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DONJOY, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
JULY 30, 1999
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TABLE OF CONTENTS
Page
ARTICLE I DEFINED TERMS...................................................................................... 1
1.1 DEFINED TERMS...................................................................................... 1
1.2 INTERPRETATION OF DEFINED TERMS.................................................................... 7
ARTICLE II ORGANIZATION...................................................................................... 7
2.1 COMPANY NAME AND ADDRESS........................................................................... 7
2.2 PURPOSE............................................................................................ 8
2.3 PREVIOUS ACTIONS................................................................................... 8
ARTICLE III UNITS............................................................................................ 8
3.1 GENERAL............................................................................................ 8
3.2 VOTING OF UNITS.................................................................................... 9
3.3 PREFERRED DISTRIBUTIONS, LIQUIDATION PREFERENCE.................................................... 9
3.4 EVENTS OF NON-COMPLIANCE........................................................................... 10
3.5 PAYMENT OF PREFERRED UNITS......................................................................... 11
3.6 COVENANTS APPLICABLE WHILE THE PREFERRED UNITS HAVE UNRETURNED ORIGINAL COST....................... 14
3.7 UNIT SPLITS, UNIT DISTRIBUTIONS, ETC............................................................... 15
ARTICLE IV MANAGEMENT OF THE COMPANY......................................................................... 15
4.1 BOARD OF MANAGERS; VOTING.......................................................................... 15
4.2 OBSERVER........................................................................................... 16
ARTICLE V MEMBERS; REPRESENTATIONS........................................................................... 17
5.1 MEMBERS GENERALLY.................................................................................. 17
5.2 REPRESENTATIONS WITH RESPECT TO UNITS.............................................................. 17
5.3 REGULATORY RESTRICTIONS ON FIRST UNION INVESTORS' VOTING RIGHTS.................................... 18
5.4 REGULATORY COMPLIANCE BY FIRST UNION............................................................... 18
ARTICLE VI CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS............................... 19
6.1 CAPITAL CONTRIBUTIONS.............................................................................. 19
6.2 CAPITAL ACCOUNTS; ALLOCATIONS...................................................................... 19
6.3 DISTRIBUTIONS...................................................................................... 22
6.4 LIABILITY FOR RETURN OF CAPITAL.................................................................... 23
6.5 ADMINISTRATIVE MATTERS............................................................................. 23
ARTICLE VII TRANSFERABILITY OF THE MEMBERS' INTEREST......................................................... 23
7.1 LIMITATIONS ON TRANSFERABILITY OF UNITS............................................................ 23
7.2 OTHER PROVISIONS WITH RESPECT TO TRANSFERABILITY OF UNITS.......................................... 24
ARTICLE VIII ADDITION OF MEMBERS, WITHDRAWAL OF MEMBERS...................................................... 25
8.1 ADDITION OF MEMBERS................................................................................ 25
8.2 WITHDRAWAL OF MEMBERS.............................................................................. 25
ARTICLE IX DISSOLUTION OF THE COMPANY; CONTINUATION.......................................................... 25
9.1 DISSOLUTION OF THE COMPANY......................................................................... 25
9.2 CONTINUATION OF THE COMPANY........................................................................ 26
ARTICLE X MISCELLANEOUS...................................................................................... 26
10.1 LIMITATION ON LIABILITY............................................................................ 26
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10.2 AMENDMENTS............................................................................................. 27
10.3 GOVERNING LAW.......................................................................................... 27
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SCHEDULES AND EXHIBITS
SCHEDULES
Schedule I - Schedule of Members
EXHIBITS
Exhibit A - Bylaws of the Company
Exhibit B - Certificate of Formation
Exhibit C - Common Certificate
Exhibit D - Preferred Certificate
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SECOND AMENDED AND RESTATED OPERATING AGREEMENT dated as of
July 30, 1999 of DONJOY, L.L.C., a Delaware limited liability company (the
"Company"), among the parties listed on SCHEDULE I.
Certain of the parties originally entered into an Operating
Agreement dated as of December 31, 1998 (the "Original Agreement") for the
purpose of forming a limited liability company pursuant to the provisions
of the Delaware Limited Liability Company Act, 6 Del. C. Section 18-101 et
seq. (the "Delaware Act").
Certain of the parties subsequently entered into an Amended
and Restated Operating Agreement dated as of June 30, 1999 (the "Amended
Agreement"), which amended and restated the Original Agreement.
The parties wish to amend and restate the Amended Agreement as
set forth herein and to add certain parties hereto.
ACCORDINGLY, in consideration of the mutual covenants and
agreements contained in this Agreement, the sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINED TERMS
1.1 DEFINED TERMS.
(a) The defined terms used in this Agreement shall, unless the context
otherwise requires, have the meanings specified in this ARTICLE I:
"Amended Agreement" shall have the meaning ascribed to such term in the
caption to this Agreement.
"Applicable Percentage" shall have the meaning ascribed to such term in
Section 3.5.
"Bank Indebtedness" shall have the meaning ascribed to such term in the
Indenture.
"Board of Managers" means the board of managers of the Company.
"Board's Determination" is defined in the definition of Fair Market Value.
"Bylaws" means the Bylaws of the Company as amended from time to time and
the initial form of which is attached hereto as EXHIBIT A.
"Capital Contribution" means, with respect to any Member, the amount of
capital contributed by such Member to the Company, as determined in accordance
with ARTICLE VI.
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"Certificate" has the meaning ascribed to such term in Section 2.3(a).
"Change of Control" shall have the meaning ascribed to such term in the
Indenture.
"Change of Control Notice" shall have the meaning ascribed to such term in
Section 3.5(b).
"Chase" means Chase DJ Partners, LLC.
"Common Certificate" shall have the meaning ascribed to such term in
Section 3.1(c).
"Common Unit" means one common unit of the Company providing the holder
thereof to the rights provided by this Agreement.
"Company" shall have the meaning ascribed to such term in the caption to
this Agreement.
"Cumulated Preferred Return" is defined in the definition of Unreturned
Original Cost.
"Delaware Act" has the meaning ascribed to such term in the caption to this
Agreement.
"Determination Notice" is defined in the definition of Fair Market Value.
"DJO" means DJ Orthopedics, LLC, a Delaware limited liability company and
wholly-owned subsidiary of the Company.
"Event of Non-Compliance" has the meaning ascribed to such term in Section
3.4(b).
"Event of Withdrawal of a Member" means, (i) with respect to a Member that
is an entity, the bankruptcy or dissolution of such Member or (ii) the
occurrence of any other similar event that terminates the continued membership
of a Member in the Company.
"Fair Market Value" shall mean, as of any date of determination, the Fair
Value of each Paid Preferred Unit, determined as follows: At any time that the
Fair Market Value shall be required to be determined hereunder, the Board of
Managers shall make a good faith determination (the "Board's Determination") of
the Fair Value of each Paid Preferred Unit within 30 days of the delivery by a
Member to the Company of an exercise notice with respect to the Put Right, and
the Board of Managers shall provide to the Member with respect to whose Paid
Preferred Unit such determination is being made a written notice of the Board's
Determination which notice shall set forth supporting data in respect of such
calculation (the "Determination Notice"). The Member shall have 10 days
following receipt of the Determination Notice within which to deliver to the
Company a written notice (the "Objection Notice") of an objection, if any, to
the Board's Determination, which Objection Notice shall set forth the Member's
good faith
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determination (the "Member's Determination") of the Fair Value of
each Paid Preferred Unit. The failure by the Member to deliver the Objection
Notice within such 10-day period shall constitute the Member's acceptance of the
Board's Determination as conclusive. In the event of the timely delivery of an
Objection Notice, the Company and the Member shall attempt in good faith to
arrive at an agreement with respect to the Fair Value, which agreement shall be
set forth in writing within 15 days following delivery of the Objection Notice.
If the Company and the Member are unable to reach an agreement within such
15-day period, the matter shall be promptly referred for determination to a
regionally or nationally recognized investment banking or valuation firm (the
"Valuer") reasonably acceptable to the Company and the Member. The Company and
the Member will cooperate with each other in good faith to select such Valuer.
The Valuer may select the Board's Determination or the Member's Determination as
the Fair Value or may select any other amount. The Valuer's selection will be
furnished to the Company and the Member in writing and conclusive and binding
upon the Company and the Member. The fees and expenses of the Valuer shall be
borne equally by the Company and the Member with respect to whose Paid Preferred
Units such determination relates.
"Fair Value" shall mean an amount per Paid Preferred Unit (calculated on a
fully diluted basis, including the exercise of all outstanding warrants, options
and other similar rights to purchase Common Units) assuming that the Company (or
DJO and each other Subsidiary) is sold to an unaffiliated third Person as a
going concern; provided that no discount for (i) lack of liquidity of such Paid
Preferred Unit, or (ii) such Paid Preferred Unit's (or such Paid Preferred Unit
holder's) minority position in the Company, shall be applied.
"First Union" shall have the meaning ascribed to such term in Section 5.3.
