EXHIBIT 10 (AA)
EMPLOYMENT AGREEMENT
AGREEMENT dated as of this 1st day of August, 1998 by and between Cantel
Industries, Inc., a Delaware corporation (the "Company") and Xxxxx X. Xxxxxx
(the "Employee").
R E C I T A L :
The Company is desirous of continuing the employment of Employee, and
Employee is desirous of continuing his employment by the Company on the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is hereby agreed by and between the Company and Employee as follows:
1. ENGAGEMENT AND TERM. The Company hereby employs Employee and Employee
hereby accepts such employment by the Company on the terms and conditions set
forth herein, for a period commencing on the date of this Agreement as set forth
above (the "Effective Date") and ending, unless sooner terminated in accordance
with the provisions of Section 5 hereof, on the fourth anniversary of such
Effective Date (the "Employment Period").
2. SCOPE OF DUTIES. Employee shall be employed by the Company as its
President and Chief Executive Officer. In such capacities, the Executive shall
have such authority, powers and duties customarily attendant upon such offices.
If elected or appointed, Employee shall also serve,
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without additional compensation, in one or more offices and as a director of the
Company or any subsidiary or affiliate of the Company, provided that his duties
and responsibilities are not inconsistent with those pertaining to his position
as stated above. Employee shall faithfully devote his full business time and
efforts so as to advance the best interests of the Company. During the
Employment Period, Employee shall not be engaged in any other business activity,
whether or not such business activity is pursued for profit or other pecuniary
advantage, unless the same is only incidental and is in no way, directly or
indirectly, competitive with, or opposed to the best interests of the Company.
The Company will use its best efforts to cause Employee to be reelected a
member of the Board of Directors of the Company during the Employment Period.
3. COMPENSATION.
3.1 BASE SALARY. During the Employment Period, the Company shall pay
Employee, as compensation for his services, a base salary (the "Base Salary") of
$275,000 per annum payable in arrears in substantially equal period installments
in accordance with the Company's regular payroll practices. Inasmuch as Employee
has not received salary at said $275,000 rate from August 1, 1998, the Company
will promptly make a lump sum payment to Employee equal to the amount he would
have received had salary at such rate been paid from August 1, 1998.
3.2 AUTOMATIC INCREASES IN BASE SALARY. The Base Salary shall be
increased annually by an amount established by reference to the "Consumer Price
Index for Urban Wage Earners and Clerical Workers, New York, New York, all items
- Series A-01" published by the Bureau of Labor Statistics of the United States
Department of Labor (the "Consumer Price Index"). The base period shall be the
month ended March 31, 1998 (the "Base Period"). If the Consumer
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Price Index for the month of March in any year, commencing in 1999, is greater
than the Consumer Price Index for the Base Period, Base Salary shall be
increased, commencing on August 1 of the next Fiscal Year (the Company's Fiscal
Year being the 12-month period ending July 31 of each year), to the amount
obtained by multiplying Base Salary by a fraction, the numerator of which is the
Consumer Price Index for the month of March of the year in which such
determination is being made and the denominator of which is the Consumer Price
Index for the Base Period. Notwithstanding the foregoing, in no event shall
Employee receive, for any Fiscal Year, an increase in Base Salary of less than
five (5%) percent over the Base Salary as adjusted (continued hereafter to be
referred to simply as "Base Salary") payable for the previous Fiscal Year.
3.3 INCENTIVE COMPENSATION. For each Fiscal Year of the Company
(each a "Subject Fiscal Year") during the Employment Period (commencing with the
Company's Fiscal Year ending July 31, 1999) the Employee shall be paid, as
additional compensation for his services, a bonus (the "Bonus") based on the
profitability of the Company. The Bonus shall be equal to six percent (6%) of
the excess of Pretax Income (hereinafter defined) for the Subject Fiscal Year
over Pretax Income for the Test Year (as hereinafter defined) multiplied by a
number (i) the numerator of which shall be the number of days during Subject
Fiscal Year that Employee is employed hereunder and (ii) the denominator of
which shall be 365, but shall, in no event, exceed 100% of Employee's Base
Salary for such Subject Fiscal Year. The Bonus shall be payable not later than
the 15th day of the fourth month following the Subject Fiscal Year for which the
Bonus is payable.
