SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
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13a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-12
ENCORE MEDICAL CORPORATION
(Name of Registrant as Specified In Its Charter)
________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price of other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing
(1) Amount Previously Paid:
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(4) Date Filed:
[ENCORE LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 29, 2001
TO OUR STOCKHOLDERS:
The 2001 annual meeting of stockholders of Encore Medical Corporation (the
"Company") will be held at the offices of the Company, 9800 Metric Blvd.,
Austin, Texas 78758, on Tuesday, May 29, 2001, beginning at 2:00 p.m. local
time. At the meeting, stockholders will act on the following matters:
(1) Election of two directors, each for a term of three years;
(2) Ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for fiscal 2001;
(3) To approve the sale by the Company of 92,933 shares of its Series A
Preferred Stock, which is initially convertible into 9,293,300 shares
of common stock, to certain investors, including Galen Partners III,
L.P., Galen Partners International III, L.P. and Galen Employee Fund
III, L.P. (which will collectively purchase approximately 85% of the
Series A Preferred Stock), pursuant to a Series A Preferred Stock
Purchase Agreement dated as of April 20, 2001; and
(4) Any other matters that properly come before the meeting.
Stockholders of record at the close of business on April 30, 2001 are
entitled to vote at the meeting or any postponement or adjournment.
By order of the Board of Directors,
/s/ HARRY L. ZIMMERMAN
Harry L. Zimmerman
Corporate Secretary
May __, 2001
Austin, Texas
TABLE OF CONTENTS
ABOUT THE MEETING.......................................................... 1
What is the purpose of the annual meeting?............................ 1
Who is entitled to vote?.............................................. 1
Who can attend the meeting?........................................... 1
What constitutes a quorum?............................................ 2
How do I vote?........................................................ 2
Can I vote by telephone or electronically?............................ 2
Can I change my vote after I return my proxy card?.................... 2
How do I vote my 401(k) shares?....................................... 2
What are the Board's recommendations?................................. 2
What vote is required to approve each item?........................... 3
What are the terms of the Transaction?................................ 3
STOCK OWNERSHIP............................................................ 4
Who are the largest owners of the Company's stock?.................... 4
How much stock do the Company's directors and officers own?........... 5
ITEM 1 - ELECTION OF DIRECTORS............................................. 6
Directors Standing for Election....................................... 6
Directors Continuing in Office........................................ 7
Executive Officers.................................................... 11
Executive Compensation................................................ 13
Report of the Compensation Committee on Executive Compensation... 14
Compensation Committee Interlocks and Insider Participation...... 15
Executive Compensation Summary Table............................. 17
Option Grants during 2000........................................ 18
Option Exercises and Values for 2000............................. 18
Comparison of Cumulative Total Return................................. 19
Report of the Audit Committee......................................... 20
ITEM 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS............ 21
ITEM 3 - APPROVAL OF SALE OF SERIES A PREFERRED STOCK...................... 21
OTHER MATTERS.............................................................. 27
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[ENCORE LOGO]
9800 Metric Blvd.
AUSTIN, TEXAS 78758
___________________
PROXY STATEMENT
___________________
This proxy statement contains information related to the annual meeting of
stockholders of Encore Medical Corporation (the "Company") to be held on
Tuesday, May 29, 2001, beginning at 2:00 p.m., at the Company's offices, 9800
Metric Boulevard, Austin, Texas 78758, and at any postponements or adjournments
thereof.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the Company's annual meeting, stockholders will act upon the matters
outlined in the accompanying notice of meeting, including the election of
directors, ratification of the Company's independent auditors, and approval of
the sale of Series A Preferred Stock, par value $0.001 per share (the "Series A
Stock"), which is initially convertible into 9,293,300 shares of common stock,
to certain investors, including Galen Partners III, L.P. ("GPLP"), Galen
Partners International III, L.P. ("GPILP") and Galen Employee Fund III, L.P.
("GEFLP" and, together with GPLP and GPILP, "Galen"), pursuant to a Series A
Preferred Stock Purchase Agreement (the "Purchase Agreement") dated as of April
19, 2001 (the "Transaction"). Galen will purchase approximately 85% of the
shares of Series A Stock. In addition, the Company's management will report on
the performance of the Company during 2000 and respond to questions from
stockholders.
WHO IS ENTITLED TO VOTE?
Only stockholders of record at the close of business on the record date,
April 30, 2001, are entitled to receive notice of the annual meeting and to vote
the shares of common stock that they held on that date at the meeting, or any
postponement or adjournment of the meeting. Each outstanding share entitles its
holder to cast one vote on each matter to be voted upon.
WHO CAN ATTEND THE MEETING?
All stockholders as of the record date, or their duly appointed proxies,
may attend the meeting.
WHAT CONSTITUTES A QUORUM?
The presence at the meeting, in person or by proxy, of the holders of a
majority of the shares of common stock outstanding on the record date will
constitute a quorum, permitting the meeting to conduct its business. As of the
record date, 8,854,965 shares of common stock of the Company were outstanding.
Proxies received but marked as abstentions and broker non-votes will be included
in the calculation of the number of shares considered to be present at the
meeting.
HOW DO I VOTE?
If you complete and properly sign the accompanying proxy card and return it
to the Company, it will be voted as you direct. If you attend the meeting, you
may deliver your completed proxy card in person.
CAN I VOTE BY TELEPHONE OR ELECTRONICALLY?
No.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. Even after you have submitted your proxy, you may change your vote at
any time before the proxy is exercised by filing with the Secretary of the
Company either a notice of revocation or a duly executed proxy bearing a later
date. The powers of the proxy holders will be suspended if you attend the
meeting in person and so request, although attendance at the meeting will not by
itself revoke a previously granted proxy.
HOW DO I VOTE MY 401(K) SHARES?
If you participate in the Encore Medical Corporation 401(k) Plan, you may
vote shares of common stock of the Company equivalent to the value of the
interest credited to your account by instructing Wells Fargo Bank, N.A., the
trustee of the plan, pursuant to the instruction card being mailed with this
proxy statement to plan participants. The trustee will vote your shares in
accordance with your duly executed instructions received by May ___, 2001. If
you do not send instructions, the share equivalents credited to your account
will be voted by the trustee in the same proportion that it votes share
equivalents for which it did receive timely instructions.
You may also revoke previously given voting instructions by May ___, 2001
by filing with the trustee either a written notice of revocation or a properly
completed and signed voting instruction card bearing a later date.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your proxy card, the persons named as
proxy holders on the proxy card will vote in accordance with the recommendations
of the Board of Directors of the Company (the "Board"). The Board's
recommendation is set forth together with the description of each item in this
proxy statement. In summary, the Board recommends a vote:
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. For election of the nominated slate of directors (see pages 6-7);
. For ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors (see page 20); and
. For the approval of the Transaction (see pages 18-26).
WHAT VOTE IS REQUIRED TO APPROVE EACH ITEM?
. Election of Directors. The affirmative vote of a plurality of the votes
cast at the meeting is required for the election of directors. A properly
executed proxy marked "WITHHOLD AUTHORITY" with respect to the election of
one or more directors will not be voted with respect to the director or
directors indicated, although it will be counted for purposes of
determining whether there is a quorum.
. Approval of the Transaction. To approve the Transaction, it is necessary to
obtain the affirmative vote of a majority of the shares entitled to vote in
person or by proxy that vote on this proposal. A properly executed proxy
marked "ABSTAIN" with respect to the approval of the transaction will have
the effect of a negative vote, although it will be counted for purposes of
determining whether there is a quorum.
. Other Items. For each other item, the affirmative vote of the holders of a
majority of the shares represented in person or by proxy and entitled to
vote on the item will be required for approval. A properly executed proxy
marked "ABSTAIN" with respect to any such matter will not be voted,
although it will be counted for purposes of determining whether there is a
quorum. Accordingly, an abstention will have the effect of a negative vote.
If you hold your shares in "street name" through a broker or other nominee,
your broker or nominee may not be permitted to exercise voting discretion with
respect to some of the matters to be acted upon. Thus, if you do not give your
broker or nominee specific instructions, your shares may not be voted on those
matters and will not be counted in determining the number of shares necessary
for approval. Shares represented by such "broker non-votes" will, however, be
counted in determining whether there is a quorum.
WHAT ARE THE TERMS OF THE TRANSACTION?
The Company sold to Galen and other investors on May __, 2001, 31,809
shares of Series A Stock at a purchase price of $200.00 per share (the "First
Tranche"). The Purchase Agreement provides for the sale of an additional 92,933
shares of Series A Stock at a purchase price of $68.00 per share after approval
of the Transaction by the stockholders at the meeting (the "Second Tranche").
The weighted average of the two prices is $102 per share of Series A Stock.
The Company currently intends to use the net proceeds of the Transaction to
fund future acquisitions by the Company, as more fully described in "Item 3 -
Approval of Sale of Preferred Stock - Use of Proceeds." The Transaction
requires stockholder approval under the Marketplace Rules (the "Marketplace
Rules") of The Nasdaq Stock Market ("Nasdaq"), on which the common stock is
quoted, because (i) the purchase price per share of $68.00 for the Series A
Stock in the Second Tranche represents a $0.68 per share of common stock
purchase price on an as converted basis, which is less than the closing price
per share on April 19, 2001 of $1.12, and (ii) the number of shares of common
stock issuable
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upon conversion after completion of the Second Tranche is 9,293,300 shares of
common stock, which is in excess of 20% of the outstanding shares of common
stock.
The Transaction will cause substantial dilution of the voting power of the
current stockholders of the Company, since, following the Transaction, the
holders of the Series A Stock will beneficially own approximately 58.5% of the
common stock. See " Item 3 - Approval of Sale of Preferred Stock --Effects of
the Transaction on Stockholders." In addition, Galen, in connection with the
approval of the Transaction, has entered into voting agreements with certain
stockholders, including Nick Cindrich, CF Holdings, Ltd., Jay Haft, Northlea
Partners, Ltd., Windy City, Inc., Kanter Family Foundation and Richard Martin,
who beneficially own, in the aggregate, approximately 21.2% of the Company's
common stock.
The holders of Series A Stock have elected two members of the Board of
Directors of the Company, Bruce F. Wesson and Zubeen Shroff, who became members
of the Board of Directors on May ___, 2001 (the date of the closing of the First
Tranche). In order to accommodate the right of the holders of Series A Stock to
name two directors, the Board of Directors increased the size of the Board of
Directors by two members to ten members in May 2001.
STOCK OWNERSHIP
WHO ARE THE LARGEST OWNERS OF THE COMPANY'S STOCK?
The Company knows of only five persons (or entities) that are, as of March
31, 2001, the beneficial owners of more than five percent of the Company's
common stock, par value $0.001 per share (the "Common Stock"). They are:
NAME AND ADDRESS NUMBER OF PERCENT OF
OF BENEFICIAL OWNER SHARES CLASS
Galen Partners III, L.P.(1) 9,852,200 52.7%
160 Fifth Avenue
New York, New York 10020
Galen Partners International III, L.P.(2) 891,800 9.1%
160 Fifth Avenue
New York, New York 10020
Nick Cindrich(3) 1,238,885 13.99%
9800 Metric Blvd.
Austin, TX 78758
CF Holdings, Ltd.(4) 1,191,177 13.45%
2628 Barton Hills Drive
Austin, TX 78704
Sandor Turanyi 693,395 7.83%
3323 McCue Road, #1012
Houston, TX 77056
Lois Turanyi 570,895 6.45%
7733 Louis Pasteur Dr., #306
San Antonio, TX 78229
Medica Holding AG 780,362 8.81%
Erlenstrasse 4b
Rotkreuz 6343
Switzerland
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(1) Represents shares of Common Stock issuable upon the conversion of the
98,522 shares of Series A Stock it has the right to acquire within 60 days
of March 31, 2001 pursuant to the Purchase Agreement.
(2) Represents shares of Common Stock issuable upon the conversion of the 8,918
shares of Series A Stock it has the right to acquire within 60 days of
March 31, 2001 pursuant to the Purchase Agreement.
(3) Includes Common Stock owned by CF Holdings, Ltd., of which Mr. Cindrich is
a significant shareholder of the corporate general partner and a limited
partner. Mr. Cindrich disclaims beneficial ownership of Common Stock held
by CF Holdings, Ltd., except to the extent of his pecuniary interest
therein.
(4) Includes Common Stock owned beneficially by Mr. Nick Cindrich.
HOW MUCH STOCK DO THE COMPANY'S DIRECTORS AND OFFICERS OWN?
The following table shows the Common Stock ownership of (i) the Company's
directors, (ii) the executive officers of the Company named in the Summary
Compensation Table below, and (iii) the directors and executive officers of the
Company as a group, in each case as of March 15, 2001.
Aggregate Number of
Shares Beneficially Acquirable within Percent of Shares
Name Owned(1) 60 days(2) Outstanding
------- -------------------- ----------------- -----------------
Nick Cindrich 1,238,885 214,152 16.02%
Craig L. Smith 36,282 399,389 4.71%
Harry L. Zimmerman 0 305,025 3.33%
August Faske 6,992 326,905 3.64%
Kenneth W. Davidson 0 185,108 2.05%
Kenneth Ludwig 11,307 298,090 3.38%
Dennis Enright 30,941 43,324 *
John Abeles 296,931 194,500 5.43%
Jay Haft 141,250 235,000 4.14%
Joel Kanter 82,500 30,000 1.27%
Bruce F. Wesson -0- -0- *
Zubeen Shroff -0- -0- *
Richard Martin 8,880 31,333 *
All Directors and
executive officers as a 1,876,357 2,714,885 39.68%
group (18 persons)
* Represents less than 1% of the Company's outstanding Common Stock.
(1) The number of shares shown includes shares that are individually or jointly
owned, as well as shares over which the individual has either sole or
shared investment or voting authority. Certain of the Company's directors
and executive officers disclaim beneficial ownership of some of the shares
included in the table, as follows:
A. Mr. Cindrich is a significant owner of the corporate general partner
and is a limited partner of CF Holdings, Ltd. and disclaims beneficial
ownership of Common Stock held by CF Holdings, Ltd. except to the
extent of his pecuniary interest therein.
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B. Dr. Abeles' stock is held by Northlea Partners, Ltd., a limited
partnership of which Dr. Abeles is the general partner and the Abeles
Family Trust is the sole limited partner. Dr. Abeles has sole voting
and investment power with respect to such shares.
C. Mr. Kanter's shares include 32,500 shares owned by Windy City, Inc.
and 50,000 shares owned by the Kanter Family Foundation, a charitable
not-for-profit corporation. Mr. Kanter is the President and a member
of the Board of Directors for both Windy City, Inc. and the Kanter
Family Foundation and has sole voting and investment control over said
securities. Mr. Kanter disclaims any and all beneficial ownership of
securities owned by either corporation.
(2) Reflects the number of shares that could be purchased by exercise of
options or warrants available at March 15, 2001 or within 60 days
thereafter under the Company's stock option plans or warrants granted.
Based upon a review of filings with the Securities and Exchange Commission
and written representations that no other reports were required, the Company
believes that all of the Company's directors and executive officers complied
during 1999 with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, except (i) a Form 4 filed by Mr. Cindrich which was
delinquent due to an administrative oversight.
ITEM 1 - ELECTION OF DIRECTORS
DIRECTORS STANDING FOR ELECTION
The Board of Directors is currently divided into three classes, each having
three-year terms that expire in successive years. The term of office of
directors in Class I expires at the 2001 annual meeting. The Board of Directors
proposes that the nominees described below, all of whom are currently serving as
Class I directors, be re-elected to Class I for a new term of three years and
until their successors are duly elected and qualified.
Each of the Class I nominees has consented to serve a three-year term. If
any of them should become unavailable to serve as a director, the Board may
designate a substitute nominee. In that case, the persons named as proxies will
vote for the substitute nominee designated by the Board.
CLASS I DIRECTORS. The directors standing for election are:
CRAIG L. SMITH, PH.D.
Dr. Smith was a director of Encore Orthopedics, Inc. ("Encore") from July
1992 until March 1997 and has been President since August 1992. He has
served in these positions for the Company since March 1997. Dr. Smith
become an Executive Vice President of the Company in October 2000. Dr.
Smith first joined Encore as its Vice President of Research and Development
in April 1992, with 10 years of experience in the medical device industry.
From 1985 to April 1992, he served as Vice President - Research and
Development for Intermedics Orthopedics, Inc. ("Intermedics"). During this
period, his responsibilities included product design, materials development
and qualification, quality assurance, clinical studies and FDA product
approval submissions. Dr. Smith also oversaw major research programs
pertaining to the characterization of
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hydroxyl-apatite-coated implants and the characterization of bone growth
factors derived from bovine sources. Dr. Smith serves on the Board of
Spinal Dynamics, Inc., a private company. Prior to his experience with
Intermedics, Dr. Smith served from 1982 to 1984 as Vice President-
Engineering for Carbomedics, Inc., a manufacturer of pyrolytic carbon
coated heart valve components, and from 1972 to 1982 at General Atomic Co.,
where he did work producing and characterizing carbon coatings. Dr. Smith
has a B.S. in Metallurgical Engineering from the University of Washington
(1966) and a Ph.D. in Materials Science from Carnegie Mellon University
(1971). Dr. Smith is 57 years old.
JOHN H. ABELES, M.D.
Dr. Abeles was President, Treasurer and a director of Healthcare
Acquisition Corporation ("HCAC") prior to the merger between Healthcare
Acquisition Inc, a wholly owned subsidiary of HCAC and Encore (the
"Merger") and has served as a Director of the Company since the Merger.
From 1971 to 1975, Dr. Abeles was an executive with several major
pharmaceutical companies in the United Kingdom and the United States,
including Sterling Drugs (UK), Pfizer Labs and USV Pharmaceuticals (a
division of Revlon Healthcare). From 1975 to 1980, he was an analyst in
Kidder Peabody's healthcare research department. Since 1980, Dr. Abeles
has been President of MedVest Inc., which has provided consulting services
to, and has been active in the founding and financing of, emerging
companies, principally in the healthcare industry. Dr. Abeles is currently
a member of the Board of Directors of Oryx Technology Corporation, DUSA
Pharmaceuticals, Inc., PharmaPrint Corporation and I-Flow Corporation. Dr.
Abeles earned a M.B., Ch.B. from the University of Birmingham (England).
Dr. Abeles is 56 years old.
DIRECTORS CONTINUING IN OFFICE
CLASS II DIRECTORS. The term of office for the following Class II directors
will end at the 2002 annual meeting:
JAY M. HAFT
Mr. Haft was Chairman of the Board and Secretary of HCAC prior to the
Merger and has served as a Director of the Company since the Merger. Mr.
Haft is a director of numerous public and private corporations, including
Robotic Vision Systems, Inc. (OTC), NCT Group, Inc. (OTC), DUSA
Pharmaceuticals, Inc. (OTC), Oryx Technology Corp. (OTC) and Thrift
Management, Inc. (OTC). He is currently of counsel to Parker Duryee Rosoff
& Haft, in New York, New York. He was previously a senior corporate
partner of such firm (1989-1994), and prior to that a founding partner of
Wofsey, Certilman, Haft et al. (1966-1988). He has served as a member of
the Florida Commission for Government Accountability to the People and is a
trustee of Florida International University as well as of the Wolfsonion
Museum. Mr. Haft earned both his B.A. and J.D. degrees from Yale
University. Mr. Haft is 65 years old.
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DENNIS J. ENRIGHT
Mr. Enright was a director of Encore from August 1994 until March 1997 and
became a director of the Company in March 1997. Mr. Enright was employed
by 3M as Staff Vice President-Technology Development and had been with 3M
from 1965 until he retired in 1995. Mr. Enright began his career as a
product development engineer in the telecommunications area and then
progressed to Technical Director, General Manager and then Division Vice
President, a position in which he served for 12 years. Mr. Enright was
elected to the Carlton Society, an internal 3M recognition for technical
personnel. Mr. Enright has a Bachelor of Mechanical Engineering from the
University of Minnesota (1961) and a Masters of Business Administration
from the University of Minnesota (1968). He has been a board member of
Associated Electronics of Mentor, Ohio; Japan Interconnect Systems (a joint
venture with Nippon Steel), Tokyo, Japan; Precision Interconnect of
Portland, Oregon; and Raycom of Denver, Colorado. Mr. Enright is 61 years
old.
KENNETH W. DAVIDSON
Mr. Davidson became Chief Executive Officer and President of the Company in
October 2000. He became Chairman of the Board of Directors on February 1,
2001. Mr. Davidson was a director of Encore from November 1996 until March
1997 and became a director of the Company in March 1997. Mr. Davidson
served as Chairman, President and CEO of Maxxim Medical, Inc. from November
1986 July 2000. Previously, Mr. Davidson held various positions with
Intermedics, Inc., Baxter Laboratories, and Merck & Co. Mr. Davidson
presently serves on the Board of Directors and is the past President of
Operation Rainbow, an international charity organization. Mr. Davidson
also serves on the Board of Directors of Bovie Medical Corp., a public
company involved in electrosurgery. Mr. Davidson received a Bachelor of
Science degree in Biology and Chemistry from Laurentian University, Sudbury
Ontario, Canada. Mr. Davidson is 52 years old.