"Indebtedness" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by (or which
customarily would be evidenced by) bonds, debentures, notes or similar
instruments, (c) all reimbursement obligations of such Person with respect to
letters of credit and similar instruments, (d) all obligations of such Person
under conditional sale or other title retention agreements relating to property
or assets purchased by such Person, (e) all obligations of such Person incurred,
issued or assumed as the deferred purchase price of property or services other
than accounts payable incurred and paid on terms customary in the business of
such Person (it being understood that the "deferred purchase price" in
connection with any purchase of property or assets shall include only that
portion of the purchase price which shall be deferred beyond the date on which
the purchase is actually consummated), (f) all obligations secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed, (g)
all obligations of such Person under forward sales, futures, options and other
similar hedging arrangements (including interest rate hedging or protection
agreements), (h) all obligations of such Person to purchase or otherwise pay for
merchandise, materials, supplies, services or other property under an
arrangement which provides that payment for such merchandise, materials,
supplies, services or other property shall be made regardless of whether
delivery of such merchandise, materials, supplies, services or other property is
ever made or tendered, (i) all guaranties by such Person of obligations of
others and (j) all capitalized lease obligations of such Person.
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"Indenture" means that certain Indenture dated June 30, 1999 among DJO and
DJ Orthopedics Capital Corporation, a Delaware corporation, as issuers, the
Company, as guarantor, and The Bank of New York as trustee relating to the
issuers' 12 5/8% Senior Subordinated Notes due 2009.
"Interest" means the ownership interest of a Member in the Company as
represented by such Member's Units, consisting of (i) such Member's right to
receive a portion of distributions, (ii) such Member's right to vote or grant or
withhold consents with respect to Company matters as provided herein or in the
Delaware Act and (iii) such Member's other rights and privileges as provided
herein or in the Delaware Act.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder.
"IPO" shall have the meaning ascribed to such term in Section 3.5(a).
"IRR" means, with respect to any Preferred Unit, the pre-tax, compounded
annual internal rate of return realized thereon, including, as a return on such
Preferred Unit, any (i) portion of the Application Fee and the Closing Fee (as
such terms are defined in the Preferred Unit Purchase Agreement) paid to the
original holder of such Preferred Unit with respect to such Preferred Unit
pursuant to the Preferred Unit Purchase Agreement, (ii) proceeds from the sale
or other disposition (including a redemption by the Company) of the related Paid
Preferred Unit at the time that payment with respect to such Preferred Unit is
made in accordance with Section 3.5(a), and (iii) cash distributions made by the
Company or any Subsidiary thereof in respect of such Preferred Unit (other than
tax distributions in respect of income allocated to the holder of such Preferred
Unit in respect of the Preferred Return thereon (i.e., distributions pursuant to
Section 6.3(a) with respect to income allocated to such Preferred Unit pursuant
to clause 2 and 3 of Section 6.2(a)(iii)(A)(first)), provided that such tax
distributions in respect of Preferred Return shall be treated for purposes of
the calculation as if the aggregate amount thereof was received on the day such
Preferred Unit became a Paid Preferred Unit).
"Liquidation Event" shall mean any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company.
"Majority in Interest of Members" means, at any time, the Members who hold
in the aggregate greater than 50% of the number of Units outstanding at such
time.
"Majority in Interest of Preferred Members" means, at any time, the Members
who hold in the aggregate greater than 50% of the number of Preferred Units
outstanding at such time.
"Management Members" shall have the meaning ascribed to such term in
Section 6.1(a).
"Manager" means a member of the Board of Managers as designated in, or
selected pursuant to, Section 4.1.
"Mandatory Redemption Date" means December 31, 2009.
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"Member" shall mean any Person holding a Unit or any Person who shall be
admitted as an additional or substituted Member pursuant to this Agreement, for
so long as they remain Members.
"Members' Agreement" means the Members' Agreement dated as of June 30,
1999, among the Company and certain holders of Units, as amended from time to
time.
"Member's Determination" is defined in the definition of Fair Market Value.
"Net Profits and Net Losses" means the net taxable income or net taxable
loss of the Company, respectively, as determined for federal income tax
purposes, for each fiscal year of the Company, plus any income that is exempt
from federal income tax and minus expenditures that are not deductible in
computing federal taxable income and not properly chargeable to capital
accounts, in each case to the extent such items are not otherwise taken into
account in computing Net Profits or Net Losses; provided however that (i) items
of income, gain, loss and deduction attributable to Section 704(c) Property
shall be determined in accordance with the principles of Treasury Regulation
Section 1.704-1(b)(2)(iv)(g) and (ii) the Net Profits and Net Losses of the
Company shall be computed without regard to the amount of any items of income,
gain, loss or deduction that are specially allocated pursuant to Section
6.2(c)(ii).
"Non-Compliance" shall have the meaning ascribed to such term in Section
3.4.
"Objection Notice" is defined in the definition of Fair Market Value.
"Original Agreement" shall have the meaning ascribed to such term in the
caption to this Agreement.
"Paid Preferred Unit" has the meaning ascribed to such term in Section
3.5(d).
"Payment Right" has the meaning ascribed to such term in Section
3.5(b)(iii).
"Person" shall be construed broadly and shall include an individual, a
partnership, a corporation, an association, a joint stock company, a limited
liability company, a trust, a joint venture, an unincorporated organization and
a governmental entity or any department, agency or political subdivision
thereof.
"Preferred Certificate" shall have the meaning ascribed to such term in
Section 3.1(c).
"Preferred Contribution Amount" is defined in the definition of Unreturned
Original Cost.
"Preferred Liquidation Preference" shall have the meaning ascribed to such
term in Section 3.3(b).
"Preferred Managers" shall have the meaning ascribed to such term in
Section 3.4(c).
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"Preferred Return" shall have the meaning ascribed to such term in Section
3.3(a).
"Preferred Unit" means one preferred unit of the Company providing the
holder thereof to the rights provided by this Agreement and shall include a Paid
Preferred Unit.
"Preferred Unit Purchase Agreement" shall mean the Preferred Unit Purchase
Agreement, dated as of June 30 1999, by and among the Company and the purchasers
named therein.
"Put Right" has the meaning ascribed to such term in Section 3.5(b)(ii).
"Quarterly Payment Date" has the meaning ascribed to such term in Section
3.3(a).
"Recapitalization Agreement" shall have the meaning ascribed to such term
in Section 6.1(a).
"Regulatory Requirement" shall have the meaning ascribed to such term in
Section 5.4.
"Related Documents" shall mean each of (i) this Agreement, (ii) the
Preferred Unit Purchase Agreement, and (iii) the Members' Agreement.
"S&N" shall have the meaning ascribed to such term in Section 6.1(a).
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Subsidiary" of any Person means any corporation, association, partnership,
limited liability company or other business entity of which more than 50% of the
total voting power of equity interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, representatives, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by: (1) such Person, (2) such
Person and one or more Subsidiaries of such Person, or (3) one or more
Subsidiaries of such Person.
"Taxable Amount" is defined in the definition of Taxable Income
Distribution Amount.
"Taxable Income Distribution Amount" means an amount determined as follows:
(1)(A) all taxable income and gains of the Company allocated to a Member for any
calendar year pursuant to the first sentence of Section 6.2(d) excluding any
allocations made pursuant to the second sentence of Section 6.2(d) (the "Taxable
Amount") less (B) an amount (not to exceed the Taxable Amount for such calendar
year) equal to all losses of the Company allocated to such Member pursuant to
the first sentence of Section 6.2(d) in any of the three prior calendar years
that have not been previously subtracted pursuant to this clause (B) from the
Taxable Amount for any prior calendar year, multiplied by (2) forty four percent
(44%).
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"Transfer" shall have the meaning set forth in Section 7.1.
"TCW" shall mean DJC, Inc., a Delaware corporation.
"TCW Members" shall mean TCW; TCW/Crescent Mezzanine Trust II; TCW
Leveraged Income Trust II, L.P.; and Crescent/MACH I Partners, L.P.
"Units" means, collectively, the Common Units and Preferred Units of the
Company.
"Unreturned Original Cost" means, with respect to a Preferred Unit that is
not a Paid Preferred Unit, an amount equal to the sum of (i) the amount of the
original capital contribution with respect to such Preferred Unit ("Preferred
Contribution Amount"), and (ii) the aggregate amount of all accrued Preferred
Return with respect to such Preferred Unit added to the Unreturned Original Cost
thereof pursuant to Section 3.3(a) ("Cumulated Preferred Return"), as such
amounts shall be equitably adjusted for any splits, distributions,
recapitalizations, reorganizations, reclassifications or combinations of
Preferred Units.
"Valuer" is defined in the definition of Fair Market Value.
1.2 INTERPRETATION OF DEFINED TERMS.
(a) The title of and the section and paragraph headings in this Agreement
are for convenience of reference only and shall not govern the interpretation of
any of the terms or provisions of this Agreement.
(b) The use herein of the masculine, feminine or neuter forms shall also
denote the other forms, as in each case the context may require.
