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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 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
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Commission File No.: 0-21330
AVECOR CARDIOVASCULAR INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1695729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7611 NORTHLAND DRIVE
MINNEAPOLIS, MINNESOTA 55428
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (612) 391-9000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 21, 1997, 7,903,268 shares of Common Stock of the registrant
were outstanding, and the aggregate market value of the Common Stock of the
registrant as of that date (based upon the last reported sale price of the
Common Stock at that date by the Nasdaq National Market), excluding outstanding
shares owned beneficially by officers and directors, was approximately
$80,345,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of this Annual Report on Form 10-K incorporate by reference
information (to the extent specific pages are referred to herein) from the
registrant's Annual Report to Shareholders for the year ended December 31, 1996
(the "1996 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates by reference information (to the extent specific sections are
referred to herein) from the registrant's Proxy Statement for its 1997 Annual
Meeting to be held May 14, 1997 (the "1997 Proxy Statement").
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The matters discussed in this Annual Report on Form 10-K contain certain
forward-looking statements. For this purpose, any statements contained in this
Report that are not statements of historical fact may be deemed to be forward-
looking statements. Without limiting the foregoing, words such as "may,"
"will," "expect," "believe," "anticipate," "estimate" or "continue," the
negative or other variations thereof, or comparable terminology, are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially
depending on a variety of factors, including the progress of product development
and clinical studies, the timing of and ability to attain regulatory approvals,
the availability of third-party reimbursement, the extent to which the Company's
products gain market acceptance, litigation regarding patent and other
intellectual property rights, the introduction of competitive products by others
and other factors, as well as those set forth below under the caption "Important
Factors" on page 19.
Affinity-TM-, MYOtherm-TM-, Signature-TM- and OnCourse-TM- are trademarks of the
Company.
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
AVECOR Cardiovascular Inc. (the "Company") designs, develops, manufactures
and markets specialty medical devices for heart/lung bypass surgery and
long-term respiratory support. The Company's products include the AFFINITY
microporous, hollow fiber membrane oxygenator and related blood reservoirs, a
line of solid silicone membrane oxygenators and related blood reservoirs, the
MYOTHERM cardioplegia delivery system, SIGNATURE custom tubing packs and the
AFFINITY arterial filter.
The Company was incorporated in Minnesota in December 1990 and began
operations in 1991 when it purchased the surgical division of SCIMED Life
Systems, Inc. (the "Predecessor Business"). The assets purchased included a line
of solid silicone membrane oxygenators. The Company introduced its MYOTHERM
cardioplegia delivery system in October 1991, and began marketing its SIGNATURE
custom tubing packs in July 1993 upon the receipt of marketing clearance from
the U.S. Food and Drug Administration (the "FDA"). Also in July 1993, the
Company began international marketing of the AFFINITY oxygenator. In November
1993, the Company received marketing clearance from the FDA to begin U.S.
marketing of the AFFINITY oxygenator, and the Company released the device to the
U.S. market in February 1994. In July 1994, the Company received marketing
clearance from the FDA to market its AFFINITY blood reservoirs. The Company
received marketing clearance from the FDA to market its AFFINITY arterial filter
in October 1995, which it released worldwide in the first quarter of 1996. In
connection with the Company's continuing efforts to offer a more complete line
of proprietary heart/lung bypass circuit products, the Company is currently
completing development of a new blood pump, for which a 510(k) pre-market
notification was filed with the FDA in September 1996.
In April 1992, the Company completed a public offering of 1,988,250 shares
of its Common Stock, $.01 par value ("Common Stock"), and received approximately
$9,700,000 in net proceeds after deducting expenses of the offering. On December
1, 1992, the Company acquired all of the issued and outstanding shares of the
capital stock of Cardio Med Ltd., a corporation organized under the laws of
England and Wales ("Cardio Med"), in exchange for 160,000 shares of the
Company's Common Stock. Cardio Med had been a distributor of the Company's
disposable membrane oxygenators, cardiotomy reservoirs and cardioplegia systems
and manufactured its own proprietary line of custom tubing packs. As a result
of the
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acquisition, Cardio Med has become a wholly-owned subsidiary of the Company.
Cardio Med's name has since been changed to AVECOR Cardiovascular Ltd. ("AVECOR
Ltd.").
In June 1995, the Company completed a public offering of 1,161,250 shares
of Common Stock, resulting in net proceeds to the Company of approximately
$12,653,000. An additional 1,478,000 shares of Common Stock were also sold by
certain shareholders of the Company in the offering. During 1995, the Company
also incorporated AVECOR Foreign Sales Corporation as a wholly-owned subsidiary
of the Company and opened a sales office in France, which is organized as a
subsidiary of AVECOR Ltd.
As used herein, the term "Company" refers to AVECOR Cardiovascular Inc.,
AVECOR Ltd., AVECOR Cardiovascular France S.A.R.L. and AVECOR Foreign Sales
Corporation. The Company's principal executive offices are located at 7611
Northland Drive, Minneapolis, Minnesota 55428, and its telephone number is (612)
391-9000.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Since its inception, the Company has operated in the single industry
segment of designing, developing, manufacturing and marketing medical devices.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
INDUSTRY BACKGROUND AND MARKETS
INDUSTRY BACKGROUND. The Company's products are used in surgical
procedures requiring heart/lung bypass, such as the treatment of coronary artery
disease by coronary artery bypass graft surgery ("CABG" or "coronary bypass
surgery"), heart valve replacement surgery and pediatric and neonatal congenital
heart defect surgery. There were approximately 850,000 heart/lung bypass
procedures performed worldwide in 1995. Approximately 400,000 heart/lung bypass
procedures were performed in the United States in 1995, and approximately
265,000 heart/lung bypass procedures were performed in Europe in 1994. Certain
of the Company's products are also used in non-surgical applications, such as
the long-term cardiopulmonary support of premature infants, newborns and other
patients with life-threatening respiratory disorders.
The primary use of the Company's products is for heart/lung bypass
procedures during the surgical treatment of coronary artery disease. Coronary
artery disease, the leading cause of death in the United States, is the
atherosclerotic narrowing of the coronary arteries that supply blood to the
heart. Atherosclerosis is the accumulation of cholesterol and blood products on
the inner lining of an artery that causes the arterial wall to thicken and lose
elasticity, narrowing the inner diameter of the artery. According to an estimate
by the American Heart Association, approximately 13,490,000 Americans have a
history of heart attack, angina pectoris (chest pain), or both, which are
generally associated with coronary artery disease. The American Heart
Association estimated that coronary artery disease would result in 1,500,000
acute myocardial infarctions, or heart attacks, in the United States in 1996, of
which approximately 500,000 would result in death.
In the late 1960s, cardiovascular surgeons pioneered coronary bypass
surgery, a surgical treatment for severe cases of coronary artery disease in
which blood vessel grafts are used to bypass the site of the blocked arteries.
Several of these procedures or "grafts" may be performed during a single surgery
in order to bypass atherosclerotic lesions in more than one of the coronary
arteries, which is commonly referred to as "multi-vessel" coronary artery
disease. Coronary bypass surgery generally requires that the patient be put on a
heart/lung bypass circuit to enable the surgeon to operate on a still,
relatively bloodless heart. The
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heart/lung bypass circuit is a series of interconnected specialty medical
devices that together function as a patient's heart and lungs by temporarily
oxygenating and circulating blood while the patient's own heart and lungs are
rendered inactive. The Company believes coronary bypass surgery accounts for
approximately 75% of the total heart/lung bypass procedures performed in the
United States and over 50% of the procedures performed in Europe.
Although coronary bypass surgery is a highly invasive procedure, it has
been shown to be highly effective in treating coronary artery disease, and the
number of procedures performed annually in the United States has grown from
approximately 200,000 in 1982 to over 400,000 in 1995 (multiple procedures may
be performed during a single surgery where multi-vessel disease is present).
The annual worldwide growth rate in the number of coronary bypass procedures has
fluctuated from year to year for various reasons.
Since the development of coronary bypass surgery, a number of non-surgical
interventional treatments for coronary artery disease have been developed which,
depending on the extent and nature of the disease as well as physician
preference, may be used as an alternative to coronary bypass surgery. These
non-surgical treatments, while generally less costly per procedure, have
limitations and to date have not resulted in reduced demand for coronary bypass
surgery.
Percutaneous transluminal coronary angioplasty ("PTCA") was introduced in
the early 1980s as a non-surgical treatment for coronary artery disease. PTCA is
performed by guiding a balloon-tipped catheter to the site of an atherosclerotic
lesion, followed by several courses of dilation under high balloon pressure. For
many patients, PTCA represents a less costly and less traumatic alternative to
bypass surgery, while for other patients it represents a preferred alternative
to drug therapy. While the number of PTCA procedures performed grew
significantly in the 1980s and early 1990s, the number of coronary bypass
procedures performed annually also continued to grow during this period.
Although the average cost of a PTCA procedure is approximately one-half of
the average cost of coronary bypass surgery, the need for further interventions
for many patients tends to significantly reduce the long-term cost differential
between these two types of procedures. Studies have indicated that 30% to 50%
of PTCA procedures are complicated by "restenosis," a renarrowing, or often
reclosure, of the dilated vessel within six months. An artery complicated by
restenosis often requires repeat procedures, reducing the overall
cost-effectiveness of PTCA. For a significant number of PTCA patients, coronary
bypass surgery is ultimately performed. In patients with multi-vessel coronary
artery disease, a randomized study has shown that within three years of
receiving treatment, only 14% of patients receiving coronary bypass surgery
required retreatment ("revascularization") while 60% of patients receiving PTCA
required revascularization. Additional studies have confirmed that
approximately 20% of PTCA patients with multi-vessel disease will undergo
coronary bypass surgery within one year of receiving PTCA. Because of the
higher rates of revascularization of patients receiving PTCA rather than
coronary bypass surgery, several studies have concluded that over a three-year
period the overall average cost of PTCA procedures exceeds 75% of the average
cost of coronary bypass surgery.
In response to the limitations of PTCA, a variety of "second generation"
interventional devices for coronary artery disease have been developed,
including atherectomy devices (catheter devices that cut and remove
atherosclerotic materials from the arterial wall), rotational ablation devices
(catheter devices which use a rotating burr to remove material), laser catheter
devices (devices that use laser energy to reduce accumulated materials in
arteries) and coronary stents (expandable metal frames that are positioned
within the diseased area in the coronary artery to maintain the vessel opening).
Of these devices, coronary stents have demonstrated the best potential to date
to reduce restenosis in a randomized population. Recent studies have concluded
that the rate of restenosis in patients receiving coronary stents following PTCA
is
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approximately 30% lower than in patients treated only by PTCA. However, the use
of stenting in connection with PTCA greatly increases the cost of the PTCA
procedure. One study has indicated that the average cost per procedure for
elective stenting in connection with PTCA was approximately twice the cost of
PTCA without stenting (or approximately equal to the cost of coronary bypass
surgery).
In addition to the existing non-surgical treatments for coronary artery
disease, an additional treatment modality has emerged for both coronary artery
disease and heart valve replacement procedures (discussed below), which involves
"least" or "minimally" invasive surgical procedures. These techniques involve
small surgical incisions in the patient's chest in lieu of the larger incision
used in traditional CABG or valve replacement surgeries. Specialized surgical
instruments used in connection with endoscopes enable surgeons to perform CABG
or valve replacement surgeries via these smaller incisions. In some variations
of this type of procedure, only a modified form of the heart/lung bypass circuit
is required, which includes an oxygenator and related disposables. However, in
other variations of this type of procedure a heart/lung bypass circuit is not
utilized.
While this modality is in its developmental stages and currently requires
significant surgical skill and training, the potential benefits to patients from
this type of surgery are a reduced recovery period and risk of infection as a
result of the smaller incision. While some of the patients currently eligible
for treatment by these types of procedures are not candidates for more invasive
and less costly procedures, there can be no assurance that this type of surgical
procedure will not represent a significant portion of the CABG or heart valve
replacement procedures in the future. Therefore, it cannot be determined at
this time what effect, if any, the development and acceptance of these
procedures may have on the market for the Company's disposable heart/lung bypass
circuit components.
A second significant use of the Company's products in conjunction with
heart/lung bypass procedures is in heart valve replacement surgery. Heart valve
replacement surgery is also an open heart surgical procedure, involving the
replacement of valves that regulate the flow of blood between chambers in the
heart. Valve replacement may be required where the valve has become narrowed or
ineffective due to the build-up of calcium or scar tissue, or where there is a
congenital defect or some other form of physical damage to the valve. Like
coronary bypass surgery, valve replacement surgery requires that the patient be
put on a heart/lung bypass circuit. The Company believes approximately 20% of
the heart/lung bypass procedures performed in the United States were performed
in heart valve replacement surgery and approximately 25% of the heart/lung
bypass procedures performed in Europe were performed in heart valve replacement
surgery.
Pediatric and neonatal congenital heart defect surgery is another
heart/lung bypass procedure which uses several of the Company's products. These
procedures are undertaken to correct developmental defects in the heart of a
child or infant. The Company believes approximately 5% of the heart/lung bypass
procedures performed in the United States and approximately 10% of those
performed in Europe were performed in connection with this type of corrective
surgery.
The primary non-surgical use of the Company's products is in connection
with a procedure known as extracorporeal membrane oxygenation ("ECMO"). ECMO is
the long-term cardiopulmonary support of premature infants, newborns and other
patients with life threatening respiratory disorders. The relatively small ECMO
market served by the Company is comprised of 112 established centers worldwide,
in which approximately 1,300 neonatal ECMO procedures (procedures performed on
children younger than one year) were performed in 1993. Neonatal ECMO
procedures constitute the vast majority of all ECMO procedures performed. There
has been relatively little growth in the overall ECMO market in recent years and
the Company believes growth in this market will remain limited until technology
overcomes complications that
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are common in long-term respiratory support, such as intracranial bleeding due
to the associated long-term use of anti-coagulants. Since the Company
manufactures what it believes to be the only oxygenator that has received
clearance from the FDA for sale for long-term cardiopulmonary support for
periods greater than 24 hours, the Company believes it has a competitive
advantage in this relatively small market.
HEART/LUNG BYPASS CIRCUIT. In procedures requiring cardiopulmonary
support, the patient is connected to a series of interconnected specialty
medical devices, collectively called a heart/lung bypass circuit. The
heart/lung bypass circuit functions as the patient's heart and lungs by
temporarily oxygenating and circulating blood while the patient's own heart and
lungs are rendered inactive. The devices in the heart/lung bypass circuit are
operated by a skilled medical professional known as a perfusionist, under the
direction of a surgeon. The primary components of a heart/lung bypass circuit,
including the oxygenator, are single-use, disposable products. Heart/lung
bypass circuits are customized for the particular practices of individual
perfusionists.
In a typical heart/lung bypass procedure, blood is removed via surgically
inserted "cannulae" (hollow tubes with specifically designed tips that
facilitate the drainage or infusion of blood into or out of a patient's body)
from the patient's vena cava (the large vessels leading to the heart). The
blood flows from the patient's vena cava by gravity into a venous blood
reservoir where it is collected and "de-bubbled" (air is eliminated from the
blood). In addition, blood that is suctioned from the patient or drained from
the heart is filtered and de-bubbled through a cardiotomy reservoir. This blood
is then also added to the venous blood reservoir. From the venous blood
reservoir, the blood is mechanically pumped by a blood pump serving as a
replacement for the patient's heart through an oxygenator. The oxygenator
serves as a replacement for the patient's lungs by removing carbon dioxide from
and adding oxygen to the blood. The carbon dioxide and oxygen levels in the
blood are monitored with blood gas monitoring equipment, allowing the
perfusionist to make the proper adjustments to maintain the correct
concentrations. The oxygenator also controls the temperature of the blood by
means of an integral heat exchanger connected to a heater-cooler console. The
oxygenated blood is then returned to the patient through a final (arterial)
filter that removes any potential air or small particles. This artificial
heart/lung system is the primary component of the bypass circuit.
In addition to the artificial heart/lung system, most bypass circuits also
include a cardioplegia delivery system. During most cardiac surgical
procedures, the heart is stopped (arrested) to provide the surgeon with a
motionless field for the delicate surgery. When this occurs, the heart muscle
receives very little blood supply. A cardioplegia system infuses specially
formulated solutions (which often include oxygenated blood) directly into the
patient's coronary arteries. In addition to delivering nutrients to the heart,
these solutions are also used to arrest the heart and maintain prescribed
temperatures.
In order to salvage the patient's own blood during surgery, a cell-saver
circuit may be used to collect and concentrate the patient's blood into washed,
packed cells which can be reinfused at a later time to improve the patient's red
blood cell count without the risks associated with donated blood. Another
method of concentrating the patient's red blood cells is with the use of a
hemoconcentrator. This device removes excess fluid from the patient's blood
(concentrating the red blood cells) and also preserves the plasma of the blood
that is generally discarded with typical blood cell salvaging.
The heart/lung bypass circuit is completed by connecting all of the devices
with tubing. Frequently, this tubing is pre-connected according to the
instructions of individual perfusionists with all or some of the devices in the
circuit and marketed as custom tubing packs. Increasingly, all of the
components in the heart/lung bypass circuit are assembled and packaged in a
complete, single container for a single heart/lung bypass procedure.
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MARKETS. The Company's products are primarily sold to hospitals that
perform heart/lung bypass surgery. There were approximately 1,000 hospitals in
the United States and about 400 hospitals in Europe which performed these
procedures in 1996. Over 400,000 heart/lung bypass procedures were performed in
the United States in 1995, and approximately 265,000 heart/lung bypass
procedures were performed in Europe in 1994. Coronary bypass surgeries
constitute a significant portion of the total number of heart/lung bypass
procedures performed each year. Although the number of heart/lung bypass
procedures performed may have been less than the number of coronary bypass
surgeries due to multiple grafts being performed during some surgeries, the
number of graft procedures performed in the United States each year grew from
less than 200,000 in 1982 to over 400,000 in 1995.
The current annual worldwide market for disposable products and related
hardware and accessories for heart/lung bypass surgery is estimated by industry
analysts to be approximately $800 million, over $600 million of which is
estimated to be attributable to disposable products. The two largest individual
markets for disposable products are the oxygenator market, estimated at
approximately $200 million in annual sales, and the custom tubing pack market,
estimated at approximately $100 million in annual sales. The Company's current
proprietary product offerings participate in an annual worldwide market for
disposable products estimated to be approximately $400 million, and the Company
anticipates that its proprietary products under development, including its new
blood pump, should allow the Company to pursue a greater portion of the
disposable product market.
PRODUCTS
The Company currently offers four product lines: the AFFINITY oxygenator
line; the solid silicone membrane oxygenator line; the MYOTHERM cardioplegia
delivery system; and SIGNATURE custom tubing packs. The following table sets
forth the amounts and percentages of the Company's consolidated net sales
attributable to these four product lines for the periods shown.
<TABLE>
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YEARS ENDED DECEMBER 31,
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1996 1995 1994
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AFFINITY oxygenator line. . . . . . . . . . . . $25,488 57% $18,329 55% $7,915 37%
Silicone membrane oxygenator line. . . . . . . 7,517 17 7,793 24 8,635 40
SIGNATURE custom tubing packs. . . . . . . . . 7,402 17 3,459 10 1,478 7
MYOTHERM cardioplegia delivery system. . . . . 3,994 9 3,759 11 3,458 16
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TOTAL. . . . . . . . . . . . . . . . . . . . $44,401 100% $33,340 100% $21,486 100%
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AFFINITY OXYGENATOR LINE. The Company's AFFINITY oxygenator line is
currently comprised of the AFFINITY oxygenator, a hardshell cardiotomy venous
reservoir and a venous reservoir bag. Upon receipt of appropriate regulatory
clearance, it is anticipated that the Company's new blood pump will also be
marketed as a part of the AFFINITY oxygenator line.
The AFFINITY oxygenator is a microporous, hollow fiber membrane oxygenator
which exchanges the carbon dioxide in the patient's blood for oxygen, returning
oxygenated blood to the patient through the heart/lung bypass circuit. This
oxygenator incorporates the Company's patented radial flow and graduated density
fiber bundle, both of which were developed through the Company's use of
"computational fluid dynamics." Computational fluid dynamics helped the Company
design the AFFINITY oxygenator with features such as a lowered blood phase
pressure drop, a more uniform flow of blood through the device's fiber bundle,
and reduced damage to the blood as it passes through the device's blood phase.
The key features of the AFFINITY oxygenator include the following:
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- - HIGH GAS TRANSFER. The Company believes that the AFFINITY oxygenator
offers superior gas transfer performance. Studies conducted by independent
investigators have demonstrated that the AFFINITY oxygenator has gas
transfer performance equal or superior to that of most competing
oxygenators. The Company believes that most perfusionists desire
oxygenators that provide optimum gas transfer performance to assure safety
for patients requiring greater oxygen transfer capability, such as larger
patients and patients operated on under lighter anesthesia or at warmer
temperatures.
- - LOW PRESSURE DROP. Studies conducted by independent investigators have
determined the pressure drop across the blood phase of the AFFINITY
oxygenator to be as low or lower than that of other leading products. The
Company believes that perfusionists generally wish to avoid large pressure
drops during heart/lung bypass procedures due to the risk of line failures
associated with high pressure drop.
- - LOW PRIMING VOLUME. The AFFINITY oxygenator has a priming volume which the
Company believes to be one of the lowest priming volumes among oxygenators
currently available, and significantly less than the priming volume of
three of the four largest selling competitive products. Lower priming
volume can result in less set-up time for the perfusionist, reduced
dilution of the patient's blood with priming solutions and a reduced use of
the patient's blood for priming, which lessens the possibility that costly
and potentially dangerous donor blood products will need to be introduced
during the procedure.
- - EASE OF USE. The AFFINITY oxygenator has been designed to be convenient to
set up, prime and operate. The AFFINITY'S relatively small size and
universal adaptability contribute to its ease of handling, and its clear
case helps to assure quick, complete priming and ongoing visual checks
during the procedure. The device's unique casing design and a proprietary
manufacturing technique result in precise alignment of the uppermost blood
port with the top of the fiber bundle, allowing for ease in venting air
during the priming procedure. The Company believes that perfusionists have
a preference for oxygenators that permit easy removal of air during priming
and ease of monitoring for the presence of air during the procedure.
Although competing oxygenators are generally designed to maximize one or
more of these key features, the Company believes the performance of the AFFINITY
oxygenator to be equal or superior to competing products across a broad range of
performance characteristics: gas transfer capability, pressure drop, priming
volume and ease of use.
In the heart/lung bypass circuit, the blood reservoir serves as a filtering
and storage device. The AFFINITY product line offers two blood reservoirs, a
hardshell cardiotomy venous reservoir and a venous reservoir bag. Computational
fluid dynamics modeling was also used in the development of these reservoirs.
The hardshell reservoir can be used as a stand-alone unit or can be integrated
with the AFFINITY oxygenator in one unit. The venous reservoir bag maintains
simplicity in its design while offering optimum priming ease, efficient air
handling and excellent mixing characteristics. By offering these blood
reservoirs in the AFFINITY line, the Company is able to configure systems to
meet its customers' needs.
In July 1993, the Company began international marketing of the AFFINITY
oxygenator. The Company began the commercial release of the AFFINITY oxygenator
in the U.S. market in February 1994, following marketing clearance from the FDA.
The Company received U.S. marketing clearance from the FDA for its AFFINITY
blood reservoirs in July 1994 and began marketing the devices following
clearance.
The Company is in the process of completing the development of a new blood
pump. Upon receipt of regulatory clearance from the FDA, the Company intends to
market this device as the AFFINITY
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Pump System. By adding the AFFINITY Pump System to its product line, the
Company will be able to offer a complete line of proprietary devices comprising
the major components of the heart/lung bypass circuit.
The AFFINITY Pump System incorporates a motor and control console, a rotor
housing, rotor assembly and a disposable pump chamber. The Company believes
that the AFFINITY Pump System will offer a number of clinical safety advantages
over existing centrifugal or standard roller-type pumps. In particular, the
modified roller-type design of the AFFINITY Pump System is designed to (i)
prevent significant negative pressure at the inlet, which minimizes the
potential for cavitation; (ii) not permit the draining of the venous reservoir
and the resulting introduction of air into the bypass circuit; (iii) not create
high discharge pressures sufficient to disrupt the tubing connections in the
bypass circuit; and (iv) not allow retrograde flow. The Company believes that
the AFFINITY Pump System will be the first blood pump to combine these safety
features with performance comparable to available pumps.
The marketing and sale of the AFFINITY Pump System is subject to receipt of
marketing clearance from the FDA pursuant to a 510(k) pre-market notification
filed by the Company in September 1996. While the Company believes that
marketing clearance for the AFFINITY Pump System could be received as early as
mid-1997, there can be no assurance that marketing clearance will be received
pursuant to the Company's 510(k), or on a timely basis, if at all.
Additionally, there can be no assurance that the AFFINITY Pump System will be
perceived as superior to currently available blood pumps, that competitors will
not introduce future products with superior performance characteristics, or that
the AFFINITY Pump System will achieve market acceptance or generate material
revenues for the Company at any time in the near future, if at all. See
"Important Factors" on page 19.
SILICONE MEMBRANE OXYGENATOR LINE. The Company's solid silicone membrane
oxygenator line consists of the Company's solid silicone membrane oxygenator and
associated cardiotomy reservoirs and the Company's ECMO (extracorporeal membrane
oxygenation) devices. This product line was purchased by the Company from the
Predecessor Business.
The Company's solid silicone membrane oxygenators allow gases to pass to
and from blood using proprietary silicone membrane technology, as opposed to the
most widely used oxygenators that use microporous membrane technology (including
the AFFINITY oxygenator). The solid silicone membrane technology permits, and
may be sold for, extended use applications because it does not experience the
performance deterioration over a longer period of use that occurs in a
microporous membrane oxygenator. In addition, some perfusionists continue to
prefer silicone membrane oxygenators for heart/lung bypass procedures. The
Company believes that its solid silicone membrane oxygenator is the only
oxygenator which is approved for sale for extended use of periods greater than
24 hours, providing the Company with a competitive advantage in this relatively
small market. The Company markets a full line of solid silicone membrane
oxygenators in several models and sizes.
The Company's solid silicone membrane oxygenator is also part of the
Company's ECMO system. ECMO is the long-term cardiopulmonary support of
premature infants, newborns and other patients with life-threatening respiratory
disorders. The ECMO system includes the membrane oxygenator, reservoir bladder
bags and a heat exchanger.
SIGNATURE CUSTOM TUBING PACKS. The Company's SIGNATURE custom tubing packs
include the tubing and other connections used to integrate the various
components of the heart/lung bypass circuit and ECMO system. The components to
be included in each tubing pack and the manner in which they are arranged and
connected are determined by the specifications provided by the Company's
individual customers. The Company has developed computer software that allows
it to design and fully document
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custom tubing packs according to individual customer specifications and to quote
prices based on these specifications within hours of a customer request. The
Company believes that this service provides it with a significant competitive
advantage. While many of the devices included in the Company's SIGNATURE custom
tubing packs are manufactured by the Company, the Company currently does not
manufacture all the devices that may be requested by customers. Consequently,
the Company is currently required to purchase certain components of its
SIGNATURE custom tubing packs from other medical device manufacturers. The
Company received marketing clearance from the FDA for its SIGNATURE custom
tubing packs in June 1993.
In October 1995, the Company received FDA clearance to market its AFFINITY
arterial filter which the Company generally sells as part of its SIGNATURE
Custom Tubing Packs. The Company began sales of this product to customers in
late 1995, with full worldwide release in the first quarter of 1996. The
AFFINITY arterial filter is the final component in the circuit of specialized
medical devices used in heart/lung bypass surgery, ensuring that the oxygenated
blood is free of air or particulate emboli before re-entering the patient's
body. The Company believes that the AFFINITY arterial filter offers low volume
priming, high visibility and excellent air handling and hemodynamics. The vast
majority of AFFINITY arterial filter devices are sold as components of custom
tubing packs. Previously, the Company had sold filters from other manufacturers
as part of its custom tubing packs.
MYOTHERM CARDIOPLEGIA DELIVERY SYSTEM. The Company's MYOTHERM cardioplegia
delivery system is used to infuse specially formulated solutions, which often
include oxygenated blood, directly into the patient's coronary arteries while
the heart is stopped during heart/lung bypass surgery. In addition to
delivering nutrients to the heart, these solutions are also used to arrest the
heart and maintain prescribed temperatures. The Company believes that the
MYOTHERM cardioplegia delivery system provides superior levels of heat exchange
performance for optimum temperature control during both the cooling and warming
phases of heart/lung bypass surgery. The MYOTHERM cardioplegia delivery system
also offers adaptability and convenience for varying cardioplegia techniques
used by cardiovascular surgeons. The perfusionist is able to specify mixtures
of cardioplegia solutions and blood in the MYOTHERM cardioplegia delivery system
without changing the pump set-up. Another feature of the MYOTHERM cardioplegia
delivery system is a self-venting drip chamber design, which affords the
perfusionist greater convenience and ease of priming. The MYOTHERM cardioplegia
delivery system is currently available in eight standard configurations and can
be configured on a customized basis to suit a surgeon's individual protocol.
The Company released its MYOTHERM cardioplegia delivery system worldwide in
October 1991. The Company is developing an improved MYOTHERM cardioplegia
delivery system scheduled for FDA submission late in the first quarter of 1997.
See "Research and Development."
ONCOURSE CONTINUOUS QUALITY CONTROL IMPROVEMENT SOFTWARE. In addition to
the Company's medical device products, the Company introduced its ONCOURSE
continuous quality improvement (CQI) manager in December 1995. This new
Microsoft Windows-based software program is currently offered free of charge to
customers who make a major commitment to the Company's products. ONCOURSE CQI
Manager guides perfusionists through the necessary steps in establishing a CQI
program. In addition, it generates a variety of useful reports for
perfusionists, including the annual American Board of Cardiovascular Perfusion
clinical activity report and several other specialized reports. Although the
Company markets this product for sale to other customers, the Company does not
expect that this product will contribute significantly to its results of
operations in the foreseeable future.
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RESEARCH AND DEVELOPMENT
The Company's research and development strategy encompasses two approaches:
developing a more complete line of products for the heart/lung bypass circuit
and developing products which addresses new markets and opportunities outside of
the heart/lung bypass market and which leverage the Company's core technologies
and expertise.
As an integral part of both its research and development and sales and
marketing strategies, the Company strives to involve its customers to a large
extent in its product development activities. Under confidentiality agreements,
the Company consults with selected customers from time to time as to market
needs and assessments of products under development by the Company. The Company
believes that this practice allows it to receive end-user assessments of
products in development at an early stage and to better assure market
acceptance.
The Company's research and development staff currently consists of 24
full-time engineers, scientists, designers and technicians. Research and
development expenses in 1996 were $3,651,000, as compared with $2,773,000 in
1995 and $2,309,000 in 1994. The Company anticipates that 1997 research and
development costs will increase approximately 20% over 1995 levels, as the
Company moves to expand and improve its proprietary line of disposable medical
devices. This forward-looking projection is dependent on the extent and timing
of new product development and the impact of the regulatory process in obtaining
marketing clearance for new products. The need or desire to modify the
Company's existing products could also influence the level of research and
development expenses. There can be no assurance, however, that the Company's
research and development efforts will result in any commercially successful
products.
As a result of the Company's research and development efforts, the Company
filed a 510(k) pre-market notification with the FDA in September 1996 covering
the AFFINITY Pump System. Additionally, the Company submitted a 510(k) pre-
market notification late in the first quarter of 1997 covering an improved
MYOTHERM cardioplegia delivery system. There can be no assurance that marketing
clearance for the AFFINITY Pump System or the improved MYOTHERM cardioplegia
delivery system will be received on a timely basis, if at all, or, if received,
that either device will become commercially successful.
MARKETING
The Company markets its products in the United States and internationally,
with domestic sales accounting for 59%, 58% and 56% of consolidated net sales in
1996, 1995 and 1994 respectively. The majority of the Company's international
sales are in Europe.
To serve the U.S. market, the Company has developed a sales organization
that markets its products directly to cardiovascular surgeons, perfusionists,
neonatologists and ECMO specialists. This organization consists of a staff of
17 direct sales employees, supplemented by seven independent sales
representative organizations and one distributor, all with cardiovascular sales
experience. This network is managed by three regional sales managers and a vice
president of marketing and sales. At its inception, the Company marketed its
products primarily through distributors and independent sales representatives.
Since that time, the Company has shifted the composition of its distribution
network in the United States to include a larger direct sales component.
Approximately 85% of the Company's U.S. sales in 1996 occurred through direct
sales employees and independent sales representatives. The Company believes
that this shift to a larger direct sales force allows better control of the
sales process and assists the Company in developing closer relationships with
its customers.
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Internationally, the Company sells its products through 38 cardiovascular
distributors who cover most major foreign markets. The Company's U.K.
subsidiary, AVECOR Ltd., is the base of the Company's international marketing
efforts, and manufactures, assembles and distributes the Company's products to
the majority of the Company's international distribution network. This
international distribution network is managed by an international sales director
and an export sales manager, both who are experienced in marketing heart/lung
bypass devices in Europe. The Company's international distribution network is
supplemented by three direct sales employees, two in the U.K. and one in France.
In October 1995, the Company opened a sales office in France, which is
organized as a subsidiary of AVECOR Ltd. Total export sales to unaffiliated
entities (primarily to Europe and payable in U.S. dollars) and sales made by
AVECOR Ltd. were $4,912,000 and $13,111,000, respectively for the year ended
December 31, 1996; $3,480,000 and $10,702,000, respectively, for the year ended
December 31, 1995; and $3,365,000 and $6,184,000, respectively, for the year
ended December 31, 1994.
The Company currently has written agreements with 28 of its domestic and
international independent sales representatives and distributors. These
agreements generally impose geographic exclusivity and non-competition
obligations on the Company's independent sales representatives and distributors.
The Company's sales representative and distributorship agreements include a
provision that requires the Company to pay a commission to the sales
representative or distributor for any sales made directly by the Company to
customers within such sales representative's or distributor's territory. The
Company may typically terminate these agreements upon breach of the agreement by
the distributor or sales representative, including breach of the quota or
minimum sales obligations imposed by the agreement, as well as certain
extraordinary events.
The Company's products are primarily sold to hospitals that perform
heart/lung bypass procedures. In the United States, the Company believes there
are approximately 1,000 hospitals at which heart/lung bypass procedures are
performed, while in Europe approximately 400 hospitals perform such procedures.
There are approximately 112 hospitals worldwide where ECMO is performed. The
Company's products are used by perfusionists, and the Company estimates that
there are about 3,000 perfusionists practicing in the United States.
A small portion of the Company's business is subject to longer term (longer
than one year) commitments with customers. These commitments involve fixed
pricing terms and minimum or exclusive purchase obligations. Many of the
Company's competitors, which have greater financial resources and broader and
longer-standing product lines than the Company, have experienced relatively
greater success in establishing these types of customer commitments. The
Company anticipates that there will be increased use of these longer term, firm
commitment arrangements in its markets due to cost concerns and other factors.
The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to assess
and satisfy their needs for products and services. The Company meets with
certain designated customers several times each year, during which ideas are
shared regarding the marketplace in general, specific products, products under
development and existing or proposed programs. In lieu of expensive advertising
and promotional materials, the Company maintains extensive contact with its
customers for the purpose of educating them in the Company's technologies and
manufacturing methods as well as to receive input and feedback about the
Company's product development and customer service functions. The Company
believes these efforts to be cost-effective in producing awareness of, and
loyalty to, the Company's products.
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The Company conducts frequent training of its sales force to facilitate
response to customer needs. The Company also maintains a 24-hour/day assistance
program in order to respond quickly to clinical questions and problems
encountered by its customers. The assistance services are provided by a former
certified clinical perfusionist employed by the Company and are supplemented by
a certified clinical perfusionist employed by the Company as well as a network
of perfusionist consultants located across the country.
No single customer accounted for more than 10% of the Company's 1996 net
sales.
COMPETITION
The cardiovascular device market in which the Company competes is
characterized by intense competition. This market is dominated by established
manufacturers that have broader product lines, greater distribution
capabilities, substantially greater capital resources and larger marketing,
research and development staffs and facilities than the Company. Many of these
competitors offer broader product lines within the specific heart/lung bypass
product market and/or in the general field of medical devices and supplies.
Broader product lines give many of the Company's competitors the ability to
negotiate exclusive, long-term medical device supply contracts and,
consequently, the ability to offer comprehensive pricing of their competing
products. By offering a broader product line in the general field of medical
devices and supplies, competitors may also have a significant advantage in
marketing competing products to group purchasing organizations, health
maintenance organizations and other managed-care organizations that increasingly
seek to reduce costs through centralization of purchasing functions. In
addition, the Company's competitors have used price reductions to preserve
market share in the oxygenator and other product markets and there can be no
assurance that the Company's competitors will not use significant and prolonged
price competition across the Company's product lines in the future.
During the past two years, one of the Company's competitors, the Bentley
Division of Baxter Healthcare Corporation, purchased three companies which
provide contract perfusion services to hospitals. Although the Company believes
it is too early to assess the effect of these acquisitions on the Company's
business, the Company is likely to have increased difficulty selling its
heart/lung bypass products to perfusionists employed by the acquired companies
or to hospitals that contract with the acquired companies for perfusion
services. These acquisitions or other acquisitions by one or more of the
Company's competitors of other companies providing contract perfusion services
could have a material adverse effect on the Company's future business, financial
condition and results of operations.
The Company's primary competitors within the heart/lung bypass market
include COBE Cardiovascular Inc. (a subsidiary of Gambro, Inc.), Medtronic,
Inc., the Bentley Division of Baxter Healthcare Corporation, C.R. Bard Inc.,
Sorin Biomedical, Inc. (a subsidiary of Fiat), Terumo Medical Corporation and
SARNS Inc. (a subsidiary of 3M Company).
The Company believes that the principal competitive factors in the market
for heart/lung bypass and long-term respiratory support products are product
performance, quality, price, ease of use, technical innovation, cost-
effectiveness, field sales support, customer service and breadth of product
line. The Company intends to continue to compete on the basis of its high
performance products, innovative technologies, cost-effective manufacturing
techniques, close customer relations and support and its strategy to increase
its offerings of products within the heart/lung bypass circuit and other medical
device technologies.
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MANUFACTURING
The Company manufactures oxygenators and other products and assembles
custom tubing packs at its U.S. facility located in Minneapolis, Minnesota. The
Company also performs certain final manufacturing processes with respect to its
oxygenators and blood reservoirs and also assembles SIGNATURE custom tubing
packs at its Bellshill, Scotland facility.
The Company's U.K. and former U.S. manufacturing facilities have been
inspected by the British Standards Institute ("BSI") and, as a result, the
Company has received ISO 9001 certification. BSI is also the "Notified Body"
that has verified that the Company's quality certification procedures conform
with the essential requirements necessary for the Company to prepare a
Declaration of Conformity and therefore place the "CE" mark on its products.
See "Governmental Regulation."
As a part of the development process for new products, the Company
simultaneously designs and develops manufacturing processes and equipment to be
used to manufacture the products. Because of the Company's ability to design
and produce its manufacturing equipment internally in conjunction with new
product development, the Company has been able to implement a highly automated,
cost-efficient manufacturing process for the products in its AFFINITY line.
The Company manufactures its oxygenators, blood reservoirs and ancillary
products from standard raw materials, components and custom manufactured
components presently purchased from outside suppliers. The Company intends to
continue to purchase these raw materials, components and custom- manufactured
components from outside suppliers in the future. While the Company believes
that the raw materials, components and custom manufactured components used in
the manufacture of its products are readily available from multiple sources,
certain of these items are purchased from single sources. Although the Company
has qualified, or is in the process of investigating, alternate sources of
supply for key components and materials, any significant interruption in supply
of these items could have a material adverse effect on the Company's ability to
manufacture its products. The Company has not experienced shortages or
significant delays in supply of these materials and components from its
suppliers.
GOVERNMENTAL REGULATION
The Company's products, development activities and manufacturing processes
are subject to regulation by numerous governmental authorities, principally the
FDA and corresponding foreign agencies. In the United States, the FDA
administers the Federal Food, Drug and Cosmetics Act and amendments thereto,
including the Safe Medical Devices Act of 1990. The Company is subject to the
standards and procedures with respect to manufacture and marketing of medical
devices contained in the Federal Food, Drug and Cosmetics Act and the
regulations promulgated thereunder and is subject to inspection by the FDA for
compliance with such standards and procedures. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution.
In the United States, medical devices are classified into one of three
classes (class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, class I devices are subject to general controls (E.G., labeling,
premarket notification and adherence to good manufacturing practices) and class
II devices are subject to general and special controls (E.G., performance
standards, postmarket surveillance, patient registries and FDA guidelines ). In
general, class III devices (E.G., life-sustaining, life-supporting and
implantable devices, or new devices
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which have not been found substantially equivalent to a legally marketed
device), in addition to being subject to general and special controls, must
receive premarket approval ("PMA") by the FDA to ensure their safety and
effectiveness.
Before a new or significantly modified device can be introduced into the
market, the manufacturer must generally obtain marketing clearance through a
510(k) notification or approval of a PMA application. A 510(k) clearance will be
granted if the proposed device is "substantially equivalent" to a predicate
device (I.E., a legally marketed class I or class II medical device, or a class
III medical device for which the FDA has not called for the submission of a PMA
application). Commercial distribution of a device for which a 510(k)
notification is required can begin only after the FDA issues a written
determination that the device is "substantially equivalent" to a predicate
device. The FDA may determine that a proposed device is not substantially
equivalent to a predicate device, or that additional information or data are
needed before a substantial equivalence determination can be made. A request
for additional data may require that clinical studies of the device's safety and
efficacy be performed. The process of obtaining a 510(k) clearance typically can
take several months to a year or longer.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a class
III device for which the FDA has called for a PMA application. Certain class
III devices that were on the market before May 28, 1976 ("preamendments class
III devices"), and devices that are substantially equivalent to them, can be
brought to market through the 510(k) process until the FDA calls for the
submission of PMA applications for preamendments class III devices. The process
of obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring
anywhere from one to several years from the date the PMA is submitted to the
FDA, if approval is obtained at all. Moreover, a PMA application, if granted,
may include significant limitations on the indicated uses for which a product
may be marketed. FDA enforcement policy strictly limits the marketing of
approved medical devices for unapproved or "off label" uses. In addition,
product approvals can be withdrawn for failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
All of the Company's current products have been the subject of successful 510(k)
submissions, and the Company believes that its products currently in development
will also be eligible for the 510(k) submission process, although there can be
no assurance that the FDA will agree with this view.
Certain of the Company's products are within product categories set forth
in an FDA order dated August 14, 1995, issued to all manufacturers of these
devices, which requires all of such manufacturers to submit additional data to
the FDA regarding the safety and the efficacy of the identified devices. The
products affected include the Company's blood oxygenators, arterial filters and
defoamers, which, by current FDA interpretation, include both cardiotomy and
venous blood reservoirs. Each of these devices is currently classified by the
FDA as a class III medical device which, because they were viewed as
substantially equivalent to preamendments class III devices, were cleared for
marketing through the 510(k) premarket notification process. Through its August
14, 1995 order, the FDA has requested data from the Company and other
manufacturers of these devices in order to make a determination as to whether
these products should be reclassified as either class I or class II medical
devices. If the FDA were to determine that such devices should remain
classified as class III medical devices, it would require manufacturers such as
the Company to submit PMA applications concerning such devices within 90 days
after the final FDA classification order.
The Company is in the process of gathering the required data for submission
to the FDA, and is working with various industry groups and the FDA to seek
reclassification of these devices. Although the FDA order requiring the
submission of data on blood oxygenators and arterial filters has characterized
these devices as having a high potential for down-classification, and the
Company believes that the devices will
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be reclassified, there can be no assurance that these devices will be
reclassified. Although the FDA order requesting data on defoamers has
characterized these devices as unlikely to be reclassified, and, therefore,
likely to require PMA submission, the Company is currently working to seek down-
classification. The Company's efforts, in conjunction with those of other
manufacturers, are based on the belief that the types of blood reservoirs
currently used in heart/lung bypass circuits are significantly different from
the defoamers used with older, bubble-type oxygenators, and, based on safety and
efficacy data, should be reclassified. While there can be no assurance that
these efforts will be successful, the Company believes that the likelihood of
reclassification of blood reservoirs is currently greater than indicated in the
FDA order. In the event that any of the devices are not reclassified, the
Company may be required to submit a PMA application. As discussed above, the
PMA application process can be expensive, uncertain and lengthy, and, if
required, could have a material adverse effect on the Company's future business,
financial condition or results of operations.
The Company is also subject to regulation in each of the foreign countries
in which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the
Company's products in such countries are similar to those of the FDA. The
national health or social security organizations of certain of such countries
require the Company's products to be qualified before they can be marketed in
those countries. The Company relies on its independent distributors to comply
with the majority of the foreign regulatory requirements. To date, the Company
has not experienced significant difficulty in complying with these regulations.
