<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 March 1, 1997
-or-
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------------------
------------------------------.
Commission file number: 0-19524
--------------
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.
19,976,074 shares common stock, par value $.001, as of April 8, 1997
--------------------------------------------------------------------
<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
November 30, 1996, and March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the Quarters
Ended March 2, 1996, and March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the Quarters
Ended March 2, 1996, and March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Interim Financial Statements . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Nov. 30, Mar. 1,
1996 1997
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,355,033 $ 7,698,842
Accounts receivable, net of allowance
for doubtful accounts of $1,497,000 in 1996
and $1,414,000 in 1997 24,858,157 26,032,419
Inventories 32,036,334 31,875,159
Prepaid expenses 620,807 667,234
Other current assets 3,497,720 3,591,197
------------ ------------
Total current assets 65,368,051 69,864,851
NET PROPERTY, PLANT, AND EQUIPMENT 48,671,113 50,023,878
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $3,609,000 in 1996 and $3,950,000 in 1997 39,618,824 39,766,178
Other purchased intangible assets, net of
accumulated amortization of $3,140,000 in
1996 and $3,280,000 in 1997 772,257 631,342
Patents and trademarks, net of accumulated
amortization of $728,000 in 1996 and $811,000
in 1997 3,358,266 3,392,677
Other 1,711,193 1,718,317
------------ ------------
Total other assets 45,460,540 45,508,514
------------ ------------
Total assets $159,499,704 $165,397,243
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
Nov. 30, Mar. 1,
1996 1997
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 7,800,378 $ 8,893,408
Accrued expenses 4,662,419 3,520,788
Income taxes payable 719,042 3,058,831
Current maturities of long-term debt 3,641,287 4,125,726
------------ ------------
Total current liabilities 16,823,126 19,598,753
LONG-TERM DEBT, net of current maturities 9,264,736 7,462,035
DEFERRED INCOME TAXES 6,179,599 5,969,599
------------ ------------
Total liabilities 32,267,461 33,030,387
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, 21,116,980 shares issued
in 1996 and 21,135,563 shares issued in 1997 21,117 21,136
Additional paid-in capital 27,886,864 28,097,452
Retained earnings 103,755,583 108,679,589
------------ ------------
131,663,564 136,798,177
Less-treasury stock, at cost:
1,159,489 shares in 1996 and 1997 3,529,197 3,529,197
Less-unearned employee stock ownership shares,
60,000 shares in 1996 and 1997 902,124 902,124
------------ ------------
Total stockholders' equity 127,232,243 132,366,856
------------ ------------
Total liabilities and stockholders' equity $159,499,704 $165,397,243
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTERS ENDED MARCH 2, 1996, AND MARCH 1, 1997
<TABLE>
<CAPTION>
Quarter Ended
----------------------------
Mar. 2, Mar. 1,
1996 1997
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
NET SALES $ 35,243,621 $ 37,310,507
COST OF GOODS SOLD 19,578,729 20,728,710
------------ ------------
Gross profit 15,664,892 16,581,797
SELLING EXPENSES 5,688,696 5,900,710
GENERAL AND ADMINISTRATIVE EXPENSES 2,068,259 2,339,475
RESEARCH AND DEVELOPMENT EXPENSES 457,991 410,263
------------ ------------
Income from operations 7,449,946 7,931,349
OTHER INCOME (EXPENSE):
Interest income 5,469 85,159
Interest expense (385,795) (108,946)
Amortization expense and other, net (457,520) (483,767)
------------ ------------
Total other income (expense) (837,846) (507,554)
------------ ------------
Income before provision
for income taxes 6,612,100 7,423,795
PROVISION FOR INCOME TAXES 2,277,974 2,499,789
------------ ------------
NET INCOME $ 4,334,126 $ 4,924,006
============ ============
Net income per common and common
equivalent share $ 0.22 $ 0.25
============ ============
Weighted average number of common and
common equivalent shares outstanding 20,127,562 20,083,764
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
TECNOL MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTERS ENDED MARCH 2, 1996, AND MARCH 1, 1997
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
Mar. 2, Mar. 1,
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,334,126 $ 4,924,006
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,306,165 1,077,360
Amortization 578,665 568,293
Decrease in deferred income taxes (200,000) (210,000)
Net change in assets and liabilities, excluding acquisitions-
Accounts receivable (5,598,633) (1,198,345)
Inventories 1,798,281 (23,241)
Other current assets (324,778) (139,904)
Accounts payable 2,510,327 1,130,030