ARTICLE II
ORGANIZATION
2.1 COMPANY NAME AND ADDRESS.
(a) The name of the Company shall be "DonJoy, L.L.C." or such other name as
the Board of Managers may from time to time hereafter designate.
(b) The principal office of the Company, and such additional offices as the
Board of Managers may determine to establish, shall be located at such place or
places inside or outside the State of Delaware as the Board of Managers may
designate from time to time.
(c) The registered office of the Company in the State of Delaware is
located at 9 East Loockerman Street, Dover, County of Kent, Delaware 19901. The
registered agent of the Company for service of process at such address is
National Registered Agents, Inc.
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2.2 PURPOSE.
The purpose of the Company shall be to engage in any lawful business that
may be engaged in by a limited liability company organized under the Delaware
Act, as such business activities may be determined by the Board of Managers from
time to time.
2.3 PREVIOUS ACTIONS.
(a) The Company was formed upon the execution and filing by Sheri Roberts
(such Person being hereby authorized to take such action) with the Secretary of
State of the State of Delaware of a certificate of formation of the Company (the
"Certificate") in the form attached hereto as EXHIBIT B on December 29, 1998.
(b) Upon the execution and delivery of this Agreement by the requisite
parties necessary to amend the Amended Agreement pursuant to Section 10.2
thereof, the Amended Agreement shall be amended and restated as set forth herein
and this Agreement shall be in full force and effect.
(c) The parties hereto hereby ratify and confirm the filing of the
Certificate and adopt and approve the Bylaws in the form of EXHIBIT A hereto;
the Bylaws are expressly incorporated by reference into this Agreement, and made
a part hereof.
ARTICLE III
UNITS
3.1 GENERAL.
(a) The Company shall be authorized to issue from time to time up to
3,000,000 Units, of which 2,900,000 Units shall be designated Common Units and
100,000 Units shall be designated Preferred Units. Such Units may be issued
pursuant to such agreements as the Board of Managers or a committee thereof
shall approve, including pursuant to options or warrants. The Board of Managers
shall have the right and authority to amend this Agreement or the Schedules
hereto to reflect the admission of holders of Units and to reflect the rights of
such holders hereunder.
(b) Except as specifically provided in this Agreement, each Unit, whether
designated as Preferred Unit or Common Unit, shall be identical.
(c) The Company shall issue to each Member who owns Common Units a limited
liability company certificate with respect to such Common Units in the form
attached hereto as EXHIBIT C (a "Common Certificate"), evidencing the Common
Units held by such Member. The Company shall issue to each Member who owns
Preferred Units a limited liability company certificate with respect to such
Preferred Units in the form attached hereto as EXHIBIT D (a "Preferred
Certificate"), evidencing the Preferred Units held by such Member. Each Common
Certificate and Preferred Certificate shall be transferable only on the books of
the Company, to
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be kept by the Secretary of the Company, on surrender thereof by
the registered holder in person or by attorney, and until so transferred, the
Company may treat the registered holder of a Common Certificate or Preferred
Certificate as the owner of the Interest evidenced thereby for all purposes.
Nothing contained in this Section 3.1 shall authorize or permit any Member to
transfer its Units except as contemplated by Article VII.
(d) For the purposes of Article 8 in any Uniform Commercial Code, each Unit
of the Company as evidenced by a Common Certificate or Preferred Certificate
shall be deemed to be a security, as such term is defined in any Uniform
Commercial Code.
3.2 VOTING OF UNITS.
Except as otherwise required by applicable law or as set forth herein or in
the Members' Agreement, the holders of the Common Units and the holders of the
Preferred Units shall vote together as a single class on all matters to be voted
on by the Members. Except as otherwise set forth herein, each Unit shall entitle
the holder thereof to one vote.
3.3 PREFERRED DISTRIBUTIONS, LIQUIDATION PREFERENCE.
(a) Distributions. Each Preferred Unit (other than a Paid Preferred Unit)
shall accrue a preferred return in an amount equal to 14.0% per annum (subject
to increase as provided below), multiplied by the Unreturned Original Cost for
such Preferred Unit (such product, the "Preferred Return"). The Preferred Return
shall accrue on a daily basis from the date of issuance of each Preferred Unit.
Each March 31, June 30, September 30 and December 31 shall be referred to as a
"Quarterly Payment Date". If the Company shall fail to distribute in cash all of
a quarter's accrued Preferred Return with respect to a Preferred Unit on the
applicable Quarterly Payment Date, then, subject to the last sentence of Section
3.3(a), the Cumulated Preferred Return for such Preferred Unit shall be
increased on such Quarterly Payment Date by any undistributed amount of
Preferred Return. If any Preferred Unit is outstanding for less than an entire
quarter, the accrual of Preferred Return on such Preferred Unit will be
prorated, based on the number of days such Preferred Unit was outstanding.
During an Event of Non-Compliance the rate per annum used to calculate the
Preferred Return shall be 16.0% per annum. Cash distributions to holders of
Preferred Units pursuant to Section 6.3(a) with respect to income allocated
pursuant to clause 2 and 3 of Section 6.2(a)(iii)(A)(first) shall not be deemed
to be distributions of Preferred Return for purposes of determining Cumulated
Preferred Return pursuant to this Section 3.3(a).
(b) Liquidation Preference. Upon the occurrence of any Liquidation Event,
the holders of Preferred Units (other than Paid Preferred Units) then
outstanding shall be entitled to receive out of the assets of the Company
legally available for distribution to its Members before any payment shall be
made to the holders of any Common Units or any other security of the Company
junior to the Preferred Units (with respect to rights upon a Liquidation Event,
(i) the Preferred Units (other than the Paid Preferred Units) shall rank senior
to the Common Units and (ii) the Paid Preferred Units will rank pari passu with
the Common Units), a cash distribution in an amount per Preferred Unit (other
than a Paid Preferred Unit) equal to the sum of (x) the Unreturned Original Cost
of such Preferred Unit plus (y) the aggregate amount of all accrued and unpaid
Preferred Return on such Preferred Unit through the date of distribution that
has not been
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added to the Cumulated Preferred Return less (z) the aggregate
amount of all distributions made pursuant to Section 6.3(a) with respect to
income allocated pursuant to clause 2 and 3 of Section 6.2(a)(iii)(A)(first)
(the "Preferred Liquidation Preference"). If, upon any Liquidation Event, the
assets of the Company available for distribution to its Members shall be
insufficient to pay the holders of Preferred Units (other than Paid Preferred
Units) the full Preferred Liquidation Preference to which they respectively
shall be entitled, the holders of such Preferred Units shall share ratably in
any distribution of assets according to the respective amounts which would be
payable with respect to such Preferred Units held by them upon such distribution
if all amounts payable on or with respect to said Preferred Units were paid in
full. Upon the payment of the full Preferred Liquidation Preference to which all
Preferred Units shall be entitled, each Preferred Unit shall thereafter share
ratably with the Common Units in any further distribution of assets pursuant to
Section 6.3.
3.4 EVENTS OF NON-COMPLIANCE.
(a) Each of the following shall constitute non-compliance hereunder (each
of clauses (i)-(v) below, "Non-Compliance"):
(i) any failure hereunder by the Company to pay or distribute when
required any amounts with respect to the Preferred Units (other than the
Paid Preferred Units) and such failure continues for ten (10) days after
notice from a holder of Preferred Units (other than Paid Preferred Units);
(ii) a material breach of any of the representations, warranties or
covenants (other than those referred to in clause (i) above) in any Related
Document that continues thirty (30) days after notice of such breach has
been delivered by a holder of Preferred Units (other than Paid Preferred
Units);
(iii) an event of default under the Bank Indebtedness, the Indenture,
any other Indebtedness having an outstanding principal amount of
$15,000,000 or more, or, in each case, any related document governing,
evidencing or securing the same;
(iv) the Company or any of its Subsidiaries shall (A) voluntarily
commence any proceeding or file any petition seeking relief under Title 11
of the United States Code or any other federal, state or foreign
bankruptcy, insolvency or similar law, (B) consent to the institution of,
or fail to controvert in a timely and appropriate manner, any such
proceeding or the filing of any such petition, (C) apply for or consent to
the appointment of a receiver, trustee, custodian, sequestrator or similar
official for any such Person or for any substantial part of its property or
assets, (D) file an answer admitting the material allegations of a petition
filed against it in any such proceeding, (E) make a general assignment for
the benefit of creditors, (F) fail generally to pay its debts as they
become due or (G) take any corporate or stockholder action in furtherance
of any of the foregoing; or
(v) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A)
relief in respect of the Company or any of its Subsidiaries, or of any
substantial part of their respective
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property or assets, under Title 11 of the United States Code or any
other federal, state or foreign bankruptcy, insolvency or similar law, (B)
the appointment of a receiver, trustee, custodian, sequestrator or similar
official for any such Person or for any substantial part of its property or
(C) the winding-up or liquidation of any such Person, and such proceeding,
petition or order shall continue unstayed and in effect for a period of 60
consecutive days.