The Company is subject to periodic inspections by the FDA, which is charged
with auditing the Company's compliance with quality assurance systems
established by the FDA and other applicable government standards. The Company
is also subject to inspections by the United Kingdom's Medical Devices
Directorate ("MDD") and other European regulatory agencies. Strict regulatory
action may be initiated in response to audit deficiencies or to product
performance problems. The Company believes that its manufacturing and quality
control procedures are in compliance with the requirements of the FDA and MDD
regulations. The Company's manufacturing facilities and processes are also
subject to periodic inspection and review by BSI in conjunction with the
Company's ISO 9001 certification. ISO certification is a series of standards
that define the basics of establishing, documenting and maintaining an effective
production quality management system. The Company believes that ISO
certification creates value for the Company both internally, by providing an
objective criteria for measuring the Company's quality assurance efforts, and
externally, through customer recognition of, and demand for, products
manufactured by ISO certified manufacturers.
BSI is also the "Notified Body" that has verified that the Company's
quality certification procedures conform with the "essential requirements" set
forth by the MDD for the class of products produced by the Company. Conformity
with these essential requirements enables the Company to prepare a Declaration
of Conformity which supports the placement of the "CE" mark on the Company's
products. The CE mark enables the Company's products to be marketed, sold and
used throughout the European Union (the "EU"), subject to limited "safeguard"
powers of member states. Presently, the CE mark is not required to be affixed
to the Company's products (or those of its competitors) sold in the EU, but may
be affixed during a transition period currently in effect and which began
January 1, 1995. This transition period will end on January 1, 1999, when all
of the Company's products (and those of its competitors) will be required to
comply with the essential requirements in order to be marketed in the EU.
The financial arrangements through which the Company markets, sells and
distributes its products may be subject to certain federal and state laws as
well as regulations in the United States with respect to
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the provision of services or products to patients who are Medicare or Medicaid
beneficiaries. The "fraud and abuse" laws and regulations prohibit the knowing
and willful offer, payment or receipt of anything of value to induce the
referral of Medicare or Medicaid patients for services or goods. In addition,
the physician anti-referral laws prohibit the referral of Medicare or Medicaid
patients for certain "Designated Health Services" to entities in which the
referring physician has an ownership or compensation interest. Violations of
these laws and regulations may result in civil and criminal penalties, including
substantial fines and imprisonment. In a number of states, the scope of fraud
and abuse or physician anti-referral laws and regulations, or both, have been
extended to include the provision of services or products to all patients,
regardless of the source of payment, although there is variation from state to
state as to the exact provisions of such laws or regulations. In other states,
and, on a national level, several health care reform initiatives have been
proposed which would have a similar impact. The Company believes that its
operations and its marketing, sales and distribution practices currently comply
in all respects with all current fraud and abuse and physician anti-referral
laws and regulations, to the extent they are applicable. Although the Company
does not believe that it will need to undertake any significant expense or
modification to its operations or its marketing, sales and distribution
practices to comply with federal and state fraud and abuse and physician
anti-referral regulations currently in effect or proposed, financial
arrangements between manufacturers of medical devices and other health care
providers may be subject to increasing regulation in the future. Compliance
with such regulation could adversely affect the Company's marketing, sales and
distribution practices, and may affect the Company in other respects not
presently foreseeable, but which could have a material adverse impact on the
Company's business, financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's products are purchased by hospitals and other users, which
then bill various third-party payors for the health care products and services
provided to the patients. These payors, which include Medicare, Medicaid,
private insurance companies and managed care organizations, reimburse part or
all of the costs and fees associated with the procedures performed with these
devices.
Medicare and Medicaid reimbursement for hospitals is based on a fixed
amount for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique and, as a result, hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been, and may in the future be, reduced in the
event of further changes in the resource-based relative value scale method of
payment calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Any amendments to
existing reimbursement rules and regulations which restrict or terminate the
reimbursement eligibility (or the extent or amount of coverage) of medical
procedures using the Company's products or the eligibility (or the extent or
amount of coverage) of the Company's products could have a material adverse
impact on the Company's business, financial condition and results of operations.
In response to the focus of national attention on rising health care costs,
a number of changes to reduce costs have been proposed or have begun to emerge.
There have been, and may continue to be, proposals by legislators and regulators
and third-party payors to curb these costs. There has also been a significant
increase in the number of Americans enrolling in some form of managed care plan,
and over 80% of hospitals participate in or have agreements with HMOs. It has
become a typical practice for hospitals to affiliate themselves with as many
managed care plans as possible. Higher managed care
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penetration typically drives down the prices of health care procedures, which in
turn places pressure on medical supply prices. This causes hospitals to
implement tighter vendor selection and certification processes, by reducing the
number of vendors used, purchasing more products from fewer vendors and trading
discounts on price for guaranteed higher volumes to vendors. Hospitals have
also sought to control and reduce costs over the last decade by joining group
purchasing organizations or purchasing alliances. The Company cannot predict
what continuing or future impact existing or proposed legislation, regulation or
such third-party payor measures may have on its future business, financial
condition or results of operations.
Because the primary application of the Company's products is in coronary
bypass procedures, changes in reimbursement policies and practices of third-
party payors with respect to coronary bypass surgery could have a substantial
and material adverse impact on sales of the Company's heart/lung bypass
products. The development or increased use of more cost-effective treatments
for coronary artery disease could cause such payors to decrease or deny
reimbursement for coronary bypass surgery or to favor these other treatments.
PATENTS AND PROPRIETARY RIGHTS
The Company protects its technology by filing patent applications for the
patentable technologies that it considers important to the development of its
business. The Company also relies upon trade secrets, know-how and continuing
technological innovations to develop and maintain its competitive position.
The Company currently holds six U.S. patents and has three pending U.S.
patent applications. In addition, the Company has four pending foreign patent
applications. Four of the Company's present U.S. patents cover significant
design features of the AFFINITY oxygenator, including the AFFINITY'S winding
mandrel, graduated density fiber bundle and heat exchanger water diverter. The
Company's other issued U.S. Patents cover the designs of the AFFINITY venous
blood reservoirs. The Company has pending U.S. Patent applications relating to
the design of the AFFINITY venous blood reservoir and the AFFINITY arterial
filter. The Company's pending foreign patent applications consist of selected
overseas filings addressing the same intellectual property addressed by the
Company's issued and pending U.S. Patents.
The three U.S. patents acquired by the Company from the Predecessor
Business cover the Company's solid silicone membrane oxygenator product line and
have expired. The Company believes that the market for solid silicone membrane
oxygenators might not be large enough to justify the expenses associated with
market entry by a competitor, and therefore, the effect of the expiration of
these patents on the revenues of the Company will not be material.
The Company, like other firms that engage in the development and marketing
of medical technology products, must address issues and risks relating to
patents and trade secrets. There can be no assurance that any of the Company's
pending or future U.S. or foreign patent applications will result in issued
patents, that any current or future U.S. or foreign patents of the Company will
not be challenged or circumvented by competitors or others, or that such patents
will be found to be valid or sufficiently broad to protect the Company's
technology or provide the Company with its desired competitive advantage. The
validity and breadth of claims covered in medical technology patents involve
complex legal and factual questions and therefore may be highly uncertain. The
Company may be required to institute litigation to enforce patents issued to the
Company or to determine the enforceability, scope and validity of the
proprietary rights of others.
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The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by competitors.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. The medical device industry is characterized by frequent
and substantial intellectual property litigation. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict. In March 1997, the Company filed a lawsuit seeking to
invalidate a newly issued U.S. patent held by Minntech Corporation ("Minntech"),
a competing manufacturer of blood oxygenators and other medical devices, and
requesting a determination that the Company's AFFINITY oxygenator does not
infringe the Minntech patent. The Company filed the suit in response to a
December 1996 letter from Minntech, alleging that the AFFINITY oxygenator
infringes certain claims under Minntech's patent, and requesting discussion
regarding a possible license agreement. The Company's action against Minntech
and any future litigation, regardless of outcome, could result in substantial
expense to the Company and significant diversion of the efforts of the Company's
technical and management personnel. In addition, if Minntech were successfully
to bring an infringement counterclaim against the Company, or if the Company
were to be subject to an adverse determination in any other legal proceeding in
the future alleging patent infringement, the Company could become subject to an
injunction preventing the manufacture and sale of the infringing products and to
monetary damages, or might be forced to seek a license from the party alleging
patent infringement in order to continue to manufacture and sell any infringing
products, which it might not be able to obtain. The outcome of any such legal
action, including the possibility of entering into such a license, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Legal Proceedings" on page 23.
Pursuant to an Asset Purchase Agreement dated June 7, 1991 ("Asset Purchase
Agreement"), for approximately $1 million in cash and a $2.5 million note, the
Company acquired the business and assets, and assumed certain liabilities, of
the Predecessor Business. In addition, under the terms of a Royalty Agreement
dated June 7, 1991 ("Royalty Agreement"), the Company is obligated to pay to
SCIMED Life Systems, Inc. ("SCIMED") specified royalties based on a percentage
of net sales (as defined) of products previously manufactured by the Predecessor
Business and future products developed from then-existing technology if the
Company achieves certain net sales thresholds with those products. The Royalty
Agreement also provides for royalty payments on certain new generations of
developed products, if any, which use certain technology embodied in the
then-existing models of such products. Royalties on net sales for individual
product lines range from 1% to 3%, only if aggregate net sales of such products
for the prior year calculated on the anniversary date (June 7) of the Royalty
Agreement exceed $10 million. If aggregate net sales of such products exceed
$12 million, then additional royalties will be due on net sales in excess of $10
million at 150% of the stated royalty rates. In June 1996, the Royalty
Agreement expired with respect to products previously manufactured by the
Predecessor Business and expires with respect to current products under
development at the time of the acquisition and certain new generation products
in June 2001. The Company has charged $95,000 in 1996, $178,000 in 1995 and
$213,000 in 1994 to operations for royalties due under the Royalty Agreement for
sales of products previously manufactured by the Predecessor Business. The
Company believes that none of the products in the AFFINITY oxygenator line nor
any of the Company's products currently under development (including the
AFFINITY Pump System) will require royalty payments under the Royalty Agreement.
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In connection with the Asset Purchase Agreement, SCIMED also assigned to
the Company ten trademarks (one of which is registered) related to the Company's
current line of products previously manufactured by the Predecessor Business.
EMPLOYEES
As of March 9, 1997, the Company employed 325 persons full-time and 2
persons part-time, including 29 in research and development, 222 in
manufacturing, 42 in sales and marketing and 34 in general and administrative
functions. The Company's employees are not represented by a union, and the
Company considers its relationship with its employees to be good.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Financial information about the Company's foreign and domestic operations
and export sales is contained in Note 7 to the Company's Consolidated Financial
Statements on page 18 of the Company's 1996 Annual Report and is incorporated
herein by reference.
ITEM 1A IMPORTANT FACTORS.
The following factors are important and should be considered carefully in
connection with any evaluation of the Company's business, financial condition,
results of operations and prospects. Additionally, the following factors could
cause the Company's actual results to differ materially from those reflected in
any forward-looking statements of the Company.
HIGHLY COMPETITIVE INDUSTRY
The cardiovascular device market in which the Company competes is
characterized by intense competition. This market is dominated by established
manufacturers that have broader product lines, greater distribution
capabilities, substantially greater capital resources and larger marketing,
research and development staffs and facilities than the Company. Many of these
competitors offer broader product lines than the Company within the specific
heart/lung bypass product market and/or in the general field of medical devices
and supplies, giving these competitors advantages in marketing and pricing their
competing products. In addition, the Company's competitors have used price
reductions to preserve market share in the oxygenator and other product markets
and there can be no assurance that the Company's competitors will not use
significant and prolonged price competition across the Company's product lines
in the future. In order to compete effectively with these manufacturers, the
Company may in the future need to offer a more complete line of devices for the
heart/lung bypass circuit with superior product performance at a competitive
price. Even if the Company is able to develop such a line of products, there
can be no assurance that the Company will be able to compete effectively.
During the last two years, one of the Company's competitors, the Bentley
Division of Baxter Healthcare Corporation ("Baxter"), has purchased three
companies that provide contract perfusion services to hospitals. Although the
Company believes that it is too early to assess the long-term effect of these
acquisitions on the Company's business, the Company is likely to have increased
difficulty selling its heart/lung bypass products to perfusionists employed by
these providers of perfusion services or hospitals which contract with these
perfusion services providers. These acquisitions, or other acquisitions by the
Company's competitors of other companies providing contract perfusion services,
could have a material adverse effect on the Company's future business, financial
condition and results of operations.
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DEPENDENCE ON MARKET ACCEPTANCE
The Company's products are intended to replace products currently being
sold by its competitors. The success of the Company will depend, among other
things, on the acceptance by the market of the Company's current products and
the products it develops and introduces in the future. The Company intends to
develop cost-competitive products that provide clinical performance advantages
and convenience benefits to achieve more of a competitive advantage. Product
development is expensive, and there can be no assurance that the Company will be
able to develop technologically superior products that can be manufactured at a
reasonable cost. In addition, there is no assurance that the market will accept
the Company's product offerings as superior to those currently available or
that, if accepted as superior, the Company's product offerings will achieve
significant sales due to the broader product lines, greater distribution
capabilities, substantially greater capital resources and larger marketing
staffs of the Company's competitors. There can be no assurance that the
Company's competitors will not succeed in developing or marketing products that
are viewed as providing superior clinical performance or are less expensive as
compared to the products currently marketed or to be developed by the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company protects its technology through patents and trade secrets.
There can be no assurance that any pending or future patent applications will
result in issued patents or that any current or future patents will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide any competitive advantage to the Company. There can also be no
assurance that the Company's trade secrets or confidentiality agreements will
provide meaningful protection of the Company's proprietary information or, in
the event of a breach of any confidentiality agreement, that the Company will
have adequate remedies. Furthermore, there can be no assurance that others will
not independently develop similar technologies or duplicate any technology
developed by the Company or that the Company's technology will not infringe
patents or other rights owned by others.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. The medical device industry is characterized by frequent
and substantial intellectual property litigation. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict. In March 1997, the Company filed a lawsuit seeking to
invalidate a newly issued U.S. patent held by Minntech Corporation ("Minntech"),
a competing manufacturer of blood oxygenators and other medical devices, and
requesting a determination that the Company's AFFINITY oxygenator does not
infringe the Minntech patent. The Company filed the suit in response to a
December 1996 letter from Minntech, alleging that the AFFINITY oxygenator
infringes certain claims under Minntech's patent, and requesting discussion
regarding a possible license agreement. The Company's action against Minntech
and any future litigation, regardless of outcome, could result in substantial
expense to the Company and significant diversion of the efforts of the Company's
technical and management personnel. In addition, if Minntech were successfully
to bring an infringement counterclaim against the Company, or if the Company
were to be subject to an adverse determination in any other legal proceeding in
the future alleging patent infringement, the Company could become subject to an
injunction preventing the manufacture and sale of the infringing products and to
monetary damages, or might be forced to seek a license from the party alleging
patent infringement in order to continue to manufacture and sell any infringing
products, which it might not be able to obtain. The outcome of any such legal
action, including the possibility of entering into such a license, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Legal Proceedings" on page 23.
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RISK OF TECHNOLOGICAL OBSOLESCENCE
The markets for the Company's current and future products are highly
dependent on the number of surgical procedures performed each year requiring
heart/lung bypass. The number of surgical procedures requiring heart/lung
bypass is dependent on a range of factors, including the incidence of coronary
artery disease, the effectiveness of alternative treatments for coronary artery
disease and the availability of third-party reimbursement for heart/lung bypass
procedures and other treatments. In addition, new surgical and other
interventional procedures and/or drugs may be developed and become accepted in
the future which could reduce the importance of procedures that use the
Company's products. Accordingly, the Company's success will depend in large part
on the continued importance of surgical procedures that use the Company's
products and on the Company's ability to respond quickly to medical and
technological changes through the development and introduction of new, cost-
effective products. There can be no assurance that the Company's existing
products or products in development will offer the same benefits at comparable
prices as competing products, or that the Company's competitors will not develop
new technologies that render the Company's products obsolete or not cost-
competitive.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company is dependent in large part upon its ability to attract and
retain qualified scientific, technical and key management personnel due to the
specialized scientific nature of the Company's business. There is intense
competition for qualified personnel in the Company's industry and there can be
no assurance that the Company will be able to continue to attract and retain
qualified personnel for the development of its business.
INTERRUPTION IN SOURCES OF SUPPLY
The Company currently purchases, and will continue to purchase, raw
materials and components for its products from outside vendors. Certain of the
components used in the Company's products are purchased from single sources.
Although the Company has qualified, or is in the process of investigating,
alternate sources of supply for key components, any significant interruption in
supply could have a material adverse effect on the Company's future business,
financial condition and results of operations.
DEPENDENCE ON DISTRIBUTOR SALES
Sales to distributors constitute a significant portion of the Company's
business both in the U.S. and foreign markets. Although no single customer
accounted for more than 10% of the Company's net sales in 1996, one foreign
distributor accounted for approximately 10% of the Company's net sales in 1995
and a different foreign distributor accounted for approximately 11% of the
Company's net sales in 1994. In addition, the Company has further developed its
direct sales organization to service the majority of its domestic market, one
U.S. distributor accounted for approximately 11% of the Company's net sales in
1995. There can be no assurance that the Company will be able to maintain its
relationships with significant distributors, or, in the event of termination of
such relationships, that new distributors will be found. The loss of a
significant distributor could materially adversely affect the Company's future
business, financial condition and results of operations if a new distributor or
other suitable sales organization could not be found on a timely basis in the
relevant geographic market.
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GOVERNMENTAL REGULATION
The Company's products, development activities and manufacturing processes
are subject to extensive and rigorous regulation by the FDA and by comparable
agencies in foreign countries. In the United States, the FDA regulates the
introduction of medical devices as well as manufacturing, labeling and
recordkeeping procedures for such products. The process of obtaining marketing
clearance from the FDA for new products can be time consuming and expensive, and
there is no assurance that such clearances will be granted or that FDA review
will not involve delays that would adversely affect the Company's ability to
commercialize additional products. Even if regulatory approvals to market a
product are obtained from the FDA, these approvals may entail limitations on the
indicated uses of the product. Marketing clearances by the FDA can also be
withdrawn due to failure to comply with regulatory standards or the occurrence
of unforeseen problems following initial approval. The FDA could also limit or
prevent the manufacture or distribution of the Company's products and has the
power to require the recall of such products. The FDA, various state agencies
and foreign regulatory agencies inspect the Company and its facilities from time
to time to determine whether the Company is in compliance with various
regulations relating to manufacturing practices, validation, testing, quality
control and product labeling. A determination that the Company is in violation
of such regulations could lead to imposition of civil penalties, including
fines, product recalls or product seizures and, in extreme cases, criminal
sanctions.
A significant portion of the Company's revenues are dependent upon sales of
its products outside the United States through independent distributors.
International regulatory bodies have established varying regulations governing
product standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. The Company
relies upon independent distributors to comply with the majority of the foreign
regulatory requirements. The inability or failure of independent distributors
to comply with the varying regulations or the imposition of new regulations
could restrict such distributors' ability to sell the Company's products
internationally and thereby adversely effect the Company's future business,
financial condition and results of operations.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company's products are purchased by hospitals and other users, which
bill various third-party payors, such as government health programs, private
health insurance plans, managed care organizations and other similar programs,
for the health care goods and services provided to their patients. Third-party
payors are increasingly challenging the prices charged for medical products and
services and, in some instances, have put pressure on medical suppliers to lower
their prices. The Company is unable to predict what changes will be made in the
reimbursement methods used by third-party health care payors. There can be no
assurance that the treatment of coronary artery disease using coronary artery
bypass graft surgery will be considered cost-effective by third-party payors,
that reimbursement for such surgery will be available or, if available, that
payors' reimbursement levels will not adversely affect the Company's ability to
sell its products on a profitable basis. In addition, the cost of health care
has risen significantly over the past decade, and there have been, and may
continue to be, proposals by legislators and regulators to curb these costs.
Legislative action limiting reimbursement for certain procedures could have a
material adverse effect on the Company's future business, financial condition
and results of operations.
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EXPOSURE TO PRODUCT LIABILITY CLAIMS; RISK OF PRODUCT RECALL
The medical device industry historically has been litigious, and the
manufacture and sale of the Company's products inherently entails a risk of
product liability claims. Although the Company maintains product liability
insurance in amounts believed to be adequate based upon the nature and risks of
its business in general and its actual experience to date, there can be no
assurance that one or more liability claims will not exceed the coverage limits
of such policies or that such insurance will continue to be available on
commercially reasonable terms, if at all. Further, the Company does not expect
to be able to obtain insurance covering its costs and losses as the result of
any recall of its products due to alleged defects, whether or not such a recall
is instituted by the Company or required by a regulatory agency. While the
Company has not experienced any product liability claims or recalls to date, a
product liability claim, recall or other claim with respect to uninsured
liabilities or in excess of insured limits could have a material adverse effect
on the future business, financial condition and results of operations of the
Company.
ITEM 2. PROPERTIES.
The Company's principal executive offices, research and development
facilities and U.S. manufacturing facilities are located at 7611 Northland
Drive, Minneapolis, Minnesota, consisting of approximately 100,000 square feet.
The Company's United Kingdom manufacturing facility is located at Phoenix
Crescent, Strathclyde Business Park, Bellshill, Scotland, U.K. ML43NJ,
consisting of approximately 15,000 square feet. The Company leases such space
through its AVECOR Ltd. subsidiary pursuant to a lease expiring in 2003. The
lease provides for monthly rent of approximately $10,000 (based on current
exchange rates) until 1998 when the monthly rent is subject to adjustment based
upon current Scotland rental market rates. The Company also pays a pro rata
share of operating expenses and real estate taxes.
In July 1996, the Minnesota Pollution Control Agency granted the Company a
five-year air emission facility permit for the Company's manufacturing
operations at its facility located at 7611 Northland Drive, Minneapolis,
Minnesota 55428. The Company believes that it has been in compliance with this
permit since its issuance and that it is in compliance in all material aspects
with federal and state laws relating to environmental matters. However,
expected future changes in federal or state regulations relating to air
emissions could require the Company to install air emission control equipment or
modify its manufacturing operations, which the Company believes would not have a
material adverse effect on its business.
ITEM 3. LEGAL PROCEEDINGS.
In March 1997, the Company filed suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent held by
Minntech Corporation ("Minntech"), a competing manufacturer of blood oxygenators
and other medical devices, and requesting a determination that the Company's
AFFINITY oxygenator does not infringe the Minntech patent. The Company filed
the suit in response to a December 1996 letter from Minntech, alleging that the
AFFINITY oxygenator infringes certain claims under Minntech's patent, and
requesting discussion regarding a possible license agreement. The Company
reviewed the subject patent and concluded, based on an opinion from its patent
counsel, that none of the claims in the patent are infringed by the AFFINITY
oxygenator, and that the patent is, in any event, invalid. However, the expense
and effort potentially required to bring this action, as well as the outcome of
any counterclaim successfully brought against the Company by Minntech,
23
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could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Important Factors - Patents and
Proprietary Rights" on page 20.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted for a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers as of March 21, 1997, are as follows:
Name Age Title
- ---- --- -----
Anthony Badolato 59 Chief Executive Officer and Director
William S. Haworth 53 Vice President-Engineering
Gregory J. Melsen 44 Vice President-Finance, Treasurer and
Chief Financial Officer
Allan R. Seck 51 Vice President-Marketing and Sales
ANTHONY BADOLATO. Mr. Badolato is a founder of the Company and has served
as a director and Chief Executive Officer of the Company since April 1991. From
April 1991 through January 1996, Mr. Badolato also served as President of the
Company. From January 1989 through September 1990, Mr. Badolato was Vice
President - Research and Development and Manufacturing of Bio-Medicus, Inc.
("Bio-Medicus"), a specialty cardiovascular products company. From 1969 to
December 1988, Mr. Badolato was employed by Johnson & Johnson, a global health
care company. While employed by Johnson & Johnson, Mr. Badolato was employed by
the Cardiovascular Division in various research and development and
manufacturing positions over a period of 12 years, including Director of
Research and Development from 1979 to 1988.
WILLIAM S. HAWORTH. Mr. Haworth has served as Vice President - Engineering
since March 1997, Vice President-Research and Development of the Company from
August 1993 to February 1997, and Director of Research and Development from
August 1991 to July 1993. From September 1983 to August 1991, Mr. Haworth was
employed by 3M Company in various research and development positions, including
Technical Manager, Biosciences Laboratory from June 1988 to August 1991. From
August 1982 to August 1983, Mr. Haworth worked as an independent consultant to
manufacturers in the medical device industry. Prior to August 1982, Mr. Haworth
was a College Lecturer in Engineering Science at Magdalen College, Oxford,
working in a multidisciplinary team to develop heart valves, blood pumps,
oxygenators and artificial kidneys. Mr. Haworth is the author of numerous
publications in scientific and technical journals.
GREGORY J. MELSEN. Mr. Melsen has served as Vice President-Finance,
Treasurer and Chief Financial Officer of the Company since January 1996. From
March 1994 through December 1995, Mr. Melsen was Chief Financial Officer of PACE
Incorporated ("PACE"), a Minnesota-based environmental testing company that
provides services through a national network of laboratories. Mr. Melsen served
as a
24
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consultant from June 1993 through February 1994. From September 1984 to June
1993, Mr. Melsen was an audit partner with the Minnesota office of Deloitte &
Touche. Mr. Melsen is a certified public accountant.
ALLAN R. SECK. Mr. Seck is a founder of the Company and has been Vice
President-Marketing and Sales of the Company since October 1995, and Vice
President - Marketing from April 1991 to September 1995. From October 1988 to
September 1990, Mr. Seck was Vice President-Marketing of Bio-Medicus. From 1968
to 1988, he was employed by Johnson & Johnson, primarily in its Cardiovascular
Division (and, after September 1987 by Medtronic Inc., its successor by
acquisition), in various marketing positions, including Group Product Director
and Director of Sales.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information under the caption "Common Stock Information" on page 20 of
the Company's 1996 Annual Report is incorporated herein by reference.
In March 1996, the Company sold 84,900 shares of its Common Stock, $.01
par value pursuant to the exercise of underwriter's warrants issued in March
1992 in connection with the Company's initial public offering. These shares
were sold at a price of $6.60 per share, for a total consideration to the
Company of $564,000, to the underwriter of the Company's initial public offering
and certain persons associated or formerly associated with the underwriter. On
December 6, 1996, the Company sold an additional 600 shares of Common Stock at
$6.60 per share, or a total of $3,960, to another individual associated with the
underwriter of the Company's initial public offering. These sales, which
together constitute a single offering, were conducted without registration under
the Securities Act of 1933, as amended (the "Securities Act") in reliance on
exemptions from registration provided by Section 4(2) of the Securities Act and
Regulation D.
ITEM 6. SELECTED FINANCIAL DATA.
The financial information in the table under the caption "Financial
Highlights" on page 1 of the Company's 1996 Annual Report is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information under the caption "Management's Discussion and Analysis of
Results of Operations and Financial Condition" on pages 6 to 9 of the Company's
1996 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements and related notes thereto
on pages 10 through 19 and the Report of Independent Accountants on page 19 of
the Company's 1996 Annual Report are incorporated herein by reference, as is the
unaudited information set forth under the caption "Quarterly Operating Data" on
page 20 of the Company's 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
26
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) DIRECTORS OF THE REGISTRANT.
The information under the captions "Election of Directors - Information
About Nominees" on pages 5 and 6 and "Election of Directors - Other Information
About Nominees" on pages 6 and 7 of the Company's 1997 Proxy Statement is
incorporated herein by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Executive Officers of the Company is included in
this Annual Report on Form 10-K under Item 4A, "Executive Officers of the
Registrant."
(c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 16 of the Company's 1997 Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors - Director
Compensation" on pages 7 and 8 and "Executive Compensation" on pages 8 to 15 of
the Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" on pages 2 to 4 of the Company's 1997 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
27
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements, Related Notes, and Report of Independent
Accountants:
The following items are incorporated herein by reference from the
pages indicated in the Company's 1996 Annual Report:
PAGE(S)
Consolidated Balance Sheets as of December 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 10
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . 11
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 . . . 12
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . 13
Notes to Consolidated Financial Statements . . . . . . . 14 to 19
Report of Independent Accountants. . . . . . . . . . . . . 19
2. Financial Statement Schedules:
The unaudited selected quarterly financial data included under the
caption "Quarterly Operating Data" on page 20 of the Company's 1996
Annual Report is incorporated herein by reference.
The following financial statement schedule and report of independent
accountants thereon are included herein and should be read in
conjunction with the financial statements referred to above (page
numbers refer to pages in this Annual Report on Form 10-K):
Report of Independent Accountants on Financial
Statements Schedule. . . . . . . . . . . . . . . . . . . . 31
Financial Statement Schedule:
II - Valuation and Qualifying Accounts . . . . . . . . . . 32
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
3. Exhibits:
The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index on pages E-1 to E-5 of this Report.
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A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of
the Company as of March 21, 1997, upon receipt from any such person of
a written request for any such exhibit. Such request should be sent
to AVECOR Cardiovascular Inc., 7611 Northland Drive, Minneapolis,
Minnesota 55428, Attention: Chief Financial Officer.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual
Report on Form 10-K pursuant to Item 14(c):
A. 1991 Stock Incentive Plan, as amended (Filed herwith
electronically)
B. 1995 Non-Employee Director Option Plan (Filed herewith
electronically).
C. Confidentiality Agreement dated November 13, 1991 between
the Company and Anthony Badolato (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (File No. 33-45731)).
D. Confidentiality Agreement dated November 13, 1991 between
the Company and Norman C. McGibbon (Incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 33-45731)).
E. Confidentiality Agreement dated November 13, 1991 between
the Company and Allan R. Seck (Incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (File No. 33-45731)).
F. Consultant Agreement dated January 1, 1996 between the
Company and Norman C. McGibbon (Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 (File No. 0-21330)).
G. Form of Change in Control Agreement between the Company and
each of Anthony Badolato, Glenn D. Taylor, Gregory J.
Melsen, Allan R. Seck and William S. Haworth (Filed herewith
electronically).
H. Form of Confidentiality Agreement between the Company and
each of Glenn D. Taylor, Gregory J. Melsen and William S.
Haworth (Filed herewith electronically).
I. Employment Agreement dated August 19, 1991 between the
Company and William S. Haworth (Filed herewith
electronically).
J. Employment Agreement dated December 29, 1995 between the
Company and Gregory J. Melsen (Filed herewith
electronically).
K. Employment Agreement dated December 27 1995 between the
Company and Glenn D. Taylor (Filed herewith electronically).
L. Separation Agreement dated December 31, 1996 between the
Company and Glenn D. Taylor (Filed herewith electronically).
29
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(b) Reports on Form 8-K:
None.
(c) Exhibits:
The response to this portion of Item 14 is included as a separate
section of this Annual Report on Form 10-K.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is included as a separate
section of this Annual Report on Form 10-K.
30
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REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of AVECOR Cardiovascular Inc.
Our report on the consolidated financial statements of AVECOR
Cardiovascular Inc. has been incorporated by reference in this Form 10-K from
page 19 of the 1996 Annual Report to Shareholders of AVECOR Cardiovascular Inc.
In connection with our audits of such financial statements, we have also audited
the related financial statement schedule referred to in Item 14(a)(2) of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 6, 1997
31
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<TABLE>
<CAPTION>
AVECOR CARDIOVASCULAR INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- ---------------------------- -------- --------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
deducted from accounts
receivable:
For the year ended:
December 31, 1996 $ 93,000 $104,000 - $77,000(1) $120,000
-------- -------- --------- ------- --------
-------- -------- --------- ------- --------
December 31, 1995 $ 50,000 $ 43,000 - - $ 93,000
-------- -------- --------- ------- --------
-------- -------- --------- ------- --------
December 31, 1994 $100,000 $ 8,000 - $58,000(1) $ 50,000
-------- -------- --------- ------- --------
-------- -------- --------- ------- --------
Valuation allowance deducted
from inventories:
For the year ended:
December 31, 1996 $ 50,000 $50,000 - - $100,000
-------- -------- --------- ------- --------
-------- -------- --------- ------- --------
December 31, 1995 $100,000 - - $50,000(2) $ 50,000
-------- -------- --------- ------- --------
-------- -------- --------- ------- --------
December 31, 1994 $100,000 - - - $100,000
-------- -------- --------- ------- --------
-------- -------- --------- ------- --------
</TABLE>
(1) Deductions from allowance resulting from write-off of bad debts.
(2) Deductions from allowance resulting from disposal of related inventories.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 1997 AVECOR CARDIOVASCULAR INC.
By /s/ Anthony Badolato
------------------------------------
Anthony Badolato
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1997 by the following persons on
behalf of the registrant and in the capacities indicated.
Signature Title
/s/ Anthony Badolato Director and Chief Executive Officer
- ------------------------------ (Principal Executive Officer)
Anthony Badolato
/s/ Gregory J. Melsen Vice President -- Finance, Treasurer and
- ------------------------------ Chief Financial Officer (Principal
Gregory J. Melsen Financial and Accounting Officer)
/s/ Edward E. Strickland Director
- ------------------------------
Edward E. Strickland
/s/ David W. Stassen Director
- ------------------------------
David W. Stassen
/s/ Ann H. Lamont Director
- ------------------------------
Ann H. Lamont
/s/ J. Gordon Wright Director
- ------------------------------
J. Gordon Wright
33
<PAGE>
AVECOR CARDIOVASCULAR INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
For the Fiscal Year Ended December 31, 1996
<TABLE>
<CAPTION>
Item No. Method of Filing
- -------- ----------------
<S> <C>
3.1 Second Restated Articles of Incorporation of
the Company, as amended July 3, 1996............ Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 (File No. 0-
21330).
3.2 Bylaws of the Company, as amended May 3,
1996............................................ Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 (File No. 0-
21330).
4.1 Specimen form of the Company's Common
Stock Certificate............................... Incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (File No.
0-21330).
4.2 Second Restated Articles of Incorporation of
the Company, as amended July 3, 1996............ See Exhibit 3.1.
4.3 Bylaws of the Company, as amended May 3,
1996............................................ See Exhibit 3.2.
4.4 Certificate of Designation, Preferences and
Rights of the Company's Series A Junior
Preferred Stock ................................ Included in Exhibit 3.1
4.5 Rights Agreement dated June 26, 1996 between
the Company and Norwest Bank Minnesota,
N.A., which includes the form of Rights
Certificate as Exhibit B ....................... Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated
June 26, 1996 (File No. 0-21330).
10.1 Asset Purchase Agreement
dated June 7, 1991 between
the Company and SCIMED Life
Systems, Inc. (SCIMED).......................... Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1
(File No. 33-45731).
E-1
<PAGE>
10.2 Royalty Agreement dated June 7,
1991 between the Company
and SCIMED...................................... Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1
(File No. 33-45731).
10.3 1991 Stock Incentive Plan, as amended........... Filed herewith electronically.
10.4 AVECOR Cardiovascular Inc. Employee Stock
Purchase Plan................................... Incorporated by reference to Exhibit 28.1 to the
Company's Registration Statement on Form S-8
(File No. 33-55184).
10.5 1995 Non-Employee Director
Option Plan. ................................... Filed herewith electronically.
10.6 Confidentiality Agreement dated November 13,
1991 between the Company and Anthony
Badolato. ...................................... Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1
(File No. 33-45731).
10.7 Confidentiality Agreement dated November 13,
1991 between the Company and Norman
McGibbon........................................ Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1
(File No. 33-45731).
10.8 Confidentiality Agreement dated November 13,
1991 between the Company and Allan Seck......... Incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form
S-1 (File No. 33-45731).
10.9 Consultant Agreement dated January 1, 1996
between the Company and Norman C.
McGibbon. ...................................... Incorporated by reference to Exhibit 10.18 to
the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 (File No.
0-21330).
10.10 Form of Change in Control Agreement between
the Company and each of Anthony Badolato,
Glenn D. Taylor, Gregory J. Melsen, Allan R.
Seck and William S. Haworth. ................... Filed herewith electronically.
E-2
<PAGE>
10.11 Form of Confidentiality Agreement between the
Company and each of Glenn D. Taylor,
Gregory J. Melsen and William S. Haworth ....... Filed herewith electronically.
10.12 Employment Agreement dated August 19, 1991
between the Company and
William S. Haworth. ............................ Filed herewith electronically.
10.13 Employment Agreement dated December 29,
1995 between the Company and Gregory J.
Melsen. ........................................ Filed herewith electronically.
10.14 Employment Agreement dated December 27
1995 between the Company and Glenn D.
Taylor. ........................................ Filed herewith electronically.
10.15 Separation Agreement dated December 31,
1996 between the Company and Glenn D.
Taylor. ........................................ Filed herewith electronically.
10.16 Lease Agreement dated June 4, 1991 between
the Company and Connecticut Mutual Life
Insurance Company............................... Incorporated by reference to Exhibit 10.18 to
the Company's Registration Statement on Form
S-1 (File No. 33-45731).
10.17 First Amendment to Lease dated September 15,
1993 between the Company and Connecticut
Mutual Life Insurance Company................... Incorporated by reference to Exhibit 10.19 to
the Company's Annual Report on Form 10-K for
fiscal year ended December 31, 1993.
10.18 Assignment of Lease Agreement dated June 7,
1991 between the Company, SCIMED and D.J.
Investments, a Minnesota general partnership,
and Lease dated December 22, 1988 between
SCIMED and D.J. Investments, a Minnesota
general partnership............................. Incorporated by reference to Exhibit 10.19 to
the Company's Registration Statement on Form
S-1 (File No. 33-45731).
E-3
<PAGE>
10.19 Office/Warehouse Lease dated December 22,
1994 between the Company and D.J.
Investments, a Minnesota general partnership ... Incorporated by reference to Exhibit 10.13 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 0-
21330).
10.20 Lease Agreement dated February 28, 1993
between the Company and Carlson Real Estate
Company, a Minnesota limited partnership........ Incorporated by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 0-
21330).
10.21 Missives of Let dated October 4, 7 and 8, 1993
and Lease Agreement between AVECOR
Cardiovascular, Ltd. and Euromed Business
Park Limited.................................... Incorporated by reference to Exhibit 10.17 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 0-
21330).
10.22 Settlement Agreement between Cobe
Laboratories Inc. and the Company dated June
30, 1996. ...................................... Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 (File No. 0-
21330).
10.23 Cobe Patent License To Avecor between Cobe
Laboratories Inc. and the Company dated June
30, 1996. ...................................... Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 (File No. 0-
21330).
10.24 Avecor Patent License To Cobe between Cobe
Laboratories Inc. and the Company dated June
30, 1996. ...................................... Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 (File No. 0-
21330).
E-4
<PAGE>
10.25 Loan Agreement dated January 30, 1997
between the Company and First Bank National
Association. ................................... Filed herewith electronically.
10.26 Note dated January 30, 1997 issued by the
Company to First Bank National Association. .... Filed herewith electronically.
10.27 Mortgage, Security Agreement, Assignment of
Leases and Rents and Fixture Financing
Statement dated January 30, 1997 between the
Company and First Bank National
Association..................................... Filed herewith electronically.
10.28 Tax Increment Revenue Note dated February 1,
1997 issued to the Company by the Brooklyn
Park Economic Development Authority............. Filed herewith electronically.
11.1 Statement regarding computation of earnings
per share....................................... Filed herewith electronically
13.1 Portions of the Company's 1996 Annual Report
to Shareholders incorporated herein by
reference....................................... Filed herewith electronically.
21.1 List of Subsidiaries of the Company............. Incorporated by reference to Exhibit 21.1 to the
Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
23.1 Consent of Coopers & Lybrand L.L.P.............. Filed herewith electronically.
27.1 Financial Data Schedule......................... Filed herewith electronically.
</TABLE>
E-5
<PAGE>
EXHIBIT 10.3
AVECOR Cardiovascular Inc.
1991 STOCK INCENTIVE PLAN
(As amended as of January 24, 1996)
ARTICLE
1.
ESTABLISHMENT AND PURPOSE
1.1. ESTABLISHMENT. AVECOR Cardiovascular Inc. (the "Company") hereby
establishes a plan providing for stock-based compensation incentive
awards for the performance by certain eligible individuals of services
for the Company. This plan shall be known as the AVECOR
Cardiovascular Inc. 1991 Stock Incentive Plan (the "Plan").
1.2. PURPOSE. The purpose of the Plan is to advance the interests of the
Company and its shareholders by enabling the Company to attract and
retain persons of ability to perform services for the Company, by
providing an incentive to such persons through equity participation in
the Company and by rewarding such persons who contribute to the
achievement by the Company of its economic objectives.
ARTICLE
2.
DEFINITIONS
The following terms shall have the meanings set forth below, unless the
context clearly otherwise requires:
2.1. "BOARD" means the Board of Directors of the Company.
2.2. "BROKER EXERCISE NOTICE" means the written notice described in Section
6.6(b) of the Plan.
2.3. "CHANGE IN CONTROL" means an event described in Section 12.1 of the
Plan.
2.4. "CODE" means the Internal Revenue Code of 1986, as amended.
2.5. "COMMITTEE" means the group of individuals administering the Plan, as
provided in Article 3 of the Plan.
2.6. "COMMON STOCK" means the common stock of the Company, par value $.01
per share, or the number and kind of shares of stock or other
securities into which such Common Stock may be changed in accordance
with Section 4.3 of the Plan.
2.7. "DISABILITY" means the disability of the Participant as defined in the
long-term disability plan of the Company then covering the Participant
or, if no such plan exists, the permanent and total disability of the
Participant within the meaning of Section 22(e)(3) of the Code.
<PAGE>
2.8. "ELIGIBLE RECIPIENT" means all employees and nonemployee consultants
and directors of the Company or any Subsidiary.
2.9. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
2.10. "FAIR MARKET VALUE" means, with respect to the Common Stock, the
following:
(a) If the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so
listed or admitted but transactions in the Common Stock are
reported on the NASDAQ National Market System, the mean between
the reported high and low sale prices of the Common Stock on such
exchange or by the NASDAQ National Market System as of such date
(or, if no shares were traded on such day, as of the next
preceding day on which there was such a trade).
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the NASDAQ National Market
System, and bid and asked prices therefor in the over-the-counter
market are reported by the NASDAQ System or the National
Quotation Bureau, Inc. (or any comparable reporting service), the
mean of the closing bid and asked prices as of such date, as so
reported by the NASDAQ System, or, if not so reported thereon, as
reported by the National Quotation Bureau, Inc. (or such
comparable reporting service).
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the NASDAQ National Market
System, and such bid and asked prices are not so reported, such
price as the Committee determines in good faith in the exercise
of its reasonable discretion. The Committee shall not be
required to obtain an appraisal within six months of the adoption
of the Plan. The Committee's determination as to the current
value of the Common Stock shall be final, conclusive and binding
for all purposes and on all persons, including, without
limitation, the Company, the shareholders of the Company, the
Participants and their respective successors-in-interest. No
member of the Board of the Committee shall be liable for any
determination regarding current value of the Common Stock that is
made in good faith.
2.11. "INCENTIVE AWARD" means an Option or Restricted Stock Award granted
pursuant to the Plan.
2.12. "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Article 6 of the Plan
that qualifies as an "incentive stock option" within the meaning of
Section 422 of the Code.
2.13. "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Article 6 of the Plan
that does not qualify as an Incentive Stock Option.
2.14. "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.15. "PARTICIPANT" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
2.16. "PERSON" means any individual, corporation, partnership, group,
association or other "person" (as such term is used in Section 14(d)
of the Exchange Act), other than the Company, a wholly
2
<PAGE>
owned subsidiary of the Company or any employee benefit plan sponsored
by the Company or a wholly owned subsidiary of the Company.
2.17. "PREVIOUSLY ACQUIRED SHARES" mean shares of Common Stock that are
already owned by the Participant or, with respect to Options, shares
of Common Stock that are to be acquired by the Participant pursuant to
the exercise of an Option, or, with respect to Restricted Stock
Awards, shares of Common Stock to be issued or delivered to the
Participant upon the grant or vesting of a Restricted Stock Award.
2.18. "RESTRICTED STOCK AWARD" means an award of Common Stock granted to an
Eligible Recipient pursuant to Article 7 of the Plan that is subject
to certain restrictions imposed by the provisions of such Article.
2.19. "RETIREMENT" means the retirement of a Participant pursuant to and in
accordance with the regular or, if approved by the Board for the
purposes of the Plan, early retirement/pension plan or practice of the
Company or Subsidiary then covering the Participant.
2.20. "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.21. "STOCK BONUS" means an award of Common Stock granted to an eligible
Recipient pursuant to Article 7 of the Plan that is not subject to any
restrictions other than any restrictions that may be imposed on
transferability.
2.22. "SUBSIDIARY" means any subsidiary corporation of the Company within
the meaning of Section 424(f) of the Code.
2.23. "TAX DATE" means the date any withholding tax obligation arises under
the Code for a Participant with respect to an Incentive Award.
ARTICLE
3.