Accrued expenses (741,605) (1,141,639)
Income taxes payable 657,437 2,339,789
----------- -----------
Total adjustments (14,141) 2,402,343
----------- -----------
Net cash provided by operating activities 4,319,985 7,326,349
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (2,324,480) (2,669,024)
Cash paid for acquisitions, net of cash acquired (5,169,463) --
Expenditures for patents and trademarks (22,269) (117,636)
Increase in other assets (716) (235,204)
----------- -----------
Net cash used in investing activities (7,516,928) (3,021,864)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank line of credit (2,055,000) --
Proceeds from bank loan 5,500,000 --
Principal payments on long-term debt (220,959) (1,171,283)
Net proceeds from exercise of stock options 54,175 210,607
----------- -----------
Net cash provided by (used in) financing activities 3,278,216 (960,676)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 81,273 3,343,809
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 230,401 4,355,033
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 311,674 $ 7,698,842
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 314,571 $ 210,117
Income taxes $ 1,820,537 $ 370,000
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 ended March 1, 1997, are not necessarily
indicative of the results that may be expected for the fiscal year ending
November 29, 1997.
The Company's fiscal year is the fifty-two or fifty-three week period ending
on the Saturday nearest to November 30. The quarter periods ended March 2,
1996, and March 1, 1997, each include thirteen weeks. The fiscal year ending
November 29, 1997, 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
------------------------------
Mar. 2, Mar. 1,
1996 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Common shares outstanding 19,939,517 19,976,074
Effect of using weighted average common and common equivalent
shares outstanding during the period (2,552) (2,367)
Effect of using weighted average unearned ESOP shares (86,250) (56,250)
Effect of assuming exercise of outstanding stock options based on
the treasury stock method 276,847 166,307
----------- -----------
Shares used in computing primary net income per share 20,127,562 20,083,764
=========== ===========
</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 November 30, 1996, and March 1, 1997, consists of the
following:
<TABLE>
<CAPTION>
Nov. 30, Mar. 1,
1996 1997
------------ ------------
<S> <C> <C>
Industrial Revenue Bonds $ 3,600,000 $ 3,400,000
Bank term loans 8,187,500 7,350,000
Other installment obligations 1,118,523 837,761
------------ ------------
12,906,023 11,587,761
Less-current maturities (3,641,287) (4,125,726)
------------ ------------
$ 9,264,736 $ 7,462,035
============ ============
</TABLE>
NOTE 4 -- INVENTORIES
Inventories at November 30, 1996, and March 1, 1997, consist of the
following:
<TABLE>
<CAPTION>
Nov. 30, Mar. 1,
1996 1997
----------- -----------
<S> <C> <C>
Raw materials $15,212,956 $15,036,450
Work-in-process 1,983,973 2,775,226
Finished goods 14,839,405 14,063,483
----------- -----------
$32,036,334 $31,875,159
=========== ===========
</TABLE>
NOTE 5 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at November 30, 1996, and March 1, 1997,
consists of the following:
<TABLE>
<CAPTION>
Nov. 30, Mar. 1,
1996 1997
----------- -----------
<S> <C> <C>
Land $ 6,247,752 $ 6,591,555
Buildings and improvements 14,563,836 14,588,472
Automotive equipment 2,913,496 3,008,625
Manufacturing equipment 36,510,853 36,254,613
Office furniture and equipment 9,267,496 9,392,416
Construction-in-progress 4,446,416 6,544,293
----------- -----------
73,949,849 76,379,974
Less accumulated depreciation (25,278,736) (26,356,096)
----------- -----------
$48,671,113 $50,023,878
=========== ===========
</TABLE>
8
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This analysis of the Company's operations encompassing the three months
ended March 2, 1996, and March 1, 1997, 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 5.9% from $35.2 million in the first quarter of fiscal
1996 to $37.3 million in the first quarter of fiscal 1997. 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 International division experienced a significant sales
increase of approximately 21% for the first quarter of fiscal 1997 compared to
the first quarter of fiscal 1996. Sales of the U.S. Hospital and Industrial
Products divisions for the first quarter of fiscal 1997 were consistent with
the first quarter of fiscal 1996. Sales of the Orthopedic and Specialty
Markets divisions reflected slight decreases for the first quarter of fiscal
1997 compared to the first quarter of fiscal 1996. Contract manufacturing
generated sales of approximately $2.6 million in the first quarter of fiscal
1997 compared to approximately $1.3 million for the first quarter of fiscal
1996.