CLASS III DIRECTORS. The term of office for the following Class III directors
will end at the 2003 annual meeting:
NICHOLAS CINDRICH
Mr. Cindrich, who founded Encore in March 1992, served as its President
from March 1992 until August 1992. From August 1992 through August 1994,
Mr. Cindrich was self-employed as a business consultant. From August 1994
to October 2000, he served as the Chief Executive Officer of Encore and
from August 1994 to February 2001 served as Chairman of the Board of
Directors of Encore. From March 1997 to October 2000 he served as the
Chief Executive Officer of the Company and from March 1997 to February 2001
served as Chairman of the Board of the Company. Mr. Cindrich is currently
a consultant to the Company. Mr. Cindrich has over 25 years of experience
in the medical device industry. He founded Encore after leaving
Intermedics where he had served as
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President from 1984 to 1991. From 1980 to 1984, Mr. Cindrich was the Group
Vice President-Operations for DePuy, Inc. In that position, he headed
worldwide operations for one of the oldest full-line orthopedic companies.
From 1969 to 1980, Mr. Cindrich held a series of positions at Zimmer, Inc.,
the last of which was Vice President of Manufacturing. Mr. Cindrich is 69
years old.
RICHARD O. MARTIN, PH.D.
Dr. Martin was a director of Encore from February 1996 until March 1997 and
became a director of the Company in March 1997. Dr. Martin is currently
President of Medtronic Physio-Control, a position he has held since the
merger of Physio-Control and Medtronic in September 1998. Prior to the
merger, Dr. Martin served as Chairman and Chief Executive Officer of
Physio-Control International Corporation, positions that he held since
1991. Prior to joining Physio-Control, Dr. Martin held a variety of
positions culminating as President and Chief Operating Officer of
Intermedics, Inc. of Angelton, Texas. He has also served as President and
Chief Operating Officer of Positron Corporation of Houston, Texas. Dr.
Martin is currently National Chairman of the AeA, the nation's largest
trade association representing the high-tech industry. He is also
immediate past Chairman of the American Heart Association's Northwest
Affiliate. He holds a B.S. in Electrical Engineering from Christian
Brothers College (1962), a M.S. in Electrical Engineering from Notre Dame
University (1964) and a Ph.D. in Electrical/Biomedical Engineering from
Duke University (1970). Dr. Martin also serves on the Board of Directors
of Scout Medical Technologies and Cardio Dynamics, Inc. Dr. Martin is 60
years old.
JOEL S. KANTER
Mr. Kanter was a director of HCAC prior to the Merger, and has served as a
Director of the Company since the Merger. Since June 1986, Mr. Kanter has
served as President of Windy City, Inc., a publicly held investment company
specializing in early stage venture capital. From 1991 through 1999, Mr.
Kanter was also President and a Director of Walnut Financial Services,
Inc., a venture capital and financial service firm listed on the Nasdaq
National Market. Mr. Kanter currently serves as a director of several
publicly traded companies including I-Flow Corporation, Magna-Labs, Inc.,
Mariner Post Acute Network, Inc., and THCG, Inc. Mr. Kanter earned a B.A.
degree from Tulane University. Mr. Kanter is 44 years old.
DIRECTORS ELECTED BY THE HOLDERS OF SERIES A STOCK. The term of office for the
following directors will end at the 2002 annual meeting:
ZUBEEN SHROFF
Mr. Zubeen has served as a director since May 2001 and serves as a member
of the Compensation Committee of the Board of Directors. He is a director
nominated by the holders of our Series A Stock pursuant to the terms of the
investor rights agreement among us and certain of our stockholders. Mr.
Shroff is
9
a general partner of Galen Associates, a healthcare venture capital firm.
Mr. Shroff joined Galen in January 1997 from The Wilkerson Group, a
provider of management consulting services to the health care products and
services industry, where he was a principal from 1995 to 1996. Mr. Shroff
currently serves on the board of Halsey Drug Co., Inc. Mr. Shroff is 36
years old.
BRUCE F. WESSON
Mr. Wesson has served as a director since May of 2001. He is a director
nominated by the holders of our Series A Stock pursuant to the terms of the
investor rights agreement among us and certain of our stockholders. Mr.
Wesson is a General Partner of Galen Associates, a venture capital firm.
Prior to his association with Galen, Mr. Wesson served as a Managing
Director in the Corporate Finance Division of Smith Barney. He currently
serves as a director for Crompton Corporation, Halsey Drug Co., Inc., and
several privately held companies. Mr. Wesson is 58 years old.
HOW ARE DIRECTORS COMPENSATED?
CASH COMPENSATION. Each Director is reimbursed his travel expenses for
attending Board meetings. No other cash compensation is paid to the Directors.
OPTIONS. Each nonemployee director receives, pursuant to the terms of the
2000 Non-Employee Director Stock Option Plan, a grant, on the date of the annual
meeting for each year, of options to purchase 10,000 shares of Common Stock.
For 2000, Messrs. Davidson, Enright, Haft, and Kanter and Drs. Abeles and Martin
received grants under this plan. Each option grant, vesting in one year and
having a 5-year term, permits the holder to purchase shares at the fair market
value on the date of grant, which was $2.50 in the case of nonemployee director
options granted in 2000.
HOW OFTEN DID THE BOARD MEETING DURING 2000?
The Board of Directors met five times during 2000. Each director attended
more than 75% of the total number of meetings of the Board and Committees on
which he served.
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WHAT COMMITTEES HAS THE BOARD ESTABLISHED?
The Board of Directors has standing Compensation, Audit and Nominating
Committees.
BOARD COMMITTEE MEMBERSHIP
COMPENSATION AUDIT NOMINATING
NAME COMMITTEE COMMITTEE COMMITTEE
------ ------------ ---------- -----------
John H. Abeles, M.D. * *
Kenneth W. Davidson **
Dennis Enright ** *
Jay M. Haft *
Joel S. Kanter *
Richard Martin **
Zubeen Shroff *
* Member
** Chairperson
COMPENSATION COMMITTEE. The Compensation Committee is charged with reviewing
the Company's general compensation strategy; establishing salaries and reviewing
benefit programs (including pensions) for the Chief Executive Officer;
reviewing, approval, recommending and administering the Company's incentive
compensation and stock option plans and certain other compensation plans; and
approving certain employment contracts. In 2000, the Compensation Committee met
four times.
AUDIT COMMITTEE. The Audit Committee met three times during 2000. Its
functions are to recommend the appointment of independent accountants; review
the arrangements for and scope of the audit by independent accounts; review the
independence of the independent accountants; consider the adequacy of the system
of internal accounting controls and review any proposed corrective actions;
review and monitor the Company's policies relating to ethics and conflicts of
interests; and discuss with management and the independent accountants the
Company's draft annual financial statements and key accounting and/or reporting
matters.
NOMINATING COMMITTEE. The Nominating Committee is responsible for soliciting
recommendations for candidates for the Board of Directors; developing and
reviewing background information for candidates; and making recommendations to
the Board regarding such candidates. The Nominating Committee met once during
2000.
EXECUTIVE OFFICERS
KENNETH W. DAVIDSON - CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
Mr. Davidson become Chief Executive Officer and President of the Company on
October 2, 2000. He was a director of Encore from November 1996 until March
1997 and became a director of the Company in March 1997. He became Chairman of
the Board of the Company on February 1, 2001. Mr. Davidson served as Chairman,
President and CEO of Maxxim Medical, Inc. from November 1986 to July 2000.
Previously, Mr. Davidson held various positions with
11
Intermedics, Inc., Baxter Laboratories, and Merck & Co. Mr. Davidson presently
serves on the Board of Directors and is the past President of Operation Rainbow,
an international charity organization. Mr. Davidson also serves on the Board of
Directors of Bovie Medical Corp., a public company involved in electrosurgery.
Mr. Davidson received a Bachelor of Science degree in Biology and Chemistry from
Laurentian University, Sudbury Ontario, Canada. Mr. Davidson is 52 years old.
CRAIG L. SMITH, PH.D., PRESIDENT OF ENCORE AND EXECUTIVE VICE PRESIDENT OF THE
COMPANY
Dr. Smith was a director of Encore from July 1992 through March 1997 and has
been President since August 1992. He has served in these positions for the
Company since March 1997. Dr. Smith first joined Encore as its Vice President
of Research and Development in April 1992, with 10 years of experience in the
medical device industry. From 1985 to April 1992, he served as Vice President-
Research and Development for Intermedics. During this period, his
responsibilities included product design, materials development and
qualification, quality assurance, clinical studies and FDA product approval
submissions. Dr. Smith also oversaw major research programs pertaining to the
characterization of hydroxyl-apatite coated implants and the characterization of
bone growth factors derived from bovine sources. Prior to his experience with
Intermedics, Dr. Smith served from 1982 to 1984 as Vice President-Engineering
for Carbomedics, Inc., a manufacturer of pyrolytic carbon coated heart valve
components, and from 1972 to 1982 at General Atomic Co., where he did work
producing and characterizing carbon coatings. Dr. Smith serves on the Board of
Spinal Dynamics, Inc., a private company. Dr. Smith has a B.S. in Metallurgical
Engineering from the University of Washington (1966) and a Ph.D. in Materials
Science from Carnegie Mellon University (1971). Dr. Smith is 57 years old.
JACK CAHILL, EXECUTIVE VICE PRESIDENT - SALES AND MARKETING
Mr. Cahill joined Encore in January 2001 with almost 20 years of prior
experience with Johnson & Johnson in a variety of sales and marketing positions,
including Director of Marketing for Johnson & Johnson Medical, Inc., Director of
Sales for the Medical Specialties Division of Johnson & Johnson Medical, Inc.,
and Director of Sales and Marketing for the Sterile Design Division of Johnson &
Johnson Medical, Inc. In addition, Mr. Cahill has over 7 years of experience
with Maxxim Medical, Inc. as its Executive Vice President of Sales and Marketing
where he oversaw a sales and marketing effort that grew Maxxim from $200 million
in annual sales to almost $700 million in annual sales. Mr. Cahill has a B.A.
from Westminster College (1971). Mr. Cahill is 57 years old.
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AUGUST FASKE, EXECUTIVE VICE PRESIDENT - CHIEF FINANCIAL OFFICER
Mr. Faske joined Encore in April 1992 with four years experience in the
orthopedics industry and a total of 24 years experience in finance and
accounting. Prior to joining Encore, he served from 1988 to April 1992 as Vice
President-Finance and Controller for Intermedics. Prior to joining Intermedics,
Mr. Faske was the Manager of Financial Accounting for Cooper Industries, Inc.
and Internal Staff Auditor and Factory Accounting Manager for Hughes Tool
Company. Mr. Faske has a B.B.A. in Accounting from Southwest Texas State
University (1974). He is a Certified Public Accountant and is a member of the
Texas Society of Certified Public Accountants and the American Institute of
Certified Public Accountants. Mr. Faske is 47 years old.
KATHY WIEDERKEHR, EXECUTIVE VICE PRESIDENT - HUMAN RESOURCES
Mrs. Wiederkehr joined Encore in 1995 as Director of Human Resources and was
promoted to Vice President-Human Resources in December 1998. Mrs. Wiederkehr
has over 19 years experience in human resources. Prior to Encore, she was
Director, Human Resources, Code Alarm, Inc.-Tessco Division in Georgetown, Texas
from September 1994 to December 1995 and Manager of Human Resources for Kewaunee
Scientific from May 1991 to September 1994. She has also worked for Fortune 500
companies including Emerson Electric, Inc. and Cooper Industries, Inc. Mrs.
Wiederkehr has a B.B.A. (with honors) in Marketing from the University of Texas
at Austin (1976) and an M.B.A. (with honors) from the University of Texas at
Austin (1990). Mrs. Wiederkehr is 45 years old.
HARRY L. ZIMMERMAN, EXECUTIVE VICE PRESIDENT - GENERAL COUNSEL
Mr. Zimmerman joined Encore in April 1994 with 12 years of experience in the
private practice of corporate, real estate and tax law. From 1992 to April
1994, Mr. Zimmerman was associated with the law firm of Winstead Sechrest &
Minick, P.C., a law firm based in Texas, where he was responsible for the
corporate, tax and real estate practices. Mr. Zimmerman was a partner in the
law firm of Bissex & Hedricks, P.C. from 1991 to 1992. He has a B.S. (with
honors) in Economics from the Wharton School of the University of Pennsylvania
(1977) and a J.D. (with honors) from the University of Texas School of Law
(1982). He is also licensed as a Certified Public Accountant. Mr. Zimmerman is
45 years old.
GREGORY J. KASEESKA, CPIM, VICE PRESIDENT-OPERATIONS
Mr. Kaseeska joined Encore in March 1993 as Materials Manager, with
responsibilities for inventory control and production control. He became Vice
President-Operations in March 1998. Prior to arriving in Texas, Mr. Kaseeska
was Materials Manager for Getner Communications Co., Inc. and HGM Medical Laser
Co. both of Salt Lake City, Utah. He had previously served 23 years in the
United States Air Force in the logistics field. He holds an M.S. in Management
from Webster University (1986) and a B.S. in Business and Management from the
University of Maryland (1982). He is also certified in Production and Inventory
Management (CPIM) from the American Production and Inventory Control Society
(APICS). Mr. Kaseeska is 53 years old.
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JESS JACKSON, VICE PRESIDENT - SALES
Mr. Jackson joined Encore in July, 2000 with over 30 years of experience in the
orthopedic device industry. He worked previously with Zimmer, Inc. for 27 years
as a distributor in the Rocky Mountains area with offices in seven states.
Prior to coming to work with Encore, Mr. Jackson worked in sales management with
ODC of Salt Lake City for two years. Mr. Jackson graduated from the University
of Utah with a degree in Entomology in 1964. Mr. Jackson is 65 years old.
J.D. WEBB, JR., VICE PRESIDENT-RESEARCH AND DEVELOPMENT
Mr. Webb joined Encore in April 1992 with nine years orthopedic industry
experience. From 1988 to April 1992, he served as Manager-Engineering,
Director-Product Development and Director-Regulatory and Clinical Affairs at
Intermedics. During that time, his responsibilities included product design and
testing, quality assurance, clinical studies and FDA approval to market. Under
his direction, Intermedics completed several development projects including the
APRII and Collared Revision Hip Systems, the Unicondylar Natural Knee and the
High Tibial Osteotomy System. From 1983 to 1988, Mr. Webb served as Development
Engineer, Senior Development Engineer and Group Development Manager for
Specialty Orthopedic Products at Zimmer, Inc. Mr. Webb holds a B.S. in
Mechanical Engineering and a M.S. in Bioengineering from the University of Utah
(1982 and 1983, respectively). Mr. Webb is 48 years old.
EXECUTIVE COMPENSATION
The following Report of the Compensation Committee and the performance graphs
included elsewhere in this proxy statement do not constitute soliciting material
and should not be deemed filed or incorporated by reference into any other
Company filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent the Company specifically incorporates this Report
or the performance graphs by reference therein.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation for 2000.
WHAT IS THE COMPANY'S PHILOSOPHY OF EXECUTIVE COMPENSATION?
The Company's compensation program for executives consists of three key
elements:
. A base salary
. A performance-based annual bonus, and
. Periodic grants of stock options
The Committee believes that this three-part approach best serves the interests
of the Company and its stockholders. It enables the Company to meet the
requirements of the highly competitive environment in which the Company operates
while ensuring that executive officers are compensated in a way that advances
both the short-and long-term interests of stockholders. Under this approach,
compensation for these officers involves a high proportion of pay that is "at
14
risk" - namely, the annual bonus and stock options. The variable annual bonus
permits individual performance to be recognized on an annual basis, and is
based, in significant part, on an evaluation of the contribution made by the
officer to Company performance. Stock options relate a significant portion of
long-term remuneration directly to stock price appreciation realized by all of
the Company's stockholders.
BASE SALARY. Base salaries for the Company's executive officers, as well as
changes in such salaries, are set by the Compensation Committee, taking into
account such factors as competitive industry salaries; a subjective assessment
of the nature of the position; the contribution and experience of the officer,
and the length of the officer's service. The Chief Executive Officer reviews
any salary recommendations with the Compensation Committee. The base salary for
the Chief Executive Officer is set by the Compensation Committee.
ANNUAL BONUS. Annual bonuses for 2000 paid to executive officers of the
Company were governed by the Company's Annual Bonus Performance Plan (the "Bonus
Plan"). The Bonus Plan provides for performance-based bonuses for all employees
of the Company who were with the Company for at least the last 3 months of 2000.
There were no bonuses paid to the executive officers for the year 2000.
Under the Bonus Plan, every employee is entitled to a bonus if certain preset
income before taxes amounts are achieved. The base bonus is set as a percentage
of an employee's salary and varies based on the employee's position in the
Company. If the targeted earnings are exceeded, then the amount of the bonus is
increased.
STOCK OPTIONS. Stock option grants may be made to executive officers upon
initial employment, upon promotion to a new, higher level position that entails
increased responsibility and accountability, in connection with the execution of
a new employment agreement, and/or whenever the Compensation Committee or Board
determines option grants are warranted. Using these guidelines, the Chief
Executive Officer recommends the number of options to be granted, within a range
associated with the individual's salary level, and presents this to the
Compensation Committee for review and approval. The Chief Executive Officer may
make recommendations that deviate from the guidelines where he deems it
appropriate. While options typically vest over a four-year period, options
granted to certain executive officers may have shorter vesting periods, or may
vest immediately.
HOW IS THE COMPANY'S CHIEF EXECUTIVE OFFICER COMPENSATED?
As Chief Executive Officer, Mr. Cindrich was compensated during 2000 pursuant
to an employment agreement initially entered into in August 1994. The
agreement, which was extended through December 2000, subject to earlier
termination under certain circumstances, provided for an annual base salary of
$224,000. Mr. Cindrich did not earn a bonus for 2000. Mr. Davidson was
compensated during 2000 pursuant to an employment agreement entered into in
October 2000. The agreement, which has a term until December 31, 2003, subject
to earlier termination under certain circumstances, provides for an annual base
salary of $200,000. Mr. Davidson did not earn a bonus for 2000.
15
HOW IS THE COMPANY ADDRESSING INTERNAL REVENUE CODE LIMITS ON DEDUCTIBILITY OF
COMPENSATION?
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public corporations for compensation over $1,000,000 paid for any
fiscal year to the corporation's Chief Executive Officer and four other most
highly compensated executive officers as of the end of any fiscal year.
However, the statute exempts qualifying performance-based compensation from the
deduction limit if certain requirements are met. No executive of the Company
receives compensation at a level that would invoke the provision of Section
162(m).
The Board and the Compensation Committee reserve the authority to award non-
deductible compensation in other circumstances as they deem appropriate.
Further, because of ambiguities and uncertainties as to the application and
interpretation of Section 162(m) and the regulations issued thereunder, no
assurance can be given, notwithstanding the Company's efforts, that compensation
intended by the Company to satisfy the requirements for deductibility under
Section 162(m) does in fact do so.
MEMBERS OF THE COMPENSATION COMMITTEE:
Joel Kanter
Richard O. Martin
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Board's Compensation Committee is or has been an
officer or employee of the Company.
EXECUTIVE COMPENSATION SUMMARY TABLE
The following table sets forth information concerning total compensation
earned or paid to the Chief Executive Officer and the four other most highly
compensated executive officers of the Company who served in such capacities as
of December 31, 2000 (the "named executive officers") for services rendered to
the Company during each of the last three years.
16
EXECUTIVE COMPENSATION SUMMARY TABLE*
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
Other annual Securities underlying
Name and principal position Year Salary ($) Bonus ($) compensation options
- ------------------------------------ ---- ---------- --------- ------------ ----------------------
Nick Cindrich 2000 $224,000 $ 0 * 0
Chief Executive Officer (through 1999 $224,000 $ 0 * 75,500
October 1, 2000) 1998 $200,000 $50,000 * 44,500
Kenneth W. Davidson 2000 $ 50,000 $ 0 * 300,000
Chief Executive Officer
(beginning October 2, 2000)
Craig L. Smith 2000 $173,600 $ 0 * 0
President 1999 $173,600 $ 0 * 0
1998 $155,000 $31,000 * 37,000
Kenneth Ludwig, Jr. 2000 $135,000 $ 0 * 0
Vice President - Sales & 1999 $135,000 $ 0 * 0
Marketing/Spine 1998 $125,000 $18,750 * 30,000
Harry L. Zimmerman 2000 $133,200 $ 0 * 0
Executive Vice President - 1999 $133,200 $ 0 * 0
General Counsel 1998 $120,000 $18,000 * 30,000
August Faske 2000 $133,200 $ 0 * 0
Executive Vice President - 1999 $133,200 $ 0 * 0
Chief Financial Officer 1998 $120,000 $18,000 * 30,000
* Amounts totaling less than $50,000 have been omitted and there were no awards
of restricted stock under long-term incentive plans made during the three-
year period ending December 31, 2000.
