<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1996
-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: 0-19524
---------------
TECNOL MEDICAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1516861
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
7201 INDUSTRIAL PARK BLVD.
--------------------------
FORT WORTH, TEXAS 76180
------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (817) 581-6424
--------------
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
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
19,957,491 shares common stock, par value $.001, as of October 10, 1996
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<PAGE> 2
TECNOL MEDICAL PRODUCTS, INC.
FORM 10-Q INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of
December 2, 1995, and August 31, 1996 . . . . . . . . . 3
Condensed Consolidated Statements of Income for the Quarters
and Year-to-Date Periods Ended September 2, 1995, and
August 31, 1996 . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
Year-to-Date Periods Ended September 2, 1995,
and August 31, 1996 . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Interim
Financial Statements . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 10
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 14
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 2, Aug. 31,
1995 1996
ASSETS ------------ ------------
------ (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 230,401 $ 7,107,957
Accounts receivable, net of allowance
for doubtful accounts of $857,000 in 1995
and $2,270,000 in 1996 22,712,480 21,664,612
Inventories 34,007,789 27,163,759
Prepaid income taxes -- 1,040,973
Other current assets 2,567,580 2,904,451
------------ ------------
Total current assets 59,518,250 59,881,752
NET PROPERTY, PLANT AND EQUIPMENT 43,505,530 47,975,476
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $2,290,000 in 1995 and $3,275,000 in 1996 35,194,066 39,087,418
Other purchased intangible assets, net of
accumulated amortization of $2,432,000 in
1995 and $2,974,000 in 1996 1,061,102 911,741
Patents and trademarks, net of accumulated
amortization of $476,000 in 1995 and $653,000
in 1996 2,278,506 2,706,260
Other 1,882,196 1,764,406
------------ ------------
Total other assets 40,415,870 44,469,825
------------ ------------
Total assets $143,439,650 $152,327,053
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
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TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
Dec. 2, Aug. 31,
1995 1996
------------ ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,830,532 $ 7,236,807
Bank line of credit borrowings 3,530,000 --
Accrued expenses 2,911,498 4,400,870
Income taxes payable 372,343 --
Current maturities of long-term debt 2,771,610 3,733,916
------------ ------------
Total current liabilities 14,415,983 15,371,593
LONG-TERM DEBT, net of current maturities 13,000,581 10,032,189
DEFERRED INCOME TAXES 5,480,589 4,966,589
------------ ------------
Total liabilities 32,897,153 30,370,371
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000
shares authorized, no shares issued -- --
Common stock, $.001 par value, 50,000,000
shares authorized, 21,091,021 shares issued
in 1995 and 21,116,980 shares issued in 1996 21,091 21,117
Additional paid-in capital 27,601,899 27,832,382
Retained earnings 87,754,688 98,985,567
------------ ------------
115,377,678 126,839,066
Less-treasury stock, at cost:
1,157,052 shares in 1995 and 1,159,489 shares in 1996 3,481,994 3,529,197
Less-unearned employee stock ownership shares,
90,000 shares in 1995 and 1996 1,353,187 1,353,187
------------ ------------
Total stockholders' equity 110,542,497 121,956,682
------------ ------------
Total liabilities and stockholders' equity $143,439,650 $152,327,053
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTERS AND YEAR-TO-DATE PERIODS ENDED SEPTEMBER 2, 1995, AND AUGUST 31, 1996
<TABLE>
<CAPTION>
Quarter Ended Year-To-Date
------------------------------ ------------------------------
Sept. 2, Aug. 31, Sept. 2, Aug. 31,
1995 1996 1995 1996
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 26,282,957 $ 35,970,954 $ 89,381,643 $ 107,552,956
COST OF GOODS SOLD 15,835,203 22,373,285 48,362,098 62,269,172
------------- ------------- ------------- -------------
Gross profit 10,447,754 13,597,669 41,019,545 45,283,784
SELLING EXPENSES 5,760,634 5,539,635 16,663,598 17,470,851
GENERAL AND ADMINISTRATIVE EXPENSES 2,072,995 3,211,113 5,896,884 7,227,971
RESEARCH AND DEVELOPMENT EXPENSES 325,934 412,157 1,161,849 1,273,577
------------- ------------- ------------- -------------
Income from operations 2,288,191 4,434,764 17,297,214 19,311,385
OTHER INCOME (EXPENSE):
Interest income 7,040 28,799 53,999 122,274
Interest expense (337,998) (153,384) (991,216) (753,874)
Litigation settlement expense -- (550,000) -- (550,000)
Other, net (383,296) (564,951) (1,123,760) (1,268,938)
------------- ------------- ------------- -------------
Total other income (expense) (714,254) (1,239,536) (2,060,977) (2,450,538)
------------- ------------- ------------- -------------
Income before provision
for income taxes 1,573,937 3,195,228 15,236,237 16,860,847
PROVISION FOR INCOME TAXES 579,048 1,063,824 5,595,642 5,629,968
------------- ------------- ------------- -------------
NET INCOME $ 994,889 $ 2,131,404 $ 9,640,595 $ 11,230,879
============= ============= ============= =============
Net income per common and common
equivalent share $ 0.05 $ 0.11 $ 0.48 $ 0.56
============= ============= ============= =============
Weighted average number of common and
common equivalent shares outstanding 20,154,793 20,163,764 20,106,594 20,153,648
============= ============= ============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
YEAR-TO-DATE PERIODS ENDED SEPTEMBER 2, 1995, AND AUGUST 31, 1996
<TABLE>
<CAPTION>
Year to Date
----------------------------
Sept. 2, Aug. 31,
1995 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,640,595 $ 11,230,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,412,809 3,160,381
Amortization 1,498,349 1,703,845
Increase (decrease) in deferred income taxes 210,000 (514,000)
Net change in assets and liabilities, excluding acquisitions-
Accounts receivable 4,734,249 1,047,868
Other current assets (518,873) (336,871)
Inventories (8,862,470) 7,396,551
Accounts payable 720,270 2,156,276
Accrued expenses (44,323) 1,487,046
Income taxes payable (1,510,120) (1,413,316)
------------ ------------
Total adjustments (360,109) 14,687,780
------------ ------------
Net cash provided by operating activities 9,280,486 25,918,659
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (7,689,596) (7,230,327)
Cash paid for acquisitions, net of cash acquired (1,360,088) (5,169,463)
Expenditures for patents and trademarks (348,171) (605,353)
Increase in other assets (1,764,152) (18,180)
------------ ------------
Net cash used in investing activities (11,162,007) (13,023,323)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank line of credit 2,245,000 (3,530,000)
Proceeds from bank loan -- 5,500,000
Principal payments on long-term debt (2,775,519) (8,171,086)
Net proceeds from exercise of stock options 453,724 183,306
------------ ------------
Net cash used in financing activities (76,795) (6,017,780)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,958,316) 6,877,556
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 2,559,997 230,401
------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 601,681 $ 7,107,957
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,053,496 $ 972,376
Income taxes $ 7,131,739 $ 7,779,663
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of note for acquisition of assets $ -- $ 665,000
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE> 7
TECNOL MEDICAL PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the quarter and year-to-date periods ended August 31,
1996 are not necessarily indicative of the results that may be expected for the
fiscal year ending November 30, 1996.
The Company's fiscal year is the fifty-two or fifty-three week period ending
on the Saturday nearest to November 30. The quarter and year-to-date periods
ended September 2, 1995, and August 31, 1996 each include thirteen and
thirty-nine weeks, respectively. The fiscal year ending November 30, 1996,
will include 52 weeks.
NOTE 2 -- NET INCOME PER SHARE
The following table reconciles the number of common shares shown as
outstanding on the consolidated balance sheet with the number of common and
common equivalent shares used in computing primary net income per share:
<TABLE>
<CAPTION>
Quarter Year-to-Date
Sept. 2, Aug. 31, Sept. 2, Aug. 31,
1995 1996 1995 1996
---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Common shares outstanding 19,918,473 19,957,491 19,918,473 19,957,491
Effect of using weighted average common
and common equivalent shares
outstanding during the period (4,614) (916) (21,233) (11,595)
Effect of using weighted average
unearned ESOP shares (101,250) (71,250) (108,750) (78,750)
Effect of assuming exercise of
outstanding stock options based on the
treasury stock method 342,184 278,439 318,104 286,502
---------- ---------- ---------- ----------
Shares used in computing primary net
income per share 20,154,793 20,163,764 20,106,594 20,153,648
========== ========== ========== ==========
</TABLE>
Primary and fully diluted net income per share are not materially different.
7
<PAGE> 8
TECNOL MEDICAL PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
Net income per common and common equivalent share was computed by dividing
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding during the periods. Stock options are the only
common stock equivalents.
NOTE 3 -- LONG-TERM DEBT
Long-term debt at December 2, 1995, and August 31, 1996, consists of the
following:
<TABLE>
<CAPTION>
Dec. 2, Aug. 31,
1995 1996
----------- -----------
<S> <C> <C>
Industrial Revenue Bonds $ 3,600,000 $ 3,600,000
Bank term loans 11,537,500 9,025,000
Other installment obligations 634,691 1,141,105
----------- -----------
15,772,191 13,766,105
Less-current maturities (2,771,610) (3,733,916)
----------- -----------
$13,000,581 $10,032,189
=========== ===========
</TABLE>
NOTE 4 -- INVENTORIES
Inventories at December 2, 1995, and August 31, 1996, consist of the
following:
<TABLE>
<CAPTION>
Dec. 2, Aug. 31,
1995 1996
----------- -----------
<S> <C> <C>
Raw materials $16,162,047 $13,444,502
Work-in-process 1,008,336 2,172,222
Finished goods 16,837,406 11,547,035
----------- -----------
$34,007,789 $27,163,759
=========== ===========
</TABLE>
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 2, 1995, and August 31, 1996,
consists of the following:
<TABLE>
<CAPTION>
Dec. 2, Aug. 31,
1995 1996
----------- -----------
<S> <C> <C>
Land $ 6,108,588 $ 6,118,717
Buildings and improvements 13,787,825 14,303,214
Automotive equipment 2,825,575 2,842,665
Manufacturing equipment 30,771,624 34,607,996
Office furniture and equipment 7,829,785 9,138,711
Construction-in-progress 3,138,329 5,080,750
----------- -----------
64,461,726 72,092,053
Less accumulated depreciation (20,956,196) (24,116,577)
----------- -----------
$43,505,530 $47,975,476
=========== ===========
</TABLE>
8
<PAGE> 9
The Company increased the useful life on certain manufacturing equipment
from 10 years to 20 years, reducing depreciation expense on these machines by
approximately $600,000 for the nine month period of fiscal year 1996 as
compared to the nine month period of fiscal year 1995.
NOTE 6 -- CONTINGENCIES
On August 21, 1995, a class action lawsuit was filed in the United States
District Court for the Northern District of Texas against the Company and
several executive officers of the Company. The suit was brought by a
stockholder on his own behalf and on behalf of other persons who purchased the
Company's stock from January 10, 1995, to July 17, 1995. The suit claimed that
the defendants disseminated false and misleading statements to the investing
public with respect to a 1995 inventory reduction in the Company's products
taken by the Company's largest distributor, resulting in an artificially high
price for Company stock. On August 29, 1996, the Company and the individual
defendants tentatively agreed to settle the lawsuit for a total payment of $2.2
million. The agreement provides that approximately $550,000 of the settlement
amount will be paid by the Company and the balance will be paid by the
Company's directors' and officers' insurance carrier. The agreement is subject
to documentation and court approval.
The Company is a party to certain other litigation and claims arising out of
the conduct of its business. While the final outcome of any litigation cannot
be determined with certainty, management believes that the final outcome of any
current litigation will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
9
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This analysis of the Company's operations encompassing the quarter and
year-to-date periods ended September 2, 1995, and August 31, 1996, should be
considered in conjunction with the condensed consolidated balance sheets,
statements of operations and statements of cash flows.