(b) After the occurrence of and during the continuation of Non-Compliance
pursuant to clauses (i), (ii) or (iii) of paragraph (a) above, the holders of a
majority of Preferred Units (other than Paid Preferred Units) may declare by
written notice to the Company that an "Event of Non-Compliance" has occurred.
After the occurrence of and during the continuation of Non-Compliance pursuant
to clauses (iv) and (v) of paragraph (a) above, an Event of Non-Compliance shall
occur automatically.
(c) During the existence of an Event of Non-Compliance, holders of a
majority of Preferred Units (other than Paid Preferred Units) shall have the
right to nominate two persons ("Preferred Managers") to the Board of Managers of
the Company (and all Members hereby agree to take all action required to
accomplish the election of such Preferred Managers).
3.5 PAYMENT OF PREFERRED UNITS.
(a) Payments at Option of Company. The Company shall have the right, at its
option, to make payments, in accordance with this Section 3.5(a), with respect
to one or more Preferred Units that are not Paid Preferred Units to cause such
Preferred Units to become Paid Preferred Units. The amount of each such payment
with respect to any such Preferred Unit shall be equal to the sum of (A) the
Applicable Percentage multiplied by such Preferred Unit's Preferred Contribution
Amount, plus (B) the amount of the Cumulated Preferred Return, if any, for such
Preferred Unit plus (C) the aggregate amount of all accrued and unpaid Preferred
Return on such Preferred Unit through the date of payment that has not been
added to Cumulated Preferred Return less (D) the aggregate amount of all
distributions made pursuant to Section 6.3(a) with respect to income allocated
to such Preferred Unit pursuant to clause 2 and 3 of Section
6.2(a)(iii)(A)(first). Except as reduced in accordance with the further
provisions of this Section 3.5(a), the "Applicable Percentage" for any such
payment in any period set forth below shall be the percentage set forth below
opposite such period.
Prior to the first anniversary of the original issuance date of the 105%
Preferred Units
On or after the first anniversary and prior to the second 104%
anniversary of the original issuance date of the Preferred Units
On or after the second anniversary and prior to the third 103%
anniversary of the original issuance date of the Preferred Units
On or after the third anniversary and prior to the fourth 102%
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anniversary of the original issuance date of the Preferred Units
On or after the fourth anniversary and prior to the fifth 101%
anniversary of the original issuance date of the Preferred Units
On or after the fifth anniversary of the original issuance date of 100%
the Preferred Units
The Applicable Percentage shall be reduced, but not below 100%, to the extent
necessary so that the amount paid pursuant to this Section 3.5(a), together with
all other payments received with respect to such Preferred Unit, does not cause
the IRR on such Preferred Unit to exceed, (i) prior to the second anniversary of
the date of the original issuance of the Preferred Units, 24%, and (ii) after
the second anniversary of the date of the original issuance of the Preferred
Units, 22%. In addition, to the extent the Company makes any payments pursuant
to this Section 3.5(a) from the proceeds of an initial public offering ("IPO")
of its or DJO's equity securities which results in such securities being listed
for trading on a nationally recognized stock exchange (including the Nasdaq
National Market System), then the Applicable Percentage with respect to up to
one-third of the then outstanding Preferred Units (other than Paid Preferred
Units) shall be reduced, if such Applicable Percentage would otherwise exceed
101%, to 101%. If the Company elects to make payments under this Section 3.5(a)
with respect to fewer than all of the outstanding Preferred Units that are not
then Paid Preferred Units, the Company shall make such payments with respect to
Preferred Units selected ratably among all holders of Preferred Units that are
not Paid Preferred Units, and if the Company is entitled to make payments with
respect to certain Preferred Units from the proceeds of an IPO in amounts based
on a reduced Applicable Percentage as provided in the immediately preceding
sentence, such Preferred Units shall also be selected ratably as aforesaid.
(b) Payments at Option of Holder.
(i) Upon a Change of Control, each holder of Preferred Units that are
not Paid Preferred Units shall have the right to require the Company to
make payments, in accordance with this Section 3.5(b)(i), with respect to
one or more of such Preferred Units in order to cause such Preferred Units
to become Paid Preferred Units. The amount of each such payment with
respect to any such Preferred Unit shall be equal to the sum of (A) 101%
multiplied by such Preferred Unit's Preferred Contribution Amount, plus (B)
the amount of the Cumulated Preferred Return, if any, for such Preferred
Unit plus (C) the aggregate amount of all accrued and unpaid Preferred
Return on such Preferred Unit through the date of payment that has not been
added to Cumulated Preferred Return less (D) the aggregate amount of all
distributions made pursuant to Section 6.3(a) with respect to income
allocated to such Preferred Unit pursuant to clause 2 and 3 of Section
6.2(a)(iii)(A)(first). The Company shall give holders of such Preferred
Units notice (the "Change of Control Notice") of the occurrence of a Change
of Control in accordance with and at the time required by Section 4.06 of
the Indenture. To exercise such option such holder must send written notice
of such election to the Company within thirty (30) days
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after such Change of Control Notice. The Company shall make the
payment required by this Section 3.5(b)(i) within thirty (30) days of
receipt of such written notice (or shall notify such holder of the failure
of one or more of the applicable conditions); provided, however, that such
payment shall be conditioned upon (x) the Company's receipt of any
applicable consents required to make such payment (the Company hereby
agrees to use its commercially reasonable efforts to obtain such consents),
and (y) the Company's compliance with applicable law and documents
respecting its Indebtedness; provided, further, however, that
notwithstanding the failure of any of the foregoing conditions, any such
failure to pay shall constitute Non-Compliance pursuant to Section
3.4(a)(i).
(ii) Each holder of Paid Preferred Units (including any Preferred Unit
that becomes a Paid Preferred Unit in accordance with Section 3.5(b)(i))
shall, upon a Change of Control or after the sixth anniversary of the date
of the original issuance of the Preferred Units, have the right (the "Put
Right") to require the Company to purchase any or all of such holder's Paid
Preferred Units, by paying to such holder the Fair Market Value of such
Paid Preferred Units; provided that, such Put Right shall be conditioned
upon (x) the Company's ability to obtain the financing to make such payment
(the Company hereby agrees to use its commercially reasonable efforts to
obtain such financing), (y) the Company's receipt of any applicable
consents required to make such payment (the Company hereby agrees to use
its commercially reasonable efforts to obtain such consents), and (z) the
Company's compliance with applicable law and documents respecting its
Indebtedness. The Put Right may be exercised by any holder of Paid
Preferred Units by delivery to the Company of a written exercise notice;
provided that if the Put Right is triggered by a Change in Control, the
holder of Paid Preferred Units may indicate in the notice under Section
3.5(b)(i) that such holder also exercises the Put Right. Within 30 days of
receipt thereof, the Company shall either purchase such Paid Preferred
Units in accordance with this Section 3.5(b)(ii) (against receipt of the
Preferred Certificate representing such Preferred Units), or inform the
exercising holder of the failure of one or more of the applicable
conditions. Upon the Company making the payment required by this Section
3.5(b)(ii), such Paid Preferred Unit shall cease to be outstanding for any
purpose hereunder and shall be cancelled.
(iii) Notwithstanding anything herein to the contrary or any provision
of applicable law that but for this paragraph would treat any right to
require the Company to make payments with respect to one or more Preferred
Units in order to cause such Preferred Units to become Paid Preferred Units
and the Put Right (or any right of each holder of Preferred Units to any
payment upon a Change of Control) (any such right, a "Payment Right") as an
unsubordinated obligation of the Company, such Payment Right shall be
subordinated to the indefeasible payment in full of the Obligations (as
defined in the Credit Agreement dated as of June 30, 1999 among the
Company, DJO, the lenders party thereto, First Union National Bank, as
administrative agent and collateral agent, and The Chase Manhattan Bank, as
syndication agent) and all obligations of the Company under the Indenture
and the Senior Subordinated Notes issued thereunder.
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(c) Mandatory Payment.
The Company shall make a payment with respect to each outstanding
Preferred Unit (other than Paid Preferred Units) to cause such Preferred
Unit to become a Paid Preferred Unit on the Mandatory Redemption Date by
distributing to each holder of an outstanding Preferred Unit (other than
Paid Preferred Units) an amount equal to the sum of (A) 100% of such
Preferred Unit's Preferred Contribution Amount plus (B) the amount of the
Cumulated Preferred Return, if any, for such Preferred Unit plus (C) the
aggregate amount of all accrued and unpaid Preferred Return on such
Preferred Unit through the date of payment that has not been added to
Cumulated Preferred Return less (D) the aggregate amount of all
distributions made pursuant to Section 6.3(a) with respect to income
allocated to such Preferred Unit pursuant to clause 2 and 3 of Section
6.2(a)(iii)(A)(first). Such mandatory payment shall be conditioned upon (i)
the Company's receipt of any applicable consents required to make such
payment (the Company hereby agrees to use its commercially reasonable
efforts to obtain such consents), and (ii) the Company's compliance with
applicable law and documents respecting its Indebtedness; provided that
notwithstanding the failure of any of the foregoing conditions, any such
failure to pay shall constitute Non-Compliance pursuant to Section
3.4(a)(i).
