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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 001-12229
DEPUY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 35-1989795
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
700 ORTHOPAEDIC DRIVE, WARSAW, INDIANA 46581-0988
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
Registrant's Telephone Number, Including Area Code: (219) 267-8143
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, par value $.01 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check X if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
----
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 17, 1997 was $357,726,383. Registrant's price as
reported on the New York Stock Exchange--Composite Transactions for March 17,
1997 was $23.00 per share.
The number of shares of Common Stock, par value $.01 per share, outstanding
as of March 17, 1997 was 98,580,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 1, 1997 are incorporated by reference in Part
III of this Report.
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GENERAL
This Report includes forward-looking statements concerning the Company's
operations, economic performance and financial condition. Such forward-looking
statements involve risks and uncertainties and are subject to change based on
various factors. Actual results could differ materially from those currently
anticipated. Readers are cautioned not to place undue reliance on forward-
looking statements, which only speak as of the date of this Report.
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Certain of the information contained in "Item 1. Business" concerning the
definition, size and development of the various product markets in which the
Company participates and the Company's general expectations concerning the
development of such product markets, both domestically and internationally,
are based on estimates prepared by the Company using data from various sources
(primarily Wessels, Arnold & Henderson, Medifacts International, MDIS
Publications, Theta Corporation and Knowledge Enterprises, as well as data
from the Company's internal research), which data the Company has no reason to
believe are unreliable, and on assumptions made by the Company, based on such
data and its knowledge of the orthopaedic industry, which the Company believes
to be reasonable. While the Company is not aware of any misstatements in such
information, the Company's estimates, in particular as they relate to the
Company's general expectations concerning the product markets in which the
Company participates, involve risks and uncertainties and are subject to
change based on various factors. Sales and market share figures contained in
the narrative portions of Item 1. "Business" includes sales of the Company's
50% owned subsidiary, DePuy DuPont Orthopaedics.
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DePuy(R), ACE(R), OrthoTech(R), LCS(R), AMK(R), Charnley(R), ENDURANCE(R),
Solution System(R), Duraloc(R), ELITE(TM), Coordinate(TM), Global(TM), STERILE
VIEW(R), STABILITY(R), POROCOAT(R), CMW(R), AML(R) and Cida(TM) are trademarks
of the Company, its subsidiaries or affiliates. Hylamer(R) is a registered
trademark of DePuy DuPont Orthopaedics. Kevlar(R) is a registered trademark of
E.I. DuPont de Nemours and Company. MOSS(R) is a registered trademark of
Biedermann Motech GmbH, the Company's joint venture partner in DePuy Motech.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
DePuy, Inc. ("DePuy" or the "Company") is one of the world's leading
designers, manufacturers and distributors of orthopaedic devices and supplies.
The Company's products are used primarily by orthopaedic medical specialists
and, in the case of the Company's spinal implants, neurosurgeons in both
surgical and non-surgical therapy to treat patients with musculoskeletal
conditions resulting from degenerative diseases, deformities, trauma and
sports-related injuries. The Company's products cover a broad range of
orthopaedic needs and include primary and revision hip, primary and revision
knee and shoulder implants to reconstruct damaged joints; spinal implants to
facilitate fusion of elements of the spine and to correct deformities; trauma
products to reconstruct small and large bone fractures; and implants, knee
braces and other soft good supplies for the rehabilitation of sports-related
injuries. Additionally, the Company markets complementary products for the
operating room.
Founded in 1895 by Revra DePuy, DePuy is the world's oldest manufacturer of
orthopaedic devices. In October 1996, the Company became a public company
through an initial public offering of its Common Stock (the "Initial Public
Offering"). Prior to the Initial Public Offering, the worldwide operations of
DePuy were consolidated under Corange U.S. Holdings, Inc., an Indiana
corporation ("CUSHI"), and an indirect wholly-owned subsidiary of Corange
Limited, a Bermuda company and the ultimate parent of the DePuy group. As part
of such reorganization, Boehringer Mannheim Corporation, the U.S. operating
subsidiary of the Boehringer Mannheim companies (which are under common
control with the DePuy subsidiaries) was transferred outside the CUSHI
consolidated group. Following such reorganization, for purposes of
reincorporating CUSHI in Delaware, CUSHI was merged downstream into the
Company, with the Company as the surviving company in such merger. The Company
had been organized in Delaware on July 26, 1996 as a wholly-owned subsidiary
of CUSHI for purposes of becoming the holding company for the DePuy group
after the Initial Public Offering.
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The Company's principal executive offices are located at 700 Orthopaedic
Drive, Warsaw, Indiana 46581-0988 and its telephone number is (219) 267-8143.
INDUSTRY OVERVIEW
The orthopaedic product market is believed by the Company to have had
approximately $7.3 billion in 1996 sales worldwide, with U.S. sales
constituting approximately $4.1 billion of that total. The Company estimates
that reconstructive products accounted for approximately $3.2 billion of the
1996 worldwide orthopaedic market, with the U.S. and international markets
split equally with approximately $1.6 billion each. The Company believes that
it is one of the leading manufacturers of reconstructive products worldwide,
having a worldwide market share of approximately 15% in 1996, and the second
leading manufacturer in the U.S., having approximately a 17% market share in
1996. With respect to hip products, the Company believes that it is one of the
three leading manufacturers worldwide and one of the two leaders in the U.S.
Within the knee market, the Company believes it is the fourth leading
manufacturer worldwide and in the U.S. The Company believes it is the leading
manufacturer within the extremities market. The Company believes that it is
the fourth leading manufacturer within the worldwide spinal market, one of the
fastest growing segments in musculoskeletal surgery.
DePuy has established a leading market position through the continued
introduction of high quality, clinically-proven products in major segments of
the orthopaedic industry. Geographically, the Company commenced the
development of international distribution channels in 1988 and now has
Company-owned distribution subsidiaries in all major markets outside the U.S.
International sales have increased to 46% of total sales in 1996, up from 11%
in 1988. The Company's acquisitions and alliances have also focused on the
entry into the high growth markets of spinal implants, trauma and sports
medicine. In 1993, the Company entered the expanding market of spinal implants
through a joint venture with Biedermann Motech GmbH of Germany. In 1994, the
Company expanded its position in the trauma device market through the
acquisition of ACE Medical Company, now called DePuy ACE Medical Company
("DePuy ACE"), a leading manufacturer of titanium alloy trauma products and
externally applied fixation devices for the treatment of fractures. Also in
1994, DePuy International Ltd. ("DePuy International"; formerly Charles F.
Thackray Limited, acquired by the Company in 1990) acquired CMW Laboratories,
("CMW"), the oldest orthopaedic bone cement manufacturer in the world. In
March 1996, the Company expanded its position in the fast-growing sports
medicine device market through its acquisition of Orthopedic Technology, Inc.,
now called DePuy Orthopaedic Technology, Inc. ("DePuy OrthoTech"), a
manufacturer and distributor of external braces used in the prevention and
rehabilitation of sports-induced injuries. On February 28, 1997, the Company
entered into an agreement with the stockholders of Landanger-Camus
("Landanger") to purchase the 1,939,452 shares (constituting 89.6% of the
outstanding shares) of such company's stock which are currently held by
members of the Landanger family and certain minority shareholders. The
purchase agreement is subject to a number of conditions. Upon satisfaction of
such conditions, and the closing of the purchase of such shares, it is
contemplated that the Company will make a tender offer to purchase the 10.4%
of the shares of Landanger owned by public shareholders. Landanger,
headquartered in Chaumont, France, is the leading French manufacturer of hip
implants and one of the leading French distributors of orthopaedic devices and
supplies. See Note 16 to the Consolidated Financial Statements contained
herein. DePuy believes that many of its target markets remain fragmented,
providing opportunities for continued consolidation. Technologically, DePuy
seeks to remain on the leading edge of innovation and has established programs
in the area of bone and tissue regeneration and biomaterials.
In the United States, DePuy has been at the forefront of pursuing
opportunities in a managed care environment. As the pressure within the health
care industry to contain costs has increased, DePuy has actively pursued
contracts with national and regional hospital buying groups as well as
individual health care facilities, where the Company believes that the
increase in unit volume produced by high level product sales to such groups
and the opportunity for increased market share offsets the financial impact of
discounting products. The Company has also created and introduced software
packages to help surgeons and health care facilities document and collect
reliable data on costs, clinical results, outcomes and patient satisfaction.
By demonstrating the superiority of its products through careful tracking,
evaluation and promotion of clinical outcomes, the Company believes that it is
well positioned for its customers to receive patient referrals from third-
party payers and integrated health care delivery networks.
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PRODUCTS
The Company's core products are, and have traditionally been, reconstructive
implant devices for hips and knees. Having established itself as a market
leader in the United States in hip and knee replacements, the Company began,
in the late 1980s, to expand its product line to cover the full range of
orthopaedic products through strategic acquisitions and alliances. The
following chart traces the expansion of the Company's product lines during the
last five years. In the table below, reconstructive products include implants
for hips, knees and extremities.
YEARS ENDED DECEMBER 31,
(DOLLARS IN MILLIONS)
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1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
PERCENT PERCENT PERCENT PERCENT PERCENT
NET OF NET OF NET OF NET OF NET OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reconstructive
Products............... $317.2 76% $363.2 78% $405.9 74% $450.6 71% $470.2 67%
Spinal Implants......... -- -- 3.2 1 12.5 2 30.6 5 45.5 7
Trauma Products......... 9.2 2 8.5 2 38.5 7 49.4 8 56.4 8
Sports Medicine(1)...... -- -- -- -- 27.7 5 29.4 4 48.2 7
Other Products.......... 93.5 22 91.8 19 67.2 12 76.6 12 77.0 11
------ --- ------ --- ------ --- ------ --- ------ ---
Total................. $419.9 100% $466.7 100% $551.8 100% $636.6 100% $697.3 100%
====== === ====== === ====== === ====== === ====== ===
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(1) Prior to 1994, sales of sports medicine products were included in other
products.
At the same time, recognizing that much of the future growth in its core
implant industry would come from international markets, the Company also began
focusing in the late 1980s on increasing its sales outside the United States
by developing distribution channels in countries outside the U.S. See
"Business--Marketing and Sales." From 1991 to 1996, non-U.S. revenue increased
from 33% to 46% of total revenues. The following table sets forth the
geographical sources of the Company's revenues for the past five years, based
on customer location during each such year.
YEARS ENDED DECEMBER 31,
(DOLLARS IN MILLIONS)
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<CAPTION>
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
PERCENT PERCENT PERCENT PERCENT PERCENT
NET OF NET OF NET OF NET OF NET OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........... $266.3 64% $296.7 64% $333.3 61% $349.9 55% $373.8 54%
Europe.................. 106.6 25 112.6 24 132.8 24 172.2 27 186.0 27
Asia/Pacific............ 35.1 8 42.9 9 68.3 12 90.6 14 107.0 15
Other................... 11.9 3 14.5 3 17.4 3 23.9 4 30.5 4
------ --- ------ --- ------ --- ------ --- ------ ---
Total................. $419.9 100% $466.7 100% $551.8 100% $636.6 100% $697.3 100%
====== === ====== === ====== === ====== === ====== ===
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Reconstructive Implants
Until the early 1960s the orthopaedic industry was primarily involved with
the manufacture and sale of products which were intended for treatment of
injuries, most often traumatic injuries. As a result of developments which
began in the late 1950s and the early 1960s, products and procedures were
developed for the treatment of joint disease, such as arthritis, as well.
Total joint replacement surgery replaces worn joints with components made of
stainless steel, titanium alloy or cobalt chromium alloy, depending on the
design, and ultra-high molecular weight polyethylene ("UHMWPE"), a medical
grade plastic. The first widely used products were various forms of hip
replacements, some of which, especially in the early years, involved the
replacement of the
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femoral side only, but as the years progressed total joint replacement became
the norm. Development of total knee systems followed the development of total
hip replacements.
The worldwide market for reconstructive implant devices in 1996 was
approximately $3.2 billion in sales. Of these sales, approximately 49% were in
the U.S. and 51% were in the rest of the world. The Company's worldwide sales
of reconstructive products in 1996 was $470.2 million.
Reconstructive products may be further broken down by category into cemented
products, cementless products and revision products. Cemented products are
secured to the bone with a grout made of polymethylmethacrylate ("cement" or
"bone cement"). Cementless products are "biologically fixed," which means the
surrounding tissue grows into the implant's porous, beaded coating, or macro
texture features, securing it without the use of cement. A revision product,
which may be either cemented or cementless, is the implant used when a primary
implant wears out or becomes loose after years of use and revision surgery is
performed.
The Company designs, manufactures and markets a full line of joint
reconstruction implants for the hip, knee, shoulder, elbow, wrist and ankle.
Hip Systems. The Company believes the market for hip implant products in
1996 was approximately $1.7 billion in sales worldwide and approximately $700
million in sales in the U.S. The Company believes it is one of the three
leading manufacturers of hip implant products worldwide and is one of the two
leaders in the United States.
In hip arthroplasty, the "ball and socket" of the hip joint are replaced
with several components, depending on the product design. The stem, made of
stainless steel, titanium alloy or cobalt chromium alloy, supports the head,
which is comprised of a "ball and neck." The acetabular component, which
usually consists of a polyethylene liner and metal cup or an all polyethylene
cup, replaces the socket. DePuy offers a full line of hip implants to meet
patient needs and surgeon preferences. Its two leading total hip systems are
the Charnley Hip and the AML Hip. The Charnley Hip is one of the leading
cemented hip implants in the world in terms of unit volume. The AML Hip, the
Solution System and the Duraloc Acetabular Cup System are, respectively, the
leading porous coated hip system, the leading revision hip system and the
leading acetabular cup in the U.S. in terms of unit volume.
AML Total Hip System. The AML Hip is a cementless system that uses a
proprietary porous implant coating (Porocoat) to secure the implant in
place through biological fixation. Considered the Company's flagship
product, the AML hip stem was the first implant to be cleared by the Food
and Drug Administration (the "FDA") to be indicated for use without cement
and has the longest clinical history of any cementless hip implant on the
market today, with a 99% survivorship estimate at 10 years for the AML
femoral hip stem. The AML Hip family of products is the most widely used
family of cementless implants in the U.S.
Charnley Hip System. Unlike the U.S., in the U.K. and much of Europe
cemented hip systems, which are less expensive, continue to be preferred.
The Charnley Hip is a specialized stainless steel alloy cemented hip
implant. It was the world's first low friction total hip implant and has
the longest clinical history of any implant on the market. The Charnley
femoral hip stem has a 90% or better survivorship estimate at 20 years. The
Charnley Hip is one of the leading cemented hip implants in the world in
terms of unit volume. The new generation of the Charnley family, the Elite
Plus Total Hip, was introduced in 1995, and can utilize a zirconian femoral
bearing surface designed to further minimize wear of the surface and
prolong the life of the arthroplasty. In the U.S., the ENDURANCE System has
been designed using the principles of the Charnley Hip. Manufactured from a
cobalt chromium alloy, the ENDURANCE System was introduced in 1994.
Solution System. Revision hip surgery is performed when infection occurs
or the supporting bone or primary implant wears out from years of use.
Introduced in 1990, the Solution System was the first extensively coated
revision system on the market. The Porocoat coating helps provide the
additional stability required in revision hip surgery. The Solution System
has a substantial share of the revision market in the U.S. DePuy also
markets a cemented revision implant as part of the ENDURANCE System.
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Duraloc Acetabular Cup System. The Duraloc Acetabular Cup System uses a
sensor-ring lock, uniform dome loading and optimal polyethylene thickness
for the specific patient application. This combination permits mobility
without sacrificing structural support. The patented Duraloc Acetabular Cup
System is the leading cup system in the U.S.
Knee Systems. The Company believes the worldwide and U.S. markets in 1996
for knee implants were $1.4 billion and $840 million, respectively, in sales.
The Company believes it is the fourth largest manufacturer in the knee market
in the U.S. and worldwide.
Total knee arthroplasty consists of several components depending on the
product design: the femoral component or components, the tibial component or
components and the patellar component or components. The Company offers a full
range of implants, including the LCS Knee, the AMK Knee and the Coordinate
Revision Knee System.
LCS Total Knee System. The LCS Total Knee System is a mobile-bearing Knee
system. The mobile bearings incorporated into the design allowed the
implant to more closely simulate the anatomic movement of a natural Knee
while minimizing stresses on the implant components. The patented LCS Knee
design, which was launched in 1985 after extensive clinical trials, has FDA
Pre-Market Approval for both cemented and cementless indications for use.
The LCS Knee design was the first, and continues to be the only, mobile-
bearing knee commercially available for use in the U.S. The LCS Knee has 19
years, including initial development and clinical trials, of clinical
history with a 97% survival estimate at 7 years. The LCS Knee is the number
one selling mobile-bearing knee implant worldwide and in the U.S. Within
the U.S. sales have been increasing as the implant's success rate becomes
more widely known and its clinical history is extended, providing more
clinical data of its success.
AMK Total Knee System. Introduced in 1987, the AMK Total Knee System is a
fixed-bearing knee system which has left and right, rather than universal,
femoral components. The AMK Knee may be used for primary and revision knee
surgery needs and has nine years of clinical follow-up history. In 1990,
the Company introduced the AMK PS (Posterior Stabilized) design, which is a
complementary product intended to address another industry trend toward
posterior stabilization of the knee joint, the fastest growing area in the
knee implant market.
Coordinate System. The Coordinate system is a revision knee system which
uses the same instrumentation as the AMK Knee family of products.
Extremities. The Company believes the worldwide and U.S. markets in 1996 for
extremities implants (shoulder, ankles, elbows and wrists) were nearly $90
million and nearly $60 million, respectively. Within the extremities market,
shoulder implants accounted for over 65% of 1996 sales worldwide and in the
U.S. DePuy believes it is the leading manufacturer of extremities implant
products in general and shoulder implants. The Global Total Shoulder System,
introduced in 1992, has in just four years become a market leader in the U.S.
shoulder market. Once considered a difficult surgery with questionable
outcomes, the improved technology embodied in the Global Shoulder has helped
the procedure gain acceptance, and shoulder surgery is now one of the fastest
growing segments in orthopaedics.
Spinal Implants
One of the fastest growing markets in musculoskeletal surgery, the spinal
implants market for 1996 was approximately $440 million in sales worldwide,
with approximately $200 million in sales in the U.S. In 1993, the Company
entered the spinal market through a joint venture with Biedermann Motech GmbH
of Germany. The resulting company, DePuy Motech, is 80% owned by DePuy. This
joint venture has resulted in the Company becoming fourth worldwide in the
sale of spinal implant devices in less than three years after its entry into
the market. The Company's 1996 worldwide sales were $45.5 million.
The primary goals of spinal instrumentation systems are to correct for
spinal deformity or imbalance, to reestablish stability of the spine and to
eliminate pain. Hooks, rods, screws and anterior support devices (metallic,
ceramic and bone) acting as the equivalent of modular spinal anchoring
devices, are constructed by the surgeon
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to create an internal bracing mechanism. Surgeons adapt these components to
the specific pathology of the individual patient, creating an implant
construct that is intended to reconstruct and restore normal spinal
biomechanics or facilitate bone fusion.
DePuy Motech has differentiated itself from other manufacturers of spinal
implants by basing its implants on "load sharing", which advocates the support
of the spine both anteriorly (front) and posteriorly (back). This philosophy
has now become an important surgical trend in spinal surgery.
Among the Company's products is the MOSS System, the first system to address
the concept of load sharing and recognize the importance of anterior column
support to restore and balance the natural forces in the spine. The MOSS Miami
System, introduced in 1995, set new design standards, while continuing to
adhere to the Company's basic design philosophies. These are complete systems
made of stainless steel and include anatomical hooks, monoaxial and polyaxial
screws and rods, and are designed for universal application in spinal surgery
for deformities, tumor, trauma and degenerative diseases of the spinal column.
These systems are marketed in the U.S. as spinal devices for fusion and for
bone repair under Section 510(k) Premarket Notification ("510(k)") clearances.
Within the U.S., DePuy markets the hooks and pedicle screws for use in certain
lumbar regions. Outside the U.S., marketing of pedicle screws for more general
use, and the labeling and marketing of the Company's surgical mesh product for
use between vertebrae, is allowed. The MOSS Miami System is also available in
titanium alloy which allows surgeons to use Magnetic Resonance Imaging and
Computer Aided Tomography evaluation following surgery and provides an implant
system for patients who may be sensitive to the nickel content of stainless
steel.
Among DePuy Motech's other recent products is Titanium Surgical Mesh,
designed in Europe by Professor Jurgen Harms and Biedermann Motech to provide
a synthetic device to reinforce weak bony tissue. This product has gained
market acceptance outside the U.S. and is marketed in the U.S. pursuant to
510(k) clearance received by Biedermann Motech in 1990. DePuy Motech is
conducting an IDE study to further evaluate specific indications for use of
Titanium Surgical Mesh. In June 1996, the Company's Peak Anterior Cervical
Compression Plate and Peak Channeled Reconstruction Plate, part of the Peak
Fixation System, were offered for sale outside the U.S. The Peak Anterior
Cervical Compression Plate addresses degenerative diseases of the anterior
cervical spine and the Peak Channeled Reconstruction Plate is used in surgery
to stabilize bony structures. These products are expected to be marketed in
the near future in the U.S. following applicable 510(k) clearances.
Trauma Devices
The orthopaedic trauma field, which involves the management of fractures,
has as its objective the achievement of complete bone healing, or "union," and
restoration of alignment and full range of motion in patients who have
sustained fractures. The worldwide market for trauma products in 1996 was
approximately $1 billion in sales, of which approximately 45% were sales in
the U.S. The Company's fixation devices may be classified generally as
external fixation devices and internal fixation devices. The acquisition of
DePuy ACE in 1994 added critical mass to the Company's trauma product
offerings, specifically adding products in the growing market of external
fixation. Within the trauma market, the Company, through DePuy ACE, is a
leading manufacturer of titanium alloy trauma products and externally applied
fixation devices for the treatment of fractured bones. DePuy ACE was a pioneer
in the use of titanium alloy implants in the orthopaedic trauma market.
Titanium alloy more closely replicates the physical properties of bone than
stainless steel and is associated with a higher degree of biocompatibility
than stainless steel implants. The Company had sales of $56.4 million
worldwide in 1996 and $26 million in the U.S., representing 5% and 6%,
respectively, of the market. DePuy ACE is a market leader in Japan, the second
largest geographical market for trauma products.
Sports Medicine Products
The sports medicine market, which includes arthroscopy equipment, soft
tissue implants, casting, braces, cold therapy and supports, amounted to
approximately $810 million in sales worldwide in 1996, including approximately
$640 million in the U.S. The Company expanded its position in this area
through its acquisition of DePuy OrthoTech in March 1996, which added critical
mass and expanded product lines. The Company's aggregate sales of sports
medicine products in 1996 were $48.2 million worldwide.
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Among the Company's products are arthroscopy instruments, anterior cruciate
ligament reconstructive guide systems, tissue fixation devices, cold therapy
management systems, foot and ankle supports and orthopaedic knee braces.
Within its knee brace product line, the Company offers a complete line of
custom-made braces which are used by professional athletes in a number of
sports. The Company also offers a complete line of high-quality, off-the-shelf
knee braces.
Cement
To complement cemented reconstructive product lines, the Company entered the
bone cement market in 1994 through the acquisition of CMW. CMW manufactures
different types of bone cements used with reconstructive implants and had 1996
sales of approximately $15 million. Early in 1997, CMW received FDA clearance
to market directly in the U.S. one type of its bone cement. Additional
versions are awaiting clearance for marketing in the U.S.
Operating Room Products
To complement its reconstructive products, the Company developed a
comprehensive line of products designed to shield health care workers,
surgeons and patients from cross-contamination and contact with body fluids
which could contain potentially infectious bacteria and viruses during
surgery. Orthopaedic reconstructive surgery carries a higher risk of such
contamination or contacts than many other types of surgeries as a result of
the instrumentation required, which scatters microscopic particles, including
bone and blood.
Among the Company's product offerings are a series of cut, stick and
puncture resistant glove liners, developed and marketed by DePuy DuPont
Orthopaedics, which incorporate Kevlar material, a lightweight fabric used in
military helmets and in flack jackets that is stronger than steel. Other
products include the Sterile View System ("space suits" that shield and filter
airborne particulates), and the Cida-system, a line of germicidal products
designed to ensure the cleanest possible surgical environment. In addition,
the Company markets power and manual instruments, wound drainage and
tourniquet systems, smoke evacuation systems and instrument repair services.