OPTION GRANTS FOR FISCAL 2000
The following table sets forth information with respect to option grants to
the named executive officers during 2000 and the potential realizable value of
such option grants:
. The number of shares of Common Stock underlying options granted during the
year;
. The percentage that such options represent of all options granted to
employees during the year;
. The exercise price;
. The expiration date; and
. The hypothetical present value, as of the grant date, of the options under
the option pricing model discussed below.
The hypothetical value of the options as of their date of grant has been
calculated below, using the Black-Scholes option pricing model, as permitted by
the rules of the Securities and Exchange Commission, based upon a set of
assumptions set forth in the footnote to the table. It should be noted that
this model is only one method of valuing options, and the Company's use of the
model should not be interpreted as an endorsement of its accuracy. The actual
value of the
17
options may be significantly different, and the value actually
realized, if any, will depend upon the excess of the market value of the Common
Stock over the option exercise price at the time of exercise.
OPTION GRANTS DURING 2000
% of Total
Options Hypothetical
Number of Granted to Exercise Value at
Options Employees in Price Expiration Grant
Name Granted Fiscal Year ($/Share) Date (1) Date (2)
- ------------------------------------- --------- ------------ --------- ----------- -------------
Nick Cindrich 0 0% - - -
Kenneth W. Davidson (3) 300,000 77.1% $1.75 9-30-2010 $312,750
Craig L. Smith 0 0% - - -
Kenneth Ludwig, Jr. 0 0% - - -
Harry L. Zimmerman 0 0% - - -
August Faske 0 0% - - -
(1) The Compensation Committee, which administers the Company's stock option
and incentive plans, has general authority to accelerate, extend or
otherwise modify benefits under option grants in certain circumstances
within overall plan limits, and, with the consent of the affected optionee,
to change the exercise price to a price not less than 100% of the market
value of the stock on the effective date of the amendment. The Committee
has no current intention to exercise that authority with respect to these
options.
(2) The estimated present value at grant date of options granted during 2000
has been calculated using the Black-Scholes option pricing model, based
upon the following assumptions: estimated time until exercise of 1 year; a
risk-free interest rate of 6.09%, representing the interest rate on a U.S.
Government zero-coupon bond on the date of grant with a maturity
corresponding to the estimated time until exercise; a volatility rate of
79.0%; and a dividend yield of 0%. The approach used in developing the
assumptions upon which the Black-Scholes valuation was done is consistent
with the requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation."
(3) These do not include the 10,000 options awarded to Mr. Davidson in May 2000
for serving as a non-employee member of the Board of Directors.
OPTION EXERCISES AND VALUES FOR 2000
The table below sets forth the following information with respect to
option exercises during 2000 by each of the named executive officers and the
status of their options at December 31, 2000:
. The number of shares of Common Stock acquired upon exercise of options
during 2000;
18
. The aggregate dollar value realized upon the exercise of such options;
. The total number of exercisable and non-exercisable stock options held
at December 31, 2000; and
. The aggregate dollar value of in-the-money exercisable options at
December 31, 2000.
AGGREGATED OPTION EXERCISES DURING 2000
AND
OPTION VALUES ON DECEMBER 31, 2000
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDER- ACQUIRED IN-THE-MONEY
SHARES VALUE LYING UNEXERCISED OPTIONS AT OPTIONS
ACQUIRED ON REALIZED DECEMBER 31, 2000 DECEMBER 31, 2000(1)
EXERCISE OF UPON ----------------------------- -----------------------------
NAME OPTION EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- -------- ----------------------------- -----------------------------
Nick Cindrich -0- -0- 323,919 -0- $ -0- $-0-
Kenneth W. Davidson -0- -0- 110,108 235,000 $ -0- $-0-
Craig L. Smith -0- -0- 399,389 -0- $198,200 $-0-
Kenneth Ludwig, Jr. -0- -0- 298,090 -0- $166,675 $-0-
Harry L. Zimmerman -0- -0- 305,025 -0- $ -0- $-0-
August Faske -0- -0- 326,905 -0- $198,200 $-0-
(1) Values are calculated by subtracting the exercise price from the fair
market value of the underlying Common Stock. For purposes of this table,
fair market value is deemed to be $1.53, the closing Common Stock price
reported on the Nasdaq National Market on December 29, 2000.
PERFORMANCE GRAPH
The following chart shows a comparison of the cumulative total
stockholder return among the Company, the NASDAQ CRSP Index and a peer group
comprised of other small and micro-cap orthopedic companies (Arthrocare Corp.,
Biomet Inc., Bionx Implants, Inc., Exactech Inc., Interpore International, Inc.,
Orthologic Corp., Osteotech Inc., Stryker Corp., and Sulzer Medica):(1)
19
[GRAPH]
3/96 12/96 12/97 12/98 12/99 12/2000
---- ----- ----- ----- ----- -------
Encore Medical
Corporation 100.00 113.89 87.49 62.49 50.69 34.02
NASDAQ US 100.00 117.94 144.45 203.71 378.56 227.77
Peer Group 100.00 92.10 114.34 151.48 168.76 236.48
(1) The total return on investment (change in year end stock price plus
reinvested dividends) assumes $100 invested on March 8, 1996 (the date
of the IPO for the Company), in the Company, in the NASDAQ CRSP Index,
and in each of the peer group companies.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Company's Board of Directors has adopted a written charter for the Audit
Committee, which is included as Annex A to this document.
The Audit Committee hereby reports as follows:
1. The Audit Committee has reviewed and discussed the audited financial
statements with the Company's management.
2. The Audit Committee has discussed with PricewaterhouseCoopers LLP, the
Company's independent accountants, the matters required to be discussed by SAS
61 (Communication with Audit Committees).
3. The Audit Committee has received the written disclosures and the letter
from PricewaterhouseCoopers LLP required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees), and has
discussed with PricewaterhouseCoopers LLP their independence.
4. Based on the review and discussion referred to in paragraphs (1) through
(3) above, the Audit Committee recommended to the Board of Directors of the
Company, and the Board has approved, that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, for filing with the Securities and Exchange Commission.
Dennis Enright (chair)
Jay Haft
John Abeles
20
ITEM 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Company has appointed PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending December 31, 2001. Services
provided to the Company and its subsidiaries by PricewaterhouseCoopers LLP in
2000 included the examination of the Company's consolidated financial
statements, limited reviews of quarterly reports, services related to filings
with the Securities and Exchange Commission, and consultations on various tax
and accounting matters.
Representatives of PricewaterhouseCoopers LLP will be present at the annual
meeting to respond to appropriate questions and to make such statements as they
may desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS FOR 2001. In the event stockholders do not ratify the appointment,
the appointment will be reconsidered by the Audit Committee and the Board of
Directors.
PricewaterhouseCoopers LLP, are the principal accountants of the Company.
PricewaterhouseCoopers provides tax advice to the Company and its subsidiaries.
The audit committee of the Company's Board of Directors has considered whether
the provision of non-audit services is compatible with maintaining
PricewaterhouseCoopers' independence.
AUDIT FEES
PricewaterhouseCoopers billed the Company and its subsidiaries approximately
$88,000 for the following professional services: audit of the annual financial
statements of the Company for the fiscal year ended December 31, 2000, and
review of the interim financial statements included in quarterly reports on Form
10-Q for the periods ended March 31, June 30 and September 30, 2000.
ALL OTHER FEES
PricewaterhouseCoopers billed the Company and its subsidiaries approximately
$61,000 million for other services for the fiscal year ended December 31, 2000.
ITEM 3 - APPROVAL OF SALE OF SERIES A PREFERRED STOCK
THE PRINCIPAL TERMS OF THE TRANSACTION ARE SET FORTH IN THE PURCHASE AGREEMENT,
A COPY OF WHICH IS SET FORTH AS ANNEX B HERETO AND IS MADE A PART OF THIS PROXY
STATEMENT. THE FOLLOWING DISCUSSION SETS FORTH A DESCRIPTION OF CERTAIN MATERIAL
TERMS OF THE PURCHASE AGREEMENT AND IS QUALIFIED BY THE MORE COMPLETE
INFORMATION SET FORTH IN THE PURCHASE AGREEMENT.
21
PURPOSE AND BACKGROUND OF THE TRANSACTION
A combination of factors occurring over the course of the last year has
caused management of the Company to explore ways of raising additional capital
to fund acquisitions and for working capital needs. For the Company to
experience growth and create increasing value, management has determined that it
must identify and acquire significant complementary businesses to its existing
orthopedics implant business that can allow it to build several platforms in the
medical products industry. This strategy is expected to begin implementation
during the first half of 2001. Therefore, the Company must raise additional
capital to fund these acquisitions.
The Company's allowable uses under its bank revolving credit facility is
currently restricted to funding current operations and is not available for use
in acquisition financings. The Company could face additional limitations on its
ability to provide debt financings adequate to fund future acquisitions. In
fact, the Company's bank revolving credit facility is set to reduce over the
course of 2001.
Management and the Board of Directors of the Company pursued financing
alternatives to fund the acquisition efforts. Due to both the state of the
credit market and the current leverage of the Company, acceptably priced debt
financing was not found to be available. Any form of equity which would require
a dividend, which the Series A Stock does not, was eliminated from review. A
public offering of Common Stock was not practical due to the Company's declining
stock price and the general state of the United States financial markets.
Several potential buyers of equity of the Company other than Galen were
approached to discuss a private sale of shares, but preliminary discussions
revealed that it was likely that any such transaction would be at a significant
discount to the market price of the Common Stock. In addition, the amount of
time it would take to consummate any of these transactions was taken into
account.
Management of the Company recognized that additional capital would be
required for the Company to take advantage of acquisition opportunities that
might become available in the medical products industry. Management of the
Company acknowledged the experience and substantial financial resources of Galen
and discussed with Galen a proposed transaction whereby Galen would make a large
capital investment in the Company in exchange for some type of equity security
of the Company. Based on its prior research into the Company and the medical
products industry and Galen's confidence in the medical product industry's long-
term prospects, Galen agreed to make an $11 million investment in the Company so
long as it could obtain board of director representation at the Company. After
several discussions, the Company and Galen agreed on the terms of the
Transaction as set forth in the Purchase Agreement. The Agreement allows for up
to $13.5 million of equity investment to be made, so additional accredited
investors, including officers and directors of the Company, may invest up to
$2.5 million on the same terms and conditions.
TERMS OF THE TRANSACTION
Pursuant to the Agreement, the Company will issue 124,743 shares of Class A
Stock to Galen and the other investors, representing beneficial ownership of
approximately 58.5% of the Common Stock outstanding after completion of the
Second Tranche purchase. The aggregate consideration to be paid to the Company
by Galen and the other investors for the shares of Series A Stock is
$12,723,750, or an average of $102.00 per share of Series A Stock.
22
The Transaction requires stockholder approval under the Marketplace Rules,
since (i) the purchase price per share of $68.00 for the Series A Stock in the
Second Tranche represents a $0.68 per share of Common Stock purchase price on an
as converted basis, which is less than the closing price per share on April 19,
2001 of $1.12, and (ii) the number of shares of Common Stock issuable upon
conversion after completion of the Second Tranche is initially 9,293,300 shares
of Common Stock, which is in excess of 20% of the outstanding shares of Common
Stock. In addition, the obligations of the parties to effect the completion of
the Second Tranche are also subject to other conditions, including, among other
things, the obtaining of all necessary consents and the listing of the shares to
be issued having been approved by Nasdaq. The Company is aware of no other
material governmental or regulatory approvals required for the consummation of
the Second Tranche, other than compliance with applicable securities laws.
USE OF PROCEEDS
The Company currently intends to use the net proceeds from the Transaction
initially to fund (i) acquisitions of medical products businesses in related or
contiguous business segments to the Company's existing operations, (ii) working
capital and general corporate expenditures related to those acquisitions, and
(iii) the payment of all reasonable fees and expenses incurred by it, Galen and
the other investors in connection with the Transaction. No assurance can be
made, however, that the Company will be successful in finding or completing any
such acquisition opportunities.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
TRANSACTION AND THE PURCHASE AGREEMENT, HAS DETERMINED THAT THE TRANSACTION AND
THE PURCHASE AGREEMENT ARE IN THE BEST INTERESTS OF THE STOCKHOLDERS AND
RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE TRANSACTION AND
THE PURCHASE AGREEMENT.
Prior to approving the Transaction, the Board of Directors of the Company
considered various alternatives to the Transaction, including public equity
offerings, high yield debt issuances and other private placements of equity
securities. In approving the Transaction, the Board concluded that the sale of
Series A Stock to Galen and the other investors presented the best course of
action for the Company at this time. The Board did not pursue the other
alternatives considered in that such alternatives would likely have been to the
exclusion of the Galen offer without any assurance that a better offer or
transaction could be realized.
The material factors considered by the Board in making such recommendation
include the following:
The proposed average purchase price of $102.00 per share for the shares of
Series A Stock and the conversion price of $1.02 per share was approximately
equal to the closing market price of $1.05 for the Common Stock on Nasdaq on
April 12, 2001, the date
23
immediately prior to the date the Board approved the Transaction. On April
19, 2001, the closing price of the Common Stock on Nasdaq was $1.12.
The Transaction will provide the Company with substantial cash and provide it
with greater financial flexibility to take advantage of the consolidation of
medical products businesses that is expected to occur in the future.
The Transaction provides the Company with a strong equity partner. Galen is a
New York City-based private investment firm specializing in strategic
investments.
EFFECTS OF THE TRANSACTION ON STOCKHOLDERS
Pursuant to the Agreement, an aggregate of 124,743 shares of Series A Stock,
which is initially convertible into 12,474,300 shares of Common Stock, will be
issued to Galen and the other investors in the Transaction. Upon consummation
of the Second Tranche, Galen and the other investors will beneficially own
12,474,200 shares of Common Stock, or 58.5% of the Common Stock after
consummation of the Second Tranche. Pursuant to the Purchase Agreement, the
holders of the Series A Stock will have the right to designate up to two
individuals to serve on the Company's Board of Directors, as permitted by
Delaware law.
The following table illustrates the pro forma effect of the issuance of the
shares of Series A Stock on the financial position and results of operations of
the Company for the year ended December 31, 2000, as if the shares were issued
and outstanding at January 1, 2000, as compared to actual results for the same
period.
Actual Results Pro Forma
-------------- ---------
Net Earnings (Loss) (in (32.63) (2,728)
Thousands)
Basic Earnings (Loss) Per (.36) (.12)
Common Share
Basic Weighted Average 8,990 22,225
Shares Outstanding (in
Thousands)
Stockholders' Equity (in 17,820 31,855
Thousands)
REASONS FOR SEEKING STOCKHOLDER APPROVAL
Stockholder approval of the Transaction is being sought solely because of the
requirements of the Marketplace Rules. If the stockholders do not approve the
Transaction, the Company will need to find alternative sources of financing in
order to allow it to fund future working capital needs and acquisitions. The
Common Stock will continue to be listed on Nasdaq following the Transaction.
The Company is unable to predict the potential effects of the Transaction on
stock appreciation, trading activity and the market price of the Common Stock.
24
DESCRIPTION OF PREFERRED STOCK
PREFERRED STOCK
Our Board of Directors is authorized, without action by the holders of our
Common Stock, to provide for the issuance of our preferred stock in one or more
series, to establish the number of shares to be included in each series and to
fix the designations, powers, preferences and rights of the shares of each
series and the qualifications, limitations, or restrictions of each series. This
includes, among other things, voting rights, conversion privileges, dividend
rates, redemption rights, sinking fund provisions and liquidation rights which
will be superior to our Common Stock.
Currently, our Board of Directors has authorized the issuance of one series
of our preferred stock, the Series A Preferred Stock, which consists of 135,000
authorized shares. The relative rights and preferences of the Series A
Preferred Stock are as follows:
. Each share of the Series A Stock is entitled to one vote for each share of
our Common Stock into which such share of the Series A Stock is then
convertible. Except as provided by law or as described below, holders of
the Series A Stock are not entitled to vote as a class on any matter.
. As long as 25% of the authorized shares of the Series A Stock are
outstanding, the holders of the Series A Stock are entitled to elect
members of our Board of Directors. If our Board of Directors consists of
10 or fewer members, the holders of the Series A Stock are entitled to
elect two members of the Board of Directors. If our Board of Directors
consists of more than 10 members, the holders of the Series A Stock are
entitled to elect 20% of the number of members of the Board of Directors.
Any vacancy of a directorship elected by the holders of the Series A Stock
will be filled by the majority vote of the remaining directors elected by
the holders of the Series A Stock.
. As long as 25% of the authorized shares of the Series A Stock are
outstanding, we may not, without the approval of the holders of at least
51% of the then outstanding shares of the Series A Stock, take the
following actions: cause any amendment of our Certificate or Incorporation
or Bylaws if such amendment would alter the rights or privileges of the
Series A Stock; increase the number of authorized shares of the Series A
Stock; create any new class of its capital stock, or reclassify any class
of its capital stock, having rights and privileges on a parity with, or
more beneficial than, the Series A Stock; except in certain circumstances,
effect any merger, consolidation or other business combination prior to
the second anniversary of the date the Series A Stock was issued; unless
the holders of the Series A Stock are to receive at least $306.00 per
share as a result of such transaction, effect any sale or other conveyance
of all or substantially all of our assets; or, except upon satisfaction of
certain criteria, incur any indebtedness.
. Shares of the Series A Stock bear non-cumulative dividends at a rate of 8%
per annum, which shall be payable semi-annually, if declared by the
Company.
25
. We may not declare a dividend on our Common Stock unless a dividend is
also concurrently declared and paid on the Series A Stock. No dividend
paid on our Common Stock will exceed the dividend rate on the Series A
Stock.
. At the option of the holders thereof, shares of the Series A Stock may be
converted into the number of shares of our Common Stock equal to the
amount paid for that share divided by the Conversion Price.
. After completion of the Transaction, the initial "Conversion Price" will
equal to $1.02. In certain circumstances, the Conversion Rate is subject
to downward adjustment if we issue additional shares of our Common Stock
for an amount less than the then current Conversion Price. Additionally,
the Conversion Price is subject to appropriate adjustment upon our
approval of a stock dividend, combination or subdivision of our Common
Stock, or the reclassification or reorganization of our Common Stock.
. If at any time less than 25% of the authorized shares of the Series A
Stock are outstanding, we have the right to convert all of the outstanding
shares of the Series A Stock into shares of our Common Stock at the then
current Conversion Price.
. If, after May , 2002, our average closing price per share for our
Common Stock, as reported by NASDAQ, exceeds three times the then current
Conversion Price for at least 20 consecutive trading days, the Series A
Stock will automatically convert into shares of our Common Stock at the
then current Conversion Rate.
. Upon our dissolution, liquidation or winding up, whether voluntary or
involuntary, the holder of each outstanding share of the Series A Stock is
entitled to receive, out of our assets, $102 plus an amount equal to an 8%
annual compounded return on such amount from the date of the initial
purchase less and dividends previously paid; provided, however, the
holders are not be entitled to such amount if, in connection with such
dissolution, liquidation or winding up, the holders receive at least $306
per outstanding share of the Series A Stock.
. After the payment to the holders of shares of the Series A Stock of the
full preferential amounts for those shares described in the prior
paragraph, the holders thereof have the further right to share, ratably,
in the distribution of our remaining assets based on the number of shares
of our Common Stock which they have the right to acquire based on the then
current Conversion Rate.
. In the event our assets available for distribution to the holders of the
Series A Stock upon our dissolution, liquidation or winding up are
insufficient to fully pay all amounts to which the holders of the Series A
Stock are entitled, no distribution may be made on account of any shares
of a class or series of our capital stock ranking on a parity with the
shares of the Series A Stock, if any, unless proportionate distributive
amounts are paid on account of the shares of the Series A Stock, ratably,
in proportion to the full distributive amounts for which holders of all
parity shares are respectively entitled upon a dissolution, liquidation or
winding up.
26
. Our consolidation with, or merger into, another entity or the sale,
transfer or other disposition of all or substantially all of our assets
will be deemed a dissolution, liquidation or winding up; provided,
however, if our stockholders prior to any such transaction own, after
consummation of such transaction, more than 50% of the voting power of the
surviving or purchasing entity, such transaction will not be deemed a
dissolution, liquidation or winding up.
. Any right or preference of the Series A Stock may be waived in writing by
the holders of at least 51% of the outstanding shares of the Series A
Stock.