3.3.1 "Test Year" shall mean the Company's Fiscal Year,
commencing with the Company's Fiscal Year ended July 31, 1998, in which
the Company has recorded its highest Pretax Income of any such Fiscal
Years.
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3.3.2 "Pretax Income" shall mean, for any Fiscal Year,
the income (positive or negative) of the Company and its consolidated
subsidiaries (or, if required by the context, of an entity acquired by the
Company) from continuing operations determined in accordance with
generally accepted accounting principles from time to time in effect
("GAAP") before provisions for income taxes and Executive's Bonus pursuant
to this Section 3.3. Pretax Income shall be adjusted to exclude gains or
losses from the sale or distribution of assets not in the Company's
ordinary course of business and gains or losses from transactions
accounted for as extraordinary events in accordance with GAAP. For any
Fiscal Year, "Pretax Income" shall be adjusted in accordance with the
provisions of Sections 3.3.3, 3.3.4, 3.3.5 and 3.3.6
3.3.3 With respect to any Subject Fiscal Year in which
the Company has made an acquisition accounted for on a "pooling of
interests" basis, Pretax Income for that Subject Fiscal Year shall include
only the percentage (the "Acquisition Percentage") of the Pretax Income of
the acquired company (the "Target") which is derived by dividing (i) the
number of days in the Subject Fiscal Year after and including the date of
the acquisition by (ii) 365. In such case, the Pretax Income of the
Company for the Test Year shall be adjusted by adding to such Pretax
Income, the Pretax Income of the Target for the Company's Fiscal Year next
preceding the year of such acquisition, multiplied by the Acquisition
Percentage. For purposes of this Section 3.3.3, the costs of such
acquisition shall be amortized over a period of thirty-six (36) months
commencing on the date of acquisition. An example of this computation is
annexed hereto as Exhibit A.
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3.3.4 With respect to any Subject Fiscal Year in which
the Company has made an acquisition accounted for on a "purchase" basis,
Pretax Income for such Subject Fiscal Year shall, in accordance with GAAP,
take into account the following: (i) the costs of funds used for such
acquisition and (ii) depreciation and amortization of the assets of the
Target (including any "Goodwill") on the basis of their valuation required
by "purchase" accounting. In addition, Pretax Income of the Company for
that Subject Fiscal Year shall include only the Acquisition Percentage of
the Pretax Income of the Target (but only if positive), and the Pretax
Income of the Company for the Test Year shall be adjusted by adding to
such Pretax Income, the Pretax Income of the Target (but only if positive)
for the Company's Fiscal Year next preceding the year of such acquisition,
multiplied by the Acquisition Percentage. In computing the Pretax Income
of the Target for such next preceding Fiscal Year, depreciation and
amortization expense of each depreciable and amortizable asset of the
Target (including Goodwill) shall be charged in such amounts as would have
been charged had the acquisition been consummated (and the assets
revalued) as of the same date in such Fiscal Year as was the effective
date of the "purchase" acquisition in the Subject Fiscal Year. An example
of this computation is annexed hereto as Exhibit B.
3.3.5 The provisions of Sections 3.3.3 and 3.3.4 to the
contrary notwithstanding, any acquisition consummated less than sixty (60)
days prior to the end of any Fiscal Year, and the expenses related
thereto, shall be disregarded for purposes of computing any Bonus for that
Fiscal Year.