Product Development
The Company conducts its research and development programs to maintain its
proprietary position by making improvements to existing products and by
developing new generations of products focused on new materials, biologic
biomaterials, and new non-invasive or minimally-invasive forms of treatment
for afflictions and injuries currently requiring surgery.
In-house, company-sponsored research and development programs at Warsaw,
Indiana and Leeds, United Kingdom focus on enhancements to the metallic and
polyethylene components of the implant and instrument devices manufactured by
the Company by increasing their strength, corrosion or oxidation resistance,
fatigue resistance, or focusing on bearing surface improvements to the
artificial joint being replaced in the human body. In addition, research is
being done on artificial joint simulators and enhancements to the bearing
interface.
In 1990, as part of its long-range product development efforts, the Company
initiated programs in the biotechnology arena with an emphasis on
orthobiologics and biologic biomaterials. The Company is researching
technologies for the next century in the area of bone substitutes, cartilage
regeneration, ligament and tendon reconstruction and musculoskeletal tissue
engineering. These efforts, however, if successful, are not expected to
produce material product revenue until, at the earliest, the beginning of the
next decade.
Bone and Tissue Regeneration. In the early 1990s, the demand for
musculoskeletal tissue to repair traumatic and sports related injuries
increased. At present, there are limited means of repairing injuries such as a
rotator cuff deficiency or a meniscus tear. For certain other types of injury
(particularly damage to ligaments and tendons), the treatment requires the use
of tissue from another site on the patient's body, thereby increasing chances
of morbidity and surgery costs. To address these problems, in March 1992,
DePuy moved into tissue engineering research by entering into an exclusive
license agreement with Purdue University to develop a tissue
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engineering concept using Small Intestine Submucosa ("SIS"). SIS is a patented
xenographic biomaterial that may be used as a scaffold in tissue engineering
applications. SIS has been shown to facilitate the regeneration, repair and
re-growth of the patient's own tissues at various anatomical sites. The
Company is investigating SIS for ligament, tendon, bone, cartilage, meniscus
and rotator cuff applications. In late 1996, the Company filed an IDE
application for anterior cruciate ligament replacement using SIS and is
currently supplying the FDA with additional information as a follow-up to that
submission.
With orthopaedic surgeons identifying cartilage repair and bone substitute
materials as significant needs, DePuy entered into an exclusive license
agreement with Genentech, Inc. in February 1992 which allows DePuy to evaluate
the use of Transforming Growth Factor Beta One ("TGFB-1") for orthopaedic
applications. TGFB-1 has been shown to aid in bone regeneration and remodeling
and to inhibit bone resorption, along with stimulating articular cartilage
repair and regeneration. Preclinical studies have demonstrated the efficacy of
TGFB-1 formulated with other biomaterials for bone substitute applications.
However, the preclinical studies also disclosed potential systemic effects of
TGFB-1 when delivered at a bony site which may preclude the use of TGFB-1
administered directly to bone. The Company is studying alternate methods of
utilizing TGFB-1 for bone regeneration through gene therapy and is
investigating the effects, both local and systemic, of direct applications of
TGFB-l to stimulate cartilage repair and regeneration.
The Company is also involved in an orthobiologic program aimed at addressing
joint trauma and degeneration. The Company is researching articular cartilage
repair through collaborations with the Boehringer Mannheim group of companies
and others utilizing resorbable polymers, cell technology applications and
gene therapy delivery mechanisms. In addition, the Company is working with
Matrix Biotechnologies, Inc., in which the Company has a minority interest, to
research and develop cartilage repair products, including materials,
procedures and related instrumentation, without the need for prosthetics. One
focus of this collaboration is the development of technology for the repair
and/or regeneration of articular cartilage using a bioresorbable device which
can be placed at the defect site to promote the body's own ability to repair
cartilage damage.
Biomaterials. In July 1987, DePuy signed an exclusive research agreement
with E.I. DuPont DeNemours and Company to investigate the use of advanced
biomaterials (polymers, composites and resorbables) in orthopaedic
applications and formed a partnership, DePuy DuPont Orthopaedics, in 1989 to
distribute new products developed by the joint venture. This venture has
already introduced a number of new products, including the Hylamer family of
orthopaedic bearing polymers consisting of UHMWPE bearing surfaces. The
polymers, available for use exclusively in the Company's hip, knee and
shoulder implants, are designed to resist wear, deformation and material
degradation, providing greater strength than traditional polymers. Current
research projects involve a newly-designed metacarpal phalangeal finger
spacer/implant, further improvements to UHMWPE, composite implant designs,
resorbable materials for screws, anchors and other fixation devices, as well
as continued research in the area of fibers, elastomers and other polymers at
various stages in the research and product development cycle.
MARKETING AND SALES
The Company markets and distributes its products through a global
distribution network. Distribution within the U.S. is through a combination of
Company-owned sales offices that supervise independent commissioned sales
associates and a number of independent commissioned sales agents. Outside the
U.S., the majority of the Company's sales are conducted through Company-owned
distribution outlets, although the Company still distributes some products
through independent distributors in certain international markets. To promote
its key products, the Company collaborates with surgeons with national and, in
many cases, international reputations in the relevant area of orthopaedic
surgery and neurosurgery. These "surgeon champions" use and study the product
and participate in learning centers and other educational or professional
activities to educate other doctors on the use of the product.
United States
The Company markets its orthopaedic implant products in the United States
through a network of approximately 500 independent, commissioned sales
associates managed by 31 Company-employed territory
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sales managers and 11 independent sales agents as of December 31, 1996. This
structure has been evolving since 1994. The salesforce was reorganized as
described below to create a structure where requisite investments in
personnel, training and instruments would be made in the Company's new product
areas such as spinal implants and trauma products. The reorganization also
allowed the Company to ensure that sales associates were receiving appropriate
incentives and compensation and to eliminate the involvement of those sales
agents who were unproductive.
For many decades, as was typical in the industry, the Company distributed
its products in the U.S. exclusively through a network of independent
commissioned sales agents, each assigned a geographic territory in which the
agent had the exclusive right to solicit orders for the Company's products.
Sales agents established and maintained personal contact with customers and
provided services related to the products sold, such as attending surgeries to
ensure that the surgeon had the correct size of implant and the necessary
instrumentation. In exchange for soliciting orders, the sales agents were paid
a commission on the invoice price of all orders shipped to their respective
territory.
As the Company's business expanded, in terms of both product offering and
share of market, in the 1980s and 1990s the sales agents were no longer able
to maintain personal customer contact with all of the customers in their
respective territories. As a result they began hiring independent sales
associates who they assigned to segments of their territories and who in time
took over customer and surgeon contact. The sales associates were compensated
by the sales agent in accordance with separate arrangements between the sales
agent and sales associates.
In mid-1994, sales agents who were not managing their areas and sales
associates to the Company's satisfaction began to be replaced with territory
sales managers, who were charged with managing the territory and the sales
associates who work there. Sales associates continue to function as before but
are now compensated directly by the Company through commissions. The Company
provides the investment in training, support and general administrative
services.
Trauma and sports medicine products are both marketed through a combination
of dedicated sales representatives and the Company's reconstructive implant
marketing system of sales associates, sales agents and territory sales
managers. In some areas, the Company has dedicated sales representatives for
each product line, while in others the sales agents and sales associates sell
all of the Company's product lines. In addition to the Company's sales agents,
sales associates and territory sales managers, DePuy ACE uses five independent
sales agents and one independent distributor who do not carry any other DePuy
products. DePuy OrthoTech's dedicated salesforce consists of its own 50-person
employee sales organization and one regional distributor. Spinal implant
products are marketed through a specialized sales force.
To address the changing customer base in the U.S. orthopaedic market
resulting from health care reform and the emergence of managed care, the
Company has strengthened its national contracts department and added a managed
care area to its sales department. See "Business--Industry Overview".
International
The Company distributes its products outside the United States and Canada,
for the most part, through a number of distribution subsidiaries. Establishing
a separate distribution channel in each country has been a critical part of
the Company's strategy for marketing abroad. Knowledge of, and on site
compliance with, each country's regulatory scheme requires the presence and
unique knowledge of a local distributor. The ability to communicate with
physicians, nurses and other operating room personnel in their own language,
is also important. In addition, successful marketing requires an understanding
of each country's health care system and its purchasing and reimbursement
practices. Until 1988, all of the Company's sales outside the United States
and Canada were to distributors who purchased the products, sold on their own
account and established prices to their customers. Beginning in 1988 with the
acquisition of the former Chevalier A.G. (now De Puy A.G.) in Switzerland, and
continuing through the present time, the Company has followed a strategy of
establishing a separate Company-owned subsidiary with DePuy employed salesmen
in each major market or potential major
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<PAGE>
market. These subsidiaries establish the prices for the products sold in their
respective countries, first purchasing them from the Company and then
reselling them at retail. In major markets, this process has sometimes
involved the acquisition of the Company's previous distributor or entering
into a joint venture with such distributor. In other markets, new companies
have been created or are being formed at the present time. The Company now has
distribution subsidiaries in the United Kingdom, Canada, Germany, France,
Italy, Switzerland, Austria, Belgium, Portugal, Spain, Sweden, Japan, Korea,
Singapore, Mexico, Taiwan, Hungary, the Czech Republic, Australia, New
Zealand, Argentina and India.
Japan represents a significant market for the Company's trauma products.
DePuy ACE has a longstanding exclusive arrangement with Japan Medical Dynamic
Marketing, an independent distributor, to sell DePuy ACE's products.
In the sports medicine market, DePuy OrthoTech has an exclusive distribution
arrangement with Beiersdorf AG covering Germany, Austria, Belgium, Spain and
The Netherlands.
For a breakdown of the Company's sales by geographical region and product,
see "Business--Products" and Note 15 to the Consolidated Financial Statements
contained elsewhere in this Report.
INTELLECTUAL PROPERTY
The Company holds domestic and foreign patents covering certain of its
systems, components and instrumentation, has patent applications pending with
respect to certain implant components and certain surgical instrumentation and
anticipates that it will apply for additional patents it deems appropriate. In
addition, the Company holds licenses from third parties to utilize certain
patents, patent applications and technology utilized in the design of some of
its devices. See "Item 3. Legal Proceedings" for information concerning patent
infringement suits involving the Company.
In addition, the Company relies on non-patented proprietary know-how, trade
secrets, processes and other proprietary information, which the Company
protects through a variety of methods, including confidentiality agreements
and proprietary information agreements.
The Company markets its LCS Knee through an exclusive, worldwide license to
manufacture and sell the LCS Knee under patents owned by Biomedical
Engineering Trust ("BET").
The Company and its subsidiaries market their products under a number of
trademarks.
MANUFACTURING
The Company's manufacturing operations are carried out at a number of
facilities owned or leased by the Company or its subsidiaries. In 1995 and
1996, the Company obtained ISO 9001 series registration for its manufacturing
facilities in Warsaw, Indiana; Leeds, England; Blackpool, England; and Los
Angeles, California and ISO 9002 for its Albuquerque, New Mexico facilities.
The Company is in the process of obtaining appropriate ISO registration for
its other facilities. ISO 9001 and ISO 9002 are internationally recognized
quality standards for manufacturing. ISO certification assists the Company in
marketing its products in certain foreign markets. See "Business--Government
Regulation."
The Company devotes significant attention to quality control in
manufacturing its products. At the main reconstructive products manufacturing
facilities, the quality control measures begin with an inspection of all raw
materials and castings to be used in implants. Each piece is inspected at each
step of the manufacturing process. As a final step, products pass through a
"clean room" environment designed and maintained to reduce product exposure to
particulate matter. In addition, the Company utilizes a new gas plasma
sterilization system for its implants. The Company cleared use of gas plasma
sterilization with the FDA through the 510(k) process, making the Company the
first and only company to receive such clearance for the industrial
application of gas plasma sterilization. This process reduces the possibility
of oxidation of polyethylene and is believed not to pose the environmental
threats of other methods of sterilization.
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Approximately 75% of the Company's products are manufactured in-house, with
the remaining 25% outsourced. Approximately 70% of DePuy ACE's trauma products
are presently outsourced. It is the Company's intention to bring all trauma
implant manufacturing in-house over time. The primary raw materials used by
the Company in the manufacture of its reconstructive products are cobalt
chromium alloy, stainless steel alloys, titanium alloy and UHMWP. Certain
components used by the Company, primarily castings and forgings which are the
major material components of most implants, are purchased from a limited
number of suppliers. However, the Company has back-up sources for all of its
materials and believes that adequate capacity exists at its suppliers to meet
all anticipated needs.
As part of its business strategy, the Company has implemented certain
manufacturing procedures to reduce costs and improve efficiencies as well as
inventory management and control systems and is incorporating manufacturing
efficiencies into the design of instruments and is redesigning current
instruments to reduce manufacturing costs. Due in large measure to these
process improvements, manufacturing lead times have been considerably reduced,
from 25 days in 1994 to 7.2 days in 1996 in the U.S., and from 30 days in 1994
to 15 days in 1996 at DePuy International. Robotics is another means employed
to increase the manufacturing efficiency of its orthopaedic products. In
addition, in 1996, the Company purchased one of its major instrument suppliers
to further reduce costs and shorten the time required to get instruments to
market.
In its trauma products, the Company uses commercial titanium and titanium
alloy in addition to stainless steel alloys. The Company competes with both
government and commercial aerospace requirements for titanium, as well as golf
equipment manufacturers. The aerospace industry controls both the price and
supply of titanium products and can dramatically affect both the cost and
availability of such materials. DePuy ACE has entered into a long-term
agreement with its primary supplier of titanium to address this concern.
In its sports medicine products, the Company uses rolled cloth goods,
metals, plastics and foams, all of which are of standard stock and are readily
available from a number of sources.
COMPETITION
The orthopaedic device industry is highly competitive and has been
characterized by innovation, technological change and advancement. Major
companies that compete in the total joint implant market, some of which also
market complementary non-implant lines that compete with the Company's other
products, include Biomet Inc.; Zimmer, Inc., a subsidiary of the Bristol-Myers
Squibb Company; Howmedica, Inc., a subsidiary of Pfizer, Inc.; Smith & Nephew
Orthopedics, a division of Smith & Nephew Ltd.; Osteonics, Inc., a subsidiary
of the Stryker Corporation; Johnson & Johnson Orthopaedics, Inc., a subsidiary
of Johnson & Johnson; and Protek, Allopro and Intermedics Orthopedics, all
divisions of Sulzer Limited. In the spinal instrumentation area, the Company's
main competitors are Sofamor Danek Group, Inc.; Synthes; Acromed, Corp.; Smith
& Nephew Ltd. and Spine-Tech, Inc. Competition within the orthopaedic implant
industry is primarily based on customer service, product design and
performance, ease of use, peer influence among surgeons and results of the
product over time. In recent years, price has become increasingly important as
the industry matures and health care providers become more concerned with
costs. At the present time, price is a factor in the sale of those devices
where differentiation of the product cannot be clearly proven and the decision
to buy is not significantly influenced by the surgeon. Additionally, as health
care providers become more cost-conscious, the use of higher-priced devices
has become increasingly limited to younger, more active patients, while
lesser-priced devices are used in patients with a lower demand (i.e., shorter
life expectancy and/or lower activity level). The Company believes that its
future success depends upon providing high quality service to all customers,
offering a wide range of quality products at different pricing points,
continuing to promote its key products and their already existing long-term
successful outcomes and clinical results, pursuing additional strategic
agreements with buying groups, offering a wide array of ancillary products
utilized by the orthopaedic community and continuing to pursue, through
research and development efforts, new products and services that can set the
Company apart from its competitors.
The Company's trauma product lines compete with products of Biomet Inc.;
Zimmer, Inc.; Richards Manufacturing Co., Inc., a subsidiary of Smith & Nephew
Ltd; Synthes and Orthofix International N.V. Competition in this area is
primarily based on service, product design and performance, technological
advances, reputation and price.
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In the sports medicine product area, the Company competes with numerous
other companies, principally Don Joy, a division of Smith & Nephew Ltd.,
Innovation Sports, and Lenox Hill, a division of Hanger Orthopedic Group, Inc.
The Company believes that the principal competitive factors affecting the
sports medicine product field are customer service, product performance,
technology, reputation and price. It believes that its service and technology
distinguish it favorably from its competitors in the marketing and sale of its
products.
In the cement market, the Company competes with numerous other companies,
primarily Howmedica, Inc., Schering-Plough Corp. and Zimmer, Inc.
EMPLOYEES
As of December 31, 1996, the Company had approximately 2,930 employees
worldwide, including approximately 1,210 engaged in the Company's U.S.
reconstructive device business, approximately 40 employed by DePuy Motech,
approximately 180 employed by DePuy ACE, approximately 300 employed by DePuy
OrthoTech, and approximately 1,200 engaged in the Company's international
businesses.
Approximately 320 employees in the Warsaw, Indiana facility are represented
by the United Paperworkers International Union, Local No. 7809, and are
subject to a five year collective bargaining agreement expiring in June 1997.
Approximately 230 employees in the Leeds, England facility are represented by
the Amalgamated Engineering and Electrical Union and are subject to a
collective bargaining agreement which expires in April 1997. In addition,
approximately 25 employees at the Leeds, England facility are represented by
the Manufacturing Scientific and Finance Union. Prior to July 31, 1996,
approximately 15 employees in the metals department at the Tracy, California
facility for sports medicine products were also represented by a union; the
union was decertified on that date.
The Company believes that its employee relations are satisfactory, and that
its relationships with all unions representing its workers are non-adversarial
and cooperative.
GOVERNMENT REGULATION
The Company's operations are subject to rigorous governmental agency
regulation in the United States and certain other countries.
The FDA regulates the testing, labeling, manufacturing and marketing of
medical devices to ensure that medical products distributed in the United
States are safe and effective for their intended uses. Additionally, the FDA
regulates the export of medical devices manufactured in the United States to
international markets.
Under the Food, Drug and Cosmetic Act, as amended, medical devices are
classified into one of three classes depending on the degree of risk imparted
to patients by the medical device. Class I devices are those for which safety
and effectiveness can be assured by adherence to General Controls, which
include compliance with Good Manufacturing Practices ("GMPs"), facility and
device registrations and listings, reporting of adverse medical events, and
appropriate truthful and non-misleading labeling, advertising and promotional
materials. Some Class I devices also require premarket review and clearance by
the FDA through the 510(k) process described below. Class II devices are those
which are subject to General Controls as well as premarket demonstration of
adherence to certain Performance Standards or other Special Controls as
specified by the FDA. Premarket review and clearance by the FDA for these
devices is accomplished through the 510(k) procedure. In the 510(k) procedure,
the manufacturer submits appropriate information to the FDA in a Premarket
Notification submission. If the FDA determines that the device is
"substantially equivalent" to a device that was legally marketed prior to May
28, 1976, the date upon which the Medical Device Amendments of 1976 were
enacted, or to another commercially available similar device subsequently
cleared through the 510(k) process, it will grant clearance to commercially
market the device. It generally takes from three to 12 months from the date of
submission to obtain clearance of a 510(k) submission, but may take longer. If
the FDA determines that the device, or its labeled intended use, is not
"substantially equivalent," the FDA will automatically place the device into
Class III.
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A Class III product is a product which has a wholly new intended use or is
based on advances in technology for which the device's safety and
effectiveness cannot be assured solely by the General Controls, Performance
Standards and Special Controls applied to Class I and II devices. These
devices often require formal clinical investigation studies to assess their
safety and effectiveness. A Premarket Approval (a "PMA") from the FDA is
required before marketing of a Class III product can proceed. The PMA process
is much more extensive than the 510(k) process. In order to obtain a PMA,
Class III devices, or a particular intended use of any such devices, usually
must undergo clinical trials pursuant to an application submitted by the
manufacturer for an IDE. An approved IDE exempts the manufacturer from the
otherwise applicable FDA regulations and grants approval for the conduct of
the human clinical investigation to generate the clinical data necessary to
scientifically evaluate the safety and efficacy of the Class III device or
intended use.
When a manufacturer believes that sufficient pre-clinical and clinical data
has been generated to prove the safety and efficacy of the new device or new
intended use, it may submit a PMA application to the FDA. An FDA review of a
PMA application generally takes one to two years from the date the PMA
application is accepted for filing, but may take significantly longer.
The Company's products include both pre-amendment and post-amendment Class
I, II and III medical devices. Most pre-amendment devices (those marketed
prior to the enactment of the Medical Device Amendment of 1976) are, in
general, exempt from such Premarket Approval requirements, as are Class I and
Class II devices. All currently marketed devices hold the relevant exemptions
or premarket clearances or approvals, as appropriate, required under federal
medical device law.
In addition, the Company's manufacturing processes are required to comply
with GMP regulations which cover the methods and documentation of the design,
testing, production, control, quality assurance, labeling, packaging and
shipping of the Company's products. The Company's facilities, records and
manufacturing processes are subject to periodic unscheduled inspections by the
FDA or other agencies.
The Company is also subject to regulations in many of the foreign countries
in which it sells its products in the areas of product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the
Company's devices and products in such countries are similar to those of the
FDA. The national health or social security organizations of certain such
countries require the Company's products to be qualified before they can be
marketed in those countries. To date, the Company has not experienced
difficulty in complying with these regulations.
The Company is also implementing policies and procedures intended to allow
the Company to position itself for the changing international regulatory
environment. The ISO 9000 series of standards has been developed as an
internationally recognized set of guidelines that are aimed at ensuring the
design and manufacture of quality products. A company that passes an ISO audit
and obtains ISO registration becomes internationally recognized as being well
run and functioning under a competent quality system. In certain foreign
markets, it may be necessary or advantageous to obtain ISO 9000 series
certification, which, in some ways, is analogous to compliance with the FDA's
GMP requirements. The European Union has promulgated rules which require that
medical products receive a CE mark by mid-1998. A CE mark is an international
symbol of adherence to certain standards and compliance with applicable
European medical device requirements and certification. ISO 9000 series
certification is one of the prerequisites for CE marking of most of the
Company's products. Certain of the Company's facilities have received ISO
certification and ISO certification is being pursued at the others. See
"Business--Manufacturing."
In addition, the Company must obtain export certificates from the FDA before
it can export some of its products.
Certain provisions of the Social Security Act, commonly known as the
"Medicare Fraud and Abuse Statute," prohibit entities, such as the Company,
from offering, paying, soliciting or receiving any form of remuneration in
return for the referral of Medicare or state health program patients or
patient care opportunities,
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or in return for the recommendation, arrangement, purchase, lease or order of
items or services that are covered by Medicare or state health programs. Many
states have adopted similar prohibitions against payments intended to induce
referrals of Medicaid and other third-party payer patients.
Federal physician self-referral legislation prohibits, subject to certain
exemptions, a physician or a member of his immediate family from referring
Medicare or Medicaid patients to an entity providing "designated health
services" in which the physician has an ownership or investment interest, or
with which the physician has entered into a compensation arrangement.
ITEM 2. PROPERTIES.
As of December 31, 1996, the Company owned or leased the following
facilities:
<TABLE>
<CAPTION>
APPROXIMATE LEASED OR
LOCATION TYPE OF FACILITY SQUARE FOOTAGE OWNED
-------- ---------------- -------------- ---------
<S> <C> <C> <C>
Warsaw, Indiana(1)...... Executive Offices, Research and 242,200 Owned
Development, Manufacturing and
Distribution
El Segundo, Executive Offices, Research and 114,000 Leased
California(2).......... Development, Manufacturing and
Distribution
St. Louis, Missouri..... Warehousing and Distribution 100,900 Leased
Tracy, California(3).... Corporate Offices and 80,000 Leased
Manufacturing
Jackson, Michigan....... Warehousing 44,000 Leased
Jackson, Michigan....... Manufacturing 24,000 Owned
Albuquerque, New
Mexico................. Manufacturing 20,600 Leased
Westminster,
California............. Manufacturing and Repair Services 15,500 Leased
Ontario, California..... Manufacturing 10,000 Leased
Dayton, Ohio............ Manufacturing 7,700 Leased
Leeds, England(4)....... Corporate Offices, Research and 158,000 Owned
Development, Manufacturing and
Warehousing
Leeds, England.......... Manufacturing 32,400 Owned
Barnet, England......... Manufacturing and Research and 30,000 Owned
Development
Blackpool, England...... Manufacturing 28,500 Leased
Garforth, England....... Manufacturing 23,000 Leased
</TABLE>
- --------
(1) The Company's principal executive offices and primary U.S. manufacturing
plant for reconstructive devices. The facility also currently serves as a
distribution facility.
(2) Corporate offices of DePuy ACE and main manufacturing plant for trauma
products.
(3) Corporate offices of DePuy OrthoTech and main manufacturing plant for
sports medicine products.
(4) Corporate offices and primary manufacturing facility for DePuy
International.
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ITEM 3. LEGAL PROCEEDINGS.
