationship with any such person. Cosentino
will not, on or before April 1, 2001, without the prior written consent of the
Company, provide substantive or qualitative information regarding any person who
is then employed by or otherwise engaged to perform services for the Company to
any person or entity engaged in the design, development, assembly, manufacture,
marketing, or sale of a Competitive Product in any area or territory in which
the Company engages or will have engaged in business during Consultancy Period.
C. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL COMMERCIAL
INFORMATION. Cosentino will not, without the prior written consent of the
Company, directly or indirectly use or disclose Confidential Information for the
benefit of anyone other than the Company, either during or after the Consultancy
Period or during or after the time of his employment with the Company.
Cosentino will hold secret and confidential all data used or processed by the
Company concerning which Cosentino has acquired knowledge or information during
the Consultancy Period or during the time of his employment with the
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Company. Cosentino will not disregard his obligations of confidence by using
any trade secret or other confidential business and/or technical information of
which he becomes informed during the Consultancy Period or was informed during
his employment to guide him in a search of publications or other publicly
available information, selecting a series of items of knowledge from unconnected
sources, and fitting them together to claim that he did not violate any
agreements set forth in this Agreement.
D. SCOPE OF RESTRICTIONS. The parties intend that, if any
court of competent jurisdiction holds that any restriction in subparagraphs 8.a.
through 8.c. above exceeds the limit of restrictions that are enforceable under
applicable law, then the restriction will nevertheless apply to the maximum
extent that is enforceable under applicable law.
E. DISPUTES. Any dispute between the parties over whether
Cosentino is in violation of any of the restrictions in subparagraphs 8.a.,
8.b., or 8.c. above will not terminate Cosentino's right to receive Severance
Pay from the Company.
9. COMPANY COOPERATION. The Company will ensure that all proper
steps are followed to comply with Cosentino's written instructions with respect
to his stock options, retirement benefits, and health and life insurance
benefits, and will provide him with information that he reasonably requires in
accordance with the applicable employee benefit plans sponsored by the Company
in which he is a participant.
10. INDEMNIFICATION. Notwithstanding Cosentino's separation from the
Company, with respect to events that occurred during his tenure as an employee
or officer of
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the Company, Cosentino will be entitled, as a former employee or officer of the
Company, to the same rights that are afforded to senior executive officers of
the Company, now or in the future, to indemnification and advancement of
expenses provided in the charter documents of the Company and under applicable
law or otherwise, and to coverage and a legal defense under any applicable
general liability and/or directors' and officers' liability insurance policies
maintained by the Company.
11. COSENTINO REPRESENTATION. Cosentino represents that, during the
entire period that he was an employee or officer of the Company, he acted in
good faith, had no reasonable cause to believe that his conduct was unlawful,
and reasonably believed that his conduct was in the best interests of the
Company. The parties intend that the terms used in this paragraph will have the
same meaning as the same terms used in paragraph 302A.531 of the Minnesota
Statutes.
12. COMPANY REPRESENTATION. The Company represents that on the date
of this Agreement no transaction or other event has occurred that would
constitute a "Change in Control" as that term is defined in the Management
Agreement dated September 1, 1996 between Cosentino and the Company.
13. MUTUAL CONFIDENTIALITY.
A. GENERAL STANDARD. It is the intent of the parties that the
terms of his separation from the Company, including the provisions of this
Agreement and the Cosentino Release and the Minntech Release (collectively
"Confidential Separation
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Information"), will be forever treated as confidential. Accordingly, Cosentino
and the Company will not disclose Confidential Separation Information to anyone
at any time, except as provided in subparagraph 13.b. below.
B. EXCEPTIONS.
i. It will not be a violation of this Agreement for the
parties to disclose Confidential Separation Information
to the Company's directors and stockholders or in
public filings in the form of proxy statements or other
reports required by securities laws or to governmental
agencies as required by law, including, but not limited
to, the Securities and Exchange Commission and any
federal or state tax authority. Cosentino acknowledges
that the Company will be required to file a copy of
this Agreement and the attachments hereto with the
Securities and Exchange Commission.
ii. It will not be a violation of this Agreement for
Cosentino to disclose Confidential Separation
Information to his immediate family, his attorneys, or
his accountants or tax advisors.
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iii. It will not be a violation of this Agreement for
Cosentino to disclose to employers and/or prospective
employers that he is constrained from certain
activities as a result of the terms of subparagraphs
8.a., 8.b., and 8.c. above. Nor will it be a violation
of this Agreement for Cosentino to inform Company
employees who ask him about employment opportunities
outside the Company that the terms of paragraph 8.b.
above preclude him from engaging in certain activities
that could interfere with their employment with the
Company.
iv. It will not be a violation of this Agreement for either
party to disclose Confidential Separation Information
to the Company's auditors, its attorneys, or its
directors, officers, employees, or agents who have a
legitimate reason to obtain the Confidential Separation
Information in the course of performing their duties or
responsibilities for the Company.