PLAN ADMINISTRATION
3.1. THE COMMITTEE. The Plan shall be administered by the Board or by a
committee of the Board consisting of not less than three persons;
provided, however, that from and after the date on which the Company
first registers a class of its equity securities under Section 12 of
the Exchange Act, the Plan shall be administered by the Board, a
majority of which Board and a majority of whom acting on any matter
under the Plan shall be "disinterested persons" within the meaning of
Rule 16b-3 under the Exchange Act, or by a committee consisting solely
of not fewer than three members of the Board who are such
"disinterested persons." Members of such a committee, if established,
shall be appointed from time to time by the Board, shall serve at the
pleasure of the Board and may resign at any time upon written notice
to the Board. A majority of the members of such a committee shall
constitute a quorum. Such a committee shall act by majority approval
of the members, shall keep minutes of its meetings and shall provide
copies of such minutes to the Board. Action of such a committee may
be taken without a meeting if unanimous written consent is given.
Copies of minutes of such a committee's meetings and of its actions by
written consent shall be provided to the Board and kept with the
corporate records of the Company. As used in this Plan, the term
"Committee" will refer to the Board or to such a committee, if
established.
3
<PAGE>
3.2. AUTHORITY OF THE COMMITTEE.
(a) In accordance with and subject to the provisions of the Plan, the
Committee shall have the authority to determine the following:
(i) the Eligible Recipients who shall be selected as
Participants, (ii) the nature and extent of the Incentive Awards
to be made to each Participant (including the number of shares of
Common Stock to be subject to each Incentive Award, any exercise
price and the manner in which Incentive Awards will vest or
become exercisable), (iii) the time or times when Incentive
Awards will be granted, (iv) the duration of each Incentive
Award, (v) the restrictions and other conditions to which the
payment or vesting of Incentive Awards may be subject, and (vi)
such other provisions of the Incentive Awards as the Committee
may deem necessary or desirable and as consistent with the terms
of the Plan. The Committee shall determine the form or forms of
the agreements with Participants which shall evidence the
particular terms, conditions, rights and duties of the Company
and the Participants with respect to Incentive Awards granted
pursuant to the Plan, which agreements shall be consistent with
the provisions of the Plan.
(b) With the consent of the Participant affected thereby, the
Committee may amend or modify the terms of any outstanding
Incentive Award in any manner, provided that the amended or
modified terms are permitted by the Plan as then in effect.
Without limiting the generality of the foregoing sentence, the
Committee may, with the consent of the Participant affected
thereby, modify the exercise price, number of shares or other
terms and conditions of an Incentive Award, extend the term of an
Incentive Award, accelerate the exerciseability or vesting or
otherwise terminate any restrictions relating to an Incentive
Award, accept the surrender of any outstanding Incentive Award,
or, to the extent not previously exercised or vested, authorize
the grant of new Incentive Awards in substitution for surrendered
Incentive Awards.
(c) With respect to the Company or any other entity whose performance
is relevant to the grant or vesting of an Incentive Award, in the
event of (i) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend,
stock split, combination of shares, rights offering or
divestiture (including a spin-off) or any other change in
corporate structure or shares, (ii) any purchase, acquisition,
sale or disposition of a significant amount of assets or a
significant business, any extraordinary dividend or any other
similar transaction, (iii) any change in accounting principles or
practices, or (iv) any other significant change in financial
condition, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of
the surviving corporation) may, without the consent of the
Participant affected thereby, amend or modify the vesting
criteria of any outstanding Incentive Award that is based in
whole or in part on the financial performance of the Company or
such other entity so as equitably to reflect such event, with
desired result that the criteria for evaluating such financial
performance of the Company or such other entity shall be
substantially the same (in the sole discretion of the Committee
or the board of directors of the surviving corporation) following
such event as prior to such event; provided, however, that the
amended or modified terms are permitted by the Plan as then in
effect.
(d) The Committee shall have the authority, subject to the provisions
of the Plan, to establish, adopt and revise such rules and
regulations relating to the Plan as it may deem necessary or
advisable for the administration of the Plan. The Committee's
decisions
4
<PAGE>
and determinations under the Plan need not be uniform and may be
made selectively among Participants, whether or not such
Participants are similarly situated. Each determination,
interpretation or other action made or taken by the Committee
pursuant to the provisions of the Plan shall be conclusive and
binding for all purposes and on all persons, including, without
limitation, the Company and its Subsidiaries, the shareholders of
the Company, the Committee and each of its members, the
directors, officers and employees of the Company and its
Subsidiaries, and the Participants and their respective
successors in interest. No member of the Committee shall be
liable for any action or determination made in good faith with
respect to the Plan or any Incentive Award granted under the
Plan.
ARTICLE
4.
STOCK SUBJECT TO THE PLAN
4.1. NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3 of
the Plan, the maximum number of shares of Common Stock that shall be
reserved for issuance under the Plan shall be 1,050,000 shares of
Common Stock. The maximum number of shares authorized and reserved
may be increased from time to time by approval of the Board and, if
required pursuant to Rule 16b-3 under the Exchange Act, Section 422 of
the Code, or the rules of any securities exchange or the NASD, the
shareholders of the Company.
4.2. SHARES AVAILABLE FOR USE. Shares of Common Stock that may be issued
upon exercise of Options or that are issued as Restricted Stock Awards
shall be applied to reduce the maximum number of shares of Common
Stock remaining available for use under the Plan. Any shares of
Common Stock that are subject to an Option (or any portion thereof)
that lapses, expires or for any reason is terminated unexercised shall
automatically again become available for use under the Plan. Any
shares of Common Stock that constitute the forfeited portion of a
Restricted Stock Award, however, shall not become available for
further use under the Plan.
4.3. ADJUSTMENTS TO SHARES. In the event of any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares, rights offering,
extraordinary dividend (including a spin-off) or any other change in
the corporate structure or shares of the Company, the Committee (or,
if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation)
shall make appropriate adjustment (which determination shall be
conclusive) as to the number and kind of securities subject to and
reserved under the Plan and, in order to prevent dilution or
enlargement of the rights of Participants, the number, kind and, where
applicable, exercise price of securities subject to outstanding
Incentive Awards. Without limiting the generality of the foregoing,
in the event that any of such transactions are effected in such a way
that the holder of Common Stock shall be entitled to receive stock,
securities or assets, including cash, with respect to or in exchange
for such Common Stock, all Participants holding outstanding Options
shall upon the exercise of such Options receive, in lieu of any shares
of Common Stock that they may be entitled to receive, such stock,
securities or assets, including cash, as would have been issued to
such Participants if their Options had been exercised and such
Participants had received Common Stock prior to such transaction.
5
<PAGE>
ARTICLE
5.
PARTICIPATION
Participants in the Plan shall be those Eligible Recipients who, in the
judgment of the Committee, have performed, are performing, or during the term of
an Incentive Award will perform, services in the management, operation and
development of the Company or any Subsidiary, and significantly contributed, are
significantly contributing or are expected to significantly contribute to the
achievement of corporate economic objectives. Eligible Recipients may be
granted from time to time one or more Incentive Awards, as may be determined by
the Committee in its sole discretion. The number, type, terms and conditions of
Incentive Awards granted to various Eligible Recipients need not be uniform,
consistent or in accordance with any plan, regardless of whether such Eligible
Recipients are similarly situated. Upon determination by the Committee that an
Incentive Award is to be granted to an Eligible Recipient, written notice shall
be given such person, specifying the terms, conditions, rights and duties
related thereto. Each Eligible Recipient to whom an Incentive Award is to be
granted shall enter into an agreement with the Company, in such form as the
Committee shall determine and which is consistent with the provisions of the
Plan, specifying such terms, conditions, rights and duties. Incentive Awards
shall be deemed to be granted as of the date specified in the grant resolution
of the Committee, which date shall be the date of the related agreement with the
Participant.
ARTICLE
6.
STOCK OPTIONS
6.1. GRANT. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options shall be subject to such terms and
conditions, consistent with the other provisions of the Plan, as shall
be determined by the Committee in its sole discretion. The Committee
may designate whether an Option is to be considered an Incentive Stock
Option or a Non-Statutory Stock Option; provided, however, that an
Incentive Stock Option shall be granted only to an Eligible Recipient
who is an employee of the Company or a Subsidiary. The terms of the
agreement relating to a Non-Statutory Stock Option shall expressly
provide that such Option shall not be treated as an Incentive Stock
Option.
6.2. EXERCISE. An Option shall become exercisable at such times and in
such installments (which may be cumulative) as shall be determined by
the Committee in its sole discretion at the time the Option is
granted. Upon the completion of its exercise period, an Option, to
the extent not then exercised, shall expire.
6.3. EXERCISE PRICE.
(a) INCENTIVE STOCK OPTIONS. The per share price to be paid by the
Participant at the time an Incentive Stock Option is exercised
shall be determined by the Committee, in its discretion, at the
date of its grant; provided, however, that such price shall not
be less than (i) 100% of the Fair Market Value of one share of
Common Stock on the date the Option is granted, or (ii) 110% of
the Fair Market Value of one share of Common Stock on the date
the Option is granted if, at the time the Option is granted, the
Participant owns, directly or indirectly (as determined pursuant
to Section 424(d) of the Code), more than 10% of the total
combined voting power of all classes of stock of the Company, any
6
<PAGE>
subsidiary corporation or any parent corporation of the Company
(within the meaning of Sections 424(f) and 424(e), respectively,
of the Code).
(b) NON-STATUTORY STOCK OPTIONS. The per share price to be paid by
the Participant at the time a Non-Statutory Stock Option is
exercised shall be determined by the Committee in its sole
discretion at the time the Option is granted, but shall not be
less than 85% of the Fair Market Value of one share of Common
Stock on the date the Option is granted.
6.4. DURATION.
(a) INCENTIVE STOCK OPTIONS. The period during which an Incentive
Stock Option may be exercised shall be fixed by the Committee in
its sole discretion at the time such Option is granted; provided,
however, that in no event shall such period exceed 10 years from
its date of grant or, in the case of a Participant who owns,
directly or indirectly (as determined pursuant to Section 424(d)
of the Code), more than 10% of the total combined voting power of
all classes of stock of the Company, any subsidiary corporation
or any parent corporation of the Company (within the meaning of
Sections 424(f) and 424(e), respectively, of the Code), five
years from its date of grant.
(b) NON-STATUTORY STOCK OPTION. The period during which a
Non-Statutory Stock Option may be exercised shall be fixed by the
Committee in its sole discretion at its date of grant.
(c) EFFECT OF TERMINATION OF EMPLOYMENT. Notwithstanding the
foregoing, except as provided in Articles 10 and 12 of the Plan,
all Options granted to a Participant shall terminate and may no
longer be exercised if the Participant's employment with the
Company and all Subsidiaries ceases.
6.5. MANNER OF OPTION EXERCISE. An Option may be exercised by a
Participant in whole or in part from time to time, subject to the
conditions contained herein and in the agreement evidencing such
Option, by delivery, in person or through certified or registered
mail, of written notice of exercise to the Company at its principal
executive office in Minneapolis, Minnesota (Attention: Treasurer), and
by paying in full the total Option exercise price for the shares of
Common Stock purchased. Such notice shall be in a form satisfactory
to the Committee and shall specify the particular Option (or portion
thereof) that is being exercised and the number of shares with respect
to which the Option is being exercised. Subject to compliance with
Section 14.1 of the Plan, the exercise of the Option shall be deemed
effective upon receipt of such notice and payment complying with the
terms of the Plan and the agreement evidencing such Option. As soon
as practicable after the effective exercise of the Option, the
Participant shall be recorded on the stock transfer books of the
Company as the owner of the shares purchased, and the Company shall
deliver to the Participant one or more duly issued stock certificates
evidencing such ownership. If a Participant exercises any Option with
respect to some, but not all, of the shares of Common Stock subject to
such Option, the right to exercise such Option with respect to the
remaining shares shall continue until it expires or terminates in
accordance with its terms. An Option shall only be exercisable with
respect to whole shares.
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6.6. PAYMENT OF EXERCISE PRICE.
(a) The total purchase price of the shares to be purchased upon
exercise of an Option shall be paid entirely in cash (including
check, bank draft or money order); provided, however, that the
Committee, in its sole discretion, may allow such payments to be
made, in whole or in part, by delivery of a Broker Exercise
Notice or a promissory note (containing such terms and conditions
as the Committee may in its discretion determine), by transfer
from the Participant to the Company of Previously Acquired
Shares, or by a combination thereof. In determining whether or
upon what terms and conditions a Participant will be permitted to
pay the purchase price of an Option in a form other than cash,
the Committee may consider all relevant facts and circumstances,
including, without limitation, the tax and securities law
consequences to the Participant and the Company and the financial
accounting consequences to the Company. In the event the
Participant is permitted to pay the total purchase price of an
Option in whole or in part with Previously Acquired Shares, the
value of such shares shall be equal to their Fair Market Value on
the date of exercise of the Option.
(b) For purposes of this Section 6.6, a "Broker Exercise Notice"
shall mean a written notice from a Participant to the Company at
its principal executive office in Minneapolis, Minnesota
(Attention: Treasurer), made on a form and in the manner as the
Committee may from time to time determine, pursuant to which the
Participant irrevocably elects to exercise all or any portion of
an Option and irrevocably directs the Company to deliver the
Participant's stock certificates to be issued to such Participant
upon such Option exercise directly to a broker or dealer. A
Broker Exercise Notice must be accompanied by or contain
irrevocable instructions to the broker or dealer (i) to promptly
sell a sufficient number of shares of such Common Stock or to
loan the Participant a sufficient amount of money to pay the
exercise price for the Options and, if not otherwise satisfied by
the Participant, to fund any related employment and withholding
tax obligations due upon such exercise, and (ii) to promptly
remit such sums to the Company upon the broker's or dealer's
receipt of the stock certificates.
6.7. RIGHTS AS A SHAREHOLDER. The Participant shall have no rights as a
shareholder with respect to any shares of Common Stock covered by an
Option until the Participant shall have become the holder of record of
such shares, and no adjustments shall be made for dividends or other
distributions or other rights as to which there is a record date
preceding the date the Participant becomes the holder of record of
such shares, except as the Committee may determine pursuant to Section
4.3 of the Plan.
6.8. DISPOSITION OF COMMON STOCK ACQUIRED PURSUANT TO THE EXERCISE OF
INCENTIVE STOCK OPTIONS. Prior to making a disposition (as defined in
Section 424(c) of the Code) of any shares of Common Stock acquired
pursuant to the exercise of an Incentive Stock Option granted under
the Plan before the expiration of two years after its date of grant or
before the expiration of one year after its date of exercise and the
date on which such shares of Common Stock were transferred to the
Participant pursuant to exercise of the Option, the Participant shall
send written notice to the Company of the proposed date of such
disposition, the number of shares to be disposed of, the amount of
proceeds to be received from such disposition and any other
information relating to such disposition that the Company may
reasonably request. The right of a Participant to make any such
disposition shall be conditioned on the receipt by the Company of all
amounts necessary to satisfy any federal, state or local withholding
and employment-related tax
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requirements attributable to such disposition. The Committee shall
have the right, in its sole discretion, to endorse the certificates
representing such shares with a legend restricting transfer and to
cause a stop transfer order to be entered with the Company's transfer
agent until such time as the Company receives the amounts necessary to
satisfy such withholding and employment-related tax requirements or
until the later of the expiration of two years from its date of grant
or one year from its date of exercise and the date on which such
shares were transferred to the Participant pursuant to the exercise of
the Option.
6.9. AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS. To
the extent that the aggregate Fair Market Value (determined as of the
date an Incentive Stock Option is granted) of the shares of Common
Stock with respect to which incentive stock options (within the
meaning of Section 422 of the Code) are exercisable for the first time
by a Participant during any calendar year (under the Plan and any
other incentive stock option plans of the Company, any subsidiary or
any parent corporation of the Company (within the meaning of Sections
424(f) and 424(e), respectively, of the Code)) exceeds $100,000 (or
such other amount as may be prescribed by the Code from time to time),
such excess Options shall be treated as Non-Statutory Stock Options.
The determination shall be made by taking incentive stock options into
account in the order in which they were granted. If such excess only
applies to a portion of an incentive stock option, the Committee, in
its discretion, shall designate which shares shall be treated as
shares to be acquired upon exercise of an incentive stock option.
ARTICLE
7.
RESTRICTED STOCK AWARDS
7.1. GRANT. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards shall be
subject to such terms and conditions, consistent with the other
provisions of the Plan, as shall be determined by the Committee in its
sole discretion.
7.2. VESTING. A Restricted Stock Award shall vest at such times and in
such installments, if any, as shall be determined by the Committee in
its sole discretion at the time the Restricted Stock Award is granted.
The Committee may impose such restrictions or conditions, not
inconsistent with the provisions of the Plan, to the vesting of such
Restricted Stock Awards as it deems appropriate, including, without
limitation, that the Participant remain in the continuous employ or
service of the Company or a Subsidiary for a certain period, or that
the Participant or the Company (or any subsidiary or division thereof)
achieve certain performance criteria. The Committee may, in its sole
discretion, require different restrictions with respect to different
Participants, with respect to different Restricted Stock Awards or
with respect to separate, designated portions of a Restricted Stock
Award. Except as otherwise provided in Articles 10 and 12 of the
Plan, if a Participant's employment or other service with the Company
and all Subsidiaries terminates prior to the vesting of any Restricted
Stock Award, any portion of such Restricted Stock Award which has not
yet vested shall be forfeited, and all shares of Common Stock (and any
dividends and distributions as described in Section 7.4 of the Plan)
related thereto shall be immediately returned to the Company.
7.3. RIGHTS AS A SHAREHOLDER; TRANSFERABILITY. A Participant shall have
all voting, dividend, liquidation and other rights with respect to
shares of Common Stock issued to the Participant as a Restricted Stock
Award under this Article 7 upon the Participant becoming the holder of
record
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of such Restricted Stock Award as if such Participant were a holder of
record of unrestricted Common Stock; provided, however, that prior to
the vesting of any Restricted Stock Award, the Participant's right to
assign or transfer such shares of Common Stock issued as a Restricted
Stock Award shall be subject to the limitations of Section 13.2 of the
Plan. As soon as practicable after the vesting of any Restricted
Stock Award, the Company shall cause to be delivered to the
Participant a certificate evidencing such shares of Common Stock
together with any dividends and distributions related thereto.
7.4. DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines
otherwise in its sole discretion, any dividends or distributions
(including dividends or distributions paid in cash) paid with respect
to shares of Common Stock subject to a Restricted Stock Award for
which the restrictions have not yet ended shall be subject to the same
restrictions as the shares to which such dividends or distributions
relate and shall be promptly deposited with the custodian designated
pursuant to Section 7.5 of the Plan. The Committee shall determine in
its sole discretion whether any interest shall be paid on such
dividends or distributions.
7.5. ENFORCEMENT OF RESTRICTIONS. The Committee may, in its sole
discretion, require one or more of the following methods of enforcing
the restrictions referred to in Sections 7.2 and 7.3 of the Plan:
(a) placing a legend on the stock certificates referring to the
restrictions; (b) requiring the Participant to keep the stock
certificates, duly endorsed, in the custody of the Company while the
restrictions remain in effect; or (c) requiring that the stock
certificates, duly endorsed, be held in the custody of a third party
while the restrictions remain in effect.
7.5. LIEN ON SHARES. The Committee may, in its sole discretion, require
that a Participant, as a condition to the grant of a Restricted Stock
Award, grant to the Company a possessory lien on the shares of Common
Stock subject to the Restricted Stock Award and any dividends or
distributions related thereto in order to (a) secure retransfer of
shares of Common Stock subject to a Restricted Stock Award into the
name of the Company, and (b) ensure adequate provision for any tax
withholding obligations arising out of the receipt of, or the lapse or
termination of the restrictions or the payment of any dividends or
other distributions with respect to, a Restricted Stock Award.
ARTICLE
8.
STOCK BONUSES
An Eligible Recipient may be granted one or more Stock Bonuses under the
Plan, and such Stock Bonuses shall be subject to such terms and conditions,
consistent with the other provisions of the Plan, as shall be determined by the
Committee in its sole discretion, including, without limitation, that the
Company (or any subsidiary or division thereof) achieve certain performance
criteria. The Participant shall have all voting, dividend, liquidation and
other rights with respect to the shares of Common Stock issued to the
Participant as a Stock Bonus under this Article 8 upon the Participant becoming
the holder of record of such Stock Bonus; provided, however, that the Committee
may impose such restrictions on the assignment or transfer of a Stock Bonus as
it in its sole discretion deems appropriate. As soon as practicable after the
grant of a Stock Bonus, the Participant shall be recorded on the stock transfer
books of the Company as the owner of the shares granted, and the Company shall
deliver to the Participant one or more duly issued stock certificates evidencing
such ownership.
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ARTICLE
9.
CASH BONUSES
In connection with any grant of Incentive Awards or at any time thereafter,
the Committee may, in its sole discretion, grant a cash bonus to a Participant
in connection with the grant, vesting and/or exercise of an Incentive Award.
The determination of whether to grant such a cash bonus, the nature and amount
of any such cash bonus and the terms and conditions of such cash bonus shall be
within the sole discretion of the Committee.
ARTICLE
10.
EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE ON INCENTIVE AWARDS
10.1. TERMINATION OF EMPLOYMENT OR OTHER SERVICE DUE TO DEATH, DISABILITY OR
RETIREMENT. Except as otherwise provided in Article 12 of the Plan,
in the event a Participant's employment or other service with the
Company and all Subsidiaries is terminated by reason of such
Participant's death, Disability or Retirement:
(a) All outstanding Options then held by the Participant shall, with
respect to termination by reason of death or Disability, become
immediately exercisable in full and remain exercisable for a
period of one year after such termination and shall, with respect
to termination by reason of Retirement, remain exercisable to the
extent exercisable as of such termination for a period of three
months after such termination (but in no event shall such Options
be exercisable after the expiration date of any such Option); and
(b) All Restricted Stock Awards then held by the Participant shall
become fully vested and the shares related thereto shall become
nonforfeitable.
10.2. TERMINATION OF EMPLOYMENT OR OTHER SERVICE FOR REASONS OTHER THAN
DEATH, DISABILITY OR RETIREMENT. Except as otherwise provided in
Article 12 of the Plan, in the event a Participant's employment or
other service is terminated with the Company and all Subsidiaries for
any reason other than death, Disability or Retirement, all rights of
the Participant under the Plan and any agreement evidencing an
Incentive Award shall immediately terminate without notice of any
kind, no Options then held by the Participant shall thereafter be
exercisable and any portions of the Restricted Stock Awards then held
by the Participant that have not vested shall be terminated and all
shares of Common Stock related thereto shall be forfeited to the
Company; provided, however, that if such termination is due to any
reason other than voluntary termination by the Participant or
termination by the Company or any Subsidiary for "cause," all
outstanding Options then held by such Participant shall remain
exercisable to the extent exercisable as of such termination for a
period of three months after such termination (but in no event after
the expiration date of any such Option). For purposes of this Section
10.2 "cause" shall be as defined in any employment or other agreement
or policy applicable to the Participant or, if no such agreement or
policy exists, shall mean (a) dishonesty, fraud, misrepresentation,
embezzlement or material or deliberate injury or attempted injury, in
each case related to the Company or any Subsidiary, (b) any unlawful
or criminal activity of a serious nature, (c) any willful breach of
duty, habitual neglect of duty or unreasonable job performance, or (d)
any
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material breach of a confidentiality or noncompete agreement entered
into with the Company or any Subsidiary.
10.3. MODIFICATION OF EFFECT OF TERMINATION. Notwithstanding the provisions
of this Article 10, upon a Participant's termination of employment or
other service with the Company and all Subsidiaries, the Committee
may, in its sole discretion (which may be exercised before or
following such termination), cause Incentive Awards, or any portions
thereof, then held by such Participant to become exercisable and
remain exercisable following such termination, or to vest or become
free of restrictions following such termination, in each case in the
manner determined by the Committee; provided, however, that no Option
shall be exercisable after the expiration date thereof and any
Incentive Stock Option that remains unexercised more than three months
following employment termination by reason of Retirement or more than
one year following employment termination by reason of Disability
shall thereafter be deemed to be a Non-Statutory Stock Option.
10.4. DATE OF TERMINATION. Unless the Committee shall otherwise determine
in its sole discretion at the time an Incentive Award is granted, a
Participant's employment or other service shall, for purposes of the
Plan, be deemed to have terminated on the date the Participant ceases
to perform services for the Company, as determined by the Committee in
its sole discretion based upon the Company's personnel records.
ARTICLE
11.
RIGHT TO WITHHOLD; PAYMENT OF WITHHOLDING TAXES
11.1. GENERAL RULES. The Company is entitled to (a) withhold and deduct from
future wages of the Participant (or from other amounts which may be
due and owing to the Participant from the Company or the Parent), or
make other arrangements for the collection of, all legally required
amounts necessary to satisfy any and all federal, state and local
withholding and employment-related tax requirements (i) attributable
to the grant, exercise or vesting of, or payment of dividends with
respect to, an Incentive Award or to a disqualifying disposition of
stock received upon exercise of an Incentive Stock Option, or (ii)
otherwise incurred with respect to an Incentive Award, or (b) require
the Participant promptly to remit the amount of such withholding to
the Company before taking any action with respect to an Incentive
Award.
11.2. SPECIAL RULES.
(a) Without limiting the generality of Section 11.1 of the Plan, the
Committee may, in its sole discretion and subject to such rules
as the Committee may adopt, permit a Participant to satisfy, in
whole or in part, any withholding or employment-related tax
obligation (i) attributable to the grant, exercise or vesting of,
or payment of dividends with respect to, an Incentive Award or to
a disqualifying disposition of stock received upon exercise of an
Incentive Stock Option, or (ii) otherwise incurred with respect
to an Incentive Award, by electing to use Previously Acquired
Shares or by electing to have the Company accept a Broker
Exercise Notice with respect to that number of shares, in any
such case, having a Fair Market Value, on the Tax Date, equal to
the amount necessary to satisfy the withholding or
employment-related taxes due or by agreeing to deliver to the
Company a promissory note in payment for some or all of the
necessary
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amounts (containing terms and conditions determined in the
discretion of the Committee).
(b) A Participant's election to use Previously Acquired Shares, a
Broker Exercise Notice or a promissory note must be made on or
prior to the Tax Date, is irrevocable and is subject to the
consent or disapproval of the Committee. If the Participant is
an officer, director or beneficial owner of more than 10% of the
outstanding Common Stock of the Company and the Company has a
class of equity securities registered under Section 12 of the
Exchange Act, an election to use Previously Acquired Shares may
not be made within six months of the date the Incentive Award is
granted (unless the death or Disability of the Participant occurs
prior to the expiration of such six-month period), and must be
made either six months prior to the Tax Date or at any time prior
to the Tax Date between the third and twelfth business days
following public release of any of the Company's quarterly or
annual summary earnings statements. When shares of Common stock
are issued prior to the Tax Date to a Participant making an
election to use Previously Acquired Shares, the Participant shall
agree in writing to surrender that number of shares on the Tax
Date having an aggregate Fair Market Value equal to the tax due.
ARTICLE
12.
CHANGE OF CONTROL
12.1. CHANGE IN CONTROL. For purposes of this Article 12, a "Change in
Control" of the Company shall mean (a) the sale, lease, exchange or
other transfer of all or substantially all of the assets of the
Company (in one transaction or in a series of related transactions) to
a corporation that is not controlled by the Company, (b) the approval
by the shareholders of the Company of any plan or proposal for the
liquidation or dissolution of the Company, or (c) a change in control
of the Company of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response
to Item 1(a) of the Current Report on Form 8-K, as in effect on the
effective date of the Plan, pursuant to Section 13 or 15(d) of the
Exchange Act, whether or not the Company is then subject to such
reporting requirement; provided, however, that, without limitation,
such a Change in Control shall be deemed to have occurred at such time
as (x) any Person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% or more of the combined voting power of
the Company's outstanding securities ordinarily having the right to
vote at elections of directors, or (y) individuals who constitute the
board of directors of the Company on the effective date of the Plan
cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the
effective date of the Plan whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors comprising the board of directors of the
Company on the effective date of the Plan (either by a specific vote
or by approval of the proxy statement of the Company in which such
person is named as a nominee for director, without objection to such
nomination) shall be, for purposes of this clause (y), considered as
though such person were a member of the board of directors of the
Company on the effective date of the Plan.
12.2. ACCELERATION OF VESTING. If a Change of Control of the Company shall
occur, then, without any action by the Committee or the Board, (a) all
outstanding Options shall become immediately exercisable in full and
shall remain exercisable during the remaining term thereof, regardless
of
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whether the Participants to whom such Options have been granted remain
in the employ or service of the Company or any Subsidiary, and (b) all
restrictions with respect to outstanding Restricted Stock Awards shall
immediately lapse and the shares related thereto shall become
nonforfeitable.
12.3. CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company shall
occur, then the Committee, in its sole discretion, and without the
consent of any Participant effected thereby, may determine that some
or all Participants holding outstanding Options shall receive, with
respect to some or all of the shares of Common Stock subject to such
Options, as of the effective date of any such Change in Control of the
Company, cash in an amount equal to the excess of the Fair Market
Value of such shares immediately prior to the effective date of such
Change in Control of the Company over the exercise price per share of
such Options.
12.4. LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in
Section 12.2 or 12.3 above to the contrary, if, with respect to a
Participant, the acceleration of the vesting of an Incentive Award as
provided in Section 12.2 or the payment of cash in exchange for all or
part of an Option as provided in Section 12.3 above (which
acceleration or payment could be deemed a "payment" within the meaning
of Section 280G(b)(2) of the Code), together with any other payments
which such Participant has the right to receive from the Company or
any corporation which is a member of an "affiliated group" (as defined
in Section 1504(a) of the Code without regard to Section 1504(b) of
the Code) of which the Company is a member, would constitute a
"parachute payment" (as defined in Section 280G(b)(2) of the Code),
then the payments to such Participant pursuant to Section 12.2 or 12.3
above shall be reduced to the largest amount as will result in no
portion of such payments being subject to the excise tax imposed by
Section 4999 of the Code.
ARTICLE
13.
RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY
13.1. EMPLOYMENT OR SERVICE. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any Subsidiary to
terminate the employment or service of any Eligible Recipient or
Participant at any time, nor confer upon any Eligible Recipient or
Participant any right to continue in the employ or service of the
Company or any Subsidiary.
13.1. RESTRICTIONS ON TRANSFER. Except as expressly permitted by this Plan,
no right or interest of any Participant in an Incentive Award may be
Transferred. Notwithstanding the foregoing and subject to Articles 10
and 11 of the Plan, in the event of a Participant's death, such
Participant's rights and interests in any outstanding Options that are
exercisable at the time of his death may be transferred by
testamentary will or the laws of descent and distribution and may be
exercised by such Participant's personal representative or executor
for a period of three months following such date of death. Any
Transfer or attempted Transfer by any Participant in violation of this
Section 13.2 shall be null and void and of no effect whatsoever. By
accepting an Incentive Award, each Participant acknowledges the
reasonableness of the restrictions on Transfer imposed by this Plan in
view of the Company's purposes and the purposes of this Plan.
Accordingly, the restrictions on Transfer contained herein shall be
specifically enforceable against any Participant attempting a Transfer
in violation of the provisions contained herein.
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13.3. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to amend, modify or rescind any previously approved
compensation plans or programs entered into by the Company. The Plan
will be construed to be in addition to any and all such other plans or
programs. Neither the adoption of the Plan nor the submission of the
Plan to the shareholders of the Company for approval will be construed
as creating any limitations on the power or authority of the Board to
adopt such additional or other compensation arrangements as the Board
may deem necessary or desirable.
ARTICLE
14.
SECURITIES LAW RESTRICTIONS
14.1. SHARE ISSUANCES. Notwithstanding any other provision of the Plan or
any agreements entered into pursuant hereto, the Company shall not be
required to issue or deliver any certificate for shares of Common
Stock under this Plan, and an Option shall not be considered to be
exercised notwithstanding the tender by the Participant of any
consideration therefor, unless and until each of the following
conditions has been fulfilled:
(a) (i) there shall be in effect with respect to such shares a
registration statement under the Securities Act and any
applicable state securities laws if the Committee, in its sole
discretion, shall have determined to file, cause to become
effective and maintain the effectiveness of such registration
statement; or (ii) if the Committee has determined not to so
register the shares of Common Stock to be issued under the Plan,
(aa) exemptions from registration under the Securities Act and
applicable state securities laws shall be available for such
issuance (as determined by counsel to the Company) and (bb) there
shall have been received from the Participant (or, in the event
of death or disability, the Participant's heir(s) or legal
representative(s)) any representations or agreements requested by
the Company in order to permit such issuance to be made pursuant
to such exemptions; and
(b) there shall have been obtained any other consent, approval or
permit from any state or federal governmental agency which the
Committee shall, in its sole discretion upon the advice of
counsel, deem necessary or advisable.
14.2. SHARE TRANSFERS. Shares of Common Stock issued pursuant to Incentive
Awards granted under the Plan may not be Transferred except pursuant
to registration under the Securities Act and applicable state
securities laws or pursuant to exemptions from such registrations.
The Company may condition the Transfer of such shares not issued
pursuant to an effective and current registration statement under the
Securities Act and all applicable state securities laws on the receipt
from the party to whom the shares of Common Stock are to be so
Transferred of any representations or agreements requested by the
Company in order to permit such Transfer to be made pursuant to
exemptions from registration under the Securities Act and applicable
state securities laws.
14.3. LEGENDS. Unless a registration statement under the Securities Act is
in effect with respect to the issuance or Transfer of shares of Common
Stock under the Plan, each certificate representing any such shares
shall be endorsed with a legend in substantially the following form,
unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
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THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER APPLICABLE
STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH
STATE LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
AND SUCH STATE LAWS, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO
THE SATISFACTION OF THE COMPANY.
ARTICLE
15.
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Incentive Awards under the Plan shall conform to
any change in applicable laws or regulations or in any other respect the Board
may deem to be in the best interests of the Company; provided, however, that no
such amendment shall be effective, without approval of the shareholders of the
Company, if shareholder approval of the amendment is then required pursuant to
Rule 16b-3 under the Exchange Act or any successor rule or Section 422 of the
Code. No termination, suspension or amendment of the Plan shall alter or impair
any outstanding Incentive Award without the consent of the Participant affected
thereby; provided, however, that this sentence shall not impair the right of the
Committee to take whatever action it deems appropriate under Section 4.3 or
Article 12 of the Plan.
ARTICLE
16.
EFFECTIVE DATE OF THE PLAN
16.1. EFFECTIVE DATE. The Plan is effective as of April 11, 1991, the date
it was adopted by the Board.
16.2. DURATION OF THE PLAN. The Plan shall terminate at midnight on April
11, 2001, and may be terminated prior thereto by Board action, and no
Incentive Award shall be granted after such termination. Incentive
Awards outstanding upon termination of the Plan may continue to be
exercised, or become free of restrictions, in accordance with their
terms.
ARTICLE
17.
MISCELLANEOUS
17.1. CONSTRUCTION AND HEADINGS. The use of the masculine gender shall also
include within its meaning the feminine, and the singular may include
the plural and the plural may include the singular, unless the context
clearly indicates to the contrary. The headings of the Articles,
Sections and subparts of the Plan are for convenience of reading only
and are not meant to be of substantive significance and shall not add
or detract from the meaning of such Article, Section or subpart.
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17.2. PUBLIC POLICY. No person shall have any claim or right to receipt of
an Incentive Award if, in the opinion of counsel to the Company, such
receipt conflicts with law or is opposed to governmental or public
policy.
17.3. GOVERNING LAW. The place of administration of the Plan shall be
conclusively deemed to be within the State of Minnesota, and the
rights and obligations of any and all persons having or claiming to
have had an interest under the Plan or under any agreements evidencing
Incentive Awards shall be governed by and construed exclusively and
solely in accordance with the laws of the State of Minnesota without
regard to the conflict of laws or provisions of any jurisdictions.
All parties agree to submit to the jurisdiction of the state and
federal courts of Minnesota with respect to matters relating to the
Plan and agree not to raise or assert the defense that such forum is
not convenient for such party.
17.4. SUCCESSORS AND ASSIGNS. This Plan shall be binding upon and inure to
the benefit of the successors and permitted assigns of the Company,
including, without limitation, whether by way of merger,
consolidation, operation of law, assignment, purchase or other
acquisition of substantially all of the assets or business of the
Company, and any and all such successors and assigns shall absolutely
and unconditionally assume all of the Company's obligations under the
Plan.
17.5. SURVIVAL OF PROVISIONS. The rights, remedies, agreements, obligations
and covenants contained in or made pursuant to the Plan, any agreement
evidencing an Incentive Award and any other notices or agreements in
connection therewith, including, without limitation, any notice of
exercise of an Option, shall survive the execution and delivery of
such notices and agreements and the delivery and receipt of shares of
Common Stock and shall remain in full force and effect.
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<PAGE>
EXHIBIT 10.5
AVECOR CARDIOVASCULAR INC.
1995 NON-EMPLOYEE DIRECTOR OPTION PLAN
1. PURPOSE OF PLAN.
The purpose of the AVECOR Cardiovascular Inc. 1995 Non-Employee Director
Option Plan (the "Plan") is to advance the interests of AVECOR Cardiovascular
Inc. (the "Company") and its shareholders by enabling the Company to attract
and retain the services of experienced and knowledgeable non-employee
directors and to increase the proprietary interests of such non-employee
directors in the Company's long-term success and progress and their
identification with the interests of the Company's shareholders.
2. DEFINITIONS.
The following terms will have the meanings set forth below, unless the
context clearly otherwise requires:
2.1. "BOARD" means the Board of Directors of the Company.
2.2. "CODE" means the Internal Revenue Code of 1986, as amended.
2.3. "COMMITTEE" means the group of individuals administering the
Plan, as provided in Section 3 of the Plan.
2.4. "COMMON STOCK" means the common stock of the Company, par value
$0.01 per share, or the number and kind of shares of stock or
other securities into which such Common Stock may be changed in
accordance with Section 4.3 of the Plan.
2.5. "DISABILITY" means the disability of an Eligible Director such as
would entitle the Eligible Director to receive disability income
benefits pursuant to the long-term disability plan of the Company
then covering the Eligible Director or, if no such plan exists or
is applicable to the Eligible Director, the permanent and total
disability of the Eligible Director within the meaning of Section
22(e)(3) of the Code.
2.6. "ELIGIBLE DIRECTORS" means all directors of the Company who are
not employees of the Company or any subsidiary of the Company.
2.7. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2.8. "FAIR MARKET VALUE" means, with respect to the Common Stock, as
of any date (or, if no shares were traded on such date, as of the
next preceding date on which there was such a trade), the closing
sale price of the Common Stock on the Nasdaq National Market.
2.9. "OPTION" means a right to purchase the number of shares of Common
Stock set forth in Sections 5.1(a) and 5.1(b) of the Plan
(subject to adjustment as provided in Section 4.3 of the Plan)
granted to an Eligible Director pursuant to the Plan that does
not qualify as an "incentive stock option" within the meaning of
Section 422 of the Code.
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2.10. "PREVIOUSLY ACQUIRED SHARES" mean shares of Common Stock that are
already owned by an Eligible Director.
2.11. "RETIREMENT" means termination of employment or service pursuant
to and in accordance with the regular (or, if approved by the
Board for purposes of the Plan, early) retirement/pension plan or
practice of the Company or any subsidiary of the Company then
covering the Participant.
2.12. "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. PLAN ADMINISTRATION.
The Plan will be administered by a committee (the "Committee") consisting
solely of two or more members of the Board. All questions of interpretation of
the Plan will be determined by the Committee, each determination, interpretation
or other action made or taken by the Committee pursuant to the provisions of the
Plan will be conclusive and binding for all purposes and on all persons and no
member of the Committee will be liable for any action or determination made in
good faith with respect to the Plan or any Option granted under the Plan. The
Committee, however, will have no power to determine the eligibility for
participation in the Plan, the number of shares of Common Stock to be subject to
Options, or the timing, pricing or other terms and conditions of Options.
4. SHARES AVAILABLE FOR ISSUANCE.
4.1. MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as
provided in Section 4.3 of the Plan, the maximum number of
shares of Common Stock that will be available for issuance under
the Plan will be 250,000 shares. The shares available for
issuance under the Plan shall be authorized but unissued shares.
4.2. ACCOUNTING FOR OPTIONS. Shares of Common Stock that are issued
under the Plan or that are subject to outstanding Options will be
applied to reduce the maximum number of shares of Common Stock
remaining available for issuance under the Plan. Any shares of
Common Stock that are subject to an Option that lapses, expires,
or for any reason is terminated unexercised will automatically
again become available for issuance under the Plan.
4.3. ADJUSTMENTS TO SHARES AND OPTIONS. In the event of any
reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, divestiture or
extraordinary dividend (including a spin-off) or any other change
in the corporate structure or shares of the Company, the
Committee (or, if the Company is not the surviving corporation in
any such transaction, the board of directors of the surviving
corporation) will make appropriate adjustment (which
determination will be conclusive) as to the number and kind of
securities available for issuance under the Plan and, in order to
prevent dilution or enlargement of the rights of Eligible
Directors, the number, kind and exercise price of securities
subject to outstanding Options.
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<PAGE>
5. OPTIONS.
5.1. GRANTS OF OPTIONS. Subject to the terms and conditions of the
Plan, the Committee will grant Options to each Eligible Director
as follows:
(a) GRANT ON INITIAL ELECTION. Upon each Eligible Director's
Initial Election (defined below), the Eligible Director will
be granted, on a one-time basis, an Option to purchase
10,500 shares of Common Stock (subject to adjustment as
provided in Section 4.3 of the Plan). "Initial Election"
means (A) in the case of an Eligible Director serving on the
Board at the effective date of the Plan as set forth in
Section 11 of the Plan, such effective date; or (B) in the
case of an Eligible Director appointed or elected to serve
as a director after the effective date of the Plan, the date
such Eligible Director is first appointed or elected. The
date of grant for Options granted pursuant to this Section
5.1(a) will be the date of Initial Election.
(b) ANNUAL GRANTS. In addition to grants upon Initial Election,
each Eligible Director who continues to serve as an Eligible
Director as of the conclusion of each Annual Meeting of
Shareholders of the Company occurring after the second
anniversary of the Initial Election will be granted an
Option to purchase 3,500 shares of Common Stock (subject to
adjustment as provided in Section 4.3 of the Plan). The
date of grant for Options granted pursuant to this Section
5.1(b) will be the date of each such Annual Meeting.
5.2. EXERCISE PRICE. The per share price to be paid by an Eligible
Director upon exercise of an Option will be 100% of the Fair
Market Value of one share of Common Stock on the date of grant.
The total purchase price of the shares to be purchased upon
exercise of an Option must be paid entirely in cash (including
check, bank draft or money order) or by delivery to the Company
of unencumbered Previously Acquired Shares having an aggregate
Fair Market Value on the date of exercise equal to the purchase
price, or by a combination of cash and such unencumbered
Previously Acquired Shares; provided, however, that no Eligible
Director may pay any portion of the exercise price with
Previously Acquired Shares if such payment would cause the
Company to incur compensation expense for financial accounting
purposes under generally accepted accounting principles.
5.3. EXERCISABILITY AND DURATION. Options granted pursuant to Section
5.1(a) will become exercisable on a cumulative basis as follows:
SHARES DATE FIRST EXERCISABLE
------ ----------------------
3,500 Initial Election
3,500 First anniversary of Initial Election
3,500 Second anniversary of Initial Election
3
<PAGE>
Options granted pursuant to Section 5.1(b) will become
exercisable in full on the first anniversary of the date of
grant. Each Option will expire and will no longer be exercisable
at 5:00 p.m., Minneapolis time, on a date 10 years from its date
of grant.
5.4. MANNER OF EXERCISE. An Option may be exercised by an Eligible
Director in whole or in part from time to time, subject to the
conditions contained in the Plan and in the agreement
evidencing such Option, by delivery in person, by facsimile or
electronic transmission or through the mail of written notice of
exercise to the Company at its principal executive office in
Plymouth, Minnesota and by paying in full the total exercise
price for the shares of Common Stock to be purchased in
accordance with Section 5.2 of the Plan.
5.5. RIGHTS AS A SHAREHOLDER. As a holder of Options, an Eligible
Director will have no rights as a shareholder unless and until
such Options are exercised for shares of Common Stock and the
Eligible Director becomes the holder of record of such shares.
Accordingly, no adjustment will be made for dividends or
distributions with respect to Options as to which there is a
record date preceding the date the Eligible Director becomes the
holder of record of such shares.
5.6. EFFECT OF TERMINATION OF SERVICE AS DIRECTOR.
(a) TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event
an Eligible Director's service as a director of the Company is
terminated by reason of death, Disability or Retirement, all
outstanding Options then held by the Eligible Director will
become immediately exercisable in full and will remain
exercisable for a period of one year after such death, Disability
or Retirement (but in no event after the expiration date of any
such Options).