In 1990, the Company voluntarily recalled certain acetabular cups. Of all
such products sold and implemented, less than 2% have resulted in incidents of
product failure reported by the Company. Of those reported incidents, as of
March 14, 1997, 281 resulted in claims against the Company for product
failure, of which all but 55 have been settled. Of those settled incidents, 81
were in litigation. Forty-one claims remain in litigation. All such claims and
suits have been treated as one occurrence under the applicable insurance
policies. Any additional claims will be paid by the Company's insurers.
On April 20, 1994, DePuy Motech was served with a class action complaint,
entitled Barbara Brown et al v. DePuy Motech et al, filed in the U.S. District
Court for the Eastern District of Louisiana on behalf of individuals who claim
to have been damaged through the use of various types of surgical screws
implanted in spinal pedicles. DePuy ACE was subsequently served with this
complaint as well. Numerous other manufacturers of spinal products, hospitals,
physicians, medical societies and other associations were also sued. The suits
allege tortious misconduct against all manufacturers engaged in spinal product
manufacture and sale, several surgeons, industry associations and professional
medical associations. Specific counts range from product liability and
negligence to various conspiracies allegedly involving efforts to mislead the
FDA into approving the use of the screws in spinal pedicles. DePuy Motech has
been named in approximately 600 lawsuits for damages filed on behalf of
individuals who claim to have been damaged through the use of various types of
surgical screws in spinal pedicles. On August 4, 1994, the Federal Judicial
Panel on multi-district litigation ordered that all federal court cases be
transferred to and consolidated for pretrial proceedings, including the
determination of class certification, in the Federal District Court for the
Eastern District of Pennsylvania. On February 22, 1995, Chief Judge Emeritus
Louis C. Bechtle denied class certification. Individual suits followed that
denial. A hearing ordered by the Court to determine if any factual basis
exists to support the conspiracy count was held July 23, 1996. On August 22,
1996, Judge Bechtle issued an order dismissing without prejudice claims based
on allegations of conspiracy and fraud and requiring that any amended
complaint be filed by September 30, 1996, which deadline was subsequently
extended to October 30, 1996. Amended or new complaints on behalf of
approximately 600 plaintiffs alleging liability of DePuy Motech based solely
on a theory of industry-wide conspiracy have been served after the August 22,
1996 dismissal order. Many, but not all, of these conspiracy complaints also
name DePuy ACE as a defendant. Motions to dismiss these amended complaints
have been filed on behalf of all defendants but no decision on the motions has
been issued. Seventeen plaintiffs in the multidistrict litigation allege
implantation of products which were sold by DePuy Motech or DePuy ACE. DePuy
Motech and DePuy ACE are responding to certain discovery initiated by the
Plaintiffs' Legal Committee. The Company believes that it has substantial
defenses to these claims and will continue to defend them vigorously, although
no assurance can be given of the eventual outcome of this litigation.
On February 25, 1995, DePuy filed suit against BET, its licensor for
technology used in the LCS Knee in the U.S. District Court for the Northern
District of Indiana. The case was transferred to the U.S. District Court for
the District of New Jersey on April 25, 1996. DePuy is seeking a declaratory
judgment as to the proper construction of contract language relating to the
calculation of royalties on sales of various licensed products to purchasers
outside the United States. BET has counterclaimed seeking damages and a
declaration ordering DePuy to continue to pay royalties after the expiration
of the patents to which the royalties relate. DePuy has filed a motion for
partial summary judgment which has not been ruled on.
Joint Medical Products Corporation ("Joint Medical") filed a complaint on
April 3, 1995 in the U.S. District Court of Connecticut against DePuy Inc. and
several other manufacturers of orthopaedic devices. The suit seeks injunctive
relief and treble damages for DePuy's alleged infringement of a patent owned
by Joint Medical. DePuy has filed a counterclaim seeking to have the patent
declared invalid and unenforceable. The Company believes it has substantial
defenses and is aggressively defending this action. The same patent was the
subject of an interference proceeding in the United States Patent and
Trademark Office between Joint Medical and a patentee from whom the Company
has a license. On October 3, 1996 Joint Medical, which has been acquired by
Johnson & Johnson, announced that, as a result of an agreement between Joint
Medical and the patentee from whom the Company has a license to arbitrate, it
has prevailed in the interference proceeding, and
15
<PAGE>
established its right to ownership of the patent. The resolution of the
interference proceeding does not affect the defenses the Company has against
the claims of Joint Medical. Additionally, as a result of the purchase of
Joint Medical by Johnson & Johnson and the agreement between Joint Medical and
the patentee from whom the Company has a license and the terms under which the
interference proceedings were submitted to arbitration, the Company has filed
a Motion to Amend its pleadings in the suit to add both the patentee from whom
the Company has a license and Johnson & Johnson as defendants and to assert
additional claims against Joint Medical. The Court has not yet ruled on this
motion.
On September 22, 1994, the Company filed a patent infringement suit against
Biomet, Inc. in the U.S. District Court for the Northern District of Indiana
seeking injunctive relief and damages. DePuy claimed Biomet infringed a DePuy
patent for a modular hip by making and selling infringing hip prostheses. On
April 17, 1995, the Company filed an amended complaint, adding claims for
infringement of a second modular hip patent and for misappropriation of trade
secrets, adding a prior DePuy employee who went to work for Biomet as a
defendant. DePuy subsequently added claims for inducing infringement and
contributory infringement as well as claims for infringement of a supertaper
patent. On May 29, 1996, Biomet filed a patent infringement suit against the
Company in the United States District Court for the Northern District of
Indiana seeking an injunction and damages for the alleged infringement by the
Company of a patent owned by Biomet relating to the manufacture of prostheses
from CAT Scan data and further alleging various tortious acts and unfair trade
practices relating to the Company's advertising. On May 31, 1996 Biomet filed
a patent infringement suit against the Company in the United States District
Court for the Northern District of Indiana seeking an injunction and damages
for the alleged infringement of a patent owned by Biomet relating to the
design of surgical instruments. On July 19, 1996 Biomet filed a patent
infringement suit against the Company in the United States District Court for
the Northern District of Indiana seeking damages for the alleged infringement
of a patent owned by Biomet relating to the design of other surgical
instruments. On May 31, 1996 Electro-Biology, Inc., a subsidiary of Biomet,
filed a patent infringement suit against DePuy ACE in the United States
District Court for the District of New Jersey seeking damages for the alleged
infringement by DePuy ACE of a patent owned by Electro-Biology, Inc. relating
to the design of an external bone fixator. On February 25, 1997 Biomet and the
Company agreed to settle all of the foregoing described litigation and
reported this agreement to the United States District Court for the Northern
District of Indiana. Pursuant to the terms of the settlement, Biomet and the
Company will cross-license each other, and each other's subsidiaries, to
permit the manufacture and sale of any product then being manufactured or sold
which would otherwise infringe any patent owned by either company or any
subsidiary of either company. The settlement and cross license will provide
royalty free licenses and each party, or a subsidiary thereof, will pay its
own costs and expenses. The litigation has been stayed to permit the parties
to prepare the necessary agreements and to file the necessary pleadings with
the respective courts to effect a dismissal of all of the foregoing
litigation.
On February 8, 1994, Sofamor Danek filed a patent infringement suit against
DePuy Motech in the United States District Court for the Southern District of
Indiana, Indianapolis Division seeking injunctive relief and damages. DePuy
and Biedermann Motech GmbH were later added as additional parties. Sofamor
Danek claimed that DePuy Motech's MOSS Miami spinal system infringes three
patents owned by Sofamor Danek Group, Inc. On June 19, 1996 the Court entered
a summary judgment order in favor of DePuy Motech as to infringement of one
patent and on October 11, 1996, the Court entered summary judgment in favor of
DePuy Motech as to infringement of the other two patents. Also on October 11,
1996 the Court entered Judgment on these decisions and dismissed DePuy
Motech's counterclaim for a declaration that Sofamor Danek's patents were
invalid with prejudice. Sofamor Danek has appealed the Court's entry of
Judgment against Sofamor Danek to the United States Court of Appeals for the
Federal Circuit. DePuy Motech has cross-appealed the dismissal with prejudice
of its counterclaim. No decision has been rendered by the appellate court.
In addition, the Company is party to certain other routine litigation
incidental to its business. The Company does not believe that any litigation
to which it is a party is likely, individually or in the aggregate, to have a
material adverse effect on the Company's business, financial condition or
results of operations.
On June 26, 1996, the Supreme Court decided the case Medtronic, Inc. v.
Lohr, holding that the Medical Device Amendments to the Food, Drug, and
Cosmetics Act does not preempt state law tort actions when there
16
<PAGE>
exists no specific counterpart federal products regulation. The Company does
not anticipate at this time that the decision will have a material adverse
effect on the Company. However, it is not possible to predict what impact, if
any, the decision may have.
ITEMS 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
EXECUTIVE OFFICERS
Set forth below are the names, ages, positions and a brief description of
the Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James A. Lent................... 54 Chairman of the Board and Chief Executive
Officer
Michael J. Dormer............... 45 President and Chief Operating Officer
Robert E. Morel................. 59 President, DePuy ACE
James M. Taylor................. 40 President, DePuy International
William E. Tidmore, Jr.......... 54 President, DePuy Motech
Steven L. Artusi................ 52 Senior Vice President, General Counsel and
Secretary
R. Michael McCaffrey............ 54 President, DePuy Development, Inc.
Thomas J. Oberhausen............ 44 Senior Vice President, Chief Financial
Officer and Treasurer
G. Taylor Seward................ 51 Senior Vice President, Personnel
</TABLE>
James A. Lent has been Chairman and Chief Executive Officer of DePuy since
1991, having served as President from 1985 to 1991. Prior to joining DePuy,
Mr. Lent worked for Johnson & Johnson from 1967 to 1985, serving as President
of J&J Orthopaedics from 1982 to 1985. Mr. Lent is a member of the Board of
Directors of Corange and also serves on the Board of Directors of
Spectranetics Inc., a cardiovascular device company.
Michael J. Dormer has been President and Chief Operating Officer of DePuy
since August 1996. Prior to that, he served as President of DePuy
International since 1993 and as Executive Vice President from 1992 until 1993.
Before joining DePuy International, he worked for Johnson & Johnson as
Managing Director, J&J Orthopaedics Europe and J&J Professional Products
Europe.
Robert E. Morel has served as President and Chief Executive Officer of DePuy
ACE since May 1996. From 1993 until 1996, he served as Senior Vice President,
Operations for DePuy. From 1985, when he originally joined DePuy, until 1993,
he was Vice President, Operations.
James M. Taylor has been President of DePuy International since August 1996.
He joined DePuy in July 1994 as Vice President, Operations. From June 1993
until April 1994, Mr. Taylor was the Chief Executive Officer of MSS Group in
the U.K. From 1989 to June 1993, Mr. Taylor was employed by Chloride
Industrial Batteries Ltd., as Operations Director.
William E. Tidmore, Jr. has served as President of DePuy Motech since August
1996. Prior to that, he served as President of DePuy Orthopaedics, a division
of DePuy, from 1994 to 1996, as Executive Vice President of DePuy from 1993 to
1994, as President of DePuy International from 1992 to 1993 and as Vice
President, International of DePuy Inc. from 1988 until 1992. Mr. Tidmore
joined DePuy in 1986.
Steven L. Artusi has served as the Company's Senior Vice President, General
Counsel and Secretary since 1992. Mr. Artusi served as Vice President, Legal
and Regulatory Affairs for DePuy, Division of BMC from 1987 to 1992 and as
Corporate Counsel of BMC from 1985 to 1987.
17
<PAGE>
R. Michael McCaffrey became President of DePuy Development, Inc., which is
engaged in business development for the DePuy worldwide group, in August 1996.
Prior to that, from 1994 until 1996, he was President of DePuy Motech, from
1990 until 1994 he was President of DePuy, and from 1985 until 1990 held
various positions at DePuy in management, marketing and sales.
Thomas J. Oberhausen has served as Senior Vice President and Chief Financial
Officer of DePuy since 1992 and from 1993 to 1995, he also served as the
Finance Director for DePuy International. He joined Bio-Dynamics, Inc., a
subsidiary of BMC, in 1980.
G. Taylor Seward has served as Senior Vice President, Personnel of DePuy
since 1990. Mr. Seward joined DePuy in 1978 and prior to 1990 held various
positions in DePuy's human resources department, including Personnel Manager,
Director of Personnel and Vice President, Personnel.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the New York Stock Exchange under
the ticker symbol "DPU". The daily trading activity and price quotation may be
found in most major newspapers under "Depuy".
The range of high and low bid prices for the common stock from October 31,
1996 (the first trading date of the common stock) through December 31, 1996
was:
High: 20 1/4
Low: 16 1/2
The Company has not paid dividends since its formation in July 1996. The
Company anticipates that it will pay an annual dividend, beginning in 1997.
As of March 17, 1997, the Company had 896 stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes the Company's operating results by quarter
for 1996 and 1995.
<TABLE>
<CAPTION>
DEC SEPT JUN MAR DEC SEPT JUN MAR
1996 1996 1996 1996 1995 1995 1995 1995
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $181.0 $167.3 $175.9 $173.1 $164.9 $148.4 $162.2 $161.1
Gross profit............ 127.3 118.5 122.8 119.7 116.5 101.5 109.9 108.5
Net income.............. 27.1 24.0 28.2 27.4 23.1 20.3 25.2 26.3
Pro forma net income per
share (unaudited)...... .28 .27 .31 .31 .26 .22 .28 .29
</TABLE>
18
<PAGE>
Selected consolidated financial data for the Company and its subsidiaries
for each of the five years in the period ended December 31, 1996 is set forth
below. This data should be read in conjunction with the Consolidated Financial
Statements contained in Item 8 of this Form 10-K:
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996(1) 1995 1994(1) 1993 1992
---------- ---------- ------- ------ ------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales................... $ 697.3 $ 636.6 $551.8 $466.7 $419.9
Cost of sales............... 209.0 200.2 173.0 151.9 148.6
---------- ---------- ------ ------ ------
Gross profit.............. 488.3 436.4 378.8 314.8 271.3
---------- ---------- ------ ------ ------
Selling, general and admin-
istration expenses......... 266.8 230.6 195.0 157.8 144.8
Research and development ex-
penses..................... 21.7 21.3 18.6 17.4 13.8
Goodwill amortization....... 12.3 14.2 14.1 10.0 10.7
---------- ---------- ------ ------ ------
Operating income.......... 187.5 170.3 151.1 129.6 102.0
---------- ---------- ------ ------ ------
Interest expense and other,
net........................ 2.5 5.1 .9 2.7 4.6
Provisions for income tax-
es......................... 78.7 72.7 65.8 57.0 40.5
Minority interest........... 1.6 .5 .7 -- (2) -- (2)
Equity in earnings (loss) of
unconsolidated affiliate... 2.0 2.9 3.1 2.3 1.0
Cumulative effect of ac-
counting change(3)......... -- -- -- -- 3.8
---------- ---------- ------ ------ ------
Net income................ $ 106.7 $ 94.9 $ 86.8 $ 72.2 $ 54.1
========== ========== ====== ====== ======
Unaudited pro forma data:
Net income per share...... $ 1.17 $ 1.05
========== ==========
Weighted average number of
shares outstanding....... 91,430,000 90,000,000
========== ==========
</TABLE>
- --------
(1) Financial results include the effects of acquisitions as outlined in Note
1 of the Notes to Consolidated Financial Statements.
(2) Prior to 1994, minority interest was immaterial and included in interest
expense and other, net.
(3) Charge for adopting Financing Accounting Standard No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions".
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1996 1995 1994 1993
------- ------- ------- -------
(IN MILLIONS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C>
Working capital.......................... $ 369.1 $ 176.8 $ 150.9 $ 99.3
Total assets............................. 908.4 623.3 567.5 386.0
Total noncurrent liabilities............. 56.6 73.5 68.4 22.7
Shareholders' equity..................... 670.6 378.1 357.1 247.8
OTHER DATA
Full-time employee equivalents........... 2,926 2,298 2,157 1,768
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
OVERVIEW
Effective October 30, 1996, the Company issued 8,580,000 new shares, and its
primary shareholder sold 7,000,000 previously outstanding shares to the public
through an Initial Public Offering at an offering price of $17.50 per share.
The issuance of stock generated net proceeds after expenses, discounts and
commissions of approximately $139 million. The Company plans to use the net
proceeds from the sale of shares of its common stock primarily to finance the
expansion of the Company's business. The Company has signed an agreement to
purchase Landanger, as described in Note 16 of Notes to Consolidated Financial
Statements. The Company plans to fund this acquisition through debt and
available cash. Any remaining cash will be invested in highly liquid
investments.
Prior to the public offering the Company was operated as the orthopaedic
division of Corange. This division comprised various legal entities that were
engaged, or partly engaged, in the orthopaedics business and were owned by a
number of different entities within Corange. As a result of a pre-offering
reorganization, (i) the non-U.S. entities (or in certain cases, the assets
thereof) that were involved in the DePuy business were transferred into the
Company's U.S. consolidated group, (ii) Boehringer Mannheim Corporation, the
U.S. operating subsidiary of the Boehringer Mannheim companies, which were
under common control with the DePuy companies, was transferred outside the
Company's U.S. consolidated group, and (iii) the Company was reincorporated in
Delaware. None of the transfers or exchanges made pursuant to the pre-offering
reorganization involved outside minority shareholders. Accordingly, all
transfers and exchanges were accounted for on a predecessor basis.
RESULTS OF OPERATIONS
The following table summarizes selected financial information expressed as a
percentage of net sales and the change from year to year.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENTAGE CHANGE
------------------------- ---------------------
YEAR ENDED DECEMBER 31
------------------------- 1996 1995
1996 1995 1994 VS 1995 VS 1994
------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................. 100.0% 100.0% 100.0% 10% 15%
Cost of sales............. 30.0 31.4 31.3 4 16
------- ------- ------- -------- ---------
Gross profit............ 70.0 68.6 68.7 12 15
------- ------- ------- -------- ---------
Selling, general and ad-
ministrative expenses.... 38.2 36.2 35.4 16 18
Research and development
expenses................. 3.1 3.4 3.4 2 15
Goodwill amortization..... 1.8 2.2 2.5 (13) 1
------- ------- ------- -------- ---------
Operating income........ 26.9 26.8 27.4 10 13
------- ------- ------- -------- ---------
Interest and other income
(expense)................ (.4) (.8) (.2) 51 (486)
------- ------- ------- -------- ---------
Income before taxes,
minority interest and
equity in earnings of
unconsolidated
affiliate.............. 26.5 26.0 27.2 12 10
------- ------- ------- -------- ---------
Provisions for income tax-
es....................... 11.3 11.4 11.9 8 11
Minority interest......... .2 .1 .1 211 (33)
Equity in earnings of un-
consolidated affiliate... .3 .4 .5 (31) (7)
------- ------- ------- -------- ---------
Net income.............. 15.3% 14.9% 15.7% 12% 9%
======= ======= ======= ======== =========
</TABLE>
20
<PAGE>
The following table summarizes sales by product line and geographical
location:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Reconstructive products................................ $ 470.2 $ 450.6 $ 405.9
Spinal implants........................................ 45.5 30.6 12.5
Trauma products........................................ 56.4 49.4 38.5
Sports medicine........................................ 48.2 29.4 27.7
Other products......................................... 77.0 76.6 67.2
------- ------- -------
Total sales.......................................... $ 697.3 $ 636.6 $ 551.8
------- ------- -------
U.S. Sourced sales..................................... $ 408.9 $ 377.2 $ 358.8
International sourced sales............................ 288.4 259.3 193.0
------- ------- -------
Total sales.......................................... $ 697.3 $ 636.6 $ 551.8
------- ------- -------
Sales to customers located in the United States........ $ 373.8 $ 349.9 $ 333.3
Sales to customers located outside the United States... 323.5 286.7 218.5
------- ------- -------
Total sales.......................................... $ 697.3 $ 636.6 $ 551.8
======= ======= =======
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales were $697.3 million for the year ended December 31, 1996,
representing an increase of $60.7 million, or 10% over the prior year.
Continued penetration of the spinal implant market caused total sales to
increase by 2%. The acquisition of DePuy OrthoTech in March 1996 resulted in
additional sales growth of 3%. The effects of foreign exchange rates in 1996
compared with 1995 resulted in an unfavorable impact on sales of 1%. The
remaining 6% increase related primarily to sales growth in international
markets, partially offset by the negative impact of lower average prices in
the United States, predominantly resulting from the managed care environment.
The components of the worldwide sales improvement were as follows:
<TABLE>
<S> <C>
Acquisitions........................................................ 3%
Volume and product mix.............................................. 10%
Net pricing changes................................................. (2)%
Effect of foreign exchange rates.................................... (1)%
</TABLE>
U.S. sourced sales to unaffiliated customers rose $31.6 million, or
approximately 8%. This growth was primarily attributable to the acquisition of
DePuy OrthoTech in March 1996 and to increased sales of spinal and shoulder
implants.
International sourced sales to unaffiliated customers rose $29.1 million, or
11%. This increase in sales was related to continued expansion in the
European, Asia/Pacific and South American regions. Expansion in these areas
caused sales to grow by 12%, 11% and 7%, respectively, during the year ended
December 31, 1996.
The Company's gross profit for the year ended December 31, 1996 was $488.3
million, or 70% of sales, as compared to 68.6% of sales for the prior year.
This margin improvement resulted from various manufacturing efficiencies
obtained through cost controls and higher unit sales, the consolidated impact
of which more than offset the negative impact of lower average prices realized
in the United States.
Selling, general and administrative expenses totaled $266.8 million for the
current year, or 38.2% of sales, as compared to 36.2% in the preceding year.
The primary reason for this increase as a percent of sales was the cost
associated with converting approximately 75% of the Company's U.S.
distribution structure from independent sales agents to Company-managed
territories under the responsibility of territory sales managers. As part of
this conversion, the Company incurred additional (in certain cases, one time)
costs totaling $16.2
21
<PAGE>
million, primarily related to new surgical instrumentation and additional
administration expenses incurred to set up the new territory offices. In
addition to these costs, the Company continued to invest in the development of
the U.S. sales infrastructure and in the expansion of its business in the
spinal and international markets.
Research and development expense of $21.7 million represented a slight
increase over the $21.3 million expense reported in 1995.
Goodwill amortization totaled $12.3 million during 1996, representing a $1.9
million decrease compared to the prior year. This decrease primarily related
to the fact that certain goodwill assets became fully amortized during 1995,
partially offset by additional goodwill recorded in the current year related
to the acquisition of DePuy OrthoTech in March 1996.
The Company reported a 10% increase in operating income to $187.5 million,
or 26.9% of sales, for the year 1996, as compared to $170.3 million for 1995,
or 26.8% of sales. This increase was primarily attributable to improved gross
margins, offset by additional expenses incurred in selling, general and
administrative expenses.
Interest expense was $6.8 million during 1996, representing a $.3 million
increase over the interest expense incurred in the prior year. This higher
expense primarily resulted from slightly higher interest rates.
Other income, net, totaled $4.3 million for the year compared to $1.5
million reported in the prior year, representing an increase of $2.8 million.
This increase mainly resulted from higher interest income, primarily
attributable to income earned on the invested proceeds received from the
public offering.
The effective income tax rate for the year was 42.5% as compared to 44.0%
recorded in the prior year. The 1.5% decrease in the rate is primarily
attributable to the reduction in non-deductible goodwill expense.
Net income for the year ended December 31, 1996 was $106.7 million, or 15.3%
of sales, representing a 12% increase over the prior year. This increase was
primarily the result of a 10% increase in operating profit, higher interest
income and a lower effective income tax rate.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales were $636.6 million for the year ended December 31, 1995,
representing an increase of $84.8 million, or 15%, compared with the prior
year. Continued penetration of the spinal implant market caused total sales to
increase by 3%. The inclusion of a full year of sales of CMW (acquired in
November 1994) and DePuy ACE (acquired in March 1994) resulted in additional
sales of 3%. The remaining 9% increase in sales related to the effects of
favorable exchange rates and market growth in both the international and U.S.
markets.
The components of the worldwide sales improvement were as follows:
<TABLE>
<S> <C>
Acquisitions......................................................... 3%
Volume and product mix............................................... 9%
Net pricing changes.................................................. 1%
Effect of foreign exchange rates..................................... 2%
</TABLE>
Sales to unaffiliated customers within the United States rose $18.4 million
or 5%. This growth was primarily attributable to increased sales of knee and
spinal implants and continued growth in the trauma market.
International sales to unaffiliated customers rose $66.4 million or 34%. The
CMW acquisition contributed 6% of this international growth and the positive
effect of foreign currency rates contributed an additional 7% increase.