(d) Effect of Payment.
Following the occurrence of a complete payment pursuant to this
Section 3.5 (other than Section 3.5(b)(ii)) to any Preferred Unit, such
Preferred Unit so paid shall remain outstanding (but the Company may
require the holder thereof to surrender the Preferred Certificate
representing such Preferred Unit so that the Company may mark upon such
Preferred Certificate that such Preferred Unit has been paid) and shall be
deemed a "Paid Preferred Unit"; provided, however, that such Paid Preferred
Unit shall not be entitled to any of the provisions of Section 3.3, 3.4 and
3.5(a) through (d) (other than Section 3.5(b)(ii)) (but shall be entitled
to the rights and obligations associated with each Common Unit existing
immediately after the payment pursuant to and subject to the terms of this
Agreement).
3.6 COVENANTS APPLICABLE WHILE THE PREFERRED UNITS HAVE UNRETURNED ORIGINAL
COST.
(a) Until all Preferred Units have become Paid Preferred Units, the Company
shall not issue any additional Preferred Units and shall not issue any other
equity securities that are senior to or pari passu with such Preferred Units
unless the Company first shall have obtained the affirmative consent of holders
of a majority of all Preferred Units that are not Paid Preferred Units.
(b) Neither the Company nor its Subsidiaries shall incur any Indebtedness
that contains restrictions on the payment of Preferred Return or the making of
payments with respect to Preferred Units (including Paid Preferred Units) that
are materially more restrictive than those contained in the Indebtedness of the
Company and the Subsidiary existing or created on June 30, 1999.
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(c) Unless the Company shall have paid in full in cash the Preferred Return
for the most recent quarter on the applicable Quarterly Payment Date, the
Company shall not make any distributions to holders of Common Units (or Paid
Preferred Units) other than distributions pursuant to Section 6.3(a).
3.7 UNIT SPLITS, UNIT DISTRIBUTIONS, ETC.
(a) The Company shall not in any manner subdivide (by split, distribution
or otherwise) or combine (by reverse split or otherwise) the outstanding
Preferred Units or Common Units unless all such subdivisions and combinations
shall be payable to the holder of each class of units of the Company only in
Units of such class.
(b) If the Company shall in any manner subdivide (by split, distribution or
otherwise) or combine (by reverse split, combination or otherwise) the
outstanding Common Units, then the outstanding Preferred Units shall also be
subdivided or combined, as the case may be, to the same extent, and in the same
proportion as the Common Units. If the Company shall in any manner subdivide (by
split, distribution or otherwise) or combine (by reverse split or otherwise) the
outstanding Preferred Units, then the outstanding Common Units shall also be
subdivided or combined, as the case may be, to the same extent, and in the same
proportion as the Preferred Units.
ARTICLE IV
MANAGEMENT OF THE COMPANY
4.1 BOARD OF MANAGERS; VOTING.
(a) Subject to the delegation of rights and powers provided for herein and
the requirements found in the Bylaws, the Board of Managers shall have the sole
right to manage the business of the Company and shall have all powers and rights
necessary, appropriate or advisable to effectuate and carry out the purposes and
business of the Company. The Board of Managers shall consist of at least nine
(9) members as designated from time to time in accordance with the Members'
Agreement but may be increased to eleven (11) members pursuant to Section 3.4(c)
and shall include the super-voting Manager described in the Bylaws. Any or all
Managers may be removed as Managers with or without cause by the vote of a
Majority in Interest of Members, provided, however, that no Manager may be
removed without the consent of the Member or Members who are entitled to
nominate such person as a Manager pursuant to the Members' Agreement (or Section
3.4(c) as the case may be); provided, further, however, that any Manager may be
removed by the party entitled to nominate such Manager under the Members'
Agreement (or Section 3.4(c) as the case may be), and the vacancy created by any
former Manager of the Board of Managers may be filled by the party entitled to
nominate such former Manager under the Members' Agreement (or Section 3.4(c) as
the case may be).
(b) No Member, by reason of such Member's status as such, shall have any
authority to act for or bind the Company but shall have only the right to vote
on or approve the actions herein specified to be voted on or approved by such
Member.
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(c) The officers of the Company shall be elected and removed and shall
perform such functions, as are provided in the Bylaws. The Board of Managers may
appoint, employ, or otherwise contract with such other Persons for the
transaction of the business of the Company or the performance of services for or
on behalf of the Company as it shall determine in its sole discretion. The Board
of Managers may delegate to any officer of the Company or to any such other
Person such authority to act on behalf of the Company as the Board of Managers
may from time to time deem appropriate in its sole discretion.
(d) Except as otherwise provided by the Board of Managers or in the Bylaws,
when the taking of such action has been authorized by the Board of Managers, any
Manager or officer of the Company or any other Person specifically authorized by
the Board of Managers may execute any contract or other agreement or document on
behalf of the Company and may execute and file on behalf of the Company with the
Secretary of State of the State of Delaware any certificates of amendment to the
Company's certificate of formation, one or more restated certificates of
formation and certificates of merger or consolidation and, upon the dissolution
and completion of winding up of the Company, at any time when there are fewer
than two Members, or as otherwise provided in the Delaware Act, a certificate of
cancellation canceling the Company's certificate of formation.
(e) If a vacancy on the Board of Managers is not filled by the Member or
Members entitled to nominate such Manager for such vacant position under the
Members' Agreement or Section 3.4(c), as the case may be, within 60 days after
such vacancy occurs, such vacancy may thereafter be filled by a majority of the
Managers then in office. Managers shall serve until they resign, die, become
incapacitated or are removed. Determinations to be made by the Managers in
connection with the conduct of the business of the Company shall be made in the
manner provided in the Bylaws, unless otherwise specifically provided herein.
4.2 OBSERVER BOARD MATERIALS.
(a) First Union shall have the right to send one non-voting observer to
each meeting of the Board of Managers; expenses incurred by such observer to
attend such meetings shall be reimbursed by the Company. In such capacity, such
observer shall be provided with all materials, information and documents the
Company provides the Managers when so provided; provided that such observer
shall agree to hold in confidence and trust all materials, information and
documents so provided. First Union acknowledges and such observer shall
acknowledge that such materials, information and documents may contain material
nonpublic information within the meaning of applicable securities law. The
Company reserves the right to exclude such observer from any distribution of
materials, information and documents, or meeting or portion thereof, when
receipt thereof or attendance by such observer could interfere with (i) the
attorney-client privilege between the Company (or the Board of Managers) and its
counsel, or (ii) contractual confidentiality obligations of the Company, in each
case, as determined by the Board of Managers in its reasonable discretion after
exercising its reasonable efforts to otherwise resolve the conflict requiring
such action to be taken. The Company may also exclude such observer in any
situation in which a conflict of interest exists or potentially exists that
would require a Manager in a similar situation to excuse himself.
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(b) The Company shall provide to TCW copies of all materials, information
and documents the Company provides the Managers when so provided; provided that
TCW shall hold in confidence and trust all materials, information and documents
provided. TCW acknowledges that such materials, information and documents may
contain material nonpublic information within the meaning of applicable
securities laws.
ARTICLE V
MEMBERS; REPRESENTATIONS
5.1 MEMBERS GENERALLY.
The name and business, mailing or residence address of the Members of the
Company are set forth on SCHEDULE I. Schedule I shall be amended from time to
time to reflect the names and business, mailing or residence address of each of
Persons who shall become Members after the date hereof.
5.2 REPRESENTATIONS WITH RESPECT TO UNITS.
Upon the acquisition of any Units, each Member makes the following
representations and warranties to the Company with respect to such Units:
(a) Such Member is acquiring the Units for its own account, for investment
and not with a view to the distribution thereof or any interest therein in
violation of the Securities Act or applicable state securities laws.
(b) Such Member understands that (i) the Units have not been registered
under the Securities Act or applicable state securities laws by reason of their
issuance by the Company in a transaction exempt from the registration
requirements of the Securities Act and applicable state securities laws and (ii)
the Units must be held by such Member indefinitely unless a subsequent
disposition thereof is registered under the Securities Act and applicable state
securities laws or is exempt from such registration.
(c) Such Member further understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to such Member)
promulgated under the Securities Act depends on the satisfaction of various
conditions, and that, if applicable, Rule 144 may afford the basis for sales of
the Units acquired hereunder in limited amounts.
(d) Such Member is an "accredited investor" (as defined in Rule 501(a) of
Regulation D promulgated under the Securities Act). The Company has made
available to such Member or its representatives all agreements, documents,
records and books that such Member has requested relating to an investment in
the Units which may be acquired by the Member hereunder. Such Member has had an
opportunity to ask questions of, and receive answers from, a person or persons
acting on behalf of the Company, concerning the terms and conditions of this
investment, and answers have been provided to all of such questions to the full
satisfaction of such Member. Such Member has such knowledge and experience in
financial and business matters that it is capable of evaluating the risks and
merits of this investment and to suffer a complete loss of his, her or its
investment.