Results of Operations
Net sales increased 36.9% from $26.3 million in the third quarter of fiscal
1995 to $36.0 million in the third quarter of fiscal 1996. In the third quarter
of fiscal 1995, the Company's largest distributor decreased its inventory of
the Company's products resulting in a reduction of sales for the Hospital
Products division of approximately $6.2 million. If sales in the third quarter
of fiscal 1995 had not been reduced by this unusual amount, the increase in
total Company sales for the third quarter of fiscal 1996 compared to the third
quarter of fiscal 1995 would have been approximately 10.7%. For the nine month
period, net sales increased 20.3% from $89.4 million in fiscal 1995 to $107.6
million in fiscal 1996. The growth in net sales was principally the result of
increases in unit sales of existing products, new product introductions and
increased sales from contract manufacturing. The Company experienced
significant sales increases in its Specialty Markets and Industrial/Safety
divisions for the third quarter of fiscal 1996 compared to the third quarter of
fiscal 1995 (21.9% and 18.5%, respectively) and the nine month period of fiscal
1996 compared to the nine month period of fiscal 1995 (24.2% and 29.3%,
respectively). The increase in sales for the Hospital Products division of
43.9% for the third quarter of fiscal 1996 as compared to the third quarter of
fiscal 1995 and of 14.1% for the nine month period in fiscal 1996 as compared
to the nine month period of fiscal 1995 should be considered in light of the
fact that sales were lower than normal for the third quarter of fiscal 1995.
Based on information received from distributors, management estimates that U.S.
Hospital purchases of the Company's Hospital Products division products from
distributors increased approximately 3% for the nine month period of fiscal
1996 as compared to the nine month period of fiscal 1995. The International
division experienced a sales increase of 12.5% for the third quarter of fiscal
1996 compared to the third quarter of fiscal 1995 and a sales increase of 9.0%
for the nine month period of fiscal 1996 compared to the nine month period of
fiscal 1995. Sales for the Orthopedic Products division increased 4.3% for
the third quarter of fiscal 1996 and decreased 1.0% for the nine month period
in fiscal 1996 as compared to fiscal 1995. The Orthopedic Products division
lost sales during fiscal 1996 in certain low margin SPORTS SUPPORTS(R)
products as prices were raised to increase overall profitability. In
addition, contract manufacturing generated sales of approximately $2.7 million
in the third quarter of fiscal 1996 and $6.9 million for the nine month period
of fiscal 1996 compared to approximately $82,000 for the third quarter of
fiscal 1995 and $338,000 for the nine month period of fiscal 1995.
The gross profit margin decreased from 39.8% in the third quarter of fiscal
1995 to 37.8% in the third quarter of fiscal 1996. For the nine month period,
the gross profit margin decreased from 45.9% in fiscal 1995 to 42.1% in fiscal
1996. The decrease in the gross profit margin during fiscal 1996 compared to
fiscal 1995 is primarily due to unabsorbed overhead costs associated with lower
production levels as the Company reduced its finished goods inventory,
inefficiencies of transitioning labor-intensive products to its Mexican
manufacturing facility, transition costs from the Sparta wound care
acquisition, and anticipated lower margins associated with contract
manufacturing (which represents 7.5% of total Company net sales for the third
quarter of fiscal 1996
10
<PAGE> 11
and 6.4% for the nine month period of fiscal 1996 as compared to 0.4% for
fiscal 1995). Additionally, the Company increased the reserve for obsolete
inventory during the third quarter of fiscal 1996 after performing a detailed
review of slow moving inventory. Adjustments to inventory recorded during the
third quarter of fiscal 1996, the majority of which were related to potentially
obsolete inventory, amounted to approximately $1 million. Gross profit margin
was positively impacted as the Company increased the useful life on certain
manufacturing equipment from 10 years to 20 years, reducing depreciation
expense on these machines by approximately $600,000 for the nine month period
of fiscal 1996 as compared to the nine month period of fiscal year 1995. The
Company expects gross profit margin to improve in fiscal 1997 as compared to
fiscal 1996 as higher anticipated production levels would provide more
efficient coverage of overhead expenses, the transition of labor-intensive
products to the Mexican manufacturing facility has been substantially
completed, the Sparta wound care operations are expected to transition to Texas
in the fourth quarter of fiscal 1996, and blood pressure cuff production is
expected to be automated. The expected improvement in gross profit margin will
be offset somewhat by an expected increase in contract manufacturing sales
which provide a lower gross profit margin than sales to distributors; however,
these sales require minimal selling expense.
Selling expenses decreased 3.8% from $5.8 million in the third quarter of
fiscal 1995 to $5.5 million in the third quarter of fiscal 1996. For the nine
month period, selling expenses increased 4.8% from $16.7 million in fiscal 1995
to $17.5 million in fiscal 1996. As a percentage of net sales, selling
expenses have decreased from 21.9% of net sales in the third quarter of fiscal
1995 to 15.4% of net sales in the third quarter of fiscal 1996 and decreased
from 18.6% in the first nine months of fiscal 1995 to 16.2% in the first nine
months of fiscal 1996. The decrease in selling expenses as a percentage of net
sales is primarily due to the fixed nature of most of these expenses as the
Company did not increase the number of its sales territories, and contract
manufacturing sales required minimal selling expenses.
General and administrative expenses increased 54.9% from $2.1 million in the
third quarter of fiscal 1995 to $3.2 million in the third quarter of fiscal
1996. During the third quarter of fiscal 1996, the Company incurred additional
bad debt expense of approximately $1.1 million attributable to rebate disputes
anticipated to result in uncollectible accounts receivable and the insolvency
of an Italian distributor. For the nine month period, general and
administrative expenses have increased 22.6% from $5.9 million in fiscal 1995
to $7.2 million in fiscal 1996. As a percentage of net sales, general and
administrative expenses were 7.9% in the third quarter of 1995 (6.6% in the
first nine months of 1995) compared to 8.9% in the third quarter of 1996 (6.7%
in the first nine months of 1996). Research and development expenses increased
by 26.5% from approximately $326,000 in the third quarter of fiscal 1995 to
approximately $412,000 in the third quarter of fiscal 1996. For the nine month
period, research and development expenses increased 9.6% from $1.2 million in
fiscal 1995 to $1.3 million in fiscal 1996.
Income from operations increased 93.8% from $2.3 million in the third
quarter of fiscal 1995 to $4.4 million in the third quarter of fiscal 1996.
The third quarter of fiscal year 1995 was negatively affected by the Company's
largest distributor reducing its inventory of the Company's products. For the
nine month period, income from operations increased 11.6% from $17.3 million in
fiscal 1995 to $19.3 million in fiscal 1996. Operating margin increased from
8.7% in the third quarter of fiscal year 1995 to 12.3% in the third quarter of
fiscal year 1996. For the nine month period, operating margin decreased from
19.4% in fiscal year 1995 to 18.0% in fiscal year 1996. The
11
<PAGE> 12
decrease in operating margin for the nine month period is primarily a result of
the decrease in gross profit margin and the increase in bad debt expense
previously discussed.
Other income (expense) represented expense of approximately $1,240,000 in
the third quarter of fiscal 1996, compared to expense of approximately $714,000
in the third quarter of fiscal 1995. During the third quarter of fiscal year
1996, the Company tentatively agreed to settle a class action lawsuit brought
against the Company and certain of its senior executives (see Part II, Item 1.
Legal Proceedings). In connection with the settlement agreement, which is
subject to documentation and court approval, the Company reserved and expensed
$550,000. For the nine month period, other expense totaled approximately $2.5
million in fiscal 1996, compared to approximately $2.1 million in fiscal 1995.
The Company has incurred lower interest expense, as certain long-term debt has
been repaid; and incurred increased amortization expense related to purchased
assets during fiscal 1996. Amortization expense included in other income
(expense) was approximately $396,000 in the third quarter of fiscal 1995,
compared to approximately $497,000 in the third quarter of fiscal 1996. For
the nine month period, this amortization expense was approximately $1,196,000
in 1995, compared to approximately $1,490,000 in 1996.
Tecnol's effective income tax rate decreased from 36.7% for the nine month
period of fiscal 1995 to 33.4% for the nine month period of fiscal 1996. This
decrease was primarily due to a revision in estimated reserves required for
federal income taxes.
Net income increased from $995,000 in the third quarter of fiscal 1995 to
$2.1 million in the third quarter of 1996 as a result of the foregoing factors.
For the nine month period, net income increased 16.5% from $9.6 million in
fiscal 1995 to $11.2 million in fiscal 1996. Net income per share increased
from $0.05 in the third quarter of fiscal 1995 to $0.11 in the third quarter of
fiscal 1996. For the nine month period, net income per share increased 16.7%
from $0.48 in fiscal 1995 to $0.56 in fiscal 1996.
There have been recent legislative proposals designed to significantly
reform the way health care services are provided in the United States. The
Company cannot predict whether any significant legislation will be enacted into
law or, if enacted, what effect the legislation will have on its business.
There are also changes in the structure and business methods within the health
care industry, initiated by the private sector through managed care and other
strategies. The objective of some of these changes is to reduce costs of
health care. These changes include changes in the methods and strategies used
in the sales, marketing, distribution and purchasing of medical devices. The
Company cannot quantify what effect, if any, these changes will have on its
business.
Liquidity and Capital Resources
The Company believes that cash flow from operations, together with existing
cash and cash equivalents and periodic utilization of its line of credit, will
be sufficient to meet working capital requirements and normal capital
expenditures for at least the next twelve months. The Company is currently in
the process of evaluating its facilities requirements for manufacturing,
warehousing of inventory, engineering, product development and office space.
Additions to or renovations of existing facilities are currently being
considered. During fiscal 1995, the Company paid approximately $1.8 million
for 25 acres of land to build a new distribution facility. Construction of this
facility is anticipated to take 18 months. The Company has entered into an
interim lease of distribution space and has deferred construction of the
distribution center while adequate interim
12
<PAGE> 13
space remains available. The distribution facility is currently in the design
phase and the cost has not yet been determined. The Company is planning to
build a second manufacturing facility in Mexico to be in operation by mid
fiscal 1997. The cost of this facility, including land, is estimated to be
approximately $2,000,000. The Company may use long-term financing for these
facilities projects and any acquisition opportunities that may arise.
The Company's working capital decreased from $45.1 million at the end of
fiscal 1995 to $44.5 million at August 31, 1996. Net cash generated by
operating activities for the fiscal year-to-date period ended August 31, 1996,
totaled $25.9 million. For the nine month period of fiscal 1996, cash
generated by operating activities, together with $5.5 million from borrowings
under a bank loan, was used to finance a $5.2 million acquisition, $7.2 million
in capital expenditures, repayment of long-term debt of $8.2 million, and $3.5
million repayment of the bank line of credit. Net cash and cash equivalents at
August 31, 1996, totaled approximately $7.1 million. Accounts receivable
decreased from $22.7 million at the end of fiscal 1995 to $21.7 million at
August 31, 1996, as the Company has increased collection efforts and increased
the reserve for uncollectible accounts. The decrease in inventory from $34.0
million on December 2, 1995, to $27.2 million on August 31, 1996, is due to
higher sales and lower production levels as the Company continued efforts to
reduce its inventory.
On August 31, 1996, the Company had no amounts outstanding and $10,000,000
available under its bank line of credit. The line of credit expires March 12,
1997. The Company also had $4,950,000 available under a reducing revolving
bank line of credit.
Forward-Looking Statements
Statements, either written or oral, which express the Company's expectation
for the future with respect to financial performance or operating strategies
can be identified as forward-looking statements. These statements are made to
provide the public with management's assessment of the Company's business.
Caution must be taken to consider these statements in light of the following
factors and assumptions: current and contemplated cost-containment measures
will be successfully implemented; products in development will be introduced
successfully and on schedule; the Company will make acquisitions which
contribute to profitability; key distributors will make purchases at the same
level as their sales; demand for the Company's products will follow recent
growth trends; the Company will continue to expand into markets other than U.S.
hospitals; competitors will not introduce new products which will substantially
reduce Tecnol's market share in its most significant product lines; conversion
from standard face masks to specialty face masks will continue in the markets
Tecnol serves; and the Company will continue to manufacture high quality
products at competitive costs and maintain or increase product pricing. In the
event any of the above factors and assumptions do not occur as management
anticipates, actual results could differ materially from the expectations
expressed in the forward-looking statements.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
On August 21, 1995, a lawsuit styled Brian Freeman v. Vance M. Hubbard,
Kirk Brunson, Valerie A. Hubbard, David Radunsky, Paul N. Brost, Douglas J.