(b) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR
RETIREMENT. In the event an Eligible Director's service as a
director of the Company is terminated for any reason other than
death, Disability or Retirement, all outstanding Options then
held by the Eligible Director will remain exercisable to the
extent exercisable as of such termination for a period of three
months after such termination (but in no event after the
expiration date of any such Options).
5.7. NON-DISCRETIONARY GRANTS. Options granted to Eligible Directors
pursuant to this Plan are intended to qualify as "formula awards"
within the meaning of Rule 16b-3 under the Exchange Act. As a
result, other than as provided in Section 10 of the Plan, the
Committee will not have the authority to amend the eligibility
requirements for, modify the terms or accelerate the
exercisability of, or exercise discretion with respect to, such
Options, if such amendment, modification, acceleration or
exercise of discretion would disqualify such Options from
treatment as "formula awards," and any provision of this Plan
that is inconsistent with the foregoing will be deemed to be null
and void AB INITIO.
6. DATE OF TERMINATION OF SERVICE AS A DIRECTOR.
An Eligible Director's service as a director of the Company will, for
purposes of the Plan, be deemed to have terminated on the date recorded on the
books and records of the Company, as interpreted by the Committee based upon
such books and records.
4
<PAGE>
7. RIGHTS OF ELIGIBLE DIRECTORS; TRANSFERABILITY OF INTERESTS.
7.1. SERVICE AS A DIRECTOR. Nothing in the Plan will interfere
with or limit in any way the right of the Company to terminate
the service of any Eligible Director at any time, and neither the
Plan, nor the granting of an Option nor any other action taken
pursuant to the Plan, will constitute or be evidence of any
agreement or understanding, express or implied, that the Company
will retain an Eligible Director for any period of time or at any
particular rate of compensation.
7.2. RESTRICTIONS ON TRANSFER OF INTERESTS. Except pursuant to
testamentary will or the laws of descent and distribution or as
otherwise expressly permitted by the Plan, no right or interest
of any Eligible Director in an Option prior to the exercise of
such Option will be assignable or transferable, or subjected to
any lien, during the lifetime of the Eligible Director,
either voluntarily or involuntarily, directly or indirectly, by
operation of law or otherwise. An Eligible Director will,
however, be entitled to designate a beneficiary to receive an
Option upon such Eligible Director's death, and, in the event of
an Eligible Director's death, payment of any amounts due under
the Plan will be made to, and exercise of any Options (to the
extent permitted pursuant to Section 5 of the Plan) may be made
by, the Eligible Director's legal representatives, heirs and
legatees.
7.3. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to modify or rescind any previously approved
compensation plans or programs of the Company or create any
limitations on the power or authority of the Board to adopt such
additional or other compensation arrangements as the Board may
deem necessary or desirable.
8. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any agreements entered
into pursuant to the Plan, the Company will not be required to issue any shares
of Common Stock under this Plan, and an Eligible Director may not sell, assign,
transfer or otherwise dispose of shares of Common Stock issued pursuant to an
Option granted under the Plan, unless (a) there is in effect with respect to
such shares a registration statement under the Securities Act and any
applicable state securities laws or an exemption from such registration under
the Securities Act and applicable state securities laws, and (b) there has been
obtained any other consent, approval or permit from any other regulatory body
that the Committee, in its sole discretion, deems necessary or advisable. The
Company may condition such issuance, sale or transfer upon the receipt of any
representations or agreements from the parties involved, and the placement
of any legends on certificates representing shares of Common Stock, as may be
deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.
9. CHANGE OF CONTROL.
9.1. CHANGE IN CONTROL. For purposes of this Section 9, a "Change in
Control" of the Company shall mean the following: (a) the sale,
lease exchange or other transfer of all or substantially all of
the assets of the Company (in one transaction or in a series of
related transactions) to a corporation that is not controlled by
the Company; (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the
Company; (c) any person becomes, after the effective date of the
Plan, the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or
5
<PAGE>
indirectly, of 50% or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to
vote at elections of directors; or (d) individuals who constitute
the Board on the effective date of the Plan cease for any reason
to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the effective date of
the Plan whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a
majority of the directors comprising the Board on the effective
date of the Plan (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a
nominee for director, without objection to such nomination) shall
be, for purposes of this clause (d), considered as though such
person were a member of the Board on the effective date of the
Plan.
9.2. ACCELERATION OF EXERCISABILITY. If a Change of Control of the
Company shall occur, then, without any action by the Committee or
the Board, all outstanding Options shall become immediately
exercisable in full and shall remain exercisable during the
remaining term thereof, regardless of whether the Eligible
Directors to whom such Options have been granted remain directors
of the Company.
10. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Options granted under the Plan will conform to any
change in applicable laws or regulations or in any other respect the Board may
deem to be in the best interests of the Company; provided, however, that (a) no
amendments to the Plan will be effective without approval of the shareholders of
the Company if shareholder approval of the amendment is then required pursuant
to Rule 16b-3 under the Exchange Act or the rules of the National Association of
Securities Dealers Automated Quotation ("Nasdaq") System, and (b) to the extent
prohibited by Rule 16b-3 of the Exchange Act, the Plan may not be amended more
than once every six months. No termination, suspension or amendment of the Plan
may adversely affect any outstanding Option without the consent of the affected
Eligible Director; provided, however, that this sentence will not impair the
right of the Committee to take whatever action it deems appropriate under
Section 4.3 of the Plan.
11. EFFECTIVE DATE AND DURATION OF THE PLAN.
Subject to approval by the shareholders of the Company, the Plan is
effective as of August 1, 1995, the date it was adopted by the Board. The Plan
will terminate at midnight on August 1, 2005 and may be terminated prior thereto
by Board action. No Options may be granted after termination of the Plan.
Options outstanding upon termination of the Plan, however, may continue to be
exercised in accordance with their terms.
6
<PAGE>
12. MISCELLANEOUS
12.1. GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations
and actions relating to the Plan will be governed by and
construed exclusively in accordance with the laws of the State of
Minnesota, notwithstanding any conflicts of laws principles.
12.2. SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure
to the benefit of the successors and permitted assigns of the
Company and the Eligible Directors.
7
<PAGE>
EXHIBIT 10.10
[AVECOR LETTERHEAD]
______________, 1997
[NAME]
[ADDRESS]
Dear ______________:
You are presently the _______________________ of AVECOR Cardiovascular
Inc., a Minnesota corporation. The Company considers the establishment and
maintenance of a sound and vital management to be essential to protecting and
enhancing the best interests of the Company and its stockholders. In this
connection, the Company recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control may arise and that such
possibility and the uncertainty and questions which it may raise among
management may result in the departure or distraction of management personnel to
the detriment of the Company and its stockholders.
Accordingly, the Board has determined that appropriate steps should be
taken to minimize the risk that Company management will depart prior to a Change
in Control, thereby leaving the Company without adequate management personnel
during such a critical period, and that appropriate steps also be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from the possibility of a Change in Control. In
particular, the Board believes it important, should the Company or its
stockholders receive a proposal for transfer of control, that you be able to
continue your management responsibilities without being influenced by the
uncertainties of your own personal situation.
The Board recognizes that continuance of your position with the Company
involves a substantial commitment to the Company in terms of your personal life
and professional career and the possibility of foregoing present and future
career opportunities, for which the Company receives substantial benefits.
Therefore, to induce you to remain in the employ of the Company, this Agreement,
which has been approved by the Board, sets forth the benefits which the Company
agrees will be provided to you in the event your employment with the Company is
terminated in connection with a Change in Control under the circumstances
described below.
1. DEFINITIONS. The following terms will have the meaning set forth below
unless the context clearly requires otherwise. Terms defined elsewhere in this
Agreement will have the same meaning throughout this Agreement.
(a) "AGREEMENT" means this letter agreement as amended, extended or
renewed from time to time in accordance with its terms.
<PAGE>
Page 2
(b) "BOARD" means the board of directors of the Company duly qualified and
acting at the time in question.
(c) "CAUSE" means: (i) your willful and continued failure to perform
substantially your duties with the Company (other than any such failure (1)
resulting from your Disability or incapacity due to bodily injury or
physical or mental illness or (2) relating to changes in your duties after
a Change in Control which constitute Good Reason) after a demand for
substantial performance is delivered to you by the chair of the Board which
specifically identifies the manner in which you have not substantially
performed your duties and provides for a reasonable period of time within
which you may take corrective actions; or (ii) your conviction (including a
plea of nolo contendere) of willfully engaging in illegal conduct
constituting a felony or gross misdemeanor under federal or state law which
is materially and demonstrably injurious to the Company. For purposes of
this definition, no act, or failure to act, on your part will be considered
"willful" unless done, or omitted to be done, by you in bad faith and
without reasonable belief that your action or omission was in, or not
opposed to, the best interests of the Company. Any act, or failure to act,
based upon authority given pursuant to a resolution duly adopted by the
Board (or a committee thereof) or based upon the advice of counsel for the
Company will be conclusively presumed to be done, or omitted to be done, by
you in good faith and in the best interests of the Company. It is also
expressly understood that your attention to matters not directly related to
the business of the Company will not provide a basis for termination for
Cause so long as the Board did not expressly disapprove in writing of your
engagement in such activities either before or within a reasonable period
of time after the Board knew or could reasonably have known that you
engaged in those activities. Notwithstanding the foregoing, you will not be
deemed to have been terminated for Cause unless and until there has been
delivered to you a copy of a resolution duly adopted by the affirmative
vote of not less than a majority of the entire membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable
notice to you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the good faith opinion of the
Board you were guilty of the conduct set forth above in clauses (i) or (il)
of this definition and specifying the particulars thereof in detail.
(d) "CHANGE IN CONTROL" means: (i) the sale, lease, exchange, or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to any Person; (ii) the
approval by the stockholders of the Company of any plan or proposal for the
liquidation or dissolution of the Company; or (iii) a change in control of
a nature that would be required to be reported (assuming such event has not
been "previously reported") in response to Item 1(a) of the Current Report
on Form 8-K, as in effect on the date hereof, pursuant to section 13 or
15(d) of the Exchange Act, whether or not the Company is then subject to
such reporting requirement; provided that, without limitation, such a
Change in Control will be deemed to have occurred at such time as: (A) any
Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of fifty percent (50%) or more
of the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, or (B)
individuals who constitute the Board on the date of this Agreement (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any individual becoming a director subsequent to the
date of this Agreement whose election, or nomination for election, by the
Company's stockholders, was approved by a vote of at least a majority of
the directors comprising the Incumbent Board (either by a specific vote or
by approval of the proxy statement of the Company in which such
<PAGE>
Page 3
individual is named as a nominee for director without objection to such
nomination) will, for purposes of this clause (B), be deemed to be a member
of the Incumbent Board.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "COMPANY" means AVECOR Cardiovascular Inc., a Minnesota corporation,
and any Successor.
(g) "CONFIDENTIAL INFORMATION" means information which is proprietary to
the Company or proprietary to others and entrusted to the Company, whether
or not trade secrets. It includes information relating to business plans
and to business as conducted or anticipated to be conducted, and to past or
current or anticipated products or services. It also includes, without
limitation, information concerning research, development, purchasing,
accounting, marketing and selling. All information which you have a
reasonable basis to consider confidential is Confidential Information,
whether or not originated by you and without regard to the manner in which
you obtain access to that and any other proprietary information.
(h) "DATE OF TERMINATION" following a Change in Control (or prior to a
Change in Control if your termination was either a condition of the Change
in Control or was at the request or insistence of any Person related to the
Change in Control) means: (i) if your employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided
that you have not returned to the performance of your duties on a full-time
basis during such thirty (30)-day period); (ii) if your employment is to be
terminated by the Company for Cause or by you for Good Reason, the date
specified in the Notice of Termination, which date may not be less than
thirty (30) days or more than sixty (60) days after the date on which the
Notice of Termination is given unless you and the company otherwise
expressly agree; (iii) if your employment is to be terminated by the
Company for any reason other than Cause, Disability, death or Retirement,
the date specified in the Notice of Termination, which in no event may be a
date earlier than ninety (90) days after the date on which a Notice of
Termination is given, unless an earlier date has been expressly agreed to
by you in writing either in advance of, or after; receiving such Notice of
Termination; or (iv) if your employment is terminated by reason of death or
Retirement, the date of death or Retirement, respectively. In the case of
termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within
thirty (30) days after receipt by you of the Notice of Termination with
respect thereto, you may notify the Company that a dispute exists
concerning the termination, in which event the Date of Termination will be
the date set either by mutual written agreement of the parties or by the
judge or arbitrators in a proceeding as provided in Section 13 of this
Agreement. During the pendency of any such dispute, you will continue to
make yourself available to provide services to the Company and the Company
will continue to pay you your full compensation and benefits in effect just
prior to the time the Notice of Termination is given (without regard to any
changes to such compensation or benefits which constitute Good Reason) and
until the dispute is resolved in accordance with Section 13 of this
Agreement. You will be entitled to retain the full amount of any such
compensation and benefits without regard to the resolution of the dispute
unless the judge or arbitrators decide(s) that your claim of a dispute was
frivolous or advanced by you in bad faith.
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Page 4
(i) "DISABILITY" means a disability as defined in the Company's long-term
disability plan as in effect immediately prior to the Change in Control or;
in the absence of such a plan, means permanent and total disability as
defined in section 22(e)(3) of the Code.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(k) "GOOD REASON" means:
(i) change in your status, position(s), duties or responsibilities as
an executive of the Company as in effect immediately prior to the
Change in Control which, in your reasonable judgment, is an adverse
change (other than, if applicable, any such change directly
attributable to the fact that the Company is no longer publicly owned)
except in connection with the termination of your employment for
Cause, Disability or Retirement or as a result of your death or by you
other than for Good Reason;
(ii) a reduction by the Company in your base salary (or an adverse
change in the form or timing of the payment thereof) as in effect
immediately prior to the Change in Control or as thereafter increased;
(iii) the failure by the Company to continue in effect any Plan in
which you (and/or your family) are eligible to participate at any time
during the ninety (90)-day period immediately preceding the Change in
Control (or Plans providing you (and/or your family) with at least
substantially similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as in effect
immediately prior to the ninety (90)-day period immediately preceding
the time of the Change in Control, or the taking of any action, or the
failure to act, by the Company which would adversely affect your
(and/or your family's) continued eligibility to participate in any of
such Plans on at least as favorable a basis to you (and/or your
family) as is the case on the date of the Change in Control or which
would materially reduce your (and/or your family's) benefits in the
future under any of such Plans or deprive you (and/or your family) of
any material benefit enjoyed by you (and/or your family) at the time
of the Change in Control;
(iv) the Company's requiring you to be based anywhere other than where
your office is located immediately prior to the Change in Control,
except for required travel on the Company's business, and then only to
the extent substantially consistent with the business travel
obligations which you undertook on behalf of the Company during the
ninety (90)-day period immediately preceding the Change in Control
(without regard to travel related to or in anticipation of the Change
in Control);
(v) the failure by the Company to obtain from any Successor the
assent to this Agreement contemplated by Section 6 of this Agreement;
(vi) any purported termination by the Company of your employment which
is not properly effected pursuant to a Notice of Termination and
pursuant to any other requirements of this Agreement, and for purposes
of this Agreement, no such purported termination will be effective;
<PAGE>
Page 5
(vii) any refusal by the Company to continue to allow you to
attend to matters or engage in activities not directly related to the
business of the Company which, at any time prior to the Change in
Control, you were not expressly prohibited in writing by the Board
from attending to or engaging in; or
(viii) your termination of your employment with the Company for any
reason other than death, Disability or Retirement during the twelfth
(12th) month following the month in which a Change in Control occurs.
(l) "HIGHEST MONTHLY COMPENSATION" means one-twelfth (1/12) of the highest
amount of your compensation for any twelve (12) consecutive calendar-month
period during the thirty-six (36) consecutive calendar-month period prior
to the month that includes the Date of Termination. For purposes of this
definition, "compensation" means the amount reportable by the Company, for
federal income tax purposes, as wages paid to you by the Company, increased
by the amount of contributions made by the Company with respect to you
under any qualified cash or deferred arrangement or cafeteria plan that is
not then includable in your income by reason of the operation of section
402(a)(8) or section 125 of the Code, and increased further by any other
compensation deferred for any reason.
(m) "NOTICE OF TERMINATION" means a written notice given on or after the
date of the Change in Control (unless your termination on or before the
date of the Change in Control was either a condition of the Change in
Control or was at the request or insistence of any Person related to the
change in Control) which indicates the specific termination provision in
this Agreement pursuant to which the notice is given. Any purported
termination by the Company or by you following a Change in Control (or
prior to a Change in Control if your termination was either a condition of
the Change in Control or was at the request or insistence of any Person
(other than the Company) related to the Change in Control) must be
communicated by written Notice of Termination.
(n) "PERSON" means and includes any individual, corporation, partnership,
group, association or other "person," as such term is used in section 14(d)
of the Exchange Act, other than the Company, a wholly-owned subsidiary of
the Company or any employee benefit plan(s) sponsored by the Company or a
wholly-owned subsidiary of the Company.
(o) "PLAN" means any compensation plan, program, policy or agreement (such
as a stock option, restricted stock plan or other equity-based plan), any
bonus or incentive compensation plan, program, policy or agreement, any
employee benefit plan, program, policy or agreement (such as a thrift,
pension, profit sharing, medical, dental, disability, accident, life
insurance, relocation, salary continuation, expense reimbursements,
vacation, fringe benefits, office and support staff plan or policy) or any
other plan, program, policy or agreement of the Company intended to benefit
employees (and/or their families) generally, management employees (and/or
their families) as a group or you (and/or your family) in particular
(including, without limitation, the Company's 1988 Stock Option Plan).
(p) "RETIREMENT" means the day on which you attain the age of sixty-five
(65).
(q) "SUBSIDIARY" means any corporation at least a majority of whose
securities having ordinary voting power for the election of directors is at
the time owned by the Company and/or one (1) or more Subsidiaries.
<PAGE>
Page 6
(r) "SUCCESSOR" means any Person that succeeds to, or has the practical
ability to control (either immediately or with the passage of time), the
Company's business directly, by merger; consolidation or other form of
business combination, or indirectly, by purchase of the Company's voting
securities, all or substantially all of its assets or otherwise; provided,
that this definition in no way confers on any Person any power or authority
to act on behalf of the Company prior to the date on which it has actual
power or authority in fact.
2. TERM OF AGREEMENT. This Agreement is effective immediately and will
continue in effect until December 31, 1997; provided, however; that commencing
on January 1, 1998 and each January 1 thereafter, the term of this Agreement
will automatically be extended for one (1) additional year beyond the expiration
date otherwise then in effect, unless at least ninety (90) calendar days prior
to any such January 1, the Company or you has given notice that this Agreement
will not be extended; and, provided, further; that this Agreement will continue
in effect beyond the termination date then in effect for a period of twelve (12)
months following the month during which a Change in Control occurs if a Change
in Control has occurred during such term.
3. BENEFITS UPON A CHANGE IN CONTROL TERMINATION. You will become entitled to
the payments and benefits described in clauses (i) and (ii) of this Section 3,
subject to the limitations described in clause (iii) of this Section 3, if and
only if (a) your employment by the Company is terminated for any reason other
than death, Cause, Disability or Retirement, or if you terminate your employment
by the Company for Good Reason and (b) the termination occurs within
____________ (____) months following the month during which a Change in Control
occurs or prior to a Change in Control if your termination was either a
condition of the Change in Control or was at the request or insistence of a
Person related to the Change in Control.
(i) CASH PAYMENT. Within five (5) business days following the Date
of Termination, the Company will make a lump-sum cash payment to you
in an amount equal to the product of (A) your Highest Monthly
Compensation multiplied by (B) ____________ (____).
(ii) WELFARE PLANS. The Company will maintain in full force and
effect, for the continued benefit of you and your dependents for a
period terminating thirty-six (36) months after the Date of
Termination, all insured and self-insured employee welfare benefit
Plans (including, without limitation, medical, life, dental, vision
and disability plans) in which you were eligible to participate at any
time during the ninety (90)-day period immediately preceding the
Change in Control, provided that your continued participation is
possible under the general terms and provisions of such Plans and any
applicable funding media and without regard to any discretionary
amendments to such Plans by the Company following the Change in
Control (or prior to the Change in Control if amended as a condition
or at the request or insistence of a Person (other than the Company)
related to the Change in Control) and provided that you continue to
pay an amount equal to your regular contribution under such Plans for
such participation (based upon your level of benefits and employment
status most favorable to you at any time during the ninety (90)-day
period immediately preceding the Change in Control). The continuation
period under federal and state continuation laws, to the extent
applicable, will begin to run from the date on which coverage pursuant
to the clause (ii) ends. If, at the end of the thirty-six (36)-month
period, you have not previously received or are not then receiving
equivalent benefits from a new employer (including coverage for any
pre-
<PAGE>
Page 7
existing conditions), the Company will arrange, at its sole cost
and expense, to enable you to convert your and your dependents'
coverage under such Plans to individual policies or programs upon the
same terms as executives of the Company may apply for such
conversions. In the event that your or your dependents' participation
in any such Plan is barred, the Company, at its sole cost and expense,
will arrange to have issued for the benefit of you and your dependents
individual policies of insurance providing benefits substantially
similar (on a federal, state and local income and employment after-tax
basis) to those which you otherwise would have been entitled to
receive under such Plans pursuant to this clause (ii) or; if such
insurance is not available at a reasonable cost to the Company, the
Company will otherwise provide you and your dependents equivalent
benefits (on a federal, state and local income and employment
after-tax basis). You will not be required to pay any premiums or
other charges in an amount greater than that which you would have paid
in order to participate in such Plans.
(iii) LIMITATION ON PAYMENTS AND BENEFITS. Notwithstanding
anything in this Agreement to the contrary, if any of the payments or
benefits to be made or provided in connection with this Agreement,
together with any other payments or benefits which you have the right
to receive from the Company or any corporation which is a member of an
"affiliated group" (as defined in section 1504(a) of the Code without
regard to section 1504(b) of the Code) of which the Company is a
member constitute an "excess parachute payment" (as defined in section
280G(b) of the Code), the payments or benefits to be made or provided
in connection with this Agreement will be reduced to the extent
necessary to prevent any portion of such payments or benefits from
becoming subject to the excise tax imposed under section 4999 of the
Code. The determination as to whether any such decrease in the
payments or benefits to be made or provided in connection with this
Agreement is necessary must be made in good faith by legal counsel or
a certified public accountant selected by you and reasonably
acceptable to the Company, and such determination will be conclusive
and binding upon you and the Company. In the event that such a
reduction is necessary, you will have the right to designate the
particular payments or benefits that are to be reduced or eliminated
so that no portion of the payments or benefits to be made or provided
to you in connection with this Agreement will be excess parachute
payments subject to the excise tax under Code section 4999. The
Company will pay or reimburse you on demand for the reasonable fees,
costs and expenses of the counsel or accountant selected to make the
determinations under this clause (iii).
4. INDEMNIFICATION. Following a Change in Control, the Company will indemnify
and advance expenses to you to the full extent permitted by law and the
Company's articles of incorporation and bylaws for damages, costs and expenses
(including, without limitation, judgments, fines, penalties, settlements and
reasonable fees and expenses of your counsel) incurred in connection with all
matters, events and transactions relating to your service to or status with the
Company or any other corporation, employee benefit plan or other entity with
whom you served at the request of the Company.
5. CONFIDENTIALITY. You will not use, other than in connection with your
employment with the Company, or disclose any Confidential Information to any
person not employed by the Company or not authorized by the Company to receive
such Confidential Information, without the prior written consent of the Company;
and you will use reasonable and prudent care to safeguard and protect and
prevent the unauthorized disclosure of Confidential Information. Nothing in this
Agreement will prevent you from
<PAGE>
Page 8
using, disclosing or authorizing the disclosure of any Confidential Information:
(a) which is or hereafter becomes part of the public domain or otherwise becomes
generally available to the public through no fault of yours; (b) to the extent
and upon the terms and conditions that the Company may have previously made the
Confidential Information available to certain persons; or (c) to the extent that
you are required to disclose such Confidential Information by law or judicial or
administrative process.
6. SUCCESSORS. The Company will seek to have any Successor, by agreement in
form and substance satisfactory to you, assent to the fulfillment by the Company
of the Company's obligations under this Agreement. Failure of the Company to
obtain such assent at least three (3) business days prior to the time a Person
becomes a Successor (or where the Company does not have at least three (3)
business days' advance notice that a Person may become a Successor, within one
(1) business day after having notice that such Person may become or has become a
Successor) will constitute Good Reason for termination by you of your
employment.
7. FEES AND EXPENSES. The Company, upon demand, will pay or reimburse you for
all reasonable legal fees, court costs, experts' fees and related costs and
expenses incurred by you in connection with any actual, threatened or
contemplated litigation or legal, administrative, arbitration or other
proceeding relating to this Agreement to which you are or reasonably expect to
become a party, whether or not initiated by you, including, without limitation:
(a) all such fees and expenses, if any, incurred in contesting or disputing any
such termination; or (b) your seeking to obtain or enforce any right or benefit
provided by this Agreement; provided, however; you will be required to repay
(without interest) any such amounts to the Company to the extent that a court
issues a final and non-appealable order setting forth the determination that the
position taken by you was frivolous or advanced by you in bad faith.
8. BINDING AGREEMENT. This Agreement inures to the benefit of, and is
enforceable by, you, your personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
die while any amount would still be payable to you under this Agreement if you
had continued to live, all such amounts, unless otherwise provided in this
Agreement, will be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or; if there be no such designee, to your
estate.
9. NO MITIGATION. You will not be required to mitigate the amount of any
payments or benefits the Company becomes obligated to make or provide to you in
connection with this Agreement by seeking other employment or otherwise. The
payments or benefits to be made or provided to you in connection with this
Agreement may not be reduced, offset or subject to recovery by the Company by
any payments or benefits you may receive from other employment or otherwise.
10. NO SETOFF. The Company will have no right to setoff payments or benefits
owed to you under this Agreement against amounts owed or claimed to be owed by
you to the Company under this Agreement or otherwise.
11. TAXES. All payments and benefits to be made or provided to you in
connection with this Agreement will be subject to required withholding of
federal, state and local income, excise and employment-related taxes.
12. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in, or required under, this Agreement must be in
writing and will be deemed to have been duly given when personally delivered or
when mailed by United States registered or certified mail, return receipt
<PAGE>
Page 9
requested, postage prepaid and addressed to each party's respective address set
forth on the first page of this Agreement (provided that all notices to the
Company must be directed to the attention of the chair of the Board), or to such
other address as either party may have furnished to the other in writing in
accordance with these provisions, except that notice of change of address will
be effective only upon receipt.
13. DISPUTES. Any dispute, controversy or claim for damages arising under or
in connection with this Agreement may, in your sole discretion, be settled
exclusively by such judicial remedies that you may seek to pursue or by
arbitration in Minneapolis, Minnesota by three (3) arbitrators in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrators' award in any court having jurisdiction. The
Company will be entitled to seek an injunction or restraining order in a court
of competent jurisdiction (within or without the State of Minnesota) to enforce
the provisions of Section 5 of this Agreement.
14. JURISDICTION. Except as specifically provided otherwise in this Agreement,
the parties agree that any action or proceeding arising under or in connection
with this Agreement must be brought in a court of competent jurisdiction in the
State of Minnesota, and hereby consent to the exclusive jurisdiction of said
courts for this purpose and agree not to assert that such courts are an
inconvenient forum.
15. RELATED AGREEMENTS. To the extent that any provision of any other Plan or
agreement between the Company and you shall limit, qualify or be inconsistent
with any provision of this Agreement, then for purposes of this Agreement, while
such other Plan or agreement remains in force, the provision of this Agreement
will control and such provision of such other Plan or agreement will be deemed
to have been superseded, and to be of no force or effect, as if such other
agreement had been formally amended to the extent necessary to accomplish such
purpose. Nothing in this Agreement prevents or limits your continuing or future
participation in any Plan provided by the Company and for which you may qualify,
and nothing in this Agreement limits or otherwise affects the rights you may
have under any Plans or other agreements with the Company. Amounts which are
vested benefits or which you are otherwise entitled to receive under any Plan or
other agreement with the Company at or subsequent to the Date of Termination
will be payable in accordance with such Plan or other agreement.
16. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement is intended
to provide you with any right to continue in the employ of the Company for any
period of specific duration or interfere with or otherwise restrict in any way
your rights or the rights of the Company, which rights are hereby expressly
reserved by each, to terminate your employment at any time for any reason or no
reason whatsoever; with or without cause.
17. CHANGE OF SUBSIDIARY STATUS. In the event that, prior to a Change in
Control: (a) a Subsidiary is sold, merged, transferred or in any other manner or
for any other reason ceases to be a Subsidiary; (b) your primary employment
duties are with the Subsidiary at the time of the occurrence of such event; and
(c) you do not, in conjunction therewith, transfer employment directly to the
Company or another Subsidiary, then this Agreement will become null and void.
18. SURVIVAL. The respective obligations of, and benefits afforded to, the
Company and you which by their express terms or clear intent survive termination
of your employment with the Company or termination of this Agreement, as the
case may be, including, without limitation, the provisions of Sections 3, 4, 5,
6, 7, 10, 11, 12 and 13 of this Agreement, will survive termination of your
employment
<PAGE>
Page 10
with the Company or termination of this Agreement, as the case may be, and will
remain in full force and effect according to their terms.
19. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such modification, waiver or discharge is agreed to in a
writing signed by you and the chair of the Board. No waiver by any party to this
Agreement at any time of any breach by another party to this Agreement of, or of
compliance with, any condition or provision of this Agreement to be performed by
such party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter to this Agreement have been made by any party which are not
expressly set forth in this Agreement. This Agreement and the legal relations
among the parties as to all matters, including, without limitation, matters of
validity, interpretation, construction, performance and remedies, will be
governed by and construed exclusively in accordance with the internal laws of
the State of Minnesota (without regard to the conflict of laws provisions of any
jurisdiction). Headings are for purposes of convenience only and do not
constitute a part of this Agreement. The parties to this Agreement agree to
perform, or cause to be performed, such further acts and deeds and to execute
and deliver or cause to be executed and delivered, such additional or
supplemental documents or instruments as may be reasonably required by the other
party to carry into effect the intent and purpose of this Agreement. The
invalidity or unenforceability of all or any part of any provision of this
Agreement will not affect the validity or enforceability of the remainder of
such provision or of any other provision of this Agreement, which will remain in
full force and effect. This Agreement may be executed in several counterparts,
each of which will be deemed to be an original, but all of which together will
constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject matter
discussed above, kindly sign and return to the Company the enclosed copy of this
letter which will then constitute our agreement on this subject.
Sincerely,
AVECOR CARDIOVASCULAR INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Agreed to this day of ,
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19 .
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<PAGE>
EXHIBIT 10.11
AGREEMENT REGARDING NON- DISCLOSURE
OF CONFIDENTIAL INFORMATION,
NON-COMPETITION AND OWNERSHIP
OF INTELLECTUAL PROPERTY
1. INTRODUCTION
AVECOR Cardiovascular Inc. ("Avecor") and the undersigned Employee
acknowledge and agree that Avecor will disclose or has already disclosed to
Employee certain Confidential Information as defined in Section 2. Employee
recognizes that the Confidential Information is a business asset of Avecor, the
value of which can only be protected by maintaining the secrecy of the
Confidential Information. Employee further understands and acknowledges that in
the course of his or her employment by Avecor, Employee will establish or has
already established personal contacts and relationships with Avecor's customers
and that such personal contacts and relationships also represent valuable
business assets of Avecor.
Employee, therefore, enters into this Agreement in consideration of
Avecor's offer of employment or continuing employment and the benefits
associated with that employment, in consideration of being given access to
Confidential Information and for other good and valuable consideration.
Employee and Avecor, intending to be legally bound, agree as follows:
2. DEFINITIONS
(a) AVECOR means AVECOR Cardiovascular Inc., its successors in interest,
and all of its parent, subsidiary or affiliate corporations and the
operating divisions thereof.
(b) CONFIDENTIAL INFORMATION means any information that Employee learns or
develops during the course of employment with Avecor that derives
independent economic value from not being generally known, or not
being readily ascertainable by proper means, by other persons who can
obtain economic value from the disclosure or use of such information.
Such information includes, but is not limited to, Avecor's sales,
clinical and engineering information, information about new or future
products, Avecor's marketing plans and goals, lists of Avecor's
customers and the identities of preferred customers, information about
customer purchases and preferences, information regarding research and
development, manufacturing processes, or management systems and any
other confidential information which provides Avecor with a
competitive advantage.
<PAGE>
(c) AREA OF EMPLOYMENT means the following:
(i) The geographical area assigned by Avecor to Employee or to persons
under Employee's supervision within which Employee or persons under
Employee's supervision sold, solicited the sale of, supported or
supervised the sale of any Avecor Product during the twelve (12)
months immediately preceding the termination of Employee's
employment with Avecor; and
(ii) The Standard Metropolitan Statistical Area or Areas within which
Employee or persons under Employee's supervision sold, solicited
or supported the sale of any Avecor Product during the twelve (12)
months immediately preceding the termination of Employee's
employment with Avecor.
(d) AVECOR PRODUCT means any actual or projected product, product line or
service that has been designed, developed, manufactured, marketed or
sold by Avecor during Employee's employment with Avecor or regarding
which Avecor has conducted or acquired research and development during
Employee's employment with Avecor. AVECOR PRODUCT specifically
includes those products, product lines, services and products in
research and development acquired by Avecor from SciMed Life Systems,
Inc. ("SciMed"), pursuant to the Asset Purchase Agreement, dated
June 7, 1991, between SciMed and Avecor.
(e) Competitive Product means any actual or projected product, product
line or service designed, developed, manufactured, marketed or sold
by anyone other than Avecor which performs similar functions or is
used for the same general purposes as an Avecor product.
(f) SOLICITATION OF SALES includes providing information or conducting
demonstrations regarding Avecor Products or Competitive Products
and other acts of service including, but not limited to, delivery
and maintenance.
3. NON-COMPETITION
During the term of employment and for a period of two (2) years following
voluntary termination of employment, for whatever reason, Employee will not
participate in or support the manufacture, invention, development, sale,
solicitation of sale, marketing, testing, research or other business aspect of
any Competitive Product. With regard to sales and solicitation of sales, such
restriction applies only within Employee's Area of Employment.
2
<PAGE>
To Compensate Employee for any economic hardship resulting from the
non-competition provisions of this Agreement, Avecor agrees that it will make
the monthly payment specified in this paragraph to Employee commencing with the
fourth (4th) month after termination of employment and continuing until the
non-competition provision expires or is expressly waived by Avecor, or until
Employee fails to meet one of the conditions specified below. The monthly
payment shall be seventy-five percent (75%) of Employee's average monthly base
salary from Avecor during the preceding twelve (12) months less any compensation
which the Employee received or obtained an unqualified right to receive as the
result of being employed during the preceding month. If Employee has not been
employed by Avecor for at least twelve (12) months prior to termination, such
average shall be taken over Employee's actual months of employment.
Avecor's obligation to make the above-described payments is expressly
conditioned on each of the following:
(a) Employee will, during the entire period during which such payments are
made, seek employment consistent with Employee's education, abilities
and experience which would not violate the non-competition provisions
of this Agreement.
(b) Employee will, within the first 10 days of each month for which
payment is to be made, provide Avecor with a written summary of efforts
made by Employee pursuant to Paragraph 3(a) above. Simultaneously
Employee will inform Avecor of the amount of compensation which
Employee received or obtained an unqualified right to receive as
a result of being employed the preceding month.
If Employee has had managerial or supervisory responsibilities, Employee
will not, for a period of two (2) years following termination of employment with
Avecor, for whatever reason, induce or attempt to induce any Avecor employee for
whom Employee had managerial or supervisory responsibilities during the twelve
(12) months immediately preceding termination of Employee's employment to leave
his or her employment with Avecor. Such inducement includes all acts of
recruitment including offering employment, seeking expressions of interest in
employment or discussing employment opportunities.
The restrictions contained in this Section 3 shall apply regardless of
whether Employee acts directly or indirectly; or whether Employee acts
personally or as an employee, agent or otherwise for another. However, the
restrictions contained in this Section 3 shall not apply in the event all or
substantially all of the assets or voting shares of Avecor are acquired by any
third party.
3
<PAGE>
4. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
Employee agrees not to disclose, during the course of Employee's employment
by Avecor or thereafter, in any manner to any person not employed by Avecor, any
Confidential Information. Upon termination of Employee's employment with
Avecor, for whatever reason, Employee agrees to return all originals and copies
of documents containing Confidential Information as well as all documents
generated by Employee on behalf of Avecor and all documents relating to the
business of Avecor from any source whatsoever.
5. INVENTIONS AND PATENTS
All inventions, improvements and discoveries, whether or not patentable,
made or conceived by Employee, whether by Employee's individual efforts or in
connection with the efforts of others, during the period of Employee's
employment with Avecor and for twenty-four (24) months thereafter, whether made
during the working hours of Avecor or on Employee's own time, relating in any
way to Avecor Products or resulting in any way from employment with Avecor,
shall be the property of Avecor. This provision shall not apply to inventions,
improvements, or discoveries meeting all of the following conditions:
(a) Any inventions, improvements, or discoveries which were made without
the use of any Avecor equipment, supplies, facilities, or Confidential
Information; and
(b) Which were developed entirely on Employee's own time; and
(c) Which do not relate directly to the business of Avecor, or to Avecor's
actual or demonstrably anticipated research and development; and
(d) Which do not result in any manner from the work performed by Employee
for Avecor.
In the event of any dispute, arbitration or litigation concerning whether
an invention, improvement or discovery made or conceived by Employee is the
property of Avecor, such invention, improvement or discovery shall be presumed
the property of Avecor and Employee shall bear the burden of establishing
otherwise.
Employee agrees to keep accurate, complete and timely records of all
inventions, improvements and discoveries, which records shall be the property of
Avecor and shall be retained on the premises of Avecor.
4
<PAGE>
Employee agrees to fully disclose and describe such inventions,
improvements and discoveries to Avecor promptly after their creation or
discovery. Employee agrees to assign, and does hereby assign, to Avecor all the
Employee's rights to such inventions, improvements and discoveries and to
applications for letters patent and/or copyrights in all countries and to all
letters patent and/or copyrights granted upon such inventions, improvements and
discoveries in all countries.
Employee agrees to assist Avecor in every reasonable way to obtain letters
patent and/or copyrights on such inventions, improvements and discoveries and to
execute all documents necessary to memorialize the assignments of such letters
patent and/or copyrights to Avecor.
Employee agrees to perform promptly (without charge to Avecor but at the
expense of Avecor) all acts as may be necessary in Avecor's opinion to preserve
all patents and/or copyrights granted upon Employee's inventions, improvements
and discoveries against forfeiture, abandonment or loss.
Employee has made no inventions, improvements or discoveries related to
Avecor Products or the business of Avecor prior to the date hereof that are
excluded from this Agreement except:
(a)
-----------------------------------------------------------------
(If none, write "none" and cross out ensuing subparagraph (b)).
(b) Those inventions, improvements, and discoveries set forth on the
attached list signed by Employee and by an officer of Avecor, a copy
of which has been delivered to Employee with a copy of this agreement.
6. INJUNCTIVE RELIEF
The remedy at law for breach of this Agreement is inadequate, and
therefore, Avecor shall be entitled to injunctive relief to enforce the terms of
this Agreement, in addition to any other remedy Avecor might have.
7. SEVERABILITY
The invalidity of any portion of this Agreement shall not impair or affect
enforceability of the remainder. If any of these restrictions is determined to
be unenforceable as to duration or extent, or for any reason whatsoever, such
restriction shall be effective for such period of time and for such extent as it
may be enforceable.
5
<PAGE>
8. PRIOR AGREEMENTS
This Agreement and any prior Non-compete and Non-disclosure Agreements
signed by Employee in connection with his or her employment at Avecor shall
constitute a single agreement. In case of conflict between any provision of
this Agreement and any provision of any other such agreement, the provisions of
this Agreement shall control. If the provisions of this Agreement so selected
are determined to be unenforceable as written, then they shall be interpreted in
accordance with Section 7 (Severability) to make them enforceable to the maximum
extent provided by law. If the provisions of this Agreement so selected are
determined to be unenforceable in their entirety and cannot be revised pursuant
to Section 7 (Severability) to make them enforceable, then such provisions shall
give way to the most restrictive provision in any other such agreement which
covers the same issue and which is enforceable. There are no agreements,
representations, or warranties relating to the subject matter of this Agreement
which are not set forth in this Agreement and the prior Non-compete and
Non-disclosure agreements (if any) signed by Employee.
9. NON-EMPLOYMENT AGREEMENT
This Agreement is not an employment contract and does not give Employee any
right to continued employment. Employee acknowledges that his employment with
Avecor is terminable at will at any time by either party.
10. GOVERNING LAW/CONSENT TO PERSONAL JURISDICTION
This Agreement will be construed and enforced in accordance with the laws
of the State of Minnesota. Employee hereby consents to the exercise of personal
jurisdictions over him or her by the courts of the State of Minnesota.
AVECOR CARDIOVASCULAR INC. EMPLOYEE
By
----------------------------- -------------------------
Date:
--------------
Employee acknowledges receiving a copy of this Agreement.
-------------------------
6
<PAGE>
EXHIBIT 10.12
[AVECOR LETTERHEAD]
July 8, 1991
Mr. Bill Haworth
2656 1st Street
White Bear Lake, MN 55110
Dear Bill:
We are pleased to offer you the position of Director of Research and Development
for Avecor Inc.
Following is the compensation package for the position:
Annual salary $80,000
An auto allowance of $500 per month to cover all operating expenses of your
vehicle for business purposes.
A stock option for 8,000 Avecor Inc. shares, exercisable at the rate of 2,000
shares per year, with the first exercise date being one year from the date you
begin employment. The exercise price will be the per share price paid in the
private offering to outside investors which the Company is currently
undertaking. A separate stock option agreement further describing the complete
terms of the option as governed by the Company's stock option plan will be
prepared for you.
Avecor Inc. also will offer:
A contributory Medical and Dental Insurance Plan
Term life insurance equal to one year's salary - additional term insurance
coverage will be made available at employee's expense.
Short and Long term disability insurance.
A 401(k) Plan (no Company matching contribution has been approved by the Board
of Directors at this time).
<PAGE>
A vacation allowance in accordance with existing Avecor Inc. policy.
Also, as part of the package, the Company requires execution of an agreement
covering confidentiality and non-competition issues, a copy of which is
attached. In addition, please disclose to us any such similar agreements under
which you are currently bound.
If the terms of this letter are agreeable to you, please acknowledge in the
space provided.
Best regards,
/s/ ANTHONY BADOLATO
Anthony Badolato
President and Chief Executive Officer
Terms Accepted
/s/ W. S. HAWORTH /s/ AUGUST 19, 1991
- ------------------------------ --------------------------------
Bill Haworth Date
Encl: Non-Competition Agreement
<PAGE>
EXHIBIT 10.13
[AVECOR LETTERHEAD]
December 29, 1995
Mr. Gregory J. Melsen
9649 Wyoming Terrace
Bloomington, Minnesota 55438
Dear Greg:
We are pleased to offer you the position of Chief Financial Officer for Avecor
Cardiovascular Inc.
Following is the compensation package for the position:
Annual base salary $110,000
A bonus of up to a maximum of 40% of annual base salary under an Executive Bonus
Plan to be determined by the Board of Directors.
An incentive stock option for 75,000 Avecor Cardiovascular Inc. common shares
will be granted to you. The grant of these options is subject to approval of an
increase in the number of shares authorized to be granted under stock options,
by the Board of Directors at their next meeting and by the Company's
Stockholders at their next annual meeting. These options will be exercisable at
the rate of 18,750 shares per year, with the first exercise date being one year
from the date you begin employment. The per share exercise price will be the
fair market value per share on the date you begin employment. A separate stock
option agreement further describing the complete terms of the option as governed
by the Company's stock option plan will be prepared for you.
An automobile allowance of $500 per month. Additionally, the Company will
reimburse you for reasonable automobile operating costs, including: fuel,
parking, oil and lubrication, car washing, tires and minor tune-ups. Finally,
the Company will reimburse you for all reasonable travel expense in accordance
with the Company's Business Travel and Expenses Policy.
A contributory Medical and Dental Insurance Plan
Term life insurance equal to one year's base compensation - additional term
insurance coverage is available at your expense.
<PAGE>
Gregory J. Melsen
Page 2
Long-term and short-term disability coverage.
A 401(k) Retirement Savings Plan following one year of service. A Company
matching contribution, if any, is at the discretion of the Board of Directors.
An Employee Stock Purchase Plan, offered to employees following one year of
service.
Four weeks annual vacation.
Also, as part of the package, the Company requires execution of an agreement
covering confidentiality and non-competition issues, a copy of which is
attached. In addition, please disclose to us any such similar agreements under
which you are currently bound.
If the terms of this letter are agreeable to you, please so acknowledge in the
space provided below.