OTHER MATTERS
As of the date of this proxy statement, the Company knows of no business
that will be presented for consideration at the annual meeting other than the
items referred to above. In the event that any other matter is properly brought
before the meeting for action by stockholders, proxies in the enclosed form
returned to the Company will be voted in accordance with the recommendation of
the Board of Directors or, in the absence of such a recommendation, in
accordance with the judgment of the proxy holder.
PROXY SOLICITATION COSTS. The proxies being solicited hereby are being
solicited by the Company. The cost of soliciting proxies in the enclosed form
will be borne by the Company. Officers and regular employees of the Company
may, but without compensation other than their regular compensation, solicit
proxies by further mailing or personal conversations, or by telephone, telex,
facsimile or electronic means. The Company will, upon request, reimburse
brokerage firms and others for their reasonable expenses in forwarding
solicitation material to the beneficial owners of stock.
PROPOSALS OF STOCKHOLDERS. If you wish to submit a proposal for possible
inclusion in the Company's 2002 proxy material, the Company must receive your
notice, in accordance with the rules of the Securities and Exchange Commission,
on or before December __, 2001.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000, which has been filed with the Securities and Exchange Commission by
the Company and is being delivered to stockholders together with this document,
is incorporated herein by reference and made a part hereof.
27
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein will be deemed to be modified or superseded
for purposes of this document to the extent that a statement contained herein
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded will
not be deemed, except as so modified or superseded, to constitute a part of this
document.
By order of the Board of Directors,
/s/ Harry L. Zimmerman
Harry L. Zimmerman
Corporate Secretary
May __, 2001
28
ANNEX A
ENCORE MEDICAL CORPORATION
AUDIT COMMITTEE CHARTER
MISSION STATEMENT
The Encore Medical Corporation Audit Committee (the "Committee") will assist the
board of directors in fulfilling its oversight responsibilities. The Committee
will review the financial reporting process, the system of internal control, the
audit process, and the company's process for monitoring compliance with laws and
regulations and with the code of conduct. In performing its duties, the
Committee will maintain effective working relationships with the board of
directors, management, and external auditors. To effectively perform his or her
role, each Committee member will obtain an understanding of the detailed
responsibilities of Committee membership as well as the company's business,
operations, and risks.
ORGANIZATION
. The Committee shall be composed of three members, all of whom shall be
dependent (as defined by the SEC and NASDAQ).
. The Committee shall meet at least quarterly.
. Members of the Committee shall be able to read and understand fundamental
financial statements, including a company's balance sheet, income statement,
and cash flow statement.
. One member of the Committee shall have past employment experience in finance
or accounting, requisite professional certification in accounting, or other
comparable experience or background, including a current or past position as
a chief executive or financial officer or other senior officer with financial
oversight responsibilities.
. The Board of Directors shall appoint the Chairperson of the Committee.
ROLES AND RESPONSIBILITIES
INTERNAL CONTROL
. Evaluate whether management is setting the appropriate tone at the top by
communicating the importance of internal control and ensuring that all
individuals possess an understanding of their roles and responsibilities.
. Focus on the extent to which external auditors review computer systems and
applications, the security of such systems and applications, and the
contingency plan for processing financial information in the event of a
systems breakdown.
. Gain an understanding of whether internal control recommendations made by
external auditors have been implemented by management.
. Ensure that the external auditors keep the audit committee informed about
fraud, illegal acts, deficiencies in internal control, and certain other
matters.
FINANCIAL REPORTING
General
. Review significant accounting and reporting issues, including recent
professional and regulatory pronouncements, and understand their impact on
the financial statements.
. Ask management and the external auditors about significant risks and
exposures and the plans to minimize such risks.
Annual Financial Statements
. Review the annual financial statements and determine whether they are
complete and consistent with the information known to committee members, and
assess whether the financial statements reflect appropriate accounting
principles.
. Pay particular attention to complex and/or unusual transactions.
. Focus on judgmental areas such as those involving valuation of assets and
liabilities, including, for example, the accounting for and disclosure of
obsolete or slow-moving inventory; product and environmental liability;
litigation reserves; and other commitments and contingencies.
. Meet with management and the external auditors to review the financial
statements and the results of the audit.
. Ensure that the external auditors communicate certain required matters to the
committee.
Interim Financial Statements
. Be briefed on how management develops and summarizes quarterly financial
information, the extent to which the external auditors review quarterly
financial information, and whether that review is performed on a pre- or
post-issuance basis.
. Meet with management and, if a pre-issuance review was completed, with the
external auditors, either telephonically or in person, to review the interim
financial statements and the results of the review.
. To gain insight into the fairness of the interim statements and disclosures,
obtain explanations from management and from the external auditors on
whether:
. Actual financial results for the quarter or interim period varied
significantly from budgeted or projected results;
. Changes in financial ratios and relationships in the interim financial
statements are consistent with changes in the company's operations and
financing practices;
. Generally accepted accounting principles have been consistently applied;
. There are any actual or proposed changes in accounting or financial
reporting practices;
. There are any significant or unusual events or transactions;
. The company's financial and operating controls are functioning
effectively;
. The company has complied with the terms of loan agreements or security
indentures; and
. The interim financial statements contain adequate and appropriate
disclosures.
. Ensure that the external auditors communicate certain required matters to the
committee.
2
COMPLIANCE WITH LAWS AND REGULATIONS
. Review the effectiveness of the system for monitoring compliance with laws
and regulations and the results of management's investigation and follow-up
(including disciplinary action) on any fraudulent acts or accounting
irregularities.
. Periodically obtain updates from management, general counsel, and tax
director regarding compliance.
. Be satisfied that all regulatory compliance matters have been considered in
the preparation of the financial statements.
. Review the findings of any examinations by regulatory agencies such as the
Securities and Exchange Commission.
COMPLIANCE WITH CODE OF CONDUCT
. Ensure that a code of conduct is formalized in writing and that all employees
are aware of it.
. Evaluate whether management is setting the appropriate tone at the top by
communicating the importance of the code of conduct and the guidelines for
acceptable business practices.
. Review the program for monitoring compliance with the code of conduct.
. Periodically obtain updates from management and general counsel regarding
compliance.
EXTERNAL AUDIT
. Review the external auditors' proposed audit scope and approach.
. Review the performance of the external auditors and recommend to the board of
directors the appointment or discharge of the external auditors.
. Review and confirm the independence of the external auditors by reviewing the
non-audit services provided and the auditors' assertion of their
independence in accordance with professional standards.
OTHER RESPONSIBILITIES
. Meet with the external auditors and management in separate executive sessions
to discuss any matters that the committee or these groups believe should be
discussed privately.
. Ensure that significant findings and recommendations made by the external
auditors are received and discussed on a timely basis.
. Review, with the company's counsel, any legal matters that could have a
significant impact on the company's financial statements.
. If necessary, institute special investigations and, if appropriate, hire
special counsel or experts to assist.
. Perform other oversight functions as requested by the full board.
. Review and update the Committee charter; receive approval of changes from the
Board.
REPORTING RESPONSIBILITIES
. Regularly update the Board of Directors about committee activities and make
appropriate recommendations.
3
ANNEX B
_____________________________________________________
SERIES A PREFERRED STOCK
PURCHASE AGREEMENT
By and Among
ENCORE MEDICAL CORPORATION
AND THE
PURCHASERS NAMED ON ANNEX I HERETO
As of April 20, 2001
_____________________________________________________
TABLE OF ANNEXES AND EXHIBITS
Annex
I Investors, Series A Preferred Stock and Purchase Price
Exhibits
A Certificate of Designation
B Form of Investors' Rights Agreement
C Form of Voting Agreement
D Form of Lock-Up Agreement
E Opinion of Counsel to the Company
i
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
SERIES A PREFERRED STOCK PURCHASE AGREEMENT, dated as of April 20, 2001, is
by and among Encore Medical Corporation, a Delaware corporation (the "Company"),
and the purchasers named on Annex I hereto. The parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. Accounting terms used in this Agreement and not
otherwise defined herein shall have the meanings provided by GAAP. Certain
capitalized terms are used in this Agreement as specifically defined in this
Section 1.1 as follows:
"Affiliate" means any Person directly or indirectly controlling,
controlled by or under direct or indirect common control with the Company (or
other specified Person) and shall include (a) any Person who is an officer,
director or beneficial holder of at least 10% of the outstanding capital stock
of the Company (or other specified Person), (b) any Person of which the Company
(or other specified Person) or any officer or director of the Company (or other
specified Person) shall, directly or indirectly, either beneficially own at
least 10% of the outstanding equity securities or constitute at least a 10%
participant, and (c) in the case of a specified Person who is an individual,
Members of the Immediate Family of such Person; provided, however, that the
Investors shall not be Affiliates of the Company for purposes of this Agreement.
"Agreement" is defined in the Preamble.
"Balance Sheet Date" is defined in Section 3.6.
"By-laws" means all written rules, regulations, procedures and by-laws
and all other similar documents, relating to the management, governance or
internal regulation of a Person other than an individual, each as from time to
time amended or modified.
"Certificate of Designation" is defined in Section 2.1.
"Charter" means the articles or certificate of incorporation, statute,
constitution, joint venture or partnership agreement or articles or other
charter of any Person other than an individual, each as from time to time
amended or modified.
"Code" means the federal Internal Revenue Code of 1986 or any
successor statute, and the rules and regulations thereunder, as from time to
time amended and in effect.
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act, the Exchange Act or
both.
"Common Stock" means the common stock, $0.001 par value, of the
Company.
1
"Company" is defined in the Preamble.
"Contractual Obligation" means, with respect to any Person, any
contracts, agreements, deeds, mortgages, leases, licenses, other instruments,
commitments, undertakings, arrangements or understandings, written or oral, or
other documents, including any document or instrument evidencing indebtedness,
to which any such Person is a party or otherwise subject to or bound by or to
which any asset of any such Person is subject.
"Employee Benefit Plan" means each and all "employee benefit plans" as
defined in section 3(3) of ERISA, maintained or contributed to by the Company,
any of its Affiliates or any of their respective predecessors, or in which the
Company, any of its Affiliates or any of their respective predecessors
participates or participated and which provides benefits to employees of the
Company or their spouses or covered dependents or with respect to which the
Company has or may have a material liability, including, (i) any such plans that
are "employee welfare plans" as defined in section 3(1) of ERISA and (ii) any
such plans that are "employee pension benefit plans" as defined in section 3(2)
of ERISA.
"ERISA" means the Employee Retirement Income Security Act of 1974 or
any successor statute and the rules and regulations thereunder, and in the case
of any referenced section of any such statute, rule or regulation, any successor
section thereof, collectively and as from time to time amended and in effect.
"ERISA Group", with respect to any entity, means any Person which is a
member of the same "controlled group" or under "common control", within the
meaning of section 414(b) or (c) of the Code or section 4001(b)(1) of ERISA,
with such entity.
"Exchange Act" means the Securities Exchange Act of 1934, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as from time to time amended and in effect.
"Financial Statements" is defined in Section 3.6.
"First Closing" is defined in Section 2.3.
"First Closing Date" is defined in Section 2.3.
"First Closing Securities" is defined in Section 2.2.
"GAAP" means United States generally accepted accounting principles,
as in effect from time to time, consistently applied.
"Investor Securities" is defined in Section 2.1.
"Investors" means the holders of Investor Securities immediately
following the First Closing or the Second Closing, as the case may be, the
original holders of which are listed on Annex I hereto.
"Investors' Rights Agreement" is defined in Section 2.4(d)(i).
2
"Legal Requirement" means any federal, state, local or foreign law,
statute, standard, ordinance, code, order, rule, regulation, resolution,
promulgation or any final order, judgment or decree of any court, arbitrator,
tribunal or governmental authority, or any license, franchise, permit or similar
right granted under any of the foregoing.
"Lock-up Agreements" is defined in Section 2.4(d)(iii).
"Material Adverse Effect" means a material adverse effect upon the
business, assets, financial condition, income or prospects of the Company.
"Members of the Immediate Family," as applied to any individual, means
each parent, spouse, child, brother, sister or the spouse of a child, brother or
sister of the individual, and each trust created for the benefit of one or more
of such persons and each custodian of a property of one or more such persons.
"Pension Plan" means each pension plan (as defined in section 3(2) of
ERISA) established or maintained, or to which contributions are or were made by
the Company or any of its Subsidiaries or former Subsidiaries, or any Person
which is a member of the same ERISA Group with any of the foregoing.
"Person" means an individual, partnership, corporation, company,
association, trust, joint venture, unincorporated organization and any
governmental department or agency or political subdivision.
"Proxy Statement" is defined in Section 5.1(b).
"Related Agreements" means the Investors' Rights Agreement, the Voting
Agreements and the Lock-up Agreements.
"Second Closing" is defined in Section 2.3.
"Second Closing Date" is defined in Section 2.3.
"Second Closing Securities" is defined in Section 2.2.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be from time to time amended and in effect.
"Series A Preferred Stock" means the Series A Preferred Stock, par
value $0.001 per share, of the Company.
"Subsidiary" means any Person of which the Company now or hereafter
shall at the time (a) own directly or indirectly through a Subsidiary at least
50% of the outstanding capital stock (or other shares of beneficial interest)
entitled to vote generally or (b) constitute a general partner.
"Voting Agreements" is defined in Section 2.4(d)(ii).
3
"Welfare Plan" means each welfare plan (as defined in section 3(l) of
ERISA) established or maintained, or to which any contributions are or were
made, by the Company or any of its Subsidiaries or any Person which is a member
of the same ERISA Group with any of the foregoing.
ARTICLE II
SALE AND PURCHASE OF SECURITIES
2.1 Investor Securities. The Series A Preferred Stock being
purchased by the Investors hereunder, together with any securities issued with
respect thereto, upon exercise, conversion or transfer thereof or in exchange
therefor, including the Common Stock issuable upon conversion of the Series A
Preferred Stock, are collectively referred to as "Investor Securities";
provided, however, that once any such securities have been sold in a public
offering registered under the Securities Act or sold pursuant to Rule 144 under
the Securities Act they shall cease to be Investor Securities for all purposes
of this Agreement. The powers, preferences and rights of the Series A Preferred
Stock are set forth in the Company's Certificate of Designation, Preferences and
Limitations, attached hereto as Exhibit A (the "Certificate of Designation").
2.2 Agreement to Sell and Purchase. Subject to the terms and
conditions hereof and in reliance on the Investors' representations, warranties
and agreements contained or referred to herein, the Company agrees to issue and
sell to the Investors and, subject to the terms and conditions hereof and in
reliance on the representations, warranties and agreements of the Company
contained or referred to herein, the Investors severally agree to purchase (i)
at the First Closing, the number of shares of Series A Preferred Stock specified
in Annex I as "First Closing Securities" (the "First Closing Securities") for
each Investor at the purchase price of $200.00 per share, payable by wire
transfer or certified check, and (ii) at the Second Closing, the number of
shares of Series A Preferred Stock specified in Annex I as "Second Closing
Securities" (the "Second Closing Securities") for each Investor at the purchase
price of $68.46 per share, payable by wire transfer or certified check.
2.3 Closing. The closing of the purchase and sale of the First
Closing Securities (the "First Closing") and the Second Closing Securities (the
"Second Closing") shall take place in New York, New York at the offices of
Reboul, MacMurray, Hewitt, Maynard & Kristol, on (i) May 2, 2001 (the "First
Closing Date"), and (ii) no later than one week after the Company's 2001 annual
stockholders meeting (the "Second Closing Date") or at such other place and time
as the Company and the Investors may otherwise agree. At each closing, the
Company will deliver to the Investors certificates evidencing the number of
shares of Series A Preferred Stock set forth on Annex I, to be purchased at such
closing against payment of the purchase price as set forth on Annex I.
2.4 Conditions to Closing for the Investors. The Investors'
several obligations to purchase the First Closing Securities or the Second
Closing Securities, as applicable, pursuant to this Agreement on the First
Closing Date or the Second Closing Date, as applicable, are subject to the
satisfaction, on or prior to such closing date, of the following conditions:
4
(a) Representations and Warranties Correct. The representations and
warranties made by the Company herein shall have been true and correct in all
material respects when made and shall be true and correct on and as of such
closing date with the same force and effect as though made on and as of such
closing date, except for representations and warranties that are made as of a
specific date which shall only be required to be true and correct as of such
date.
(b) Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with by the Company on or prior to
such closing shall have been performed or complied with in all material respects
and the Company shall not be in default in the performance of or compliance with
any provisions of this Agreement.
(c) Compliance Certificates. The Company shall have delivered to the
Investors a certificate of the chief executive officer or chief financial
officer of the Company, dated the date of such closing, certifying to the
matters stated in Sections 2.4(a) and (b).
(d) Related Agreements. The Company and the other parties thereto
shall have duly authorized, executed and delivered to the Investors the
following agreements:
(i) Investors' Rights Agreement, in the form of Exhibit B,
among the Company and the Investors (as from time to time
in effect, the "Investors' Rights Agreement").
(ii) The Voting Agreements, in the form of Exhibit C, among
Galen Partners III, L.P. and certain other stockholders of
the Company, which stockholders, as of the record date for
the Company's 2001 Annual Meeting of stockholders ("Annual
Meeting"), hold, in the aggregate, at least a majority of
the outstanding voting power of the Company (as from time
to time in effect, the "Voting Agreements").
(iii) The Lock-up Agreements, in the form of Exhibit D, among the
Company, the Investors and the directors and executive
officers of the Company, in their individual capacity (as
from time to time in effect, the "Lock-up Agreements").
(e) Secretary's Certificate. The Company shall have delivered to the
Investors copies of each of the following:
(i) the Charter of the Company as of the Closing (which shall
include the Certificate of Designation), certified by the
5
Secretary of State of Delaware as of a date not more than
five (5) days prior to the Closing;
(ii) the By-laws of the Company; and
(iii) resolutions of the Board of Directors of the Company, the
form and substance of which are reasonably satisfactory to
each of the Investors, authorizing the execution, delivery
and performance of this Agreement and the Related
Agreements to which the Company is a party, and the
transactions contemplated hereby and thereby, including the
terms and filing of the Certificate of Designation and the
issuance and sale of the Series A Preferred Stock.
(f) Legal Opinion. On the applicable closing date, the Investors shall
have received from Jackson Walker L.L.P., counsel to the Company, their opinion
substantially in the form of Exhibit E.
(g) Key Executive Insurance. The Company will have in full force and
effect as the owner thereof on such closing date key executive life insurance
policies with a financially sound and reputable insurer in the amount of
$3,000,000 covering the life of Kenneth W. Davidson, the proceeds of which shall
be payable to the Company. Such policies shall not be cancelable without at
least thirty (30) days' written notice from the insurer to the Investors.
(h) Key Employment Agreements. The Company will have in full force and
effect on such closing date amended and restated employment agreements with the
following individuals Kenneth W. Davidson, Craig L. Smith, Jack Cahill, August
Faske and Harry L. Zimmerman, each on terms and conditions reasonably acceptable
to the Investors, and all preexisting employment agreements with such persons
shall be of no further force and effect.
(i) Severance Agreements. All severance agreements between the Company
and its employees shall have been terminated, except for the agreement between
the Company and Joyce Ludwig, which shall remain in effect.
(j) Election of Directors. As of the First Closing, the Board of
Directors of the Company shall consist of ten (10) directors, including two
persons selected by the Investors (who shall initially be Bruce F. Wesson and
Zubeen Shroff), and one of the persons selected by the Investors shall have been
appointed to the Compensation Committee of the Board of Directors.
(k) Nasdaq Listing. As of such closing, the shares of Common Stock
into which the Series A Preferred Stock to be issued on such closing date are
convertible shall have been listed on the Nasdaq National Market, subject only
to official notice of issuance.
6
(l) Stockholder Approval. As of the Second Closing, the stockholders
of the Company shall have approved the issuance and sale of the Series A
Preferred Stock pursuant to this Agreement at the Annual Meeting in accordance
with the rules of the Nasdaq National Market.
(m) Credit Agreement Amendment and Assurance. The Company's credit
agreement with Wells Fargo Bank Texas, N.A. (the "Bank") shall have been amended
in a manner satisfactory to Galen Partners III, L.P. relating to the Bank's
acquisition approval rights and the Bank shall have provided written assurance
to the Investors that the redemption rights contained in Section 6.3 will be
allowed.
(n) Consents. All consents and approvals to the transactions
contemplated by this Agreement required to be obtained by the Company from any
third party shall have been obtained by the Company.
(o) Legality. All authorizations, approvals or permits of any
governmental authority or regulatory body that are required in connection with
the lawful issuance and sale of the Investor Securities pursuant to this
Agreement shall have been duly obtained and shall be in full force and effect.
(p) General. All instruments and legal and corporate proceedings in
connection with the transactions contemplated by this Agreement shall be
reasonably satisfactory in form and substance to the Investors, and the
Investors shall have received copies of all documents, including records of
corporate proceedings and officers' certificates, which they may have reasonably
requested in connection therewith.