3.3.6 None of the above adjustments are to be made to
Pretax Income with respect to any acquisition in the computation of Bonus
for any Subject Fiscal
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Year subsequent to the Fiscal Year in which the acquisition occurs (an
"Acquisition Year") except as follows:
3.3.6.1 The adjustment described in the last
sentence of Section 3.3.3 shall be made with respect of each
the Fiscal Years following an acquisition accounted for on a
pooling of interests basis; and
3.3.6.2 With respect to any acquisition made on a
purchase basis, if the Acquisition Year of such acquisition is
a potential Test Year for any subsequent Subject Fiscal Year,
the Pretax Income of such Fiscal Year shall be adjusted by
adding thereto the Pretax Income (but only if positive) of the
Target for the portion of such Acquisition Year which precedes
the date of such acquisition; and if any Fiscal Year PRIOR to
the Acquisition Year of such acquisition is a potential Test
Year for any subsequent Subject Fiscal Year, the Pretax Income
of such Fiscal Year shall be adjusted by adding thereto the
Pretax Income (but only if positive) of the Target for the
entire Acquisition Year, including the portions of the
Acquisition Year which are both before and after the effective
date of such acquisition (computed on the basis of the
Company's fiscal year, not the Target's fiscal year).
3.3.7 The provisions of Sections 3.3.3, 3.3.4, 3.3.5 and
3.3.6 are intended to express the general agreement of the parties with
respect to acquisitions. Both the Company and Employee acknowledge that
many acquisitions create factors which would make application of these
principles inequitable or difficult or impossible of computation, and
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agree to negotiate case by case adjustments in good faith.
3.4 ADDITIONAL BONUS. The Company agrees to pay Employee an
additional bonus in the amount of Sixty Five Thousand ($65,000) Dollars on each
of (i) the date of execution hereof, (ii) August 1, 1999 and (ii) August 1,
2000; PROVIDED that the Company's obligation to make any such payment is
contingent upon Employee's continued employment by the Company on the date of
such payment.
3.5 STOCK OPTIONS. The Company agrees to grant to Employee as of the
date of the execution of this Agreement, an option (the "Option") to purchase
100,000 shares of the Company's Common Stock, par value $.10 per share. The
Company acknowledges that such grant is a material inducement for Employee to
enter into this Agreement and essential to Employee for him to continue his
employment with the Company. The Option will be granted pursuant to a separate
option agreement entered into on the execution date of this Agreement, shall
have an option exercise price per share equal to the closing price for the
Company's Common Stock as reported by NASDAQ on the last trading day on which
such stock was traded next preceding the date of such execution, and shall have
a term of 10 years. The Option will consist entirely of "Incentive Stock
Options" ("ISO") as defined in the Internal Revenue Code. The Option shall
become exercisable in such number of approximately equal annual installments as
is the smallest number of installments so that the number of the shares as to
which the Option first becomes exercisable in each installment does not exceed
the $100,000 limitation for ISO's, with the first such installment becoming
exercisable by Employee on the date of such grant, and each succeeding
installment becoming exercisable by Employee on succeeding anniversaries of such
grant; PROVIDED, HOWEVER, that in the event that Employee's employment with the
Company shall terminate for any reason prior to the Option's
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becoming exercisable in its entirety, the Option shall automatically become
exercisable (and shall remain exercisable for at least a ninety-day period
following such termination of employment), without regard for the treatment of
the entirety of the Option as an ISO, as to 25,000 shares for each Fiscal Year
or fraction thereof that have elapsed between the Effective Date of this
Agreement and the date of such termination. The Option shall be subject to any
requirement of shareholder approval imposed by the National Association of
Securities Dealers, Inc. as a condition to the continued quotation of the
Company's Common Stock on NASDAQ (including the National Market System thereof).
The Company will have used its best efforts to obtain such shareholder approval,
if required, at the next annual meeting of the Company's shareholders following
the Effective Date hereof. Notwithstanding the foregoing, in the event of
Employee's termination as an employee of the Company, except as a result of the
breach of any material term or condition hereof by the Company, any portion of
the Option not then exercisable shall automatically expire.