Best regards,
/s/ ANTHONY BADOLATO
Anthony Badolato
President and Chief Executive Officer
Enclosure: Agreement Regarding Non-Disclosure of
Confidential Information, Non-Competition and
Ownership of Intellectual Property
Terms Accepted
/s/ GREGORY J. MELSEN
- ---------------------------------------------
Gregory J. Melsen
<PAGE>
EXHIBIT 10.14
[AVECOR LETTERHEAD]
December 27, 1995
Mr. Glenn D. Taylor
10 Braunview Way
Orchard Park, NY 14127
Dear Glenn
We are pleased to offer you the position of President and Chief Operating
Officer for Avecor Cardiovascular Inc.
Following is the compensation package we discussed for the position:
Annual base salary $175,000
A bonus of up to a maximum of 40% of annual base salary under an Executive Bonus
Plan to be determined by the Board of Directors.
An incentive stock option for 150,000 Avecor Cardiovascular Inc. common shares
will be granted to you. The grant of these options is subject to approval of an
increase in the number of shares authorized to be granted under stock options,
by the Board of Directors at their next meeting and by the Company's
Stockholders at their next annual meeting. These options will be exercisable at
the rate of 37,500 shares per year, with the first exercise date being one year
from the date you begin employment. The per share exercise price will be the
fair market value per share on the date you begin employment. A separate stock
option agreement further describing the complete terms of the option as governed
by the Company's stock option plan will be prepared for you.
The Company will pay reasonable expenses to relocate your household goods and
vehicles to Minneapolis. The Company will also pay reasonable expenses for your
spouse to visit Minneapolis for house hunting visits.
An automobile allowance of $500 per month. Additionally, the Company will
reimburse you for reasonable automobile operating costs, including: fuel,
parking, oil and lubrication, car washing, tires and minor tune-ups. Finally,
the Company will reimburse you for all reasonable travel expense in accordance
with the Company's Business Travel and Expenses Policy.
<PAGE>
Glenn D. Taylor
Page 2
A contributory Medical and Dental Insurance Plan
Term life insurance equal to one year's base compensation - additional term
insurance coverage is available at your expense.
Long-term and short-term disability coverage.
A 401(k) Retirement Savings Plan following one year of service. A Company
matching contribution, if any, is at the discretion of the Board of Directors.
An Employee Stock Purchase Plan, offered to employees following one year of
service.
Four weeks annual vacation.
Also, as part of the package, the Company requires execution of an agreement
covering confidentiality and non-competition issues, a copy of which is
attached. In addition, please disclose to us any such similar agreements under
which you are currently bound.
If the terms of this letter are agreeable to you, please so acknowledge in the
space provided below.
Best regards,
/s/ ANTHONY BADOLATO
Anthony Badolato
President and Chief Executive Officer
Enclosure: Agreement Regarding Non-Disclosure of
Confidential Information, Non-Competition and
Ownership of Intellectual Property
Terms Accepted
/s/ GLENN D. TAYLOR
- -----------------------------------
Glenn D. Taylor
<PAGE>
EXHIBIT 10.15
SEPARATION AGREEMENT
AGREEMENT made as of the 31st day of December, 1996, by and between AVECOR
Cardiovascular Inc. (the "Company") and Glenn D. Taylor ("Executive").
In consideration of the mutual covenants made herein and intending to be legally
bound hereby, the Company and Executive agree as follows:
1. Executive hereby resigns, effective immediately, as an officer, director
and employee of the Company and of AVECOR Cardiovascular Ltd., a subsidiary
of the Company.
2. Executive's base compensation and benefits shall be paid through December
31, 1996, in accordance with the terms of a letter agreement between the
parties dated December 27, 1995. Executive shall remain entitled to an
Executive Bonus for 1996 payable in accordance with the terms of said
letter agreement and the Company's Executive Bonus Plan.
3. From and after January 1, 1997, the Company shall pay to or for the benefit
of Executive the following:
a. An amount equal to Executive's annual base compensation, less any
deductions required by law, shall be paid through December 31, 1997,
payable from time to time in the manner in which Executive's base
compensation is currently paid. Payment of the foregoing amount shall
not constitute Executive an employee of the Company, and Executive
shall be under no obligation to provide any services to the Company.
b. The Company will continue to maintain for Executive's benefit medical
and dental insurance with the coverage currently in effect under the
Company's Medical and Dental Insurance Plans.
c. Executive's options to acquire 150,000 shares of the Company's common
stock will vest as to 37,500 of such shares and be exercisable as to
such shares in accordance with the terms of the applicable option
agreement, and the option will lapse and terminate as to the remaining
112,500 shares. In the case of Executive's incentive stock option,
the option will vest as to 8,333 shares and be exercisable through
March 31, 1997. In the case of Executive's non-statutory option, the
option will vest as to 29,167 shares and be exercisable through
January 31, 1997.
d. The Company will continue to indemnify Executive as authorized or
permitted by law in accordance with its Bylaws and the indemnification
provisions of the Minnesota Business Corporation Act for liabilities
incurred by or claims made against Executive by reason of his service
as an officer or director of the Company.
4. Except as provided in this Agreement, Executive acknowledges that he will
have no entitlement to any further compensation or benefits from the
Company.
<PAGE>
5. Agreements between the Company and Executive regarding Non-Disclosure of
Confidential Information, Non-Competition and Ownership of Intellectual
Property will remain in effect according to their respective terms, and
pursuant to its terms, the Non-Competition Agreement will expire December
31, 1997.
6. This Agreement may be modified or amended only by a writing signed by each
of the parties hereto. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns. This Agreement is not
assignable by either party without the prior written consent of the other
party.
7. This Agreement may be executed in two or more counterparts, each of which
shall for all purposes be deemed to be an original, and all of which shall
constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day
and year first above written.
AVECOR CARDIOVASCULAR INC.
By: /s/ ANTHONY BADOLATO
------------------------------
Chief Executive Officer
/s/ GLENN D. TAYLOR
- -----------------------------------
Glenn D. Taylor
Executive
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<PAGE>
EXHIBIT 10.25
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of January 30, 1997, is by and between AVECOR
CARDIOVASCULAR INC., a Minnesota corporation (the "Borrower"), and FIRST BANK
NATIONAL ASSOCIATION, a national banking association (the "Lender").
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 DEFINED TERMS. As used in this Agreement the following terms
shall have the following respective meanings:
"BUSINESS DAY": Any day (other than a Saturday, Sunday or legal holiday in
the State of Minnesota) on which national banks are permitted to be open for
business in Minneapolis, Minnesota.
"CLOSING DATE": The date on which the conditions set forth in Section 3.1
have been satisfied and the Loan is closed.
"DEFAULT": Any event which, with the giving of notice (whether such notice
is required under Section 6.1, or under some other provision of this Agreement,
or otherwise) or lapse of time, or both, would constitute an Event of Default.
"DEFAULT RATE": As defined in the Note.
"ERISA": The Employee Retirement Income Security Act of 1974, as amended.
"EVENT OF DEFAULT": Any event described in Section 6.1.
"FINANCING STATEMENT": The Financing Statement(s) executed by the Borrower,
as Debtor, in favor of the Lender, as Secured Party.
"GAAP": Generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession,
which are applicable to the circumstances as of any date of determination.
"GOVERNMENTAL REQUIREMENTS": All laws, statutes, codes, ordinances, and
governmental rules, regulations and requirements applicable to the Borrower, the
Lender and the Project.
"IMPROVEMENTS": The buildings and improvements located upon the Land.
<PAGE>
"INDEMNIFICATION AGREEMENT": The Environmental and ADA Indemnification
Agreement dated of even date herewith, executed by the Borrower in favor of
Lender.
"LAND": The land legally described on Exhibit A attached hereto and hereby
made a part hereof.
"LIEN": With respect to any Person, any security interest, mortgage,
pledge, lien, charge, encumbrance, title retention agreement or analogous
instrument or device (including the interest of each lessor under any
capitalized lease), in, of or on any assets or properties of such Person, now
owned or hereafter acquired, whether arising by agreement or operation of law.
"LOAN": As defined in Section 2.1.
"LOAN DOCUMENTS": This Agreement, the Note, the Mortgage, the
Indemnification Agreement, the Financing Statement, the TIF Subordination
Agreement, and any other document collateral to or as security for the Loan.
"LOAN FEE": As defined in Section 2.3.
"MATURITY DATE": February 1, 2002.
"MORTGAGE": The Mortgage, Security Agreement, Assignment of Leases and
Rents and Fixture Financing Statement dated of even date herewith, executed by
the Borrower in favor of the Lender.
"NOTE": The Note dated of even date herewith, in the amount of the Loan,
executed by the Borrower and payable to the order of the Lender.
"OBLIGATIONS": The Borrower's obligations in respect of the due and
punctual payment of principal and interest on the Note when and as due, whether
by acceleration or otherwise and all fees, expenses, indemnities, reimbursements
and other obligations of the Borrower under this Agreement or any other Loan
Document, in all cases whether now existing or hereafter arising or incurred.
"PERMITTED ENCUMBRANCES": The liens, charges and encumbrances on title to
the Project listed on Exhibit B attached hereto and hereby made a part hereof.
"PERSON": Any natural person, corporation, partnership, limited
partnership, joint venture, firm, association, trust, unincorporated
organization, government or governmental agency or political subdivision or any
other entity, whether acting in an individual, fiduciary or other capacity.
"PROJECT": The Land, the Improvements and all fixtures, equipment and
personal property now or hereafter owned by the Borrower and located or to be
located in or on, and used in connection with the management, maintenance or
operation of, the Land and the Improvements.
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<PAGE>
"REGULATORY CHANGE": Any change after the date of this Agreement in
federal, state or foreign laws or regulations or the adoption or making after
such date of any interpretations, directives or requests applying to a class of
banks including the Lender under any federal, state or foreign laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"TIF AGREEMENTS": Collectively, the Individual Development Agreement #5
dated October 4, 1996, between Ryan Construction Company of Minnesota, Inc. and
the Brooklyn Park Economic Development Authority, with respect to the Project,
and the Assessment Agreement and the Note executed in connection therewith and
pursuant thereto.
"TIF SUBORDINATION AGREEMENT": Subordination Agreement dated of even date
herewith, executed by the Borrower, the Lender and the City of Brooklyn Park.
"TITLE COMPANY": Old Republic National Title Insurance Company.
"TITLE POLICY": A current ALTA form loan title insurance policy, dated as
of the date of recording of the Mortgage, containing such endorsements and
assurances as the Lender may require, and containing only those exceptions
approved by the Lender.
Section 1.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be
expressly provided to the contrary herein, all accounting terms used herein
shall be interpreted and all accounting determinations hereunder shall be made
in accordance with GAAP.
Section 1.3 OTHER DEFINITIONAL TERMS, TERMS OF CONSTRUCTION. The words
"hereof", "herein" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. References to Sections, Exhibits, Schedules and
like references are to Sections, Exhibits, Schedules and the like of this
Agreement unless otherwise expressly provided. The words "include", "includes"
and "including" shall be deemed to be followed by the phrase "without
limitation". Unless the context in which used herein otherwise clearly requires,
"or" has the inclusive meaning represented by the phrase "and/or". All
incorporations by reference of covenants, terms, definitions or other provisions
from other agreements are incorporated into this Agreement as if such provisions
were fully set forth herein, and include all necessary definitions and related
provisions from such other agreements. All covenants, terms, definitions and
other provisions from other agreements incorporated into this Agreement by
reference shall survive any termination of such other agreements until the
obligations of the Borrower under this Agreement and the Note are irrevocably
paid in full.
ARTICLE II
TERMS OF LENDING
Section 2.1 LOAN. Upon the terms and subject to the conditions hereof,
the Lender agrees to make a loan (the "Loan") to the Borrower of $5,167,500.00
on the Closing Date.
3
<PAGE>
Section 2.2 THE NOTE; INTEREST AND REPAYMENT. The Loan shall be
evidenced by the Note. The Lender shall enter in its ledgers and records the
payments made on the Loan, and the Lender is authorized by the Borrower to enter
on a schedule attached to the Note a record of such payments. The Note shall
accrue interest and shall be payable, together with interest thereon, and may be
prepaid, if at all, and is subject to mandatory prepayment, as provided in the
Note. If not sooner paid, the Note, together with all accrued and unpaid
interest thereon, shall be due and payable in full on the Maturity Date.
Section 2.3 LOAN FEE. In consideration of the Lender's agreement to make
the Loan, the Borrower shall pay the Lender, at or prior to the closing of the
Loan, a loan fee in the amount of $20,000.00, $10,000.00 of which was paid at
the time of execution of the commitment for the Loan.
Section 2.4 CAPITAL ADEQUACY. In the event that any Regulatory Change
reduces or shall have the effect of reducing the rate of return on the Lender's
capital or the capital of its parent corporation (by an amount the Lender deems
material) as a consequence of the Loan to a level below that which the Lender or
its parent corporation could have achieved but for such Regulatory Change
(taking into account the Lender's policies and the policies of its parent
corporation with respect to capital adequacy), then the Borrower shall, within
five days after written notice and demand from the Lender, pay to the Lender
additional amounts sufficient to compensate the Lender or its parent corporation
for such reduction. Any determination by the Lender under this Section and any
certificate as to the amount of such reduction given to the Borrower by the
Lender shall be final, conclusive and binding for all purposes, absent error.
Section 2.5 USE OF PROCEEDS. The proceeds of the Loan shall be used for
payment of the costs of construction of the Improvements.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 CONDITIONS OF THE LOAN. The obligation of the Lender to make
the Loan hereunder shall be subject to the prior or simultaneous fulfillment of
each of the following conditions:
3.1(a) DOCUMENTS. The Lender shall have received the documents and other
materials as set forth on Schedule 3.1(a) attached hereto and hereby made a part
hereof.
3.1(b) OTHER MATTERS. All organizational and legal proceedings relating
to the Borrower and all instruments and agreements in connection with the
transactions contemplated by this Agreement shall be satisfactory in scope, form
and substance to the Lender and its counsel, and the Lender shall have received
all information and copies of all documents, including records of corporate
proceedings, which it may reasonably have requested in connection therewith,
such documents where appropriate to be certified by Borrower or governmental
authorities.
4
<PAGE>
3.1(c) FEES AND EXPENSES. The Lender shall have received the Loan Fee
and all other fees and amounts due and payable by the Borrower on or prior to
the Closing Date, including the reasonable fees and expenses of counsel to the
Lender payable pursuant to Section 7.2.
3.1(d) PERFECTION. The Mortgage and the Financing Statement, and any
other Loan Document creating or evidencing a lien or security interest which
Lender requires to be filed of record, shall have been appropriately filed to
the satisfaction of the Lender and the priority and perfection of the Lien
created thereby shall have been established to the satisfaction of the Lender.
3.1(e) NO DEFAULT. All representations and warranties of the Borrower
made in this Agreement shall remain true and correct and no Default or Event of
Default shall exist.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender:
Section 4.1 ORGANIZATION, STANDING ETC. The Borrower is a corporation
duly incorporated and validly existing and in good standing under the laws of
the jurisdiction of its incorporation, and, if different, the jurisdiction in
which the Project is located, and has all requisite corporate power and
authority to own its properties and to carry on its business as now conducted,
to enter into this Agreement and the other Loan Documents to which it is a party
and to issue the Note and to perform its obligations hereunder and thereunder.
This Agreement, the Note and the other Loan Documents to which it is a party
have been duly authorized by all necessary corporate action and when executed
and delivered will be the legal and binding obligations of the Borrower. The
execution, delivery and performance of this Agreement, the Note and the other
Loan Documents to which it is a party will not violate the Borrower's Articles
of Incorporation or bylaws or any law applicable to the Borrower, and will not
violate or cause a default under or permit acceleration of any agreement to
which Borrower is a party or by which it or the Project is bound. Except for
consents, approvals and exemptions previously obtained (copies of which have
been delivered to the Lender), no approval of or exemption by any Person is
required in connection with the Borrower's execution, delivery and performance
of this Agreement, the Note and the other Loan Documents to which it is a party.
To the Borrower's knowledge, it is not in default (beyond any applicable grace
period) in the performance of any agreement, order, writ, injunction, decree or
demand to which it is a party or by which it is bound.
Section 4.2 FINANCIAL STATEMENTS AND NO MATERIAL ADVERSE CHANGE. The
Borrower's audited financial statements as at December 31, 1995 and its
unaudited financial statements as at September 30, 1996, as heretofore furnished
to the Lender, have been prepared in accordance with GAAP. The Borrower has no
material obligation, liability or asset not disclosed in such financial
statements, and there has been no material adverse change in the condition of
the Borrower since the dates of such financial statements.
5
<PAGE>
Section 4.3 LITIGATION. Other than the claims asserted by MinnTech
Technologies, which have been fully disclosed to Lender by Borrower, there are
no actions, suits or proceedings pending or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or the Project which, if determined
adversely to the Borrower, would have a material adverse effect on the condition
of the Borrower or on the ability of the Borrower to perform its obligations
under the Loan Documents. Neither the Borrower nor the Project is in violation
of any Governmental Requirement where such violation could reasonably be
expected to impose a material liability on the Borrower.
Section 4.4 TAXES. The Borrower has filed all federal, state and local
tax returns required to be filed and has paid or made provision for the payment
of all taxes due and payable pursuant to such returns and pursuant to any
assessments made against it or any of its property (other than taxes, fees or
charges the amount or validity of which is currently being contested in good
faith by appropriate proceedings and with respect to which reserves in
accordance with GAAP have been provided on the books of the Borrower).
Section 4.5 SUBSIDIARIES. The Borrower has no subsidiaries, except as
follows: AVECOR Cardiovascular Ltd., incorporated in England and Wales; AVECOR
Foreign Sales Corporation, incorporated in Barbados; and AVECOR Cardiovascular
France S.A.R.L., incorporated in France.
Section 4.6 EMPLOYEE BENEFIT PLANS. Except as disclosed in writing to
the Lender: (a) the Borrower is not an employee benefit plan as defined in
Section 3(1) of ERISA, whether or not subject to ERISA; (b) no assets of the
Borrower constitute assets of any such plan under ERISA regulations or rulings;
(c) with respect to any such plan that the Borrower sponsors, participates in or
has fiduciary duties with respect to, the Borrower has materially complied with
all federal and state laws, plan documents and funding requirements; (d) the
Borrower does not sponsor, participate in, or have fiduciary duties with respect
to any defined benefit pension plan subject to Title IV of ERISA or any multi-
employer pension plan as defined in Section 3(37) (A) of ERISA or any plan
providing medical or other welfare benefits to retirees or other former
employees (except as required by federal or state law); and (e) the Borrower is
not (and has not ever been) a member of a group of trades or businesses (whether
or not incorporated) that is treated as a single employer under Section 414 of
the Internal Revenue Code.
ARTICLE V
COVENANTS
Until the Note and all of the Borrower's other Obligations shall have been
paid and performed in full, unless the Lender shall otherwise consent in
writing:
Section 5.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will furnish
to the Lender:
5.1(a) As soon as available and in any event within 90 days after the
end of each fiscal year of the Borrower, financial statements of the Borrower
consisting of at least statements
6
<PAGE>
of income, cash flow and changes in stockholders' equity, a balance sheet as at
the end of such year, and a statement of contingent liabilities as at the end of
such year, setting forth in each case in comparative form corresponding figures
from the previous annual audit, certified without qualification by Coopers &
Lybrand or other independent certified public accountants of recognized national
standing selected by the Borrower and acceptable to the Lender.
5.1(b) As soon as available and in any event within 90 days after the
end of each fiscal year of the Borrower, a copy of the Borrower's annual form
10-K filed with the Securities and Exchange Commission.
5.1(c) As soon as available and in any event within 45 days after the
end of each fiscal quarter of the Borrower, unaudited financial statements for
the Borrower for such quarter and for the period from the beginning of such
fiscal year to the end of such quarter, substantially similar to the annual
audited statements.
5.1(d) As soon as available and in any event within 45 days after the
end of each fiscal quarter of the Borrower, a copy of the Borrower's quarterly
Form 10-Q filed with the Securities and Exchange Commission
5.1(e) As soon as practicable and in any event within 45 days after
the end of each fiscal quarter, (i) a statement signed by the chief financial
officer of the Borrower stating that as at the end of such quarter there did not
exist any Default or Event of Default or, if such Default or Event of Default
existed, specifying the nature and period of existence thereof and what action
the Borrower proposes to take with respect thereto, and (ii) a Covenant
Compliance Certificate in the form of Schedule V-1 attached hereto and hereby
made a part hereof.
5.1(f) Immediately upon any officer of the Borrower becoming aware of
any Default or Event of Default, a notice describing the nature thereof and what
action the Borrower proposes to take with respect thereto.
5.1(g) From time to time, such other information regarding the
business, operation and financial condition of the Borrower and the Project as
the Lender may reasonably request.
Section 5.2 BOOKS AND RECORDS. The Borrower will keep adequate and
proper records and books of account in which full and correct entries will be
made of its dealings, business and affairs, including its use and operation of
the Project.
Section 5.3 INSPECTION. Upon reasonable prior notice from the Lender,
the Borrower will permit any Person designated by the Lender to visit and
inspect any of the properties (including the Project), books and financial
records of the Borrower, to examine and to make copies of the books of accounts
and other financial records of the Borrower, and to discuss the affairs,
finances and accounts of the Borrower with its officers at such reasonable times
and intervals as the Lender may designate.
7
<PAGE>
Section 5.4 EXISTENCE. The Borrower will maintain its existence in good
standing under the laws of its jurisdiction of incorporation or formation, and,
if different, the jurisdiction where the Project is located, and its
qualification to transact business in each jurisdiction (including the
jurisdiction where the Project is located) where failure so to qualify would
permanently preclude the Borrower from enforcing its rights with respect to any
material asset or would expose the Borrower to any material liability.
Section 5.5 NOTICE OF LITIGATION. The Borrower will give prompt written
notice to the Lender of the commencement of any action, suit or proceeding
affecting the Borrower.
Section 5.6 EMPLOYEE BENEFIT PLANS. The Borrower shall neither take any
action, nor omit to take any action, if such action or omission would result in
any of the statements set forth in Section 4.6 (including any written
disclosures made by the Borrower to the Lender under Section 4.6) becoming
inaccurate or misleading at any time while the Note remains outstanding.
Section 5.7 INSURANCE. The Borrower will maintain with financially sound
and reputable insurance companies such insurance as may be required by law and
such other insurance in such amounts and against such hazards as is customary in
the case of reputable companies engaged in the same or similar business and
similarly situated, including, without limitation, the insurance which the
Borrower is required to maintain pursuant to Section 1.4 of the Mortgage.
Section 5.8 PAYMENT OF TAXES. The Borrower will file all tax returns and
reports which are required by law to be filed by it and will pay before they
become delinquent, all taxes, assessments and governmental charges and levies
imposed upon it or its property and all claims or demands of any kind (including
those of suppliers, mechanics, carriers, warehousemen, landlords and other like
Persons) which, if unpaid, might result in the creation of a Lien upon its
property.
Section 5.9 MAINTENANCE OF PROPERTIES, COMPLIANCE. The Borrower will
maintain its properties in good condition, repair and working order, and
supplied with all necessary equipment, and make all necessary repairs, renewals,
replacements, betterments and improvements thereto, all as may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times. The Borrower will comply in all material
respects with all laws, rules and regulations to which it may be subject.
Section 5.10 ADDITIONAL COVENANTS. For additional covenants, see Schedule
V attached hereto and hereby made a part hereof.
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
Section 6.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an Event of Default:
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6.1(a) The Borrower shall fail to make when due, whether by
acceleration or otherwise, any payment of principal of or interest on the Note
or any other obligations of the Borrower to the Lender pursuant to this
Agreement or any of the other Loan Documents, and such failure shall continue
for a period of five (5) days after the due date thereof.
6.1(b) Any representation or warranty made by or on behalf of the
Borrower in this Agreement or any of the other Loan Documents or by or on behalf
of the Borrower in any certificate, statement, report or document herewith or
hereafter furnished to the Lender pursuant to this Agreement or any of the other
Loan Documents shall prove to have been false or misleading in any material
respect on the date as of which the facts set forth are stated or certified.
6.1(c) The Borrower shall fail to comply with Sections 5.1 or 5.7 or
any covenant contained in Schedule V hereto, including, but not limited to,
failure to deliver the original, signed TIF Note to Lender immediately after
issuance by the Brooklyn Park Economic Development Authority or by March 10,
1997, whichever occurs first.
6.1(d) A sale, transfer, conveyance or encumbrance of the Project or
any part thereof or of all or any part of the Borrower s interest therein in
violation of Section 1.3 of the Mortgage shall occur.
6.1(e) The Borrower shall fail to comply with any other agreement,
covenant, condition, provision or term contained in this Agreement or any of the
other Loan Documents (other than those hereinabove set forth in this Section
6.1) and such failure to comply shall continue for thirty (30) calendar days
after whichever of the following dates is the earliest: (i) the date the
Borrower gives notice of such failure to the Lender, (ii) the date the Borrower
should have given notice of such failure to the Lender pursuant to Section 5.1,
or (iii) the date the Lender gives notice of such failure to the Borrower.
6.1(f) The Borrower shall become insolvent or shall generally not pay
its debts as they mature or shall apply for, shall consent to, or shall
acquiesce in the appointment of a custodian, trustee or receiver of itself or
for a substantial part of its property, or, in the absence of such application,
consent or acquiescence, a custodian, trustee or receiver shall be appointed for
the Borrower or for a substantial part of the property thereof and shall not be
discharged within forty-five (45) days, or the Borrower shall make an assignment
for the benefit of creditors.
6.1(g) Any bankruptcy, reorganization, debt arrangement or other
proceedings under any bankruptcy or insolvency law shall be instituted by or
against the Borrower and, if instituted against the Borrower, shall have been
consented to or acquiesced in by the Borrower, as the case may be, or shall
remain undismissed for sixty (60) days, or an order for relief shall have been
entered against the Borrower.
6.1(h) Any dissolution or liquidation proceeding shall be instituted
by or against the Borrower and, if instituted against the Borrower, shall be
consented to or acquiesced in by the Borrower or shall remain for forty-five
(45) days undismissed.
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6.1(i) A judgment or judgments for the payment of money in excess of
the sum of $100,000.00 in the aggregate shall be rendered against the Borrower
and either (i) the judgment creditor executes on such judgment or (ii) such
judgment remains unpaid or undischarged for more than sixty (60) days from the
date of entry thereof or such longer period during which execution of such
judgment shall be stayed during an appeal from such judgment.
6.1(j) The maturity of any material indebtedness of the Borrower
(other than the Loan) shall be accelerated, or the Borrower shall fail to pay
any such material indebtedness when due (after the lapse of any applicable grace
period) or any event shall occur or condition shall exist and shall continue for
more than the period of grace, if any, applicable thereto and shall have the
effect of causing, or permitting the holder of any such indebtedness to cause,
such material indebtedness to become due prior to its stated maturity or to
realize upon any collateral given as security therefor. For purposes of this
Section, indebtedness shall be deemed "material" if it exceeds $100,000.00 as to
any item of indebtedness or in the aggregate for all items of indebtedness with
respect to which any of the events described in this Section has occurred.
6.1(k) Any execution or attachment shall be issued whereby any
substantial part of the property of the Borrower shall be taken or attempted to
be taken and the same shall not have been vacated or stayed within thirty (30)
days after the issuance thereof.
6.1(l) Any default shall occur under any other Loan Document, and
shall continue beyond any grace or cure period provided therein with respect to
such default.
6.1(m) The Borrower shall fail to obtain and deliver to the Lender, on
or before March 15, 1997, an unconditional certificate of occupancy issued by
the City of Brooklyn Park, Minnesota.
Section 6.2 REMEDIES. If (a) any Event of Default described in Sections
6.1 (f), (g) or (h) shall occur with respect to the Borrower, the Note and all
other obligations of the Borrower to the Lender under this Agreement and the
other Loan Documents shall automatically become immediately due and payable, or
(b) any other Event of Default shall occur and be continuing, then the Lender
may declare the Note and all other obligations of the Borrower to the Lender
under this Agreement and the other Loan Documents to be forthwith due and
payable, whereupon the same shall immediately become due and payable, in each
case without presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived, anything in this Agreement or in the Note or
in any of the other Loan Documents to the contrary notwithstanding. Upon the
occurrence of any of the events described in clauses (a) or (b) of the preceding
sentence the Lender may exercise all rights and remedies under this Agreement,
the Note and any of the other Loan Documents and under any applicable law. In
addition, the Lender may cure the Event of Default on behalf of the Borrower,
and, in doing so, may enter upon the Project, and may expend such sums as it may
deem desirable, including attorneys' fees, all of which shall be deemed to be
advances hereunder and under the Note, even though causing the Loan to exceed
the face amount of the Note, shall bear interest at the Default
10
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Rate and shall be payable by the Borrower on demand, and shall be secured by the
Mortgage and all other Loan Documents securing the Loan.
Section 6.3 OFFSET. In addition to the remedies set forth in Section
6.2, upon the occurrence of any Event of Default and thereafter while the same
be continuing, the Borrower hereby irrevocably authorizes the Lender to set off
all sums owing by the Borrower to the Lender against all deposits and credits of
the Borrower with, and any and all claims of the Borrower against, the Lender.
ARTICLE VII
MISCELLANEOUS
Section 7.1 MODIFICATIONS. Notwithstanding any provisions to the
contrary herein, any term of this Agreement may be amended with the written
consent of the Borrower; PROVIDED that no amendment, modification or waiver of
any provision of this Agreement or consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such amendment, modification, waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.
Section 7.2 COSTS AND EXPENSES. Whether or not the transactions
contemplated hereby are consummated, the Borrower agrees to reimburse the Lender
upon demand for all reasonable out-of-pocket expenses paid or incurred by the
Lender (including filing and recording costs and fees and expenses of Dorsey &
Whitney LLP, counsel to the Lender, and all expenses for any architect, engineer
or other consultants retained by Lender for the purposes outlined in the Loan
Commitment from Lender to Borrower dated and accepted November 6, 1996) in
connection with the negotiation, preparation, approval, review, execution,
delivery, amendment, modification, interpretation, collection and enforcement of
this Agreement, the Note and the other Loan Documents. The obligations of the
Borrower under this Section shall survive any termination of this Agreement.
Section 7.3 WAIVERS, ETC. No failure on the part of the Lender or the
holder of the Note to exercise and no delay in exercising any power or right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any power or right preclude any other or further exercise thereof or
the exercise of any other power or right. The rights and remedies of the Lender
hereunder are cumulative and not exclusive of any right or remedy the Lender
otherwise has.
Section 7.4 NOTICES. Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, telegram, telex, facsimile transmission, overnight courier or United
States mail (postage prepaid) addressed to such party at the address specified
on the signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telegram, telex
11
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or facsimile transmission, from the first Business Day after the date of sending
if sent by overnight courier, or from four days after the date of mailing if
mailed. Either party may change its address for notices by a notice given not
less than five (5) Business Days prior to the effective date of the change.
Section 7.5 SUCCESSORS AND ASSIGNS; DISPOSITION OF LOANS. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and assigns, except that the
Borrower may not assign its rights or delegate its obligations hereunder without
the prior written consent of the Lender. The Lender may at any time sell,
assign, transfer, grant participations in, or otherwise dispose of any portion
of the Loan to banks or other financial institutions. The Lender may disclose
any information regarding the Borrower in the Lender's possession to any
prospective buyer or participant.
SECTION 7.6 GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION
AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF
LAWS OR PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED
STATES APPLICABLE TO NATIONAL BANKS. WHENEVER POSSIBLE, EACH PROVISION OF THIS
AGREEMENT AND ANY OTHER STATEMENT, INSTRUMENT OR TRANSACTION CONTEMPLATED HEREBY
OR RELATING HERETO, SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND
VALID UNDER SUCH APPLICABLE LAW, BUT, IF ANY PROVISION OF THIS AGREEMENT OR ANY
OTHER STATEMENT, INSTRUMENT OR TRANSACTION CONTEMPLATED HEREBY OR RELATING
HERETO SHALL BE HELD TO BE PROHIBITED OR INVALID UNDER SUCH APPLICABLE LAW, SUCH
PROVISION SHALL BE INEFFECTIVE ONLY TO THE EXTENT OF SUCH PROHIBITION OR
INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE
REMAINING PROVISIONS OF THIS AGREEMENT OR ANY OTHER STATEMENT, INSTRUMENT OR
TRANSACTION CONTEMPLATED HEREBY OR RELATING HERETO.
SECTION 7.7 CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER, THIS
AGREEMENT AND THE NOTE MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE
COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND THE BORROWER CONSENTS
TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT
VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY
ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT,
THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE
OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
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SECTION 7.8 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE AND ANY OTHER LOAN
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
Section 7.9 CAPTIONS. The captions or headings herein and any table of
contents hereto are for convenience only and in no way define, limit or describe
the scope or intent of any provision of this Agreement.
Section 7.10 NUMBER; GENDER. The singular of all terms used herein shall
include the plural and the plural shall include the singular, and the use of any
gender herein shall include all other genders, where the context so requires or
permits.
Section 7.11 ENTIRE AGREEMENT. This Agreement and the other Loan
Documents embody the entire agreement and understanding between the Borrower and
the Lender with respect to the subject matter hereof and thereof. This Agreement
supersedes all prior agreements and understandings relating to the subject
matter hereof.
Section 7.12 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
AVECOR CARDIOVASCULAR INC.
By: /s/ Gregory J. Melsen
---------------------------------
Print Name: Gregory J. Melsen
Title: Chief Financial Officer
Borrower's Address:
7611 Northland Drive
Minneapolis, MN 55428
Attention: Gregory J. Melsen
Fax (612) 391-9102
FIRST BANK NATIONAL ASSOCIATION
By: /s/ Jan A. Jasmin
---------------------------------
Print Name: Jan A. Jasmin
Title: Vice President
Lender's Address:
First Bank National Association
3305 Plymouth Boulevard
Plymouth, MN 55447
Attention: Jan A. Jasmin
Fax (612) 551-9058
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EXHIBIT A
(Legal Description of Land)
Lot 1, Block 1, Northland Park Division 4, according to the recorded plat
thereof, and situate in Hennepin County, Minnesota.
<PAGE>
EXHIBIT B
(Permitted Encumbrances)
1. Real estate taxes not yet due and payable and installments of special
assessments payable therewith.
2. Restrictions, covenants, conditions and easements set forth in Protective
Covenants for Northland Park II dated April 1, 1981, acknowledged August
25, 1992, filed August 26, 1992, as Document No. 5960478.
Above restriction assigned and assumed by Document No. 6337703.
Terms and conditions of that certain Bifurcation and Separation Agreement
Regarding Northland Park II and Creation of Northland Park III regarding
the above Restrictions dated October 12, 1995, filed December 23, 1995, as
Document No. 6517830.
3. Utility and drainage and drainage for ponding easement(s) as shown on the
recorded plat of Northland Park Division 4.
4. Right to construct and maintain temporary snow fences over lands adjacent
to County State Aid Highway No. 18, acquired by the County of Hennepin, as
evidenced by Final Certificate recorded as Document No. 2075297.
5. No right of access exists from premises to County State Aid Highway No. 18.
Right of access was acquired by the County of Hennepin as evidenced by
Document No. 3755252, except that the abutting owner shall have the right
of access to the frontage road.
6. No right of access exists from premises to County State Aid Highway No. 18.
Right of access was acquired by the County of Hennepin as evidenced by
Document No. 3840555 except that the abutting owner shall have the right of
access to the frontage road.
7. Easement for drainage purposes over part of premises together with
incidental rights granted to the County of Hennepin, as evidenced by
instrument dated March 30, 1983, filed June 3, 1983, as Document No.
4797904.
8. Assessment Agreement between Ryan Construction Company of Minnesota, Inc.
and Brooklyn Park E.D.A. dated October 4, 1996, recorded December 13, 1996,
as Document No. 6674367.
9. Individual Development Agreement No. 5 between Ryan Construction Company of
Minnesota, Inc. and Brooklyn Park E.D.A. dated October 4, 1996, recorded
December 13, 1996, as Document No. 6674366.
<PAGE>
SCHEDULE 3.1(A)
This Agreement, the Note, the Mortgage, the Indemnification Agreement, the
Financing Statement, the TIF Subordination Agreement, and an endorsement and
assignment from the Borrower to the Lender of the Note executed as part of the
TIF Agreements ("TIF Note"), each duly executed by the Borrower and dated the
Closing Date.
The TIF Agreements.
A copy of the corporate resolutions of the Borrower authorizing the execution,
delivery and performance of this Agreement, the Note and the other Loan
Documents to which the Borrower is a party, and containing an incumbency
certificate showing the names and titles, and bearing the signatures of, the
officers of the Borrower authorized to execute this Agreement, the Note and the
other Loan Documents to which the Borrower is a party, certified as of the
Closing Date by the Secretary or an Assistant Secretary of the Borrower.
A copy of the Articles of Incorporation of the Borrower with all amendments
thereto, certified by the appropriate governmental official of the jurisdiction
of its incorporation as of a date not more than 15 days prior to the Closing
Date.
A certificate of good standing for the Borrower in the jurisdiction of its
incorporation, and, if different that the jurisdiction of its incorporation, the
jurisdiction in which the Project is located, certified by the appropriate
governmental officials as of a date not more than 15 days prior to the Closing
Date.
A copy of the bylaws of the Borrower, certified as of the Closing Date by the
Secretary or an Assistant Secretary of the Borrower.
The opinion of counsel to the Borrower covering such matters as the Lender may
request.
An appraisal of the Project, addressed to the Lender, prepared in conformance
with the Lender's real estate appraisal and evaluation policy, and signed by an
appraiser acceptable to the Lender.
The most current available financial statements of the Borrower, as well as
financial statements of the Borrower for each of its preceding three (3) full
fiscal years together with copies of all federal income tax returns (with all
supporting schedules) of the Borrower for its three (3) most recent fiscal
years, all signed and certified as true, correct and complete by the Borrower.
The Title Policy, or a suitably marked up title insurance commitment issued by
Title Company unconditionally agreeing to issue the Title Policy upon
recordation of the Mortgage.
A survey prepared by a registered land surveyor licensed in the state where the
Land is located and complying with Minimum Standard Detail Requirements for
ALTA/ACSM Land Title Surveys (Urban) (1992), including items 1, 2, 3, 4, 6, 7a,
7b, 8, 9, 10, 11 and 13 of Table A
<PAGE>
thereof and such other information as the Lender may reasonably request, and
certified in a manner acceptable to the Lender.
UCC chattel lien searches from the appropriate office in Hennepin County,
Minnesota, and from the office of the Secretary of State of Minnesota, covering
the name of the Borrower.
A written environmental assessment addressed to the Lender, conducted by an
environmental engineer or consultant acceptable to the Lender, setting forth the
results of an investigation of the Project, containing an analysis and
evaluation of any and all environmental risks associated with the Project, and
concluding that there is no significant risk of any hazardous materials
contamination of any portion of the Project.
Insurance policies or certificates thereof in form satisfactory to the Lender,
satisfying the requirements of Section 1.4 of the Mortgage.
A flood check satisfactory to the Lender and satisfying the requirements of 42
U.S.C. Section 4104b and any rules and regulations promulgated pursuant thereto.
Evidence acceptable to Lender and Title Company that the Improvements have been
completed in accordance with the plans and specifications approved by Lender and
all costs of such work have been paid in full.
A Uniform Land Use Confirmation Form in form and substance satisfactory to the
Lender.
An unconditional certificate of occupancy for the Project issued by the City of
Brooklyn Park and all other licenses and permits necessary for lawful occupation
and use of the Project for its intended purposes, including, without limitation,
an emission facility permit with respect to the Project, issued by the Minnesota
Pollution Control Agency.
A written evaluation report addressed to the Lender, prepared by an architect,
engineer, or other consultant acceptable to the Lender, setting forth the
results of a physical inspection of the Project.
Two (2) complete sets of the final working plans, including drawings,
specifications, details and manuals, for the Improvements ("Plans"). All
mechanical, electrical, structural and other specialized drawings shall be
signed by licensed engineers of the respective disciplines normally responsible
for such drawings, in addition to Pope Associates, Inc. (the "Project
Architect").
Soil reports on the Land, showing that the soil will adequately support the
Improvements when constructed in accordance with the Plans.
A Certificate of Substantial Completion addressed to the Borrower and the
Lender, from the Project Architect.
<PAGE>
An itemized, certified statement of actual costs of the Project, signed and
sworn to by the Borrower, Ryan Construction Company of Minnesota, Inc. and the
Project Architect.
Such other documents as the Lender may reasonably require to assure compliance
with the requirements of this Agreement.
<PAGE>
SCHEDULE V
ADDITIONAL COVENANTS
Until the Note and all of the other Obligations shall have been paid and
performed in full, unless the Lender shall otherwise consent in writing:
MERGER. The Borrower will not merge or consolidate or enter into any
analogous reorganization or transaction with any Person or liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution).
SALE OF ASSETS. The Borrower will not sell, transfer, lease or otherwise
convey all or any substantial part of its assets except for sales and leases of
inventory in the ordinary course of business.
DIVIDENDS. The Borrower will not pay any dividends or otherwise make any
distributions on, or redemptions of, any of its outstanding stock.
INVESTMENTS. The Borrower will not make any loans, advances or extensions
of credit to any other Person (except for trade and customer accounts receivable
for inventory sold or services rendered in the ordinary course of business and
payable in accordance with customary trade terms) or purchase or acquire any
stock or other debt or equity securities of or any interest in any other Person
or any integral part of any business or the assets comprising such business or
part thereof, except for:
(a) Investments in readily marketable direct obligations issued or
unconditionally guaranteed by the United States government or any agency thereof
and supported by the full faith and credit of the United States.
(b) Certificates of deposit or bankers' acceptances issued by any
commercial bank organized under the laws of the United States or any State
thereof which has (i) combined capital and surplus of at least $100,000,000, and
(ii) a credit rating with respect to its unsecured indebtedness from a
nationally recognized rating service that is satisfactory to the Lender.
(c) Commercial paper given the highest rating by a nationally
recognized rating service.
(d) Repurchase agreements relating to securities of the kind
described in clause (a) above.
(e) Other readily marketable investments in debt securities which are
reasonably acceptable to the Lender.
(f) Travel advances to officers and employees in the ordinary course
of business.
<PAGE>
Any investments under clauses (a), (b), (c) or (d) above must mature within
three years, with an average maturity date of fifteen (15) months of less, of
the acquisition thereof by the Borrower.
LIENS. The Borrower will not create, incur, assume or suffer to exist any
Lien, or enter into any arrangement for the acquisition of any property through
conditional sale, lease-purchase or other title retention agreements except:
(a) Liens granted to the Lender.
(b) Liens existing on the date of this Agreement and disclosed in the
Title Policy or heretofore disclosed in writing by the Borrower to the Lender.
(c) Deposits or pledges to secure payment of workers' compensation,
unemployment insurance, old age pensions or other social security obligations
arising in the ordinary course of business of the Borrower.
(d) Liens for taxes, fees, assessments and governmental charges not
delinquent.
(e) Liens of carriers, warehousemen, mechanics and materialmen, and
other like Liens arising in the ordinary course of business, for sums not due.
(f) Liens incurred or deposits or pledges made or given in connection
with, or to secure payment of, indemnity, performance or other similar bonds.
(g) Encumbrances in the nature of zoning restrictions, easements and
rights or restrictions of record on the use of real property and landlord's
Liens under leases on the premises rented, which do not materially detract from
the value of such property or impair the use thereof in the business of the
Borrower.
CONTINGENT OBLIGATIONS. The Borrower will not guarantee or otherwise become
liable on the indebtedness of any other Person.
LEVERAGE RATIO. The Borrower will not permit its Leverage Ratio (the ratio
of its Total Liabilities to its Tangible Net Worth) to be more than 1.0 to 1.0
as of the last day of any fiscal quarter.
CASH FLOW LEVERAGE RATIO. The Borrower will not permit the Cash Flow
Leverage Ratio, as of the last day of any fiscal quarter for the four
consecutive fiscal quarters ending on that date, to be greater than 5.0 to 1.
<PAGE>
COVERAGE RATIO. The Borrower will not permit the Coverage Ratio, as of the
last day of any fiscal quarter for the four consecutive fiscal quarters ending
on that date, to be less than 1.5 to 1.
TIF AGREEMENTS. The Borrower shall comply with all terms and provisions of
the TIF Agreements and keep the TIF Agreements in full force and effect and in
good standing and shall comply with all laws and regulations with respect
thereto. Borrower shall either deliver or authorize the delivery of the original
TIF Note to Lender immediately upon the issuance thereof by the Brooklyn Park
Economic Development Authority. Failure to deliver the original signed TIF Note
to Lender immediately after its issuance by the Brooklyn Park Economic
Development Authority or by March 10, 1997, whichever occurs first, shall be an
Event of Default hereunder and shall entitle Lender to pursue any or all of the
remedies available to Lender upon Event of Default as provided in the Loan
Documents, at law or equity.