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(e) The execution and delivery of this Agreement by such Member has been
duly authorized.
5.3 REGULATORY RESTRICTIONS ON FIRST UNION INVESTORS' VOTING RIGHTS.
Notwithstanding anything herein to the contrary, in no event shall (i) any
vote, consent, approval or authorization (collectively, for purposes of this
Section 5.3, "consent") hereunder of First Union Investors, Inc., or the
successors or assigns of its Interest (other than the TCW Members and their
successors and assigns) (collectively, "First Union") be required unless the
matter subject to such consent would "significantly and adversely affect" the
Interest thereof, as such terms are used in Section 225.2(q)(2)(i) of Regulation
Y of the Board of Governors of the Federal Reserve System or (ii) any consent of
First Union be required if the result of such consent would be to cause the
Interest (or any portion thereof) of First Union to be considered "voting
securities" for purpose of Regulation Y of the Board of Governors of the Federal
Reserve System.
5.4 REGULATORY COMPLIANCE BY FIRST UNION.
Notwithstanding anything herein to the contrary, in the event that First
Union determines that, by reason of any future federal or state rule,
regulation, guideline, order, interpretive release, request or directive (having
the force of law and where the failure to comply therewith would be unlawful)
(collectively, a "Regulatory Requirement"), it is effectively restricted or
prohibited from holding its Interest (or any equity securities distributable to
First Union in any merger, reorganization, readjustment or other
reclassification or exchange with respect to the Company or any successor
thereof) or otherwise realize upon or receive the benefits intended hereunder,
and following First Union's exercise of its reasonable best efforts to overcome
such Regulatory Requirement, the Company, the Board of Managers and the Members
shall make all reasonable efforts to take such action as First Union may deem to
be necessary to permit First Union to comply with such Regulatory Requirement.
Such action to be taken may include the Company's authorization or creation of
one or more new classes of interest and the modification or amendment of this
Agreement or any other documents or instruments executed in connection with the
limited liability company interests held by First Union; and, if compliance with
such Regulatory Requirement can not be satisfied by such efforts, First Union
shall have the right, subject to Section 7.2(b), to freely sell, exchange or
otherwise transfer all or such part of its Interest as it determines to be
necessary without the consent of the Board of Managers or any other Member to
one or more third parties and such assignee(s), upon the written consent of
First Union, shall be admitted as a substituted Member(s); provided that
notwithstanding anything to the contrary contained herein, any such transfer may
not and will not cause the Company to be treated as a "publicly traded
partnership" within the meaning of Section 7704(b) of the Code. First Union
shall give written notice to the Company, the Board of Managers and the other
Members of any such determination and the action or actions necessary to comply
with such Regulatory Requirement, and the Company, the Board of Managers and the
other Members shall take all steps to comply with such determination as
expeditiously as possible.
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ARTICLE VI
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS;
ALLOCATIONS; DISTRIBUTIONS
6.1 CAPITAL CONTRIBUTIONS.
(a) At the time of the closing of the transactions contemplated by the
Recapitalization Agreement dated as of April 29, 1999 among Chase, Smith &
Nephew, Inc. ("S&N") and the Company (the "Recapitalization Agreement"), the
following occurred:
(i) Chase and certain Members listed on Schedule I as "Management
Members" contributed the New Membership Interest Purchase Price (as defined
in the Recapitalization Agreement) to the Company in exchange for 664,000
Common Units;
(ii) the Company, First Union, and CB Capital Investors, L.P.
consummated the transactions contemplated by the Preferred Unit Purchase
Agreement; and
(iii) the Company distributed to S&N (1) the Existing Membership
Interest Purchase Price (as defined in (and upon the terms and conditions
set forth in) the Recapitalization Agreement) in partial redemption of
S&N's ownership Interest in the Company (and such redeemed Units
representing such ownership Interest shall cease to be outstanding and any
Units representing such ownership Interest shall have the status of
authorized but unissued Units) and (2) 54,000 Common Units in redemption of
the remainder of S&N's prior ownership interests in the Company.
(b) For Federal income tax purposes, the foregoing distribution of cash to
S&N shall be treated as a sale to the Company of an undivided interest of each
of the business assets as set forth more fully in the Recapitalization
Agreement. Moreover, S&N shall be deemed to have contributed to the Company the
remaining interests in the business assets in exchange for Units pursuant to
Section 721 of the Code.
6.2 CAPITAL ACCOUNTS; ALLOCATIONS.
(a) A separate capital account shall be maintained on the books of the
Company for each Member, which shall be adjusted (1) as of December 31 of each
year, (2) immediately prior to the acquisition of any Unit by any Person, (3)
effective as of the date of sale of the Company (whether by way of asset sale,
Unit sale, recapitalization, or merger in which the Members immediately prior to
such transaction shall cease to own a majority of all Units owned by all
Members) and (4) on the date of dissolution of the Company as follows:
(i) the amount of money and the fair market value of property (net of
any liabilities secured by such property that the Company assumes or takes
subject to) contributed by such Member to the Company shall be credited to
such Member's capital account;
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(ii) the amount of any distributions (including (A) the fair market
value (as determined by the Board of Managers in good faith) of property
other than cash (net of any liabilities that such Member assumes or takes
subject to) and (B) any distribution in respect of a payment with respect
to Preferred Units in accordance with Section 3.5 hereof) distributed to
such Member shall be debited from such Member's capital account; and
(iii) Net Profits (and any items of income or gain specially allocated
pursuant to Sections 6.2(b)(iii) and 6.2(c)(ii)) incurred by the Company
since the last date on which Net Profits or Net Losses shall have been
allocated to the Members shall be credited to such Member's capital account
and Net Losses (and any items of loss or deduction that are specially
allocated pursuant to Section 6.2(c)(ii)) incurred by the Company since the
last date on which Net Losses or Net Profits shall have been allocated to
the Members shall be debited to such Member's capital account, which
allocations shall be made as follows:
(A) Net Profits (or items of gross income or gain) shall be
allocated, first, to the holders of Preferred Units (other than Paid
Preferred Units) pro rata until the capital account of each such
holder equals an amount equal to the sum of (1) the aggregate
Preferred Contribution Amount with respect to all such Preferred Units
held by such holder, plus (2) the aggregate amount of the Cumulated
Preferred Return, if any, for all such Preferred Units held by such
holder plus (3) the aggregate amount of all accrued and unpaid
Preferred Return on all such Preferred Units through the date of
allocation that has not been added to Cumulated Preferred Return less
(4) the aggregate amount of all distributions pursuant to Section
6.3(a) with respect to income allocated pursuant to clause (2) and (3)
through the date of allocation (with any such allocations being deemed
to be applied first to (1), second to (2), third to (3) and fourth to
(4)); and second, to the holders of all Units pro rata according to
their respective holdings of such Units (except as otherwise required
by Sections 6.2(b)(iii) and 6.2(c)(ii)); and
(B) Net Loss shall be allocated, first, to reverse allocations
made pursuant to clause second of Section 6.2(a)(iii)(A), second, to
the holders of Common Units pro rata according to their respective
holdings of such Common Units until the capital accounts of the
holders of Common Units equal zero; third, 100% to the holders of
Preferred Units (other than Paid Preferred Units) according to their
respective holdings of such Preferred Units until their capital
accounts equal zero; and fourth, to the holders of all Units pro rata
according to their respective holdings of Units (except as otherwise
required by Section 6.2(c)(ii)).
(b) (i) Notwithstanding any provision of this Agreement to the contrary,
upon the date of each exercise of each warrant or option issued by the Company,
each Member's (including the exercising option holder's or warrant holder's)
capital account shall be reallocated (a "Capital Shift") such that after such
Capital Shift the ratio of each Member's (including the exercising option
holder's or warrant holder's) capital account (in the case of a Member who holds
Preferred Units (other than Paid Preferred Units), reduced (but not below $0) by
the
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aggregate of all amounts in such Member's capital account attributable to
Unreturned Original Cost or to accrued and unpaid Preferred Return through the
date of reallocation) to the aggregate of all Members' capital account balances
(less any amounts attributable to Unreturned Original Cost or to accrued and
unpaid Preferred Return through the date of reallocation on all Preferred Units)
shall be the same as the ratio of the number of Units owned by each such Member
(including the exercising option holder or warrant holder) to the aggregate
number of all Units outstanding.
(ii) Solely for purposes of determining the tax treatment to the
Members, the Company will treat (except as otherwise required by applicable
law) the exercise of a compensatory option, as though the option holder
received a cash payment from the Company in an amount equal to the
difference between the option exercise price and the fair market value of
Units received therefor, and the option holder then purchased, from the
Company for cash, the applicable number of Units at such fair market value.
Any deduction attributable to such deemed cash payment shall be allocated
to the holders of Units immediately before such payment.