3.6 DISCRETIONARY COMPENSATION. The Employee shall also be entitled
to such additional increases in Base Salary, bonuses and stock options as shall
be determined from time to time by the Board of Directors of the Company.
3.7 CERTAIN PAYMENTS UPON TERMINATION.
3.7.1 In the event that Employee shall leave the employment of
the Company for any reason, including voluntary termination, death, disability
or cause, prior to August 1, 1999, he shall be entitled to a special severance
payment of One Hundred and Thirty Thousand ($130,000) Dollars; and in the event
that Employee shall leave the employment of the Company for any reason on or
after August 1, 1999 but prior to August 1, 2000, he shall be entitled to a
special severance payment of Sixty-Five Thousand ($65,000) Dollars. Any payments
made pursuant to this Section
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3.7.1 shall be payable in a lump sum within fifteen (15) days after the date on
which Employees employment shall terminate and shall be in addition to any other
payments made to Employee under this Agreement. Employee shall be entitled to no
payments pursuant to this Section 3.7.1 in the event that his employment with
the Company terminates on or after August 1, 2000.
3.7.2 In the event that no new employment agreement is entered
into by the Company and Employee, and Employee's employment with the Company is
terminated for any reason after the expiration of the Employment Period,
Employee shall be entitled to severance pay, payable in a lump sum upon such
termination of employment, equal to (i) one year's Base Salary at the rate
payable immediately prior to such termination, plus (ii) the amount of Bonus
payable with respect the most recently completed Fiscal Year of the Company
computed pursuant to Section 3.3 hereof.
3.8 CHANGE IN CONTROL. In the event at any time after the Effective
Date, (i) a majority of the Board of Directors is composed of persons who are
not "Continuing Directors," as hereinafter defined, or (ii) Xx. Xxxxxxx Xxxxx
AND a total of three (3) other persons who were members of the Board of
Directors at December 31, 1998 have ceased to serve as members of the Board of
Directors, which events are defined to mean a "Change in Control," Employee
shall have the option, to be exercised within nine (9) months after such Change
of Control by written notice to the Company, to resign as an employee and
terminate this Agreement, effective as of such date specified in the notice of
exercise, which shall not be earlier than thirty (30) days nor later than sixty
(60) days after the date of such notice. Immediately upon such termination
Employee shall receive payment of a sum (the "Severance Payment") computed as
follows:
3.8.1 In the event Employee exercises his option to
terminate his employment pursuant to this Section 3.8 prior to the first
anniversary of this Agreement, the
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Severance Payment shall be Employee's Average Compensation (as hereinafter
defined) times two and one half (2 1/2).
3.8.2 In the event Employee exercises his option to
terminate this Agreement pursuant to Section 3.8 after the first
anniversary of this Agreement, the amount of Severance Payment computed
pursuant to Section 3.8.1 shall be reduced by two and one half (2.5%)
percent times the number of complete months which have elapsed at the time
of exercise of such option after such first anniversary; PROVIDED,
HOWEVER, that in no event shall such amount be less then would have been
paid Employee if the payment contemplated by Section 3.7.2 became payable
on the date of such exercise; and PROVIDED FURTHER, HOWEVER, that in no
event shall Employee receive payments under both Section 3.7.2 and this
Section 3.8.
3.8.3 The Severance Payment shall be made to Employee
not later than twenty (20) days after the date designated by the Employee
as the date upon which Employee's resignation as an employee and
termination of his Employment is to be effective. The Severance Payment
shall constitute liquidated damages and not a penalty, and Employee shall
not be obligated to seek employment to mitigate his damages; nor shall any
compensation the Employee receives from any party subsequent to such
termination be an offset to the amount of the Severance Payment.
3.8.4 "Continuing Directors" shall mean (i) the
directors of the Company at the close of business on December 31, 1998,
and (ii) any person who was or is elected (A) to succeed a Continuing
Director or (B) to become a director as a result of an increase in the
size of the Board, recommended, in each case, by a majority of the
Continuing
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Directors then on the Board.