Inman, James H. Weaver and Tecnol Medical Products, Inc., Case No. 4-95
CV-617-Y, was filed in the United States District Court for the Northern
District of Texas, Fort Worth Division. By an order dated November 30, 1995,
Paul N. Brost, Douglas J. Inman and James H. Weaver were dismissed as
defendants from the suit. All remaining individual defendants are executive
officers and directors of the Company. The suit is a class action brought by a
stockholder on his own behalf and on behalf of all other persons who purchased
the stock of the Company during the period beginning on January 10, 1995, and
ending on July 17, 1995. The suit seeks an unspecified amount of damages,
claiming that the defendants disseminated false and misleading statements to
the investing public with respect to a 1995 inventory reduction in the
Company's products taken by the Company's largest distributor, resulting in an
artificially high price for Company stock. On August 29, 1996, the Company and
the individual defendants tentatively agreed to settle the lawsuit for a total
payment of $2.2 million. The agreement provides that approximately $550,000 of
the settlement amount will be paid by the Company and the balance will be
covered by the Company's directors' and officers' insurance carrier. The
agreement is subject to documentation and court approval.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - The following exhibits are filed as part of this report:
10(a)(3) Amendment to 1991 Tecnol Stock Option Plan adopted June
20, 1996
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated November
20, 1995
10(o)(1) Form of Incentive Stock Option, Trade Secret, Invention
and Non-Competition Agreement
27 Financial Data Schedule
** Management contract or compensatory plan or arrangement.
(b) No reports on Form 8-K were filed during the quarter ended August 31,
1996.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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.
TECNOL MEDICAL PRODUCTS, INC.
---------------------------------------
(Registrant)
Date: October 11, 1996 /s/David Radunsky
------------------- ---------------------------------------
DAVID RADUNSKY, Chief Operating Officer
Date: October 11, 1996 /s/Jeffrey A. Nick
------------------- ---------------------------------------
JEFFREY A. NICK, Vice President Finance
and Accounting
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C>
10(a)(3) Amendment to 1991 Tecnol Stock Option Plan adopted June
20, 1996
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated November
20, 1995
10(o)(1) Form of Incentive Stock Option, Trade Secret, Invention
and Non-Competition Agreement
27 Financial Data Schedule
** Management contract or compensatory plan or arrangement.
</TABLE>
<PAGE> 1
EXHIBIT 10(a)(3)
AMENDMENT TO THE 1991
TECNOL STOCK OPTION PLAN
ADOPTED JUNE 20, 1996
The Company's Board of Directors approved an amendment to the 1991
Tecnol Stock Option Plan (the "Plan") at its meeting held on June 20, 1996.
The effect of the Amendment was to amend and restate Section 14 of the Plan to
read as follows:
14. Changes in the Company's Capital Structure.
A. The existence of outstanding Options will not affect in any way the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations, or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Stock or the rights of the Common Stock,
or the dissolution or liquidation of the Company, or any sale or transfer of
all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
If the Company effects a subdivision or consolidation of shares or other
capital readjustment, pays a stock dividend, or otherwise increases or reduces
the number of shares of Common Stock outstanding, without receiving
compensation therefor in money, services, or property, then (a) if the number
of such shares outstanding is increased, then the number of shares of Common
Stock then subject to Options under this Plan will be proportionately
increased, and the Option price per share will be proportionately reduced; (b)
if the number of such shares outstanding is reduced, then the number of shares
of Common Stock then subject to Options under this Plan will be proportionately
reduced, and the option price per share will be proportionately increased; and
(c) the number of shares then available for Options under this Plan will be
proportionately increased or decreased.
Except as herein expressly provided, the Company's issuance of shares of
stock of any class, or securities convertible into shares of stock of any
class, for cash, property, labor, or services, either upon direct sale, upon
the exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, will not affect, and no adjustment by reason thereof will be made
with respect to, the number or price of shares of Common Stock then subject to
outstanding Options.
B. If, while unexercised Options remain outstanding under the Plan, the
Company is merged or consolidated with another corporation or entity (whether
or not the Company is the surviving corporation or entity) or if the Company
sells or otherwise disposes of substantially all of its assets to another
business entity or if the Company liquidates or dissolves, then subject to the
provisions of clauses (i) and (ii) below and subject to any required action by
stockholders, after the effective date of such merger, consolidation,
liquidation, dissolution, or sale, as the case may be, each holder of an
outstanding Option will be entitled, upon exercise of such Option, at no
additional cost, to receive, in lieu of the number of shares for which such
Option would otherwise then be exercisable, the number and class of shares of
stock or other
<PAGE> 2
securities (or cash or other property) to which such holder would have been
entitled pursuant to the terms of such merger, liquidation, dissolution,
consolidation or sale if, immediately prior to such merger, liquidation,
dissolution, consolidation or sale, the holder had been the record holder of a
number of shares of Common Stock equal to the number of shares for which such
Option is exercised.
Under the conditions set forth herein, the board of directors may, but
is not obligated to, cancel Options outstanding as of the effective date of any
such merger, consolidation, dissolution, liquidation, or sale. If the Company
is the surviving corporation or entity as of the effective date of such a
merger or consolidation, the board of directors may, but is not obligated to,
cancel all Options granted after June 20, 1996, and outstanding as of the
effective date of such merger or consolidation; if the Company is not the
surviving corporation or entity, or in the event of a liquidation, dissolution
or sale, the board of directors may, but is not obligated to, cancel all
Options outstanding as of the effective date of such merger, consolidation,
liquidation, dissolution, or sale, provided that
(x) notice of such cancellation is given to each holder of such an
Option; and
(y) each holder of such an Option has the right to exercise such Option
to the "Applicable Extent", during a 30- day period preceding the effective
date of such merger, liquidation, dissolution, consolidation, or sale, or, if
notice has been given pursuant to clause (ii) below, during the 30-day period
beginning on the date such notice is given. If the Option in question was
granted on or before June 20, 1996, then the "Applicable Extent" is the full
extent to which such Option is exercisable, without regard to any limitations
set forth in or imposed pursuant to Paragraph 7 of this Plan. In all other
cases, the "Applicable Extent" is the extent to which an Option is otherwise
exercisable and vested by its terms as of the date notice of cancellation of
such Option is given to the holder thereof, after giving effect to any action
of the board of directors pursuant to clauses (i) or (ii) below.
In the event of such a merger or consolidation (whether or not the
Company is the surviving corporation or entity), or a liquidation, dissolution,
or sale, and regardless of whether options outstanding under this Plan are
subject to cancellation pursuant to the terms of the preceding paragraph, the
board of directors may, but is not obligated to:
(i) waive any limitations set forth in or imposed pursuant to Paragraph
7 of this Plan so that all Options, from and after a date prior to the
effective date of the merger, consolidation, liquidation, dissolution, or sale,
as the case may be, specified by the board of directors, will be exercisable in
full; or
(ii) restrict the number of shares of Common Stock (or, if applicable,
other shares of stock, securities, cash or property) issuable upon exercise of
each Option granted after June 20, 1996, and outstanding immediately prior to
the effective time of such merger, consolidation, liquidation, dissolution, or
sale, to the number of shares of Common Stock (or, if applicable, other shares
of stock, securities, cash or property) for which each such Option is
exercisable immediately prior to such effective time, giving full effect to the
limitations set forth in or imposed pursuant to Paragraph 7 of this Plan,
provided that the board of directors acts to impose such restriction prior to
the effective time of such merger, liquidation, dissolution, consolidation or
sale and gives notice of such restriction to each holder of such an Option not
later than ten (10) days after the effective date of such merger,
consolidation, liquidation, dissolution, or sale.
<PAGE> 1
EXHIBIT 10(k)
INCENTIVE STOCK OPTION,
TRADE SECRET, INVENTION, AND
NON-COMPETITION AGREEMENT
THIS AGREEMENT, made this 20th day of November, 1995, by and between
TECNOL MEDICAL PRODUCTS, INC., a Delaware corporation (hereinafter called
"TMPI"), and Jeffrey A. Nick (hereinafter called the "Optionee"), but effective
as of the date set forth in paragraph 2 below.
W I T N E S E T H:
WHEREAS, Optionee is a key employee of the Company who, during the
course of Optionee's employment with the Company has been, and in the future is
expected to be, engaged in one or more of the manufacturing, marketing,
selling, administrative, management, financial communications, legal,
engineering, product development, product quality, or other important
activities of the Company and is expected to obtain valuable and proprietary
confidential information of the Company in the course of carrying out
Optionee's duties of employment; and
WHEREAS, the Company wants to encourage Optionee's continued interest in
and loyalty and commitment to the Company and toward that end, the Company
desires to increase Optionee's proprietary interest in the success of the
Company by making it possible for Optionee to acquire an initial or increased
stock ownership interest in the Company on a basis anticipated to be
economically beneficial and favorable to Optionee; and
WHEREAS, as a condition to the Company's willingness to facilitate
Optionee's stock ownership interest in the Company and ancillary to its
undertaking to do so and to impart confidential information to Optionee, the
Company desires to obtain Optionee's commitment to the Company to not disclose
confidential information of the Company and not compete with the Company should
Optionee's employment terminate; and
WHEREAS, Optionee and the Company both recognize and agree that such
commitment by Optionee is necessary to protect the value of the Company for all
of its security holders, including Optionee:
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements herein contained, TMPI and the Optionee hereby agree with each other
as follows:
1. The granting of this Option shall not impose upon the Company any
obligation to employ or continue to employ the Optionee; and the right of the
Company to terminate the employment of the Optionee shall not be diminished or
affected by reason of the fact that an option has been granted to him.
-1-
<PAGE> 2
2. Subject to the terms and conditions set forth herein, TMPI hereby
grants to the Optionee under the Option Plan the right to purchase up to, but
not exceeding in the aggregate, 11,667 shares of the common stock, $.001 par
value, of TMPI (the "Common Stock") during the period commencing March 1, 1996
and ending March 1, 2003, at a price per share of $17.00 (the "Option Exercise
Price"). The "Effective Date" of this agreement is November 20, 1995.
The right and option granted hereunder may be exercised from time to
time as follows: beginning March 1, 1996, as to not more than 1,667 shares
covered hereby; beginning March 1, 1997, as to any number of shares which, when
added to the number of shares previously purchased under the option, shall not
exceed 3,334 shares covered hereby; beginning March 1, 1998, as to any number
of shares which, when added to the number of shares previously purchased under
the option, shall not exceed 5,001 covered hereby; beginning March 1, 1999, as
to any number of shares which, when added to the number of shares previously
purchased under the option, shall not exceed 6667 shares covered hereby;
beginning March 1, 2000, as to any number of shares which, when added to the
number of shares previously purchased under the option shall not exceed 8334 of
the total shares covered hereby; beginning March 1, 2001, as to any number of
shares which, when added to the number of shares previously purchased under the
option, shall not exceed 10,001 shares covered hereby; beginning March 1, 2002,
as to any number of shares which, when added to the number of shares previously
purchased under the option, shall not exceed the total number of shares covered
hereby.
Shares cannot be sold, transferred, or encumbered for a period of two
(2) years after the date on which the Option is exercised, excluding transfers
to the Company, members of the Optionee's immediate family, or trusts for the
benefit of the Optionee or members of the Optionee's immediate family, provided
that any Shares so transferred (other than to the Company) will remain subject
to the remainder of the two-year prohibition on transfer. In the event of the
death of the Optionee, any Shares held by the Optionee's estate may be
transferred free of the remainder of the two-year prohibition on transfer. Any
Shares as to which the two-year prohibition on transfer has been lifted shall
be subject to the requirement that the Optionee notify the Company of any
disposition as provided in paragraph 5 hereof. Each certificate representing
shares shall bear a legend reflecting the appropriate restriction.
The option granted hereunder is intended to qualify as an incentive
stock option under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). However, to the extent that the aggregate fair market value of
the Common Stock (determined at the date of grant of the option) with respect
to which incentive stock options are exercisable for the first time by the
Optionee during any calendar year (under all incentive stock option plans of
TMPI and any parent or subsidiary corporation of TMPI) exceeds $100,000, such
options will not be incentive stock options. For this purpose, options shall
be taken into account in the order in which they were granted.
-2-
<PAGE> 3
The option granted hereunder is granted pursuant to and is governed by
the terms of the 1991 Tecnol Stock Option Plan (the "Option Plan").
3. The right and option granted hereunder shall be exercised by
delivering to Tecnol Medical Products, Inc. a written notification specifying
the number of shares which the Optionee desires to purchase, together with
cash, certified check, bank cashier's check or postal or express money order to
the order of Tecnol Medical Products, Inc. for an amount equal to the option
price of such shares, and specifying the address to which the certificates for
such shares are to be mailed. In lieu of payment in cash or cash equivalents,
Optionee may make payment by tendering to Tecnol Medical Products, Inc. shares
of Common Stock, or by tendering shares of Common Stock plus cash or cash
equivalents, in amounts such that the fair market value of the Common Stock
tendered, plus the amount of cash or cash equivalents paid, if any, equals the
option price for the shares to be purchased.