EMISSION FACILITY PERMIT. The Borrower shall comply with all terms and
provisions of the emission facility permit issued by the Minnesota Pollution
Control Agency with respect to the Project and keep such permit in full force
and effect and in good standing and shall comply with all laws and regulations
with respect thereto.
DEFINITIONS:
For purposes hereof, the following definitions have the following meanings:
"CASH FLOW LEVERAGE RATIO": For any period of determination with respect to
the Borrower, the ratio of
(a) the sum (without duplication) of the aggregate principal amount of all
outstanding capitalized lease obligations and that portion of Total
Liabilities bearing interest determined as of the last day of that period
payable during the ensuing four consecutive fiscal quarters,
to
(b) EBITDA minus the sum of (i) cash tax expenses and (ii) expenditures for
fixed and capital assets not financed, in each case determined for the
previous four fiscal quarters in accordance with GAAP.
"COVERAGE RATIO": For any period of determination with respect to the
Borrower, the ratio of its EBITDA for the previous four fiscal quarters to
projected payments of principal and interest on all indebtedness of the Borrower
for the following four fiscal quarters.
"EBITDA": For any period of determination, the net income of the Borrower
before deductions for income taxes, interest expense, depreciation and
amortization, all as determined in accordance with GAAP. For purposes of
determining the Cash Flow Leverage Ratio and the Coverage Ratio, EBITDA for 1996
will be adjusted as follows: by adding back the legal
<PAGE>
expenses of $4,200,000 related to the COBE lawsuit NET of the associated tax
benefit using an estimated tax rate of 28%, for a net add-back of $3,024,000,
and capital expenditures will exclude the capital expenses related to the
initial construction of the Improvements, which total approximately $9,500,000).
"TANGIBLE NET WORTH": As defined in accordance with GAAP (and shall be
reduced by all proper reserves), except that in no event shall it include any
receivable due from officers, directors, shareholders or employees of the
Borrower, or patents, copyrights, trademarks, any goodwill, or any
organizational costs.
"TOTAL LIABILITIES": At the time of any determination, the amount of all
items of Indebtedness of the Borrower that would constitute "liabilities" for
balance sheet purposes in accordance with GAAP.
"CONDITIONAL CERTIFICATE OF OCCUPANCY": On or before February 7, 1997
Borrower shall deliver to Lender a Conditional Certificate of Occupancy from the
City of Brooklyn Park which allows Borrower to occupy the Project and which will
remain in effect until such time as an unconditional Certificate of Occupancy is
issued to Borrower.
<PAGE>
SCHEDULE V-1
COVENANT COMPLIANCE CERTIFICATE
To: First Bank National Association
THE UNDERSIGNED HEREBY CERTIFIES THAT:
(1) I am the duly elected chief financial officer of AVECOR Cardiovascular
Inc. (the "Borrower");
(2) I have reviewed the terms of the Loan Agreement dated as of
January __, 1997 between the Borrower and First Bank National Association (the
"Loan Agreement") and I have made, or have caused to be made under my
supervision, a detailed review of the transactions and conditions of the
Borrower during the accounting period covered by the Attachment hereto;
(3) The examination described in paragraph (2) did not disclose, and I
have no knowledge, whether arising out of such examinations or otherwise, of the
existence of any condition or event which constitutes a Default or an Event of
Default (as such terms are defined in the Loan Agreement) during or at the end
of the accounting period covered by the Attachment hereto or as of the date of
this Certificate, except as described below (or on a separate attachment to this
Certificate). The exceptions listing, in detail, the nature of the condition or
event, the period during which it has existed and the action which the Borrower
has taken, is taking or proposes to take with respect to each such condition or
event are as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The foregoing certification, together with the computations in the
Attachment hereto and the financial statements delivered with this Certificate
in support hereof, are made and delivered this ___ day of ___________, ____,
pursuant to Section 5.1 (e) of the Loan Agreement.
AVECOR CARDIOVASCULAR INC.
By
-------------------------------------
Name
----------------------------------
Title
----------------------------------
<PAGE>
ATTACHMENT TO COMPLIANCE CERTIFICATE
AS OF_________, __________ WHICH PERTAINS
TO THE PERIOD FROM __________, ________
TO _________, ________
Leverage Ratio (Maximum 1.0 to 1.0) ___ to 1.0
Cash Flow Leverage Ratio (Maximum 5.0 to 1.0) ___ to 1.0
Coverage Ratio (Minimum 1.5 to 1.0) ___ to 1.0
<PAGE>
EXHIBIT 10.26
NOTE
$5,167,500.00 Minneapolis, Minnesota
January 30, 1997
FOR VALUE RECEIVED, AVECOR CARDIOVASCULAR INC., a Minnesota corporation
("Borrower"), hereby promises to pay to the order of FIRST BANK NATIONAL
ASSOCIATION, a national banking association ("Lender", which term shall include
any future holder hereof), at 3305 Plymouth Boulevard, Plymouth, Minnesota
55447, or at such other place as Lender may from time to time designate in
writing, in lawful money of the United States of America, the principal sum of
FIVE MILLION ONE HUNDRED SIXTY-SEVEN THOUSAND FIVE HUNDRED and no/100 Dollars
($5,167,500.00) or so much thereof as may be advanced hereunder and to pay
interest on the outstanding principal balance hereof from time to time at the
rate of eight and eleven one-hundredths percent (8.11%) per annum. Interest
shall be computed on the basis of actual days elapsed and a year of 360 days.
Accrued interest from the date hereof shall be paid on the first day of
February, 1997. Commencing on the first day of March, 1997, and on the same day
of each month thereafter, Borrower shall make monthly payments equal to the sum
of (a) $21,531.25 of principal plus (b) all accrued and unpaid interest, all
payments to be applied first to accrued interest and then to reduction in
principal. The total unpaid principal amount and all interest thereon shall be
payable on February 1, 2002 (the "Maturity Date"). THIS NOTE REQUIRES A BALLOON
PAYMENT.
Borrower may prepay this Note in whole or in part at any time upon three
(3) business days' prior written notice to Lender, and if in part from time to
time, during the entire term of this Note, provided that at the time of such
prepayment Borrower pays Lender a prepayment premium as calculated in accordance
with the following provisions of this paragraph. If at the time of any
prepayment (whether voluntary or involuntary), the Government Yield, as
hereinafter defined, is less than the Note Rate, as hereinafter defined,
Borrower shall pay to Lender a prepayment premium calculated as follows: the
amount prepaid shall be multiplied by (a) the amount by which the Note Rate
exceeds the Government Yield times (b) a fraction, the numerator of which is the
number of days remaining to the Maturity Date and the denominator of which is
360. The resulting product shall then be divided by the number of whole months
(using a 30-day month) then remaining to the Maturity Date, yielding a quotient
(the "Quotient"). The amount of the prepayment premium shall be the present
value (determined in accordance with standard financial practice) on the date of
prepayment (using the Government Yield as of the date of prepayment as the
discount factor) of a stream of equal monthly payments in number equal to the
number of whole months (using a 30-day month) then remaining to the Maturity
Date, with the amount of each hypothetical monthly payment equal to the Quotient
and with the first payment payable thirty days after the date of prepayment. The
term "GOVERNMENT YIELD" means the yield (converted as necessary to the
equivalent semi-annual compound rate) on U. S. Treasury Securities having a
maturity date closest to the Maturity Date. "U.S. Treasury Securities" means
actively traded U. S. Treasury bonds, bills and notes and, if more than one
issue of U. S. Treasury Securities is scheduled to mature on or about the
Maturity Date, then to the extent possible the U. S. Treasury Security issued
most recently prior to the date of
<PAGE>
determination will be chosen as the basis of the Government Yield. The term
"NOTE RATE" means the rate of interest payable under this Note as of the date of
determination. No prepayment shall suspend any required payments of either
principal or interest on this Note or reduce the amount of any scheduled
payment. Such prepayment premium shall be payable whether this Note is prepaid
voluntarily or involuntarily (including any such involuntary prepayment as a
result of Lender's acceleration of this Note on account of an Event of Default
(as defined in the Loan Agreement) or the exercise of Lender's rights under
"due-on-sale," "due-on-encumbrance" or similar provisions in the Mortgage, or in
connection with any bankruptcy proceeding involving the property subject to the
Mortgage or any foreclosure of such property). Notwithstanding anything to the
contrary contained herein, however, no prepayment premium shall be payable in
connection with any prepayment of this Note made with insurance proceeds or
condemnation awards or proceeds unless such insurance proceeds or condemnation
awards or proceeds are not made available to repair, rebuild or restore the
property subject to the Mortgage by reason of the existence of an Event of
Default.
This Note is secured by a Mortgage, Security Agreement, Assignment of
Leases and Rents and Fixture Financing Statement of even date herewith (the
"Mortgage") on real property located in Hennepin County, Minnesota, therein
described. This Note is the Note referred to in the Loan Agreement of even date
herewith between Borrower and Lender (the "Loan Agreement"), and is subject to
the additional terms and conditions set forth in the Loan Agreement and the
documents referred to therein.
If a payment due hereunder is not made within five days after the date when
due, Borrower shall pay to Lender a late payment charge of 5% of the amount of
the overdue payment to compensate Lender for a portion of the cost related to
handling the overdue payment. After an Event of Default, as defined in the Loan
Agreement, then the entire principal sum evidenced by this Note, together with
all accrued and unpaid interest, shall, at the option of the holder hereof, bear
interest at the rate per annum (the "Default Rate") equal to 5% in excess of the
rate of interest per annum which would otherwise be payable hereunder, and
become immediately due and payable without further notice (except as provided in
the Loan Agreement), demand or presentment for payment, and without any relief
whatever from any valuation or appraisement laws. Failure to exercise any option
provided herein shall not constitute a waiver of the right to exercise the same
in the event of any subsequent default. Borrower agrees that if, and as often
as, this Note is given to an attorney for collection or to defend or enforce any
of Lender's rights hereunder, Borrower will pay to the Lender Lender's
reasonable attorneys' fees together with all court costs and other expenses paid
by Lender.
Borrower waives presentment, protest and demand, notice of protest, demand
and of dishonor and nonpayment of this Note and any lack of diligence or delays
in collection or enforcement of this Note. Borrower agrees that this Note, or
any payment hereunder, may be extended from time to time, and Borrower consents
to the release of any party liable for the obligation evidenced by this Note,
the release of any of the security for this Note, the acceptance of any other
security therefor, or any other indulgence or forbearance whatsoever, all
without notice to any party and without affecting the liability of Borrower.
2
<PAGE>
This Note shall be construed under and governed by the laws of the State of
Minnesota, without giving effect to conflict of laws or principles thereof, but
giving effect to federal laws of the United States applicable to national banks.
Whenever possible, each provision of this Note and any other statement,
instrument or transaction contemplated hereby or relating hereto, shall be
interpreted in such manner as to be effective and valid under such applicable
law, but, if any provision of this Note or any other statement, instrument or
transaction contemplated hereby or relating hereto shall be held to be
prohibited or invalid under such applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note or any other statement, instrument or transaction contemplated hereby or
relating hereto.
At the option of Lender, this Note may be enforced in any Federal Court or
Minnesota State Court sitting in Minneapolis or St. Paul, Minnesota; and
Borrower consents to the jurisdiction and venue of any such Court and waives any
argument that venue in such forums is not convenient. In the event Borrower
commences any action in another jurisdiction or venue under any tort or contract
theory arising directly or indirectly from the relationship created by this
Note, Lender at its option shall be entitled to have the case transferred to one
of the jurisdictions and venues above-described, or if such transfer cannot be
accomplished under applicable law, to have such case dismissed without
prejudice.
Borrower and Lender each irrevocably waives any and all right to trial by
jury in any legal proceeding arising out of or relating to this Note or any of
the Loan Documents (as defined in the Loan Agreement) or the transactions
contemplated hereby or thereby.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date first
above written.
AVECOR CARDIOVASCULAR INC.
By /s/ Gregory J. Melsen
-----------------------------------
Gregory J. Melsen
Its Chief Financial Officer
3
<PAGE>
EXHIBIT 10.27
THIS INSTRUMENT WAS PREPARED BY,
AND WHEN RECORDED SHOULD BE
RETURNED TO:
Dorsey & Whitney LLP (JFC)
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
MORTGAGE, SECURITY AGREEMENT,
ASSIGNMENT OF LEASES AND RENTS
AND FIXTURE FINANCING STATEMENT
THIS MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND
FIXTURE FINANCING STATEMENT (this "Mortgage") is made as of January 30, 1997, by
AVECOR CARDIOVASCULAR INC., a Minnesota corporation ("Borrower"), having its
principal offices at 13010 County Road 6, Plymouth, MN 55441, in favor of FIRST
BANK NATIONAL ASSOCIATION, a national banking association ("Lender"), having an
office at 3305 Plymouth Boulevard, Plymouth, Minnesota 55447.
RECITALS
A. Lender has lent, or agreed to lend, to Borrower the principal sum of
FIVE MILLION ONE HUNDRED SIXTY-SEVEN THOUSAND FIVE HUNDRED and no/100 Dollars
($5,167,500.00) (the "Loan"), to be repaid with interest thereon, as evidenced
by Borrower's Note (the "Note", which term shall include any amendment,
modification, supplement, extension, renewal, replacement or restatement
thereof), which Loan is the subject of a Loan Agreement between Borrower and
Lender (the "Loan Agreement", which term shall include any amendment,
modification, supplement, extension, renewal, replacement or restatement
thereof). The Note, the Loan Agreement and any other Loan Document (as defined
in the Loan Agreement) are each dated the same date as this Mortgage, are hereby
incorporated by reference, and, together with this Mortgage, as any of the same
may be amended, modified, supplemented, extended, renewed, replaced or restated,
are sometimes collectively referred to as the "Loan Documents".
B. The obligations secured by this Mortgage (the "Obligations") are as
follows:
(i) the principal amount of $5,167,500.00 or so much thereof as
may be advanced by Lender under the Note and pursuant to the Loan
Agreement; plus
(ii) interest on the amount advanced and unrepaid, at the
interest rate or rates provided in the Note; plus
<PAGE>
(iii) all other amounts payable by Borrower and all other
agreements of Borrower under the Loan Documents as the same now exist or
may hereafter be amended.
C. The Obligations shall mature on or before February 1, 2002 (the
"Maturity Date").
D. The maximum principal indebtedness secured hereby is $5,167,500.00
plus amounts which may be advanced by Lender in protection of the Mortgaged
Property or this Mortgage.
NOW, THEREFORE, Borrower, in consideration of Lender making the Loan, and
to secure the Loan and payment and performance of the Obligations, hereby
grants, bargains, sells, conveys and mortgages to Lender, its successors and
assigns, forever, with power of sale, and grants to Lender, its successors and
assigns, a security interest in, the following, all of which is called the
"Mortgaged Property":
A. LAND AND IMPROVEMENTS
The land described in Exhibit A attached hereto and all mineral rights,
hereditaments, easements and appurtenances thereto (collectively the "Land"),
and all improvements and structures thereon (the "Improvements"); and
B. FIXTURES AND PERSONAL PROPERTY
All fixtures (the "Fixtures"), and all machinery, equipment and personal
property (collectively the "Personal Property") now or hereafter located on, in
or under the Land and the Improvements, used in connection with the Land or the
Improvements, and which are owned by Borrower or in which Borrower has an
interest, including any construction and building materials stored on and to be
included in the Improvements, plus any repairs, replacements and betterments to
any of the foregoing and the proceeds and products thereof; and
C. LEASES AND RENTS
All rights of Borrower with respect to tenants or occupants now or
hereafter occupying any part of the Land or the Improvements, if any, including
all leases and licenses and rights in connection therewith, whether oral or
written (collectively the "Leases"), and all rents, income, both from services
and occupation, royalties, revenues and payments, including prepayments and
security deposits (collectively the "Rents"), which are now or hereafter due or
to be paid in connection with the Land, the Improvements, the Fixtures or the
Personal Property; and
D. GENERAL INTANGIBLES
All general intangibles of Borrower which relate to any of the Land, the
Improvements, the Fixtures, the Personal Property, the Leases or the Rents,
including proceeds of insurance and condemnation or conveyance of the Land and
the Improvements, accounts, trade names, contract rights, accounts receivable
and bank accounts, including, without limitation, all right, title and
2
<PAGE>
interest of Borrower in, to and under the Development Agreement referred to as
item 9 in Exhibit A hereto (including, without limitation, the right to receive
payments pursuant to Section 4.3 thereof and pursuant to the Note to be issued
pursuant to said Development Agreement by the Brooklyn Park Economic Development
Authority); and
E. AFTER ACQUIRED PROPERTY AND PROCEEDS
All after acquired property similar to the property herein described and
conveyed which may be subsequently acquired by Borrower and used in connection
with the Land, the Improvements, the Fixtures, the Personal Property and other
property; and all cash and non-cash proceeds and products of all of the
foregoing property.
TO HAVE AND TO HOLD the same, and all estate therein, together with all the
rights, privileges and appurtenances thereunto belonging, to the use and benefit
of Lender, its successors and assigns, forever.
PROVIDED NEVERTHELESS, should Borrower pay and perform all the Obligations,
then these presents will be of no further force and effect, and this Mortgage
shall be satisfied by Lender, at the expense of Borrower.
This Mortgage constitutes an assignment of rents and profits within the
meaning of Minnesota Statutes, Sections 559.17 and 576.01, and is intended to
comply fully with the provisions thereof, and to afford Lender, to the fullest
extent allowed by law, the rights and remedies of a mortgage lender or secured
lender pursuant thereto.
This Mortgage also constitutes a security agreement within the meaning of
the Uniform Commercial Code as in effect in the State of Minnesota (the "UCC"),
with respect to all property described herein as to which a security interest
may be granted and/or perfected pursuant to the UCC, and is intended to afford
Lender, to the fullest extent allowed by law, the rights and remedies of a
secured party under the UCC.
BORROWER FURTHER agrees as follows:
ARTICLE I
AGREEMENTS
SECTION 1.1 PERFORMANCE OF OBLIGATIONS; INCORPORATION BY REFERENCE.
Borrower shall pay and perform the Obligations. Time is of the essence hereof.
All of the covenants, obligations, agreements, warranties and representations of
Borrower contained in the Loan Agreement and the other Loan Documents and all of
the terms and provisions thereof, are hereby incorporated herein and made a part
hereof by reference as if fully set forth herein.
SECTION 1.2 FURTHER ASSURANCES. If Lender requests, Borrower shall sign
and deliver and cause to be recorded as Lender shall direct any further
mortgages, instruments of further
3
<PAGE>
assurance, certificates and other documents as Lender reasonably may consider
necessary or desirable in order to perfect, continue and preserve the
Obligations and Lender's rights, title, estate, liens and interests under the
Loan Documents. Borrower further agrees to pay to Lender, upon demand, all costs
and expenses incurred by Lender in connection with the preparation, execution,
recording, filing and refiling of any such documents, including attorneys' fees
and title insurance costs.
SECTION 1.3 SALE, TRANSFER, ENCUMBRANCE. If Borrower sells, conveys,
transfers or otherwise disposes of, or encumbers, any part of its interest in
the Mortgaged Property, whether voluntarily, involuntarily or by operation of
law, without the prior written consent of Lender, Lender shall have the option
to declare the Obligations immediately due and payable without notice. Included
within the foregoing actions requiring prior written consent of Lender are: (a)
sale by deed or contract for deed; (b) mortgaging or granting a lien on the
Mortgaged Property; (c) leasing any portion of the Improvements or the Mortgaged
Property; (d) a transfer which changes the persons in control of Borrower or
which transfers more than 25% of the beneficial interest in Borrower, except for
transfers to related or affiliated entities, and (e) a transfer in the ownership
of stock of Borrower which will result in one person or entity or his, her or
its family members or affiliates controlling Borrower. Borrower shall give
notice of any proposed action to Lender at least thirty (30) days prior to
taking such action. Borrower shall pay all costs and expenses incurred by Lender
in evaluating any such action. Lender may condition such consent upon
modification of the Loan Documents or payment of fees. No such action shall
relieve Borrower from liability for the Obligations. The consent by Lender to
any action shall not constitute a waiver of the necessity of such consent to any
subsequent action.
SECTION 1.4 INSURANCE. Borrower shall obtain, maintain and keep in full
force and effect (and upon request of Lender shall furnish to Lender copies of)
policies of insurance as described in, and meeting the requirements set forth
in, Exhibit B attached hereto, and upon request of Lender shall furnish to
Lender proof of payment of all premiums for such insurance. At least ten (10)
days prior to the termination of any such coverage, Borrower shall provide
Lender with evidence satisfactory to Lender that such coverage will be renewed
or replaced upon termination with insurance that complies with the provisions of
this Section. Borrower, at its sole cost and expense, from time to time when
Lender shall so request, will provide Lender with evidence, in a form acceptable
to Lender, of the full insurable replacement cost of the Mortgaged Property. All
property (including boiler and machinery) and liability insurance policies
maintained by Borrower pursuant to this Section shall (i) include effective
waivers by the insurer of all claims for insurance premiums against Lender, and
(ii) provide that any losses shall be payable notwithstanding (a) any act of
negligence by Borrower or Lender, (b) any foreclosure or other proceedings or
notice of foreclosure sale relating to the Mortgaged Property, or (c) any
release from liability or waiver of subrogation rights granted by the insured.
All insurance policies maintained by Borrower pursuant to the foregoing
provisions shall respond on a primary basis relative to any other insurance
carried by Lender in the event of loss. Insurance terms not otherwise defined
herein shall be interpreted consistent with insurance industry usage.
SECTION 1.5 TAXES, LIENS AND CLAIMS, UTILITIES. Borrower, at least five
(5) days before any penalty attaches thereto, shall pay and discharge, or cause
to be paid and discharged, all
4
<PAGE>
taxes, assessments and governmental charges and levies (collectively
"Impositions") imposed upon or against the Mortgaged Property or the Rents, or
upon or against the Obligations, or upon or against the interest of Lender in
the Mortgaged Property or the Obligations, except Impositions measured by the
income of Lender. Borrower shall provide evidence of such payment at Lender's
request. Borrower shall keep the Mortgaged Property free and clear of all liens,
encumbrances, easements, covenants, conditions, restrictions and reservations
(collectively "Liens") except those listed on Exhibit A attached hereto (the
"Permitted Encumbrances"). Borrower shall pay or cause to be paid when due all
charges or fees for utilities and services supplied to the Mortgaged Property.
Notwithstanding anything to the contrary contained in this Section, Borrower
shall not be required to pay or discharge any Imposition or Lien so long as
Borrower shall in good faith, and after giving notice to Lender, contest the
same by appropriate legal proceedings. If Borrower contests any Imposition or
Lien against the Mortgaged Property, Borrower shall provide such security to
Lender as Lender shall reasonably require against loss or impairment of
Borrower's ownership of or Lender's lien on the Mortgaged Property and shall in
any event pay such Imposition or Lien before loss or impairment occurs.
SECTION 1.6 ESCROW PAYMENTS. If requested by Lender, Borrower shall
deposit with Lender monthly on the same date as payments are due under the Note
the amount reasonably estimated by Lender to be necessary to enable Lender to
pay, at least five (5) days before they become due, all Impositions against the
Mortgaged Property and the premiums upon all insurance required hereby to be
maintained with respect to the Mortgaged Property. All funds so deposited shall
secure the Obligations. Such deposits shall be held by Lender, or its nominee,
in a non-interest bearing account and may be commingled with other funds. Such
deposits shall be used to pay such Impositions and insurance premiums when due.
Any excess sums so deposited shall be retained by Lender and shall be applied to
pay said items in the future, unless the Obligations have been paid and
performed in full, in which case all excess sums so paid shall be refunded to
Borrower. Upon the occurrence of an Event of Default, Lender may apply any funds
in said account against the Obligations in such order as Lender may determine.
SECTION 1.7 MAINTENANCE AND REPAIR; COMPLIANCE WITH LAWS. Borrower shall
cause the Mortgaged Property to be operated, maintained and repaired in safe and
good repair, working order and condition, reasonable wear and tear excepted;
shall not commit or permit waste thereof; except as provided in any Loan
Document, shall not remove, demolish or substantially alter the design or
structural character of any Improvements without the prior written consent of
Lender; shall complete or cause to be completed forthwith any Improvements which
are now or may hereafter be under construction upon the Land; shall comply or
cause compliance with all laws, statutes, ordinances and codes, and governmental
rules, regulations and requirements, applicable to the Mortgaged Property or the
manner of using or operating the same, and with any covenants, conditions,
restrictions and reservations affecting the title to the Mortgaged Property, and
with the terms of all insurance policies relating to the Mortgaged Property; and
shall obtain and maintain in full force and effect all consents, permits and
licenses necessary for the use and operation of the Mortgaged Property.
SECTION 1.8 INDEMNITY. Borrower shall indemnify Lender and its
directors, officers, agents and employees (collectively the "Indemnified
Parties") against, and hold the Indemnified
5
<PAGE>
Parties harmless from, all losses, damages, suits, claims, judgments, penalties,
fines, liabilities, costs and expenses by reason of, or on account of, or in
connection with the construction, reconstruction or alteration of the Mortgaged
Property, or any accident, injury, death or damage to any person or property
occurring in, on or about the Mortgaged Property or any street, drive, sidewalk,
curb or passageway adjacent thereto. The indemnity contained in this Section
shall include costs of defense of any such claim asserted against an Indemnified
Party, including attorneys' fees. The indemnity contained in this Section shall
survive payment and performance of the Obligations and satisfaction and release
of this Mortgage and any foreclosure thereof or acquisition of title by deed in
lieu of foreclosure.
SECTION 1.9 APPRAISALS. Lender shall have the right from time to time,
but not more often than once during any twelve (12)-month period, to obtain an
appraisal of the Mortgaged Property in form and substance satisfactory to Lender
and prepared by an independent MAI appraiser selected by Lender. Borrower shall
reimburse Lender for the cost incurred for any such appraisal within ten (10)
days following demand therefor by Lender, if Lender has reason to believe that
the value of the Mortgaged Property has declined materially, and such appraisal
determines that the original principal amount of the Note exceeds seventy-five
percent (75%) of the value of the Mortgaged Property.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties:
SECTION 2.1 OWNERSHIP, LIENS, COMPLIANCE WITH LAWS. Borrower owns the
Mortgaged Property free from all Liens, except the Permitted Encumbrances. All
applicable zoning, environmental, land use, subdivision, building, fire, safety
and health laws, statutes, ordinances, codes, rules, regulations and
requirements affecting the Mortgaged Property permit the current use and
occupancy thereof, and Borrower has obtained all consents, permits and licenses
required for such use. Borrower has examined and is familiar with all applicable
covenants, conditions, restrictions and reservations, and with all applicable
laws, statutes, ordinances, codes and governmental rules, regulations and
requirements affecting the Mortgaged Property, and the Mortgaged Property
complies with all of the foregoing.
SECTION 2.2 USE. The Mortgaged Property is not homestead property nor is
it agricultural property or in agricultural use.
SECTION 2.3 UTILITIES; SERVICES. The Mortgaged Property is serviced by
all necessary public utilities, and all such utilities are operational and have
sufficient capacity. There is no contract or agreement providing for services to
or maintenance of the Mortgaged Property which cannot be canceled upon 30 days'
or less notice.
6
<PAGE>
ARTICLE III
CASUALTY; CONDEMNATION
SECTION 3.1 CASUALTY, REPAIR, PROOF OF LOSS. If any portion of the
Mortgaged Property shall be damaged or destroyed by any cause (a "Casualty"),
Borrower shall:
(a) give immediate notice to the Lender; and
(b) promptly commence and diligently pursue to completion (in accordance
with plans and specifications approved by Lender) the restoration, repair and
rebuilding of the Mortgaged Property as nearly as possible to its value,
condition and character immediately prior to the Casualty; and
(c) if the Casualty is covered by insurance, immediately make proof of
loss and collect all insurance proceeds, all such proceeds to be payable to
Lender or as Lender shall direct. If an Event of Default shall be in existence,
or if Borrower shall fail to provide notice to Lender of filing proof of loss,
or if Borrower shall not be diligently proceeding, in Lender's reasonable
opinion, to collect such insurance proceeds, then Lender may, but is not
obligated to, make proof of loss, and is authorized, but is not obligated, to
settle any claim with respect thereto, and to collect the proceeds thereof.
Borrower shall not accept any settlement of an insurance claim, the result of
which shall be a payment which is $10,000 or more less than the full amount of
the claim, without the prior written consent of Lender.
SECTION 3.2 USE OF INSURANCE PROCEEDS. Lender shall make the net
insurance proceeds received by it (after reimbursement of Lender's out-of pocket
costs of collecting and disbursing the same) available to Borrower to pay the
cost of restoration, repair and rebuilding of the Mortgaged Property, subject to
the following conditions:
(a) There shall be no Event of Default in existence at the time of any
disbursement of the insurance proceeds.
(b) Lender shall have determined, in its reasonable discretion, that the
cost of restoration, repair and rebuilding is and will be equal to or less than
the amount of insurance proceeds and other funds deposited by Borrower with
Lender.
(c) Lender shall have determined, in its reasonable discretion, that the
restoration, repair and rebuilding can be completed in accordance with plans and
specifications approved by Lender (such approval not to be unreasonably
withheld), in accordance with codes and ordinances and in accordance with the
terms, and in any event not less than six (6) months prior to the Maturity Date.
(d) All funds shall be held in an interest-bearing account and shall be
disbursed, at Lender's option, in accordance with Lender's customary
disbursement procedures for construction loans.
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<PAGE>
(e) The Casualty shall have occurred more than twelve (12) months prior to
the Maturity Date.
If any of these conditions shall not be satisfied, then Lender shall have the
right to use the insurance proceeds to prepay the Loan in accordance with the
Note. If any insurance proceeds shall remain after completion of the
restoration, repair and rebuilding of the Mortgaged Property, they shall be
disbursed to Borrower, or at the Lender's discretion, used to prepay the Loan in
accordance with the Note.
SECTION 3.3 CONDEMNATION. If any portion of the Mortgaged Property shall
be taken, condemned or acquired pursuant to exercise of the power of eminent
domain or threat thereof (a "Condemnation"), Borrower shall:
(a) give immediate notice thereof to Lender, and send a copy of each
document received by Borrower in connection with the Condemnation to Lender
promptly after receipt; and
(b) diligently pursue any negotiation and prosecute any proceeding in
connection with the Condemnation at Borrower's expense. If an Event of Default
shall be in existence, or if Borrower, in Lender's reasonable opinion, shall not
be diligently negotiating or prosecuting the claim, Lender is authorized, but
not required, to negotiate and prosecute the claim and appear at any hearing for
itself and on behalf of Borrower and to compromise or settle all compensation
for the Condemnation. Lender shall not be liable to Borrower for any failure by
Lender to collect or to exercise diligence in collecting any such compensation.
Borrower shall not compromise or settle any claim resulting from the
Condemnation if such settlement shall result in payment of $10,000 or more less
than Lender's reasonable estimate of the damages therefrom. All awards shall be
paid to Lender.
SECTION 3.4 USE OF CONDEMNATION PROCEEDS. Lender shall make the net
proceeds of any Condemnation received by it (after reimbursement of Lender's
out-of-pocket costs of collecting and disbursing the same) available to Borrower
for restoration, repair and rebuilding of the Mortgaged Property, subject to the
following conditions:
(a) There shall be no Event of Default in existence at the time of any
disbursement of the condemnation proceeds.
(b) Lender shall determined, in its reasonable discretion, that the cost
of restoration, repair and rebuilding is and will be equal to or less than the
amount of condemnation proceeds and other funds deposited by Borrower with
Lender.
(c) Lender shall have determined, in its reasonable discretion, that the
restoration, repair and rebuilding can be completed in accordance with plans and
specifications approved by Lender (such approval not to be unreasonably
withheld), in accordance with codes and
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ordinances and in accordance with the terms, and in any event not less than six
(6) months prior to the Maturity Date.
(d) All funds shall be held in an interest-bearing account and shall be
disbursed, at Lender's option, in accordance with Lender's customary
disbursement procedures for construction loans.
(e) The Condemnation shall have occurred more than twelve (12) months
prior to the Maturity Date.
If any of these conditions shall not be satisfied, then Lender shall have the
right to use the condemnation proceeds to prepay the Loan in accordance with the
Note. If any condemnation proceeds shall remain after completion of the
restoration, repair and rebuilding of the Mortgaged Property, they shall be
disbursed to Borrower, or at Lender's discretion, used to prepay the Loan in
accordance with the Note.
ARTICLE IV
DEFAULTS AND REMEDIES
SECTION 4.1 EVENTS OF DEFAULT. An Event of Default, as defined in the
Loan Agreement, shall constitute an Event of Default hereunder.
SECTION 4.2 REMEDIES. Upon the occurrence of an Event of Default
described in Sections 6.1(f), (g) or (h) of the Loan Agreement, all of the
Obligations shall be accelerated and become immediately due and payable without
notice or declaration to Borrower. Upon the occurrence of one or more other
Events of Default, all of the Obligations, at the option of Lender, shall be
accelerated and become immediately due and payable upon notice to Borrower. In
either event, the Obligations shall be due and payable without presentment,
demand or further notice of any kind. Lender shall have the right to proceed to
protect and enforce its rights by one or more of the following remedies:
(a) LENDER SHALL HAVE THE RIGHT TO BRING SUIT either for damages, for
specific performance of any agreement contained in any Loan Document, for the
foreclosure of this Mortgage, or for the enforcement of any other appropriate
legal or equitable remedy.
(b) LENDER SHALL HAVE THE RIGHT TO SELL THE MORTGAGED PROPERTY AT PUBLIC
AUCTION AND CONVEY THE SAME TO THE PURCHASER IN FEE SIMPLE, as provided by law,
Borrower to remain liable for any deficiency. Said sale may be as one tract or
otherwise, at the sole option of Lender. In the event of any sale of the
Mortgaged Property pursuant to any judgment or decree of any court or at public
auction or otherwise in connection with the enforcement of any of the terms of
this Mortgage, Lender, its successors or assigns, may become the purchaser, and
for the purpose of making settlement for or payment of the purchase price, shall
be entitled to deliver over and use the Note and any claims for interest accrued
and unpaid thereon, together with all other sums, with interest, advanced or
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secured hereby and unpaid hereunder, in order that there may be credited as paid
on the purchase price the total amount of the Obligations then due, including
principal and interest on the Note and all other sums, with interest, advanced
or secured hereby and unpaid hereunder or under any of the other Loan Documents.
(c) LENDER SHALL HAVE THE RIGHT TO OBTAIN THE APPOINTMENT OF A RECEIVER at
any time after the occurrence of an Event of Default. Lender may apply for the
appointment of a receiver to the district court for the county where the
Mortgaged Property or any part thereof is located, by an action separate from
any foreclosure of this Mortgage pursuant to Minnesota Statutes Chapter 580 or
pursuant to Minnesota Statutes Chapter 581, or as a part of the foreclosure
action under said Chapter 581 (it being agreed that the existence of a
foreclosure pursuant to said Chapter 580 or a foreclosure action pursuant to
said Chapter 581 is not a prerequisite to any action for a receiver hereunder).
Lender shall be entitled to the appointment of a receiver without regard to
waste, adequacy of the security or solvency of Borrower. The receiver, who shall
be an experienced property manager, shall collect (until the Obligations are
fully paid and satisfied and, in the case of a foreclosure sale, during the
entire redemption period) the Rents, and shall manage the Mortgaged Property,
execute Leases within or beyond the period of the receivership if approved by
the court and apply all rents, profits and other income collected by him in the
following order:
(i) to the payment of all reasonable fees of the receiver, if
any, approved by the court;
(ii) to the repayment of tenant security deposits, with interest
thereon, as required by Minnesota Statutes, Section 504.20;
(iii) to the payment when due of delinquent or current real estate
taxes or special assessments with respect to the Mortgaged Property, or the
periodic escrow for the payment of the same;
(iv) to the payment when due of premiums for insurance of the
type required by this Mortgage, or the periodic escrow for the payment of the
same;
(v) to the payment for the keeping of the covenants required of
a lessor or licensor pursuant to Minnesota Statutes, Section 504.18, subdivision
1;
(vi) to the payment of all expenses for normal maintenance of the
Mortgaged Property; and
(vii) the balance to Lender (a) if received prior to the
commencement of a foreclosure, to be applied to the Obligations, in such order
as Lender may elect and (b) if received after the commencement of a foreclosure,
to be applied to the amount required to be paid to effect a reinstatement prior
to foreclosure sale, or, after a foreclosure sale to any deficiency and
thereafter to the amount required to be paid to effect a redemption, all
pursuant to Minnesota Statutes, Sections 580.30, 580.23 and 581.10, with any
excess to be paid to Borrower.
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Provided, that if this Mortgage is not reinstated nor the Mortgaged Property
redeemed as provided by said Sections 580.30, 580.23 or 581.10, the entire
amount paid to Lender pursuant hereto shall be the property of Lender together
with all or any part of the Mortgaged Property acquired through foreclosure.
Lender shall have the right, at any time and without limitation, as
provided in Minnesota Statutes, Section 582.03, to advance money to the receiver
to pay any part or all of the items which the receiver should otherwise pay if
cash were available from the Mortgaged Property and sums so advanced, with
interest at the Default Rate set forth in the Note, shall be secured hereby, or
if advanced during the period of redemption shall be part of the sum required to
be paid to redeem from the sale.
(d) LENDER SHALL HAVE THE RIGHT TO COLLECT THE RENTS from the Mortgaged
Property and apply the same in the manner hereinbefore provided with respect to
a receiver. For that purpose, Lender may enter and take possession of the
Mortgaged Property and manage and operate the same and take any action which, in
Lender's judgment, is necessary or proper to collect the Rents and to conserve
the value of the Mortgaged Property. Lender may also take possession of, and for
these purposes use, any and all of the Personal Property. The expense (including
any receiver's fees, attorneys' fees, costs and agent's compensation) incurred
pursuant to the powers herein contained shall be secured by this Mortgage.
Lender shall not be liable to account to Borrower for any action taken pursuant
hereto other than to account for any Rents actually received by Lender.
Enforcement hereof shall not cause Lender to be deemed a mortgagee in possession
unless Lender elects in writing to be a mortgagee in possession.
(e) LENDER SHALL HAVE THE RIGHT TO ENTER AND TAKE POSSESSION of the
Mortgaged Property and manage and operate the same in conformity with all
applicable laws and take any action which, in Lender's judgment, is necessary or
proper to conserve the value of the Mortgaged Property.
(f) LENDER SHALL HAVE ALL OF THE RIGHTS AND REMEDIES PROVIDED IN THE
UNIFORM COMMERCIAL CODE including the right to proceed under the Uniform
Commercial Code provisions governing default as to any Personal Property
separately from the real estate included within the Mortgaged Property, or to
proceed as to all of the Mortgaged Property in accordance with its rights and
remedies in respect of said real estate. If Lender should elect to proceed
separately as to such Personal Property, Borrower agrees to make such Personal
Property available to Lender at a place or places acceptable to Lender, and if
any notification of intended disposition of any of such Personal Property is
required by law, such notification shall be deemed reasonably and properly given
if given at least ten (10) days before such disposition in the manner
hereinafter provided.
(g) LENDER SHALL HAVE THE RIGHT TO FILE PROOF OF CLAIM and other documents
as may be necessary or advisable in order to have its claims allowed in any
receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment,
composition or other judicial proceedings affecting Borrower, its creditors or
its property, for the entire amount due and payable by Borrower in respect of
the Obligations at the date of the institution of such
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proceedings, and for any additional amounts which may become due and payable by
Borrower after such date.
Each remedy herein specifically given shall be in addition to every other right
now or hereafter given or existing at law or in equity, and each and every right
may be exercised from time to time and as often and in such order as may be
deemed expedient by Lender and the exercise or the beginning of the exercise of
one right shall not be deemed a waiver of the right to exercise at the same time
or thereafter any other right. Lender shall have all rights and remedies
available under the law in effect now and/or at the time such rights and
remedies are sought to be enforced, whether or not they are available under the
law in effect on the date hereof.
SECTION 4.3 EXPENSES OF EXERCISING RIGHTS POWERS AND REMEDIES. The
reasonable expenses (including any receiver's fees, attorneys' fees, appraisers'
fees, environmental engineers' and/or consultants' fees, costs incurred for
documentary and expert evidence, stenographers' charges, publication costs,
costs (which may be estimated as to items to be expended after entry of the
decree of foreclosure) of procuring all abstracts of title, continuations of
abstracts of title, title searches and examinations, title insurance policies
and commitments and extensions therefor, Torrens duplicate certificates of
title, UCC and chattel lien searches, and similar data and assurances with
respect to title as Lender may deem reasonably necessary either to prosecute any
foreclosure action or to evidence to bidders at any sale which may be had
pursuant to any foreclosure decree the true condition of the title to or the
value of the Mortgaged Property, and agent's compensation) incurred by Lender
after the occurrence of any Event of Default and/or in pursuing the rights,
powers and remedies contained in this Mortgage shall be immediately due and
payable by Borrower, with interest thereon from the date incurred at the Default
Rate set forth in the Note, and shall be added to the indebtedness secured by
this Mortgage.
SECTION 4.4 RESTORATION OF POSITION. In case Lender shall have proceeded
to enforce any right under this Mortgage by foreclosure, sale, entry or
otherwise, and such proceedings shall have been discontinued or abandoned for
any reason or shall have been determined adversely, then, and in every such
case, Borrower and Lender shall be restored to their former positions and rights
hereunder with respect to the Mortgaged Property subject to the lien hereof.
SECTION 4.5 MARSHALLING. Borrower, for itself and on behalf of all
persons, parties and entities which may claim under Borrower, hereby waives all
requirements of law relating to the marshalling of assets, if any, which would
be applicable in connection with the enforcement by Lender of its remedies for
an Event of Default hereunder, absent this waiver. Lender shall not be required
to sell or realize upon any portion of the Mortgaged Property before selling or
realizing upon any other portion thereof.
SECTION 4.6 WAIVERS. No waiver of any provision hereof shall be implied
from the conduct of the parties. Any such waiver must be in writing and must be
signed by the party against which such waiver is sought to be enforced. The
waiver or release of any breach of the provisions set forth herein to be kept
and performed shall not be a waiver or release of any preceding or subsequent
breach of the same or any other provision. No receipt of partial payment after
acceleration of any of the Obligations shall waive the acceleration. No payment
by
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Borrower or receipt by Lender of a lesser amount than the full amount secured
hereby shall be deemed to be other than on account of the sums due and payable
hereunder, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment be deemed an accord and satisfaction, and
Lender may accept any check or payment without prejudice to Lender's right to
recover the balance of such sums or to pursue any other remedy provided in this
Mortgage. The consent by Lender to any matter or event requiring such consent
shall not constitute a waiver of the necessity for such consent to any
subsequent matter or event.
SECTION 4.7 LENDER'S RIGHT TO CURE DEFAULTS. If Borrower shall fail to
comply with any of the terms of the Loan Documents with respect to the procuring
of insurance, the payment of taxes, assessments and other charges, the keeping
of the Mortgaged Property in repair, or any other term contained herein or in
any of the other Loan Documents, Lender may make advances to perform the same
without releasing Borrower from any of the Obligations. Borrower agrees to repay
upon demand all sums so advanced and all sums expended by Lender in connection
with such performance, including without limitation attorneys' fees, with
interest at the Default Rate set forth in the Note from the dates such advances
are made, and all sums so advanced and/or expenses incurred, with interest,
shall be secured hereby, but no such advance and/or incurring of expense by
Lender, shall be deemed to relieve Borrower from any default hereunder or under
any of the other Loan Documents, or to release Borrower from any of the
Obligations.
SECTION 4.8 SUITS AND PROCEEDINGS. Lender shall have the power and
authority, upon prior notice to Borrower, to institute and maintain any suits
and proceedings as Lender may deem advisable to (i) prevent any impairment of
the Mortgaged Property by any act which may be unlawful or by any violation of
this Mortgage, (ii) preserve or protect its interest in the Mortgaged Property,
or (iii) restrain the enforcement of or compliance with any legislation or other
governmental enactment, rule or order that may be unconstitutional or otherwise
invalid, if, in the sole opinion of Lender, the enforcement of or compliance
with such enactment, rule or order might impair the security hereunder or be
prejudicial to Lender's interest.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 BINDING EFFECT; SURVIVAL; NUMBER; GENDER. This Mortgage
shall be binding on and inure to the benefit of the parties hereto, and their
respective heirs, legal representatives, successors and assigns. All agreements,
representations and warranties contained herein or otherwise heretofore made by
Borrower to Lender shall survive the execution, delivery and foreclosure hereof.
The singular of all terms used herein shall include the plural, the plural shall
include the singular, and the use of any gender herein shall include all other
genders, where the context so requires or permits.
SECTION 5.2 SEVERABILITY. The unenforceability or invalidity of any
provision of this Mortgage as to any person or circumstance shall not render
that provision unenforceable or invalid as to any other person or circumstance.