Expansion in the European, Asia/Pacific and other regions, excluding the
effects of foreign exchange, caused sales to grow by 11%, 6% and 4%,
respectively, during 1995.
22
<PAGE>
The Company's gross profit for 1995 was $436.4 million, or 68.6% of sales,
decreasing slightly compared to 68.7% of sales reported for the prior year.
Manufacturing efficiency improvements offset the negative impact of lower
average prices in the U.S. resulting from managed care contracts.
Selling, general and administrative expense totalled $230.6 million for the
year or 36.2% of sales, as compared to 35.4% of sales in the prior year. This
increase was primarily the result of higher selling expense incurred as
efforts continued to strengthen the U.S. sales force infrastructure and
investments were made to grow the spinal implant business and to expand
international distribution. Increased investment in surgical instrumentation
sets provided to customers also produced higher selling expense during 1995.
Research and development expense increased 14.6% for the year but remained
constant at 3.4% of sales. The Company continues to make investments in
technological advancements in order to remain competitive in the orthopaedic
market and to provide its customers with the latest technology available.
Goodwill amortization totalled $14.2 million for the year representing a 1%
increase over the prior year. This increase related primarily to the goodwill
recorded in conjunction with the acquisition of CMW in November 1994 and the
full year amortization of goodwill relating to the acquisition of DePuy ACE in
March 1994, partially offset by certain goodwill assets becoming fully
amortized during 1995.
Operating income for the year was $170.3 million, or 26.8% of sales, a 13%
increase as compared to operating income of $151.1 million, or 27.4% of sales,
in the prior year. The decrease in operating income as a percentage of sales
was primarily attributable to additional expenses incurred as the Company
continued to invest in the strengthening of the U.S. sales infrastructure, the
expansion of the international and spinal implant markets and the increased
cost of providing surgical instrument sets. The negative impact of managed
care cost restraints was also a contributing factor.
Interest expense was $6.5 million, representing a $4.2 million increase over
the prior year. This higher expense primarily resulted from interest related
to additional indebtedness of approximately $35.0 million incurred to fund the
CMW acquisition.
The effective income tax rate remained essentially constant at 44.0% in 1995
compared to 43.8% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the reorganization previously described, the Company's cash flow in
the United States was pooled with that of Corange's other U.S. operations.
Effective with the Company becoming a public company, all cash generated is
now maintained in its own accounts and is available for use by the Company. In
addition to the net proceeds received from the Initial Public Offering
effective October 30, 1996, cash generated from operations is the principal
source of funding available and provides adequate liquidity to meet the
Company's operational needs. Cash and cash equivalents totaled $209.4 million
at December 31, 1996, compared to $46.9 million at December 31, 1995.
Working capital at December 31, 1996, was $369.1 million, representing a
$192.3 million increase from December 31, 1995. The annualized inventory
turnover ratio for the year ended December 31, 1996 was 1.6, decreasing
slightly compared with the rate of 1.7 experienced during the prior year. The
annualized accounts receivable turnover rate was 5.8 for the current year
remaining constant with the prior year.
Operating activities generated $99.0 million during 1996 as compared to
$90.3 million of cash provided in the prior year. The $8.7 million increase
resulted primarily from higher net income and the receipt of payment on an
affiliate receivable outstanding at December 31, 1995. This increase was
partially offset by investments made in surgical instrumentation sets,
investments in inventories in support of changes in the Company's method of
distribution and inventory buildup to support the faster-growing product lines
such as trauma and spinal.
23
<PAGE>
Cash flows used for investing activities totaled $84.4 million in the year
ended December 31, 1996, and was comprised of $54.9 million paid for various
acquisitions, capital expenditures of $24.9 million, and $4.6 million of
investments in short-term securities. The consideration paid for business
acquisitions (net of cash received) was comprised of $45.9 million paid for
the acquisition of DePuy OrthoTech and $9.0 million of payments related to
other various acquisitions, including deferred payments for DePuy ACE and CMW
Laboratories, both purchased in 1994.
Cash flows provided by financing activities were $147.2 million during 1996
and included $138.6 million of net proceeds received from the issuance of
stock sold as part of the Initial Public Offering, $44.1 million of advances
received from Corange U.S. Holdings, Inc., an affiliate, as part of the
centralized cash management system previously described (funds used for the
DePuy OrthoTech acquisition) and $4.5 million of capital contributions
received from affiliates, partially offset by a net decrease in debt of $31.4
million and dividends of $8.6 million paid to affiliates.
The Company anticipates that it will pay dividends annually, provided that
funds are available therefore and subject to the discretion of the Board of
Directors. Capital expenditures are expected to be approximately $27 million
in 1997, primarily consisting of purchases of machinery and equipment. In
addition to these funding requirements, the Company expects to continue to
evaluate potential acquisitions to expand its business.
The Company has historically been able to fund its capital and operating
needs through its cash flow from operations and expects to be able to continue
to do so in the future. The Company believes that with its current cash
position and its ability to obtain additional cash, either through the
issuance of additional shares of common stock or utilization of credit lines,
it has the ability to fund its acquisition strategy.
FACTORS AFFECTING FUTURE PERFORMANCE
The orthopaedic industry is experiencing a period of significant transition
as a result of healthcare reform. While cost containment issues have existed
for several years outside of the United States, these issues are relatively
recent phenomena in the U.S. orthopaedic market. Trends in the U.S. market,
which have had an impact on the Company, include the increased movement toward
the provision of healthcare through managed care and significant emphasis on
cost control.
The advent of managed care in the orthopaedic products industry has meant
greater attention to tradeoffs of patient need and product cost, or demand
matching, where patients are evaluated as to their age, need for mobility, and
other parameters, and are then matched with a replacement product that is cost
effective in light of such evaluation. From about the middle of 1995 onward,
this has led to an increase in unit sales of lower-priced, cemented products,
sales of which constitute an increasing share of the Company's overall unit
growth. In addition, price discounting is becoming more prevalent in the
industry resulting in reduced margins for products sold to buying groups under
preferred supplier arrangements.
The shift in product mix and trends toward industry discounting have had an
impact on the Company's sales with respect to hip replacement systems and, to
a lesser extent, knee replacement systems. Although it is uncertain how these
issues will affect future performance, the Company experienced a reduction in
the rate at which prices were declining during 1996.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net sales................................. $697,273 $636,561 $ 551,773
Cost of sales............................. 208,976 200,139 172,939
----------- ----------- ---------
Gross profit............................ 488,297 436,422 378,834
----------- ----------- ---------
Selling, general and administrative ex-
penses................................... 266,776 230,578 195,011
Research and development expenses......... 21,693 21,320 18,609
Goodwill amortization..................... 12,325 14,201 14,088
----------- ----------- ---------
Operating income........................ 187,503 170,323 151,126
----------- ----------- ---------
Interest expense, affiliate............... 4,869 4,479 909
Interest expense, other................... 1,942 2,061 1,358
Other income, net......................... (4,330) (1,493) (1,406)
----------- ----------- ---------
Income before taxes, minority interest
and equity in earnings of unconsoli-
dated affiliate........................ 185,022 165,276 150,265
----------- ----------- ---------
Provisions for income taxes............... 78,689 72,707 65,758
Minority interest......................... 1,553 499 741
Equity in earnings of unconsolidated af-
filiate.................................. 1,968 2,859 3,070
----------- ----------- ---------
Net income.............................. $106,748 $ 94,929 $ 86,836
=========== =========== =========
Unaudited pro forma data:
Net income per share.................... $ 1.17 $ 1.05
Weighted average number of shares out-
standing............................... 91,430,000 90,000,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................... $ 209,387 $ 46,909
Short-term investments.................................. 4,640 --
Accounts receivable, net of allowances of $8,534 (1996)
and $6,628 (1995)...................................... 126,465 115,452
Receivable from affiliates, net......................... -- 24,265
Inventories at lower of cost or market.................. 151,406 116,566
Deferred income taxes................................... 29,366 25,275
Prepaid expenses and other current assets............... 25,455 18,023
--------- ---------
Total current assets.................................. 546,719 346,490
--------- ---------
Noncurrent Assets
Goodwill, net of accumulated amortization of $78,373
(1996) and $60,312 (1995).............................. 238,233 181,208
Other intangible assets, net of accumulated amortization
of $698 (1996) and $245 (1995)......................... 1,894 1,278
Deferred income taxes................................... 18,348 4,876
Investment in affiliate................................. 2,648 2,081
Other assets............................................ 10,934 10,634
--------- ---------
272,057 200,077
--------- ---------
Property, plant and equipment, net........................ 89,601 76,683
--------- ---------
Total assets.......................................... $ 908,377 $ 623,250
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt payable to affiliates................... $ 30,295 $ 31,717
Short-term debt......................................... 31,413 21,048
Accounts payable........................................ 30,515 26,090
Accounts payable to affiliates, net..................... 709 --
Income taxes payable.................................... 17,384 23,088
Income taxes payable to affiliate....................... -- 10,738
Accrued royalties....................................... 18,580 16,596
Accrued employee compensation........................... 18,237 16,121
Other accrued expenses.................................. 30,468 24,282
--------- ---------
Total current liabilities............................. 177,601 169,680
--------- ---------
Noncurrent Liabilities
Long-term debt payable to affiliates.................... 15,413 42,591
Long-term debt.......................................... 4,754 5,342
Long-term employee benefits............................. 17,141 17,756
Noncurrent deferred income tax liability................ 18,925 5,585
Other noncurrent liabilities............................ 401 2,236
--------- ---------
Total noncurrent liabilities.......................... 56,634 73,510
--------- ---------
Contingencies (Note 8)
Minority Interest......................................... 3,514 1,961
--------- ---------
Shareholders' Equity
Shareholder's net investment............................ -- 378,099
Common stock, $.01 par value, 130,000,000 shares autho-
rized, shares outstanding of 98,580,000 (1996)......... 986 --
Additional paid-in capital.............................. 675,144 --
Retained earnings....................................... 17,108 --
Net unrealized appreciation on securities............... 360 --
Minimum pension liability adjustment.................... (236) --
Cumulative translation adjustment....................... (22,734) --
--------- ---------
Total shareholders' equity............................ 670,628 378,099
--------- ---------
Total liabilities and shareholders' equity.......... $ 908,377 $ 623,250
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $106,748 $ 94,929 $ 86,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 28,378 26,635 25,718
Deferred income taxes........................ (2,717) (5,668) (909)
Other, net................................... (2,123) 843 287
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable........................ (8,510) (11,474) (15,448)
Inventories................................ (32,037) 3,052 (17,878)
Amounts payable to or receivable from af-
filiates, net............................. 28,330 (28,215) 712
Prepaid expenses and other current assets.. (7,291) (2,090) (10,661)
Other noncurrent assets.................... (811) (3,553) (6,153)
Accounts payable........................... 3,139 45 338
Accrued employee compensation and other.... 7,907 2,348 6,543
Other current and noncurrent liabilities... (3,805) 4,940 4,105
Income taxes payable....................... (18,237) 8,554 7,452
-------- -------- ---------
Net cash provided by operating activi-
ties.................................... 98,971 90,346 80,942
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (24,882) (15,598) (14,015)
Business acquisitions, net of cash acquired.... (54,889) (17,500) (107,634)
Purchases of short-term investments............ (4,640) -- --
-------- -------- ---------
Net cash used for investing activities... (84,411) (33,098) (121,649)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of short-term debt.................... (33,232) (6,550) (15,631)
Proceeds from issuance of short-term debt...... 31,140 38,378 4,747
Payments of long-term debt..................... (29,860) (1,027) (2,876)
Proceeds from issuance of long-term debt....... 534 487 41,476
Advances from (to) affiliate................... 44,063 (76,558) 19,000
Net proceeds from issuance of stock............ 138,563 -- --
Capital contributions from affiliates.......... 4,564 4,000 1,625
Dividends paid to affiliate.................... (8,553) (1,868) --
-------- -------- ---------
Net cash provided by (used for) financing
activities.............................. 147,219 (43,138) 48,341
-------- -------- ---------
Effect of exchange rate changes on cash........ 699 668 (2,268)
-------- -------- ---------
Increase in cash and cash equivalents.... 162,478 14,778 5,366
-------- -------- ---------
Cash and cash equivalents at beginning of
year.......................................... 46,909 32,131 26,765
-------- -------- ---------
Cash and cash equivalents at end of year....... $209,387 $ 46,909 $ 32,131
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET MINIMUM
SHAREHOLDER'S ADDITIONAL UNREALIZED PENSION CUMULATIVE
NET COMMON COMMON PAID-IN RETAINED APPRECIATION LIABILITY TRANSLATION
INVESTMENT SHARES STOCK CAPITAL EARNINGS ON SECURITIES ADJUSTMENT ADJUSTMENT
------------- ---------- ------ ---------- -------- ------------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1993................... $ 247,818 -- $-- $ -- $ -- $-- $ -- $ --
--------- ---------- ---- -------- ------- ---- ----- --------
Net income for the
year................... 86,836
Change in net transfers
to affiliate........... 19,000
Foreign currency
translation
adjustments............ 1,693
Minimum pension
liability adjustment... 78
Capital contributions
from affiliates........ 1,625
--------- ---------- ---- -------- ------- ---- ----- --------
BALANCE AT DECEMBER 31,
1994................... 357,050 -- -- -- -- -- -- --
--------- ---------- ---- -------- ------- ---- ----- --------
Net income for the
year................... 94,929
Dividend to affiliate... (1,868)
Change in net transfers
to affiliate........... (76,526)
Foreign currency
translation
adjustments............ 333
Minimum pension
liability adjustment... 181
Capital contributions
from affiliate......... 4,000
--------- ---------- ---- -------- ------- ---- ----- --------
BALANCE AT DECEMBER 31,
1995................... 378,099 -- -- -- -- -- -- --
--------- ---------- ---- -------- ------- ---- ----- --------
Net income for the
period................. 89,640
Dividends to affiliate.. (8,553)
Change in net transfers
to affiliate........... 44,063
Foreign currency
translation
adjustments............ 4,727
Minimum pension
liability adjustment... --
Unrealized gain on
securities............. 44
Capital contributions
from affiliates........ 4,564
Capitalization resulting
from reorganization and
initial public
offering............... (512,584) 98,580,000 986 675,144 -- 44 (24) (25,003)
--------- ---------- ---- -------- ------- ---- ----- --------
BALANCE AT OCTOBER 30,
1996, EFFECTIVE DATE OF
INITIAL PUBLIC
OFFERING............... -- 98,580,000 986 675,144 -- 44 (24) (25,003)
--------- ---------- ---- -------- ------- ---- ----- --------
Net income for the
period................. 17,108
Foreign currency
translation
adjustments............ 2,269
Minimum pension
liability adjustment... (212)
Unrealized gain on
securities............. 316
--------- ---------- ---- -------- ------- ---- ----- --------
BALANCE AT DECEMBER 31,
1996................... $ -- 98,580,000 $986 $675,144 $17,108 $360 $(236) $(22,734)
========= ========== ==== ======== ======= ==== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--ORGANIZATION/ACQUISITIONS
DePuy, Inc. (the "Company") was formed as the result of a worldwide
reorganization completed by its parent, Corange Limited ("Parent"), to realign
its worldwide orthopaedic operations into a stand-alone entity in order to
sell shares of the realigned entity to the public through an Initial Public
Offering. Prior to the public offering, various actions were taken to form the
Company including (i) the consolidation of the worldwide operations of DePuy
under Corange U.S. Holdings, Inc., an Indiana corporation ("CUSHI"), (ii) the
transfer out of the CUSHI consolidated group Boehringer Mannheim Corporation
("BMC"), and (iii) the merging of CUSHI downstream into DePuy, Inc., which was
created on July 26, 1996 for purposes of becoming the holding company for the
DePuy worldwide operations, with DePuy, Inc. as the surviving company in the
merger, the effect of which was to reincorporate CUSHI in Delaware under the
name "DePuy, Inc." None of these actions involved outside minority
shareholders. Accordingly, the consolidation of the entities was accounted for
on a predecessor basis.
Pursuant to a registration statement filed with the Securities and Exchange
Commission that became effective on October 30, 1996, the Company issued,
through an Initial Public Offering, 7,780,000 shares of its common stock at
$17.50 per share which generated net proceeds after expenses, discounts and
commissions of approximately $126,000. In November 1996, an additional 800,000
shares were sold pursuant to an underwriter's over allotment provision
generating net proceeds of approximately $13,000. The Company plans to use the
net proceeds from the sale of shares of its common stock primarily to finance
the expansion of the Company's business, provided suitable acquisitions can be
identified and negotiated.
The Company's primary business is the development, manufacture and sale of
orthopaedic joint implants (primarily hips, knees and shoulders), spinal
implants, related surgical instruments, trauma products and sports medicine
soft goods.
In 1993, the Company established a new entity, Argentina Joints S.A., funded
through a capital contribution of $1,000 from its parent. An additional $4,000
in capital was contributed during 1994.
During 1996, various contributions of capital were made from affiliates
totaling $4,564 resulting primarily from the realignment previously described.
On March 8, 1994, the Company acquired Ace Medical Company (ACE), a
developer and manufacturer of orthopaedic trauma products, for $70,500 in cash
and $10,000 in a note paid in January 1995. Under the terms of the purchase
agreement, contingent upon ACE achieving certain sales and profit levels, the
Company paid and recorded goodwill of $5,000 in 1995 and $5,000 in 1996. The
Company also recorded a liability and increased goodwill for $10,000 for an
additional contingent payment which will be paid in 1997. The purchase method
of accounting was applied to this acquisition, and $87,214 of goodwill has
been recorded.
The operating results of ACE have been included in the consolidated
statements of income from the date of acquisition. Had the acquisition taken
place at the beginning of 1994, consolidated net sales would have been
$557,786 for the year ended December 31, 1994, and consolidated net income
would have been $86,925 for the fiscal year 1994. This unaudited pro forma
financial information is presented for informational purposes only and is not
necessarily indicative of the operating results that would have occurred had
the acquisition been consummated as of the above date, nor is it necessarily
indicative of future operating results.
On November 22, 1994, the Company acquired certain assets and assumed
certain liabilities of CMW Laboratories ("CMW"), a division of Dentsply
Limited, for $35,000 in cash consideration. Under terms of the purchase
agreement, additional payments were made totaling $2,500 in 1995 and $1,000 in
1996, and recorded as goodwill, after certain milestones were achieved. The
Company may be required to make additional contingent payments of $5,000 over
the next five years based on the achievement of certain milestones. These
milestones
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
relate to obtaining U.S. Food and Drug Administration clearance to market a
new product and achieving certain sales objectives for this product over the
next four years. The additional contingent payments will be recorded as
goodwill when earned. The purchase method of accounting was applied to this
acquisition, and $40,000 of goodwill has been recorded. CMW is a manufacturer
of bone cement for orthopaedic implant procedures. CMW net sales and net
income are not material to consolidated net sales or consolidated net income.
On March 11, 1996, the Company acquired all of the outstanding shares of
common stock of Orthopedic Technology, Inc. ("DePuy OrthoTech"), a
manufacturer of orthopaedic products, primarily for the sports medicine
market, in consideration of $46,300 in cash. For the year ended September 30,
1995, DePuy OrthoTech reported net sales of $18,400 and net income of $600
(unaudited). The purchase method of accounting was applied to this acquisition
and a total of $41,551 was allocated to goodwill. The acquisition was funded
by available internal resources. The operating results of DePuy OrthoTech have
been included in the consolidated statements of income from the date of
acquisition and are not material to consolidated net sales or consolidated net
income.
NOTE 2--ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of the Company and its subsidiaries as defined in Note 1. All
significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated affiliates that are between 20% and 50% owned
are carried at cost plus equity in undistributed earnings since acquisition.
For periods prior to the reorganization as described in Note 1, the
consolidated financial statements have been prepared from the historical
accounting records of the consolidated affiliates.
REVENUE RECOGNITION Revenues from product sales are recognized at the time
of shipment to the customer.
TRANSLATION OF FOREIGN CURRENCY Assets and liabilities of foreign
subsidiaries are translated to U.S. dollars using exchange rates in effect as
of the balance sheet date. Revenues and expenses are translated using the
average exchange rates throughout the period. Translation gains and losses are
included in shareholders' equity. Foreign currency transaction gains and
losses are included in other income, net, and are not material to the results
of operations.
CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES Inventories are stated at the lower of cost or market, with cost
being determined under the first-in, first-out method. At December 31,
inventories consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Finished products........................................ $122,035 $ 98,887
Work in process.......................................... 10,392 7,656
Raw materials............................................ 18,979 10,023
-------- --------
$151,406 $116,566
======== ========
</TABLE>
GOODWILL AND OTHER INTANGIBLE ASSETS The Company's acquisitions have
generated goodwill. The Company determines the initial amortization period for
goodwill based upon an evaluation of criteria which would be indicators of
future success of the businesses acquired. Such criteria include, but are not
limited to, past and expected profitability and cash flows, customer base,
existing and new product offerings, and key contractual relationships. Based
upon the evaluations, the Company is amortizing goodwill on a straight-line
basis over the periods of expected benefit which range from 5 to 30 years, the
majority of which is over a period
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
of 30 years. Other intangible assets are amortized over their estimated useful
lives ranging from one to three years. The Company assesses the recoverability
of long-lived assets including goodwill and other intangible assets whenever
adverse events or changes in circumstances or business climate indicate that
an impairment may have occurred. If the future cash flows (undiscounted and
without interest) expected to result from the use of the related assets are
less than the carrying value of such assets, an impairment has been incurred
and a loss is recognized to reduce the carrying value of the long-lived
assets, including goodwill, based on the expected discounted cash flows or
market prices. Expected cash flows are discounted at a rate commensurate with
the risk involved.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are reported at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets which generally range from 10 to 40 years
for buildings and improvements and from 3 to 10 years for machinery and
equipment. Amounts expended for maintenance and repairs are charged to expense
as incurred. Upon disposition, any related gain or loss is credited or charged
to other income, net. Depreciation expense of $15,800, $12,400 and $11,600 was
recorded in 1996, 1995 and 1994, respectively. At December 31, property, plant
and equipment consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land................................................... $ 2,035 $ 1,918
Buildings and improvements............................. 43,729 37,037
Machinery and equipment................................ 130,582 108,507
-------- --------
176,346 147,462
Less allowance for depreciation........................ (86,745) (70,779)
-------- --------
$ 89,601 $ 76,683
======== ========
</TABLE>
The Company adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (FAS 121) in 1996. The adoption of FAS 121 did not have a
material impact on the Company's consolidated financial condition, results of
operations or cash flows.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK The Company uses
forward exchange contracts to manage its exposure to fluctuating foreign
currency exchange rates. All of the Company's forward exchange contracts are
with Corange International Limited ("CIL"), a related affiliate. Gains or
losses on these contracts are recognized in the basis of the transaction being
hedged.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivables.
The risk is limited due to the large number and types of entities comprising
the Company's customer base and their dispersion across many geographic
regions. At December 31, 1996, the Company had no significant concentrations
of credit risk.
RISK AND UNCERTAINTIES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
SHAREHOLDER'S NET INVESTMENT Prior to the reorganization, the Company
participated in a centralized cash management system for all of its U.S.
operations through an affiliate. Substantially all cash receipts and
disbursements were processed through CUSHI and the Company was charged or
credited for the net of cash
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
receipts, cash disbursements, and other CUSHI allocated charges each month.
The net effect of this monthly activity was charged or credited to
shareholder's net investment.
INCOME TAXES Income taxes are accounted for in accordance with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes"
(FAS 109) and have been computed on the separate return method. The current
provision for income taxes is computed on the pretax income of the
consolidated entities located within each taxing country based upon the tax
law in effect during the respective period. Deferred income taxes result from
the future tax consequences associated with temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets
and liabilities for financial accounting purposes. Incremental U.S. income
taxes have not been provided on the cumulative undistributed earnings of the
foreign subsidiaries totaling $46,969 as of December 31, 1996. These earnings,
which reflect full provision for non-U.S. income taxes, are expected to be
reinvested indefinitely in non-U.S. operations or to be remitted substantially
free of additional tax due to the availability of foreign tax credits.
STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS 123). FAS 123 encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. Had the fair value based method proposed by FAS 123
been adopted, it would not have had a material effect on the Company's
financial position or results of operations.
UNAUDITED PRO FORMA NET INCOME PER SHARE Prior to the reorganization
described in Note 1, the Company was not a legal entity and did not have a
separately identifiable pool of capital. Accordingly, historical per share
data has been omitted from the consolidated financial statements. Pro forma
net income per share for 1996 is based on historical net income and pro forma
weighted average shares outstanding giving effect to the shares outstanding
after the reorganization and the additional shares and common stock
equivalents issued through, or in connection with, the Initial Public
Offering. Pro forma net income per share for 1995 was based on historical net
income and the number of shares of common stock which were outstanding after
the reorganization.