4. As promptly as practical after receipt of such written
notification and payment and receipt of such evidence of intent to acquire for
investment as may be required by the Company, the Company will deliver to the
Optionee certificates for the number of shares with respect to which such
option has been so exercised, issued in the Optionee's name; provided that such
delivery shall be deemed effected for all purposes when a stock transfer agent
of the Company shall have deposited such certificates in the United States
mail, postage prepaid, addressed to the Optionee, at the address specified
pursuant to paragraph 3 hereof.
5. If the Optionee shall dispose of any of the shares purchased
hereunder within the later of one year after the transfer of such shares to him
or two years from the effective date of the granting of this option, then in
order to provide the Company with the opportunity to claim the benefit of any
income tax deduction which may be available to it under the circumstances, the
Optionee shall promptly notify the Company of the dates of acquisition and
disposition of such shares, the number of shares so disposed of, and the
consideration, if any, received for such shares. In addition, in order to help
assure that the Company receives notice of any such transfer, any stock
certificate evidencing any shares of Common Stock issued under this Agreement
shall bear a legend substantially as follows for the first year after issuance
of such Common Stock to the Optionee or, if sooner, until such time as the
Optionee certifies in writing to the Company that such Common Stock has been
sold in a bona fide transaction and advises the Company of the amount of the
consideration received for such shares:
"The Company has asked its stock transfer agent to notify the Secretary
of the Company if the securities represented by this certificate are
held of record at any time prior to [applicable date] in any name other
than [applicable name]."
-3-
<PAGE> 4
Further, upon request of the Company, from time to time, the Optionee shall
certify in writing the dates of acquisition and any dispositions of such Common
Stock on or before the first anniversary of the issuance of such Common Stock
to the Optionee, the number of shares so disposed of, and the consideration, if
any, received for such shares.
6. Except as is otherwise expressly provided in this Agreement, the
option herein granted shall terminate immediately upon the severance of the
employment relationship between the Company and the Optionee by the Company for
good cause, and two weeks after the severance of the employment relationship
between the Company and the Optionee for any reason, other than for good cause
or on account of death or retirement in good standing from the employ of the
Company for reasons of age or total and permanent disability under the then
established rules of the Company. For purposes of this Agreement, "Company"
shall mean Tecnol Medical Products, Inc. and any corporation in which Tecnol
Medical Products Inc. owns, directly or indirectly, stock possessing eighty
percent or more of the total combined voting power of all classes of stock;
and, any corporation in which Tecnol Medical Products, Inc. owns, directly or
indirectly, stock possessing fifty percent or more of the total combined voting
power of all classes of stock, if the Board of Tecnol Medical Products, Inc.
resolves that such other corporation shall be so defined. Whether authorized
leave of absence or absence on military or government service shall constitute
severance of the employment relationship between the Company and the Optionee
shall be determined by the Committee appointed by the Board of Directors of
TMPI to administer the Option Plan (the "Committee). In the event of the death
of the Optionee while in the employ of the Company and before the date of
expiration of this option, this option shall terminate one year following the
date of death of the Optionee. After the death of the Optionee, Optionee's
executors, administrators, or any person or persons to whom this option may be
transferred by will or by the laws of descent and distribution, shall have the
right, at any time prior to such termination, to exercise the option granted
hereunder, in whole or in part. If, before the date of expiration of this
option, the Optionee shall be retired in good standing from the employ of the
Company for reasons of age or total and permanent disability under the then
established rules of the Company, this option shall terminate three months
(twelve months in the case of retirement for disability) after the date of such
retirement. However, in the event of such retirement, the Optionee shall have
the right prior to the termination of such option to exercise the option to the
extent to which Optionee was entitled to exercise the option immediately prior
to such retirement. Provided, however, nothing in this Section shall operate
to extend this option beyond 10 years after the Effective Date hereof.
7. Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provisions should logically be
construed to apply to the executors, administrators or the person or persons to
whom the option may be transferred by will or by the laws of descent and
distribution, the word "Optionee" shall be deemed to include such person or
persons.
-4-
<PAGE> 5
8. This option is not transferable by the Optionee otherwise than by
will or under the laws of descent and distribution, and is exercisable, during
Optionee's lifetime, only by Optionee. No assignment or transfer of this
option, or of the rights represented thereby, whether voluntary or involuntary,
by operation of law or otherwise (except by will or by the laws of descent and
distribution) shall vest in the assignee or transferee any interest or right
herein whatsoever, but immediately upon any such assignment or transfer this
option shall terminate and become of no further effect.
9. The Optionee shall not be deemed for any purpose to be a
stockholder of TMPI in respect of any shares as to which this option shall not
have been exercised, as herein provided, and until such shares shall have been
issued to the Optionee by TMPI hereunder.
10. The existence of this option shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
11. The shares with respect to which this option is granted are
shares of the Common Stock of TMPI as presently constituted, but if, and
whenever, prior to the delivery by TMPI of all the shares of the Common Stock
with respect to which this option is granted, TMPI shall effect a subdivision
or consolidation of shares or other capital readjustment, the payment of a
stock dividend, or other increase or reduction of the number of shares of the
Common Stock outstanding, without receiving compensation therefor in money,
services or property, then (a) in the event of an increase in the number of
such shares outstanding, the number of shares of Common Stock then remaining
subject to option hereunder shall be proportionately increased, and the option
price per share shall be proportionately reduced; and (b) in the event of a
reduction in the number of such shares outstanding, the number of shares of
Common Stock then remaining subject to option hereunder shall be
proportionately reduced, and the option price per share shall be
proportionately increased.
12. After a merger of one or more corporations into TMPI, or after a
consolidation of TMPI and one or more corporations in which TMPI shall be the
surviving corporation, the Optionee shall, at no additional cost, be entitled
upon any exercise of this option, to receive (subject to any required action by
stockholders) in lieu of the number of shares as to which this option shall
then be so exercisable, the number and class of shares of stock or other
securities or cash or other property to which the Optionee would have been
entitled pursuant to the terms of the agreement of merger or consolidation, as
if immediately prior to such merger or consolidation the Optionee had been the
holder of record of a number of shares of Common
-5-
<PAGE> 6
Stock of TMPI equal to the number of shares as to which such option shall be so
exercised; provided that, anything herein contained to the contrary
notwithstanding, upon the dissolution or liquidation of TMPI, or upon any
merger or consolidation if TMPI is not the surviving corporation, the Board of
Directors of TMPI shall determine the disposition of this option in accordance
with the alternatives set forth in paragraph 14 of the Option Plan.
13. Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property or for labor or services, either
upon direct sale, upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to this option.
14. Notwithstanding any of the provisions hereof, the Optionee hereby
agrees that he will not exercise the option granted hereby, and that the
Company will not be obligated to issue any shares to the Optionee hereunder, if
the exercise hereof or the issuance of such shares shall constitute a violation
by the Optionee or the Company of any provisions of any law or regulations of
any governmental authority. If, at any time specified herein for the issuance
of shares to the Optionee, any law or regulation shall require either the
Company or the Optionee to take any action in connection with the shares then
to be issued, the issuance of such shares shall be deferred until such action
shall have been taken. Any determination in this connection by the Committee
shall be final, binding and conclusive. The Company shall in no event be
obligated to register any securities pursuant to the Securities Act of 1933 (as
now in effect or as hereafter amended) or to take any other affirmative action
in order to cause the exercise of the option or the issuance of shares pursuant
thereto to comply with any law or regulation of any governmental authority.
15. Every notice or other communication relating to this Agreement
shall be in writing, and shall be mailed to or delivered to the party for whom
it is intended at such address as may from time to time be designated by it in
a notice mailed or delivered to the other party as herein provided; provided
that, unless and until some other address be so designated, all notices or
communications by the Optionee to the Company shall be addressed to the
President of TMPI and mailed or delivered to TMPI at its office at 7201
Industrial Park Blvd., Fort Worth, Texas 76180, and all notices or
communications by the Company to the Optionee may be given to the Optionee
personally or may be mailed to him at Optionee's address as shown in the
records of the Company.
16. (a) The Optionee recognized and acknowledges that:
-6-
<PAGE> 7
(1) "Company-Type Products" means the types of products
that the Company is and will be engaged in developing,
manufacturing, marketing and selling, such as, but not
limited to, the following: reusable orthopedic soft goods;
face masks and respirators; all disposable restraints,
holders, binders, supports, pads, protectors, straps, ice
packs, telemetry unit pouches, wash mitts, caps, shoe
covers, wound dressings, and other health care and
industrial disposable items developed, manufactured,
marketed or sold by the Company during Optionee's
employment with the Company; and, if Optionee engages in
Technical Activities of the Company (as defined below) at
any time during Optionee's employment with the Company,
any components or raw materials for use in any of the
above which were the subject of research and/or
development during Optionee's employment with the Company.
(2) If Optionee, at any time during the course of
Optionee's employment with the Company, is engaged in the
manufacturing, engineering and/or product development
activities of the Company ("Technical Activities") such as
manufacturing existing Company-Type Products, improving
and enhancing Company-Type Products, and developing new
Company-Type Products, then, during the course of
Optionee's employment, Optionee will likely (a) engage in
research and experimentation to create and improve the
design of such products; (b) design and manufacture
special machinery that is used to manufacture,
automatically inspect and/or package such products; (c)
develop and design sonic bonding equipment used in such
machines; (d) design and develop specifications and
manufacturing processes for materials used in Company-Type
Products including, without limitation, films, and
non-woven fabrics; and/or (e) design and manufacture
machines used to manufacture such materials in the
performance if Optionee's duties. The Company's success
and innovation in developing new, and in enhancing
existing, Company-Type Products and in developing and
improving the materials and machinery used in, and to
manufacture, its Company-Type Products confers on the
Company a significant competitive advantage against its
competitors. The continued confidentiality of these
aspects of the Company's business are vital to its
business.
(3) If Optionee, at any time during the course of
Optionee's employment with the Company, is engaged in the
financial, legal, administrative, management, marketing,
sales, or communication activities of the Company ("Sales
and Administrative Activities") then the Optionee will
become familiar with or have access to extensive
confidential information
-7-
<PAGE> 8
pertaining to the business of the Company, which may
include, without limiting the forgoing, and depending upon
Optionee's specific employment duties, names of customers
of the Company and the prices it obtains or has obtained
from customers or for which it sells or has sold its
products, sources for materials used in the Company's
products, contract relationships between the Company and
its customers and suppliers, confidential business and
financial data of the Company, information pertaining to
the Company's employees (including, without limitation
information concerning compensation and benefit programs),
information regarding the Company's costs, information
about the Company's products and anticipated new products,
forecasts, plans, objectives, investment opportunities,
and long term business strategies and plans of the
Company. This confidential information is of strategic
importance to the Company in its ability to successfully
compete. The continued confidentiality of this
information is vital to the Company's business.
(4) The Company has established a valuable and extensive
trade in its Company-Type Products as well as business
connections and customers which are of significant value
to it.
(5) By virtue of Optionee's employment, Optionee
acknowledges that Optionee holds a position of trust with
respect to the confidential information of the company
made accessible to the Optionee, and that the Company will
suffer irreparable injury if during Optionee's employment
or at any time subsequent to the termination of such
employment, Optionee should, directly or indirectly, enter
into competition with the Company or divulge such secret
and confidential information to competitors or potential
competitors of the Company.
(6) It is expected that Optionee, during Optionee's
employment by the Company, may conceive or generate (alone
or together with others) inventions, discoveries or ideas,
and it is recognized that the ownership thereof should be
and will be in the Company.
(7) The covenants and conditions contained herein are
reasonable and necessary for the protection of the
Company's business. In this regard, Optionee recognizes
that the descriptive scope of the confidential information
described in Section 16 and the territory covered by the
non-competition covenants in Section 16 hereof are
reasonable in light of the fact that the work that
Optionee will perform for the Company as its employee will
contribute to the manufacture or sale of products
-8-
<PAGE> 9
that will be sold to end users (directly or in many cases
through intermediary distributors) located throughout the
Geographic Region described in Section 16(f).