The gross profit margin was 44.4% for the first quarter of fiscal 1997 and
the first quarter of fiscal 1996. Gross profit margin was negatively impacted
by approximately 1.0% due to sales increases in contract manufacturing, as
contract manufacturing provides a lower gross profit margin than sales to
distributors. Contract manufacturing represented approximately 7.0% of total
sales in the first quarter of fiscal 1997 compared to 3.8% of total net sales
in the first quarter of fiscal 1996. Operating income from contract
manufacturing is consistent with the corporate average, as minimal selling
expenses are required. The negative impact to gross profit margin from
increased contract manufacturing was offset by improvements in manufacturing
productivity resulting from reduced turnover of employees and less overtime
incurred, along with efficiencies gained from moving all wound care production
to Texas. Additionally, gross profit margin was positively impacted as the
Company increased the useful life on certain manufacturing equipment from 10
years to 20 years during the second quarter of fiscal 1996, reducing
depreciation expense on these machines by approximately $200,000 for the first
quarter of fiscal 1997 as compared to the first quarter of fiscal year 1996.
Selling expenses increased 3.7% from $5.7 million in the first quarter of
fiscal 1996 to $5.9 million in the first quarter of fiscal 1997. As a
percentage of net sales, selling expenses decreased from 16.1% of net sales in
the first quarter of fiscal 1996 to 15.8% of net sales in the first quarter of
fiscal 1997. 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 require minimal selling expenses.
General and administrative expenses increased 13.1% from $2.1 million in the
first quarter of fiscal 1996 to $2.3 million in the first quarter of fiscal
1997. As a percentage of net sales, general and administrative expenses were
5.9% in the first quarter of 1996 compared to 6.3% in the first quarter of
1997. Research and development expenses decreased by 10.4% from approximately
9
<PAGE> 10
$458,000 in the first quarter of fiscal 1996 to approximately $410,000 in the
first quarter of fiscal 1997.
Income from operations increased 6.5% from $7.4 million in the first quarter
of fiscal 1996 to $7.9 million in the first quarter of fiscal 1997. Operating
margin increased from 21.1% in the first quarter of fiscal year 1996 to 21.3%
in the first quarter of fiscal year 1997.
Other income (expense) represented expense of approximately $508,000 in the
first quarter of fiscal 1997, compared to expense of approximately $838,000 in
the first quarter of fiscal 1996. The Company has incurred lower interest
expense, as certain long-term debt and borrowings under the line of credit have
been repaid. Amortization expense included in other income (expense) was
approximately $489,000 in the first quarter of fiscal 1996, compared to
approximately $482,000 in the first quarter of fiscal 1997.
Tecnol's effective income tax rate decreased from 34.5% in the first quarter
of fiscal 1996 to 33.7% in the first quarter of fiscal 1997. The effective tax
rates for the first quarter of fiscal 1997 and 1996 are lower than the
statutory rate due to revisions in estimated reserves required for federal
income taxes. Net income in the first quarter of 1997 was favorably impacted
by $0.01 per share due to a decrease in the Company's income tax reserves. The
Company expects the effective tax rate to be approximately 36.5% for the
remainder of 1997.
Net income increased 13.6% from $4.3 million in the first quarter of fiscal
1996 to $4.9 million in the first quarter of fiscal 1997 as a result of the
foregoing factors. Net income per share increased 13.6% from $0.22 in the first
quarter of fiscal 1996 to $0.25 in the first quarter of fiscal 1997.
Over the past few years, legislation designed to significantly reform the
way health care services are provided in the United States has been proposed.
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 hospital group purchasing
organizations, managed care, and other strategies. The objective of some of
these changes is to reduce costs of health care, including the hospital cost of
medical devices. 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, existing cash, 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.