14. NON-DISPARAGEMENT. Cosentino will not disparage, defame, or
besmirch the reputation, character, image, products, or services of the Company,
or the
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reputation or character of its directors, officers, employees, or agents. The
Company will not disparage, defame, or besmirch the reputation, character, or
image of Cosentino.
15. CLAIMS INVOLVING THE COMPANY. Cosentino will not recommend or
suggest to any potential claimants or plaintiffs or their attorneys or agents
that they initiate claims or lawsuits against the Company, any of its affiliates
or divisions, or any of its or their directors, officers, employees, or agents,
nor will Cosentino voluntarily aid, assist, or cooperate with any claimants or
plaintiffs or their attorneys or agents in any claims or lawsuits now pending or
commenced in the future against the Company, any of its affiliates or divisions,
or any of its or their directors, officers, employees, or agents; provided,
however, that this paragraph will not be interpreted or construed to prevent
Cosentino from giving testimony in response to questions asked pursuant to a
legally enforceable subpoena, deposition notice, or other legal process, during
any legal proceedings involving the Company, any of its affiliates or divisions,
or any of its or their directors, officers, employees, or agents.
16. RECORDS, DOCUMENTS, AND PROPERTY. The Company hereby sells to
Cosentino for $1.00 the personal computer, monitor, printer, scanner, and fax
machine that the Company has previously provided to him. In addition, the
Company will promptly deliver to Cosentino all scientific and technical books
and journals that were personally purchased by Cosentino and are currently
located on the Company's premises. Within five business days after the end of
the Consultancy Period, Cosentino will return to the Company all equipment
listed on Schedule 2 attached to this Agreement and records, correspondence,
documents,
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financial data, plans, computer disks, computer tapes, and other tangible
property in his possession and all copies thereof belonging to the Company.
Cosentino acknowledges that all CAD files that have been downloaded onto his
personal computer during his employment with the Company and all copies thereof
constitute property of the Company for purposes of this paragraph 16 and will be
immediately deleted from all computer systems under Cosentino's control.
Cosentino acknowledges that within 30 days after Cosentino executes this
Agreement a third party designated by the Company will verify that all such CAD
files and all copies thereof have been deleted from all computer systems under
his control as provided in this paragraph 16. All such CAD files are listed in
Schedule 3 attached to this Agreement.
17. TIME TO CONSIDER AGREEMENT. Cosentino understands that he may
take at least 21 calendar days to decide whether to sign this Agreement and the
Cosentino Release, which 21-day period will commence on the date on which
Cosentino receives copies of this Agreement and the Cosentino Release for
review. Cosentino represents that if he signs this Agreement and the Cosentino
Release before the expiration of the 21-day period, it is because he has decided
that he does not need any additional time to decide whether to sign this
Agreement and the Cosentino Release.
18. RIGHT TO RESCIND OR REVOKE. Cosentino understands that he has
the right to rescind or revoke this Agreement and the Cosentino Release for any
reason within 15 calendar days after he signs them (which 15-day period
expressly includes any other shorter
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time periods provided by law). Cosentino understands that this Agreement and
the Cosentino Release will not become effective or enforceable unless and until
he has not rescinded this Agreement and the Cosentino Release and any applicable
rescission period has expired. Cosentino understands that if he wishes to
rescind, the rescission must be in writing and hand-delivered or mailed to the
Company. If hand-delivered, the rescission must be (a) addressed to Ms. Barbara
A. Wrigley, Vice President and General Counsel, Minntech Corporation,
14605--28th Avenue North, Minneapolis, Minnesota 55447; and (b) delivered to
Ms. Wrigley within the 15-day period. If mailed, the rescission must be: (a)
postmarked within the 15-day period; (b) addressed to Ms. Barbara A. Wrigley,
Vice President and General Counsel, Minntech Corporation, 14605--28th Avenue
North, Minneapolis, Minnesota 55447; and (c) sent by certified mail, return
receipt requested.
19. FULL COMPENSATION. Cosentino and his attorneys, Leonard-Street,
understand that the payments made and other consideration provided by the
Company under this Agreement will fully compensate Cosentino for and extinguish
any and all of the claims Cosentino is releasing in the Cosentino Release,
including, but not limited to, his claims for attorneys' fees and costs and any
and all claims for any type of legal or equitable relief.