(b) Optionee covenants and agrees that Optionee will not
at any time during Optionee's employment or thereafter, in any
fashion, form or manner, either directly or indirectly, except to
the extent necessary to carry out Optionee's employee
responsibilities for the benefit of the Company, divulge,
disclose or communicate to any person, firm, partnership,
corporation, or enterprise in any manner whatsoever any
information of any kind, nature or description concerning any
matters affecting or relating to the business of the Company,
including without limitation, (i) research conducted by the
Company in connection with product development, manufacturing
processes, machinery construction, product materials or
otherwise, (ii) the manufacturing methods or processes used or
under development by the Company for its products, machines and
materials, (iii) the nature or properties of the materials used
by the Company in its products or under development, and supply
sources of such materials, (iv) the names of any of the Company's
customers and the prices it obtains or has obtained or for which
it sells or has sold its products, (v) contract relationships
between the Company and its customers and suppliers, (vi)
confidential business and financial data of the Company, (vii)
information pertaining to the Company's employees (including,
without limitation, information concerning compensation and
benefit programs), (viii) information regarding the Company's
cost, (ix) information about the Company's products and
anticipated new products, (x) forecasts, plans, objectives,
investment opportunities, and long term business strategies and
plans of the Company, and (xi) any other information of, about
or concerning the business of the Company, its manner of
operations, its plans, processes or other data of any kind,
nature or description. The Optionee and Company agree that the
foregoing information is important, material and confidential and
substantially effects the successful conduct of the business of
the Company, and its good will, regardless of whether any or all
of the foregoing matters would be deemed to be "trade secrets" as
defined by law. Optionee may have occasion to learn other
information as a consequence of or through Optionee's employment
with the Company, such as information from or about suppliers,
customers, competitors and others. This information generally is
obtained by the Company by studying competitive products, by
requesting information from such other companies, by doing
various studies and the like. Such information is some cases may
not be proprietary to the Company but nevertheless the Company
learns such information in the course of its business, keeps such
information secret (because it is costly and useful information),
and
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<PAGE> 10
legitimately uses such information in connection with its
business. Optionee agrees Optionee will not use or disclose, or
permit such information to be disclosed or used except in
furtherance of Optionee's duties for the Company and agrees not
to use or disclose such information in violation of any
obligations or duties which Optionee or the Company has to any
third party. The parties agree that any breach of the terms of
this Section 16(b) is a material breach of this Agreement. The
Company considers, and the Optionee agrees, that all such
information is the Company's sole and exclusive property, and
Optionee agrees to promptly deliver all such information in
tangible form as well as all other correspondence, memoranda,
notes, records, reports, plans, customer lists and all other
papers (and copies thereof) and all electronically stored or
computerized data to the Company either upon the Company's
request or upon any termination of this Agreement. The Company
agrees to provide Optionee with access to and the right to use in
the performance of Optionee's duties to the Company the
confidential, proprietary and other business information and
trade secrets described above in this Section 16 in consideration
of the covenants of Optionee of non-disclosure and
non-competition set forth in this Section 16.
(c) All "Inventions" made or conceived by the Optionee, solely
or with others, while employed by the Company, either during or
after working hours, or within a period of one (1) year after
termination of Optionee's employment, which are useful in or
related to the business of the Company or which have been made or
conceived wholly or partially, with the use of the Company's
time, material, or facilities, shall belong exclusively to the
Company. The Optionee agrees that Optionee shall have no claim
for additional compensation for such Inventions. The Optionee
agrees promptly to disclose in accordance with Company procedures
any such Invention promptly and fully by a written report,
setting forth in detail the structures, procedures and
methodology employed and the results achieved. In addition, full
reports and records shall be kept in accordance with Company
practices during and on completion of any study or research
project undertaken on the Company's behalf, whether or not in
Optionee's opinion a given study or project has resulted in an
Invention. For purposes hereof the term "Invention" means any
discovery, concept, idea, whether patentable or not, relating to
any present or prospective activities of the Company, including,
but not limited to, devices, processes, methods, formulae,
techniques, and any improvements to any of the foregoing. The
Optionee hereby assigns and agrees to assign to the Company all
of Optionee's rights to such Inventions and to all proprietary
rights therein, based thereon or related thereto, including, but
not limited to, applications for United States and foreign
letters patent and resulting letters patent. At the request of
the Company, either before or
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<PAGE> 11
after termination of Optionee's employment, Optionee shall assist
the Company in acquiring and maintaining patent protection upon
and confirming its title to such Inventions. Optionee's
assistance shall include the signing of applications for patent
assignments and other papers, and taking any other steps
considered desirable by the Company.
(d) Ancillary to, an in order to further assure that the
Optionee will not violate Optionee's covenants of non-disclosure
of confidential, proprietary and other business information of
the Company set forth in Section 16(b) hereof or Optionee's
obligations respecting Inventions under Section 16(c), and
ancillary to the rest of this Agreement and in consideration of
each of the foregoing, Optionee covenants and agrees that for the
Applicable Period (as defined below) after termination of
Optionee's employment for any reason, Optionee will not, for any
reason, anywhere in the Geographic Region (as defined below),
directly or indirectly, as an employee, employer, consultant,
agent, principal, partner, stockholder, officer, director, or in
any other individual or representative capacity:
(1) engage or participate in any business that:
(A) is engaged, directly or indirectly, in
the sale or marketing of any product that is the
same as or similar to or competitive with any
Company-Type Product which was sold or marketed by
the Company during Optionee's employment with the
Company; or
(B) is engaged, directly or indirectly in
research for or the development or manufacture of
any product that is the same as or similar to or
competitive with any Company-Type Product which was
the subject of research or development or which was
manufactured, by the Company during Optionee's
employment with the Company; or
(C) is engaged, directly or indirectly, in
the research, development, manufacture, sale or
marketing of any item made from film or non-woven
fabric bonded through a sonic bonding manufacturing
process; or
(D) is engaged, directly or indirectly, in
the research development, manufacture, use, sale or
marketing of any manufacturing equipment that (i)
uses computers in automated
-11-
<PAGE> 12
manufacturing; or (ii) is used to produce products
made of film or non-woven fabric; or (iii) uses an
automated or computerized product inspection
system, because equipment similar in function or
design to any of the foregoing equipment would be
similar to equipment developed or manufactured by
the Company during the course of Employee's
employment; or
(E) is engaged, directly or indirectly, in
the business described in clause (D) above, if such
machines or designed to be used to manufacture
Company-Type Products; or
(2) recruit, or hire, or attempt to recruit or
hire, directly or or by assisting others, any other
employee or consultant of the Company or give advice or
counsel with respect to the hiring of any person who
shall have been an employee of the Company at any time
within the two- year period immediately preceding such
hiring, advice or counsel.
(e) Ancillary to, and in order to further assure that
Optionee will not violate Optionee's covenants of non-disclosure
of confidential, proprietary and other business information of
the Company set forth in Section 16(b) herein, or Optionee's
obligations respecting Inventions under Section 16(c), and
ancillary to the rest of this Agreement and in consideration of
each of the foregoing, Optionee covenants and agrees that for the
Applicable Period after termination of Optionee's employment for
any reason Optionee will not, for any reason, anywhere outside
the Geographic Region (as defined below), directly or indirectly
as an employee, employer, consultant, agent, principal, partner,
stockholder, officer director, or in any other individual or
representative capacity engage or participate in any business
described in paragraph (d)(1) of this Section 16 if in fact such
business is shipping the products or equipment described therein
to any country included in the Geographic Region. Optionee
recognizes that the foregoing covenant is necessary to prevent
Optionee from indirectly competing with the Company in a
prohibited manner inside the Geographic Region.
(f) Geographic Region means United States, Canada, Japan,
Puerto Rico, Mexico, Australia and the countries included in the
European Economic Community; and, if Optionee was directly
engaged in selling Company-Type Products in any other country
while employed by the Company, then in such other country.
(g) If Optionee engages in Technical Activities at any
time during Optionee's employment with the Company, then, for
purposes of sections 16(d)(1)
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<PAGE> 13
and (2) and 16(e), Applicable Period means:
<TABLE>
Period For Conduct Described in Clause
------ -------------------------------
<S> <C>
6 months (d)(1)(A)
2 years (d)(1)(B)
2 years (d)(1)(C)
2 years (d)(1)(D)
3 years (d)(1)(E)
2 years (d)(2)
</TABLE>
and, if Optionee engages in Sales and Administrative Activities
at any time during Optionee's employment with the Company, then,
for purposes of sections 16(d)(1) and (2) and 16(e), "Applicable
Period" means:
<TABLE>
Period For Conduct Described in Clause
------ -------------------------------
<S> <C>
2 years (d)(1)(A)
2 years (d)(1)(B)
6 months (d)(1)(C)
6 months (d)(1)(D)
1 year (d)(1)(E)
2 years (d)(2)
</TABLE>
If Optionee engages in Technical Activities and in Sales
and Administrative Activities during Optionee's employment with
Company then the Applicable Period shall be the longer period
designated for specific conduct.
(h) Optionee agrees to provide to any future employer a
copy of the covenants contained in this Section 16 and agrees
that the Company may do so as well.
(i) During the term of Optionee's employment, Optionee
shall not do any act that is prohibited immediately following
termination of Optionee's employment under Section 16.
(j) The ownership of less than 2% of a publicly traded
company will not, in and of itself, violate Section 16.
(k) Both the Company's rights and the Optionee's duties
under this Section 16 shall survive any termination of this
Agreement. If Optionee violates any covenant contained in
Section 16 of this Agreement, the Company shall not, as a result
of the time involved in obtaining relief, be deprived of the
benefit of the
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<PAGE> 14
full period of any such covenant. Accordingly, the covenants of
Optionee contained in Section 16 shall be deemed to have the
durations specified therein, which periods shall commence upon
the later of (i) the termination of Optionee's employment with
the Company and (ii) the later to occur of: (A) the date of entry
of a final judgment enforcing the covenants of Optionee under
Section 16, as the case may be or (B) the date on which Optionee
permanently ceases such violation.
(l) The Optionee recognizes that the remedy of damages
for breach or threatened breach of the provisions of this Section
16 would be inadequate and that the harm occasioned by such
breach would be irreparable, and accordingly, Optionee expressly
agrees that in the event of a breach or threatened breach by
Optionee of any of the provisions of this Section 16, the Company
will be entitled to an injunction, without the requirement of
posting bond, restraining Optionee from violating the terms
hereof, or from rendering services to any person, firm,
corporation, association, or other entity to whom any
confidential information concerning or relating to the business
of the Company has been disclosed or may be threatened to be
disclosed, or for whom Optionee is working or rendering services,
or threatens to work or render services in violation of the terms
hereof. Nothing herein shall be construed as prohibiting the
Company from pursuing any other remedies available to it for
breach or threatened breach of this Section 16, including
recovery of damages from Optionee. Optionee's allegation of or
the existence of any claim against the Company, under this
Agreement or otherwise, will not constitute a defense to the
Company's enforcement of this Section.
(m)
(1) The parties recognize and agree that it may be
difficult if not impossible for the Company to prove the
existence of a breach of the Optionee's covenants of
confidentiality and non- disclosure under Section 16(b)
of this Agreement. The parties further recognize and
agree that the non-competition covenants contained in
Section 16(d) are necessary to support the legitimate
business interests of the Company in preserving the
confidentiality and secrecy of and control over such
confidential information and its business goodwill and are
ancillary to, supportive of, and a part of this Agreement,
are ancillary to the Company's undertaking to facilitate
Optionee's stock ownership in the Company, and are
necessary as a means of ensuring compliance by Optionee
with such confidentiality covenants.
(2) The existence of any claim or cause of action
of Optionee against the Company or any officer, director,
or shareholder of the
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<PAGE> 15
Company, that is predicated on this Agreement or
otherwise, shall not constitute a defense to the
enforcement by the Company of the covenants of the
Optionee contained in this Section 16. In addition, the
provisions of this Section 16 shall continue to be binding
upon Optionee in accordance with their terms,
notwithstanding the termination of Optionee's employment
with the Company for any reason.
(3) The parties acknowledge and agree that the
time, scope, territory and other provisions of this
Section 16 are reasonable under the circumstances. The
parties further agree that if at any time despite the
express agreement of the parties hereto, it is held
through enforcement proceedings that any portion of
Section 16 is unenforceable by reason of its being too
extensive in any respect, then it shall be interpreted and
reformed to extend only over the maximum period of time
for which it may be enforceable and over the maximum
geographical area as to which it may be enforceable and to
the maximum extent in all other respects as to which it
may be enforceable.