(iii) Notwithstanding anything herein to the contrary, if the Company
engages in any transaction that will lead to a distribution pursuant to
Section 9.1(e)(iv), then the holders of Preferred Units shall be specially
allocated additional Net Profits (and, if there are insufficient Net
Profits, items of gross income and gain, including any Net Profits, gross
income or gain from a prior taxable year that may properly be so
allocated), pro rata (in accordance with the number of Preferred Units held
by such holders) such that, to the extent possible, after such allocation
the ratio of each Member's capital account (in the case of a Member who
holds Preferred Units (other than Paid Preferred Units), considering only
the portion of such capital account that exceeds the amount thereof
attributable to Unreturned Original Cost or to accrued and unpaid Preferred
Return through the date of reallocation on all Preferred Units) to the
aggregate of all Members' capital account balances (or, in the case of
Preferred Units (other than Paid Preferred Units), the applicable portion
thereof as aforesaid) shall be the same as the ratio of the number of Units
owned by each such Member to the aggregate number of all Units outstanding.
(c) Notwithstanding any provision of this Agreement to the contrary but
after giving effect to Section 6.2(a)(i), each Member's capital account shall be
maintained and adjusted in accordance with the Code, including (i) the
adjustments permitted or required by Code Section 704(b) (provided that such
adjustment is not reasonably likely to have a material effect on amounts
distributable to any Member pursuant to Section 9.1) and the regulations
promulgated thereunder and (ii) adjustments required to maintain capital
accounts in accordance with the "substantial economic effect test" set forth in
the regulations promulgated under Internal Revenue Code Section 704(b)
(including the "minimum gain chargeback" requirements of Sections 1.704-2(f) and
1.704-2(i)(4), the "qualified income offset" requirements of Section
1.704-1(b)(2)(ii)(d) and the "partner nonrecourse debt" allocations of Treasury
Regulation Sections 1.704-2(c), 1.704-2(i)(2) and 1.704-2(j)(1)).
(d) The Company's ordinary income and losses and capital gains and losses
as determined for Federal income tax purposes (and each item of income, gain,
loss or deduction
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entering into the calculation thereof) shall be allocated to
the Members in the same proportions as the corresponding "book" items are
allocated pursuant to Sections 6.2(a), (b)(iii), and (c). Notwithstanding the
foregoing sentence, Federal income tax items relating to "Section 704(c)
Property" (as defined in Treasury Regulation Section 1.704-3(a)(3) and including
(i) all of the Company's assets deemed to be contributed pursuant to this
Section 6.2 and (ii) any Company property that, at the election of the Board of
Managers, is subject to a revaluation upon the occurrence of an event specified
in Treasury Regulation Section 1.704-1(b)(2)(iv)(f)) shall be allocated among
the Members in accordance with Section 704(c) of the Code taking into account
the difference between the fair market value and the tax basis of such Section
704(c) Property as of the date of its contribution using the so-called
"traditional method with curative allocations" described in Treasury Regulation
Section 1.704-3(c).
(e) Any Member, including any substitute Member, who shall receive any
Units by means of a transfer to him of Units of another Member shall have a
capital account that reflects the capital account associated with the
transferred Units.
(f) No Member shall have an obligation to the Company or any Member to
restore a negative or deficit capital account.
6.3 DISTRIBUTIONS.
Distributions from the Company shall be made in the following order of
priority:
(a) First, (i) within 10 days following the end of each calendar quarter,
the Company will distribute to each Member a cash amount equal to twenty-five
percent (25%) of the Taxable Income Distribution Amount of such Member for such
calendar year as estimated by the Board of Managers; and (ii) with respect to
tax payments to be made with income tax returns filed for a full calendar year
or with respect to adjustments to such returns imposed by the Internal Revenue
Service or other taxing authority, such distribution to Members shall be equal
to the Taxable Income Distribution Amount for each calendar year minus the
aggregate amount distributed for such calendar year as provided in clause (i)
above; provided that in no event shall the Company be obligated to distribute
cash amounts to Members in excess of the aggregate distributions made to the
Company by Subsidiaries of the Company (less any amounts retained by the
Company, which in the Board of Managers sole discretion, are necessary to be
retained by the Company). In the event that the amount determined under clause
(ii) above is a negative amount, the amount of any distributions pursuant to
this Section 6.3(a) in the succeeding calendar year (or if necessary any
subsequent calendar years) shall be reduced by such negative amount.
(b) Second, distributions shall be made, at such times and in such amounts
as the Board of Managers may determine, to the holders of Preferred Units with
respect to the Preferred Return as provided in Section 3.3(a) (but only to the
extent any such distribution has not already been made pursuant to Section
6.3(a)).
(c) Third, subject to Section 3.6(c) such other distributions of the
Company to holders of Units, whether in cash or in kind, shall be made at such
times and in such amounts as
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the Board of Managers may determine, and shall be made to the Members pro
rata in accordance with their respective holdings of Units at the date of
distribution.
6.4 LIABILITY FOR RETURN OF CAPITAL.
No Member or Manager shall have any liability for the return of any
Member's Capital Contribution, which Capital Contribution shall be payable
solely from the assets of the Company at the absolute discretion of the Board of
Managers, subject to the requirements of the Delaware Act.
6.5 ADMINISTRATIVE MATTERS.
(a) The Company hereby designates Chase as the "tax matters partner" for
purposes of Code Section 6231 and the regulations promulgated thereunder. In
such capacity, Chase may cause the Company to make any tax elections that it
deems necessary or advisable. Chase shall be reimbursed by the Company for any
expenses incurred in its capacity as tax matters partner. (b) It is the
intention of the Members that the Company shall be taxed as a "partnership" for
federal, state, local and foreign income tax purposes. The Members shall take
all reasonable actions, including the amendment of this Agreement and the
execution of other documents, as may reasonably be required in order for the
Company to qualify for and receive "partnership" treatment for federal, state,
local and foreign income tax purposes.
(c) The fiscal year of the Company shall be the calendar year. The books
and records of the Company shall be maintained in accordance with generally
accepted accounting principles and Code Section 704(b) and the regulations
promulgated thereunder.
(d) As to each of the first three fiscal quarters of the Company and each fiscal
year of the Company, the Company shall send to each Member a copy of (a) the
balance sheet of the Company as of the end of the fiscal quarter or year, (b) an
income statement of the Company for such quarter or year, and (c) a statement
showing the amounts distributed by the Company to Members in respect of such
quarter or year. Such financial statements shall be delivered no later than
forty-five (45) days following the end of the fiscal quarter to which the
statements apply, except that the financial statements relating to the end of
the fiscal year shall be delivered no later than ninety (90) days following the
end of such fiscal year.
ARTICLE VII
TRANSFERABILITY OF THE MEMBERS' INTEREST
7.1 LIMITATIONS ON TRANSFERABILITY OF UNITS.
(a) Except as otherwise expressly authorized herein, no Member may sell,
assign, pledge or otherwise transfer or encumber (collectively, "Transfer") all
or any part of its Units or its Interest, and no transferees of all or any part
of the Units or the Interest of a Member shall be admitted as a substituted
Member, without, in either event, having obtained the prior written consent of a
Majority in Interest of the Members (excluding Members that are transferring
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Units), which consent may be withheld in their sole discretion, and without
complying with the applicable provisions of the Members' Agreement applicable to
such Units or Interest, as the case may be. Notwithstanding the preceding
sentence, the prior written consent of a Majority in Interest of the Members
shall not be required for a Transfer of Units (i) made in compliance with
Sections 2, 3, 4 and 6, as applicable, of the Members' Agreement or (ii) that
constitutes a pledge of Units by a Management Member to secure a loan by the
Company to such Person. Any Transfer or attempted Transfer of any Units or
Interest in the Company in violation of any of the provisions of this Section
7.1 shall be void, and the Company shall not record such Transfer on its books
or treat any purported transferee of such Units (or Interest) as the owner of
such Units (or Interest) for any purpose. The Board of Managers shall amend
SCHEDULE I hereto from time to time to reflect Transfers made in accordance
with, and as permitted under, this Section 7.1 and the Members' Agreement.
(b) Notwithstanding anything herein to the contrary, but subject to Section
7.2(b), a holder of a Preferred Unit may freely transfer such Preferred Unit
without the consent of any Member or the Board of Managers and such assignee(s),
upon the written consent of such holder shall be admitted as a substituted
Member; provided, that, such transfer will not cause the Company to be treated
as a "publicly traded partnership" within the meaning of Section 7704(b) of the
Code.
(c) Prior to the Transfer (other than by means of a public offering) of
Units to any Person who is not a party to this Agreement, such Person shall
execute a counterpart to this Agreement and the Members' Agreement and shall
agree to be bound by the terms hereof and thereof.
7.2 OTHER PROVISIONS WITH RESPECT TO TRANSFERABILITY OF UNITS.
(a) Transfer of any Unit shall constitute the Transfer of a proportionate
share of each attribute constituting the Member's Interest represented by the
Unit.