3.8.5 "Average Compensation" shall mean the average of
Base Salary and Bonus (including any similar payments for periods prior to
the term of this Agreement, but excluding payments pursuant to Sections
3.4 and 3.7.1 and grants of stock options) paid by Company to Employee for
the three most recently completed Fiscal Years.
3.9 OTHER BENEFITS.
3.9.1 Employee shall be entitled to participate, at
Company expense, in the major medical health insurance plan, and all other
health, insurance or other benefit plans immediately applicable generally
to executive officers of the Company. Without limiting the generality of
the foregoing, the Company agrees to maintain term life insurance in the
principal amount of $500,000 for the benefit of the Employee during the
Employment Period.
3.9.2 During the Employment Period, Employee will be
entitled to paid vacation and holidays consistent with the Company's
policy applicable to executives generally. All vacations shall be
scheduled at the mutual convenience of the Company and the Employee.
3.9.3 During the Employment Period, Employee shall be
entitled to the use of an automobile leased or owned by the Company in
connection with the Company's business. The make and model of the
automobile shall be reasonably satisfactory to Employee, provided that the
Company's monthly payments in respect thereof (exclusive of the expenses
referred to in the following sentence) shall not exceed $700. Employee
shall be entitled to receive reimbursement for reasonable out-of-pocket
expenses, including, without limitation, cost of gas, oil, insurance and
other costs incurred by Employee in operating and
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maintaining the automobile; provided, however, that Employee shall be
responsible for keeping appropriate records regarding the use of said
automobile, as instructed by the Company or its accountants.
3.9.4 The Company will reimburse the Employee for
reasonable out-of-pocket expenses incurred in furtherance of the business
of the Company, including travel, entertainment and similar items, upon
the presentation of appropriate receipts of vouchers therefor.
4. DISCLOSURE OF CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE.
Employee acknowledges that the Company possesses confidential information,
know-how, customer lists, purchasing, merchandising and selling techniques and
strategies, and other information used in its operations of which Employee will
obtain knowledge, and that the Company will suffer serious and irreparable
damage and harm if this confidential information were disclosed to any other
party or if Employee used this information to compete against the Company.
Accordingly, Employee hereby agrees that except as required by Employee's duties
to the Company, Employee, without the consent of the Company's Board of
Directors, shall not at any time during or after the term of this contract
disclose or use any secret or confidential information of the Company,
including, without limitation, such business opportunities, customer lists,
trade secrets, formulas, techniques and methods of which Employee shall become
informed during his employment, whether learned by him as an Employee of the
Company, as a member of its Board of Directors of otherwise, and whether or not
developed by the Employee, unless such information shall be or become public
knowledge other than as a result of the Employee's direct or indirect disclosure
of the same.
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Employee further agrees that for a period of two (2) years following the
termination of Employee's employment with the Company, except as a result of the
breach by the Company of any material term or condition hereof, Employee will
not, directly or indirectly, alone or with others, individually or through or by
a corporate or other business entity in which he may be interested as a partner,
shareholder, joint venturer, officer or director or otherwise, engage in the
United States or Canada in any business which is competitive with that of the
Company or any of its subsidiaries, provided, however, that the foregoing shall
not be deemed to prevent the ownership by Employee of up to five percent of any
class of securities of any corporation which is regularly traded on any stock
exchange or over-the-counter market.
5. TERMINATION OF EMPLOYMENT. The provisions of Section 1 of this
Agreement notwithstanding, the Company or Employee may terminate this Agreement
and Employee's employment hereunder in the manner and for the causes hereinafter
set forth, in which event the Company shall be under no further obligation to
Employee other than as specifically provided herein:
5.1 If Employee is absent from work or otherwise substantially
unable to assume his normal duties for a period of sixty (60) successive days or
an aggregate of ninety (90) business days during any consecutive twelve-month
period during the Employment Period because of physical or mental disability,
accident, illness, or any other cause other than vacation or approved leave of
absence, the Company may thereupon, or any time thereafter while such absence or
disability still exists, terminate the employment of Employee hereunder upon ten
(10) days' written notice to
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Employee.