RECLASSIFICATIONS Certain reclassifications have been made for prior years
presented in the financial statements to conform to the classifications
adopted in 1996.
NOTE 3--INVESTMENT IN AFFILIATE
The Company has a 50% investment interest in a joint venture with E.I.
DuPont de Nemours and Company for the purpose of sharing in the production and
sale of advanced technologies, primarily in North American countries. The
Company received pretax distributions of $3,538, $5,264 and $5,138 from this
venture in 1996, 1995 and 1994, respectively. This investment is reported
using the equity method as described in Note 2.
NOTE 4--RELATED PARTY TRANSACTIONS
The Company recorded amounts (payable to) receivable from affiliates, net,
of $(709) and $24,265 at December 31, 1996 and 1995, respectively. The balance
at December 31, 1995, includes advances to an affiliate of $21,921, which was
repaid during the first quarter of 1996. The remaining balances represent
advances between affiliated companies for transactions incurred in the normal
course of business. In addition, the Company obtained financing from
affiliated entities as described in Note 6 and participated in a centralized
cash management system described in Note 2. Related party transactions are
also disclosed concerning forward exchange contracts, income taxes, and
employee benefit plans in Notes 2, 5, 11, 13 and 14.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The consolidated financial statements reflect the results of operations,
financial condition and cash flows of the Company as a component of the Parent
and may not be indicative of actual results of the Company under other
ownership. Management believes that the consolidated statements of income
include a reasonable allocation of administrative expenses incurred by CUSHI
on behalf of the Company prior to its reorganization as described in Note 1.
The allocations of administrative expenses were based upon actual time and
expenses incurred totaling $674, $779 and $739 in 1996, 1995 and 1994,
respectively.
Beginning in 1994, the Company is insured for product liability through an
affiliated captive insurance company, Bellago Insurance Limited of Hamilton
Bermuda ("Bellago"), for $2,000 per occurrence, $5,000 per group of related
claims and $10,000 in the aggregate. Excess claims are insured through
commercial carriers. Insurance premiums of $2,100, $1,900 and $556 were paid
to Bellago in 1996, 1995 and 1994, respectively.
In 1992, the Company entered into an oral arrangement with BMC to fund
research in the area of orthobiologics. Total expenses incurred related to
this arrangement were $707, $638 and $506 for the years ended December 31,
1996, 1995 and 1994, respectively.
NOTE 5--INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
FAS 109. This standard requires, among other things, recognition of future tax
expense or benefits, measured by enacted tax rates attributable to temporary
differences between financial reporting and income tax bases of assets and
liabilities, and net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not.
The Company's domestic operations have been members of a U.S. group filing a
consolidated federal corporation income tax return with other affiliated
companies. The group has had no tax sharing or allocation agreement and taxes
have been allocated on a separate company basis. The Company has entered into
a tax indemnity agreement with the Parent that limits the Company's liability
for taxes to those arising out of the Company's operations. Prior to the
reorganization, CUSHI had been responsible for remitting all federal and state
income tax payments for all members of the group. Therefore, while the Company
had not actually made payments of federal or state taxes prior to the
reorganization referred to in Note 1, it was assumed that the Company paid 90%
of its current federal and state provision during the year and the remaining
10% prior to the filing of its U.S. tax returns in the subsequent year. Total
income taxes paid, including actual and assumed payments, were $78,855,
$71,852 and $64,273 in 1996, 1995 and 1994, respectively.
Earnings from operations before income taxes, minority interest and equity
in earnings of unconsolidated affiliate were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
United States.................................. $139,392 $124,443 $113,386
International.................................. 45,630 40,833 36,879
-------- -------- --------
Total earnings before taxes.................. $185,022 $165,276 $150,265
======== ======== ========
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
Federal....................................... $48,507 $48,303 $42,410
International................................. 22,535 21,647 19,128
State......................................... 10,364 8,425 8,758
------- ------- -------
81,406 78,375 70,296
------- ------- -------
Deferred:
Federal....................................... (4,170) (3,658) (6,542)
International................................. 1,644 (1,497) 2,922
State......................................... (191) (513) (918)
------- ------- -------
(2,717) (5,668) (4,538)
------- ------- -------
Income tax expense.............................. $78,689 $72,707 $65,758
======= ======= =======
</TABLE>
A reconciliation of the effective income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States federal tax rate........................... 35.0% 35.0% 35.0%
Add (deduct):
Effect of international operations..................... 2.4 2.4 1.6
State taxes, net of federal tax benefit................ 3.6 3.1 3.4
Impact of nondeductible goodwill....................... 1.7 2.8 3.0
Other, net............................................. (.2) .7 .8
---- ---- ----
Effective income tax rate................................ 42.5% 44.0% 43.8%
==== ==== ====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are comprised of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory........................................... $ 7,405 $ 7,271
Profit in inventory................................. 15,269 10,597
Royalties........................................... 2,224 2,753
Amortization other than goodwill.................... 10,006 3,942
Deferred compensation............................... 9,391 7,845
Net operating losses................................ 2,108 --
Other............................................... 5,084 5,938
Valuation allowances................................ (2,754) (902)
-------- --------
Net deferred tax assets........................... $ 48,733 $ 37,444
-------- --------
Deferred tax liabilities:
Depreciation........................................ $(18,601) $(12,497)
Other............................................... (1,343) (381)
-------- --------
Net deferred tax liabilities...................... $(19,944) $(12,878)
======== ========
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 6--LINES OF CREDIT AND LONG-TERM DEBT
At December 31, 1996, the Company had lines of credit with affiliated
finance companies totaling $68,427, of which $45,708 has been used. The
Company also had a line of credit with an external bank amounting to $10,000
which has not been utilized. No compensating balances are required or
maintained.
The Company has outstanding borrowings as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Short-term debt:
Borrowings from affiliates, variable interest rates ranging
from 4.0% to 11.1%, weighted average interest rate of 6.3%
(1996) and 8.2% (1995), principal and interest due at
various maturity dates...................................... $30,295 $31,717
Short-term bank debt--
7.00% interest rate, due 1/12/96........................... -- 17,263
6.37% interest rate, due 6/18/97........................... 11,590 --
Interest rate varies based upon MIBOR plus 15 basis points,
due 12/20/97.............................................. 2,506 --
5.25% interest rate, due 3/27/97........................... 2,177 --
Other bank debt, interest rates ranging from 7.5% to 7.66%,
principal and interest due at various maturity dates........ 729 --
Acquisition related debt..................................... 10,000 --
Other debt, variable interest rates ranging from 6.5% to
8.25%, principal and interest due at various maturity
dates....................................................... 4,411 3,785
------- -------
Total short-term debt...................................... $61,708 $52,765
------- -------
Long-term debt:
Note payable to affiliate, interest rate varies quarterly
based upon LIBOR plus 37.5 basis points, due 11/22/99....... $15,413 $38,815
Note payable, 7.66%, due 12/30/98............................ 534 --
Note payable, 8%, due 12/31/02............................... -- 1,287
Note payable to affiliate, 3.25%, due 1/1/01................. -- 2,513
Note payable to affiliate, 8.5%, due 1/1/01.................. -- 1,263
Other debt, variable interest rates ranging from 6.5% to
8.25%, principal and interest due at various maturity
dates....................................................... 4,220 4,055
------- -------
Total long-term debt....................................... $20,167 $47,933
======= =======
</TABLE>
At December 31, 1996, aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 4,127
1999............................................................. 15,866
2000............................................................. 119
2001............................................................. 51
2002............................................................. 4
</TABLE>
Acquisition related debt comprises the $10,000 contingency recorded in
conjunction with the acquisition of ACE, described in Note 1.
Interest paid was $5,116, $4,276 and $1,371 for 1996, 1995 and 1994,
respectively, including $4,553, $3,638 and $1,214 paid to affiliates in 1996,
1995 and 1994, respectively.
During 1996, $28,465 of long-term notes payable were paid in advance of
their maturity dates to utilize excess cash and reduce future interest
expense.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7--LEASES
The Company is a lessee under a number of cancelable and noncancelable
operating leases. Total rental expense was approximately $5,804, $4,153 and
$6,023 for the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum rental commitments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year Ending December 31:
1997................................................... $ 5,108 $ 678
1998................................................... 4,187 200
1999................................................... 2,607 90
2000................................................... 1,941 65
2001................................................... 1,730 19
Thereafter............................................. 5,698 --
------- ------
Total minimum lease payments............................. $21,271 $1,052
======= ------
Less amount representing interest........................ 88
------
Present value of net minimum lease payments.............. 964
Less current portion of capital leases................... 614
------
Long-term portion of capital leases...................... $ 350
======
</TABLE>
Property, plant and equipment at December 31, 1996 and 1995 included $2,568
and $1,083, respectively, of equipment under leases that have been
capitalized. Accumulated depreciation for such equipment was $1,593 and $566
at December 31, 1996 and 1995, respectively.
NOTE 8--CONTINGENCIES
The Company is subject to a number of investigations, lawsuits and claims
during the normal course of business. Management does not expect that
resulting liabilities beyond provisions already recorded will have a
materially adverse effect on the Company's consolidated financial position,
results of operations or cash flows. The loss provisions recorded have not
been reduced for any material amounts of anticipated insurance recoveries.
NOTE 9--STOCK COMPENSATION PLANS
Effective October 30, 1996, the Company adopted the DePuy, Inc. 1996 Equity
Incentive Plan ("Incentive Plan"). Under the Incentive Plan, the Company may
grant nonqualified or incentive stock options, stock appreciation rights,
restricted stock or restricted stock units, performance awards, phantom stock
units or other stock-based awards for the benefit of selected executive
personnel, key employees, sales representatives, consultants of the Company
and its affiliates, and non-employee directors of the Company.
The Incentive Plan provides that the aggregate number of shares of the
Company's stock which will be available for award to participants will be
9,485,069. The maximum number of shares available for restricted stock awards
under the Incentive Plan is 350,000. Subject to the provisions of the
Incentive Plan, the term of options awarded in 1996 is 10 years from the date
of grant.
Effective with the Initial Public Offering, 1,249,250 stock options were
awarded with an exercise price of $17.50, the Initial Public Offering price.
One-third of the options granted in 1996 vest in each of the years 1997, 1998
and 1999. In addition, 85,069 phantom stock units were granted to key
personnel, which entitle the holder to one share of common stock for each
unit, in settlement of amounts payable under a long-term incentive
compensation plan which has been discontinued.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
A summary of the status of the Incentive Plan as of December 31, 1996 and
changes during the year is presented below:
<TABLE>
<CAPTION>
FIXED OPTIONS PHANTOM STOCK
------------------ -------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE SHARES
--------- -------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1996.......... -- $ -- --
Granted................................. 1,249,250 17.50 85,069
Exercised............................... -- -- --
Forfeited............................... -- -- --
Expired................................. -- -- --
--------- ------ ------
Outstanding at December 31, 1996........ 1,249,250 $17.50 85,069
Exercisable at December 31, 1996........ -- -- --
Available for grant at December 31,
1996................................... 8,150,750
========= ====== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of .75%, expected
volatility of 37.34%, risk-free interest rate of 6.18% and an expected life of
6 years. The weighted average remaining contractual life of the options is 9.8
years. The weighted average fair value of options and phantom stock units
granted during the year was $7.70 and $17.50, respectively.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans and no compensation cost was recognized in connection
with the issuance of the stock options. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of FAS 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net income
As reported................................................... $106,748
Pro forma..................................................... $106,447
========
Earnings per share
As reported................................................... $ 1.17
Pro forma..................................................... $ 1.16
========
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not likely
to be representative of the effects on reported net income for future years.
NOTE 10--SHAREHOLDERS' EQUITY
Prior to the reorganization and Initial Public Offering described in Note 1,
the total equity of the Company was recorded as shareholder's net investment.
As a result of the reorganization and Initial Public Offering, which was
effective October 30, 1996, the Company recorded the par value of the
98,580,000 shares outstanding as $986 of common stock. In addition, certain
identifiable components of equity including cumulative translation adjustment,
net unrealized appreciation on securities and minimum pension liability
adjustment, were capitalized separately as of the date of the offering. The
remaining equity of the Company totaling $675,144 was recorded as additional
paid-in capital resulting in the liquidation of the shareholder's net
investment balance.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Retained earnings of $17,108 at December 31, 1996, represents the net income
of the Company subsequent to the effective date of the Initial Public
Offering.
NOTE 11--EMPLOYEE PENSION PLANS AND OTHER BENEFIT PLANS
Eligible Company employees participate in a noncontributory defined
contribution plan, sponsored by CUSHI prior to the reorganization, which
covers substantially all non-union employees of the Company in the United
States. This plan provides for targeted benefits based on the employee's
average compensation in the years preceding retirement. In general, the
Company's policy is to contribute actuarially determined amounts that are
sufficient to meet projected benefit payment requirements. Pension expense for
this plan was $967, $898 and $693 for 1996, 1995 and 1994, respectively, and
was allocated based on the ratio of the target benefits for the Company's
participants relative to the total target benefits for all participants of the
plan.
Employees of international subsidiaries are covered by various pension
benefit arrangements, some of which are considered to be defined benefit plans
for financial reporting purposes. Assets of the plans are comprised primarily
of equity securities. Benefits under these plans are primarily based on levels
of compensation. Funding policies are based on legal requirements, tax
considerations and local practices. Pension expense for the most significant
of these international plans was $1,312, $1,476 and $1,032 for 1996, 1995 and
1994, respectively.
The following assumptions were made to develop net periodic benefit
obligations for the international defined benefit plan for 1996, 1995 and
1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected long-term rate of return........................ 9.0% 9.0% 9.0%
=== === ===
Weighted average discount rate........................... 9.0% 9.0% 9.0%
=== === ===
Rate of increase in compensation levels.................. 7.0% 7.0% 7.0%
=== === ===
</TABLE>
The U.S. operating division also has a noncontributory defined benefit
pension plan which covers substantially all of the Company's union employees
who meet eligibility requirements. This plan generally provides pension
benefits based on the employee's years of service with normal retirement at
age 65. Pension expense for this plan was $380, $381 and $405 for 1996, 1995
and 1994, respectively.
The following table provides the assumptions used to develop net periodic
pension cost and the actuarial present value of projected benefit obligations
for the U.S. defined benefit plan:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected long-term rate of return on plan assets......... 7.5% 7.5% 7.75%
=== === ====
Weighted average discount rate........................... 7.0% 7.0% 7.00%
=== === ====
</TABLE>
The Company recorded a pension liability as required by Financial Accounting
Standards Board Statement No. 87, "Employers' Accounting for Pensions" (FAS
87), representing the amount by which the actuarial present value of the
accumulated benefit obligation exceeds the fair value of the plan's assets. A
corresponding amount is recognized as an intangible asset to the extent of the
unamortized prior service cost and transition obligation. The excess is
charged directly to shareholders' equity.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The amounts recorded at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -----------------------
ACCUMULATED ASSETS ACCUMULATED ASSETS
BENEFITS EXCEED BENEFITS EXCEED
EXCEED ACCUMULATED EXCEED ACCUMULATED
ASSETS BENEFITS ASSETS BENEFITS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of ac-
cumulated benefit obligation:
Vested...................... $(3,321) $(19,798) $(2,793) $(15,617)
Non-vested.................. (489) -- (589) --
------- -------- ------- --------
(3,810) (19,798) (3,382) (15,617)
Effect of projected future
salary increases............. -- (4,533) -- (3,574)
------- -------- ------- --------
Projected benefit obligation.. (3,810) (24,331) (3,382) (19,191)
Plan assets at fair value..... 2,809 30,411 2,475 25,044
------- -------- ------- --------
Projected benefit obligation
(in excess of) or less than
plan assets.................. (1,001) 6,080 (907) 5,853
Unamortized transition asset.. (13) (4,658) (15) (4,488)
Unrecognized net actuarial
losses (gains)............... 249 (168) 39 (752)
Unrecognized prior service
costs........................ 737 -- 806 --
Adjustment to recognized mini-
mum liability................ (973) -- (830) --
------- -------- ------- --------
Net (pension liability) pre-
paid pension cost recognized
in the consolidated balance
sheets....................... $(1,001) $ 1,254 $ (907) $ 613
======= ======== ======= ========
Amount reflected as an intan-
gible asset.................. $ (737) $ -- $ (806) $ --
======= ======== ======= ========
Amount reflected as a minimum
pension liability adjust-
ment......................... $ (236) $ -- $ (24) $ --
======= ======== ======= ========
</TABLE>
The Company participates in a 401(k) plan for non-union employees of its
domestic operations. The Company made contributions under this plan of $1,511,
$1,250 and $1,017 in 1996, 1995 and 1994, respectively.
The Company's senior management participates in a supplemental retirement
plan sponsored by the Company. The benefits under the plan are based on the
participants' salary at their retirement date adjusted by the total of
retirement income to be received by the participants from other sources.
Expense for this plan was $806, $763 and $515 for 1996, 1995 and 1994,
respectively.
NOTE 12--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain domestic subsidiaries of the Company sponsor unfunded postretirement
healthcare benefit plans that cover either salaried or union employees. In
general, the Company pays a defined portion of an eligible retiree's
healthcare premium. The plans are contributory based on years of service, with
contributions adjusted annually. Net periodic postretirement benefits cost
includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Benefits cost for service during the year and other....... $505 $305 $426
Interest cost on accumulated postretirement benefit obli-
gation................................................... 490 409 403
---- ---- ----
Net periodic postretirement benefit cost.................. $995 $714 $829
==== ==== ====
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The accrued postretirement benefit obligation recorded at December 31, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $1,751 $ 782
Fully eligible active plan participants................... 279 317
Other active plan participants............................ 6,703 6,194
------ ------
Total accumulated postretirement benefit obligation......... 8,733 7,293
Unrecognized net actuarial gains............................ 1,157 1,313
------ ------
Accrued postretirement benefit obligation................... $9,890 $8,606
====== ======
</TABLE>
Expenditures for these benefits during 1996, 1995 and 1994 were immaterial.
The assumed healthcare cost trend rates used to measure the expected cost of
benefits for 1996 ranged from 9.0% for a post-65 retiree to 12.0% for a pre-65
retiree and for 1995 ranged from 9.3% for a post-65 retiree to 12.7% for a
pre-65 retiree. The healthcare trend rates are assumed to decrease ratably
over a 10 year period down to 6.0%. An increase in this annual trend rate of
1.0% would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $1,781 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year then ended
by approximately $320.
The weighted average discount rate used to measure the accumulated
postretirement benefit obligation as of December 31, 1996 and 1995, was 7.0%
and 6.75%, respectively.
NOTE 13--DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Exchange Risk Management The Company uses forward exchange contracts
to manage its global foreign exchange exposure. The forward contracts serve
primarily to hedge nonfunctional currency denominated transactions and
commitments for the purchase of inventory within the Company and with
affiliates expected to occur within the year. Such contracts are with CIL, a
related affiliate. The Company does not hold or issue derivative financial
instruments for trading purposes or use leveraged derivatives in its financial
management program. The Company does not anticipate any material adverse
effect on its financial position resulting from its involvement in these
instruments, nor does it anticipate nonperformance by its counterparty. The
notional amounts of the Company's forward contracts at December 31, 1996 and
1995 were $136,636 and $134,734, respectively. The Company's domestic and
international operations are committed, under terms of the forward contracts,
to purchase the following currencies:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
U.S. Dollars.............................................. 132,495 81,571
======= ======
British Pounds............................................ 88 29,690
======= ======
French Francs............................................. 12,424 9,575
======= ======
Deutsche Marks............................................ 2,508 5,985
======= ======
Swiss Francs.............................................. 500 1,078
======= ======
</TABLE>
Concentrations of Credit Risk Concentrations of credit risk may arise due to
financial instruments existing for groups of customers or counterparties
having similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other conditions. The Company anticipates, however, that counterparties will
be able to satisfy fully their obligations under the
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
contracts. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk, but monitors the credit standing
of the counterparty.
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1996 and 1995.
Financial Accounting Standards Board Statement No. 107, "Disclosures about
Fair Value of Financial Instruments" (FAS 107), defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged
in a current transaction between willing parties:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Nonderivatives:
Long-term debt......................... $20,167 $20,227 $47,933 $47,638
------- ------- ------- -------
Derivatives:
Forward contracts...................... $ -- $ 2,986 $ -- $ 5,094
======= ======= ======= =======
</TABLE>
The fair value of the long-term debt is estimated by discounting expected
cash flows at the rates likely to be offered to the Company for debt of the
same remaining maturities. The fair value of the forward contracts comprised
solely of contracts with CIL, a related affiliate, represents the amount of
hedging gain (or loss) deferred and generally reflects the estimated amounts
that the Company would receive or pay to terminate the contracts at the
reporting date based on dealer quotes. All other nonderivative financial
instruments approximate fair value.
NOTE 15--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one dominant industry segment which includes the
manufacturing and marketing of joint and spinal implants, surgical
instruments, trauma products and sports medicine soft goods used primarily by
orthopaedic medical specialists in both surgical and nonsurgical therapies.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales, operating income and identifiable assets by geographic area are
presented in the table following.
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------
UNITED STATES ASIA/PACIFIC EUROPE OTHER ELIMINATIONS TOTAL
------------- ------------ -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 408,919 $79,093 $186,802 $22,459 $ -- $697,273
Sales to affiliated
customers.............. 72,753 629 56,588 -- (129,970) --
---------- ------- -------- ------- --------- --------
Total sales........... $ 481,672 $79,722 $243,390 $22,459 $(129,970) $697,273
---------- ------- -------- ------- --------- --------
Operating income
(loss)................. $ 141,616 $18,389 $ 40,304 $(1,833) $ (10,973) $187,503
---------- ------- -------- ------- --------- --------
Identifiable assets..... $1,071,153 $62,829 $362,732 $25,086 $(613,423) $908,377
========== ======= ======== ======= ========= ========
<CAPTION>
1995
------------------------------------------------------------------
UNITED STATES ASIA/PACIFIC EUROPE OTHER ELIMINATIONS TOTAL
------------- ------------ -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 377,264 $71,549 $166,652 $21,096 $ -- $636,561
Sales to affiliated
customers.............. 54,695 982 40,416 26 (96,119) --
---------- ------- -------- ------- --------- --------
Total sales........... $ 431,959 $72,531 $207,068 $21,122 $ (96,119) $636,561
---------- ------- -------- ------- --------- --------
Operating income
(loss)................. $ 132,737 $20,710 $ 25,972 $ (931) $ (8,165) $170,323
---------- ------- -------- ------- --------- --------
Identifiable assets..... $ 309,439 $54,940 $355,800 $18,410 $(115,339) $623,250
========== ======= ======== ======= ========= ========
<CAPTION>
1994
------------------------------------------------------------------
UNITED STATES ASIA/PACIFIC EUROPE OTHER ELIMINATIONS TOTAL
------------- ------------ -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 358,840 $55,206 $125,068 $12,659 $ -- $551,773
Sales to affiliated
customers.............. 45,226 -- 27,796 -- (73,022) --
---------- ------- -------- ------- --------- --------
Total sales........... $ 404,066 $55,206 $152,864 $12,659 $ (73,022) $551,773
---------- ------- -------- ------- --------- --------
Operating income
(loss)................. $ 119,053 $16,816 $ 24,863 $ 353 $ (9,959) $151,126
---------- ------- -------- ------- --------- --------
Identifiable assets..... $ 298,854 $39,635 $314,426 $16,154 $(101,541) $567,528
========== ======= ======== ======= ========= ========
</TABLE>
Intercompany transfers are made at negotiated prices which include profit
margin.
For the years ended December 31, 1996, 1995 and 1994, there were no
customers which accounted for 10% or more of the Company's sales.
Sales to unaffiliated customers based on customer location were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
United States.................................. $373,771 $349,909 $333,310
Europe......................................... 186,053 172,189 132,794
Asia/Pacific................................... 106,971 90,595 68,297
Other regions.................................. 30,478 23,868 17,372
-------- -------- --------
Total sales to unaffiliated customers........ $697,273 $636,561 $551,773
======== ======== ========
</TABLE>
NOTE 16--SUBSEQUENT EVENTS
The Company will adopt, effective January 1, 1997, subject to shareholder
approval, the DePuy, Inc. Employee Stock Option/Purchase Plan ("the Stock
Purchase Plan") for purposes of providing the employees of the Company with an
opportunity to participate in equity ownership of the Company by purchasing
stock of the Company at a discount. The maximum aggregate number of shares to
be issued under the Stock Purchase Plan
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
will be 600,000. The committee administering the Stock Purchase Plan will
determine the maximum number of shares to be issued during each annual period,
except that the maximum number of shares to be issued during the 1997 annual
period will be 150,000. All employees who have completed 90 days of employment
with the Company are eligible to participate in offerings under the Stock
Purchase Plan. In order to participate, an eligible employee must authorize a
payroll deduction at a rate of 1% to 10% of base pay, which deductions are
credited to the participant's plan account. The option price of the stock
under the Stock Purchase Plan is 85% of the lower of the fair market value of
the stock on the offering commencement date or the termination date.