Tecnol owns 25 acres of land in Fort Worth, Texas on which the Company has
begun construction of a central distribution facility for finished goods, with
completion expected in fiscal 1998 at an estimated cost of $10 million. In
early 1997, the Company purchased approximately 10 acres of land in Acuna,
Mexico, on which the Company has entered into a contract to build a 91,000
square foot facility to be used for office space, manufacturing, and
warehousing. The cost of the land and this facility is expected to be
approximately $3.5 million. Construction of this facility began in early 1997
and is expected to be completed by the end of fiscal 1997. During fiscal 1997,
10
<PAGE> 11
the Company is planning to add approximately 54,000 square feet to its
headquarters building in order to add engineering, product development,
manufacturing, and office space at an estimated cost of $4 to $5 million.
Additionally during 1997, the Company is planning to remodel existing space and
add approximately 75,000 square feet to the facility located less than one mile
from Tecnol's corporate headquarters at an estimated cost of $2 million. The
Company may use long-term financing for these facilities projects and any
acquisition opportunities that may arise.
The Company's working capital increased from $48.5 million at the end of
fiscal 1996 to $50.3 million at March 1, 1997. Net cash generated by operating
activities for the quarter ended March 1, 1997, totaled $7.3 million. Cash
generated by operating activities was used to repay approximately $1.2 million
of long-term debt and to purchase approximately $2.7 million of property,
plant, and equipment. Net cash and cash equivalents at March 1, 1997, totaled
approximately $7.7 million.
On March 1, 1997, the Company had no amounts outstanding and $10,000,000
available under its bank line of credit. The line of credit was renewed and
the total amount increased to $12,500,000 on March 12, 1997. The line of
credit expires March 14, 1998. On March 1, 1997, the Company also had
$4,400,000 available under a reducing revolving bank line of credit.
Cautionary Information Regarding 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 the context in which
they are made, including assumptions which are explicitly or implicitly
included in the statements, and 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 or pricing in its 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 do not occur as management
anticipates, actual results could differ materially from the expectations
expressed in the forward-looking statements. The Company may or may not update
information contained in previously released forward-looking statements and
does not assume the duty to do so.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - The following exhibits are filed as part of this report:
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated
December 20, 1996
27 Financial Data Schedule
** Management contract or compensatory plan or arrangement.
(b) No reports on Form 8-K were filed during the quarter ended March 1, 1997.
12
<PAGE> 13
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: April 14, 1997 /s/David Radunsky
----------------------- ----------------------------------------
DAVID RADUNSKY, Chief Operating Officer
Date: April 14, 1997 /s/Jeffrey A. Nick
----------------------- ----------------------------------------
JEFFREY A. NICK, Vice President Finance
and Accounting
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
** 10(k) Jeffrey A. Nick Incentive Stock Option, Trade Secret,
Invention and Non-Competition Agreement dated
December 20, 1996
27 Financial Data Schedule
</TABLE>
** Management contract or compensatory plan or arrangement.
12
<PAGE> 1
EXHIBIT 10(K)
INCENTIVE STOCK OPTION, TRADE SECRET,
INVENTION, AND NON-COMPETITION AGREEMENT
THIS AGREEMENT, made this 20th day of December, 1996, by and between
TECNOL MEDICAL PRODUCTS, INC., a Delaware corporation (hereinafter called
"TMPI"), and the person whose name is set forth on the signature page to this
Agreement (hereinafter called the "Optionee").
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, in order to encourage Optionee's continued interest in and
loyalty and commitment to the Company, the Company previously granted Optionee
an option to purchase Common Stock (as defined below) of the Company (the
"Original Option"), pursuant to an Incentive Stock Option, Trade Secret,
Invention, and Non-Competition Agreement effective as of the "Original
Effective Date" as defined in Section 21 of this Agreement (the "Original
Option Agreement"); and
WHEREAS, the parties desire to replace the Original Option with a new
option to acquire Common Stock of the Company on the terms and conditions set
forth in this Agreement which were approved and authorized by the Board of
Directors and Stock Option Committee of the Company on October 24, 1996; and
WHEREAS, as a condition to the Company's willingness to enter into
this Agreement and to facilitate Optionee's stock ownership interest in the
Company, and ancillary to the Company's undertaking to facilitate such
ownership 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 to 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 Optionee.