2.5 Conditions to Closing for the Company. The Company's
obligations to issue and sell the First Closing Securities or the Second Closing
Securities, as applicable, pursuant to this Agreement on the First Closing Date
or the Second Closing Date, as applicable, are subject to the satisfaction, on
or prior to such closing date, of the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties made by the Investors herein shall have been true and correct in all
respects when made and shall be true and correct on and as of such closing date
with the same force and effect as though made on and as of such closing date.
(b) Legality. All authorizations, approvals or permits of any
governmental authority or regulatory body that are required in connection with
the lawful issuance and sale of the Investor Securities pursuant to this
Agreement shall have been duly obtained and shall be in full force and effect.
7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of the Investors as
follows:
3.1 Organization. The Company is a duly organized and validly
existing corporation in good standing under the laws of Delaware. The Company
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which it does business, except where the
failure to be so qualified would not have a Material Adverse Effect.
3.2 Corporate Power. The Company has all necessary corporate power
and authority to enter into and perform this Agreement and the Related
Agreements to which it is a party, to issue and sell the Investor Securities
hereunder, to own all the properties owned by it and to carry on the businesses
now conducted or presently proposed to be conducted by it. The Company has
taken all corporate action necessary to authorize this Agreement, the Related
Agreements to which it is a party and the issuance of the Investor Securities to
be issued and sold hereunder.
3.3 Subsidiaries. Except as listed in Schedule 3.3, the Company
has no Subsidiaries. Each of the Subsidiaries is a duly organized and validly
existing corporation under the laws of its jurisdiction of organization, which
jurisdiction is listed in Schedule 3.3. Each Subsidiary has all necessary
corporate power and authority to own all the properties owned by it and to carry
on the businesses now conducted or presently proposed to be conducted by it.
Each Subsidiary is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which it does business, except where
the failure to be so qualified would not have a Material Adverse Effect. The
Company owns all of the issued and outstanding capital stock of each of its
Subsidiaries and there are no outstanding preemptive, conversion or other
rights, options, warrants or agreements granted or issued by or binding upon any
Subsidiary for the purchase or acquisition of any shares of its capital stock.
3.4 Capitalization. The authorized capital stock of the Company
immediately prior to each closing is set forth in Schedule 3.4. Schedule 3.4
contains a true and correct list of all outstanding capital stock, warrants and
options as of the date hereof, including the owner thereof, and, with respect to
the warrants and options, the exercise price and the dates of issuance and
termination. All of the outstanding shares of capital stock of the Company,
including the Series A Preferred Stock to be issued pursuant to this Agreement,
will be, upon consummation of the transactions contemplated by this Agreement,
validly issued, fully paid, nonassessable and subject to no lien or restriction
on transfer, except restrictions on transfer imposed by the Related Agreements
and applicable securities laws or as otherwise set forth in Schedule 3.4. The
shares of Common Stock issuable upon conversion of the Series A Preferred Stock
have been duly and validly reserved and, upon issuance in accordance with the
conversion provisions of the Series A Preferred Stock will be validly issued,
fully paid, nonassessable and subject to no lien or restriction on transfer,
except restrictions on transfer imposed by the Related Agreements and applicable
securities laws or as otherwise set forth in Schedule 3.4. All of the
outstanding shares of capital stock and warrants have been offered and sold in
compliance with applicable federal
8
and state securities laws. Other than as set forth in Schedule 3.4, the Company
has no outstanding (i) rights (either preemptive or otherwise) or options to
subscribe for or purchase, or any warrants or other agreements providing for or
requiring the issuance of, any capital stock or any securities convertible into
or exchangeable for its capital stock, (ii) obligation to repurchase or
otherwise acquire or retire any of its capital stock, any securities convertible
into or exchangeable for its capital stock or any rights, options or warrants
with respect thereto, (iii) rights that require it to register the offering of
any of its securities under the Securities Act or (iv) any restrictions on
voting any of its securities.
3.5 Authorization. All shareholder approval and corporate action
on the part of the Company necessary for the due authorization, execution and
delivery of this Agreement, the Certificate of Designation and the Related
Agreements to which the Company is a party and the consummation of the
transactions contemplated herein and therein, and for the due authorization and
issuance of (i) the shares of Series A Preferred Stock, and (ii) the Common
Stock issuable upon conversion of the Series A Preferred Stock has been or will
be taken prior to the applicable closing date. This Agreement and the Related
Agreements to which the Company is a party are legal, valid and binding
agreements of the Company, enforceable in accordance with their terms. The
execution, delivery and performance by the Company of this Agreement and the
Related Agreements to which the Company is a party and the issuance and sale of
the Investor Securities will not result in any violation of or be in conflict
with, or result in a breach of or constitute a default under, any term or
provision of any Legal Requirement to which the Company or any of its
Subsidiaries is subject, or the Company's or any Subsidiary's Charter or By-
Laws, or any Contractual Obligation to which the Company or any of its
Subsidiaries is a party or by which it is bound.
3.6 Financial Statements. The Investors have been furnished with
complete and correct copies of the following financial statements of the Company
(the "Financial Statements"): (a) the audited consolidated balance sheet of the
Company as of December 31, 1999 and the respective related consolidated
statements of income, retained earnings and cash flows for the twelve-month
period then ended, (b) the audited consolidated balance sheet of the Company as
of December 31, 2000 together with the related consolidated statements of
operations, retained earnings and cash flows for the twelve-month period then
ended, and (c) the unaudited consolidated balance sheet of the Company as of
February 23, 2001 (the "Balance Sheet Date") together with the related
consolidated statements of operations, cash flows and stockholders' equity for
the two-month period then ended. The Financial Statements have been prepared in
accordance with GAAP consistently applied and fairly and accurately present the
financial condition of the Company and its Subsidiaries at the date thereof and
the results of its operations for the period covered thereby. All the books,
records and accounts of the Company and its Subsidiaries are in all material
respects accurate and complete, are in all material respects in accordance with
good business practice and all laws, regulations and rules applicable to the
Company and its Subsidiaries and the conduct of their business and accurately
present and reflect in all material respects all of the transactions described
therein.
3.7 Outstanding Debt: Absence of Liabilities. Neither the Company
nor any of its Subsidiaries (i) has any outstanding indebtedness for borrowed
money except as reflected in the Financial Statements or Schedule 3.7 and (ii)
except as reflected, is a guarantor or
9
otherwise contingently liable on such indebtedness of any other Person. Except
as set forth in Schedule 3.7, neither the Company nor any of its Subsidiaries
has any material liabilities or obligations, contingent or otherwise, which are
not reflected or provided for in the Financial Statements.
3.8 Changes in Condition. Since the Balance Sheet Date, there have
occurred no event or events that, individually or in the aggregate, have caused
or will cause a Material Adverse Effect. Except as set forth in Schedule 3.8,
neither the Company nor any of its Subsidiaries has (a) declared any dividend or
other distribution on any shares of its capital stock, (b) made any payment
(other than compensation to its directors, officers and employees at rates in
effect prior to the Balance Sheet Date or for bonuses accrued in accordance with
normal practice prior to the Balance Sheet Date) to any of its Affiliates, (c)
increased the compensation, including bonuses, payable or to be payable to any
of its directors, officers, employees or Affiliates, by more than 10%, or (d)
entered into any Contractual Obligation, or entered into or performed any other
transaction, not in the ordinary and usual course of business and consistent
with past practice, other than as specifically contemplated by this Agreement.
3.9 Contractual Obligations. Schedule 3.9 contains, together with
a reference to the paragraph pursuant to which each item is being disclosed, a
correct and complete list of all Contractual Obligations of a material nature of
the Company and its Subsidiaries of the types described below:
(a) All collective bargaining agreements, all employment, bonus or
consulting agreements, all pension, profit sharing, deferred compensation, stock
option, stock purchase, retirement, welfare or incentive plans or agreements,
and all plans, agreements or practices that constitute "fringe benefits" to any
of the employees of the Company or its Subsidiaries.
(b) All Contractual Obligations under which the Company or any
Subsidiary is restricted from carrying on any business, venture or other
activities anywhere in the world.
(c) All Contractual Obligations to sell or lease (as lessor) any of
the properties or assets of the Company or any Subsidiary, except in the
ordinary course of business, or to purchase or lease (as lessee) any real
property.
(d) All Contractual Obligations pursuant to which the Company or any
Subsidiary guarantees any liability of any Person, or pursuant to which any
Person guarantees any liability of the Company or any Subsidiary.
(e) All Contractual Obligations pursuant to which the Company or any
Subsidiary provides goods or services involving payments to the Company or any
Subsidiary of more than $100,000 annually, which Contractual Obligation is not
terminable by the Company or any Subsidiary without penalty upon notice of
thirty (30) days or less.
10
(f) All Contractual Obligations with any Affiliate of the Company or
any Subsidiary (other than the Related Agreements).
(g) All Contractual Obligations providing for the disposition of the
business, assets or shares of the Company or any Subsidiary or the merger or
consolidation or sale or purchase of all or substantially all of the assets or
business of any Person, and any letters of intent relating to the foregoing.
(h) All Contractual Obligations of the Company or any Subsidiary
relating to the borrowing of money or to the mortgaging or pledging of, or
otherwise placing a lien on, any asset of the Company or any Subsidiary (except
liens imposed by operation of law in favor of landlords, suppliers, mechanics or
others who provide services to the Company or any Subsidiary).
All of the Contractual Obligations of the Company and its Subsidiaries
are enforceable against the Company and its Subsidiaries, as the case may be,
and, to the Company's knowledge, the other parties thereto in accordance with
their terms, except for Contractual Obligations the failure of which to be so
enforceable does not and will not result in a Material Adverse Effect. Neither
the Company nor any of its Subsidiaries is in default under nor, to the
Company's knowledge, are there any liabilities arising from any breach or
default by any Person prior to the date of this Agreement of, any provision of
any such Contractual Obligation. Upon request by counsel for the Investors, the
Company will, prior to each Closing, furnish to counsel for the Investors true
and correct copies of all Contractual Obligations listed in Schedule 3.9.
3.10 Insurance. The Company has insurance policies in full force
and effect, written by reputable insurers licensed to write insurance in the
states in which the Company and its Subsidiaries conduct business, which
insurance contracts provide for coverages which are usual and customary in its
business as to amount and scope. Schedule 3.10 contains a correct and complete
list and description of all insurance policies owned by the Company or any of
its Subsidiaries, correct and complete copies of which have previously been made
available to the Investors. Neither the Company nor any of its Subsidiaries is
in default under any of its insurance policies, nor has the Company or any of
its Subsidiaries received any notice of cancellation or intent to cancel or
increase premiums with respect to present insurance policies. Schedule 3.10
also contains a list of all pending claims with any insurance company and any
instances of a denial of coverage of the Company or any of its Subsidiaries by
any insurance company.
3.11 Transactions with Affiliates. Other than as set forth in
Schedule 3.11, no Affiliate of the Company or any Subsidiary is a customer or
supplier of, or is party to any Contractual Obligation with, the Company or any
Subsidiary.
3.12 Conformity With Legal Requirements. The operations of the
Company and its Subsidiaries as now conducted are not in violation of, nor is
the Company or any Subsidiary in default under, any Legal Requirements presently
in effect or the Company's or any Subsidiary's Charter or By-Laws, except for
such violations and defaults as do not and will not, in the aggregate, have a
Material Adverse Effect. The Company and its Subsidiaries have all
11
franchises, licenses, permits or other authority presently necessary for the
conduct of their businesses as now conducted.
3.13 Benefit Plans. Schedule 3.13 sets forth a complete list of
all Employee Benefit Plans and all Welfare Plans applicable to the employees of
the Company and its Subsidiaries. Each Employee Benefit Plan and Welfare Plan
has been administered in substantial compliance with its terms and all
applicable laws, including the Code and ERISA. Except as set forth in Schedule
3.13, neither Company nor any Subsidiary has any obligation under any Welfare
Plan to provide for the continuation of benefits (other than disability payments
and medical benefits incurred for illness arising in the course of employment)
for more than one year after retirement or other termination of employment. No
"reportable events" within the meaning of section 4043 of ERISA have occurred
with respect to any Employee Benefit Plan. No Pension Plan is a "multiemployer
plan" as defined in ERISA. The present value of benefits liabilities as
described in Title IV of ERISA of Employee Benefit Plans does not exceed the
current value of such Employee Benefit Plans assets allocable to such benefits
liabilities by more than $100,000.
3.14 Employees. None of the employees of the Company or any
Subsidiary is presently represented by a labor union, and no petition has been
filed or proceedings instituted by any employee or group of employees with any
labor relations board seeking recognition of a bargaining representative.
Except as set forth in Schedule 3.14, no controversies or disputes are pending
between the Company or any Subsidiary and any of its employees, except for such
controversies and disputes as do not and will not, in the aggregate, have a
Material Adverse Effect. To the Company's knowledge, no employee of the Company
or any Subsidiary is in violation of any term of any Contractual Obligation with
a former employer relating to the right of any such employee to be employed by
the Company or such Subsidiary because of the nature of the Company's or such
Subsidiary's business or the use of any trade secrets or proprietary
information. Except as set forth in Schedule 3.14, each employee of the Company
and its Subsidiaries is an "employee at will" and may be terminated by the
Company or such Subsidiary without payment of any amounts other than accrued
wages.
3.15 Taxes. The Company and each of its Subsidiaries has filed all
federal, state and local tax and information returns which are required to be
filed by it and such returns are true and correct in all material respects. The
Company and each of its Subsidiaries have paid all taxes, interest and
penalties, if any, reflected in such tax returns or otherwise due and payable by
it. The Company has no knowledge of any material additional assessments or any
basis therefor. The charges, accruals and reserves on the balance sheet of the
Company as of the Balance Sheet Date in respect of taxes or other governmental
charges are adequate in amount for the payment of all liabilities for such taxes
or other governmental charges. The Company and its Subsidiaries have withheld
or collected from each payment made to its employees the amount of all taxes
required to be withheld or collected therefrom and has paid over such amounts to
the appropriate taxing authorities. Any deficiencies proposed as a result of
any governmental audits of such tax returns have been paid or settled or are
being contested in good faith, and there are no present disputes as to taxes
payable by the Company or any of its Subsidiaries.
12
3.16 Litigation. No litigation or proceeding before, or
investigation by, any foreign, federal, state or municipal board or other
governmental or administrative agency or any arbitrator is pending or, to the
Company's knowledge, threatened (nor to the Company's knowledge, does any basis
exist therefor) against the Company or any of its Subsidiaries or, to the
Company's knowledge, any officer of the Company or any Subsidiary, which
individually or in the aggregate could result in any material liability or which
may otherwise result in a Material Adverse Effect, or which seeks rescission of,
seeks to enjoin the consummation of, or which questions the validity of, this
Agreement or any other Related Agreement or any of the transactions contemplated
hereby or thereby.
3.17 Patents and Trademarks. The Company owns or has sufficient
rights to use all patents, patent applications, trademarks, service marks,
copyrights, trade secrets and other proprietary information necessary for its
business as now conducted or proposed to be conducted by it. A complete list of
all of the Company's patents, patent applications, trademarks, and registered
copyrights is included in Schedule 3.17. To the Company's knowledge without any
independent investigation for the purpose hereof, the conduct of the business of
the Company and its Subsidiaries does not conflict with or infringe upon the
patents, trademarks, copyrights or other intellectual property rights of any
other Person. The Company is not aware that any of its patents, trademarks,
copyrights or other intellectual property rights are not valid and enforceable.
3.18 Consents. No consent, approval, qualification, order or
authorization of, or filing with any governmental authority is required in
connection with the Company's valid execution, delivery or performance of the
Related Agreements to which it is a party, or the offer, issue or sale of the
Investor Securities by the Company, the conversion of the Series A Preferred
Stock, or the issuance of Common Stock upon conversion of the Series A Preferred
Stock, or the consummation of any other transaction pursuant to this Agreement
on the part of the Company, except the filing of the Certificate of Designation
and filings under applicable federal securities or blue sky laws.
3.19 Filings, Broker's Fees. The Company is not obligated to pay
any broker's fee, finder's fee, investment banker's fee or other similar
transaction fee in connection with the transactions contemplated hereby.
3.20 Minute Books. The minute books of the Company, which shall
have been provided to counsel for the Investors prior to the Closing if
requested, contain a complete record of actions taken at all meetings of
directors and stockholders since April 19, 1995 and reflect all such actions
accurately in all material respects.
3.21 Real Property Holding Corporation. The Company is not a
"United States real property holding corporation" as defined in section
897(c)(2) of the Code and Treasury Regulation section 1.897-2(b).
3.22 Disclosure. The Company's Annual Report on Form 10-K for the
year ended December 31, 2000 does not contain any untrue statement of a material
fact, nor omits to state any material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. Neither this Agreement, nor any
13
agreement, certificate, statement or document furnished in writing by or on
behalf of the Company to the Investors in connection herewith or therewith
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading. The
Company has furnished the Investors with an accurate and complete copy of its
Annual Report on Form 10-K for the 2000 fiscal year and all other reports or
documents required to be filed by the Company pursuant to the Exchange Act and
the rules and regulations of the Commission thereunder, since the filing of the
most recent annual report to stockholders. The Company has made all filings with
the Commission that it has been legally required to make.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
4.1 Representations and Warranties of the Investors. Each of the
Investors severally represents and warrants to the Company, on the closing date
applicable to such Investor's purchase, that:
(a) He or it has full power and authority to enter into this Agreement
and the Related Agreements, and that this Agreement and the Related Agreements,
when executed and delivered, will constitute the valid and binding legal
obligation of such Investor.
(b) He or it is an "accredited investor" for purposes of Regulation D
under the Securities Act and that he or it has sufficient knowledge and
experience in evaluating and investing in companies similar to the Company in
terms of the Company's stage of development so as to be able to evaluate the
risks and merits of his or its investment in the Company and is able financially
to bear the risks thereof. If such Investor is other than an individual, then
such Investor represents that it was not organized for the purpose of acquiring
the Series A Preferred Stock or, if such Investor was formed for the purpose of
acquiring the Series A Preferred Stock, then all of its members are "accredited
investors" for purposes of Regulation D under the Securities Act.
(c) He or it is acquiring the Investor Securities at the applicable
closing, subject to the terms hereof and related contemporaneous agreements, for
investment for his or its own account and not with a view to, or for resale in
connection with, any distribution thereof, and that such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same; provided, however, that the disposition of the Investors' property
shall at all times remain in the Investors' control. By executing this
Agreement, each Investor further represents and warrants that such Investor does
not have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Investor Securities.
(d) He or it has had an opportunity to discuss the terms and
conditions of the offering of the Series A Preferred Stock and the Company,
business, management and financial affairs with the Company's management and has
received (or had made available to it) any financial and business documents
requested by him or it.
14
(e) He or it understands that the shares of Series A Preferred Stock
to be purchased hereunder have not been registered under the Securities Act and
must be held indefinitely unless a subsequent disposition thereof is registered
under the Securities Act or is exempt from such registration.
(f) He or it has no contract, arrangement or understanding with any
broker, finder or similar agent with respect to the transactions contemplated by
this Agreement.
4.2 Legend. Each certificate representing shares of Investor
Securities shall bear a legend in substantially the following form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under the securities
laws of any state, and may not be sold, or otherwise transferred, in
the absence of such registration or unless the Corporation has been
furnished with an opinion of counsel satisfactory to the Corporation
that such registration is not required."
ARTICLE V
COVENANTS OF THE COMPANY AND THE INVESTORS
5.1 Annual Stockholder Meeting.
(a) As soon as practicable, the Company shall take all action
necessary in accordance with the Delaware general corporation law and its
Charter and By-laws to call, give notice of and convene a meeting of the
Company's stockholders to consider and vote upon the approval of the
transactions contemplated by this Agreement as required by the rules of the
Nasdaq National Market and for such other purposes as may be necessary or
desirable.
(b) The Company shall, as promptly as practicable, prepare and file
with the Commission a proxy statement (the "Proxy Statement") with respect to
the approval of the transactions contemplated by this Agreement. The Company
shall use its best efforts to cause the Proxy Statement to be mailed to the
stockholders of the Company at the earliest practicable date and shall use its
best efforts to hold the Annual Meeting as soon as practicable after the date
hereof.
5.2 Expenses. The Company will bear its own expenses and legal
fees incurred on its behalf with respect to this Agreement and the Related
Agreements, and the Company hereby agrees to pay the reasonable fees, expenses
and disbursements of the Investors, including those of Reboul, MacMurray,
Hewitt, Maynard & Kristol, counsel for the Galen parties, and Cahill Gordon &
Reindel, counsel for Ivy Orthopedic Partners LLC (up to a maximum of $6,000),
with respect to services rendered in connection with the transactions
contemplated by this Agreement, up to an aggregate maximum of $125,000.