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SECTION 5.3 NOTICES. Any notice or other communication to any party in
connection with this Mortgage shall be in writing and shall be sent by manual
delivery, telegram, telex, facsimile transmission, overnight courier or United
States mail (postage prepaid) addressed to such party at the address specified
below, or at such other address as such party shall have specified to the other
party hereto in writing. All periods of notice shall be measured from the date
of delivery thereof if manually delivered, from the date of sending thereof if
sent by telegram, telex or facsimile transmission, from the first Business Day
(as defined in the Loan Agreement) after the date of sending if sent by
overnight courier, or from four days after the date of mailing if mailed.
Notices shall be given to or made upon the respective parties hereto at their
respective addresses set forth below:
If to Borrower: Avecor Cardiovascular Inc.
7611 Northland Drive
Minneapolis, MN 55428
Attn: Gregory J. Melsen, CFO
Telecopy No. (612) 391-9102
If to Lender: First Bank National Association
3305 Plymouth Boulevard
Plymouth, MN 55447
Attn: Jan A. Jasmin
Telecopy No. (612) 551-9058
Either party may change its address for notices by a notice given not less than
five (5) Business Days prior to the effective date of the change.
SECTION 5.4 APPLICABLE LAW. This Mortgage and the other Loan Documents
shall be construed and enforceable in accordance with, and be governed by, the
laws of the State of Minnesota, without giving effect to conflict of laws or
principles thereof, but giving effect to federal laws of the United States
applicable to national banks. Whenever possible, each provision of this Mortgage
and any other statement, instrument or transaction contemplated hereby or
relating hereto, shall be interpreted in such manner as to be effective and
valid under such applicable law, but, if any provision of this Mortgage or any
other statement, instrument or transaction contemplated hereby or relating
hereto shall be held to be prohibited or invalid under such applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Mortgage or any other statement, instrument or
transaction contemplated hereby or relating hereto.
SECTION 5.5 WAIVER OF JURY TRIAL. Borrower and Lender each irrevocably
waives any and all right to trial by jury in any legal proceeding arising out of
or relating to this Mortgage or any of the other Loan Documents or the
transactions contemplated hereby or thereby.
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SECTION 5.6 EFFECT. This Mortgage is in addition and not in substitution
for any other guarantees, covenants, obligations or other rights now or
hereafter held by Lender from any other person or entity in connection with the
Obligations.
SECTION 5.7 ASSIGNABILITY. Lender shall have the right to assign this
Mortgage, in whole or in part, or sell participation interests herein, to any
person obtaining an interest in the Obligations.
SECTION 5.8 HEADINGS. Headings of the Sections of this Mortgage are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
SECTION 5.9 FIXTURE FILING. This instrument shall be deemed to be a
Fixture Filing within the meaning of the Minnesota Uniform Commercial Code, and
for such purpose, the following information is given:
(a) Name and address of Debtor: Avecor Cardiovascular, Inc.
7611 Northland Drive
Minneapolis, MN 55428
Federal Tax I.D. No.: 41-1695729
(b) Name and address of
Secured Party: First Bank National Association
3305 Plymouth Boulevard
Plymouth, MN 55447
(c) Description of the types (or
items) of property covered
by this Fixture Filing: See granting clause on pages 2 and
3 hereof.
(d) Description of real estate
to which the collateral is
attached or upon which it
is or will be located: See Exhibit A hereto.
Some of the above-described collateral is or is to become fixtures upon the
above-described real estate, and this Fixture Filing is to be filed for record
in the public real estate records.
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IN WITNESS WHEREOF, Borrower has executed this Mortgage as of the date
first written above.
AVECOR CARDIOVASCULAR INC.
By: /s/ Gregory J. Melsen
----------------------------------
Name: Gregory J. Melsen
Title: Chief Financial Officer
16
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STATE OF MINNESOTA)
)ss.
COUNTY OF HENNEPIN)
The foregoing instrument was acknowledged before me this 29th day of January,
1997, by Gregory J. Melsen, the Chief Financial Officer of Avecor
Cardiovascular, Inc., a Minnesota corporation, on behalf of the corporation.
/s/ Kristi L. Broderick
--------------------------------------
Notary Public
[SEAL] KRISTI L. BRODERICK
NOTARY PUBLIC - MINNESOTA
ANOKA COUNTY
My Commission Expires January 31, 2000
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION (Granting Clause A)
Lot 1, Block 1, Northland Park Division 4, according to the recorded plat
thereof, and situate in Hennepin County, Minnesota.
PERMITTED ENCUMBRANCES (SECTION 2.1)
1. Real estate taxes not yet due and payable and installments of special
assessments payable therewith.
2. Restrictions, covenants, conditions and easements set forth in Protective
Covenants for Northland Park II dated April 1, 1981, acknowledged August
25, 1992, filed August 26, 1992, as Document No. 5960478.
Above restriction assigned and assumed by Document No. 6337703.
Terms and conditions of that certain Bifurcation and Separation Agreement
Regarding Northland Park II and Creation of Northland Park III regarding
the above Restrictions dated October 12, 1995, filed December 23, 1995, as
Document No. 6517830.
3. Utility and drainage and drainage for ponding easement(s) as shown on the
recorded plat of Northland Park Division 4.
4. Right to construct and maintain temporary snow fences over lands adjacent
to County State Aid Highway No. 18, acquired by the County of Hennepin, as
evidenced by Final Certificate recorded as Document No. 2075297.
5. No right of access exists from premises to County State Aid Highway No. 18.
Right of access was acquired by the County of Hennepin as evidenced by
Document No. 3755252, except that the abutting owner shall have the right
of access to the frontage road.
6. No right of access exists from premises to County State Aid Highway No. 18.
Right of access was acquired by the County of Hennepin as evidenced by
Document No. 3840555 except that the abutting owner shall have the right of
access to the frontage road.
7. Easement for drainage purposes over part of premises together with
incidental rights granted to the County of Hennepin, as evidenced by
instrument dated March 30, 1983, filed June 3, 1983, as Document No.
4797904.
8. Assessment Agreement between Ryan Construction Company of Minnesota, Inc.
and Brooklyn Park E.D.A. dated October 4, 1996, recorded December 13, 1996,
as Document No. 6674367.
<PAGE>
9. Individual Development Agreement No. 5 between Ryan Construction Company of
Minnesota, Inc. and Brooklyn Park E.D.A. dated October 4, 1996, recorded
December 13, 1996 as Document No. 6674366.
<PAGE>
EXHIBIT B
(Insurance Requirements)
I. PROPERTY INSURANCE
An ORIGINAL (or certified copy) Special Form Hazard Insurance POLICY naming
Borrower as an insured, reflecting coverage of 100% of the replacement
cost, and written by a carrier approved by Lender with a current Best's
Insurance Guide rating of at least A+ IX (which is authorized to do
business in the State of Minnesota), that includes:
___ Lender's Loss Payable Endorsement with a Severability of Interest
Clause
___ 30-day notice to Lender in the event of cancellation, non-renewal or
material change
___ Replacement Cost Endorsement
___ Stipulated Value/Agreed Amount Endorsement
___ Boiler Explosion Coverage
___ Sprinkler Leakage Coverage
___ Vandalism and Malicious Mischief Coverage
___ Flood Insurance
___ One (1) year's business interruption or rent loss insurance in an
amount acceptable to Lender.
II. LIABILITY INSURANCE
An ORIGINAL CERTIFICATE of General Comprehensive Public Liability Insurance
naming Borrower as an insured, and written by a carrier approved by Lender
with a current Best's Insurance Guide rating of at least A+ IX (which is
authorized to do business in the State of Minnesota), that includes:
___ combined general liability policy limit of at least $2,000,000 each
occurrence, applying to liability for bodily injury, personal injury
and property damage
___ Additional Insured Endorsement naming First Bank National Association
with a Severability of Interest Endorsement
___ 30-day notice to Lender in the event of cancellation, non-renewal or
material change
III. WORKER'S COMPENSATION
An ORIGINAL CERTIFICATE of Worker's Compensation coverage in the statutory
amount, naming Borrower as owner of the Project, written by a carrier
approved by Lender.
<PAGE>
EXHIBIT 10.28
UNITED STATES OF AMERICA
STATE OF MINNESOTA
COUNTY OF HENNEPIN
BROOKLYN PARK ECONOMIC DEVELOPMENT AUTHORITY
NO. R-1 $893,402.00
TAX INCREMENT REVENUE NOTE
SERIES 1997
Date
Rate: of Original Issue
9.50% February 1, 1997
The Brooklyn Park Economic Development Authority (the "Authority"), for
value received, certifies that it is indebted and hereby promises to pay to
AVECOR Cardiovascular Inc. or registered assigns (the "Owner"), the principal
sum of $893,402 and to pay interest thereon at the rate of 9.50% per annum (the
"Stated Rate"), as and to the extent set forth herein. (NOTE: PAYMENT HEREUNDER
IS SUBJECT TO AND RESTRICTED BY SECTION 4.3(D) OF INDIVIDUAL DEVELOPMENT
AGREEMENT #5 BY AND BETWEEN THE AUTHORITY AND RYAN CONSTRUCTION COMPANY OF
MINNESOTA, INC. ("RYAN") DATED OCTOBER 4, 1996.)
1. PAYMENTS. Principal and interest ("Payments") shall be paid semi-
annually on each February 1 and August 1, commencing August 1, 1998 and
continuing to and including February 1, 2005 ("Payment Dates") in the amounts
set forth in Attachment A hereto (the "Payment Schedule"), but only to the
extent of Available Tax Increment as hereinafter defined. Payments shall be
applied first to accrued interest, and then to unpaid principal.
Payments are payable by mail to the address of the Owner or such other
address as the Owner may designate upon 30 days written notice to the Authority.
Payments on this Note are payable in any coin or currency of the United Sates of
America which, on the Payment Date, is legal tender for the payment of public
and private debts.
2. INTEREST. Interest at the Stated Rate shall accrue on this Note's
initial principal amount of $893,402 (the "Initial Principal") commencing on the
Date of Original Issue set forth above. The interest that will accrue between
the Date of Original Issue and February 1, 1998 shall be added to the Initial
Principal on February 1, 1998 and the sum of $980,291 shall be the Principal
Amount of this Note. Interest shall accrue on the unpaid balance of the
Principal Amount at the Stated Rate from and after February 1, 1998, and shall
be compounded on each Payment Date. Such interest shall be due and payable as
part of the semi-annual Payments provided in the Payment Schedule attached
hereto.
<PAGE>
3. AVAILABLE TAX INCREMENT. Payments on this Note are payable solely from
"Available Tax Increment," which shall mean, on each Payment Date, 52.5% of the
Tax Increment generated in the preceding six (6) months with respect to
"Individual Development Property #5" and the "Individual lmprovements" thereon
and remitted to the Authority by Hennepin County not to exceed the total
scheduled Payment set forth in the Payment Schedule, all as such terms are
defined in the Individual Development Agreement #5, dated as of October 4, 1996
(the "Agreement") between the Authority and Ryan.
Available Tax Increment shall not include any Tax Increment generated by
the Individual Development Property #5 if, as of any Payment Date, the Owner has
breached and failed to cure any term or condition of the Agreement.
The Authority shall have no obligation to pay principal of and interest on
this Note on any Payment Date from any source other than Available Tax
lncrement, and the failure of the Authority to pay the entire amount of
principal or interest on this Note on any Payment Date as set forth in the
Payment Schedule shall not constitute a default hereunder as long as the
Authority pays principal and interest hereon to the extent of Available Tax
Increment. If on any Payment Date there is available to the Authority
insufficient Available Tax Increment to pay all amounts due on such date, the
amount of such deficiency shall be deferred and shall be paid, without interest
thereon, on the next Payment Date on which the Authority has available to it
Available Tax Increment in excess of the amount necessary to pay the amount due
on such Payment Date. The Authority shall have no obligation to pay unpaid
balance of principal or accrued interest that may remain after the final Payment
due on February 1, 2005.
4. OPTIONAL PREPAYMENT. The principal sum and all accrued interest
payable under this Note is prepayable in whole or in part at any time by the
Authority without premium or penalty.
5. TERMINATION. At the Authority's option, this Note shall terminate and
the Authority's obligation to make any payments under this Note shall be
discharged upon the occurrence of an Event of Default on the part of the
Developer as defined in Section 9.1 of the Agreement, but only if the Event of
Default has not been cured in accordance with Section 9.2 of the Agreement.
6. NATURE OF OBLIGATION. This Note is an issue to aid in financing
certain qualified costs and administrative costs of a Project undertaken by the
Authority pursuant to Minnesota Statutes, Sections 469.124 through 469.134, and
is issued pursuant to an authorizing resolution (the "Resolution") duly adopted
by the Authority (the terms of which are incorporated herein), and pursuant to
and in full conformity with the Constitution and laws of the State of Minnesota,
including MINNESOTA STATUTES, Sections 469.174 to 469.179. This Note is a
limited obligation of the Authority which is payable solely from Available Tax
Increment pledged to the payment hereof under the Resolution. This Note and the
interest hereon shall not be deemed to constitute a general obligation of the
State of Minnesota or any political subdivision thereof, including, without
limitation, the Authority. Neither the State of Minnesota, nor any political
subdivision thereof shall be obligated to pay the principal of or interest on
this Note or other costs incident
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<PAGE>
hereto except out of Available Tax Increment, and neither the full faith and
credit nor the taxing power of the State of Minnesota or any political
subdivision thereof is pledged to the payment of the principal of or interest on
this Note or other costs incident hereto.
EXCEPT AS TO THE OBLIGATION TO MAKE PAYMENTS FROM AVAILABLE TAX INCREMENT,
THIS NOTE IS NOT A DEBT OF THE AUTHORITY, THE CITY OF BROOKLYN PARK (THE
"CITY"), OR THE STATE OF MINNESOTA (THE "STATE"), AND NEITHER THE
AUTHORITY, THE C1TY, THE STATE, NOR ANY POLITICAL SUBDIVISION THEREOF SHALL
BE LIABLE ON THE NOTE, NOR SHALL THE NOTE BE PAYABLE OUT OF ANY FUNDS OR
PROPERTIES OTHER THAN AVAILABLE TAX INCREMENT.
7. REGISTRATION AND TRANSFER. This Note is issuable only as a fully
registered note without coupons. As provided in the Resolution, and subject to
certain limitations set forth therein, this Note is transferable upon the books
of the Authority kept for that purpose, at the principal office of the
Authority, by the Owner hereof in person or by such Owner's attorney duly
authorized in writing, upon surrender of this Note together with a written
instrument of transfer satisfactory to the Authority, duly executed by the
Owner. Upon such transfer or exchange and the payment by the Owner of any tax,
fee, or governmental charge required to be paid by the Authority with respect to
such transfer or exchange, there will be issued in the name of the transferee a
new Note of the same aggregate principal amount, bearing interest at the same
rate and maturing on the same dates.
This Note shall not be transferred to any person other than an affiliate,
or other related entity, of the Owner unless the Authority has been provided
with an opinion of counsel from the transferor and an investment letter from the
transferee, in a form satisfactory to the Authority, establishing that such
transfer is exempt from registration and prospectus delivery requirements of
federal and applicable state securities laws.
IT IS HEREBY CERTIFIED AND RECITED that all acts, conditions, and things
required by the Constitution and laws of the State of Minnesota to be done, to
exist, to happen, and to be performed in order to make this Note a valid and
binding limited obligation of the Authority according to its terms, have been
done, do exist, have happened, and have been performed in due form, time and
manner as so required.
IN WITNESS WHEREOF, the Board of Commissioners of the Brooklyn Park
Economic Development Authority has caused this Note to be executed with the
manual signatures of its President and Executive Director, all as of the Date of
Original Issue specified above.
BROOKLYN PARK ECONOMIC DEVELOPMENT AUTHORITY
/s/ JOE ENGE /s/ D. A. SEBOK
- ------------------------------ ------------------------------
President, Vice Executive Director
3
<PAGE>
REGISTRATION PROVISIONS
The ownership of the unpaid balance of the within Note is registered in the
bond register of the Authority, in the name of the person last listed below.
Date of Signature of
Registration Registered owner Executive director
------------ ---------------- ------------------
February 6,1997 AVECOR Cardiovascular Inc. /s/ D. A. SEBOK
7611 Northland Drive North
Brooklyn Park, MN 55443
Federal Tax I.D.: 41-1695729
4
<PAGE>
ATTACHMENT A
PAYMENTS AND PAYMENT DATES
TOTAL
DATE PRINCIPAL INTEREST PAYMENT
---- --------- -------- -------
August 1, 1998 50,892 46,564 97,456
February 1, 1999 53,310 44,146 97,456
August 1, 1999 55,842 41,614 97,456
February 1, 2000 58,494 38,962 97,456
August 1, 2000 61,273 36,183 97,456
February 1, 2001 64,183 33,273 97,456
August 1, 2001 67,232 30,224 97,456
February 1, 2002 70,425 27,031 97,456
August 1, 2002 73,771 23,685 97,456
February 1, 2003 77,275 20,181 97,456
August 1, 2003 80,945 16,511 97,456
February 1, 2004 84,790 12,666 97,456
August 1, 2004 88,818 8,638 97,456
February 1, 2005 93,042 4,419 97,461
980,292 384,097 1,364,389
*NOTE: THESE PAYMENTS ARE SUBJECT TO AND RESTRICTED BY SECTION 4.3(d) OF
INDIVIDUAL DEVELOPMENT AGREEMENT #5 BY AND BETWEEN THE AUTHORITY AND RYAN.
A-1
<PAGE>
EXHIBIT 11.1 - STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
NET INCOME ($567) $3,296 ($39)
--------- --------- ----------
--------- --------- ----------
PER SHARE DATA:
Net income per common equivalent share,
primary ($0.07) $0.45 ($0.01)
--------- --------- ----------
--------- --------- ----------
Net income per common equivalent share,
fully diluted ($0.07) $0.45 ($0.01)
--------- --------- ----------
--------- --------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES:
Primary:
Weighted average number of common
shares outstanding 7,767 7,046 6,390
Common equivalent shares: (1)
Warrants 46
Options 216
--------- --------- ----------
7,767 7,307 6,390
--------- --------- ----------
--------- --------- ----------
Fully diluted:
Weighted average number of common
shares outstanding 7,767 7,046 6,390
Common equivalent shares: (1)
Warrants 57
Options 298
--------- --------- ----------
7,767 7,400 6,390
--------- --------- ----------
--------- --------- ----------
</TABLE>
- -------------------------
(1) For the years ended December 31, 1996 and 1994, common equivalent stock
options and stock warrants have been excluded in the calculation of net
loss per common equivalent share because their inclusion would be anti-
dilutive.
<PAGE>
OUTSIDE FRONT COVER ART GOES ON THIS PAGE
<PAGE>
ABOUT THE COMPANY
AVECOR CARDIOVASCULAR INC. DESIGNS, DEVELOPS, MANUFACTURES AND MARKETS SPECIALTY
DISPOSABLE MEDICAL DEVICES FOR HEART/LUNG BYPASS SURGERY AND LONG-TERM
RESPIRATORY SUPPORT. THE COMPANY'S PRODUCT LINE CONSISTS PRIMARILY OF HOLLOW
FIBER AND SILICONE MEMBRANE OXYGENATORS, BLOOD RESERVOIRS, CARDIOPLEGIA SYSTEMS,
ARTERIAL FILTERS AND CUSTOM TUBING PACKS.
ON THE COVER
THE INNOVATIVE NEW AFFINITY BLOOD PUMP IS SCHEDULED FOR 1997 INTRODUCTION
FOLLOWING MARKETING CLEARANCE FROM THE U.S. FOOD AND DRUG ADMINISTRATION.
[PHOTO]
AVECOR'S NEW HEADQUARTERS FACILITY IN THE MINNEAPOLIS SUBURB OF BROOKLYN PARK
CONTAINS 100,000 SQUARE FEET AND CONSOLIDATES OPERATIONS PREVIOUSLY AT FOUR
SEPARATE LOCATIONS.
Except for the historical financial information contained herein, the matters
discussed in this annual report contain certain forward-looking statements. For
this purpose, any statements contained in this annual report that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue," the negative or other
variations thereof, or comparable terminology, are intended to identify forward-
looking statements. These statements by their nature involve substantial risks
and uncertainties, and actual results may differ materially depending on a
variety of factors, including the progress of product development and clinical
studies, the timing of and ability to attain regulatory approvals, the
availability of third-party reimbursement, the extent to which the Company's
products gain market acceptance, litigation regarding patent and other
intellectual property rights, the introduction of competitive products by others
and other factors, as well as those set forth from time to time in the Company's
filings with the Securities and Exchange Commission, including the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
Affinity-TM-, MYOtherm-TM-, Signature-TM- and OnCourse-TM- are trademarks of the
Company.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AVECOR CARDIOVASCULAR INC.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net Sales . . . . . . . . . . . . . . . $44,401,000 $33,340,000 $21,486,000 $14,125,000 $12,459,000
Cost of sales . . . . . . . . . . . . . 25,986,000 18,180,000 12,556,000 9,067,000 8,020,000
----------------------------------------------------------------------------------
Gross profit . . . . . . . . . . . . . 18,415,000 15,160,000 8,930,000 5,058,000 4,439,000
Operating Expenses:
Selling, general and administrative. . 11,885,000 8,727,000 6,779,000 5,044,000 3,285,000
Litigation expense . . . . . . . . . . 4,205,000 170,000 -- -- --
Research and development . . . . . . . 3,651,000 2,773,000 2,309,000 1,891,000 1,840,000
----------------------------------------------------------------------------------
Operating income (loss) . . . . . . . (1,326,000) 3,490,000 (158,000) (1,877,000) (686,000)
Interest income . . . . . . . . . . . . 725,000 586,000 143,000 204,000 294,000
Interest expense. . . . . . . . . . . . -- -- -- -- (37,000)
----------------------------------------------------------------------------------
Income (loss) before income taxes . . . (601,000) 4,076,000 (15,000) (1,673,000) (429,000)
Income tax provision (benefit). . . . . (34,000) 780,000 24,000 (23,000) 29,000
----------------------------------------------------------------------------------
Net income (loss) . . . . . . . . . . . $ (567,000) $ 3,296,000 $ (39,000) $(1,650,000) $ (458,000)
----------------------------------------------------------------------------------
Net income (loss) per share . . . . . . $(.07) $.45 $(.01) $(.26) $(.08)
----------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding (1) . . . 7,767,000 7,307,000 6,390,000 6,361,000 5,581,000
----------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . $20,563,000 $26,247,000 $10,150,000 $ 9,725,000 $12,876,000
Total assets . . . . . . . . . . . . . 37,161,000 33,519,000 15,877,000 15,031,000 15,766,000
Long-term debt. . . . . . . . . . . . . -- -- -- -- --
Stockholders' equity. . . . . . . . . . 29,938,000 29,322,000 13,145,000 12,970,000 14,516,000
</TABLE>
(1) Shares sold and stock options issued within 12 months prior to March 26,
1992 (the date of the initial public offering for a per share price less than
$5.50 (the initial public offering price) are included in the calculation of
earnings (loss) per share as if they had been outstanding for the entire period
using the treasury stock method.
SALES MOMENTUM GROSS PROFIT R&D SPENDING
SALES BY QUARTER GROSS PROFIT BY QUARTER (IN MILLIONS)
(IN MILLIONS) (IN MILLIONS)
[GRAPH] [GRAPH] [GRAPH]
1
<PAGE>
TO OUR SHAREHOLDERS:
While the costs of litigating and settling a patent suit caused a loss for
1996, AVECOR Cardiovascular made tremendous progress on a number of fronts.
Sales increased 33% as the AFFINITY oxygenator continued to strengthen its
market position. International sales continued to increase, with further
investment and expansion in Europe. We submitted a 510(k) application to begin
marketing our innovative new blood pump. And we moved to a new headquarters
building that allows us to combine all of our Minneapolis operations under one
roof for the first time.
SALES TOP $44 MILLION Sales expanded to $44.4 million, up 33% from 1995,
led by the AFFINITY oxygenator line which continued to strengthen its position
with a 39% increase over 1995. Sales of custom tubing packs more than doubled to
$7.4 million. The older silicone membrane oxygenator line continued its decline
with a 4% decrease for the year, while sales of MYOtherm cardioplegia systems
gained 6%.
Gross margins declined to 41.5% from 45.5% in 1995, mainly as the result of
the sharply increased sales of lower-margin custom tubing packs. Competitive
pricing and the continued trend toward group buying and the associated quantity
discounts also adversely affected margins. In the third quarter, we initiated a
number of changes to improve margins. These involve selective price increases,
sales incentives tied to margin improvement, and further efforts to reduce
manufacturing costs. The positive effect of these actions began to show in the
fourth quarter of 1996, and we expect additional margin improvement during 1997.
We continued to emphasize investment in research and development in order
to expand and improve our product line. R&D spending rose to $3.7 million in
1996 as the AFFINITY blood pump was readied for market. Selling, general and
administrative expenses also grew, mainly reflecting a one-third expansion of
our domestic sales force.
The Company recorded a loss for the year primarily as the result of the
$4.2 million cost of litigating and settling a patent suit with COBE
Laboratories. We also recorded a non-recurring charge of $474,000 in the fourth
quarter to reflect the costs related to the relocation of our headquarters,
lease abandonment costs and severance-related expenses.
After these charges, the loss for the year was $567,000, equal to 7 cents a
share. We earned 45 cents per share in 1995.
CONTINUED INTERNATIONAL GROWTH International sales continue to be an important
part of our growth strategy. In 1996, international sales totalled over $18
million and continued the compound growth rate of approximately 40% annually
realized over the last three years.
We also continued to invest in our French subsidiary to further develop
product sales on the European continent.
SALES OF AFFINITY PUMP EXPECTED TO BEGIN IN 1997 We anticipate receiving
marketing clearance for the new AFFINITY blood pump from the U.S. Food and Drug
Administration (FDA) in the first half of 1997. European clinical trials, aimed
at demonstrating the superior characteristics of the new pump, began in the
first quarter of 1997 at multiple sites.
The new pump is undoubtedly our most significant product since we
introduced the AFFINITY oxygenator in 1993. We believe its innovative design
will make this pump safer and more cost-effective than centrifugal pumps, and
that it also will offer significant safety advantages over roller pumps
currently used in heart/lung bypass surgery. Because the AFFINITY pump cannot be
over-pressurized, won't drain the blood reservoir and has superior
2
<PAGE>
blood-handling characteristics, we expect that it will be well-received by the
market. Like our other products, it is designed to be easy to set up and prime.
The AFFINITY oxygenator continued to build market share in 1996. Its
powerful performance, superior operating characteristics and competitive price
continue to win over new users in the medical community.
We expect to file three new products with the FDA in 1997. First is an
improved MYOtherm cardioplegia system, scheduled for submission late in the
first quarter. In addition to high performance and ease of use -- hallmarks of
all AVECOR products -- the new cardioplegia system will be simpler to
manufacture, which should help improve margins on this segment of the business.
Other submissions scheduled in 1997 involve proprietary system coatings to
improve blood handling and new oxygen saturation/hemocrit technology.
COBE SUIT SETTLED The COBE patent suit was settled in July of 1996 for an
amount that approximated the cost of carrying the suit through to trial. Terms
of the settlement, which contains cross-licensing provisions, call for a net
payment by AVECOR of $2.2 million, for which AVECOR received a paid-up license
of three COBE patents for oxygenators and related devices.
The agreement was entered into without admission or liability or
infringement by either party. Conclusion of this litigation has allowed
management to focus its entire attention on the Company's growth and
profitability.
NEW FACILITY COMPLETED The Company has completed its move to a new headquarters
facility in suburban Minneapolis. This consolidates all laboratory, engineering,
office, manufacturing and warehousing activities in a single location, which is
expected to result in significantly improved efficiency. These functions had
previously occupied four different locations.
The Company owns the new building, which occupies 100,000 square feet on a
12-acre site in suburban Brooklyn Park. Laboratories, clean room facilities and
a customer education and training center at the new site incorporate state-of-
the-art technology. We also have room for expansion, should that become
necessary in the future.
The move to the new building was accomplished in stages with minimum
disruption of our activities. All departments are now operating at the new
location.
1997 OUTLOOK All of us at AVECOR are excited to be in our new building, and we
are looking forward to what we expect will be a very successful introduction of
the AFFINITY pump in 1997. We fully expect to realize a healthy profit in 1997
from our larger product line and further global expansion, and we will continue
our research into new products that improve patient benefits while lowering
costs.
Sincerely,
/s/ Anthony Badolato
Anthony Badolato
Chief Executive Officer
March 20, 1997
3
<PAGE>
PRODUCT REVIEW
The products of AVECOR Cardiovascular Inc. are used primarily in heart/lung
bypass surgery and for long-term respiratory support. The annual worldwide
market for specialty medical devices used in bypass surgery is estimated at $800
million, of which about $600 million is attributable to
disposable products.
The Company's current products include:
[PHOTO]
THE AFFINITY OXYGENATOR, STILL THE CENTERPIECE OF AVECOR'S PRODUCT LINE,
CONTINUES TO INCREASE ITS MARKET SHARE.
THE AFFINITY-TM- OXYGENATOR. Introduced internationally in mid-1993 and to
the U.S. market in 1994, the AFFINITY is a microporous, hollow fiber membrane
oxygenator. During a bypass procedure, the oxygenator takes the place of the
patient's lungs, removing carbon dioxide and adding oxygen to the blood. The
AFFINITY is a state-of-the-art device that studies have shown to be one of the
most efficient oxygenators on the market. It combines high gas transfer with low
pressure drop. Its compact size provides low priming volumes; its clear
polycarbonate case permits high visibility of all phases of the unit's
operation. The AFFINITY oxygenator continued to increase its worldwide market
share in 1996, and at year-end was estimated to be the third best-selling
oxygenator in the U.S., with a market share of approximately 16%. This reflects
growing awareness of its superior performance and ease of use.
SOLID SILICONE MEMBRANE OXYGENATORS. The Company markets a complete line of
these oxygenators in several models and sizes. This technology permits extended
use of the oxygenator for certain applications without the deterioration of
performance that microporous membrane oxygenators may experience. This is
particularly important for procedures that entail long-term support.
AFFINITY-TM- BLOOD PUMP. The AFFINITY blood pump incorporates an
innovative design that makes it safer and more cost-effective than the
centrifugal pumps that are widely used in heart/lung bypass surgery today. It
also offers significant safety advantages over roller pumps. The Company will
begin marketing the pump in the U.S. following clearance from the FDA, which is
anticipated in the first half of 1997. European clinical trials began at
multiple sites in the first quarter of 1997.
BLOOD RESERVOIRS. The Company produces a hardshell cardiotomy reservoir
and venous reservoir bags. These devices are used to filter and store blood
during bypass surgery. The Company began marketing two new reservoirs in mid-
1994.
MYOTHERM-TM- CARDIOPLEGIA SYSTEM. This system is used to infuse specially
formulated solutions, which often include oxygenated blood, directly into the
patient's coronary arteries while the heart is stopped during bypass surgery.
In addition to delivering nutrients to the heart, these
4
<PAGE>
solutions are also used to arrest the heart and maintain prescribed
temperatures. A new version of the MYOtherm unit, the MYOtherm XP, designed for
higher performance and improved manufacturing efficiences, is scheduled for
submission to the FDA late in the first quarter of 1997.
ECMO System. The Company produces a system for extracorporeal membrane
oxygenation (ECMO), which is the long-term cardiopulmonary support of premature
infants, newborns and other patients with life-threatening respiratory
disorders. The system includes reservoir bags, heat exchangers and a membrane
oxygenator.
[PHOTO]
THE NEW AFFINITY BLOOD PUMP, CURRENTLY AWAITING MARKETING CLEARANCE FROM
THE FDA, IS SHOWN HERE IN A TYPICAL INSTALLATION WITH AVECOR'S HARDSHELL
CARDIOTOMY VENOUS RESERVOIR AND THE AFFINITY OXYGENATOR. THE PUMP'S CONTROL
CONSOLE IS ON THE RIGHT.
SIGNATURE-TM- CUSTOM TUBING PACKS. All or some of the devices used in a
heart/lung bypass procedure are sometimes pre-connected and sold in a custom
tubing pack. The components to be included in the pack and the exact way they
are arranged and connected are determined by the specifications provided by our
customer, the perfusionist. The Company has developed computer software that
allows it to design custom tubing packs according to these individual
specifications and to quote prices within hours of a customer request. AVECOR
began assembling and selling custom tubing packs in Europe in 1992 and in the
United States in mid-1993.
AFFINITY-TM- ARTERIAL FILTER. The Company introduced this product for
evaluation by customers late in 1995, with full release worldwide in the first
quarter of 1996. The AFFINITY filter is the final safety component in the
circuit of specialized medical devices used in heart/lung by-pass surgery,
ensuring that the oxygenated blood is free of air or particulate emboli before
reentering the patient's body. The filter offers low-volume priming, high
visibility, excellent air handling and excellent hemodynamics. The Company has
previously sold filters from other manufacturers as part of its custom tubing
packs.
ONCOURSE-TM- CONTINUOUS QUALITY CONTROL (CQI) MANAGER. This Windows-based
software program was introduced in late 1995. OnCourse CQI Manager guides
perfusionists through the necessary steps in establishing a CQI program. In
addition, it generates a variety of useful reports for perfusionists, including
the annual American Board of Cardiovascular Perfusion clinical activity report
and several custom reports such as Non-Compliance, Standard of Perfusion and
equipment preventative maintenance. This software is currently offered to AVECOR
customers who make a major commitment to AVECOR products -- another important
product line differentiation for AVECOR in the marketplace.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of the Company's results of operations and financial
condition should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.
OVERVIEW
AVECOR Cardiovascular Inc. (the "Company") designs, develops, manufactures and
markets specialty disposable medical devices for heart/lung bypass surgery and
long-term respiratory support. The Company was incorporated on December 13,
1990, and in June 1991, acquired the business and assets and assumed certain
liabilities of the surgical division of SCIMED Life Systems, Inc. (the
"Predecessor Business"). On December 1, 1992, the Company exchanged 160,000
shares of its Common Stock for all of the outstanding shares of AVECOR
Cardiovascular Ltd. (formerly Cardio Med Ltd.) pursuant to which AVECOR
Cardiovascular Ltd. became a wholly-owned subsidiary of the Company. AVECOR
Cardiovascular Ltd. had formerly been a distributor for the Company in the
United Kingdom. In October 1995, the Company opened a sales office in France
which is organized as a wholly-owned subsidiary of AVECOR Cardiovascular Ltd.
The assets acquired by the Company from the Predecessor Business included the
Company's line of solid silicone membrane oxygenators. Since that time, the
Company has been successful in developing and obtaining marketing clearance for
a number of its proprietary products, with the goal of developing and marketing
a more complete line of proprietary products used in the heart/lung bypass
circuit. The Company began marketing its MYOtherm cardioplegia delivery system
in October 1991, and began marketing its Signature custom tubing packs in July
1993 following receipt of marketing clearance from the U.S. Food and Drug
Administration (the "FDA"). The Company began marketing its Affinity oxygenator
internationally in July 1993 and in the United States in February 1994,
following receipt of marketing clearance from the FDA in November 1993. The
Company received marketing clearance from the FDA to market its Affinity blood
reservoirs and Affinity arterial filter in July 1994 and October 1995,
respectively. In connection with the Company's continuing efforts to offer a
more complete line of proprietary heart/lung bypass circuit products, the
Company has developed a new blood pump, for which a 510(k) pre-market
notification was filed with the FDA in
September 1996.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996
WITH THE YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 33% to $44,401,000 for 1996 from $33,340,000
for 1995. This increase was principally the result of a higher volume of product
shipments of the Company's Affinity product line and Signature custom tubing
packs, which accounted for approximately 65% and 36% of the overall increase in
net sales, respectively. Overall, average prices associated with 1996 product
shipments declined slightly from that of 1995 in response to competitive pricing
in the market place. Selective price increases were implemented in the last half
of 1996. The favorable impact of increased net sales of these product lines was
partially offset by a decrease of $276,000 in net sales of the Company's older
solid silicone membrane oxygenator product line. The Company believes that the
availability of the Affinity oxygenator continues to be the primary contributor
to the decline in net sales of the Company's solid silicone membrane oxygenator
line, as certain customers changed their oxygenator of preference from the
Company's solid silicone membrane oxygenator to the Affinity oxygenator. The
Company continues to anticipate declining shipments of products in the solid
silicone membrane oxygenator line.
Over the past two years, one of the Company's competitors has purchased three
companies that provide contract perfusion services to hospitals. The Company
believes that such control, as well as any future acquisitions of contract
perfusion groups by its competitors, are likely to have a negative impact on the
Company's ability to market its products to perfusionists controlled by
competitors or to hospitals or other medical providers that contract with
competitor-controlled groups for perfusion services, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any effect of such control or future acquisitions is subject to the
degree of control exerted by the Company's competitors with respect to
purchasing decisions made by controlled groups of perfusionists, the extent of
future acquisitions of contract perfusion groups by the Company's competitors,
the breadth of the Company's product offerings relative to those of competitors
controlling contract perfusion groups, and the degree to which the Company's
research and development and marketing efforts result in the successful
commercialization of products with enhanced or superior performance
characteristics. For 1996, the Company estimates that sales to contract
perfusion groups controlled by one of the Company's competitors were
approximately $1,850,000, representing an increase of approximately $350,000
over 1995. However, the acquisitions of these contract perfusion groups occurred
in the first half of 1996 during which the Company sold about $1,100,000 to
these groups compared to approximately $750,000 in the second half of 1996.
Sales to customers located outside of the United States were approximately
41% of consolidated net sales for 1996 compared to 42% for 1995.
6
<PAGE>
COST OF SALES/GROSS PROFIT. Cost of sales as a percentage of net sales
increased to 58.5% for 1996 from 54.5% for 1995. The cost of sales percentage
for 1996 was unfavorably impacted by significant increases in sales of the
Company's lower-margin Signature custom tubing pack line, as well as competitive
pricing pressures in the marketplace. The mix of products sold in any period
will influence the cost of sales and gross profit for the period.
Higher production volumes continued to improve Affinity oxygenator product
costs, although, these improvements were offset, primarily by an ongoing
decrease in average selling prices due to the Company being in a competitive
pricing environment. Also, optimal volume-related manufacturing efficiencies
were not achieved throughout 1996 for production of the Company's Affinity
arterial filter. Production of the Affinity arterial filter began on or about
December 31, 1995.
The Company's future gross profit margin percentages will be influenced by
the ongoing pressures of the competitive pricing environment, changes in the
sales mix, new product introductions and the extent of further manufacturing
efficiencies, if any. Given the uncertainty associated with new product
introductions, the ultimate realization of any such manufacturing efficiencies
and the continuing price pressures characteristic in the Company's markets, the
Company cannot be certain if its gross profit margin will be maintained, improve
or decline.
SELLING, GENERAL AND ADMINISTRATIVE AND LITIGATION EXPENSE. Selling,
general and administrative expenses increased 36% to $11,885,000 for 1996 from
$8,727,000 for 1995. This increase is attributed to costs associated with the
continuing development of a direct sales force in certain of the Company's
territories formerly served by distributors and independent sales
representatives and the overall increase in support needed to achieve the
Company's sales levels. In connection with the Company's development of a direct
sales force, in October 1995, the Company opened a sales office in France from
which it fields a direct sales force to serve the French market. The Company
recorded non-recurring charges in the fourth quarter of 1996 associated with
relocation and lease abandonment expenses in connection with the consolidation
of the Company's U.S. operations from four leased facilities into one owned
property and the addition and subsequent resignation of a Chief Operating
Officer. As a percent of sales, selling, general and administrative expenses
increased to 26.8% for 1996 from 26.2% for 1995.
Management anticipates that selling, general and administrative expenses
for the year ended December 31, 1997 will be higher than the year ended December
31, 1996 and will approximate 1996 as a percentage of sales dollars. This
forward-looking statement will be influenced by revenue increases achieved by
the Company, its ability to attract and retain qualified sales personnel as the
Company continues to develop its direct sales force, and the timing and extent
of promotional activities associated with new product introductions, if any.
On July 17, 1996, the Company reached an agreement with COBE Laboratories
Inc. (COBE) to settle COBE's patent suit against the Company. The terms of the
settlement with COBE provide for the Company to make net payments totaling
$2,200,000, of which a net $1,100,000 was paid in August 1996. The remaining
amount is payable on or about August 6, 1997, subject to COBE's active
enforcement of its claimed patent rights with respect to other manufacturers.
The Company recorded settlement costs and professional expenses of approximately
$4,205,000 in 1996, in connection with the COBE suit, compared to $170,000 in
1995. See Consolidated Financial Statements -- Note 10 "Patent Matters."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 32% to $3,651,000 for 1996 from $2,773,000 for 1995. This increased
research and development spending is a result of the Company's ongoing efforts
to pursue a number of potential product opportunities, including a new blood
pump for which the Company submitted a 510(k) application with the FDA late in
September 1996. There can be no assurance that the appropriate marketing
clearance from the FDA will be received on a timely basis regarding this
product, if at all, or, if received, that this device will become commercially
successful.
The Company anticipates that research and development expenses for 1997
will increase approximately 20% over 1996 levels, as the Company moves to expand
and improve its proprietary line of disposable medical devices. This forward-
looking projection is dependent upon the extent and timing of new product
development and the impact of the regulatory process in obtaining marketing
clearance for new products, including the new blood pump. The need or desire to
modify the Company's existing products could also influence the level of
research and development expenses. In addition to the aforementioned blood pump,
the Company is developing an improved MYOtherm cardioplegia system, scheduled
for FDA submission late in the first quarter of 1997; proprietary systems
coatings that will improve blood handling, scheduled for a mid-year 1997 FDA
submission; and new oxygen saturation/ hematocrit technology that is expected to
be submitted to the FDA late in the third quarter of 1997. There can be no
assurance, however, that the Company's research and development efforts will
result in regulatory submissions to the FDA as set forth above, if at all, or
will result in any commercially successful products. The forward-looking
statements regarding anticipated regulatory submissions contained in this
paragraph will be impacted by the results of the Company's development efforts,
the availability of any required clinical data, any changes in the regulatory
scheme for such products, and the Company's assessment of the cost and
anticipated benefit of such submissions.
INTEREST INCOME. Interest income increased to $725,000 for 1996 from
$586,000 for 1995. Interest income during 1996 and 1995 was earned primarily
from the investment of the remaining net proceeds from the Company's June
7
<PAGE>
1995 stock offering. At December 31, 1996, the majority of these remaining net
proceeds were invested with two investment portfolio managers who invested in
U.S. government securities, agency paper, money markets, commercial paper and
corporate obligations.
INCOME TAX PROVISION. For 1996, a tax benefit of $34,000 was recorded as
compared to a tax provision of $780,000 for 1995. The 1996 effective tax rate
differs from the normal statutory tax rate primarily due to losses incurred by
the Company's French subsidiary for which no tax benefit has been recognized
because of uncertainty of realization. The 1995 tax provision reflects an
effective rate which benefited from use of previously generated net operating
loss carryforwards and research and experimentation credits.
NET INCOME (LOSS). Net loss was $567,000 or $.07 per share for 1996
compared to net income of $3,296,000 or $.45 per share for 1995. The 1996 loss
is primarily due to litigation and settlement expense incurred during 1996 in
connection with the COBE lawsuit, which resulted in a charge to operations of
$4,205,000.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995
WITH THE YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased 55% to $33,340,000 for 1995 from $21,486,000
for 1994. This increase was principally the result of a higher volume of product
shipments of the Company's Affinity product line and Signature custom tubing
packs.
Sales from the Affinity product line accounted for approximately 88% of the
overall increase in net sales. The Company began U.S. marketing of the Affinity
oxygenator in late February 1994 and the Affinity blood reservoirs in July 1994.
The favorable impact of increased net sales of these product lines was partially
offset by a decrease of $842,000 in net sales of the Company's older solid
silicone membrane oxygenator product line.
COST OF SALES/GROSS PROFIT. Cost of sales as a percentage of net sales
decreased to 54.5% for 1995 from 58.4% for 1994. The cost of sales percentage
for the year ended December 31, 1995 was favorably impacted principally by a
significant change in product mix in 1995, as a result of substantial sales
increases in the Affinity product line, and by higher overall production volumes
as a result of increases in net sales. This decrease in cost of sales as a
percentage of net sales was partially offset by a decrease in average selling
prices in the Affinity product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 31% to $8,897,000 for the year ended December
31, 1995 from $6,779,000 for the year ended December 31, 1994. This increase is
attributed to an overall increase in the Company's activity level and costs
associated with the continuing development of a direct sales force in connection
with sales of the Affinity product line in the United States. In connection with
the Company's development of a direct sales force the Company also opened a
sales office in France from which it now fields a direct sales force to serve
the French market. Also, the Company expensed $170,000 during 1995 in connection
with the COBE lawsuit.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 20% to $2,773,000 for the year ended December 31, 1995 from $2,309,000
for the year ended December 31, 1994. Beginning in the second quarter of 1994,
the Company increased research and development spending to pursue a number of
potential product opportunities.