UNAUDITED SUBSEQUENT EVENT On February 28, 1997, the Company entered into an
agreement to purchase 89.6% of the shares of Landanger-Camus ("Landanger") or
1,939,452 shares which are currently held by members of the Landanger family
and certain minority shareholders. The purchase price has not yet been
finalized but approximates $145 million (translated at the February 28, 1997
exchange rate of 5.7), subject to certain adjustments including changes
resulting from the audit of the net asset value of Landanger. The purchase
agreement is subject to a number of conditions, including receipt of necessary
regulatory approvals. Upon satisfaction of such conditions, the purchase will
be followed by a tender offer to purchase the remaining 10.4% shares owned by
minority shareholders. Landanger, headquartered in France, is a manufacturer
of hip implants and a distributor of orthopaedic devices and supplies. For the
year ended August 31, 1996, Landanger reported sales of $99.5 million and net
income of $8.0 million (unaudited and translated at the average exchange rate
of 5.0 for the fiscal year).
43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of DePuy, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 45 present fairly, in all
material respects, the financial position of DePuy, Inc. and its subsidiaries
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Indianapolis, Indiana
February 21, 1997
44
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be provided under Item 10 with respect to the
Company's Executive Officers is included in Part I hereof under Item 4. The
material set forth under the headings "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" on pages 4 through 5 and page
13 of the Company's Proxy Statement for its Annual Meeting to be held on May
1, 1997 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The material set forth under the heading "Executive Compensation" on pages 6
through 15 of the Company's Proxy Statement for its Annual Meeting to be held
on May 1, 1997 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The material set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" on pages 2 through 3 of the Company's Proxy
Statement for its Annual Meeting to be held on May 1, 1997 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The material set forth under the heading "Certain Relationships and Related
Transactions" on pages 32 through 33 of the Company's Proxy Statement for its
Annual Meeting to be held on May 1, 1997 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Consolidated Statements of Income for the three years ended December
31, 1996
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
(2) Financial Statement Schedules:
II Valuation and Qualifying Accounts for the three years ended December
31, 1996
(b) Reports on Form 8-K.
None.
(c) Exhibits.
3.1 Articles of Incorporation of the Company, incorporated by reference
to Exhibit 3.1 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).
3.2 By-laws of the Company, incorporated by reference to Exhibit 3.2 of
the Company's Registration Statement on Form S-1 (Registration No.
333-09345).
10.1 Employment Agreement, dated May 1, 1996, between Jim Lent and DePuy
Inc., incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-1 (Registration No. 333-09345).
45
<PAGE>
10.2 Employment Agreement, dated July 13, 1992, between Michael J. Dormer
and DePuy Inc., incorporated by reference to Exhibit 10.2 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.3 Employment Agreement, dated May 1, 1996, between Michael J. Dormer
and DePuy International Limited, incorporated by reference to Exhibit
10.3 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).
10.4 Employment Agreement, dated May 1, 1996, between R. Michael McCaffrey
and DePuy Inc., incorporated by reference to Exhibit 10.4 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.5 Employment Agreement, dated May 1, 1996, between William E. Tidmore
and DePuy Inc., incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.6 Employment Agreement, dated May 1, 1996, between Robert E. Morel and
DePuy Inc., incorporated by reference to Exhibit 10.6 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.7 Employment Agreement, dated May 1, 1996, between Steve L. Artusi and
DePuy Inc., incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.8 Employment Agreement, dated May 1, 1996, between Thomas J. Oberhausen
and DePuy Inc., incorporated by reference to Exhibit 10.8 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.9 Employment Agreement, dated May 1, 1996, between G. Taylor Seward and
DePuy Inc., incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.10 DePuy, Inc. 1996 Equity Incentive Plan.
10.11 DePuy, Inc. Employee Stock Option/Purchase Plan.
10.12 DePuy, Inc. Senior Executive Incentive Compensation Plan.
10.13 Corange Limited Incentive and Performance Plan--Executive
Remuneration, incorporated by reference to Exhibit 10.21 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.14 DePuy, Inc. and DePuy International Limited Orthopaedic Extra-
Compensation Opportunity, incorporated by reference to Exhibit 10.22
of the Company's Registration Statement on Form S-1 (Registration No.
333-09345).
10.15 DePuy, Inc. Supplemental Retirement Plan (Plan No. 1) (As Amended and
Restated Effective as of October 1, 1996).
10.16 DePuy, Inc. Supplemental Retirement Plan (Plan No. 2) (As Amended and
Restated Effective as of October 1, 1996).
10.17 Trust Deed, dated July 1, 1993, between DePuy International Limited
and George Taylor Seward and Others, incorporated by reference to
Exhibit 10.25 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).
10.18 Deed of Appointment and Retirement for the DePuy Executive Retirement
Benefits Scheme, dated January 23, 1996, between DePuy International
Limited and George Taylor Seward and Others, incorporated by
reference to Exhibit 10.26 of the Company's Registration Statement on
Form S-1 (Registration No. 333-09345).
46
<PAGE>
10.19 DePuy, Inc. 1996 Incentive Planning and Special Recognition Program,
incorporated by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (Registration No. 333-09345).
10.20 DePuy, Inc. Excess Retirement Plan (As Amended and in Effect as of
October 1, 1996).
10.21 Tax Allocation and Indemnity Agreement, dated October 30, 1996,
between the Company, Boehringer Mannheim Corporation and Corange
Limited.
10.22 Registration Rights Agreement, dated October 30, 1996, between
Corange Limited, Corange International Limited, Corange International
Holdings B.V., Pharminvest S.A., and the Company.
10.23 Second License Agreement, dated July 24, 1979, by and between
Biomedical Engineering Corp. and DePuy Division of Bio-Dynamics,
Inc., incorporated by reference to Exhibit 10.14 of the Company's
Registration Statement on Form S-1 (Registration No. 333-09345).*
10.24 Amendment to Second License Agreement, dated March 25, 1985, by and
between Biomedical Engineering Trust and DePuy, Division of
Boehringer Mannheim Corporation, incorporated by reference to Exhibit
10.15 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.25 Purchase Agreement, dated June 1, 1995, by and between Columbia/HCA
Healthcare Corporation and DePuy Inc., incorporated by reference to
Exhibit 10.16 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.26 Letter Agreement, dated July 3, 1995, by and between Columbia/HCA
Healthcare Corporation and DePuy Inc., incorporated by reference to
Exhibit 10.17 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.27 Purchase Agreement, dated August 15, 1995, by and between
Columbia/HCA Healthcare Corporation and DePuy Inc., incorporated by
reference to Exhibit 10.18 of the Company's Registration Statement on
Form S-1 (Registration No. 333-09345).*
10.28 Purchase Agreement, dated June 15, 1995, by and between Columbia/HCA
Healthcare Corporation and DePuy Inc., incorporated by reference to
Exhibit 10.19 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.29 Joint Venture Agreement, dated February 4, 1993, by and among DePuy
Inc., Biedermann Motech GmbH and Lutz Biedermann, incorporated by
reference to Exhibit 10.20 of the Company's Registration Statement on
Form S-1 (Registration No. 333-09345).*
11.1 Statement re Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- --------
* Confidential portions omitted and filed separately with the Securities and
Exchange Commission.
47
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNDER DULY AUTHORIZED.
DePuy, Inc.
March 28, 1997 By: /s/ James A. Lent
----------------------------------
JAMES A. LENT
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ James A. Lent Chairman and Chief March 28, 1997
_____________________________________ Executive Officer
JAMES A. LENT
/s/ Thomas J. Oberhausen Senior Vice March 28, 1997
_____________________________________ President and Chief
THOMAS J. OBERHAUSEN Financial and
Accounting Officer
/s/ Richard C. Bolesky Director March 28, 1997
_____________________________________
RICHARD C. BOLESKY
/s/ Richard A. Gilleland Director March 28, 1997
_____________________________________
RICHARD A. GILLELAND
/s/ Gerald C. Hanes Director March 28, 1997
_____________________________________
GERALD C. HANES
/s/ M.L. Lowenkron Director March 28, 1997
_____________________________________
M.L. LOWENKRON
Director March , 1997
_____________________________________
ROBERT VOLZ, M.D.
/s/ Anthony Williams Director March 28, 1997
_____________________________________
ANTHONY WILLIAMS
48
<PAGE>
SCHEDULE II
DEPUY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DESCRIPTION ADDITIONS
- ----------- ----------------------
DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO BAD DEBTS BALANCE AT
BEGINNING COSTS AND OTHER WRITTEN END OF
OF PERIOD EXPENSES ACCOUNTS(A) OFF PERIOD
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
For the year ended
December 31, 1996...... $6,628 $2,973 $466 $(1,533) $8,534
For the year ended
December 31, 1995...... 5,677 1,863 9 (921) 6,628
For the year ended
December 31, 1994...... 4,004 1,927 9 (263) 5,677
Deferred tax valuation
allowances:
For the year ended
December 31, 1996...... $ 902 $1,852 $-- $ -- $2,754
For the year ended
December 31, 1995...... 333 569 -- -- 902
For the year ended
December 31, 1994...... -- 333 -- -- 333
</TABLE>
- --------
(a) Recovery of amounts previously written off.
S-1
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of the Company, incorporated by reference
to Exhibit 3.1 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).
3.2 By-laws of the Company, incorporated by reference to Exhibit 3.2 of
the Company's Registration Statement on Form S-1 (Registration No.
333-09345).
10.1 Employment Agreement, dated May 1, 1996, between Jim Lent and DePuy
Inc., incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-1 (Registration No. 333-09345).
10.2 Employment Agreement, dated July 13, 1992, between Michael J. Dormer
and DePuy Inc., incorporated by reference to Exhibit 10.2 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.3 Employment Agreement, dated May 1, 1996, between Michael J. Dormer
and DePuy International Limited, incorporated by reference to Exhibit
10.3 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).
10.4 Employment Agreement, dated May 1, 1996, between R. Michael McCaffrey
and DePuy Inc., incorporated by reference to Exhibit 10.4 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.5 Employment Agreement, dated May 1, 1996, between William E. Tidmore
and DePuy Inc., incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.6 Employment Agreement, dated May 1, 1996, between Robert E. Morel and
DePuy Inc., incorporated by reference to Exhibit 10.6 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.7 Employment Agreement, dated May 1, 1996, between Steve L. Artusi and
DePuy Inc., incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.8 Employment Agreement, dated May 1, 1996, between Thomas J. Oberhausen
and DePuy Inc., incorporated by reference to Exhibit 10.8 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.9 Employment Agreement, dated May 1, 1996, between G. Taylor Seward and
DePuy Inc., incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.10 DePuy, Inc. 1996 Equity Incentive Plan.
10.11 DePuy, Inc. Employee Stock Option/Purchase Plan.
10.12 DePuy, Inc. Senior Executive Incentive Compensation Plan.
10.13 Corange Limited Incentive and Performance Plan--Executive
Remuneration, incorporated by reference to Exhibit 10.21 of the
Company's Registration Statement on Form S-1 (Registration No. 333-
09345).
10.14 DePuy, Inc. and DePuy International Limited Orthopaedic Extra-
Compensation Opportunity, incorporated by reference to Exhibit 10.22
of the Company's Registration Statement on Form S-1 (Registration No.
333-09345).
10.15 DePuy, Inc. Supplemental Retirement Plan (Plan No. 1) (As Amended and
Restated Effective as of October 1, 1996).
<PAGE>
10.16 DePuy, Inc. Supplemental Retirement Plan (Plan No. 2) (As Amended and
Restated Effective as of October 1, 1996).
10.17 Trust Deed, dated July 1, 1993, between DePuy International Limited
and George Taylor Seward and Others, incorporated by reference to
Exhibit 10.25 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).
10.18 Deed of Appointment and Retirement for the DePuy Executive Retirement
Benefits Scheme, dated January 23, 1996, between DePuy International
Limited and George Taylor Seward and Others, incorporated by
reference to Exhibit 10.26 of the Company's Registration Statement on
Form S-1 (Registration No. 333-09345).
10.19 DePuy, Inc. 1996 Incentive Planning and Special Recognition Program,
incorporated by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (Registration No. 333-09345).
10.20 DePuy, Inc. Excess Retirement Plan (As Amended and in Effect as of
October 1, 1996).
10.21 Tax Allocation and Indemnity Agreement, dated October 30, 1996,
between the Company, Boehringer Mannheim Corporation and Corange
Limited.
10.22 Registration Rights Agreement, dated October 30, 1996, between
Corange Limited, Corange International Limited, Corange International
Holdings B.V., Pharminvest S.A., and the Company.
10.23 Second License Agreement, dated July 24, 1979, by and between
Biomedical Engineering Corp. and DePuy Division of Bio-Dynamics, Inc,
incorporated by reference to Exhibit 10.14 of the Company's
Registration Statement on Form S-1 (Registration No. 333-09345).*
10.24 Amendment to Second License Agreement, dated March 25, 1985, by and
between Biomedical Engineering Trust and DePuy, Division of
Boehringer Mannheim Corporation, incorporated by reference to Exhibit
10.15 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.25 Purchase Agreement, dated June 1, 1995, by and between Columbia/HCA
Healthcare Corporation and DePuy Inc., incorporated by reference to
Exhibit 10.16 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.26 Letter Agreement, dated July 3, 1995, by and between Columbia/HCA
Healthcare Corporation and DePuy Inc., incorporated by reference to
Exhibit 10.17 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.27 Purchase Agreement, dated August 15, 1995, by and between
Columbia/HCA Healthcare Corporation and DePuy Inc., incorporated by
reference to Exhibit 10.18 of the Company's Registration Statement on
Form S-1 (Registration No. 333-09345).*
10.28 Purchase Agreement, dated June 15, 1995, by and between Columbia/HCA
Healthcare Corporation and DePuy Inc., incorporated by reference to
Exhibit 10.19 of the Company's Registration Statement on Form S-1
(Registration No. 333-09345).*
10.29 Joint Venture Agreement, dated February 4, 1993, by and among DePuy
Inc., Biedermann Motech GmbH and Lutz Biedermann, incorporated by
reference to Exhibit 10.20 of the Company's Registration Statement on
Form S-1 (Registration No. 333-09345).*
11.1 Statement re Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- --------
* Confidential portions omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 10.10
DEPUY, INC.
1996 EQUITY INCENTIVE PLAN
SECTION 1. PURPOSE. The purpose of the DePuy, Inc. 1996 Equity Incentive
Plan is to promote the interests of DePuy, Inc. and its stockholders by (i)
attracting and retaining exceptional executive personnel, other key employees,
consultants and sales representatives of the Company and its Affiliates; (ii)
attracting and retaining non-employee advisors to serve on the Board of
Directors of the Company; and (iii) enabling such persons to participate in
the long-term growth and financial success of the Company.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have
the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly, is
controlled by or under common control with the Company and (ii) any entity
in which the Company has a significant equity interest, in either case as
determined by the Committee.
"Award" shall mean any Option, Stock Appreciation Right, Restricted Stock
Award, Performance Award, Phantom Stock Unit or other stock-based award as
herein provided.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may be required to be
executed or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall be deemed to have occurred if: (i) any "person"
as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other
than the Company, an Affiliate, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or an Affiliate,
or any Company owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of Stock
of the Company), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the
Company's then outstanding securities; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the
Plan), individuals who at the beginning of such period constitute the Board
of Directors, and any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a
transaction described in clause (i), (iii), or (iv) of this paragraph whose
election by the Board of Directors or nomination for election by the
Company stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning
of the two-year period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a
majority of the Board of Directors; (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation
which is not an Affiliate, other than a merger that would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; provided, however, that a merger or consolidation effected
to implement a recapitalization of the Company or an Affiliate (or similar
transaction) in which no person acquires more than 30% of the combined
voting power of the Company's then outstanding securities shall not
constitute a Change in Control of the Company; or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets. If any of the events enumerated
in clauses (i) through (iv) occur, the Board shall determine the effective
date of the Change in Control resulting therefrom, for purposes of the
Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" shall mean a committee of the Board designated by the Board
to administer the Plan and composed of not less than the minimum number of
persons from time to time required by Rule 16b-3
1
<PAGE>
and Section 162(m) of the Code, each of whom, to the extent necessary to
comply with Rule 16b-3 and Section 162(m) of the Code only, is a
"disinterested person" and an "outside director" within the meaning of Rule
16b-3 and Section 162(m) of the Code, respectively. Until otherwise
determined by the Board, the Compensation Committee designated by the Board
shall be the Committee under the Plan.
"Company" shall mean DePuy, Inc., a Delaware corporation, and its
successors and assigns.
"Consultant" shall mean a person who has agreed to perform consulting
services on behalf of the Company or an Affiliate.
"Director" shall mean a member of the Board.
"Employee" shall mean an employee of the Company or of any Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officer" shall mean, at any time, an individual who is an
executive officer of the Company within the meaning of Exchange Act Rule
3b-7 as promulgated and interpreted by the SEC under the Exchange Act, or
any successor rule or regulation thereto as in effect from time to time, or
who is an officer of the Company within the meaning of Exchange Act Rule
16a-l(f) as promulgated and interpreted by the SEC under the Exchange Act,
or any successor rule or regulation thereto as in effect from time to time.
"Fair Market Value" shall mean, except as otherwise set forth herein, the
fair market value of the property or other item being valued, as determined
by the Committee in its sole discretion.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to
meet the requirements of Section 422 of the Code or any successor provision
thereto.
"Net After-Tax Amount" shall mean the net amount of compensation,
assuming for this purpose only that all vested Awards and other forms of
compensation subject to vesting upon such Change of Control are exercised
upon such Change in Control, to be received (or deemed to have been
received) by such Participant in connection with such Change of Control
under any award agreement and under any other plan, arrangement or contract
of the Company to which such Participant is a party, after giving effect to
all income and excise taxes applicable to such payments.
"Non-Employee Director" shall mean a member of the Board who is not a
full-time employee of the Company.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from
the Company that is granted under Section 6 of the Plan and that is not
intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option and shall include a Restoration Option.
"Other Stock-Based Award" shall mean any right granted under Section 11
of the Plan.
"Participant" shall mean any Employee, Sales Representative, or
Consultant selected by the Committee to receive an Award under the Plan or
any Non-Employee Director who receives an Award pursuant to Section 12 of
the Plan.
"Performance Award" shall mean any right granted under Section 10 of the
Plan.
"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization,
government or political subdivision thereof or other entity.
"Phantom Stock Unit" shall mean a hypothetical Share which is cancelled
by the delivery of an actual Share or, in the discretion of the Company, by
the payment of cash (or a combination of cash and Shares) in an amount
equal to the Fair Market Value of a Share on the date of surrender.
"Plan" shall mean this DePuy, Inc. 1996 Equity Incentive Plan as the same
shall be amended, revised or terminated from time to time.
"QDRO" shall mean a domestic relations order meeting such requirements as
the Committee shall determine, in its sole discretion.
2
<PAGE>
"Restoration Option" shall mean an Option granted pursuant to Section
6(f) of the Plan.
"Restricted Stock" shall mean any Share granted under Section 8 of the
Plan.
"Restricted Stock Unit" shall mean any unit granted under Section 8 of
the Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the
SEC under the Exchange Act, or any successor rule or regulation thereto as
in effect from time to time.
"Sales Representative" shall mean any individual who acts as an
independent sales representative and/or distributor for the Company and/or
Affiliate.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the staff thereof.
"Shares" shall mean shares of the common stock of the Company, or such
other securities of the Company as may be designated by the Committee from
time to time.
"Stock Appreciation Right" shall mean any right granted under Section 7
of the Plan.
"Substitute Awards" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company
acquired by the Company or with which the Company combines.
SECTION 3. ADMINISTRATION.
(a) Authority of Committee. The Plan shall be administered by the Committee.
Subject to the terms of the Plan and applicable law, and in addition to other
express powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and discretionary authority to: (i) designate
Participants; (ii) determine the type or types of Awards to be granted to
eligible persons and the rights of Participants to such Awards; (iii)
determine the number of Shares to be covered by, or with respect to which
payments, rights, or other matters are to be calculated in connection with,
Awards; (iv) determine the terms and conditions of any Award; (v) determine
whether, to what extent, and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards or other property,
or canceled, forfeited, or suspended and the method or methods by which Awards
may be settled, exercised, canceled, forfeited or suspended; (vi) determine
whether, to what extent and under what circumstances cash, Shares, other
securities, other Awards, other property and other amounts payable with
respect to an Award shall be deferred either automatically or at the election
of the holder thereof or of the Committee; (vii) interpret and administer the
Plan and any instrument or agreement relating to, or Award made under, the
Plan; (viii) establish, amend, suspend, or waive such rules and regulations
and appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (ix) make any other determination and take any
other action that the Committee deems necessary or desirable for the
administration of the Plan.
(b) Committee Discretion Binding. Unless otherwise expressly provided in the
Plan, all designations, determinations, interpretations and other decisions
under or with respect to the Plan or any award shall be within the sole
discretion of the Committee, may be made at any time and shall be final,
conclusive and binding upon all Persons, including the Company, any Affiliate,
any Participant, any holder or beneficiary of any Award, any stockholder and
any Employee.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) Shares Available. Subject to adjustment as provided in Section 4(b), the
number of Shares with respect to which Awards may be granted under the Plan
shall be equal to 9,485,069. The maximum number of Shares with respect to
which Options and Stock Appreciation Rights may be granted under the Plan to
any individual in any calendar year shall be equal to 1,000,000 Shares. If,
after the effective date of the Plan, any Shares covered by an Award granted
under the Plan or by an award granted under any prior stock award plan of the
Company, or to which such an Award or award relates, are forfeited, or if such
an Award or award is settled for cash or otherwise terminates or is canceled
for any reason without the delivery of Shares, then the Shares covered by such
Award or award, or to which such Award or award relates, or the number of
Shares otherwise
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counted against the aggregate number of Shares with respect to which Awards
may be granted, to the extent of any such settlement, forfeiture, termination
or cancellation, shall again become Shares with respect to which Awards may be
granted. In the event that any Option or other Award granted hereunder or any
award granted under any prior stock award plan of the Company is exercised
through the delivery of Shares, or in the event that withholding tax
liabilities arising from such Award or award are satisfied by the withholding
of Shares by the Company, the number of Shares available for Awards under the
Plan shall be increased by the number of Shares so surrendered or withheld.
(b) Adjustments. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares
such that an adjustment is determined by the Committee to be appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall, in
such manner as it may deem equitable, adjust any or all of (i) the number of
Shares or other securities of the Company (or number and kind of other
securities or property) with respect to which Awards may be granted, (ii) the
number of Shares or other securities of the Company (or number and kind of
other securities or property) subject to outstanding Awards, and (iii) the
grant or exercise price with respect to any Award, or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding Award;
provided, in each case, that, with respect to Awards of Incentive Stock
Options, no such adjustment shall be authorized to the extent that such
authority would cause the Plan to violate Section 422(b)(1) of the Code, as
from time to time amended.
(c) Substitute Awards. Any Shares underlying Substitute Awards shall not be
counted against the Shares available for Awards under the Plan.
(d) Source of Shares Deliverable Under Awards. Any Shares delivered pursuant
to an Award may consist, in whole or in part, of authorized and unissued
Shares or of treasury Shares.
SECTION 5. ELIGIBILITY. The following persons shall be eligible to participate
in the Plan:
(a) any employee, including any officer or employee-director of the
Company or an Affiliate who is not a member of the Committee;
(b) any Sales Representative of the Company or an Affiliate;
(c) any Consultant of the Company or an Affiliate; and
(d) any Non-Employee Director.
SECTION 6. STOCK OPTIONS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the Employees, Sales
Representatives and Consultants to whom Options shall be granted, the number
of Shares to be covered by each Option, the option price therefor and the
conditions and limitations applicable to the exercise of the Option. The
Committee shall have the discretion and authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both types of
options. In the case of Incentive Stock Options, the terms and conditions of
such grants shall be subject to and comply with such rules as may be
prescribed by Section 422 of the Code, as from time to time amended, and any
regulations implementing such statute.