5.3 Use of Proceeds. Without the consent of Investors holding
greater than fifty percent (50%) of the voting power of all of the Investor
Securities, the Company will not
15
use the proceeds from the sale of the Series A Preferred Stock hereunder for any
purpose other than (i) acquisitions in related or contiguous business segments,
(ii) working capital and general corporate purposes related to acquisitions in
related or contiguous business segments and (iii) payment of all reasonable fees
and expenses incurred by the Company and the Investors in connection with the
transactions contemplated by this Agreement.
5.4 Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement,
including, without limitation, using all reasonable efforts to obtain all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings.
ARTICLE VI
MISCELLANEOUS
6.1 Indemnification.
(a) All representations, warranties, covenants or agreements made
herein or in any Related Agreement or in any closing certificate or other
certificate or written report delivered to the Investors pursuant to an express
requirement hereof shall be deemed to have been material and relied on by the
Investors, notwithstanding any investigation made by the Investors or on the
Investors' behalf, and shall survive the execution and delivery to the Investors
hereof and of the Investor Securities. All representations, warranties,
covenants or agreements made herein or in any Related Agreement or in any
closing certificate or other certificate or written report delivered to the
Company pursuant to an express requirement hereof shall be deemed to have been
material and relied on by the Company, notwithstanding any investigation made by
the Company or on the Company's behalf, and shall survive the execution and
delivery to the Company hereof.
(b) The Company shall indemnify and hold any Investors harmless from
and against any and all actions, causes of action, suits, litigation, losses,
liabilities, damages and expenses (including, but not limited to, reasonable
legal fees and court costs), whether or not resulting from judgments or
arbitration awards, that shall be suffered or incurred by any Investor, as the
case may be, resulting from or arising out of any breach of any of the
representations, warranties, covenants or agreements of the Company made in this
Agreement or in any Related Agreement to which the Company is a party or in any
schedule, certificate, exhibit or other instrument furnished or to be furnished
by the Company hereunder or thereunder.
(c) The Investors shall severally indemnify and hold the Company
harmless from and against any and all actions, causes of action, suits,
litigation, losses, liabilities, damages and expenses (including, but not
limited to, reasonable legal fees and court costs), whether or not resulting
from judgments or arbitration awards, that shall be suffered or incurred by the
Company, resulting from or arising out of any breach of any of the
representations, warranties, covenants or agreements of the Investors made in
this Agreement or in any Related
16
Agreement or in any schedule, certificate, exhibit or other instrument furnished
or to be furnished by the Investors hereunder or thereunder.
(d) The indemnified party will notify the indemnifying party in
writing within ten days after the receipt by any indemnified party of any notice
of legal process of any suit brought against or claim made against such
indemnified party as to any matters covered by this Section 6.1. The
indemnifying party shall be entitled to participate at its own expense in the
defense of any claim, action, suit or proceeding covered by this Section 6.1,
or, if it so elects, to assume at its expense by counsel satisfactory to the
indemnified parties the defense of any such claim, action, suit or proceeding,
and if the indemnifying party elects to assume such defense, the indemnified
party shall be entitled to participate in the defense of any such claim, action,
suit or proceeding at its expense.
6.2 Survival. The obligations of the Company to the Investors, and
the Investors to the Company, as the case may be, under this Agreement shall
survive the redemption, repurchase or transfer of any or all of the Investor
Securities.
6.3 Termination; Put Option. This Agreement may be terminated, whether
before or after approval by the stockholders of the Company:
(a) by mutual action of the board of directors of the Company and the
Investors, or, following the First Closing, those Investors holding at the
relevant time greater than fifty percent (50%) of the voting power of all
Investor Securities; or
(b) by either the Company or the Investors, or, following the First
Closing, those Investors holding at the relevant time greater than fifty percent
(50%) of the voting power of all Investor Securities, if (i) the conditions to
its obligations under Sections 2.4 and 2.5, as applicable, shall not have been
complied with or performed in any material respect and such noncompliance or
nonperformance shall not have been cured or eliminated (or by its nature cannot
be cured or eliminated) by the other party on or before July 31, 2001 or such
later date as agreed to by the Company and Galen Partners III, or (ii) neither
Closing shall have occurred prior to the close of business on July 31, 2001 or
such later date as agreed to by the Company and Galen Partners III; unless in
the case of either (i) or (ii), such event has been caused by the breach of this
Agreement by the party seeking such termination.
If the Second Closing does not occur as contemplated herein on or before July
31, 2001 or such later date as agreed to by the Company and Galen Partners III,
L.P. due to any reason other than the breach or non-performance of an
representation, warranty, term or condition contained in this Agreement or any
Related Agreement by the Investors, then each Investor will have the option to
sell to the Company, and the Company will be required to purchase, all of the
First Closing Securities purchased by any such Investor at the purchase price of
$2.00 per share (the "Repurchase Price"), payable by wire transfer or certified
check. Any Investor who so desires to sell all of their First Closing Securities
shall so notify the Company and the Company shall pay the applicable Repurchase
Price to such electing Investor within five (5) days of receipt of such notice
from the Investor against presentment and cancellation of such Investors' First
Closing Securities.
17
6.4 Notices. Any notice or other communication in connection with
this Agreement or the Investor Securities shall be deemed to be delivered if in
writing addressed as provided below and if either (a) actually delivered at said
address, (b) in the case of a letter, seven business days shall have elapsed
after the same shall have been deposited in the United States mails, postage
prepaid and registered or certified, return receipt requested or (c) transmitted
to any address outside of the United States, by telecopy and confirmed by
overnight or two-day courier:
If to the Company, to it at 9800 Metric Blvd., Austin, TX 78758,
attention: Harry Zimmerman, telecopy: (512) 834-6310, telephone: (512) 832-9500,
with a copy to Jackson Walker L.L.P., 100 Congress Avenue, Suite 1100, Austin,
TX 78701-4099, attention: Lawrence A. Waks, Esq., telecopy (512) 236-2002,
telephone (512) 236-2000 or at such other address as the Company shall have
specified by notice to the Investors.
If to the Investors, to the Investors' respective addresses set forth
on Annex I, or at such other address as the Investors shall have specified by
notice to the Company, with a copy to Reboul, MacMurray, Hewitt, Maynard &
Kristol, 45 Rockefeller Plaza, New York, NY 10111, attention: Merrill A. Ulmer,
Esq., telecopy: (212) 841-5725, telephone: (212) 841-5700 and Cahill Gordon &
Reindel, 80 Pine Street, New York, New York 10005, attention: Roger Meltzer,
Esq., telecopy (212) 269-5420, telephone (212) 701-3851.
If to any other holder of record of any Investor Security, to it at
its address set forth in the stock register of the Company.
6.5 Press Releases. The Company and all of the Investors shall agree
on a form of press release related to this Agreement following the First Closing
Date and the Company may thereafter issue such press release from time to time
without consulting the Investors named in such press release (if any); provided
that the Company shall not issue such press release in the event that (i) any
material modifications are made to the form of press release or (ii) the
information provided regarding any Investor is modified in any manner.
6.6 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only with the written consent of (i) the Company and (ii) the Investors or,
following the First Closing, those Investors holding at the relevant time
greater than fifty percent (50%) of the voting power of all Investor Securities.
Any amendment or waiver effected in accordance with this Section 6.6 shall be
binding upon each holder of any Investor Securities and the Company and each of
its Subsidiaries.
6.7 Binding Effect; Assignment. This Agreement shall be binding
upon and inure to the benefit of the personal representatives, successors and
assigns of the respective parties hereto. The Company shall not have the right
to assign its rights or obligations hereunder or any interest herein without
obtaining the prior written consent of the Investors or, following the First
Closing, the Investors holding at the relevant time the greater of fifty percent
(50%) of the voting power of all Investor Securities. The Investors may assign
or transfer their rights under this Agreement to the extent permitted herein and
by the other agreements between the respective parties and the Company. Whether
or not any express assignment has been made in
18
this Agreement, provisions of this Agreement that are for the Investors' benefit
as the holder of any Investor Securities are also for the benefit of, and
enforceable by, all subsequent holders of Investor Securities.
6.8 General. The invalidity or unenforceability of any term or
provision hereof shall not affect the validity or enforceability of any other
term or provision hereof. The headings in this Agreement are for convenience of
reference only and shall not alter or otherwise affect the meaning hereof. This
Agreement, the Related Agreements and the other items referred to herein or
therein constitute the entire understanding of the parties hereto with respect
to the subject matter hereof and thereof and supersede all present and prior
agreements, whether written or oral. This Agreement is intended to take effect
as a sealed instrument and may be executed in any number of counterparts which
together shall constitute one instrument and shall be governed by and construed
in accordance with the laws (other than the conflict of laws rules) of the State
of Delaware, and shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns.
6.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
[Signature pages follow]
19
The undersigned have executed this Agreement as of the date first above
written.
ENCORE MEDICAL CORPORATION
By: /s/ Kenneth W. Davidson
---------------------------------
Name: Kenneth W. Davidson
Title: Chairman of the Board,
Chief Executive Officer
and President
GALEN PARTNERS III, L.P.
By: Claudius, L.L.C., its General Partner
By: /s/ Bruce F. Wesson
---------------------------------
Name: Bruce F. Wesson
Title: Managing Member
GALEN PARTNERS INTERNATIONAL III, L.P.
By: Claudius, L.L.C., its General Partner
By: /s/ Bruce F. Wesson
---------------------------------
Name: Bruce F. Wesson
Title: Managing Member
GALEN EMPLOYEE FUND III, L.P.
By: Wesson Enterprises, Inc., its General Partner
By: /s/ Bruce F. Wesson
---------------------------------
Name: Bruce F. Wesson
Title: President
IVY ORTHOPEDIC PARTNERS, LLC
By: /s/ Russell F. Warren, Jr.
---------------------------------
Name: Russell F. Warren, Jr.
Title: Manager
20
ANNEX I TO SERIES A PREFERRED STOCK
PURCHASE AGREEMENT
Investors
Name and Address First Closing Purchase Second Closing Purchase Total
Shares Price Shares Price Price Purchase
------------- -------- -------------- -------- ----- --------
GALEN PARTNERS III, L.P.
610 Fifth Avenue
New York, New York 10020
GALEN PARTNERS INTERNATIONAL
III, L.P.
610 Fifth Avenue
New York, New York 10020
GALEN EMPLOYEES FUND III, L.P.
610 Fifth Avenue
New York, New York 10020
IVY ORTHOPEDIC PARTNERS, LLC
Four Brighton Road, Suite 250
Clifton, New Jersey 07012
Total
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND LIMITATIONS
OF
SERIES A PREFERRED STOCK
OF
ENCORE MEDICAL CORPORATION
Pursuant to the provisions of Section 151 of the General Corporation Law of
the State of Delaware and Article Fourth A. of its Certificate of Incorporation,
Encore Medical Corporation, a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY that pursuant to the authority conferred upon the Board
of Directors of the Corporation by the Corporation's Certificate of
Incorporation, and pursuant to the General Corporation Law of the State of
Delaware, the following resolution, establishing and designating a series of
shares of Preferred Stock and fixing and determining the designations,
preferences and rights, and the qualifications, limitations or restrictions
thereof, was duly adopted by the Board of Directors and by all other necessary
action on the part of the Corporation on April __, 2001:
RESOLVED, that pursuant to the authority provided in the Corporation's
Certificate of Incorporation and expressly granted to and vested in the Board,
the Board hereby creates out of the Preferred Stock, par value $0.001 per share,
of the Corporation, a Series A Preferred Stock (the "Series A Preferred Stock"),
and hereby fixes the designation and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, to the extent not otherwise
provided in the Corporation's Certificate of Incorporation of the shares of such
series as follows:
A. NUMBER OF SHARES. The maximum number of authorized shares of Series A
Preferred Stock shall be one hundred thirty-five thousand (135,000), unless and
until such number is changed in accordance with applicable law and this
resolution (the "Designating Resolution").
B. WAIVERS PERMITTED. Notwithstanding anything to the contrary herein,
any right, condition, requirement, or covenant contained in this Designating
Resolution may be waived in writing by the holders of at least 51% of the Series
A Preferred Stock then outstanding.
C. PREFERENCES AND RIGHTS OF SERIES A PREFERRED STOCK.
2. Dividends.
The holders of Series A Preferred Stock shall be entitled to receive
dividends at the rate of eight percent (8%) per share per annum payable semi-
annually, when, if and as declared by the Board of Directors ("Board") out of
any assets legally available therefor. The right to such dividends on the Series
A Preferred Stock shall not be cumulative, and no right shall accrue to holders
of Series A Preferred Stock by reason of the fact that dividends on such shares
are not
declared or paid in any prior year. No dividend shall be declared and paid on
the Common Stock (herein so called) of the Corporation unless a dividend is also
concurrently being declared and paid on the Series A Preferred Stock and no
dividend shall be paid on the Common Stock at a rate greater than the rate at
which dividends are paid on the Series A Preferred Stock (based on the number of
shares of Common Stock into which the Series A Preferred Stock is convertible on
the date the dividend is declared).
3. Liquidation Preference.
3.1 Preference. If there is any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of the Corporation to the holders of Common
Stock, an amount per outstanding share of Series A Preferred Stock equal to the
average of the original per share amounts actually paid for all such shares held
by such holder, plus an amount equal to an eight percent (8%) annual compounded
return on the average of the original per share amounts actually paid for all
such shares from the date of the initial purchase of such share less any
dividends previously paid on such share (subject to adjustment under Section
C.3(e)); provided, however, that the holders of the Series A Preferred Stock
shall not be entitled to any such preferential amounts if, in connection with
any such liquidation, dissolution or winding up of the Corporation, the holders
of the Series A Preferred Stock receive an amount per outstanding share of
Series A Preferred Stock equal to at least three (3) times the average of the
original per share amounts actually paid for all such shares (subject to
adjustment under Section C.3(e)). If, upon the occurrence of any such event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock are insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of Series A Preferred Stock in proportion to the preferential
amount that each such holder is otherwise entitled to receive.
3.2 Remaining Assets. If there are any assets remaining after the
payment or distribution (or the setting aside for payment or distribution) to
the holders of the Series A Preferred Stock of their full preferential amounts
described in Section C.2(a) above or if no such preferential amounts are owed by
the Corporation, then all such remaining assets shall be distributed first as
may be required with respect to other series of Preferred Stock that may from
time to time come into existence, and then to the holders of the Common Stock
and the Series A Preferred Stock in proportion to the shares of Common Stock
then held by them and the shares of Common Stock which they then have the right
to acquire upon conversion of the shares of Series A Preferred Stock.
3.3 Deemed Liquidation Events.
(a) Any consolidation or merger of the Corporation with or into any
other corporation or corporations, or a sale, transfer, lease, conveyance or
disposition of all or substantially all of the assets of the Corporation to a
single person or a group of affiliated persons shall be deemed to be a
liquidation, dissolution or winding
2
up of the Corporation within the meaning of this Section C.2, unless the
stockholders of the Corporation immediately before such transaction own,
directly or indirectly, immediately after the consummation of such transaction,
at least 50% of the voting power of the surviving or purchasing entity (on an
as-converted basis).
(ii) If any of such events described in Section C.2(c)(i) occurs and
the consideration received by the Corporation is other than cash, its value
will be deemed its fair market value as determined in good faith by the
Board.
4. Conversion and Anti-Dilution Provisions.
4.1 Right to Convert. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, into such number of fully paid and non-assessable shares
of Common Stock as is determined by dividing the average of the original per
share amounts actually paid for all such shares held by such holder (the
Initial Price") by the Conversion Price (as defined below) at the time in
effect for such share (the "Conversion Rate"). The conversion price per share
shall be the average of the original per share amounts actually paid for all
shares of Series A Preferred Stock held by such holder divided by 100, as
adjusted pursuant to Section C.3(d) and C.3(e) (the "Conversion Price"). If at
any time less than twenty-five percent (25%) of the authorized Series A
Preferred Stock remains outstanding, the Corporation shall have the right to
convert the remaining outstanding shares of Series A Preferred Stock into Common
Stock at the Conversion Rate at the time in effect for each such share of Series
A Preferred Stock.
4.2 Automatic Conversion. Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Rate at
the time in effect for such Series A Preferred Stock if, after May 2, 2002, the
Corporation's average closing share price for Common Stock as reported on NASDAQ
for at least twenty (20) consecutive trading days exceeds three (3) times the
Conversion Price.
4.3 Mechanics of Conversion. Before any shares of Series A Preferred
Stock shall be converted pursuant to Section C.3(a) or C.3(b) into shares of
Common Stock, the holder thereof shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series A Preferred Stock, and (i) if being converted at the
election of the holder pursuant to Section C.3(a), such holder must give written
notice by mail, postage prepaid, to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued, or (ii) if being converted at the election of the Corporation
pursuant to Section C.3(a) or automatically pursuant to Section C.3(b), the
Corporation must give written notice by mail, postage prepaid, to the holder at
the last known address as reflected on the Corporation's records of such
conversion and requesting the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation shall,
as soon as practicable thereafter, issue and deliver to such holder of Series A
Preferred Stock, or to the nominee or nominees of such holder if so directed, a
certificate
3
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately before the close of business on the date of such surrender of
the shares of Series A Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date.
4.4 Adjustments to Series A Preferred Stock Conversion Price for Certain
Diluting Issues.
(i) Special Definitions. The following terms shall have the
following meanings:
(1) "Options" shall mean rights, options, or warrants to
subscribe for, purchase or otherwise acquire Common Stock, Series A Preferred
Stock, or Convertible Securities.
(2) "Original Issue Date" shall mean the date on which a share
of Series A Preferred Stock was first issued.
(3) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock and Series A Preferred Stock) or
other securities convertible into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued (or, pursuant to Section C.3(d)(iii), deemed to be
issued) by the Corporation after the Original Issue Date, other than shares of
Common Stock issued or issuable:
(A) upon conversion of shares of Series A Preferred Stock;
(B) to officers, directors or employees of, or consultants
or sales agents to, the Corporation directly or pursuant to stock
option or restricted stock purchase plans or agreements either in
place as of the Original Issue Date or as approved by the Board;
(C) as a dividend or distribution on Series A Preferred
Stock;
(D) upon exercise or conversion of outstanding options or
warrants, respectively; or
(E) for which adjustment of the Conversion Price is made
pursuant to Section C.3(e); or
(F) in connection with lease lines, bank or other commercial
financings, or other similar transactions that are approved by the
Board; or
4
(G) in connection with the offering of shares of Common
Stock or Convertible Securities resulting in aggregate gross proceeds
to the Corporation of less than Two Million Dollars ($2,000,000).
(ii) No Adjustment of Conversion Price. Any provision herein to the
contrary notwithstanding, no adjustment in the Conversion Price shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share (determined pursuant to Section C.3(d)(v)) for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to, such issue.
(iii) Deemed Issue of Additional Shares of Common Stock. In the event
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities then entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
Stock issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options for Convertible Securities or for Series A Preferred
Stock, the conversion or exchange of such Convertible Securities or Series A
Preferred Stock, shall be deemed to be Additional Shares of Common Stock issued
as of the time of such issue or, in case such a record date shall have been
fixed, as of the close of business on such record date, provided that in any
such case in which Additional Shares of Common Stock are deemed to be issued:
(1) no further adjustments in the Conversion Price shall be made upon
the subsequent issue of such Convertible Securities, or Series A Preferred Stock
or shares of Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities or Series A Preferred Stock;
(2) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase or decrease in the
consideration payable to the Corporation, increase or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the
Conversion Price shall affect Common Stock previously issued upon conversion of
the Series A Preferred Stock);
(3) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible Securities or Options for Common Stock
the only Additional Shares of Common Stock issued were the shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually
5
received by the Corporation upon such exercise, or for the issue of all such
Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(B) in the case of Options for Convertible Securities or Series A
Preferred Stock only the Convertible Securities or Series A Preferred Stock, if
any, actually issued upon the exercise thereof were issued at the time of issue
of such Options, and the consideration received by the Corporation for the
Additional Shares of Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to have been
received by the Corporation (determined pursuant to Section C.3(d)) upon the
issue of the Convertible Securities or Series A Preferred Stock with respect to
which such Options were actually exercised;
(4) no readjustment pursuant to clause (2) or (3) above shall have the
effect of increasing the Conversion Price to an amount which exceeds the lesser
of (a) the Conversion Price on the original adjustment date, or (b) the
Conversion Price that would have resulted from any issuance of Additional Shares
of Common Stock between the original adjustment date and such readjustment date;
(5) in the case of any Options which expire by their terms not more
than thirty (30) days after the date of issue thereof, no adjustment of the
Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided in
clause (3) above.