5.2 In the event of the death of Employee, this Agreement shall
immediately terminate on the date thereof.
5.3 If Employee materially breaches or violates any material term of
his employment hereunder, or commits any criminal act or an act of dishonesty or
moral turpitude, in the reasonable judgment of the Company's Board of Directors,
then the Company may, in addition to other rights and remedies available at law
or equity, immediately terminate this Agreement upon written notice to Employee
with the date of such notice being the termination date and such termination
being deemed for "cause."
5.4 Employee shall have the right to terminate his employment with
or without cause upon three (3) months' prior written notice to the Company.
6. MISCELLANEOUS PROVISIONS.
6.1 SECTION HEADINGS. Section headings are for convenience only and
shall not be deemed to govern, limit, modify or supersede the provisions of this
Agreement.
6.2 CHOICE OF LAWS. This Agreement is entered into in the State of
New York and shall be governed pursuant to the laws of the State of New York. If
any provision of this Agreement shall be held by a court of competent
jurisdiction to be invalid, illegal or unenforceable, the remaining provisions
hereof shall continue to be fully effective.
6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement
of the parties regarding this subject matter. There are no contemporaneous oral
agreements and all prior understandings, agreements, negotiations and
representations are merged herein.
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6.4 AMENDMENT. This Agreement may be modified only by means of a
writing signed by the party to be charged with such modification.
6.5 NOTICES. Notices or other communications required or permitted
to be given hereunder shall be in writing and shall be deemed duly given upon
receipt by the party to whom sent at the respective addresses set forth below or
to such other address as any party shall hereafter designate to the other in
writing delivered in accordance herewith:
If to the Company:
Cantel Industries, Inc.
0000 Xxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, Xxx Xxxxxx 00000
If to Employee:
Xxxxx X. Xxxxxx
00 Xxxxxxxx Xxxx
Xxxxxx, Xxx Xxxxxx 00000
6.6 SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement shall inure
to the benefit of, and shall be binding upon, the Company, its successors and
assigns, including, without limitation, any entity that may acquire all or
substantially all of the Company's assets and business or into which the Company
may be consolidated or merged. This Agreement may not be assigned by Employee.
[Balance of Page Intentionally Left Blank]
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6.7 COUNTERPART EXECUTION. This Agreement may be executed in
separate counterparts, each of which shall constitute the original hereof.
IN WITNESS WHEREOF, the parties have set their hands as of the date first
above written.
CANTEL INDUSTRIES, INC.
Dated: March 29, 1999 By:/s/ Xxxxxxx X. Xxxxx
---------------------------
Xxxxxxx X. Xxxxx, Chairman
of the Board
Dated: March 29, 1999 /s/ Xxxxx X. Xxxxxx
------------------------------
Xxxxx X. Xxxxxx
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EXHIBIT A
Computation of Effect of a "Pooling of Interests" Acquisition
on
Xxxxx X. Xxxxxx Bonus Computation
------------------
1. ASSUMPTIONS
i. The Company's Pretax Income, without giving effect to any
acquisition, is as follows:
FY1998 FY1999 FY200
------ ------ -----
$3.0M $2.9M $3.2M
ii. An acquisition of Target is consummated November 1, 1999. Pretax
Income of Target is as follows:
FY1999 FY2000
------ ------
$0.8M $1.2M
Note that Target's financial results would need to be restated to be
on the Company's (July 31) Fiscal Year. Note also that the Company
operated Target's business for 273 days of FY2000, so the
Acquisition Percentage will be approximately 75%.
iii. Aggregate costs of the acquisition were $.4M. As these costs are to
be amortized over a 36 month period, and 1/4 (9 months) of this
period falls within the Subject Fiscal Year, $.1M is charged against
Pretax Income in the Subject Fiscal Year.