<PAGE> 2
2. Effective upon the execution of this Agreement by both
Optionee and the Company, the Original Option shall be terminated and of no
further force and effect and shall be replaced in its entirety by the option
granted under this Agreement. 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") defined in Section
21 to be the "Number of Option Shares" during the period commencing on the date
hereof or, if later, on the first anniversary of the "Original Effective Date,"
and ending March 1, 2003, at a price per share of $15.00 (the "Option Exercise
Price").
The right and option granted hereunder may be exercised from time to
time as follows:
(a) Beginning on the date this Agreement is made, this option
shall be exercisable as to the number of shares of Common
Stock, if any, defined in Section 21 to be the "Number of
Shares Immediately Exercisable"; and
(b) Beginning on March 1, 1997, and continuing on each March 1
thereafter through and including March 1, 2002, this option
shall become exercisable as to an additional number of shares
of Common Stock equal to the "Number of Shares Exercisable
Annually" as defined in Section 21 of this Agreement, provided
that in no event shall the total number of shares exercisable
under this option on a cumulative basis exceed the Number of
Option Shares.
The result of the foregoing is that the option granted hereunder shall
be exercisable as to the same number of shares of Common Stock and on the same
dates as would have applied under the Original Option had it remained in
effect.
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.
-2-
<PAGE> 3
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 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
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<PAGE> 4
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 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 Original Effective Date.
-4-
<PAGE> 5
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.
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,
-5-
<PAGE> 6
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 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.
-6-
<PAGE> 7
(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
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.
-7-
<PAGE> 8
(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, (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
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<PAGE> 9
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 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
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<PAGE> 10
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
(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
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<PAGE> 11
(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.
(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>
<CAPTION>
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>
-11-
<PAGE> 12
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>
<CAPTION>
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.
(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
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<PAGE> 13
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 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.
-13-
<PAGE> 14
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 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.
-14-
<PAGE> 15
21. As used in this Agreement, the following terms have
the meanings set forth below:
"Original Effective Date" means November 20, 1995.
"Number of Option Shares" means 11,667 shares of Common Stock.
"Number of Shares Immediately Exercisable" means 1,667 shares
of Common Stock.
"Additional Number of Shares Exercisable Annually" means 1,666
shares of Common Stock in each year except the year beginning on March
1, 2002, in which case the "Additional Number of Shares Exercisable
Annually," if different, is the balance of the Number of Option Shares
that have not previously become exercisable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TECNOL MEDICAL PRODUCTS, INC. OPTIONEE:
By: /s/ Van Hubbard By: /s/ Jeffrey A. Nick
---------------------- --------------------------------
President Jeffrey A. Nick
704 Giltin Court
-------------------------------------
Street Address
Arlington, TX 76008
-------------------------------------
City State/County Zip Code
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TECNOL
MEDICAL PRODUCTS, INC. 10Q FILING FOR FIRST QUARTER OF FISCAL YEAR 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-29-1997
<PERIOD-START> DEC-1-1996
<PERIOD-END> MAR-1-1997
<CASH> 7,698,842
<SECURITIES> 0
<RECEIVABLES> 26,032,419
<ALLOWANCES> 1,414,000
<INVENTORY> 31,875,159
<CURRENT-ASSETS> 69,864,851
<PP&E> 76,379,974
<DEPRECIATION> 26,356,096
<TOTAL-ASSETS> 165,397,243
<CURRENT-LIABILITIES> 19,598,753
<BONDS> 7,462,035
0
0
<COMMON> 21,136
<OTHER-SE> 132,345,720
<TOTAL-LIABILITY-AND-EQUITY> 165,397,243
<SALES> 37,310,507
<TOTAL-REVENUES> 37,310,507
<CGS> 20,728,710
<TOTAL-COSTS> 20,728,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,946
<INCOME-PRETAX> 7,423,795
<INCOME-TAX> 2,499,789
<INCOME-CONTINUING> 4,924,006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,924,006
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25<F1>
<FN>
<F1>PRIMARY AND FULLY DILUTED NET INCOME PER SHARE ARE NOT MATERIALLY DIFFERENT.
</FN>
</TABLE>