(iv) Adjustment of Conversion Price Upon Issuance of Additional Shares
of Common Stock. In the event the Corporation, at any time after the Original
Issue Date shall issue Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to Section C.3(d)(iii))
without consideration or for a consideration per share less than the Conversion
Price in effect on the date of and immediately prior to such issue, then and in
such event, the Conversion Price shall be reduced, concurrently with such issue,
(1) if such issuance occurs prior to the first anniversary of the
Original Issue Date, to a price equal to the price per share of such issue, or
(2) if such issuance occurs on or after the first anniversary of the
Original Issue Date, to a price (calculated to the nearest cent), determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such issue
plus the number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of Additional Shares of Common
Stock so issued would purchase at such Conversion Price in effect immediately
prior to such issuance, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number
6
of such Additional Shares of Common Stock so issued. For the purpose of the
above calculation, the number of shares of Common Stock outstanding immediately
prior to such issue shall be calculated on a fully diluted basis, as if all
shares of Series A Preferred Stock and all Convertible Securities had been fully
converted into shares of Common Stock immediately prior to such issuance and any
outstanding warrants, options or other rights for the purchase of shares of
stock or convertible securities had been fully executed immediately prior to
such issuance (and the resulting securities fully converted into shares of
Common Stock, if so convertible) as of such date.
(v) Determination of Consideration. For purposes of this Section
C.3(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be computed at the aggregate
amount of cash received by the Corporation excluding amounts paid or payable for
accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be computed at
the fair value thereof at the time of such issue, as determined in good faith by
the Board; and
(C) in the event Additional Shares of Common Stock are issued together
with other shares or securities or other assets of the Corporation for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (A) and (B) above, as determined in
good faith by the Board.
(2) Options and Convertible Securities. The consideration per share
received by the Corporation for Additional Shares of Common Stock deemed to have
been issued pursuant to Section C.3(d)(iii), relating to Options and Convertible
Securities shall be determined by dividing:
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities or Series A Preferred Stock, the exercise of such Options for
Convertible Securities or Series A Preferred Stock and the conversion or
exchange of such Convertible Securities or Series A Preferred Stock by
(B) the maximum number of shares of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
designed to protect against the dilution) issuable upon the exercise of such
Options or conversion or exchange of such Convertible Securities.
7
4.5 Adjustments to Conversion Price for Stock Dividends and for
Combinations or Subdivisions of Common Stock. If the Corporation at any time or
from time to time after the initial issuance date shall declare or pay, without
consideration, any dividend on the Common Stock payable in Common Stock or in
any right to acquire Common Stock for no consideration, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by stock split, reclassification or otherwise than by
payment of a dividend in Common Stock or in any right to acquire Common Stock),
or in the event the outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of shares
of Common Stock, then the Conversion Price in effect immediately before such
event shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. If the Corporation shall
declare or pay, without consideration, any dividend on the Common Stock payable
in any right to acquire Common Stock for no consideration, then the Corporation
shall be deemed to have made a dividend payable in Common Stock in an amount of
shares equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.
4.6 Adjustments for Reclassification and Reorganization. If the Common
Stock issuable upon conversion of the Series A Preferred Stock shall be changed
into the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for in Section C.3(e) or a
merger or other reorganization that is considered a deemed liquidation event
under Section C.2(c)), the Conversion Price then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series A Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series A Preferred Stock immediately before that change.
4.7 No Fractional Shares and Certificates as to Adjustments. No
fractional shares shall be issued upon conversion of the Series A Preferred
Stock, and the number of shares of Common Stock to be issued shall be rounded to
the nearest whole share. The number of shares of Common Stock issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series A Preferred Stock at the time being converted into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
4.8 Reservation of Stock Issuable On Conversion. The Corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the
8
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including, without limitation,
engaging in its best efforts to obtain stockholder approval of any necessary
amendment to the Articles of Incorporation of the Corporation.
5. Voting Rights.
5.1 In General. Except as otherwise provided for the election of
directors (which shall be governed by Section C.4(b)), the holder of each share
of Series A Preferred Stock shall have the right to one vote for each share of
Common Stock into which such Series A Preferred Stock could then be converted
(with any fractional share determined on an aggregate conversion basis being
rounded to the nearest whole share), and with respect to such vote, such holder
shall have full voting rights and powers equal to the voting rights and powers
of the holders of Common Stock, and shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation, and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which holders of Common Stock have the right to vote. The
Series A Preferred Stock shall not be entitled to vote as a class on any matter
except as provided herein or as may be required by law.
5.2 Board of Directors.
(a) For so long as at least twenty-five percent (25%) of the authorized
Series A Preferred Stock is outstanding, the holders of Series A Preferred
Stock, voting together as a class, shall be entitled, at each meeting or
pursuant to each consent of the Corporation's stockholders for the election of
directors,
(1) if the Board consists of ten (10) or fewer members, to elect
two (2) members of the Board; or
(2) if the Board consists of more than ten (10) members, to elect
at least twenty percent (20%) of the number of members of the Board.
(ii) Any director elected pursuant to this Section 4(b) shall hold
office until (x) one (1) year from the date of such election, (y) until his
successor is duly elected and qualified, or (z) until his earlier death,
resignation or removal.
(iii) In the case of any vacancy in the office of a director
occurring among the directors elected by the holders of the Series A Preferred
Stock pursuant to Section C.4(b) hereof, the remaining director or directors so
elected by the holders of the Series A Preferred Stock may, by affirmative vote
of a majority thereof (or the remaining director so elected if there is but one,
or if there is no such director remaining, by the affirmative vote of the
holders of a majority of the outstanding shares of Series A Preferred Stock)
elect a successor or successors to hold the office for the unexpired term of the
director or directors whose place or
9
places shall be vacant. Any director who shall have been elected by the holders
of the Series A Preferred Stock or any director so elected as provided in the
preceding sentence hereof, may be removed during the aforesaid term of office,
whether with or without cause, only by the affirmative vote of the holders of a
majority of the Series A Preferred Stock.
(c) Special Voting Rights. The Corporation shall not, without the
vote or written consent of the holders of at least fifty-one percent (51%) of
the then outstanding shares of the Series A Preferred Stock, voting together as
a single class:
(i) amend its Certificate of Incorporation or Bylaws if such amendment
would result in any change to the rights, preferences or privileges of the
Series A Preferred Stock;
(ii) increase the number of authorized shares of Series Preferred
Stock;
(iii) create any new class or series, or reclassify any existing
class or series, having a preference over, or on a parity with, the Series A
Preferred Stock with respect to voting rights or representation, dividends,
redemptions, or upon liquidation;
(iv) redeem or repurchase shares of the Common Stock other than shares
repurchased from employees or officers pursuant to stock option or restricted
stock purchase plans or agreements either in place as of the Original Issue Date
or as approved by the Board;
(v) effect any merger, consolidation or other business combination, or
acquisition of stock or assets of a business, prior to the second anniversary of
the Original Issue Date, provided, however, the provisions of this Section
C.4(c)(v) shall not apply and the holders of the Series A Preferred Stock shall
not be entitled to vote as a separate class with respect to any such transaction
if (x) such transaction does not involve funded debt financing that would cause
the Corporation's total funded indebtedness after the transaction to exceed
three and one-half (3.5) times the Corporation's EBITDA (as defined below)
computed on a pro forma basis, for the most recent trailing twelve (12) month
period ending on the last day of the month immediately preceding the proposed
closing of such transaction, or (y) such transaction shows that, based upon
financial projections prepared by management, that the Company's earnings per
share will be higher by the end of the second year following such transaction
than the Company's earnings per share would otherwise have been if such
transaction had not been effected; or
(vi) effect (x) any sale or other conveyance of all or substantially
all of the assets of the Corporation, or (y) any merger, consolidation or other
business combination unless the stockholders of the Corporation immediately
before such transaction own, directly or indirectly, immediately after the
consummation of such transaction, at least 50% of the voting power of the
surviving or purchasing entity (on an as-converted basis), provided, however,
the provisions of this Section C.4(c)(vi) shall not apply and the holders of the
Series A Preferred Stock shall not be entitled to vote as a separate class with
respect to any such transaction if the holders of the Series A Preferred Stock
will receive an amount per outstanding share of Series A
10
Preferred Stock equal to at least three (3) times the average of the original
per share amounts actually paid for all such shares (subject to adjustment under
Section C.3(e)) in connection with such transaction; or
(vii) incur any funded indebtedness if as a result of such
transaction, the total indebtedness of the Corporation after the transaction
exceeds three and one-half (3.5) times the Corporation's EBITDA, computed on a
pro forma basis, for the most recent trailing twelve (12) month period ending on
the last day of the month immediately preceding the proposed closing of such
transaction.
For purposes of this Section C.4(c), "EBITDA" shall be defined as net
profit before taxes plus interest expense (net of capitalized interest expense),
depreciation expense and amortization expense, ignoring the effects of all
extraordinary gains or losses, all determined in accordance with generally
accepted accounting principles.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed this ___ day of April, 2001.
ENCORE MEDICAL CORPORATION
By:
-------------------------------
Name:
-----------------------------
Its:
-----------------------------
EXHIBIT B
ENCORE MEDICAL CORPORATION
INVESTORS' RIGHTS AGREEMENT
This Investors' Rights Agreement (this "Agreement") is made and entered
into as of the ___ day of May, 2001 by and among Encore Medical Corporation, a
Delaware corporation (the "Company"), and the persons identified on Exhibit A
attached hereto (the "Investors").
RECITALS
WHEREAS, the Investors are parties to the Series A Preferred Stock Purchase
Agreement dated as of April __, 2001 between the Company and the Investors (the
"Series A Agreement"), and certain of the Company's and the Investors'
obligations under the Series A Agreement are conditioned upon the execution and
delivery by the Investors and the Company of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS.
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Affiliate" shall have the same meaning given to such term in the
Series A Agreement.
(b) "Closing" shall mean the date of the initial sale of shares of the
Company's Series A Preferred Stock.
(c) "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
(d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(e) "Holder" shall mean any Investor who holds Registrable Securities
and any holder of Registrable Securities to whom the registration rights
conferred by this Agreement have been transferred in compliance with Section 1.2
and Section 1.12 hereof.
(f) "Initiating Holders" shall mean any Holder or Holders who in the
aggregate hold more than fifty percent (50%) of the outstanding Registrable
Securities.
(g) "Investors" shall mean persons who purchased Shares pursuant to the
Series A Agreement.
(h) "Material Adverse Effect" shall mean a material adverse effect upon
the business, assets, financial condition, income or prospects of the Company.
(i) "Other Stockholders" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their securities
in certain registrations hereunder.
(j) "Registrable Securities" shall mean (i) shares of Common Stock
issued or issuable pursuant to the conversion of the Shares, and (ii) any Common
Stock issued as a dividend or other distribution with respect to or in exchange
for or in replacement of the shares referenced in clause (i) above, provided,
however, that Registrable Securities shall not include any shares of Common
Stock which have previously been registered or which have been sold to the
public either pursuant to a registration statement or Rule 144, or which have
been sold in a private transaction in which the transferor's rights under this
Agreement are not assigned.
(k) The terms "register," "registered" and "registration" shall refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(l) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, and expenses of any regular or special audits incident to or
required by any such registration, but shall not include Selling Expenses, fees
and disbursements of counsel for the Holders and the compensation of regular
employees of the Company, which shall be paid in any event by the Company.
(m) "Restricted Securities" shall mean any Registrable Securities
required to bear the legend set forth in Section 1.2(b) hereof.
(n) "Rule 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(o) "Rule 145" shall mean Rule 145 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(p) "Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
2
(q) "Selling Expense" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Securities and fees and disbursements of counsel for any Holder (other than the
fees and disbursements of counsel included in Registration Expenses).
(r) "Shares" shall mean the Company's Series A Preferred Stock par value
$.001 per share.
1.2 Restrictions on Transfer.
(a) Each Holder agrees not to make any disposition of all or any portion
of the Registrable Securities unless and until the transferee has agreed in
writing for the benefit of the Company to be bound by this Section 1.2, provided
and to the extent such Section is then applicable, and:
(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(ii) (A) Such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and
(B) if reasonably requested by the Company, such Holder shall have
furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
shares under the Securities Act. It is agreed that the Company will not
require opinions of counsel for transactions made pursuant to Rule 144
except in unusual circumstances.
Notwithstanding the provisions of paragraphs (i) and (ii) above, no such
registration statement or opinion of counsel shall be necessary for a transfer
by a Holder which is (A) a partnership to its partners or retired partners in
accordance with partnership interests, (B) a corporation to its shareholders in
accordance with their interest in the corporation, (C) a limited liability
company to its members or former members in accordance with their interest in
the limited liability company, or (D) to the Holder's family member or trust for
the benefit of an individual Holder or for the benefit of a Holder's family
member, provided the transferee will be subject to the terms of this Section 1.2
to the same extent as if such transferee were an original Holder hereunder.
(b) Each certificate representing Registrable Securities shall (unless
otherwise permitted by the provisions of this Agreement) be stamped or otherwise
imprinted with a legend substantially similar to the following (in addition to
any legend required under applicable state securities laws):
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT Of 1933, AS AMENDED, AND MAY NOT BE SOLD OR
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND
3
UNTIL REGISTERED UNDER SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
(c) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any Holder thereof if the Holder shall have
obtained an opinion of counsel at such Holder's expense (which counsel may be
counsel to the Company) reasonably acceptable to the Company to the effect that
the securities proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
1.3 Requested Registration.
(a) Request for Registration. If the Company shall receive from
Initiating Holders at any time or times not earlier than April 30, 2002, a
written request that the Company effect any registration with respect to all or
a part of the Registrable Securities, the Company will:
(i) promptly, and in any event no later than ten (10) days of
the receipt of such written request; give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or other
state securities laws, and appropriate compliance with the Securities Act)
to permit or facilitate the sale and distribution of all or such portion of
such Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request received by
the Company within twenty (20) days after such written notice from the
Company is mailed or delivered.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.3:
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting
such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be
required by the Securities Act;
(B) After the Company has initiated two (2) such registrations
pursuant to this Section 1.3(a) (counting for these purposes only
registrations which have been declared or ordered effective and pursuant to
which securities have been sold and registrations which have been withdrawn
by the Holders as to which the
4
Holders have not elected to bear the Registration Expenses pursuant to
Section 1.5 hereof and would, absent such election, have been required to
bear such expenses);
(C) During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of,
a Company-initiated registration; provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or
(D) If the Initiating Holders propose to dispose of shares of
Registrable Securities which may be immediately registered on Form S-3
pursuant to a request made under Section 1.6 hereof.
(b) Subject to the foregoing clauses (A) through (D), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable, and in any event no later than forty-
five (45) days, after receipt of the request or requests of the Initiating
Holders; provided, however, that if (i) in the good faith judgment of the Board
of Directors of the Company, such registration would be seriously detrimental to
the Company and the Board of Directors of the Company concludes, as a result,
that it is essential to defer the filing of such registration statement at such
time, and (ii) the Company shall furnish to the Initiating Holders a certificate
signed by the Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company for such registration statement to be filed in the
near future and that it is, therefore, essential to defer the filing of such
registration statement, then the Company shall have the right to defer such
filing (except as provided in clause (C) above) for a period of not more than
one hundred thirty-five (135) days after receipt of the request of the
Initiating Holders, and, provided further, that the Company shall not defer its
obligation in this manner more than once in any twelve-month period.
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Sections 1.3(d) and 1.14
hereof, include other securities of the Company, with respect to which
registration rights have been granted, and may include securities of the Company
being sold for the account of the Company.
(c) Participation. A Holder may elect to include in any registration and
underwriting, if applicable, all or a part of the Registrable Securities he
holds.
(d) Procedures. If (i) the Company shall request inclusion in any
registration pursuant to this Section 1.3 of securities being sold for its own
account, or if other persons shall request inclusion in any registration
pursuant to this Section 1.3 and (ii) the Initiating Holders request that
pursuant to this Section 1.3, Registrable Securities be registered pursuant to
an underwriting, the Initiating Holders shall, on behalf of all Holders, offer
to include such securities in the underwriting and may condition such offer on
their acceptance of the further applicable provisions of this Article 1
(including Section 1.13). The Company shall (together with all Holders and other
persons proposing to distribute their securities through such underwriting)
5
enter into an underwriting agreement in customary form with the representative
of the underwriter or underwriters selected for such underwriting by a majority
in interest of the Initiating Holders, which underwriters are reasonably
acceptable to the Company. Notwithstanding any other provision of this Section
1.3, if the representative of the underwriters advises the Initiating Holders in
writing that marketing factors require a limitation on the number of shares to
be underwritten, then the number of such shares to be included in the
underwritten public offering shall be reduced, and shares shall be excluded from
such underwritten public offering in a number deemed necessary by such
underwriters, first by excluding shares held by the Company, directors,
officers, employees and founders of the Company, and then, to the extent
necessary, by excluding Registrable Securities in accordance with the allocation
provisions contained in Section 1.13.
(e) If a person who has requested inclusion in such registration as
provided above does not agree to the terms of any such underwriting, such person
shall be excluded therefrom by written notice from the Company, the underwriter
or the Initiating Holders. Any Registrable Securities or other securities so
excluded or withdrawn from such underwriting shall also be withdrawn from such
registration. If shares are so withdrawn from the registration and if the number
of shares to be included in such registration was previously reduced as a result
of marketing factors pursuant to this Section 1.3(d), then the Company shall
offer to all Holders who have retained rights to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among such Holders requesting additional inclusion in accordance
with Section 1.13.
1.4 Company Registration.
(a) If the Company shall determine to register any of its securities
either for its own account or the account of a security holder or holders
exercising their respective demand registration rights (other than pursuant to
Section 1.3 or 1.6 hereof), other than a registration relating solely to
employee benefit plans on Form S-1, Form S-8 or any successor Forms or a
registration relating to a corporate reorganization or other transaction on Form
S-4 or any successor to Form S-4, or a registration on any registration form
that does not permit secondary sales, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance), except
as set forth in Section 1.4(b) below, and in any underwriting involved
therewith, all the Registrable Securities specified in a written request or
requests, made by any Holder and received by the Company within ten (10)
days after the written notice from the Company described in clause (i)
above is mailed or delivered by the Company. Such written request may
specify all or a part of a Holder's Registrable Securities.
(b) Underwriting. If the registration of which the Company gives notice
is for a registered public offering involving an underwriting, the Company shall
so advise the Holders as
6
a part of the written notice given pursuant to Section 1.4(a)(i). In such event,
the right of any Holder to registration pursuant to this Section 1.4 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company and the other holders
of securities of the Company with registration rights to participate therein
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 1.4, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Registrable Securities from, or limit the number of Registrable Securities to be
included in, the registration and underwriting. The Company shall so advise all
holders of securities requesting registration, and the number of shares of
securities that are entitled to be included in the registration and underwriting
shall be allocated first to the Company for securities being sold for its own
account and thereafter as set forth in Section 1.13.
If any person does not agree to the terms of any such underwriting, he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities so excluded from
such underwriting shall be withdrawn from such registration. If shares are so
withdrawn from the registration and if the number of shares of Registrable
Securities to be included in such registration was previously reduced as a
result of marketing factors, the Company shall then offer to all persons who
have retained the right to include securities in the registration the right to
include additional securities in the registration in an aggregate amount equal
to the number of shares so withdrawn, with such shares to be allocated among the
persons requesting additional inclusion in accordance with Section 1.13 hereof.
1.5 Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Sections 1.3, 1.4 and 1.6 hereof and reasonable fees of one counsel for the
selling stockholders in the case of registrations pursuant to Section 1.3 and
1.6 shall be borne by the Company; provided, however, that if the Holders bear
the Registration Expenses for any registration proceeding begun pursuant to
Section 1.3 and subsequently withdrawn by the Holders registering shares
therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 1.3 hereof. Furthermore, in the event that a
withdrawal by the Holders is based upon material adverse information relating to
the Company that is different from the information known or available (upon
request from the Company or otherwise) to the Holders requesting registration at
the time of their request for registration under Section 1.3, such registration
shall not be treated as a counted registration for purposes of Section 1.3
hereof, even though the Holders do not bear the Registration Expenses for such
registration. All Selling Expenses relating to securities so registered shall be
borne by the holders of such securities pro rata on the basis of the number of
shares of securities so registered on their behalf, as shall any other expenses
in connection with the registration required to be borne by the Holders of such
securities.
7
1.6 Registration on Form S-3.
(a) If the Company qualifies for the use of Form S-3, in addition to the
rights contained in the foregoing provisions of this Article 1, the Holders of
Registrable Securities shall have the right to request registrations on Form S-3
(such requests shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended methods of disposition
of such shares by such Holder or Holders), provided, however, that any such
request must be made by Holders who in the aggregate hold more than ten percent
(10%) of the outstanding Registrable Securities, provided, further, that the
Company shall not be obligated to effect any such registration (i) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) on Form S-3 at an aggregate price
to the public of less than $1,000,000, (ii) in the circumstances described in
clauses (A) and (C) of Section 1.3(a), (iii) if the Company shall furnish the
certification described in Section 1.3(b) (but subject to the limitations set
forth therein) or (iv) if, in a given twelve month period, the Company has
effected one such registration in such period.