20. NO ADMISSION OF WRONGDOING. Cosentino understands that this
Agreement does not constitute an admission that the Company has violated any
local ordinance, state or federal statute, or principle of common law, or that
the Company has engaged in any improper or unlawful conduct or wrongdoing
against Cosentino. Cosentino
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will not characterize this Agreement or the payment of any money or other
consideration in accordance with this Agreement as an admission that the Company
has engaged in any improper or unlawful conduct or wrongdoing against him.
21. AUTHORITY. Cosentino represents and warrants that he has the
authority to enter into this Agreement and the Cosentino Release, and that no
causes of action, claims, or demands released pursuant to this Agreement and the
Cosentino Release have been assigned to any person or entity not a party to this
Agreement and the Cosentino Release.
22. REPRESENTATION. Cosentino acknowledges that he has been
represented by his own attorneys in this matter, that he has had a full
opportunity to consider this Agreement and the Cosentino Release, that he has
had a full opportunity to ask any questions that he may have concerning this
Agreement, the Cosentino Release, or the settlement of his potential claims
against the Company, and that he has not relied upon any statements or
representations made by the Company or its attorneys, written or oral, other
than the statements and representations that are explicitly set forth in this
Agreement, the Cosentino Release, the Minntech Release, the Stock Plans and
Cosentino's agreements relating thereto (to the extent not modified by the
action of the Board), the Retirement Plan, and any other employee benefit plans
sponsored by the Company in which Cosentino is a participant.
23. SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and
inure to the benefit of the parties and their respective heirs, representatives,
successors, and assigns, including, but not limited to, a purchaser of
substantially all the business or assets of
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the Company, but will not be assignable by either party without the prior
written consent of the other party.
24. INVALIDITY. In the event that any provision of this Agreement,
the Cosentino Release, or the Minntech Release is determined by a court of
competent jurisdiction to be invalid, illegal, or unenforceable in any respect,
such a determination will not affect the validity, legality, or enforceability
of the remaining provisions of this Agreement, the Cosentino Release, or the
Minntech Release, and the remaining provisions of this Agreement, the Cosentino
Release, and the Minntech Release will continue to be valid and enforceable, and
any court of competent jurisdiction may modify the objectionable provision so as
to make it valid and enforceable.
25. ENTIRE AGREEMENT. Before signing this Agreement, the Cosentino
Release, and the Minntech Release, the parties and their representatives engaged
in discussions and negotiations and generated certain documents, in which the
parties and their representatives considered the matters that are the subject of
this Agreement, the Cosentino Release, and the Minntech Release. In such
discussions, negotiations, and documents, the parties and their representatives
may have expressed their judgments and beliefs concerning the intentions,
capabilities, and practices of the parties, and may have forecast future events.
The parties recognize, however, that all business transactions, including the
transactions upon which the parties' judgments, beliefs, and forecasts are
based, contain an element of risk, and that it is normal business practice to
limit the legal obligations of contracting parties only to
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those promises and representations that are essential to the transaction so as
to provide certainty as to their respective future rights and remedies.
Accordingly, this Agreement, the Cosentino Release, the Minntech Release, the
Stock Plans and Cosentino's agreements relating thereto (to the extent not
modified by action of the Board), the Retirement Plans, and any other employee
benefit plans sponsored by the Company in which Cosentino is a participant are
intended to define the full extent of the legally enforceable undertakings of
the parties, and no promises or representations, written or oral, that are not
set forth explicitly in this Agreement, the Cosentino Release, the Minntech
Release, the Stock Plans and Cosentino's agreements relating thereto (to the
extent not modified by action of the Board), the Retirement Plans, or any other
employee benefit plans sponsored by the Company in which Cosentino is a
participant are intended by either party to be legally binding, and all other
agreements and understandings between the parties are hereby superseded.
26. HEADINGS. The descriptive headings of the paragraphs and
subparagraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement.
27. COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
28. GOVERNING LAW. This Agreement, the Cosentino Release, and the
Minntech Release will be interpreted and construed in accordance with, and any
dispute or
-31-
<PAGE>
CONFIDENTIAL
controversy arising from any breach or asserted breach of this Agreement, the
Cosentino Release, or the Minntech Release will be governed by, the laws of
Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date stated above.
---------------------------------
LOUIS C. COSENTINO, Ph.D.
MINNTECH CORPORATION
---------------------------------
Thomas J. McGoldrick
Its President and
Chief Executive Officer
-32-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (File No. 2-99511 effective July 18, 1985;
File No. 33-32070 effective December 5, 1989; File No. 33-34621 effective May
20, 1990; File No. 33-35368 effective July 1, 1990; File No. 33-35990 effective
July 24, 1990; File No. 33-45351 effective January 28, 1992) of Minntech
Corporation of our report dated May 23, 1997 appearing on page 31 of this Form
10-K.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 30, 1997
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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