2. COMPUTATION
i. TEST YEAR PRETAX INCOME: The Test Year is FY1998, because that
Fiscal Year has the Higher Pretax Income. To the $3.0M Pretax Income
generated by the Company in that year is added $0.6M, being 75% (the
Acquisition Percentage) of the $0.8M Pretax Income generated by
Target in FY1999, the year next prior to the acquisition. Thus,
total adjusted Pretax Income for the Test Year is $3.6M.
ii. SUBJECT YEAR PRETAX INCOME: The Subject Year is FY2000, the Fiscal
Year in which the acquisition occurred and, by hypothesis, the year
for which the Bonus is being
A - 1
computed. The $3.2M Pretax Income generated by the Company in that
year is reduced by $.1M (the acquisition costs attributed to that
year) to $3.1M, to which is added $0.9M, being 75% (the Acquisition
Percentage) of the $1.2M Pretax Income generated by Target in
FY2000, the year of the acquisition. Thus, total adjusted Pretax
Income for the Subject Year is $4.0M.
iii. COMPUTATION OF BONUS: The Bonus with respect to FY2000 will be
$24,000, being $4.0M (Subject Year Pretax Income, as adjusted) less
$3.6M (Test Year Pretax Income, as adjusted) or $0.4M, times 6%.
A - 2
EXHIBIT B
Computation of Effect of a "Purchase" Acquisition
on
Xxxxx X. Xxxxxx Bonus Computation
------------------
1. ASSUMPTIONS
i. The Company's Pretax Income, without giving effect to any
acquisition, is as follows:
FY1998 FY1999 FY2000
------ ------ -----
$3.0M $2.9M $3.1M
ii. An acquisition of Target is consummated November 1, 1999. Pretax
Income of Target, without including the additional amortization and
depreciation expense mandated by "purchase" accounting is as
follows:
FY1999 FY2000
------ ------
$0.8M $1.2M
Note that Target's financial results would need to be restated to be
on the Company's (July 31) Fiscal Year. Note also that the Company
operated Target's business for 273 days of FY2000, so the
Acquisition Percentage will be approximately 75%.
iii. In FY2000 Target incurs an additional $0.3M of additional
Depreciation and Amortization Expense because the acquisition
requires the stepping up of the depreciable and amortizable basis of
certain assets. It is assumed that if the acquisition had been
consummated on the same date in FY1999, the depreciation and
amortization expense would have been increased by the same amount.
iv. A $0.2M interest expense is incurred in the Subject Fiscal Year as
interest on the funds borrowed for the acquisition.
B - 1
2. COMPUTATION
i. TEST YEAR PRETAX INCOME: The Test Year is FY1998, because that
Fiscal Year has the higher Pretax Income. To the $3.0M Pretax Income
generated by the Company in that year is added $0.6M, being 75% (the
Acquisition Percentage) of the $0.8M Pretax Income generated by
Target in FY1999, the year next prior to the acquisition, less the
$0.3M of additional depreciation expense. Thus, total adjusted
Pretax Income for the Test Year is $3.3M.
ii. SUBJECT YEAR PRETAX INCOME: The Subject Year is FY2000, the Fiscal
Year in which the acquisition occurred and, by hypothesis, the year
for which the Bonus is being computed. To the $3.1M Pretax Income
generated by the Company in such Subject Fiscal Year is added $0.9M,
being 75% (the Acquisition Percentage) of the $1.2M Pretax Income
generated by Target in FY2000, the year of the acquisition. From
this total is subtracted the $0.3M of additional depreciation
expense and the $0.2M additional interest expense, making the
adjusted Pretax Income for the Subject Fiscal Year $3.5M.
iii. COMPUTATION OF BONUS: The Bonus with respect to FY2000 will be
$12,000, being $3.5M (Subject Year Pretax Income, as adjusted) less
$3.3M (Test Year Pretax Income, as adjusted) or $0.2M, times 6%.
B - 2