(b) If a request complying with the requirements of Section 1.6(a)
hereof is delivered to the Company, the provisions of Sections 1.3(a)(i) and
(ii) and Section 1.3(b) hereof shall apply to such registration. If the
registration is for an underwritten offering, the rights of any Holder to
registration pursuant to this Section 1.6 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless mutually agreed by a majority
in interest of the Initiating Holders and such Holder with respect to such
participation and inclusion) to the extent provided herein and the provisions of
Section 1.3(d) hereof shall apply to such registration. A Holder may elect to
include in such underwriting all or a part of the Registrable Securities he
holds.
1.7 Registration Procedures. In the case of each registration effected
by the Company pursuant to Section 1, the Company will keep each Holder advised
in writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred twenty
(120) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that (i) such 120-day period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, to keep the registration statement effective until all such
Registrable Securities are sold, however in no event longer than one year from
the effective date of the registration statement and provided that Rule 145, or
any successor rule under the Securities Act, permits an offering on a continuous
or delayed basis, and provided further that applicable rules under the
Securities Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment, that (I) includes any
prospectus required by Section 10(a)(3) of the Securities Act, or (II) reflects
facts or events representing a material or fundamental change in the information
set forth in the registration statement, the incorporation by reference of
information required to be included in (I) and (II) above to be
8
contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Exchange Act in the registration statement;
(b) Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant hereunder
to be listed on each securities exchange on which similar securities issued by
the Company are then listed;
(f) Use its best efforts to register and qualify the securities covered
by such registration statement under such other securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by the Holders, provided
that the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions;
(g) Use its best efforts to furnish, at the request of any underwriter
on the date that such Registrable Securities are delivered to the underwriters
for sale in connection with a registration pursuant to this Section 1, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
and (ii) a letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters;
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration; and
9
(i) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 1.3 hereof, the Company will
enter into an underwriting agreement in form reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
reasonable and customary provisions.
1.8 Indemnification.
(a) The Company will indemnify each Holder, each of its officers,
directors and partners, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification, or compliance has been
effected pursuant to this Article 1, and each underwriter, if any, and each
person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability, or expense rises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein. It is agreed that the indemnity agreement contained in this Section
1.8(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration, qualification, or
compliance is being effected, indemnify the Company, each of its directors,
officers, partners, legal counsel, and accountants and each underwriter, if any,
of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, each other such Holder and Other Stockholder,
and each of their officers, directors, and partners, and each person controlling
such Holder or Other Stockholder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular, or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such Holders, other Stockholders,
directors, officers, partners, legal counsel, and accountants, persons,
10
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder (with respect to such
Holder) and stated to be specifically for use therein provided, however, that
the obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld); and provided that in
no event shall any indemnity under this Section 1.8 exceed the gross proceeds
from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 1.8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
be unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1.8, to the extent such
failure is not prejudicial. Notwithstanding the foregoing, any Indemnified Party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Indemnified Party unless (i) the Indemnified
Party shall have been advised by counsel that representation of the Indemnified
Party by counsel provided by the Indemnifying Party would be inappropriate due
to actual or potential conflicting interests between the Indemnifying Party and
the Indemnified Party, including situations in which there are one or more legal
defenses available to the Indemnified Party that are different from or
additional to those available to the Indemnifying Party, (ii) the Indemnifying
Party shall have authorized in writing the employment of counsel for the
Indemnified Party at the expense of the Indemnifying Party, or (iii) the
Indemnifying Party shall have failed to assume the defense or retain counsel
reasonably satisfactory to the Indemnified Party. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.8 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such
11
Indemnified Party hereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party on the one hand and of the Indemnified Party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission. In no event shall any contribution by a Holder under this
Section 1.8(d) exceed the net proceeds from the offering received by such
Holder.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in any underwriting agreement entered
into in connection with the underwritten public offering of Registrable
Securities are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(f) This Section 1.8 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Section 1, and
otherwise.
1.9 Information by Holder. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 1.
1.10 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after the date hereof;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) So long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon written request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
as a Holder may reasonably request in availing itself of any rule or regulation
of the Commission allowing a Holder to sell any such securities without
registration.
1.11 Transfer or Assignment of Registration Rights. The rights to cause
the Company to register securities granted to a Holder by the Company under this
Article 1 may be transferred or
12
assigned by a Holder only to its partners and Affiliates, provided that the
Company is given written notice at the time of or within a reasonable time after
said transfer or assignment, stating the name and address of the transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, and, provided further, that the
transferee or assignee of such rights assumes in writing the obligations of such
Holder under this Section 1.
1.12 "Market Stand-Off" Agreement. If requested by an underwriter of
Common Stock (or other securities) of the Company, a Holder shall not sell or
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company held by such Holder (other than those included in the registration)
during the one hundred eighty (180) day period following the effective date of a
registration statement of the Company filed under the Securities Act; provided,
however, that this Section 1.12 shall not apply unless all officers and
directors of the Company and other Investors holding five percent (5%) of the
Shares enter into similar agreements.
The obligations described in this Section 1.12 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a transaction on Form S-4 or similar forms that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the shares of Common Stock (or other securities) subject to the
foregoing restriction until the end of such one hundred eighty (180) day period.
1.13 Allocation of Registration Opportunities. In any circumstance in
which all of the Registrable Securities and other shares of Common Stock of the
Company (including shares of Common Stock issued or issuable upon conversion of
shares of any currently unissued series of Preferred Stock of the Company) with
registration rights (the "Other Shares") requested to be included in a
registration on behalf of the Holders or other selling stockholders cannot be so
included as a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, the number of
shares of Registrable Securities and Other Shares that may be so included shall
be allocated among the Holders and other selling stockholders requesting
inclusion of shares pro rata on the basis of the number of shares of Registrable
Securities and Other Shares that would be held by such Holders and other selling
stockholders, assuming conversion; provided, however, that such allocation shall
not operate to reduce the aggregate number of Registrable Securities and Other
Shares to be included in such registration, if any Holder or other selling
stockholder does not request inclusion of the maximum number of shares of
Registrable Securities and Other Shares allocated to him pursuant to the above-
described procedure, in which case the remaining portion of his allocation shall
be reallocated among those requesting Holders and other selling stockholders
whose allocations did not satisfy their requests pro rata on the basis of the
number of shares of Registrable Securities and Other Shares which would be held
by such Holders and other selling stockholders, assuming conversion, and this
procedure shall be repeated until all of the shares of Registrable Securities
and Other Shares which may be included in the registration on behalf of the
Holders and other selling stockholders have been so allocated. The Company shall
not limit the number of Registrable Securities to be included in a registration
pursuant to this Agreement in order to include shares held by stockholders with
no registration rights or to include shares of stock issued to employees,
officers, directors, or consultants pursuant to the Company's stock option or
13
similar compensation plan, or in the case of registrations under Sections 1.3 or
1.6 hereof, in order to include in such registration securities registered for
the Company's own account.
1.14 Delay of Registration. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Article 1.
1.15 Termination of Registration Rights.
(a) Except as set forth in subparagraph (b) below, the right of any
Holder to request registration or inclusion in any registration pursuant to
Section 1.3, 1.4 or 1.6 shall terminate if all shares of Registrable Securities
held or entitled to be held upon conversion by such Holder may immediately be
sold under Rule 144 during any 90-day period.
(b) The provisions of subparagraph (a) above shall not apply to any
Holder who owns more than one percent (1%) of the Company's outstanding stock
until such time as such Holder owns less than one percent (1%) of the
outstanding stock of the Company.
2. COVENANTS OF THE COMPANY.
The Company hereby covenants and agrees, so long as any Holder owns any
Registrable Share, as follows:
2.1 Basic Financial Information. The Company will furnish the following
reports to each Holder who, together with its Affiliates, owns at least twenty
percent (20%) of the Shares issued pursuant to the Series A Agreement (each a
"Significant Holder"):
(a) As soon as practicable, and in any event, within ninety (90) days
after the end of each fiscal year of the Company, a consolidated balance sheet
of the Company and its subsidiaries, if any, as at the end of such fiscal year,
and consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such year, prepared in accordance with generally
accepted accounting principles consistently applied and certified by independent
public accountants of recognized national standing selected by the Company.
(b) As soon as practicable, and in any event, within forty-five (45)
days after the end of the first, second, and third quarterly accounting periods
in each fiscal year of the Company, a consolidated balance sheet of the Company
and its subsidiaries, if any, as of the end of each such period, and
consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such period and for the current fiscal year to date,
prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in comparative form the figures for the
corresponding periods of the previous fiscal year, subject to changes resulting
from normal year-end audit adjustments, except that such financial statements
need not contain the notes required by generally accepted accounting principles.
14
2.2 Additional Information and Rights.
(a) The Company will deliver the reports and information described below
in this Section 2.2 to each Significant Holder:
(i) As soon as practical after the end of each month and in any
event within thirty (30) days thereafter, a consolidated balance sheet of
the Company and its subsidiaries, if any, as at the end of such month and
consolidated statements of income and cash flows of the Company and its
subsidiaries, for each month and for the current fiscal year of the Company
to date, all subject to normal year-end audit adjustments, prepared in
accordance with generally accepted accounting principles consistently
applied, together with a comparison of such statements to the corresponding
periods of the prior fiscal year, subject to changes resulting from normal
year-end audit adjustments, except that such financial statements need not
contain the notes required by generally accepted accounting principles.
(ii) Annually (and in any event no later than ten (10) days
after adoption by the Board of Directors of the Company) the budget of the
Company, in the form approved by its Board of Directors, which operating
plan shall include at least a projection of income and a projected cash
flow statement for each fiscal quarter in such fiscal year, a projected
balance sheet as of the end of each fiscal quarter in such fiscal year and
proposed management incentives for the fiscal year (the "Budget").
(iii) With reasonable promptness, all press releases issued by
the Company or any subsidiary, any filings made with the Commission by the
Company or any subsidiary, and such other data and information as from time to
time may be reasonably requested by any Holder or such other data as the Company
may from time to time furnish to any of the holders of its securities.
(b) The provisions of Section 2.1 and this Section 2.2 shall not be in
limitation of any rights which any Holder or Significant Holder may have with
respect to the books and records of the Company and its subsidiaries, or to
inspect their properties or discuss their affairs, finances and accounts, under
the laws of the jurisdictions in which they are incorporated.
(c) Anything in Article 2 to the contrary notwithstanding, no Holder by
reason of this Agreement shall have access to any trade secrets or classified
information of the Company. Each Holder hereby agrees to hold in confidence and
trust and not to misuse or disclose any confidential information provided
pursuant to this Section 2.2. The Company shall not be required to comply with
this Section 2.2 in respect of any Holder whom the Company reasonably determines
to be, directly or indirectly, a competitor or an officer, employee, director or
greater than two percent (2%) stockholder of a competitor.
(d) In lieu of the financial information required pursuant to Section
2.1, copies of the Company's annual reports on Form 10-K and its quarterly
reports on Form 1O-Q, respectively, may be provided to the Significant Holders.
15
2.3 Right of First Refusal. The Company hereby grants to each Holder who
owns any Shares or any shares of Common Stock issued upon conversion of the
Shares the right of first refusal to purchase a pro rata share of New Securities
(as defined in this Section 2.3) which the Company may, from time to time,
propose to sell and issue. An Investor's pro rata share, for purposes of this
right of first refusal, is the ratio of the number of Shares purchased by such
Investor pursuant to the Series A Agreement, to the total number of Shares
issued pursuant to the Series A Agreement. Each Investor shall have a right of
over-allotment such that if any Investor fails to exercise its right hereunder
to purchase its pro rata share of New Securities, the other Investors may
purchase the non-purchasing Investor's portion on a pro rata basis within ten
(10) days from the date such non-purchasing Investor fails to exercise its right
hereunder to purchase its pro rata share of New Securities. This right of first
refusal shall be subject to the following provisions:
(a) "New Securities" shall mean any capital stock (including Common
Stock and/or Preferred Stock) of the Company whether now authorized or not, and
rights, options or warrants to purchase such capital stock, and securities of
any type whatsoever that are, or may become, convertible into capital stock;
provided, that, the term "New Securities" does not include (i) securities
purchased under the Series A Agreement; (ii) securities issued upon conversion
of the Shares; (iii) securities issued pursuant to the acquisition of another
business entity or business segment of any such entity by the Company by merger,
purchase of substantially all the assets or other reorganization whereby the
Company will own more than fifty percent (50%) of the voting power of such
business entity or business segment of any such entity; (iv) any borrowings,
direct or indirect, from financial institutions or other persons by the Company,
whether or not presently authorized, including any type of loan or payment
evidenced by any type of debt instrument; (v) securities issued to employees,
consultants, officers, directors or agents of the Company pursuant to any stock
option, stock purchase or stock bonus plan, agreement or arrangement approved by
the Board of Directors at any time; (vi) securities issued to vendors or
customers or to other persons in similar commercial situations with the Company
if such issuance is approved by the Board of Directors; (vii) securities issued
in connection with obtaining lease financing, whether issued to a lessor,
guarantor or other person; (viii) securities issued in a public offering
pursuant to a registration under the Securities Act; (ix) securities issued in
connection with any stock split, stock dividend or recapitalization of the
Company; (x) securities issued in connection with corporate partnering
transactions on terms approved by the Board of Directors; and (xi) any right,
option or warrant to acquire any security convertible into the securities
excluded from the definition of New Securities pursuant to subsections (i)
through (x) above.
(b) In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Holder written notice of its intention,
describing the type of New Securities, and their price and the general terms
upon which the Company proposes to issue the same. Each Holder shall have twenty
(20) days after any such notice is mailed or delivered to agree to purchase such
Holder's pro rata share of such New Securities for the price and upon the terms
specified in the notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased.
(c) In the event the Holders fail to exercise fully the right of first
refusal within such 20-day period and after the expiration of the 10-day period
for the exercise of the over-allotment
16
provisions of this Section 2.3, the Company shall have ninety (90) days
thereafter to sell or enter into an agreement (pursuant to which the sale of New
Securities covered thereby shall be closed, if at all, within ninety (90) days
from the date of said agreement) to sell the New Securities respecting which the
Holders' right of first refusal option set forth in this Section 2.3 was not
exercised, at a price and upon terms no more favorable to the purchasers thereof
than specified in the Company's notice to Holders pursuant to Section 2.3(b). In
the event the Company has not sold within such ninety (90) day period or sold
and issued New Securities in accordance with the foregoing within 90 days from
the date of such agreement, the Company shall not thereafter issue or sell any
New Securities, without first again offering such securities to the Holders in
the manner provided in Section 2.3(b) above.
(d) The right of first refusal granted under this Agreement shall expire
on May 2, 2002.
(e) The right of first refusal set forth in this Section 2.3 may not
be assigned or transferred, except that (i) such right is assignable by each
Holder to any Affiliate of such Holder, and (ii) such right is assignable
between and among any of the Holders.
2.4 Board of Directors. For so long as at least twenty-five percent
(25%) of the authorized Shares are outstanding, the Company's Board of Directors
shall maintain a Compensation Committee to be comprised of at least a majority
of outside directors, including one (1) member to be appointed by the holders of
a majority of the Shares.
2.5 Form S-3 Eligibility. The Company shall use its best efforts to
maintain its qualification for registration on Form S-3 or any comparable or
successor form or forms.
2.6 Key Executive Insurance. For a period of at least three (3) years
from the date of the Closing, the Company shall maintain key executive life
insurance policies with a financially sound and reputable insurer in the amount
of $3,000,000 covering the life of Kenneth W. Davidson, the proceeds of which
shall be payable to the Company. Such policies shall not be cancelable without
at least 30 days' written notice from the insurer to the Holders.
2.7 Employee Non-Competition, Confidentiality, Non-Solicitation and
Invention Agreements. For so long as at least twenty-five percent (25%) of the
authorized Shares are outstanding, the Company shall include non-competition,
confidentiality, non-solicitation and invention provisions reasonably acceptable
to the Holders in the employment agreement for each current and future officer
or key employee of the Company or any of its subsidiaries.
3. MISCELLANEOUS.
3.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Delaware, without regard to its conflicts of laws
principles.
3.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
17
3.3 Entire Agreement; Amendment; Waiver. This Agreement (including the
Exhibits hereto) constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof. Neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated, except by
a written instrument signed by the Company and the Initiating Holders and any
such amendment, waiver, discharge or termination shall be binding on all the
Holders.
3.4 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, sent by facsimile or delivered personally by
hand or nationally recognized courier addressed (a) if to a Holder, as indicated
on the list of Holders attached hereto as Exhibit A, or at such other address or
facsimile number as such holder or permitted assignee shall have furnished to
the Company in writing, or (b) if to the Company, at such address or facsimile
number as the Company shall have furnished to each Holder in writing. All such
notices and other written communications shall be effective on the date of
mailing, confirmed facsimile transfer or delivery.
3.5 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any Holder, upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of
such Holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default therefore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any Holder of any breach or default under this Agreement or any
waiver on the part of any Holder of any provisions or conditions of this
Agreement must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any Holder, shall be cumulative and
not alternative.
3.6 Rights; Separability. Unless otherwise expressly provided herein, a
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
3.7 Information Confidential. Each Holder acknowledges that the
information received pursuant hereto may be confidential and for its use only,
and it will not use such confidential information in violation of the Exchange
Act or reproduce, disclose or disseminate such information to any other person
(other than its employees or agents having a need to know the contents of such
information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.
3.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing or interpreting this Agreement.
18
3.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
19
IN WITNESS WHEREOF, the parties hereto have executed this Investors' Rights
Agreement effective as of the day and year first above written.
ENCORE MEDICAL CORPORATION
By:
Name: _________________________________
Title:
INVESTORS:
GALEN PARTNERS III, L.P.
By: Claudius, L.L.C., its General Partner
By: ____________________________
Name:
Title:
GALEN PARTNERS INTERNATIONAL III, L.P.
By: Claudius, L.L.C., its General Partner
By: ____________________________
Name:
Title:
GALEN EMPLOYEE FUND III, L.P.
By: Wesson Enterprises, Inc., its General Partner
By: ____________________________
Name:
Title:
IVY ORTHOPEDIC PARTNERS, LLC
By: ____________________________
Name:
Title:
20
EXHIBIT A
INVESTORS:
Galen Partners III, L.P.
610 Fifth Avenue
(i) New York, New York 10020
Galen Partners International III, L.P.
610 Fifth Avenue
New York, New York 10020
Galen Employee Fund III, L.P.
610 Fifth Avenue
New York, New York 10020
Ivy Orthopedic Partners, LLC
Four Brighton Road, Suite 250
Clifton, New Jersey 07012
REVOCABLE PROXY
ENCORE MEDICAL CORPORATION
9800 Metric Blvd., Austin, Texas 78758
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Kenneth W. Davidson, Craig L. Smith and
Harry L. Zimmerman, and each of them, with full power of substitution, as
proxies of the undersigned, with all the powers that the undersigned would
possess if personally present to cast all votes that the undersigned would be
entitled to vote at the Annual Meeting of Stockholders of Encore Medical
Corporation (the "Company") to be held on May 29, 2001, at the executive offices
of the Company at 9800 Metric Blvd., Austin, Texas 78758, at 2:00 p.m. local
time, and any and all adjournments or postponements thereof, with respect to the
following matters described in the accompanying Proxy Statement and, in their
discretion, on other matters which come before the meeting:
1. To elect two Class I directors:
[ ] FOR the nominees listed below [ ] WITHHOLD AUTHORITY
(Except as indicated to the contrary below)
Nominees: Craig L. Smith, Ph.D. and John H. Abeles, M.D.
Instructions: To withhold authority to vote for any individual nominee or
nominees, write their names here:
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2. To ratify and approve the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for fiscal 2001:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the Company's sale of 92,933 shares of its Series A Preferred
Stock to certain investors pursuant to the Series A Preferred Stock Purchase
Agreement dated as of April 20, 2001:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof. This proxy will be voted at the Annual
Meeting of Stockholders or any adjournment or postponement thereof as specified.
If no specifications are made, this Proxy will be voted FOR Proposals No. 1
through 3. This proxy hereby revokes all prior proxies given with respect to the
shares of the undersigned.
Date _______________________, 2001
______________________________________
(Signature)
______________________________________
______________________________________
(Please print your name)
Please sign name as fully and exactly as it appears opposite. When signing
in a fiduciary or representative capacity, please give full title as such. When
more than one owner, each owner should sign. Proxies executed by a corporation
should be signed in full corporate name by a duly authorized officer. If a
partnership, please sign in partnership name by an authorized person.
PLEASE MARK, SIGN, DATE AND MAIL TO THE COMPANY
AT THE ADDRESS STATED ON THE RETURN ENVELOPE