17. This Agreement constitutes the entire agreement between the parties
and may not be amended except by an instrument in writing executed by both
parties.
18. This Agreement has been executed and will be performed in the State
of Texas and will be governed by and construed in accordance with the laws of
the State of Texas subject to the extent limited in Section 20 hereof.
19. If any one or more provisions of this Agreement shall be held to be
invalid, illegal or unenforceable in any respect in any jurisdiction, the
validity, legality or enforceability of the remaining provisions of this
Agreement in such jurisdiction shall not in any way be affected or impaired
thereby. Further, in lieu of such invalid, illegal, or unenforceable
provision, there shall be deemed inserted a provision as close in scope and
content to such provision as possible while remaining valid, legal and
enforceable in such jurisdiction.
20.
(a) Any dispute arising out of or relating to the
interpretation, validity, or enforcement of Section 16 of this Agreement
shall be settled by binding arbitration in accordance with the then
current commercial Arbitration Rules of the American Arbitration
Association. Either party may initiate an arbitration proceeding in
accordance with such Rules. The arbitration shall be conducted by a
panel of three independent arbitrators appointed in accordance with such
Rules. The arbitration shall be governed solely by the United States
Arbitration Act notwithstanding any other provision of this
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<PAGE> 16
Agreement to the contrary. If the arbitrators determine that a breach
of any of the provisions of Section 16 has occurred or is threatened
then, at the request of the Company, the arbitrators shall award
temporary or permanent injunctive relief in favor of the Company, as it
may request, restraining and enjoining any further such breach. Such
award shall be in addition to and not in lieu of any other relief to
which the Company may be entitled, including, without limitation,
damages arising out of any such breach. The arbitrators shall enter any
award in form sufficient to permit judgment upon the award to be entered
by, and to permit an order for contempt enforcing compliance ith such
judgment to be entered by, a court of competent jurisdiction.
(b) Prior to the hearing on the merits in an arbitration
proceeding to enforce theprovisions of Section 16 hereof, in order to
maintain the status quo pending such hearing,the Company shall have the
right to seek and obtain temporary or preliminary injunctive relief from
a court of competent jurisdiction restraining Optionee from violating
theprovisions of Section 16.
21. This amended and restated Agreement is amended on July 26, 1996,
with the effective date of the amendment being November 20, 1995, in order to
give effect to the intention of the parties and correct the mutual mistake of
the parties regarding certain provisions governing the transferability of the
shares subject hereto as required by the Option Plan, and supercedes the
previously executed Agreement dated November 20, 1995.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TECNOL MEDICAL PRODUCTS, INC.
By: /s/ VAN HUBBARD
-----------------------------------------
President
/s/ JEFFREY A. NICK
--------------------------------------------
Optionee
704 Giltin Court
--------------------------------------------
Street address
Arlington TX 76006
--------------------------------------------
City State/County Zip Code
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<PAGE> 1
EXHIBIT 10(o)(1)
INCENTIVE STOCK OPTION, TRADE SECRET,
INVENTION, AND NON-COMPETITION AGREEMENT
THIS AGREEMENT, made this _____ day of _____________, 19__, by and
between TECNOL MEDICAL PRODUCTS, INC., a Delaware corporation (hereinafter
called "TMPI"), and _________________________________________________
(hereinafter called the "Optionee"), but effective as of the date set forth in
Section 2 below.
W I T N E S S E T H:
WHEREAS, Optionee is a key employee of the Company who, during the
course of Optionee's employment with the Company has been, and in the future is
expected to be, engaged in one or more of the manufacturing, marketing,
selling, administrative, management, financial, communications, legal,
engineering, product development, product quality, or other important
activities of the Company and is expected to obtain valuable and proprietary
confidential information of the Company in the course of carrying out
Optionee's duties of employment; and
WHEREAS, the Company wants to encourage Optionee's continued interest
in and loyalty and commitment to the Company and toward that end, the Company
desires to increase Optionee's proprietary interest in the success of the
Company by making it possible for Optionee to acquire an initial or increased
stock ownership interest in the Company on a basis anticipated to be
economically beneficial and favorable to Optionee; and
WHEREAS, as a condition to the Company's willingness to facilitate
Optionee's stock ownership interest in the Company and ancillary to its
undertaking to do so and to impart confidential information to Optionee, the
Company desires to obtain Optionee's commitment to the Company to not disclose
confidential information of the Company and not compete with the Company should
Optionee's employment terminate; and
WHEREAS, Optionee and the Company both recognize and agree that such
commitment by Optionee is necessary to protect the value of the Company for all
of its security holders, including Optionee;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements herein contained, TMPI and the Optionee hereby agree with each other
as follows:
1. The granting of this Option shall not impose upon the Company
any obligation to employ or continue to employ the Optionee; and the right of
the Company to terminate the
-1-
<PAGE> 2
employment of the Optionee shall not be diminished or affected by reason of the
fact that an option has been granted to Optionee.
2. Subject to the terms and conditions set forth herein, TMPI
hereby grants to the Optionee under the Option Plan the right to purchase up
to, but not exceeding in the aggregate, the number of shares of the common
stock, $.001 par value, of TMPI (the "Common Stock") stated below, during the
period commencing one year after the Effective Date hereof (as stated below)
and ending ten (10) years after the Effective Date hereof, at a price per share
(the "Option Exercise Price") as stated below.
Number of Shares ( )
-------------------------
Option Exercise Price Dollars ($ . )
-------------------------
Effective Date -------------------------
The right and option granted hereunder may be exercised from time to
time as follows: beginning one year after the Effective Date, as to not more
than 1/9 of the total number of shares covered hereby; beginning two years
after the Effective Date, as to any number of shares which, when added to the
number of shares previously purchased under the option, shall not exceed 2/9 of
the total number of shares covered hereby; beginning three years after the
Effective Date, as to any number of shares which, when added to the number of
shares previously purchased under the option, shall not exceed 3/9 of the total
number of shares covered hereby; beginning four years after the Effective Date,
as to any number of shares which, when added to the number of shares previously
purchased under the option, shall not exceed 4/9 of the total number of shares
covered hereby; beginning five years after the Effective Date, as to any number
of shares which, when added to the number of shares previously purchased under
the option, shall not exceed 5/9 of the total shares covered hereby; beginning
six years after the Effective Date, as to any number of shares which, when
added to the number of shares previously purchased under the option, shall not
exceed 6/9 of the total number of shares covered hereby; beginning seven years
after the Effective Date, as to any number of shares which, when added to the
number of shares previously purchased under the option, shall not exceed 7/9 of
the total number of shares covered hereby; beginning eight years after the
Effective Date, as to any number of shares which, when added to the number of
shares previously purchased under the option, shall not exceed 8/9 of the total
number of shares covered hereby; beginning nine years after the Effective Date,
as to any number of shares which, when added to the number of shares previously
purchased under the option shall not exceed the total number of shares covered
hereby.
On each occasion that any shares are purchased hereunder, the shares
so purchased shall be divided into two classes: the "Exercise Cost Shares",
and the "Residual Shares". The Exercise Cost Shares shall consist of the
smallest number of whole shares which, when multiplied by the
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<PAGE> 3
market value of one share of TMPI stock on the exercise date, equals (or
exceeds) the Option Exercise Price multiplied by the total number of shares
being purchased on that occasion. The Company shall use the average of the
high and low prices of TMPI stock on the day of exercise to compute the market
value of one share. All Exercise Cost Shares purchased hereunder shall be
subject to the requirement that the Optionee notify the Company of any
disposition as provided in Section 5 hereof.
The number of shares representing the difference between the total
number of shares the Optionee is purchasing on that occasion and the Exercise
Cost Shares shall be the "Residual Shares". Residual Shares cannot be sold,
transferred, or encumbered for a period of two (2) years after issued under
this option, excluding transfers to the Company, members of the Optionee's
immediate family, or trusts for the benefit of the Optionee or members of the
Optionee's immediate family, provided that any Residual Shares so transferred
(other than to the Company) will remain subject to the remainder of the
two-year prohibition on transfer. In the event of the death of the Optionee,
any Residual Shares held by the Optionee's estate may be transferred free of
the remainder of the two-year prohibition on transfer. Any Residual Shares as
to which the two-year prohibition on transfer has been lifted shall be subject
to the requirement that the Optionee notify the Company of any disposition as
provided in Section 5 hereof. Each certificate representing shares shall bear
a legend reflecting the appropriate restriction.
The option granted hereunder is intended to qualify as an incentive
stock option under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). However, to the extent that the aggregate fair market value of
the Common Stock (determined at the date of grant of the option) with respect
to which incentive stock options are exercisable for the first time by the
Optionee during any calendar year (under all incentive stock option plans of
TMPI and any parent or subsidiary corporation of TMPI) exceeds $100,000, such
options will not be incentive stock options. For this purpose, options shall
be taken into account in the order in which they were granted.
The option granted hereunder is granted pursuant to and is governed by
the terms of the 1991 Tecnol Stock Option Plan (the "Option Plan").
3. The right and option granted hereunder shall be exercised by
delivering to Tecnol Medical Products, Inc. a written notification specifying
the number of shares which the Optionee desires to purchase, together with
cash, certified check, bank cashier's check or postal or express money order to
the order of Tecnol Medical Products, Inc. for an amount equal to the option
price of such shares, and specifying the address to which the certificates for
such shares are to be mailed. In lieu of payment in cash or the cash
equivalents as described above, Optionee may make payment by tendering to
Tecnol Medical Products, Inc. shares of Common Stock, or by tendering shares of
Common Stock plus cash or such cash equivalents, in amounts such that the
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<PAGE> 4
fair market value of the Common Stock tendered, plus the amount of cash or cash
equivalents paid, if any, equals the option price for the shares to be
purchased.
4. As promptly as practical after receipt of such written
notification and payment and receipt of such evidence of intent to acquire for
investment as may be required by the Company, the Company will deliver to the
Optionee certificates for the number of shares with respect to which such
option has been so exercised, issued in the Optionee's name; provided that such
delivery shall be deemed effected for all purposes when a stock transfer agent
of the Company shall have deposited such certificates in the United States
mail, postage prepaid, addressed to the Optionee, at the address specified
pursuant to Section 3 hereof.
5. If the Optionee shall dispose of any of the shares purchased
hereunder within the later of one year after the transfer of such shares to
Optionee or two years from the effective date of the granting of this option,
then in order to provide the Company with the opportunity to claim the benefit
of any income tax deduction which may be available to it under the
circumstances, the Optionee shall promptly notify the Company of the dates of
acquisition and disposition of such shares, the number of shares so disposed
of, and the consideration, if any, received for such shares. In addition, in
order to help assure that the Company receives notice of any such transfer, any
stock certificate evidencing any shares of Common Stock issued under this
Agreement shall bear a legend substantially as follows for the first year after
issuance of such Common Stock to the Optionee or, if sooner, until such time as
the Optionee certifies in writing to the Company that such Common Stock has
been sold in a bona fide transaction and advises the Company of the amount of
the consideration received for such shares:
"The Company has asked its stock transfer agent to notify the
Secretary of the Company if the securities represented by this
certificate are held of record at any time prior to [applicable date]
in any name other than [applicable name]."
Further, upon request of the Company, from time to time, the Optionee shall
certify in writing the dates of acquisition and any dispositions of such Common
Stock on or before the first anniversary of the issuance of such Common Stock
to the Optionee, the number of shares so disposed of, and the consideration, if
any, received for such shares.
6. Except as is otherwise expressly provided in this Agreement,
the option herein granted shall terminate immediately upon the severance of the
employment relationship between the Company and the Optionee by the Company for
serious violation of Company policy or intentional misconduct, and two weeks
after the severance of the employment relationship between the Company and the
Optionee for any reason, other than for serious violation of Company policy or
intentional misconduct or on account of death or retirement in good standing
from the employ
-4-
<PAGE> 5
of the Company for reasons of age or total and permanent disability under the
then established rules of the Company. For purposes of this Agreement,
"Company" shall mean Tecnol Medical Products, Inc. and any corporation in which
Tecnol Medical Products, Inc. owns, directly or indirectly, stock possessing
eighty percent or more of the total combined voting power of all classes of
stock; and, any corporation in which Tecnol Medical Products, Inc. owns,
directly or indirectly, stock possessing fifty percent or more of the total
combined voting power of all classes of stock, if the Board of Tecnol Medical
Products, Inc. resolves that such other corporation shall be so defined.