(b) Exercise Price. Subject to the requirement set forth in Section 6(e) the
Committee in its sole discretion shall establish the exercise price at the
time each option is granted.
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(c) Term. Subject to the provisions of the Plan, the term of any Option
granted hereunder shall be 10 years from the date of grant.
(d) Exercise. Each Option shall be exercisable at such times and subject to
such terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award Agreement or thereafter. The Committee may
impose such conditions with respect to the exercise of options, including
without limitation, any relating to the application of federal or state
securities laws, as it may deem necessary or advisable.
(e) Payment. No Shares shall be delivered pursuant to any exercise of an
Option until payment in full of the option price therefor is received by the
Company. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging Shares owned by the
optionee (which are not the subject of any pledge or other security interest),
or by the delivery of irrevocable instructions to a broker dealer pursuant to
procedures approved by the Committee to sell Shares to be received upon
exercise of an Option and to remit the proceeds to the Company, or by a
combination of the foregoing, provided that the combined value of all cash and
cash equivalents and the Fair Market Value of any such Shares so tendered to
the Company as of the date of such tender is at least equal to such option
price.
(f) Restoration Options. In the event that any Participant delivers Shares
in payment of the exercise price of any Option granted hereunder in accordance
with Section 6(d) or of any option granted under a prior stock award plan of
the Company, or in the event that the withholding tax liability arising upon
exercise of any such Option or option by a Participant is satisfied through
the withholding by the Company of Shares otherwise deliverable upon exercise
of the Option or option, the Committee shall have the authority to grant or
provide for the automatic grant of a Restoration Option to such Participant.
The grant of a Restoration Option shall be subject to the satisfaction of such
conditions or criteria as the Committee in its sole discretion shall establish
from time to time. A Restoration Option shall entitle the holder thereof to
purchase a number of shares equal to the number of such Shares so delivered or
withheld upon exercise of the original Option or option. A Restoration Option
shall have a per share exercise price of not less than 100% of the per Share
Fair Market Value of the date of grant of such Restoration Option and such
other terms and conditions as the Committee in its sole discretion shall
determine.
SECTION 7. STOCK APPRECIATION RIGHTS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the eligible persons
to whom Stock Appreciation Rights shall be granted, the number of Shares to be
covered by each Stock Appreciation Right Award, the grant price thereof and
the conditions and limitations applicable to the exercise thereof. Stock
Appreciation Rights may be granted in tandem with another Award, in addition
to another Award or freestanding and unrelated to another Award. Stock
Appreciation Rights granted in tandem with or in addition to an Award may be
granted either at the same time as the Award or at a later time. Stock
Appreciation Rights shall not be exercisable earlier than six months after
grant and shall have a grant price as determined by the Committee on the date
of grant.
(b) Exercise and Payment. A Stock Appreciation Right shall entitle the
Participant to receive an amount equal to the excess of the Fair Market Value
of a Share on the date of exercise of the Stock Appreciation Right over the
grant price thereof, provided that the Committee may for administrative
convenience determine that, with respect to any Stock Appreciation Right that
is not related to an Incentive Stock Option and that can only be exercised for
cash during limited periods of time in order to satisfy the conditions of Rule
16b-3, the exercise of such Stock Appreciation Right for cash during such
limited period shall be deemed to occur for all purposes hereunder on the day
during such limited period on which the Fair Market Value of the Shares is the
highest. Any such determination by the Committee may be changed by the
Committee from time to time and may govern the exercise of Stock Appreciation
Rights granted prior to such determination as well as Stock Appreciation
Rights thereafter granted. The Committee shall determine whether a Stock
Appreciation Right shall be settled in cash, Shares or a combination of cash
and Shares.
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(c) Other Terms and Conditions. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine, at or after the
grant of a Stock Appreciation Right, the term, methods of exercise, methods
and form of settlement, and any other terms and conditions of any Stock
Appreciation Right. Any such determination by the Committee may be changed by
the Committee from time to time and may govern the exercise of Stock
Appreciation Rights granted or exercised prior to such determination as well
as Stock Appreciation Rights granted or exercised thereafter. The Committee
may impose such conditions or restrictions on the exercise of any Stock
Appreciation Right as it shall deem appropriate.
SECTION 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the eligible persons
to whom Shares of Restricted Stock and Restricted Stock Units shall be
granted, the number of Shares of Restricted Stock and/or the number of
Restricted Stock Units to be granted to each Participant, the duration of the
period during which, and the conditions under which, the Restricted Stock and
Restricted Stock Units may be forfeited to the Company, and the other terms
and conditions of such Awards. The maximum number of shares of Restricted
Stock available under the Plan will be 350,000.
(b) Transfer Restrictions. Shares of Restricted Stock and Restricted Stock
Units may not be sold, assigned, transferred, pledged or otherwise encumbered,
except, in the case of Restricted Stock, as provided in the Plan or the
applicable Award Agreements. Certificates issued in respect of Shares of
Restricted Stock shall be registered in the name of the Participant and
deposited by such Participant, together with a stock power endorsed in blank,
with the Company. Upon the lapse of the restrictions applicable to such Shares
of Restricted Stock, the Company shall deliver such certificates to the
Participant or the Participant's legal representative.
(c) Payment. Each Restricted Stock Unit shall have a value equal to the Fair
Market Value of a Share. Restricted Stock Units shall be paid in cash, Shares,
other securities or other property, as determined in the sole discretion of
the Committee, upon the lapse of the restrictions applicable thereto, or
otherwise in accordance with the Applicable Award Agreement.
(d) Dividends and Distributions. Dividends and other distributions paid on
or in respect of any Shares of Restricted Stock may be paid directly to the
Participant, or may be reinvested in additional Shares of Restricted Stock or
in additional Restricted Stock Units, as determined by the Committee in its
sole discretion.
SECTION 9. PHANTOM STOCK UNITS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the eligible persons
to whom Phantom Stock Units shall be granted, the number of Phantom Stock
Units to be granted to each Participant, the duration of the period during
which, and the conditions under which, the Phantom Stock Units may be
forfeited to the Company and the other terms and conditions of such Awards.
(b) Surrender. Each Award Agreement with respect to a Phantom Stock Unit
shall specify the date on which the Phantom Stock Unit shall be surrendered,
and thereby cancelled by delivery of a Share with respect thereto, subject to
such terms and conditions as the Committee may specify, in its sole
discretion, in the applicable Award Agreement or thereafter. The date on which
the Phantom Stock Units shall be surrendered may be accelerated upon the
occurrence of certain events, as determined by the Committee in its sole
discretion and as set forth in the applicable Award Agreement.
(c) Dividends and Distributions. Payments may be made to Participants who
have been awarded Phantom Stock Units in an amount equal to dividends and
other distributions paid on or in respect of an equivalent number of Shares.
Such payments may be paid directly to the Participant or may be reinvested in
additional Phantom Stock Units, as determined by the Committee in its sole
discretion.
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SECTION 10. PERFORMANCE AWARDS.
(a) Grant. The Committee shall have sole and complete authority to determine
each eligible person who shall receive a "Performance Award," which shall
consist of a right that is (i) denominated in cash or Shares, (ii) valued, as
determined by the Committee, in accordance with the achievement of such
performance goals during such performance periods as the Committee shall
establish, and (iii) payable at such time and in such form as the Committee
shall determine.
(b) Terms and Conditions. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine the performance
goals to be achieved during any performance period, the length of any
performance period, the amount of any Performance Award and the amount and
kind of any payment or transfer to be made pursuant to any Performance Award.
(c) Payment of Performance Awards. Performance Awards may be paid in a lump
sum or in installments following the close of the performance period or, in
accordance with procedures established by the Committee, on a deferred basis.
SECTION 11. OTHER STOCK-BASED AWARDS. The Committee shall have the
discretion and authority to grant to eligible persons an "Other Stock-Based
Award," which shall consist of any right that is (i) not an Award described in
Sections 6 through 10 above and (ii) an Award of Shares or an Award
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to, Shares (including, without limitation,
securities or rights convertible into Shares), as deemed by the Committee to
be consistent with the purposes of the Plan. Subject to the terms of the Plan
and any applicable Award Agreement, the Committee shall determine the terms
and conditions of any such Other Stock-Based Award.
SECTION 12. NON-EMPLOYEE DIRECTOR.
(a) Automatic Grant. Notwithstanding the authority set forth in Section 3(a)
or any other provision of the Plan, the Committee shall have no power to
determine eligibility for grants of Non-Qualified Options or the number of
Shares for which Non-Qualified Options may be granted or the timing or
exercise price of Non-Qualified Options with respect to any Non-Employee
Director. Grants of Non-Qualified Options to Non-Employee Directors shall be
automatic as set forth in this Section 12.
(b) Options. All Non-Employee Directors who are Directors on the effective
date of the Plan or who become Directors after such date shall be granted
automatically, immediately following the effective date of the Plan or, if
such person becomes a Director after such date, as of the date such person
becomes a Director, a Non-Qualified Stock Option with respect to 20,000
Shares, at an exercise price per Share of the Fair Market Value at the date of
grant. Notwithstanding any other provision of the Plan, for purposes of this
Section, Fair Market Value means the average of the high and low sale price
per Share as finally reported in the exchange of listing, or if the Shares are
not sold on such date, the average of the high and low sale price per Share as
finally reported in the exchange of listing for the most recent prior date on
which Shares were sold. A Non-Qualified Stock Option granted to a Non-Employee
Director shall vest in three equal cumulative installments on each of the
first, second and third anniversaries following the date of grant.
(c) Ineligible Non-Employee Directors. Notwithstanding any other provision
of the Plan, a Non-Employee Director who is the beneficial owner of more than
10% of the total combined voting power of all classes of stock of the Company
as of the date that an automatic grant would otherwise occur under Section
12(b) shall not be eligible for such automatic grant.
SECTION 13. Termination or Suspension of Services to the Company. The
following provisions shall apply in the event that the Participant ceases to
provide services to the Company, either as an Employee, a Sales
Representative, a Consultant or a Non-Employee Director, unless, with respect
to any Participant other than a Non-Employee Director, the Committee shall
have provided otherwise, either at the time of the grant of the Award or
thereafter.
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(a) Non-Qualified Stock Options and Stock Appreciation Rights.
(i) Upon Termination of Services as Employee, Sales Representative or
Consultant.
(A) If the Participant ceases to provide services to the Company or its
Affiliates either as an Employee, Sales Representative or Consultant for
any reason other than death, permanent and total disability or, in the case
of an Employee or Sales Representative, retirement, the Participant's right
to exercise any Non-Qualified Stock Option or Stock Appreciation Right
shall terminate, and such Option or Stock Appreciation Right shall expire,
on the earlier of (1) the first anniversary of the date on which such
relationship terminates or (2) the date such Option or Stock Appreciation
Right would have expired had it not been for the termination of such
relationship. The Participant shall have the right to exercise such Option
or Stock Appreciation Right prior to such expiration to the extent it was
exercisable, but not exercised, as of the date on which such relationship
terminates.
(B) If the Participant ceases to provide services to the Company or its
Affiliates either as an Employee, Sales Representative or Consultant by
reason of death, permanent and total disability or, in the case of an
Employee or Sales Representative, retirement, the Participant or his or her
successor (if such termination results by death) shall have the right to
exercise all Non-Qualified Stock Option or Stock Appreciation Rights, to
the extent exercisable as of the date on which the Participant's
relationship with the Company and its Affiliates terminates, but in no
event shall such option be exercisable later than the date the Option would
have expired had it not been for the termination of such relationship. The
meaning of the terms "total and permanent disability" and "retirement"
shall be determined by the Committee.
(C) Notwithstanding the foregoing, the Committee may, in its discretion,
provide (1) that an Option granted to a Participant may terminate at a date
earlier than set forth above, (2) that an Option granted to a Participant
may terminate at a date later than set forth above, provided such date
shall not be beyond the date the Option would have expired had it not been
for the termination of the Participant's relationship with the Company and
its Affiliates, and (3) that an Option or Stock Appreciation Right may
become immediately exercisable when it finds that such acceleration would
be in the best interest of the Company.
(ii) Upon termination of Service as a Non-Employee Director.
(A) If a Participant who is a Non-Employee Director ceases to serve on
the Board for any reason other than death or under conditions other than as
described in (C) below, the Participant shall have the right to exercise
any unexercised Option for a period of one year from the date on which the
Participant ceases to serve on the Board, to the extent that such Option is
exercisable as of such date, except that in no event should an Option be
exercisable after the expiration of its term.
(B) If a Participant who is a Non-Employee Director ceases to serve on
the Board because of his or her death, the Participant's successor shall
have the right to exercise any unexercised Option until the third
anniversary of the date on which the Participant ceased to serve as a
Director, to the extent exercisable as of such date, except that in no
event shall an Option be exercisable after the expiration of its term.
(C) If a Participant who is a Non-Employee Director ceases to serve on
the Board and the Participant is at least 65 years of age or the
Participant has been a Director or a member of the Board of Directors of
any Affiliate for at least 5 years, the Participant shall have the right to
exercise any unexercised Option until the third anniversary of the date on
which the Participant ceased to serve as a Director, to the extent
exercisable as of such date, except that in no event shall an Option be
exercisable after the expiration of its term.
(b) Incentive Stock Options. Except as otherwise determined by the Committee
at the time of grant, if the Participant's employment with the Company
terminates for any reason, the Participant shall have the right to exercise
any Incentive Stock Option and any related Stock Appreciation Right during the
90 days after such termination of employment to the extent it was exercisable
at the date of such termination, but in no event later than the date the
option would have expired had it not been for the termination of such
employment. If the Participant does not exercise such Option or related Stock
Appreciation Right to the full extent permitted by the preceding sentence, the
remaining exercisable portion of such Option automatically will be deemed a
Non-Qualified Stock Option (except to the extent otherwise provided by Section
421 or Section 422 of the Code), and
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such Option and any related Stock Appreciation Right will be exercisable
during the period set forth in Section 13(a) of the Plan, provided that in the
event that employment terminates because of death or the Participant dies in
such 90-day period, the option will continue to be an Incentive Stock Option
to the extent provided by Section 421 or Section 422 of the Code, or any
successor provisions, and any regulations promulgated thereunder.
(c) Restricted Stock. Except as otherwise determined by the Committee at the
time of grant, upon termination of employment for any reason during the
restriction period, all shares of Restricted Stock still subject to
restriction shall be forfeited by the Participant and reacquired by the
Company at the price (if any) paid by the Participant for such Restricted
Stock, provided that in the event of a Participant's retirement, permanent and
total disability or death, or in cases of special circumstances, the Committee
may, in its sole discretion, when it finds that a waiver would be in the best
interests of the Company, waive in whole or in part any or all remaining
restrictions with respect to such participant's shares of Restricted Stock.
(d) Phantom Stock Units. Except as otherwise determined by the Committee at
the time of grant, upon termination of employment for any reason, the date of
surrender of Phantom Stock Units shall be accelerated and the Phantom Stock
Units shall be automatically and immediately surrendered and cancelled by
delivery of Shares as of the date of such termination.
SECTION 14. CHANGE IN CONTROL. Notwithstanding any other provision of the Plan
to the contrary, upon a Change in Control all outstanding Awards shall vest,
become immediately exercisable or payable or have all restrictions lifted as
may apply to the type of Award and no outstanding Stock Appreciation Right may
be terminated, amended or suspended upon or after a Change in Control;
provided, however, that unless otherwise determined by the Committee at the
time of award or thereafter, if it is determined that the Net After-Tax Amount
to be realized by any Participant, taking into account the accelerated vesting
provided for by this Section as well as all other payments to be received by
such Participant in connection with such Change in Control, would be higher if
Awards did not vest in accordance with this Section, then and to such extent
the Awards shall not vest. The determination of whether any such Award should
not vest shall be made by a nationally recognized accounting firm selected by
the Company, which shall be instructed to consider that (i) Awards and other
forms of compensation subject to vesting upon a Change of Control shall be
vested in the order in which they were granted and within each grant in the
order in which they would otherwise have vested and (ii) unless and to the
extent any other plan, arrangement or contract of the Company pursuant to
which any such payment is to be received provides to the contrary, such other
payment shall be deemed to have occurred after any acceleration of Awards or
other forms of compensation subject to vesting upon a Change of Control.
SECTION 15. AMENDMENT AND TERMINATION.
(a) Amendments to the Plan. Except as set forth in subsection (e) below, the
Board may amend, alter, suspend, discontinue or terminate the Plan or any
portion thereof at any time. Notwithstanding anything to the contrary herein,
the Committee may amend the Plan in such manner as may be necessary so as to
have the Plan conform with local rules and regulations in any jurisdiction
outside the United States or to obtain tax benefits for the Company or
Participants in any such jurisdiction.
(b) Amendments to Awards. Except as set forth in subsection (e) below, the
Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Award theretofore
granted, prospectively or retroactively; provided that any such waiver,
amendment, alteration, suspension, discontinuance, cancellation or termination
that would adversely affect the right of any Participant or any holder or
beneficiary of any Award theretofore granted shall not to that extent be
effective without the consent of the affected Participant, holder or
beneficiary.
(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in
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Section 4(b) hereof) affecting the Company, any Affiliate, or the financial
statements of the Company or any Affiliate, or of changes in applicable laws,
regulations or accounting principles, whenever the Committee determines that
such adjustments are appropriate in order to prevent dilution or enlargement
of the benefits or potential benefits intended to be made available under the
Plan.
(d) Cancellation. Any provision of the Plan or any Award Agreement to the
contrary notwithstanding, the Committee may cause any Award granted hereunder
to be canceled in consideration of a cash payment or alternative Award made to
the holder of such canceled Award equal in value to the Fair Market Value of
such canceled Award.
(e) Non-Employee Directors Provisions. The provisions of Section 12 shall
not be amended more often than once every six months, unless such amendment
would be consistent with the provisions of Rule 16b-3 promulgated under the
Exchange Act (or any successor provision thereto).
SECTION 16. GENERAL PROVISIONS.
(a) Dividend Equivalents. In the sole and complete discretion of the
Committee, an Award, whether made as an Other Stock-Based Award under Section
11 or as an Award granted pursuant to Sections 6 through 10 hereof, may
provide the Participant with dividends or dividend equivalents, payable in
cash, Shares, other securities or other property on a current or deferred
basis.
(b) Nontransferability. No Award shall be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by a Participant, except
by will or the laws of descent and distribution or pursuant to a QDRO;
provided, however, that an Award may be transferable, to the extent set forth
in the applicable Award Agreement, (i) if such Award Agreement provisions do
not disqualify such Award for exemption under Rule 16b-3 or (ii) if such Award
is not intended to qualify for exemption under such rule.
(c) No Rights to Awards. No Employee, Participant or other Person shall have
any claim to be granted any Award, and there is no obligation for uniformity
of treatment of Employees, Participants or holders or beneficiaries of Awards.
The terms and conditions of Awards need not be the same with respect to each
recipient.
(d) Share Certificates. All certificates for Shares or other securities of
the Company or any Affiliate delivered under the Plan pursuant to any Award or
the exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations and other requirements of the Securities and Exchange Commission,
any stock exchange upon which such Shares or other securities are then listed
and any applicable Federal, state or foreign laws, and the Committee may cause
a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions. The Company shall not be required to issue or
deliver Shares to a Participant unless and until the Company is advised by its
counsel that such issuance or delivery does not violate applicable securities
laws, rules or regulations or any rules or regulations of any securities
exchange or system on which Shares are traded or quoted.
(e) Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or
any Affiliate, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to
grant Awards to, or to cancel, modify or waive rights with respect to, or to
alter, discontinue, suspend or terminate Awards held by, Employees who are not
officers or directors of the Company for purposes of Section 16 of the
Exchange Act, or any successor section thereto, or who are otherwise not
subject to such Section.
(f) Withholding. A participant may be required to pay to the Company or any
Affiliate and the Company or any Affiliate shall have the right and is hereby
authorized to withhold from any Award, from any payment due or transfer made
under any Award or under the Plan or from any compensation or other amount
owing to a Participant the amount (in cash, Shares, other securities, other
Awards or other property) of any applicable
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withholding taxes in respect of an Award, its exercise or any payment or
transfer under any Award or under the Plan and to take such other action as
may be necessary in the opinion of the Company to satisfy all obligations for
the payment of such taxes.
(g) Award Agreements. Each Award hereunder shall be evidenced by an Award
Agreement that shall be delivered to the Participant and shall specify the
terms and conditions of the Award and any rules applicable thereto.
(h) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other compensation arrangements, which may, but need not, provide for
the grant of options, restricted stock, Shares and other types of Awards
provided for hereunder (subject to stockholder approval if such approval is
required), and such arrangements may be either generally applicable or
applicable only in specific cases.
(i) No Right to Employment. The grant of an Award shall not be construed as
giving a Participant who is an Employee the right to be retained in the employ
of the Company or any Affiliate or to retain a relationship with the Company
as a Sales Representative, Consultant or Non-Employee Director. Further, the
Company or an Affiliate may at any time dismiss a Participant who is an
Employee from employment, free from any liability or any claim under the Plan,
unless otherwise expressly provided in the Plan or in any Award Agreement.
(j) No Rights as Stockholder. Subject to the provisions of the applicable
Award, no Participant or holder or beneficiary of any Award shall have any
rights as a stockholder with respect to any Shares to be distributed under the
Plan until he or she has become the holder of such Shares. Notwithstanding the
foregoing, in connection with each grant of Restricted Stock hereunder, the
applicable Award shall specify if and to what extent the Participant shall not
be entitled to the rights of a stockholder in respect of such Restricted
Stock.
(k) Governing Law. The validity, construction and effect of the Plan and any
rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware.
(l) Severability. If any provision of the Plan or any Award is or becomes or
is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to
any Person or Award, or would disqualify the Plan or any Award under any law
deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform to the applicable laws, or if it cannot be construed
or deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Award, such provision shall be stricken
as to such jurisdiction, Person or Award and the remainder of the Plan and any
such Award shall remain in full force and effect.
(m) Other Laws. The Committee may refuse to issue or transfer any shares or
other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary
in connection with the exercise of such Award shall be promptly refunded to
the relevant Participant, holder or beneficiary. Without limiting the
generality of the foregoing, no Award granted hereunder shall be construed as
an offer to sell securities of the Company, and no such offer shall be
outstanding, unless and until the Committee in its sole discretion has
determined that any such offer, if made, would be in compliance with all
applicable requirements of the U.S. federal securities laws and any other laws
to which such offer, if made, would be subject. All grants made under the plan
shall, to the extent possible, meet the requirements of Section 162(m) of the
Code.
(n) No Trust or Fund Created. Neither the Plan nor any Award shall create or
be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any
other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company.
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(o) No Fractional Shares. No Fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities or other property shall be paid or transferred in lieu
of any Fractional Shares or whether such Fractional Shares or any rights
thereto shall be canceled, terminated or otherwise eliminated.
(p) Headings. Headings are given to the Sections and subsections of the Plan
solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.
SECTION 17. TERM OF THE PLAN.
(a) Effective Date. The Plan shall be effective as of October 31, 1996, and
subject to approval by the stockholders of the Company either before October
31, 1996, or within one year thereafter.
(b) Expiration Date. No Incentive Stock Option shall be granted under the
Plan after 10 years from October 31, 1996. Unless otherwise expressly provided
in the Plan or in an applicable Award Agreement, any Award granted hereunder
may, and the authority of the Board or the Committee to amend, alter, adjust,
suspend, discontinue or terminate any such Award or to waive any conditions or
right under any such Award shall, continue after the authority for grant of
new Awards hereunder has been exhausted.
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EXHIBIT 10.11
DEPUY, INC.
EMPLOYEE STOCK OPTION/PURCHASE PLAN
ARTICLE I--PURPOSE
1.1 Purpose
The DePuy, Inc. Employee Stock Option/Purchase Plan is intended to provide a
method whereby employees of DePuy, Inc., a Delaware corporation, and its
subsidiary corporations (hereinafter referred to, unless the context otherwise
requires, as the "Company") will have an opportunity to acquire a proprietary
interest in the Company through the purchase of shares of the common stock of
the Company (the "Shares"). It is the intention of the Company to have the
Plan qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the
Plan shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
ARTICLE II--DEFINITIONS
2.1 Base Pay
"Base Pay" shall mean regular straight-time earnings and commissions,
excluding payments for overtime, shift premium, bonuses paid in the form of
commissions or otherwise, other special payments, and other marketing
incentive payments.
2.2 Committee
"Committee" shall mean the individuals described in Article XI.
2.3 Employee
"Employee" means any person who is classified by the Company as full-time or
part-time, is regularly scheduled to work more than 20 hours per week and is
not covered by a collective bargaining agreement to which the Company is a
party, unless such agreement, by specific reference to the Plan, provides for
coverage under the Plan.