(b) Each Member shall, after complying, or making provision to comply, with
Section 7.1, but prior to any Transfer of Units, give written notice to the
Company of such proposed Transfer. Each such notice shall describe the manner
and circumstances of the proposed Transfer. Upon request by the Company, the
Member delivering such notice shall deliver a written opinion, addressed to the
Company, of counsel for such Member, stating that in the opinion of such counsel
(which opinion and counsel shall be reasonably satisfactory to the Company) such
proposed Transfer does not involve a transaction requiring registration or
qualification of such Units under the Securities Act or the securities or "blue
sky" laws of any state of the United States. Such Member shall thereupon be
entitled to Transfer Units in accordance with the terms of the notice delivered
to the Company, if the Company does not request such opinion within five days
after delivery of such notice, or, if the Company requests such opinion, and
does not reasonably object (based on the contents of such opinion) to such
Transfer within five days after delivery of such opinion.
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ARTICLE VIII
ADDITION OF MEMBERS, WITHDRAWAL OF MEMBERS
8.1 ADDITION OF MEMBERS.
Subject to Section 3.6 and Section 10.2 hereof, the Board of Managers, with
the consent of a Majority in Interest of Members, shall have the right to amend
this Agreement and cause the Company to issue additional Units and to admit
additional Members upon the acquisition of such Units upon such terms and
conditions, at such time or times, and for such Capital Contributions as shall
be determined by the Board of Managers. In connection with Transfers permitted
under this Agreement or the admission of an additional Member, the Board of
Managers shall amend SCHEDULE I hereof to reflect the name and address of the
additional Member. Prior to the admission of any Person as a Member, such Person
shall execute a counterpart to this Agreement and the Members' Agreement and
shall agree to be bound by the terms hereof and thereof.
8.2 WITHDRAWAL OF MEMBERS.
No Member shall have the right to withdraw from the Company except with the
consent of the Board of Managers and upon such terms and conditions as may be
specifically agreed upon between the Company and the withdrawing Member. The
provisions hereof with respect to distributions upon withdrawal are exclusive,
and no Member shall be entitled to claim any further or different distribution
upon withdrawal under Section 18-604 of the Delaware Act or otherwise. This
Section 8.2 shall not apply to Transfers permitted under this Agreement.
ARTICLE IX
DISSOLUTION OF THE COMPANY; CONTINUATION
9.1 DISSOLUTION OF THE COMPANY.
(a) Subject to the provisions of Section 9.2, the Company shall be
dissolved and its affairs wound up and terminated upon the first to occur of the
following:
(i) December 31, 2030;
(ii) the determination of the Board of Managers and a Majority in
Interest of Members to dissolve the Company; or
(iii) the occurrence of an Event of Withdrawal of a Member or any
other event causing a dissolution of the Company under Section 18-801 of
the Delaware Act.
(b) Upon dissolution of the Company, the Company's affairs shall be
promptly wound up in accordance with the provisions of this Section 9.1. The
Company shall engage in no further business except as may be necessary, in the
reasonable discretion of the Board of Managers, to preserve the value of the
Company's assets during the period of dissolution and liquidation.
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(c) Distributions to the Members in liquidation may be made in cash or in
kind, or partly in cash and partly in kind, as determined by the Board of
Managers. With respect to distributions in kind, the capital account of each
Member receiving such distribution shall be adjusted as if such distributed
property had been sold at fair market value and the gain or loss on such sale
had been allocated to such Member.
(d) The Net Profits and Net Losses of the Company during the period of
dissolution and liquidation shall be allocated among the Members in accordance
with the provisions of Section 6.2.
(e) The assets of the Company (including, without limitation, proceeds from
the sale or other disposition of any assets during the period of dissolution and
liquidation) shall be applied as follows:
(i) First, to repay any indebtedness of the Company, whether to third
parties or the Members, in the order of priority required by law;
(ii) Next, to any reserves which the Board of Managers reasonably
deems necessary for contingent or unforeseen liabilities or obligations of
the Company (which reserves when they become unnecessary shall be
distributed in accordance with the provisions of (iii) and (iv), below);
(iii) Next, subject to and in accordance with Section 3.3(b), to the
holders of Preferred Units, to the extent of the Preferred Liquidation
Preference of such Preferred Units held by each such holder, and
(iv) Next, to the Members in proportion to their respective positive
capital account balances (after taking into account all adjustments to the
Members' capital accounts required under Section 6.2).
9.2 CONTINUATION OF THE COMPANY.
Notwithstanding the provisions of Section 9.1, the occurrence of an Event
of Withdrawal of a Member shall not dissolve the Company if within 90 days after
the occurrence of such Event of Withdrawal of a Member the business of the
Company is continued by a Majority in Interest of Members remaining after such
Event of Withdrawal.
ARTICLE X
MISCELLANEOUS
10.1 LIMITATION ON LIABILITY.
The debts, obligations and liabilities of the Company, whether arising in
contract, tort or otherwise, shall be solely the debts, obligations and
liabilities of the Company, and no Member or Manager of the Company shall be
obligated personally for any such debt, obligation or liability of the Company
solely by reason of being a Member or Manager.
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10.2 AMENDMENTS.
This Agreement may be amended only upon the written consent of (i) the
Board of Managers, (ii) a Majority in Interest of Preferred Members, and (iii) a
Majority in Interest of Members; provided, however, that no modification or
amendment shall be effective to reduce the percentage of the Units the consent
of the holders of which is required under this Section 10.2 nor shall any
modification or amendment discriminate against any Member without the consent of
such Member; provided, further, however, that any amendment that would adversely
affect the rights hereunder of any Member, in its capacity as Member, without
similarly affecting the rights hereunder of all Members of the same class, shall
not be effective without such Member's prior written consent.
10.3 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Delaware without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
* * * * *
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IN WITNESS WHEREOF, the undersigned have duly executed this Operating
Agreement as of the date first written above.
DONJOY, L.L.C.
By: /s/ Cyril Talbot III
---------------------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
CHASE DJ PARTNERS, LLC,
By: Fairfield Chase Medical Partners, LLC,
its Managing Member
By: /s/ Charles T. Orsatti
---------------------------------
Name: Charles T. Orsatti
Title: Managing Member
SMITH & NEPHEW DISPOSAL, INC.
By: /s/ Cliff Lomax
---------------------------------
Name: Cliff Lomax
Title: President
CB CAPITAL INVESTORS, L.P.
By: CB Capital Investors, Inc.,
its general partner
By: /s/ Damion Wicker
---------------------------------
Name: Damion Wicker
Title: General Partner
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/s/ Leslie H. Cross
-----------------------------------
Leslie H. Cross
/s/ Michael R. McBrayer
-----------------------------------
Michael R. McBrayer
/s/ Cyril Talbot III
-----------------------------------
Cyril Talbot III
FIRST UNION INVESTORS, INC.
By: /s/ Frederick W. Eubank II
-----------------------------------
Name: Frederick W. Eubank II
Title: Senior Vice President
DJC, INC.
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
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TCW/CRESCENT MEZZANINE TRUST II
By: TCW/Crescent Mezzanine II, L.P.,
as general partner or managing owner
By: TCW/Crescent Mezzanine, L.L.C.,
its general partner
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
TCW LEVERAGED INCOME TRUST II, L.P.
By: TCW Investment Management Company,
as Investment Advisor
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
By: TCW (LINC II), L.P., as general partner
By: TCW Advisors (Bermuda), Ltd.,
as its general partner
By: /s/ Mark L. Attanasio
-----------------------------------
Name: Mark L. Attanasio
Title: Group Managing Director
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
as Portfolio Manager and as Attorney-in-Fact
the Partnership
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
DonJoy, L.L.C. Amended and Restated Operating Agreement
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SCHEDULE I -- SCHEDULE OF MEMBERS
Common Units Preferred Units Percentages
Chase DJ Partners, LLC 645,500 85.14%
c/o Chase Capital Partners
380 Madison Avenue, 12th Floor
New York, New York 10017
Smith & Nephew Disposal, Inc. 54,000 7.12%
c/o Smith & Nephew, Inc.
1450 Brooks Road
Memphis, TN 38116
PREFERRED UNIT HOLDERS
CB Capital Investors, L.P. 20,427 2.69%
c/o Chase Capital Partners
380 Madison Avenue, 12th Floor
New York, New York 10017
First Union Investors, Inc. 6,362 0.84%
One First Union Center
Charlotte, NC 28288
DJC, Inc. 9,631 1.27%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
TCW Crescent Mezzanine Trust II 2,090 0.28%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
TCW Leveraged Income Trust II, L.P. 1,004 0.13%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
36
Crescent MACH I Partners, L.P. 670 0.09%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
MANAGEMENT MEMBERS
Les Cross 12,500 1.65%
3330 Caminito Daniella
Del Mar, CA 92014
Michael McBrayer 3,000 0.40%
4308 Horizon Drive
Carlsbad CA 92008
Cy Talbot 3,000 0.40%
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2511 Lozana Road
Del Mar, CA 92014
Total 718,000 40,184 100%
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