Whether authorized leave of absence or absence on military or government
service shall constitute severance of the employment relationship between the
Company and the Optionee shall be determined by the Committee appointed by the
Board of Directors of TMPI to administer the Option Plan (the "Committee"). In
the event of the death of the Optionee while in the employ of the Company and
before the date of expiration of this option, this option shall terminate one
year following the date of death of the Optionee. After the death of the
Optionee, Optionee's executors, administrators, or any person or persons to
whom this option may be transferred by will or by the laws of descent and
distribution, shall have the right, at any time prior to such termination, to
exercise the option granted hereunder, in whole or in part. If, before the
date of expiration of this option, the Optionee shall be retired in good
standing from the employ of the Company for reasons of age or total and
permanent disability under the then established rules of the Company, this
option shall terminate three months (twelve months in the case of retirement
for disability) after the date of such retirement. However, in the event of
such retirement, the Optionee shall have the right prior to the termination of
such option to exercise the option to the extent to which Optionee was entitled
to exercise the option immediately prior to such retirement. Provided,
however, nothing in this Section shall operate to extend this option beyond 10
years after the Effective Date hereof.
7. Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provisions should logically be
construed to apply to the executors, administrators or the person or persons to
whom the option may be transferred by will or by the laws of descent and
distribution, the word "Optionee" shall be deemed to include such person or
persons.
8. This option is not transferable by the Optionee otherwise than
by will or under the laws of descent and distribution, and is exercisable,
during Optionee's lifetime, only by Optionee. No assignment or transfer of
this option, or of the rights represented thereby, whether voluntary or
involuntary, by operation of law or otherwise (except by will or by the laws of
descent and distribution) shall vest in the assignee or transferee any interest
or right herein whatsoever, but immediately upon any such assignment or
transfer this option shall terminate and become of no further effect.
-5-
<PAGE> 6
9. The Optionee shall not be deemed for any purpose to be a
stockholder of TMPI in respect of any shares as to which this option shall not
have been exercised, as herein provided, and until such shares shall have been
issued to the Optionee by TMPI hereunder.
10. The existence of this option shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
11. The shares with respect to which this option is granted are
shares of the Common Stock of TMPI as presently constituted, but if, and
whenever, prior to the delivery by TMPI of all the shares of the Common Stock
with respect to which this option is granted, TMPI shall effect a subdivision
or consolidation of shares or other capital readjustment, the payment of a
stock dividend, or other increase or reduction of the number of shares of the
Common Stock outstanding, without receiving compensation therefor in money,
services or property, then (a) in the event of an increase in the number of
such shares outstanding, the number of shares of Common Stock then remaining
subject to option hereunder shall be proportionately increased, and the option
price per share shall be proportionately reduced; and (b) in the event of a
reduction in the number of such shares outstanding, the number of shares of
Common Stock then remaining subject to option hereunder shall be
proportionately reduced, and the option price per share shall be
proportionately increased.
12. After a merger of one or more business entities into TMPI,
after a consolidation of TMPI and one or more business entities, or upon the
sale, dissolution or liquidation of TMPI, the Board of Directors of TMPI shall
determine the disposition of this option in accordance with the alternatives
set forth in Section 14 of the Option Plan.
13. Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property or for labor or services, either
upon direct sale, upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to this option.
14. Notwithstanding any of the provisions hereof, the Optionee
hereby agrees that Optionee will not exercise the option granted hereby, and
that the Company will not be obligated to issue any shares to the Optionee
hereunder, if the exercise hereof or the issuance of such shares
-6-
<PAGE> 7
shall constitute a violation by the Optionee or the Company of any provisions
of any law or regulations of any governmental authority. If, at any time
specified herein for the issuance of shares to the Optionee, any law or
regulation shall require either the Company or the Optionee to take any action
in connection with the shares then to be issued, the issuance of such shares
shall be deferred until such action shall have been taken. Any determination in
this connection by the Committee shall be final, binding and conclusive. The
Company shall in no event be obligated to register any securities pursuant to
the Securities Act of 1933 (as now in effect or as hereafter amended) or to
take any other affirmative action in order to cause the exercise of the option
or the issuance of shares pursuant thereto to comply with any law or regulation
of any governmental authority.
15. Every notice or other communication relating to this Agreement
shall be in writing, and shall be mailed to or delivered to the party for whom
it is intended at such address as may from time to time be designated by it in
a notice mailed or delivered to the other party as herein provided; provided
that, unless and until some other address be so designated, all notices or
communications by the Optionee to the Company shall be addressed to the
President of TMPI and mailed or delivered to TMPI at its office at 7201
Industrial Park Blvd., Fort Worth, Texas 76180, and all notices or
communications by the Company to the Optionee may be given to the Optionee
personally or may be mailed to Optionee at Optionee's address as shown in the
records of the Company.
16. (a) The Optionee recognizes and acknowledges that:
(1) "Company-Type Products" means the types of
products that the Company is and will be engaged in
developing, manufacturing, marketing and selling, such as, but
not limited to, the following: reusable orthopedic soft
goods; face masks and respirators; all disposable restraints,
holders, binders, supports, pads, protectors, straps, ice
packs, telemetry unit pouches, wash mitts, caps, shoe covers,
wound dressings, and other health care and industrial
disposable items developed, manufactured, marketed or sold by
the Company during Optionee's employment with the Company;
and, if Optionee engages in Technical Activities of the
Company (as defined below) at any time during Optionee's
employment with the Company, any components or raw materials
for use in any of the above which were the subject of research
and/or development during Optionee's employment with the
Company.
(2) If Optionee, at any time during the course of
Optionee's employment with the Company, is engaged in the
manufacturing, engineering and/or product development
activities of the Company ("Technical Activities") such as
manufacturing existing Company-Type Products, improving and
enhancing
-7-
<PAGE> 8
Company-Type Products, and developing new Company-Type
Products, then, during the course of Optionee's employment,
Optionee will likely (a) engage in research and
experimentation to create and improve the design of such
products; (b) design and manufacture special machinery that is
used to manufacture, automatically inspect and/or package such
products; (c) develop and design sonic bonding equipment used
in such machines; (d) design and develop specifications and
manufacturing processes for materials used in Company-Type
Products including, without limitation, films, and non-woven
fabrics; and/or (e) design and manufacture machines used to
manufacture such materials in the performance of Optionee's
duties. The Company's success and innovation in developing
new, and in enhancing existing, Company-Type Products and in
developing and improving the materials and machinery used in,
and to manufacture, its Company-Type Products confers on the
Company a significant competitive advantage against its
competitors. The continued confidentiality of these aspects of
the Company's business are vital to its business.
(3) If Optionee, at any time during the course of
Optionee's employment with the Company, is engaged in the
financial, legal, administrative, management, marketing,
sales, or communication activities of the Company ("Sales and
Administrative Activities") then the Optionee will become
familiar with or have access to extensive confidential
information pertaining to the business of the Company, which
may include, without limiting the forgoing, and depending upon
Optionee's specific employment duties, names of customers of
the Company and the prices it obtains or has obtained from
customers or for which it sells or has sold its products,
sources for materials used in the Company's products, contract
relationships between the Company and its customers and
suppliers, confidential business and financial data of the
Company, information pertaining to the Company's employees
(including, without limitation, information concerning
compensation and benefit programs), information regarding the
Company's costs, information about the Company's products and
anticipated new products, forecasts, plans, objectives,
investment opportunities, and long term business strategies
and plans of the Company. This confidential information is of
strategic importance to the Company in its ability to
successfully compete. The continued confidentiality of this
information is vital to the Company's business.
(4) The Company has established a valuable and
extensive trade in its Company-Type Products as well as
business connections and customers which are of significant
value to it.
-8-
<PAGE> 9
(5) By virtue of Optionee's employment, Optionee
acknowledges that Optionee holds a position of trust with
respect to the confidential information of the Company made
accessible to Optionee, and that the Company will suffer
irreparable injury if during Optionee's employment or at any
time subsequent to the termination of such employment,
Optionee should, directly or indirectly, enter into
competition with the Company or divulge such secret and
confidential information to competitors or potential
competitors of the Company.
(6) It is expected that Optionee, during
Optionee's employment by the Company, may conceive or generate
(alone or together with others) inventions, discoveries or
ideas, and it is recognized that the ownership thereof should
be and will be in the Company.
(7) The covenants and conditions contained herein
are reasonable and necessary for the protection of the
Company's business. In this regard, Optionee recognizes that
the descriptive scope of the confidential information
described in Section 16 and the territory covered by the non-
competition covenants in Section 16 hereof are reasonable in
light of the fact that the work that Optionee will perform for
the Company as its employee will contribute to the manufacture
or sale of products that will be sold to end users (directly
or in many cases through intermediary distributors) located
throughout the Geographic Region described in Section 16(f).
(b) Optionee covenants and agrees that Optionee will not at
any time during Optionee's employment or thereafter, in any fashion,
form or manner, either directly or indirectly, except to the extent
necessary to carry out Optionee's employee responsibilities for the
benefit of the Company, divulge, disclose or communicate to any
person, firm, partnership, corporation or enterprise in any manner
whatsoever any information of any kind, nature or description
concerning any matters affecting or relating to the business of the
Company, including without limitation, (i) research conducted by the
Company in connection with product development, manufacturing
processes, machinery construction, product materials or otherwise,
(ii) the manufacturing methods or processes used or under development
by the Company for its products, machines and materials, (iii) the
nature or properties of the materials used by the Company in its
products or under development, and supply sources of such materials,
(iv) the names of any of the Company's customers and the prices it
obtains or has obtained or for which it sells or has sold its
products, (v) contract relationships between the Company and its
customers and suppliers, (vi) confidential business and financial data
of the Company, (vii) information pertaining to the Company's
employees (including, without limitation, information concerning
compensation and benefit programs), (viii) information regarding the
Company's costs,
-9-
<PAGE> 10
(ix) information about the Company's products and anticipated new
products, (x) forecasts, plans, objectives, investment opportunities,
and long term business strategies and plans of the Company, and (xi)
any other information of, about or concerning the business of the
Company, its manner of operations, its plans, processes or other data
of any kind, nature or description. The Optionee and Company agree
that the foregoing information is important, material and confidential
and substantially affects the successful conduct of the business of
the Company, and its good will, regardless whether any or all of the
foregoing matters would be deemed to be "trade secrets" as defined by
law. Optionee may have occasion to learn other information as a
consequence of or through Optionee's employment with the Company, such
as information from or about suppliers, customers, competitors and
others. This information generally is obtained by the Company by
studying competitive products, by requesting information from such
other companies, by doing various studies and the like. Such
information in some cases may not be proprietary to the Company but
nevertheless the Company learns such information in the course of its
business, keeps such information secret (because it is costly and
useful information), and legitimately uses such information in
connection with its business. Optionee agrees Optionee will not use
or disclose, or permit such information to be disclosed or used except
in furtherance of Optionee's duties for the Company and agrees not to
use or disclose such information in violation of any obligations or
duties which Optionee or the Company has to any third party. The
parties agree that any breach of the terms of this Section 16(b) is a
material breach of this Agreement. The Company considers, and the
Optionee agrees, that all such information is the Company's sole and
exclusive property, and Optionee agrees to promptly deliver all such
information in tangible form as well as all other correspondence,
memoranda, notes, records, reports, plans, customer lists and all
other papers (and copies thereof) and all electronically stored or
computerized data to the Company either upon the Company's request or
upon any termination of this Agreement. The Company agrees to provide
Optionee with access to and the right to use in the performance of
Optionee's duties to the Company the confidential, proprietary and
other business information and trade secrets described above in this
Section 16 in consideration of the covenants of Optionee of
non-disclosure and non- competition set forth in this Section 16.