INTEREST INCOME. Interest income increased to $586,000 for the year ended
December 31, 1995 from $143,000 for the year ended December 31, 1994. Interest
income in 1995 increased primarily because of earnings on the Company's
investment of the net proceeds from its June 1995 stock offering. As of December
31, 1995 the proceeds were invested in bank certificates of deposit, commercial
paper and a daily money market fund.
INCOME TAX PROVISION. For the year ended December 31, 1995, a provision for
income taxes of $780,000 was recorded. At December 31, 1994 the Company
maintained a full valuation allowance for its net operating loss carryforwards
due to a limited history of operating profits. All net operating loss
carryforwards were utilized in 1995 and the valuation allowance was accordingly
reversed. The Company recorded a minimal provision for income taxes for the year
ended December 31, 1994 which consisted primarily of foreign taxes payable.
NET INCOME (LOSS). Net income was $3,296,000 or $.45 per share for the year
ended December 31, 1995, compared to a net loss of $39,000 or ($.01) per share
for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
For 1996, the Company used $2,470,000 in operating activities compared to
providing $1,481,000 from operating activities in 1995. The net change of
$3,951,000 is primarily the result of paying about $3,100,000 in litigation and
settlement expenses, along with increasing levels of accounts receivable and
inventory resulting from increasing revenues. These operating uses of cash were
offset by increased accrued expenses in 1996. The Company believes that its
existing cash and cash equivalents and short-term investments, as well as
anticipated cash generated from operations, will be sufficient to satisfy the
Company's cash requirements for the foreseeable future.
Cash expenditures for capital additions totaled $2,629,000 in 1996 compared
to $1,146,000 in 1995. These expenditures were primarily related to the addition
of equipment, molds and tooling necessary to further the production of the
Affinity oxygenator, related blood reservoirs and arterial filter, and include
$332,000 related to the equipment, molds and tooling for the anticipated
production of the Company's new blood pump. The 1996 cash expenditures include
capital additions related to the Company's new facility.
8
<PAGE>
Leases for the Company's U.S. manufacturing, research and development and
administrative facilities expired on December 31, 1996. In January 1997, the
Company consolidated its four separate facilities into a newly constructed
facility, which the Company has purchased. The cost of this facility was
approximately $8,600,000, plus approximately $1,050,000 for the purchase of
furniture, fixtures and manufacturing equipment for the facility. To finance the
$9,650,000 total cost of the project, the Company entered into a $5,167,000 bank
note payable agreement in January 1997 and, in addition, will fund out of
corporate funds $4,483,000, of which approximately $650,000 was paid by the
Company during 1996. Closing occurred on January 30, 1997.
The note payable agreement bears interest at 8.11% and requires monthly
principal payments of $21,531, plus interest, through January 2002 with the
remaining principal and interest due February 2002. The note payable is
collateralized by the new corporate headquarters and manufacturing facility and,
among other things, requires the Company to meet certain ratios related to
leverage, debt service and cash flow. Additionally, the bank note payable
agreement prohibits the Company from distributing dividends to its shareholders.
At December 31, 1996, the Company had cash and short term investments of
$4,450,000 restricted for payment of the new corporate headquarters and
manufacturing facility.
The Company anticipates that depreciation expense resulting from the new
facility should approximate the Company's facilities rental expense for 1996,
thus not significantly impacting 1997 cost of goods sold, selling, general and
administrative expense or research and development costs. Annual interest income
is expected to be reduced by approximately $250,000 as a result of this
transaction and an estimated $400,000 of interest expense is expected to be
added in 1997. The Company estimates that the overall 1997 after-tax impact of
constructing and financing associated with the new facility will be
approximately $.01 per share each quarter.
The Company's capital expenditures for 1997 are expected to be
approximately $2,700,000, excluding construction costs related to the new
facility. This estimate includes additional equipment, molds and tooling for the
new blood pump, an improved MYOtherm cardioplegia system and new oxygen
saturation/hematocrit technology.
The foregoing forward-looking statements relating to the amount of capital
expenditures, ultimate cash usage and future income statement impact are
dependent on the progress of the Company's product development efforts and the
timing of the receipt of FDA marketing clearance for any future products.
In 1996, net cash proceeds of approximately $529,000 were generated from
exercises of the Company's stock warrants. At December 31, 1996, the majority of
these proceeds, along with a significant portion of the net proceeds from the
Company's offering of common stock in June 1995, remained in unrestricted cash
and cash equivalents and short-term investments and will be used for general
corporate purposes, including research and development, working capital and
possible acquisitions.
As discussed above under "Results of Operations -- Selling, General and
Administrative and Litigation Expense", on July 17, 1996, the Company reached an
agreement with COBE to settle COBE's patent suit against the Company. The terms
of the settlement provide for the Company to make net payments totaling
$2,200,000, of which $1,100,000 was paid in August 1996. The remaining amount is
payable on or about August 6, 1997, subject to COBE's active enforcement of its
claimed patent rights with respect to other manufacturers. See Consolidated
Financial Statements -- Note 10 "Patent Matters."
FOREIGN CURRENCY TRANSACTIONS
Transactions by the Company's international subsidiaries are negotiated,
invoiced and paid in various foreign currencies, primarily pounds sterling and
U.S. dollars. Accordingly, the Company is currently subject to risks associated
with fluctuations in exchange rates between the various currencies.
Substantially all of the Company's other international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates in other
countries may therefore reduce the demand for the Company's products by
increasing the price of the Company's products in the currency of the countries
in which the products are sold.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). The Company has elected to continue following the guidance of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, for measurement and recognition of stock-based transactions with
employees. The Company has adopted the disclosure provisions of SFAS 123 in
1996. See Consolidated Financial Statements -- Note 5 "Shareholders' Equity."
9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS AVECOR Cardiovascular Inc.
AS OF DECEMBER 31
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . $ 6,114,000 $ 9,178,000
Short-term investments . . . . . . . . . . . . . . 2,638,000 7,757,000
Accounts receivable, net . . . . . . . . . . . . . 7,298,000 6,207,000
Inventories. . . . . . . . . . . . . . . . . . . . 9,476,000 5,934,000
Deferred tax asset . . . . . . . . . . . . . . . . 1,274,000 550,000
Other current assets . . . . . . . . . . . . . . . 744,000 518,000
-----------------------------------
Total current assets. . . . . . . . . . . . . . . 27,544,000 30,144,000
Restricted cash and investments. . . . . . . . . . . 4,450,000 --
Property, plant and equipment, net . . . . . . . . . 4,808,000 3,065,000
Other assets . . . . . . . . . . . . . . . . . . . . 359,000 310,000
-----------------------------------
Total assets . . . . . . . . . . . . . . . . . . . $ 37,161,000 $ 33,519,000
-----------------------------------
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 2,790,000 $ 2,224,000
Accrued expenses . . . . . . . . . . . . . . . . . 3,091,000 1,673,000
Accrued litigation settlement. . . . . . . . . . . 1,100,000 --
-----------------------------------
Total current liabilities . . . . . . . . . . . . 6,981,000 3,897,000
Deferred grant . . . . . . . . . . . . . . . . . . . 205,000 120,000
Deferred tax liability . . . . . . . . . . . . . . . 37,000 180,000
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity:
Serial preferred stock, par value $.01 per share;
authorized 2,000,000 shares; none issued
Common stock, par value $.01 per share; authorized
20,000,000 shares; issued and outstanding shares
7,812,000 and 7,664,000 shares at December 31, 1996
and December 31, 1995, respectively . . . . . . . 78,000 77,000
Additional paid-in capital . . . . . . . . . . . . 29,024,000 28,124,000
Retained earnings. . . . . . . . . . . . . . . . . 609,000 1,176,000
Cumulative translation adjustments . . . . . . . . 227,000 (55,000)
-----------------------------------
Total shareholders' equity. . . . . . . . . . . . 29,938,000 29,322,000
-----------------------------------
Total liabilities and shareholders' equity. . . $37,161,000 $ 33,519,000
-----------------------------------
-----------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS AVECOR Cardiovascular Inc.
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . $ 44,401,000 $ 33,340,000 $ 21,486,000
Cost of sales. . . . . . . . . . . . . . . . . . . 25,986,000 18,180,000 12,556,000
----------------------------------------------------
Gross profit. . . . . . . . . . . . . . . . . 18,415,000 15,160,000 8,930,000
Operating expenses:
Selling, general and administrative. . . . . . . 11,885,000 8,727,000 6,779,000
Litigation expense . . . . . . . . . . . . . . . 4,205,000 170,000 --
Research and development . . . . . . . . . . . . 3,651,000 2,773,000 2,309,000
----------------------------------------------------
Operating income (loss) . . . . . . . . . . . (1,326,000) 3,490,000 (158,000)
Interest income. . . . . . . . . . . . . . . . . . 725,000 586,000 143,000
----------------------------------------------------
Income (loss) before income taxes. . . . . . . . . (601,000) 4,076,000 (15,000)
Income tax provision (benefit) . . . . . . . . . . (34,000) 780,000 24,000
----------------------------------------------------
Net income (loss) . . . . . . . . . . . . . . $ (567,000) $ 3,296,000 $ (39,000)
----------------------------------------------------
Net income (loss) per share. . . . . . . . . . . . $(0.07) $0.45 $(0.01)
----------------------------------------------------
Weighted average common and
common equivalent shares outstanding . . . . . . 7,767,000 7,307,000 6,390,000
----------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AVECOR Cardiovascular Inc.
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK ADDITIONAL CUMULATIVE
--------------------- PAID-IN RETAINED TRANSLATION
SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENTS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993. . . . . . . . 6,374,000 $ 64,000 $15,004,000 $(2,081,000) $ (18,000) $12,969,000
Sale of shares for cash
pursuant to Employee
Stock Purchase Plan. . . . . . . . . . . . 23,000 -- 144,000 -- -- 144,000
Exercise of stock options. . . . . . . . . . 16,000 -- 46,000 -- -- 46,000
Stock bonuses. . . . . . . . . . . . . . . . 1,000 -- 11,000 -- -- 11,000
Net loss for 1994. . . . . . . . . . . . . . -- -- -- (39,000) -- (39,000)
Cumulative translation adjustments . . . . . -- -- -- -- 14,000 14,000
------------------------------------------------------------------------------------
Balances at December 31, 1994. . . . . . . . 6,414,000 64,000 15,205,000 (2,120,000) (4,000) 13,145,000
Sale of share pursuant to
public stock offering, net of
expenses of $1,283,000 . . . . . . . . . . 1,161,000 12,000 12,641,000 -- -- 12,653,000
Sale of shares for cash
pursuant to Employee
Stock Purchase Plan. . . . . . . . . . . . 18,000 -- 178,000 -- -- 178,000
Exercise of stock options. . . . . . . . . . 71,000 1,000 (155,000) -- -- (154,000)
Tax benefit realized upon exercise
of stock options . . . . . . . . . . . . . -- -- 255,000 -- -- 255,000
Net income for 1995. . . . . . . . . . . . . -- -- -- 3,296,000 -- 3,296,000
Cumulative translation adjustments . . . . . -- -- -- -- (51,000) (51,000)
------------------------------------------------------------------------------------
Balances at December 31, 1995. . . . . . . . 7,664,000 77,000 28,124,000 1,176,000 (55,000) 29,322,000
Sale of shares for cash
pursuant to exercise of stock
warrants, net of expenses
of $35,000 . . . . . . . . . . . . . . . . 85,000 1,000 528,000 -- -- 529,000
Sale of shares for cash
pursuant to Employee
Stock Purchase Plan. . . . . . . . . . . . 23,000 -- 250,000 -- -- 250,000
Exercise of stock options. . . . . . . . . . 40,000 -- (70,000) -- -- (70,000)
Tax benefit realized upon exercise
of stock options . . . . . . . . . . . . . -- -- 192,000 -- -- 192,000
Net loss for 1996. . . . . . . . . . . . . . -- -- -- (567,000) -- (567,000)
Cumulative translation adjustments . . . . . -- -- -- -- 282,000 282,000
------------------------------------------------------------------------------------
7,812,000 $78,000 $29,024,000 $ 609,000 $227,000 $29,938,000
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS AVECOR Cardiovascular Inc.
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (567,000) $ 3,296,000 $ (39,000)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 1,375,000 1,063,000 914,000
Accretion of discount on investments. . . . . . . . . . . . . . . . . . (508,000) (189,000) --
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . 104,000 42,000 8,000
Stock bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 11,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (867,000) (370,000) --
Deferred grant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (67,000) (19,000) (16,000)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . (958,000) (2,088,000) (1,859,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,547,000) (1,696,000) (112,000)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . (199,000) (127,000) 44,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 122,000 946,000 256,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,542,000 623,000 237,000
Accrued litigation settlement. . . . . . . . . . . . . . . . . . . 1,100,000 -- --
------------------------------------------------
Net cash (used in) provided by operating activities . . . . . (2,470,000) 1,481,000 (556,000)
------------------------------------------------
Cash flows from investing activities:
Purchase of equipment and improvements . . . . . . . . . . . . . . . . . . (2,629,000) (1,146,000) (733,000)
Purchase of short-term investments . . . . . . . . . . . . . . . . . . . . (6,183,000) (7,666,000) (1,902,000)
Proceeds upon sale or maturity of short-term investments . . . . . . . . . 11,810,000 2,000,000 --
Cash and investments restricted as to use. . . . . . . . . . . . . . . . . (4,450,000) -- --
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . (53,000) (162,000) (56,000)
------------------------------------------------
Net cash used in investing activities . . . . . . . . . . . . (1,505,000) (6,974,000) (2,691,000)
------------------------------------------------
Cash flows from financing activities:
Net proceeds from sales of common stock. . . . . . . . . . . . . . . . . . 250,000 12,831,000 144,000
Net proceeds from options exercised. . . . . . . . . . . . . . . . . . . . (70,000) (154,000) 46,000
Net proceeds from warrants exercised . . . . . . . . . . . . . . . . . . . 529,000 -- --
Grant proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,000 -- 137,000
------------------------------------------------
Net cash provided by financing activities . . . . . . . . . . 811,000 12,677,000 327,000
------------------------------------------------
Effect of exchange rates on cash . . . . . . . . . . . . . . . . . . . . . . 100,000 (41,000) 5,000
------------------------------------------------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . (3,064,000) 7,143,000 (2,915,000)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . 9,178,000 2,035,000 4,950,000
------------------------------------------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . $ 6,114,000 $ 9,178,000 $ 2,035,000
------------------------------------------------
------------------------------------------------
Supplemental disclosure:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 57,000 $ 654,000 $ --
------------------------------------------------
------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AVECOR Cardiovascular Inc.
1. BUSINESS DESCRIPTION AND SIGNIFICANT
ACCOUNTING POLICIES:
BUSINESS DESCRIPTION: AVECOR Cardiovascular Inc.
(the "Company") was incorporated on December 13, 1990. The Company designs,
develops, manufactures and markets specialty disposable medical devices for
heart/lung bypass surgery and long-term respiratory support.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of AVECOR Cardiovascular Inc. and its wholly owned subsidiaries,
AVECOR Cardiovascular Ltd. and AVECOR Foreign Sales Corporation, after
elimination of all significant intercompany transactions and accounts.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: For financial
reporting purposes, the Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. The Company's cash and cash equivalent balances are concentrated
primarily with two investment managers, the majority of which is invested in
daily money market funds.
Short-term investments consist of bank certificates of deposit, U.S.
government securities, agency paper, commercial paper and other corporate
obligations, and money market instruments and are classified as short-term in
the balance sheet based on their maturity date. All of the Company's short-term
investments mature in 1997 and are considered by management to be "available for
sale."
At December 31, 1996, the estimated fair value of the short-term investments
approximated their cost. Unrealized gains and losses were not significant.
At December 31, 1996, certain of these cash and cash equivalents and short-
term investments totaling $4,450,000 were restricted as to their use (see Note
6).
CONCENTRATIONS OF CREDIT RISK: The Company's accounts receivable are
primarily due from independent distributors and hospitals located primarily in
the U.S. and Western Europe. Although the Company does not require collateral
from its customers, concentrations of credit risk in the U.S. are somewhat
mitigated by a large number of geographically dispersed customers. The Company
has a significant amount of trade receivables from distributors outside of the
U.S., primarily in Western Europe. The Company does not presently anticipate
credit risk associated with foreign trade receivables, although collection could
be impacted by the underlying economies of the respective countries.
INVENTORIES: Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at
cost less accumulated depreciation and amortization. Depreciation and
amortization are recorded using the straight-line method over estimated useful
asset lives of generally five years or less (shorter of asset life or lease term
for improvements). The cost of molds, tooling and dies is capitalized and
depreciated generally over periods of three to five years using straight-line or
units of production methods.
Maintenance, repairs and minor improvements are charged to expense as
incurred while major betterments and renewals are capitalized. When assets are
sold or retired, the cost and related accumulated depreciation and amortization
are removed from the accounts and the resulting gain or loss is included in
operations.
REVENUE RECOGNITION: The Company recognizes sales upon product shipment.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
INCOME TAXES: The Company accounts for income taxes using the liability
method. The liability method provides that deferred tax assets and liabilities
are recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes
("temporary differences") using enacted tax rates in effect in the years in
which the differences are expected to reverse. Temporary differences relate
primarily to the allowance for doubtful accounts, obsolete inventory allowances,
depreciation, and accruals for vacation, product liability and warranty costs.
NET INCOME (LOSS) PER SHARE: Net income (loss) per common and common
equivalent share has been computed by dividing net income (loss) by the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares relate to stock options and stock warrants when their effect
is not antidilutive. The difference between primary and fully diluted earnings
per share was not significant in any year presented.
FOREIGN CURRENCY TRANSLATION: All assets and liabilities of the Company's
international subsidiaries are translated to U.S. dollars at year-end exchange
rates, while elements of the statement of operations are translated at average
exchange rates in effect during the year. Translation adjustments arising from
the use of differing exchange rates are included in cumulative translation
adjustments in shareholders' equity.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets
14
<PAGE>
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The most significant areas which require the use of
management's estimates relate to the determination of the allowances for
doubtful accounts receivable and obsolete inventory and the need for a valuation
allowance on deferred tax assets.
2. BALANCE SHEET INFORMATION:
The following provides additional information concerning selected balance sheet
accounts as of December 31, 1996 and 1995:
1996 1995
- -----------------------------------------------------------------------------
Accounts receivable, net:
Accounts receivable. . . . . . . . . . $ 7,418,000 $ 6,300,000
Allowance for doubtful
accounts . . . . . . . . . . . . . . . (120,000) (93,000)
-------------------------------
$ 7,298,000 $ 6,207,000
-------------------------------
-------------------------------
Inventories:
Raw materials. . . . . . . . . . . . . $ 3,424,000 $ 2,507,000
Work-in-progress . . . . . . . . . . . 2,343,000 1,340,000
Finished goods . . . . . . . . . . . . 3,709,000 2,087,000
-------------------------------
$ 9,476,000 $ 5,934,000
-------------------------------
-------------------------------
Property, plant and equipment, net:
Machinery and equipment. . . . . . . . $ 3,324,000 $ 2,172,000
Office and laboratory equipment. . . . 2,430,000 1,325,000
Molds, tooling and dies. . . . . . . . 2,183,000 1,960,000
Leasehold improvements . . . . . . . . 786,000 703,000
Building . . . . . . . . . . . . . . . 557,000 --
-------------------------------
9,280,000 6,160,000
Accumulated depreciation
and amortization. . . . . . . . . . . (4,472,000) (3,095,000)
-------------------------------
$ 4,808,000 $3,065,000
-------------------------------
-------------------------------
Accrued expenses:
Accrued payroll. . . . . . . . . . . . $ 472,000 $ 257,000
Accrued vacation . . . . . . . . . . . 288,000 193,000
Accrued commissions. . . . . . . . . . 447,000 360,000
Accrued income taxes . . . . . . . . . 616,000 453,000
Other. . . . . . . . . . . . . . . . . 1,268,000 410,000
-------------------------------
$3,091,000 $1,673,000
-------------------------------
-------------------------------
3. SUPPLEMENTAL CASH FLOW INFORMATION:
At December 31, 1996, the Company had accounts
payable of $387,000 relating to purchases of property, plant and equipment.
4. DEFERRED GRANT:
During 1996 and 1994, the Company received grants from the Scottish Government
to fund improvements for the Company's Scotland facility. Pursuant to terms of
the grant, the Company must satisfy certain benchmarks in order to retain the
funds received. Accordingly, funds received are reported as a "deferred grant"
on the Company's balance sheet pending periodic satisfaction of the benchmarks.
The Company expects to satisfy these benchmarks.
5. SHAREHOLDERS' EQUITY:
SERIAL PREFERRED STOCK: The Company's Restated Articles of Incorporation provide
for 2,000,000 shares of preferred stock, par value $.01 per share, issuable in
series ("Serial Preferred Stock"). The Board of Directors is empowered to
authorize the issuance and establish the terms of any shares of the Serial
Preferred Stock without shareholder approval. In 1996, the Board of Directors
authorized 200,000 shares for issuance as Series A Junior Preferred Stock under
the Company's Shareholder Rights Plan.
STOCK INCENTIVE PLAN: The Company's 1991 Stock Incentive Plan ("Plan") provides
for granting to eligible employees and certain other individuals nonqualified
and incentive options. The Company has reserved 1,050,000 shares of common stock
for issuance under the Plan. Options granted under the Plan are generally
exercisable beginning one year from the date of grant in cumulative yearly
amounts of 25% of the shares under option and expire, if not exercised, five
years after the date of grant.
Pursuant to the terms of the Plan, optionees may use cash, tender
previously owned shares, or be credited for a portion of the shares exercised to
reimburse the Company for the cost of excercising the options and the taxes due
on the recognized gain. The shares tendered from the optionee or credited at
time of exercise are at the fair market value of the stock on the transaction
date. In 1996, 19,000 common shares valued at $278,000 and, in 1995, 33,000
shares valued at $486,000 were credited the optionees at the exercise date to
satisfy such obligations. No common shares were credited to optionees to satisfy
such obligations in 1994.
Upon the occurrence of a change of control (as defined), all outstanding
options become immediately exercisable in full and all restrictions with respect
to outstanding restricted stock awards immediately lapse.
The Plan also provides for stock bonuses and awards of restricted shares of
the Company's common stock to eligible recipients. Restricted shares awarded may
not be sold, assigned, or otherwise transferred by the recipient until the
shares awarded become free of restrictions on transferability. All shares still
subject to restrictions will be forfeited and returned to the Plan if
affiliation with the Company terminates. Plan administrators may waive or
accelerate the lapsing of restrictions.
During the year ended December 31, 1994, $11,000 was charged to
compensation expense representing the quoted market value of 1,200 common shares
awarded to employees as stock bonuses. There were no stock bonuses issued under
the Plan for the years ended December 31, 1996 and 1995. No restricted shares
were issued under the Plan for the years ended December 31, 1996, 1995 and 1994.
15
<PAGE>
A summary of option transactions under the Plan for 1996, 1995 and 1994
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -----------------------------------------------------------------------------------
AVERAGE OPTION
EXERCISE PRICE RANGE
SHARES PRICE PER SHARE PER SHARE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, December 31, 1993. . . . . . . 397,000 $5.01 $1.00 - $9.87
Options granted . . . . . . . . . . . . 192,000 $9.69 $7.63 - $9.94
Options exercised . . . . . . . . . . . (16,000) $2.93 $1.00 - $5.50
Options cancelled . . . . . . . . . . . (3,000) $5.50 $5.50
--------
Balances, December 31, 1994. . . . . . . 570,000 $6.65 $1.00 - $9.94
Options granted . . . . . . . . . . . . 42,000 $10.63 $8.38 - $12.63
Options exercised . . . . . . . . . . . (104,000) $3.20 $1.00 - $9.88
Options cancelled . . . . . . . . . . . (3,000) $9.88 $9.88
--------
Balances, December 31, 1995. . . . . . . 505,000 $7.67 $1.00 - $12.63
Options granted . . . . . . . . . . . . 309,000 $12.32 $10.88 - $14.75
Options exercised . . . . . . . . . . . (58,000) $3.58 $1.00 - $12.00
Options cancelled . . . . . . . . . . . (113,000) $11.99 $9.88 - $12.00
--------
Balances, December 31, 1996. . . . . . . 643,000 $9.51 $2.00 - $14.75
--------
--------
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------
WEIGHTED-
AVG. WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVG. AVG.
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------
$2.00 4,000 0.1 YEARS $2.00 4,000 $2.00
$4.56 - $6.65 158,000 0.6 YEARS $5.48 154,000 $5.46
$7.00 - $9.94 248,000 3.2 YEARS $9.62 91,000 $9.50
$10.63 - $14.75 233,000 3.4 YEARS $12.25 9,000 $10.87
------- -------
643,000 2.6 YEARS $9.51 258,000 $7.02
------- -------
------- -------
1995 NON-EMPLOYEE DIRECTOR PLAN: In 1995, the Company's Board of Directors
authorized, and in 1996, the Company's shareholders approved, a reserve of
250,000 shares of the Company's common stock for issuance to Non-Employee
Directors of the Company, pursuant to the 1995 Non-Employee Director Plan (the
"1995 Director Plan"). Options granted under the 1995 Director Plan are
exercisable on a cumulative basis, with one third exercisable as of the date of
grant and the remainder becoming exercisable in equal installments on each of
the first and second anniversaries of the date of grant. Each option expires and
is no longer exercisable on the date ten years from its date of grant. Options
to purchase 42,000 shares at $13.38 and 10,500 shares at $12.25 per share were
granted during 1995 and 1996, respectively.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------
WEIGHTED-
AVG. WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVG. AVG.
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------------------------------------------------------------
$12.25 - $13.38 53,000 8.7 YEARS $13.15 32,000 $13.25
ACCOUNTING FOR STOCK-BASED COMPENSATION: In October 1995, the Financial
Accounting Standards Board Issued Statement No. 123, "Accounting for Stock-Based
Compensation (SFAS 123)", a new standard of accounting and reporting for stock-
based compensation plans. The Company has adopted this new standard in 1996. The
Company has continued to measure compensation cost for its stock-based
compensation plans using the intrinsic value-based method of accounting its has
historically used and, therefore, the new standard has no effect on the
Company's operating results.
Had the Company used the fair value-based method of accounting for its 1991
Stock Incentive Plan and 1995 Non-Employee Director Plan beginning in 1995 and
charged this compensation cost along with the value of the shares granted
through the Employee Stock Purchase Plan against income, over the plans' vesting
periods, based on the fair value of options at the date of grant, net income and
net income per share for 1996 and 1995 would have been as follows:
1996 1995
- ----------------------------------------------------------------------------
Net income (loss) As reported $ (567,000) $3,296,000
Pro forma $ (845,000) $3,117,000
Net income (loss) As reported $ (0.07) $ 0.45
per share Pro forma $ (0.11) $ 0.43
The pro forma information above includes stock options granted, as well as
purchases under the Employee Stock Purchase Plan, in 1995 and 1996.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model for the 1991 Stock Incentive Plan
and the 1995 Non-Employee Director Plan. The assumptions for 1996 and 1995 were
as follows:
1996 1995
- ----------------------------------------------------------------------------
1991 1995 1991 1995
INCENTIVE DIRECTOR INCENTIVE DIRECTOR
PLAN PLAN PLAN PLAN
- ----------------------------------------------------------------------------
Risk-free interest rates 5.2% - 6.8% 6.2% 6.2% - 7.8% 6.6%
Expected life 4.3 YEARS 8 YEARS 4.3 YEARS 8 YEARS
Expected volatility 50% 50% 50% 50%
Expected dividends 0% 0% 0% 0%
WARRANTS: In connection with the completion of its initial public offering
of common shares in 1992, the Company granted to the representatives of the
underwriters warrants for 90,000 shares of common stock at an exercise price of
$6.60 per share. During 1996 the Company issued 85,000 shares of common stock
pursuant to the exercise of the warrants. At December 31, 1996 there are 5,000
shares of common stock to be issued upon the exercise of the remaining warrants.
EMPLOYEE STOCK PURCHASE PLAN: The AVECOR Cardiovascular Inc. Employee Stock
Purchase Plan ("Stock Purchase Plan"), which is available to substantially all
employees, enables eligible employees to contribute up to 10% of their wages
toward quarterly purchases of the
16
<PAGE>
Company's common stock at 85% of market value on the first or last day of each
calendar quarter, whichever had the lower stock price. Employees purchased
23,000 shares at an average price of $11.00 per share in 1996, 18,000 shares at
an average price of $10.17 per share in 1995, and 23,000 shares at an average
price of $6.18 per share in 1994. At December 31, 1996, 16,000 additional shares
were reserved for future employee purchases of stock under this plan.
SHAREHOLDER RIGHTS PLAN: In June 1996 the Company adopted a shareholder
rights plan, pursuant to which the Company declared a dividend distribution of
one Preferred Share Purchase Right on each share of the Company's Common Stock
outstanding on August 2, 1996. Each Right will entitle the holder to buy one-
thousandth of a share of the Company's Series A Junior Preferred Stock, or a
combination of securities and assets of equivalent value, at an exercise price
of $80.00, subject to adjustment. The description and terms of the Rights are
set forth in a Rights Agreement dated June 26, 1996, between the Company and
Norwest Bank Minnesota, N.A., as Rights Agent.
6. COMMITMENTS AND CONTINGENCIES:
LEASES: In 1996 and years prior, the Company leased all of its facilities and
certain equipment pursuant to operating leases. The leases for the Company's
United States operating facilities expired in December 1996. The Company's
facility near Glasgow, Scotland is leased for a period of ten years ending in
October 2003. This lease agreement provides for adjustment of minimum rentals
based upon market rates in 1998 and requires minimum monthly rental payments
plus real estate taxes and applicable common facility operating expenses.
Rent expense, including allocated real estate taxes and operating expenses,
under all rental agreements was $725,000, $596,000 and $587,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. The following is a
schedule of future minimum lease payments pursuant to the terms of the
non-cancellable leases for the Glasgow, Scotland facility described above:
YEAR ENDING DECEMBER 31
- -------------------------------------------------------------------------------
1997 $ 120,000
1998 147,000
1999 147,000
2000 147,000
2001 147,000
2002 and thereafter 259,000
----------
$ 967,000
----------
----------
PURCHASE OF FACILITY: In January 1997, the Company purchased a new
corporate headquarters and manufacturing facility for $9,650,000 and
consolidated its former four separate U.S. facilities. In connection with this
purchase, the Company entered into a $5,167,000 bank note payable agreement in
January 1997 and, in addition, utilizing restricted cash and investments (see
Note 1), funded $4,483,000 of the remaining cost of construction of the new
building.
The bank note payable agreement bears interest at 8.11% and requires
monthly principal payments of $21,531, plus interest, through January 2002 with
the remaining principal and interest due February 2002. The bank note payable is
collateralized by the new corporate headquarters and manufacturing facility and,
among other things, requires the Company to meet certain ratios related to
leverage, debt service and cash flow. Additionally, the bank note payable
agreement prohibits the Company from distributing dividends to its shareholders.
Principal payments on the bank note payable are
as follows:
YEAR ENDING DECEMBER 31
- --------------------------------------------------------------------------------
1997 $ 215,000
1998 258,000
1999 258,000
2000 258,000
2001 258,000
2002 and thereafter 3,920,000
-----------
$ 5,167,000
-----------
-----------
ROYALTY AGREEMENT: In connection with the Company's June 1991 acquisition
of the Surgical Division of SCIMED Life Systems, Inc. (the Predecessor
Business), the Company entered into a royalty agreement with SCIMED. The
agreement required the Company to make payments to SCIMED primarily based on net
sales (as defined), through June 1996, of products previously manufactured by
the Predecessor Business as of the acquisition date. The Company has incurred
royalties of $95,000, $178,000, and $213,000 for the years ended December 31,
1996, 1995 and 1994, respectively, under this agreement.
The agreement also provides for royalty payments should the Company develop
and sell new products (new generation products) using certain technology
embodied in product models developed by the Predecessor Business. This element
of the agreement expires in June 2001. The Company has not paid or incurred any
such royalties through December 31, 1996.
PRODUCT LIABILITY: The Company is self-insured on product liability claims
below a certain dollar limitation and maintains product liability insurance
above this limitation per claim and in the aggregate.
CONFIDENTIALITY AND NON-COMPETE AGREEMENTS: The Company has entered into
confidentiality and non-compete agreements with certain employees. If any of
these employees are terminated, the Company is conditionally required to pay the
employee 75% of his or her base salary, as defined, during the non-compete
period (one to two years) if the employee remains unemployed during
this period.
17
<PAGE>
7. INDUSTRY SEGMENT INFORMATION:
The Company distributes its products through its direct sales force and
independent sales representatives. Additionally, the Company distributes its
products through domestic and foreign independent distributors who then market
the products directly to medical institutions. While sales to certain of the
Company's independent distributors exceed 10% of the Company's 1995 and 1994 net
sales, management does not believe the Company is primarily dependent upon any
one distributor for the ultimate sale of products to medical institutions. Sales
to distributors accounting for 10% or more of the Company's net sales were as
follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Distributor #1 . . (1) (1) $2,296,000
Distributor #2 . . (1) $3,503,000 (1)
(1) Accounted for less than 10% of the Company's net sales.
Total export sales from the U.S. to unaffiliated entities (primarily to
Europe and payable in U.S. dollars) were $4,912,000, $3,480,000 and $3,365,000,
respectively, for the years ended December 31, 1996, 1995 and 1994.
At December 31, 1996 and 1995, consolidated accounts receivable include
$3,738,000 and $3,093,000, respectively, due from customers located outside of
the U.S.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------
AVECOR AVECOR
CARDIOVASCULAR CARDIOVASCULAR
INC. LTD. CONSOLIDATED
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996
Sales to unaffiliated
customers . . . . . . . . . . . $31,290,000 $13,111,000 $44,401,000
Operating income (loss). . . . . (1,738,000) 412,000 (1,326,000)
Identifiable assets. . . . . . . 30,699,000 6,462,000 37,161,000
1995
Sales to unaffiliated
customers . . . . . . . . . . . 22,638,000 10,702,000 33,340,000
Operating income . . . . . . . . 2,806,000 684,000 3,490,000
Identifiable assets. . . . . . . 27,902,000 5,617,000 33,519,000
1994
Sales to unaffiliated
customers . . . . . . . . . . . 15,302,000 6,184,000 21,486,000
Operating income (loss). . . . . (372,000) 214,000 (158,000)
Identifiable assets. . . . . . . 12,845,000 3,032,000 15,877,000
</TABLE>
During the years ended December 31, 1996, 1995, and 1994, AVECOR
Cardiovascular Ltd. made capital expenditures of approximately $146,000, $57,000
and $320,000, respectively.
8. RETIREMENT SAVINGS PLAN:
The AVECOR Cardiovascular Inc. Retirement Savings Plan (the "Savings Plan") is a
profit sharing plan which provides for voluntary pre-tax employee contributions
and discretionary employer matching and profit sharing contributions and is
intended to satisfy the requirements of Section 401(k) of the Internal Revenue
Code. Generally, all employees of the Company who are over 21 years of age and
who have completed one year of service with the Company are eligible to
participate in the Savings Plan. The Company approved contributions of $23,000
and $10,000 to the Savings Plan in 1996 and 1995, respectively. The Company did
not make any contributions to the Savings Plan in 1994.
9. INCOME TAXES:
The components of the Company's income tax provision (benefit) are as follows:
YEAR ENDED DECEMBER 31
1996 1995 1994
- --------------------------------------------------------------------------------
Current
U.S. federal . . . . . . . . . . . $484,000 $875,000 $ --
U.S. state . . . . . . . . . . . . 57,000 5,000 --
International. . . . . . . . . . . 292,000 270,000 24,000
Deferred . . . . . . . . . . . . . . (867,000) (370,000) --
----------------------------------------
$(34,000) $780,000 $24,000
----------------------------------------
----------------------------------------
The variance of the 1996 effective tax rate from the statutory tax rate was
primarily due to losses incurred by the Company's French subsidiary for which no
tax benefit has been recorded because of the uncertainty of their realization.
The variance of the 1995 effective tax rate from the statutory tax rate was
primarily due to utilization of $1,730,000 of net operating loss carryforwards
("NOLs") and $26,000 of state research and experimentation credits.
Components of the Company's deferred tax assets and liabilities are as
follows:
DECEMBER 31
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Patent settlement. . . . . . . . . . . $ 418,000 $ --
Research and experimentation
credits . . . . . . . . . . . . . . 560,000 420,000
French subsidiary NOL
carryforwards . . . . . . . . . . . . 119,000 15,000
Other, primarily certain
accrued expenses. . . . . . . . . . . 296,000 130,000
Valuation allowance. . . . . . . . . . (119,000) (15,000)
---------------------------
1,274,000 550,000
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . (37,000) (180,000)
---------------------------
Net deferred tax assets. . . . . . . . . $1,237,000 $ 370,000
---------------------------
---------------------------
The company has established a valuation allowance to offset its deferred
tax asset related to its French subsidiary's NOL carryforwards due to the
uncertainty of their realization. The nol carryforwards expire from 2000 to
2001. The Company expects its future taxable income will be sufficient to
realize its other deferred tax assets, therefore there is no valuation allowance
offsetting them.
Available research and experimentation credits at December 31, 1996,
represent federal and state amounts of approximately $370,000 and $190,000,
respectively, with expiration dates ranging from 2007 to 2011.
18
<PAGE>
Domestic and international components of income (loss) before income taxes
are as follows:
YEAR ENDED DECEMBER 31
1996 1995 1994
- -------------------------------------------------------------------------------
AVECOR Cardiovascular Inc. $(1,088,000) $ 3,351,000 $ (240,000)
AVECOR Cardiovascular Ltd. 487,000 725,000 225,000
--------------------------------------------------
$ (601,000) $ 4,076,000 $ (15,000)
--------------------------------------------------
--------------------------------------------------
Undistributed earnings of the Company's foreign subsidiary are indefinitely
reinvested in foreign operations. Accordingly, no provision has been made for
income taxes that might be payable upon remittance.
10. PATENT MATTERS:
In 1996, the Company reached an agreement with COBE Laboratories Inc. (COBE) to
settle COBE's patent suit against the Company.
The terms of the settlement with COBE provide for the Company to make net
payments totaling $2,200,000, of which a net $1,100,000 was paid in August 1996
for settlement of the suit as well as certain license rights. The net settlement
costs of $2,200,000 and the associated legal costs were recognized as a charge
to operations in 1996. The remaining amount is payable on or about August 6,
1997, subject to COBE's active enforcement of its claimed patent rights with
respect to other manufacturers.
In March 1997, the Company filed suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent held by
a competing manufacturer of blood oxygenators and other medical devices, and
requesting a determination that the Company's Affinity oxygenator does not
infringe the competitor's patent. The Company filed suit in response to a
December 1996 letter from the competitor, alleging that the Affinity oxygenator
infringes certain claims under the competitor's patent, and requesting
discussion regarding a possible license agreement. The Company reviewed the
subject patent and concluded, based on an opinion from its patent counsel, that
none of the claims in the patent are infringed by the Affinity oxygenator, and
that the patent is, in any event, invalid. However, the expense and effort
potentially required to bring this action, as well as the outcome of any
counterclaim successfully brought against the Company by the competitor, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
11. QUARTERLY DATA (UNAUDITED):
Quarterly net sales, gross profit, net income (loss) and net income (loss) per
share data are presented on page 20.
12. RECLASSIFICATIONS:
Certain reclassifications were made to the 1995 and 1994 financial statements to
conform to the 1996 presentation. These reclassifications had no effect on
previously reported total assets, total liabilities, shareholders' equity or net
income (loss).
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
AVECOR Cardiovascular Inc.:
We have audited the accompanying consolidated balance sheets of AVECOR
Cardiovascular Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AVECOR
Cardiovascular Inc. as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
March 6, 1997
19
<PAGE>
QUARTERLY OPERATING DATA
The following table sets forth certain unaudited operating data for the four
quarters in 1996, 1995 and 1994. In the opinion of management, the data include
all adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the information set forth therein.
FIRST SECOND THIRD FOURTH
(UNAUDITED) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Net sales. . . . . . . . . . . . . . $10,293 $11,145 $11,315 $11,648
Gross profit . . . . . . . . . . . . 4,342 4,702 4,534 4,837
Net income (loss) . . . . . . . . . 211 (1,876) 628 470
Net income (loss) per share . . . . $.03 $(.24) $.08 $.06
1995
Net sales. . . . . . . . . . . . . . $7,597 $8,090 $8,529 $9,124
Gross profit . . . . . . . . . . . . 3,383 3,746 3,969 4,062
Net income . . . . . . . . . . . . . 666 607 1,014 1,009
Net income per share . . . . . . . . $.10 $.09 $.13 $.13
1994
Net sales. . . . . . . . . . . . . . $4,447 $5,073 $5,566 $6,400
Gross profit . . . . . . . . . . . . 1,784 1,894 2,313 2,939
Net income (loss). . . . . . . . . . (338) (342) 121 520
Net income (loss) per share. . . . . $(.05) $(.05) $.02 $.08
The summation of quarterly net income (loss) per share may not equate to the
calculation for the year due to rounding.
COMMON STOCK INFORMATION
The Company's Common Stock is currently traded on the Nasdaq National Market
under the symbol AVEC. Through February 28, 1995, AVECOR stock was quoted
on theNasdaq SmallCap Market. The quotations set forth below were furnished by
the National Association of Securities Dealers and reflect closing prices for
the period in which the Company was traded on the Nasdaq National Market and the
range of high and low bid prices for the period during which shares were traded
on theNasdaq SmallCap Market.
These prices do not include adjustments for retail mark-ups, mark-downs or
commissions, and, prior to March 1, 1995, represent inter-dealer quotations and
do not necessarily represent actual transactions.
1996 HIGH LOW
First Quarter . . . . . . . . . . . . . . . . . . $17 1/4 $10 1/2
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 14 1/8 12
Third Quarter . . . . . . . . . . . . . . . . . . . . . . 15 7/8 11 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 14 7/8 10 7/8
1995HIGHLOW
First Quarter. . . . . . . . . . . . . . . . . . . . . . . $13 1/8 $ 8 1/2
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 14 3/8 12
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . 14 1/2 12 1/2
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 18 7/8 13 1/2
SHAREHOLDERS. As of March 21, 1997, there were approximately 300 holders of
record and approximately 4,100 beneficial shareholders of the Company's Common
Stock.
DIVIDENDS. The Company has not declared or paid any cash dividends on its
Common Stock since its inception, and the Board of Directors currently intends
to retain all earnings for use in the business for the foreseeable future. Under
terms of a note payable used to finance the Company's U.S. manufacturing
facility in January 1997, no dividends may be paid to shareholders while the
note payable is outstanding. The bank note payable will fully mature in February
2002.
20
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
AVECOR Cardiovascular Inc.
7611 Northland Drive
Minneapolis, Minnesota 55428
(612) 391-9000
FORM 10-K
Shareholders may receive a copy of the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, without charge by writing to:
Investor Relations
AVECOR Cardiovascular Inc.
7611 Northland Drive
Minneapolis, Minnesota 55428
STOCK TRANSFER AGENT
For change of name, address, or to replace lost stock certificates, contact:
Norwest Bank Minnesota, N.A.
P.O. Box 738
161 N. Concord Exchange
South St. Paul, Minnesota 55075-0738
(612) 450-4064
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
GENERAL COUNSEL
Oppenheimer Wolff & Donnelly
Minneapolis, Minnesota
INVESTOR RELATIONS COUNSEL
Swenson/Falker Associates Inc.
Minneapolis, Minnesota
(612) 371-0000
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Wednesday, May 14, 1997, at
3:30 p.m. at the Minneapolis Marriott City Center Hotel, 30 South Seventh
Street, Minneapolis, Minnesota.
DIRECTORS
ANTHONY BADOLATO
Chief Executive Officer
ANN H. LAMONT
General Partner
Oak Associates IV, Limited Partnership
EDWARD E. STRICKLAND
Independent Financial Consultant
DAVID W. STASSEN
President and Chief Executive Officer
Spine-Tech, Inc.
J. GORDON WRIGHT
Founder and Managing Director
Caledonian Medical Limited
OFFICERS
ANTHONY BADOLATO
Chief Executive Officer
WILLIAM S. HAWORTH
Vice President - Engineering
GREGORY J. MELSEN
Vice President - Finance, Treasurer and
Chief Financial Officer
ALLAN R. SECK
Vice President - Marketing and Sales
<PAGE>
AVECOR CARDIOVASCULAR INC.
7611 NORTHLAND DRIVE
MINNEAPOLIS, MINNESOTA 55428
(612) 391-9000
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
AVECOR Cardiovascular Inc. on Form S-8 (File Nos. 33-55184, 33-55166 and 33-
90460) and Form S-3 (File No. 333-00064) of our reports dated March 6, 1997, on
our audits of the consolidated financial statements and financial statement
schedule of AVECOR Cardiovascular Inc. as of December 31, 1996 and 1995, and for
the years ended December 31, 1996, 1995 and 1994, which reports are included or
incorporated by reference in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 31, 1997
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