(c) All "Inventions" made or conceived by the Optionee,
solely or with others, while employed by the Company, either during or
after working hours, or within a period of one (1) year after
termination of Optionee's employment, which are useful in or related
to the business of the Company or which have been made or conceived,
wholly or partially, with the use of the Company's time, material or
facilities, shall belong exclusively to the Company. The Optionee
agrees that Optionee shall have no claim for additional compensation
for such Inventions. The Optionee agrees promptly to disclose in
accordance with Company procedures any such Invention promptly and
fully by a
-10-
<PAGE> 11
written report, setting forth in detail the structures, procedures and
methodology employed and the results achieved. In addition, full
reports and records shall be kept in accordance with Company practices
during and on completion of any study or research project undertaken
on the Company's behalf, whether or not in Optionee's opinion a given
study or project has resulted in an Invention. For purposes hereof
the term "Invention" means any discovery, concept, idea, whether
patentable or not, relating to any present or prospective activities
of the Company, including, but not limited to, devices, processes,
methods, formulae, techniques, and any improvements to any of the
foregoing. The Optionee hereby assigns and agrees to assign to the
Company all of Optionee's rights to such Inventions and to all
proprietary rights therein, based thereon or related thereto,
including, but not limited to, applications for United States and
foreign letters patent and resulting letters patent. At the request
of the Company, either before or after termination of Optionee's
employment, Optionee shall assist the Company in acquiring and
maintaining patent protection upon and confirming its title to such
Inventions. Optionee's assistance shall include the signing of
applications for patent assignments and other papers, and taking any
other steps considered desirable by the Company.
(d) Ancillary to, and in order to further assure that the
Optionee will not violate Optionee's covenants of non-disclosure of
confidential, proprietary and other business information of the
Company set forth in Section 16(b) hereof or Optionee's obligations
respecting Inventions under Section 16(c), and ancillary to the rest
of this Agreement and in consideration of each of the foregoing,
Optionee covenants and agrees that for the Applicable Period (as
defined below) after termination of Optionee's employment for any
reason, Optionee will not, for any reason, anywhere in the Geographic
Region (as defined below), directly or indirectly, as an employee,
employer, consultant, agent, principal, partner, stockholder, officer,
director, or in any other individual or representative capacity:
(1) engage or participate in any business that:
(A) is engaged, directly or indirectly, in the
sale or marketing of any product that is the same as or
similar to or competitive with any Company-Type Product which
was sold or marketed by the Company during Optionee's
employment with the Company; or
(B) is engaged, directly or indirectly in
research for or the development or manufacture of any product
that is the same as or similar to or competitive with any
Company-Type Product which was the subject of research or
development or which was manufactured, by the Company during
Optionee's employment with the Company; or
-11-
<PAGE> 12
(C) is engaged, directly or indirectly, in the
research, development, manufacture, sale or marketing of any
item made from film or non-woven fabric bonded through a sonic
bonding manufacturing process; or
(D) is engaged, directly or indirectly, in the
research, development, manufacture, use, sale or marketing of
any manufacturing equipment that (i) uses computers in
automated manufacturing; or (ii) is used to produce products
made of film or non-woven fabric; or (iii) uses an automated
or computerized product inspection system, because equipment
similar in function or design to any of the foregoing
equipment would be similar to equipment developed or
manufactured by the Company during the course of Employee's
employment; or
(E) is engaged, directly or indirectly, in the
business described in clause (D) above, if such machines are
designed to be used to manufacture Company-Type Products; or
(2) recruit, or hire, or attempt to recruit or hire,
directly or by assisting others, any other employee or consultant of
the Company or give any advice or counsel with respect to the hiring
of any person who shall have been an employee of the Company at any
time within the two-year period immediately preceding such hiring,
advice or counsel.
(e) Ancillary to, and in order to further assure that Optionee
will not violate Optionee's covenants of non-disclosure of confidential,
proprietary and other business information of the Company set forth in Section
16(b) herein, or Optionee's obligations respecting Inventions under Section
16(c), and ancillary to the rest of this Agreement and in consideration of
each of the foregoing, Optionee covenants and agrees that for the Applicable
Period after termination of Optionee's employment for any reason Optionee will
not, for any reason, anywhere outside the Geographic Region (as defined below),
directly or indirectly, as an employee, employer, consultant, agent, principal,
partner, stockholder, officer, director, or in any other individual or
representative capacity engage or participate in any business described in
paragraph (d)(1) of this Section 16 if in fact such business is shipping the
products or equipment described therein to any country included in the
Geographic Region. Optionee recognizes that the foregoing covenant is
necessary to prevent Optionee from indirectly competing with the Company in a
prohibited manner inside the Geographic Region.
-12-
<PAGE> 13
(f) Geographic Region means United States, Canada, Japan, Puerto
Rico, Mexico, Australia and the countries included in the European Economic
Community; and, if Optionee was directly engaged in selling Company-Type
Products in any other country while employed by the Company, then in such other
country.
(g) If Optionee engages in Technical Activities at any time during
Optionee's employment with the Company, then, for purposes of Sections 16(d)(1)
and (2) and 16(e), Applicable Period means:
<TABLE>
Period For Conduct Described in Clause
------ -------------------------------
<S> <C>
6 months (d)(1)(A)
2 years (d)(1)(B)
2 years (d)(1)(C)
2 years (d)(1)(D)
3 years (d)(1)(E)
2 years (d)(2)
</TABLE>
and, if Optionee engages in Sales and Administrative Activities at any time
during Optionee's employment with the Company, then, for purposes of Sections
16(d)(1) and (2) and 16(e), "Applicable Period" means:
<TABLE>
Period For Conduct Described in Clause
------ -------------------------------
<S> <C>
2 years (d)(1)(A)
2 years (d)(1)(B)
6 months (d)(1)(C)
6 months (d)(1)(D)
1 year (d)(1)(E)
2 years (d)(2)
</TABLE>
If Optionee engages in Technical Activities and in Sales and
Administrative Activities during Optionee's employment with Company then the
Applicable Period shall be the longer period designated for specific conduct.
(h) Optionee agrees to provide to any future employer a copy of
the covenants contained in this Section 16 and agrees that the Company may do
so as well.
(i) During the term of Optionee's employment, Optionee shall not
do any act that is prohibited following termination of Optionee's employment
under Section 16.
-13-
<PAGE> 14
(j) The ownership of less than 2% of a publicly traded company
will not, in and of itself, violate Section 16.
(k) Both the Company's rights and the Optionee's duties under this
Section 16 shall survive any termination of this Agreement. If Optionee
violates any covenant contained in Section 16 of this Agreement, the Company
shall not, as a result of the time involved in obtaining relief, be deprived of
the benefit of the full period of any such covenant. Accordingly, the
covenants of Optionee contained in Section 16 shall be deemed to have the
durations specified therein, which periods shall commence upon the later of (i)
the termination of Optionee's employment with the Company and (ii) the later to
occur of: (A) the date of entry of a final judgment enforcing the covenants of
Optionee under Section 16, as the case may be or (B) the date on which Optionee
permanently ceases such violation.
(l) The Optionee recognizes that the remedy of damages for breach or
threatened breach of the provisions of this Section 16 would be inadequate and
that the harm occasioned by such breach would be irreparable, and accordingly,
Optionee expressly agrees that in the event of a breach or threatened breach by
Optionee of any of the provisions of this Section 16, the Company will be
entitled to an injunction, without the requirement of posting bond, restraining
Optionee from violating the terms hereof, or from rendering services to any
person, firm, corporation, association, or other entity to whom any
confidential information concerning or relating to the business of the Company
has been disclosed or may be threatened to be disclosed, or for whom Optionee
is working or rendering services, or threatens to work or render services in
violation of the terms hereof. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to it for
such breach or threatened breach of this Section 16, including recovery of
damages from Optionee. Optionee's allegation of or the existence of any claim
against the Company, under this Agreement or otherwise, will not constitute a
defense to the Company's enforcement of this Section.
(m)
(1) The parties recognize and agree that it may be
difficult if not impossible for the Company to prove the existence of
a breach of the Optionee's covenants of confidentiality and non-
disclosure under Section 16(b) of this Agreement. The parties further
recognize and agree that the non-competition covenants contained in
Section 16(d) and (e) are necessary to support the legitimate business
interests of the Company in preserving the confidentiality and secrecy
of and control over such confidential information and its business
goodwill and are ancillary to, supportive of, and a part of this
Agreement, are ancillary to the
-14-
<PAGE> 15
Company's undertaking to facilitate Optionee's stock ownership
in the Company, and are necessary as a means of ensuring
compliance by Optionee with such confidentiality covenants.
(2) The existence of any claim or cause of action
of Optionee against the Company or any officer, director, or
shareholder of the Company, that is predicated on this
Agreement or otherwise, shall not constitute a defense to the
enforcement by the Company of the covenants of the Optionee
contained in this Section 16. In addition, the provisions of
this Section 16 shall continue to be binding upon Optionee in
accordance with their terms, notwithstanding the termination
of Optionee's employment with the Company for any reason.
(3) The parties acknowledge and agree that the
time, scope, territory and other provisions of this Section 16
are reasonable under the circumstances. The parties further
agree that if at any time despite the express agreement of the
parties hereto, it is held through enforcement proceedings
that any portion of Section 16 is unenforceable by reason of
its being too extensive in any respect, then it shall be
interpreted and reformed to extend only over the maximum
period of time for which it may be enforceable and over the
maximum geographical area as to which it may be enforceable
and to the maximum extent in all other respects as to which it
may be enforceable.
17. This Agreement constitutes the entire agreement between the
parties and may not be amended except by an instrument in writing executed by
both parties.
18. This Agreement has been executed and will be performed in the
State of Texas and will be governed by and construed in accordance with the
laws of the State of Texas except to the extent limited in Section 20 hereof.
19. If any one or more provisions of this Agreement shall be held
to be invalid, illegal or unenforceable in any respect in any jurisdiction, the
validity, legality or enforceability of the remaining provisions of this
Agreement in such jurisdiction shall not in any way be affected or impaired
thereby. Further, in lieu of such invalid, illegal, or unenforceable
provision, there shall be deemed inserted a provision as close in scope and
content to such provision as possible while remaining valid, legal and
enforceable in such jurisdiction.
20.
(a) Any dispute arising out of or relating to the
interpretation, validity, or enforcement of Section 16 of this
Agreement shall be settled by binding arbitration in
-15-
<PAGE> 16
accordance with the then current Commercial Arbitration Rules of the
American Arbitration Association. Either party may initiate an
arbitration proceeding in accordance with such Rules. The arbitration
shall be conducted by a panel of three independent arbitrators
appointed in accordance with such Rules. The arbitration shall be
governed solely by the United States Arbitration Act notwithstanding
any other provision of this Agreement to the contrary. If the
arbitrators determine that a breach of any of the provisions of
Section 16 has occurred or is threatened then, at the request of the
Company, the arbitrators shall award temporary or permanent injunctive
relief in favor of the Company, as it may request, restraining and
enjoining any further such breach. Such award shall be in addition to
and not in lieu of any other relief to which the Company may be
entitled, including, without limitation, damages arising out of any
such breach. The arbitrators shall enter any award in form sufficient
to permit judgment upon the award to be entered by, and to permit an
order for contempt enforcing compliance with such judgment to be
entered by, a court of competent jurisdiction.
(b) Prior to the hearing on the merits in an arbitration
proceeding to enforce the provisions of Section 16 hereof, in order to
maintain the status quo pending such hearing, the Company shall have
the right to seek and obtain temporary or preliminary injunctive
relief from a court of competent jurisdiction restraining Optionee
from violating the provisions of Section 16.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TECNOL MEDICAL PRODUCTS, INC.
-----------------------------------
Optionee
-----------------------------------
Street address
By:
---------------------------- -----------------------------------
President City State/County Zip Code
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TECNOL
MEDICAL PRODUCTS, INC. 10Q FILING FOR THE THIRD QUARTER OF FISCAL YEAR 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THIS DOCUMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-02-1995
<PERIOD-END> AUG-31-1996
<CASH> 7,107,957
<SECURITIES> 0
<RECEIVABLES> 21,664,612
<ALLOWANCES> 2,270,000
<INVENTORY> 27,163,759
<CURRENT-ASSETS> 59,881,752
<PP&E> 72,092,053
<DEPRECIATION> 24,116,577
<TOTAL-ASSETS> 152,327,053
<CURRENT-LIABILITIES> 15,371,593
<BONDS> 10,032,189
0
0
<COMMON> 21,117
<OTHER-SE> 121,935,565
<TOTAL-LIABILITY-AND-EQUITY> 152,327,053
<SALES> 107,552,956
<TOTAL-REVENUES> 107,552,956
<CGS> 62,269,172
<TOTAL-COSTS> 62,269,172
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,413,000
<INTEREST-EXPENSE> 753,874
<INCOME-PRETAX> 16,860,847
<INCOME-TAX> 5,629,968
<INCOME-CONTINUING> 11,230,879
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 11,230,879
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0<F1>
<FN>
<F1>PRIMARY AND FULLY DILUTED NET INCOME PER SHARE ARE NOT MATERIALLY DIFFERENT.
</FN>
</TABLE>