2.4 Subsidiary Corporation
"Subsidiary Corporation" shall mean any present or future corporation which
(i) would be a "subsidiary corporation" of DePuy, Inc. as that term is defined
in Section 424 of the Code and (ii) is designated as a participating company
in the Plan by the Committee.
ARTICLE III--ELIGIBILITY AND PARTICIPATION
3.1 Initial Eligibility
Any employee who shall have completed ninety (90) days' employment and shall
be employed by the Company on the date his or her participation in the Plan is
to become effective shall be eligible to participate in an Offering (as such
term is defined below) under the Plan which commences on or after such ninety
day period has concluded.
3.2 Leave of Absence
For purposes of participation in the Plan, a person on leave of absence
shall be deemed to be an employee for the first 90 days of such leave of
absence and such employee's employment shall be deemed to have terminated at
the close of business on the 90th day of such leave of absence unless such
employee shall have returned to regular full-time or part-time employment (as
the case may be) prior to the close of business on such
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90th day. Termination by the Company of any employee's leave of absence, other
than termination of such leave of absence on return to full-time or part-time
employment, shall terminate an employee's employment for all purposes of the
Plan and shall terminate such employee's participation in the Plan and right to
exercise any option.
3.3 Restrictions on Participation
Notwithstanding any provisions of the Plan to the contrary, no employee shall
be granted an option to acquire Shares under the Plan:
(a) if, immediately after the grant, such employee would own Shares,
and/or hold outstanding options to purchase Shares, possessing 5% or more
of the total combined voting power or value of all classes of stock of the
Company (for purposes of this paragraph, the rules of Section 424(d) of the
Code shall apply in determining stock ownership of any employee); or
(b) which permits his or her rights to purchase Shares under all employee
stock purchase plans of the Company and any subsidiary intended to qualify
under Section 423 of the Code to accrue at a rate which exceeds $25,000 in
fair market value of the stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding.
3.4 Commencement of Participation
An eligible employee may become a participant by completing an authorization
for a payroll deduction on the form provided by the Company and filing it with
the office of the Treasurer of the Company (or to such other person as the
Committee shall designate) on or before the date set therefor by the Committee,
which date shall be prior to the Offering Commencement Date (as such term is
defined below) for the Offering. Payroll deductions for a participant shall
commence on the applicable Offering Commencement Date when the participant's
authorization for a payroll deduction becomes effective and shall end on the
Offering Termination Date of the Offering to which such authorization is
applicable unless sooner terminated by the participant as provided in Article
VIII.
ARTICLE IV--OFFERINGS
4.1 Annual Offerings
The Plan will be implemented by four annual offerings of the Company (each,
an "Offering") beginning on the effective date of the Plan, January 1, 1997, or
as soon as practicable thereafter (or on such other date thereafter as the
Committee shall determine) and on each anniversary of the effective date
thereafter for three years, each Offering terminating on the following December
31; provided, however, that each annual Offering may, in the discretion of the
Committee exercised prior to the commencement thereof, be divided into two
six-month Offerings commencing, respectively, on January 1, 1997 or as soon as
practicable thereafter (or on such other date thereafter as the Committee shall
determine) and on the date which is six months subsequent to such date and each
anniversary thereafter and terminating, respectively, on the following June 30
and December 31. The maximum aggregate number of shares to be issued under the
Plan shall be 600,000. The Committee shall determine, in its discretion, the
maximum number of shares to be issued under the Plan during each annual
Offering, except that with respect to the 1997 annual Offering, the maximum
number of shares to be issued under the Plan shall be 150,000.
If a six-month Offering is made, the maximum number of shares to be issued
shall be 1/2 of the number of shares determined by the Committee for the annual
period in which the six-month Offering falls, plus unissued shares, whether
offered or not, from the immediately preceding six-month Offering. As used in
the Plan, "Offering Commencement Date" means the effective date, January 1,
1997 or as soon as practicable thereafter (or such other date thereafter as the
Committee shall determine), any anniversary of the effective date or the date
which is six months subsequent to the effective date or anniversary of the
effective date, as the case may be, on which the particular Offering begins and
"Offering Termination Date" means the June 30 or December 31, as the case may
be, on which the particular Offering terminates.
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ARTICLE V--PAYROLL DEDUCTIONS
5.1 Amount of Deduction
At the time a participant files his or her authorization for payroll
deductions, the participant shall elect to have deductions made from his or her
pay on each payday during the time he or she is a participant in an Offering at
the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his or her base pay in effect
at the Offering Commencement Date of such Offering. In the case of a part-time
hourly employee, such employee's base pay during an Offering shall be
determined by multiplying such employee's regular hourly rate of pay in effect
on the Offering Commencement Date by the number of regularly scheduled hours of
work for such employee during such Offering. In the event that the
participant's base pay is increased or decreased during an Offering, the
payroll deduction percentage which the participant authorized pursuant to the
preceding sentence shall apply with respect to such increased or decreased base
pay amount, and payroll deductions shall be adjusted accordingly.
In the event that a person becomes an employee under Section 2.3 of the Plan
during an Offering, such person shall then be entitled to participate in the
Plan and in any future or current Offering, to the extent possible, as
determined by the Committee, by authorizing payroll deductions and electing a
payroll deduction percentage at such time. In the event that a participant
ceases to be an employee under Section 2.3 of the Plan during an Offering, such
person shall no longer be eligible to participate in the Plan and in any future
or current Offering.
5.2 Participant's Account
All payroll deductions made for a participant shall be credited to the
account established with respect to such participant under the Plan (the
"Account"). A participant may not make any separate cash payment into such
Account except when on leave of absence and, then, only as provided in Section
5.4.
5.3 Changes in Payroll Deductions
A participant may discontinue his or her participation in the Plan as
provided in Article VIII, but no other change can be made during an Offering
and, specifically, a participant may not alter the amount of his or her payroll
deductions for that Offering.
5.4 Leave of Absence
A participant who is on a leave of absence shall have the right to elect,
subject to Section 8.5: (a) to withdraw the balance in his or her Account
pursuant to Section 7.2, (b) to discontinue contributions to the Plan but
remain a participant in the Plan, or (c) to remain a participant in the Plan
during such leave of absence, authorizing deductions to be made from payments
by the Company to the participant during such leave of absence and undertaking
to make cash payments to the Plan at the end of each payroll period to the
extent that amounts payable by the Company to such participant are insufficient
to meet such participant's authorized Plan deductions.
ARTICLE VI--GRANTING OF OPTION
6.1 Number of Option Shares
On the Commencement Date of each Offering, a participating employee shall be
deemed to have been granted an option to purchase a maximum number of Shares
equal to an amount determined as follows: an amount equal to (i) that
percentage of the employee's base pay which he has elected to have withheld
(but not in any case in excess of 10%) multiplied by (ii) the employee's base
pay during the period of the Offering (iii) divided by 85% of the market value
of a Share on the applicable Offering Commencement Date. The market value of a
Share shall be determined as provided in paragraphs (a) and (b) of Section 6.2
below. An employee's base pay during the period of an Offering shall be
determined by multiplying, in the case of a one-year Offering, the employee's
normal weekly rate of pay (as in effect on the last day prior to the
Commencement Date of the
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particular Offering) by 52 or the hourly rate by 2,080 or, in the case of a
six-month Offering, by 26 or 1,040, as the case may be, provided that, in the
case of a part-time hourly employee, the employee's base pay during the period
of an Offering shall be determined by multiplying such employee's hourly rate
by the number of regularly scheduled hours of work for such employee during
such Offering.
6.2 Option Price
The option price of each Share purchased with payroll deductions made during
such annual Offering with respect to a participant therein shall be the lower
of:
(a) 85% of the closing price of a Share on the Offering Commencement Date
or the nearest prior business day on which trading occurred on the exchange
where the Company Stock is to be listed; or
(b) 85% of the closing price of a Share on the Offering Termination Date
or the nearest prior business day on which trading occurred on the exchange
where the Share is to be listed. If Shares are not admitted to trading on
any of the aforesaid dates for which closing prices of the stock are to be
determined, then reference shall be made to the fair market value of Shares
on that date, as determined on such basis as shall be established or
specified for the purpose by the Committee.
ARTICLE VII--EXERCISE OF OPTION
7.1 Automatic Exercise
Unless a participant gives contrary written notice to the Company as
hereinafter provided, the participant's option for the purpose of acquiring
Shares with payroll deductions made during any Offering will be deemed to have
been exercised automatically on the Offering Termination Date applicable to
such Offering, for the purchase of the number of full and fractional Shares
which the accumulated payroll deductions in the participant's Account at that
time will purchase at the applicable option price (but not in excess of the
number of shares for which options have been granted to the employee pursuant
to Section 6.1), and any excess in the participant's account at that time will
be returned to the participant.
7.2 Withdrawal of Account
By written notice to the Treasurer of the Company (or other person as the
Committee shall designate), at any time prior to the Offering Termination Date
applicable to any Offering, a participant may elect to withdraw all the
accumulated payroll deductions in his or her Account at such time.
7.3 Transfer of Stock
As of each Offering Termination Date, the custodian appointed pursuant to
Section 11.2 (the "Custodian") shall transfer to each participant's Account the
Shares acquired pursuant to Section 7.1 as of such Offering Termination Date
with respect to each participant.
7.4 Transferability of Option
During a participant's lifetime, options held by such participant shall be
exercisable only by that participant.
7.5 Crediting of Dividends
As soon as administrative practicable after any cash dividends have been paid
with respect to Shares held in a participant's Account, such dividends shall be
credited (net of taxes) by the Custodian to the participant's Account, as of
the appropriate record date and applied to purchase as many whole and
fractional Shares as possible at fair market value for such Account. Such
Shares, as well as any stock dividends issued as Shares with respect to Shares
held in a participant's Account, shall be credited to the participant's Account
accordingly.
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ARTICLE VIII--WITHDRAWAL
8.1 In General
As provided in Section 7.2, a participant may withdraw the payroll deductions
credited to his or her Account under the Plan at any time prior to the
applicable Offering Termination Date by giving written notice to the Treasurer
of the Company (or to such other person as the Committee shall designate). All
of the payroll deductions credited to a participant's Account will be paid to
the participant promptly after receipt of his or her notice of withdrawal, and
no further payroll deductions will be made with respect to such participant
during such Offering. The Company may, at its option, treat any attempt to
borrow by an employee on the security of his or her accumulated payroll
deductions as an election under Section 7.2 to withdraw such deductions.
A participant also may at any time instruct the Company (i) to cause the
transfer of whole Shares credited to the participant's Account to him or her
and to pay in cash to the participant any amounts representing fractional
Shares, or (ii) to cause the sale of whole and any fractional Shares credited
to his or her Account and the remittance to the participant of the proceeds of
such sale, net of any brokerage commissions or expenses associated with the
sale of such Shares.
8.2 Effect on Subsequent Participation
A participant's withdrawal from any Offering will not have any effect upon
his or her eligibility to participate in any succeeding Offering or in any
similar plan which may hereafter be adopted by the Company.
8.3 Termination of Employment
Upon termination of a participant's employment for any reason, including
retirement (but excluding death while the participant is in the employ of the
Company or continuation of a leave of absence for a period beyond 90 days), the
payroll deductions credited to his or her Account will be returned to the
participant and any whole Shares held in the Account will be transferred to the
participant (any fractional shares will be returned in cash); provided,
however, the participant may elect to have any Shares held in the participant's
Account sold, in which event the proceeds of such sale, net of any brokerage
commissions or expenses associated with the sale of such Shares, shall be
remitted to the participant. In the case of the participant's death subsequent
to the termination of the participant's employment, amounts paid or Shares
transferred, as the case may be, shall be paid or transferred to the person or
persons entitled thereto under Section 12.1.
8.4 Termination of Employment Due to Death
Upon termination of a participant's employment because of the participant's
death, the participant's beneficiary (as defined in Section 12.1) shall have
the right to elect, by written notice given to the Treasurer of the Company (or
to such other person as the Committee shall designate) prior to the earlier of
the next subsequent Offering Termination Date or the expiration of a period of
sixty (60) days commencing with the date of the death of the participant:
(a) With respect to cash held in the participant's Account, either
(i) to withdraw all of the payroll deductions credited to the
participant's Account under the Plan since the most recent prior Offering
Termination Date, or
(ii) to exercise the participant's option for the purchase of Shares on
the Offering Termination Date next following the date of the participant's
death for the purchase of the number of full Shares of stock which the
accumulated payroll deductions in the participant's Account at the date of
the participant's death will purchase at the applicable option price, and
any excess in such Account will be returned to said beneficiary, without
interest.
(b) With respect to Shares held in the participant's Account, either
(i) to have transferred to him or her all of the whole Shares credited to
the participant's Account and any cash amounts representing fractional
Shares, or
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(ii) to have the whole Shares credited to the participant's Account sold
and to have remitted to him or her the proceeds of such sale, net of any
brokerage commissions or expenses associated with the sale of such Shares.
In the event that no such written notice of election shall be duly received
by the office of the Treasurer of the Company (or such other person as the
Committee shall designate), the beneficiary shall automatically be deemed to
have elected, pursuant to paragraph (a)(ii), to exercise the participant's
option and then, pursuant to paragraph (b)(i), to have transferred to him or
her all of the Shares credited to the participant's Account and any cash
amounts representing fractional Shares.
8.5 Leave of Absence
A participant on leave of absence shall, subject to the election made by such
participant pursuant to Section 5.4, continue to be a participant in the Plan
so long as such participant is on continuous leave of absence. A participant
who has been on leave of absence for more than 90 days and is not deemed an
employee for the purposes of the Plan shall not be entitled to participate in
any Offering commencing after the 90th day of such leave of absence.
Notwithstanding any other provisions of the Plan, unless a participant on leave
of absence returns to regular full-time or part-time employment with the
Company at the earlier of: (a) the termination of such leave of absence or (b)
three months from the 90th day of the commencement of such leave of absence,
such participant's participation in the Plan shall terminate on whichever of
such dates first occurs.
ARTICLE IX--INTEREST
9.1 Payment of Interest
No interest will be paid or allowed on any money paid into the Plan or
credited to the Account of any participant; provided, however, that interest
shall be paid on any cash amounts distributed to a participant or the
participant's beneficiary in cash pursuant to the provisions of Sections 7.1,
7.2, 8.1, 8.3, 8.4 and 10.1 but only to the extent that such amounts do not
represent the proceeds of the sale of any whole or fractional Shares held in
the participant's Account. Such distributions shall bear simple interest during
the period from the date of withholding to the date of return at the regular
passbook savings Account rates per annum in effect at a bank to be designated
by the Committee. Where the amount returned represents an excess amount in the
participant's Account after such Account has been applied to the purchase of
stock, the participant's Account shall be deemed to have been applied first
toward purchase of Shares under the Plan, so that interest shall be paid on the
last withholdings during the period which results in the excess amount.
ARTICLE X--STOCK
10.1 Maximum Shares
The maximum number of Shares which shall be issued under the Plan, subject to
Section 4.1 and to adjustment upon changes in capitalization of the Company as
provided in Section 12.3, shall be determined by the Committee. If the total
number of shares for which options are exercised on any Offering Termination
Date in accordance with Article VI exceeds the maximum number of shares for the
applicable Offering, the Company shall make a pro rata allocation of the shares
available for delivery and distribution in as nearly a uniform manner as shall
be practicable and as it shall determine to be equitable, and the balance of
payroll deductions credited to the Account of each participant under the Plan
shall be returned to him or her as promptly as possible.
10.2 Participant's Interest in Option Stock
A participant will have no interest in Shares covered by an option until such
option has been exercised.
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10.3 Registration of Stock
Shares held in a participant's Account shall be registered in the name of the
Custodian. Shares to be delivered to a participant or, if applicable, a
beneficiary of a deceased participant under the Plan will be registered in the
name of the participant (or, if applicable, beneficiary).
10.4 Restrictions on Exercise
The Board of Directors of the Company (the "Board") may, in its discretion,
require as conditions to the exercise of any option that the Shares reserved
for issuance upon the exercise of the option shall have been duly listed, upon
official notice of issuance, upon a stock exchange, and that a Registration
Statement under the Securities Act of 1933, as amended, with respect to said
Shares shall be effective.
ARTICLE XI--ADMINISTRATION
11.1 Appointment of Committee
The Board shall designate a committee (the "Committee") to administer the
Plan. Unless otherwise determined by the Board, the Compensation Committee
designated by the Board shall be the Committee. No member of the Committee
shall be eligible to purchase stock under the Plan.
11.2 Authority of Committee
Subject to the express provisions of the Plan, the Committee shall have
plenary authority in its discretion to interpret and construe any and all
provisions of the Plan, to adopt rules and regulations for administering the
Plan, and to make all other determinations deemed necessary or advisable for
administering the Plan, including, without limitation, all questions concerning
eligibility to participate in and options to be received under, the Plan;
provided that all Employees who are granted options under the Plan shall be
treated equally with respect to their rights and privileges with respect to
such options. The Committee's determination on the foregoing matters shall be
conclusive. The Committee (or the Company) shall appoint as the Custodian of
the Plan an entity to maintain custody of all amounts withheld as participant
contributions, to maintain custody of all Shares (including fractional shares)
held under the Plan, to register Shares held in participants' Accounts under
the Plan in its name, and to perform such ministerial, recordkeeping and other
duties with respect to the Plan as shall be determined by the Committee or the
Company.
11.3 Rules Governing the Administration of the Committee
The Board may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee may select one of
its members as its Chairman and shall hold its meetings at such times and
places as it shall deem advisable and may hold telephonic meetings. A majority
of its members shall constitute a quorum. All determinations of the Committee
shall be made by a majority of its members. The Committee may correct any
defect or omission or reconcile any inconsistency in the Plan, in the manner
and to the extent it shall deem desirable. Any decision or determination
reduced to writing and signed by a majority of the members of the Committee
shall be as fully effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee may appoint a secretary and shall
make such rules and regulations for the conduct of its business as it shall
deem advisable.
ARTICLE XII--MISCELLANEOUS
12.1 Designation of Beneficiary
A participant may file a written designation of a beneficiary who is to
receive any Shares and/or cash held in the participant's Account under the
Plan. Such designation of beneficiary may be changed by the participant
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at any time by written notice to the Treasurer of the Company (or other person
as the Committee shall designate). Upon the death of a participant and upon
receipt of the Company of proof of identity and existence at the participant's
death of a beneficiary validly designated by him or her under the Plan, the
Company shall deliver, subject to the provisions of Section 8.4, such Shares
and/or cash held in the participant's Account under the Plan to such
beneficiary. In the event of the death of a participant and in the absence of a
beneficiary validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver, subject to the provisions of
Section 8.4, Shares and/or cash held in the participant's Account under the
Plan to the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver, subject to the
provisions of Section 8.4, such Shares and/or cash to the spouse or to any one
or more dependents of the participant as the Company may designate. No
beneficiary shall, prior to the death of the participant by whom the
beneficiary has been designated, acquire any interest in the Shares or cash
credited to the participant's Account.
12.2 Transferability
Neither payroll deductions credited to a participant's Account nor any rights
with regard to the exercise of an option or to receive Shares under the Plan
may be assigned, transferred, pledged or otherwise disposed of in any way by
the participant other than by will or the laws of descent and distribution. Any
such attempted assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with Section 7.2.
12.3 Adjustment Upon Changes in Capitalization
(a) If, while any options are outstanding or Shares are held in participants'
Accounts, the outstanding Shares have increased, decreased, changed into or
been exchanged for a different number or kind of shares or securities of the
Company through reorganization, merger, recapitalization, reclassification,
stock split, reverse stock split or similar transaction, appropriate and
proportionate adjustments may be made by the Committee in the number and/or
kind of Shares which are subject to purchase under outstanding options and on
the option exercise price or prices applicable to such outstanding options and
with respect to any Shares held in participants' Accounts. In addition, in any
such event, the number and/or kind of shares which may be offered in the
Offerings described in Article IV hereof shall also be proportionately
adjusted. No adjustments shall be made for stock dividends. For the purposes of
this Paragraph (a), any distribution of Shares to shareholders in an amount
aggregating 20% or more of the outstanding Shares shall be deemed a stock split
and any distributions of shares aggregating less than 20% of the outstanding
Shares shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, each participant who has an option then outstanding under
the Plan or has Shares held in his or her Account will thereafter be entitled
to receive at the next Offering Termination Date upon the exercise of such
option with respect to each Share as to which such option shall be exercised or
with respect to each Share held in the participant's Account, as the case may
be, as nearly as reasonably may be determined, the cash, securities and/or
property which a holder of one Share was entitled to receive upon and at the
time of such transaction. The Board shall take such steps in connection with
such transactions as it shall deem necessary to assure that the provisions of
this Section 12.3 shall thereafter be applicable, as nearly as reasonably may
be determined, in relation to the said cash, securities and/or property as to
which each participant who has an option or Share held in his or her Account
might thereafter be entitled to receive.
12.4 Participant Voting and Other Rights
A participant shall have all rights of a shareholder with respect to any
Shares held in the participant's Account, including the right to vote such
shares, and the Company shall provide each participant with respect to whom
Shares are held in the participant's Account with a copy of the Company's
annual report and with such
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other informational material, including material concerning the voting of such
Shares, and reports of the Company as are generally provided to shareholders of
the Company. A participant shall provide written timely notice to the Custodian
as to the manner in which he or she desires to vote the Shares held in his or
her Account, and the Custodian shall vote such Shares accordingly.
12.5 Reports
Statements with respect to each participant's or beneficiary's Account shall
be provided periodically as determined by the Company, but in no event shall
such statements be provided less frequently than within a reasonable time after
each Offer Termination Date.
12.6 Indemnification
The Company, by its adoption of the Plan, indemnifies and holds its employees
and the members of the Committee, jointly and severally, harmless from the
effects and consequences of their acts, omissions, and conduct with respect to
the Plan in their official capacities, except to the extent that such effects
and consequences result from their own wilful misconduct, breach of good faith
or gross negligence in the performance of their duties hereunder. The foregoing
right of indemnification shall not be exclusive of other rights to which each
such employee or Committee member may be entitled by any contract as a matter
of law.
12.7 Amendment and Termination
The Board shall have complete power and authority to terminate or amend the
Plan; provided, however, that the Board shall not, without the approval of the
stockholders of the Corporation (i) increase the maximum number of shares which
may be issued under any Offering (except pursuant to Section 12.3); (ii) amend
the requirements as to the class of employees eligible to purchase Shares under
the Plan or permit the members of the Committee to purchase Shares under the
Plan. Notwithstanding the foregoing, attached as Appendix A to the Plan is the
"Savings Related Share Option Scheme," which sets forth certain provisions
applicable to the participation of employees of DePuy International Ltd., the
Company's United Kingdom employees, and, to the extent applicable, shall
supersede the provisions set forth herein. In addition, the Committee may amend
the Plan to add other provisions respecting the participation of employees in
jurisdictions outside the United States as it shall determine from time to
time. No termination, modification or amendment of the Plan may, without the
consent of a participant then having an option under the Plan to purchase
Shares, adversely affect the rights of such participant with respect to such
option.
12.8 Effective Date
The Plan shall become effective as of January 1, 1997, or as soon as
practicable thereafter, subject to approval by the holders of the majority of
the Shares present and represented at a special or annual meeting of the
shareholders held on the date which is twelve months subsequent to the date on
which the Plan is adopted by the Board. If the Plan is not so approved, the
Plan shall not become effective.
12.9 No Employment Rights
The Plan does not, directly or indirectly, create any right for the benefit
of any employees to purchase any Shares under the Plan, or create in any
employee or class of employees any right with respect to continuation of
employment by the Company, and it shall not be deemed to interfere in any way
with the Company's right to terminate, or otherwise modify, an employee's
employment at any time.
12.10 Effect of Plan
The provisions of the Plan shall, in accordance with its terms, be binding
upon, and inure to the benefit of, all successors of each employee
participating in the Plan, including, without limitation, such employee's
estate and the executors, administrators or trustees thereof, heirs and
legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
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12.11 Governing Law
The law of the State of Delaware will govern all matters relating to this
Plan except to the extent it is superseded by the laws of the United States.
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EXHIBIT A
THE DEPUY SAVINGS-RELATED SHARE OPTION SCHEME
1. DEFINITIONS AND INTERPRETATION
1.1 In this Scheme, unless the context otherwise requires, the following
terms have the following meanings:--
"THE BOARD" the board of directors of the Company or a duly
appointed committee of such board of directors;
"BONUS DATE" in the case of a 3 year or 5 year Savings
Contract the earliest date on which a bonus is
payable under the Savings Contract made in
connection with an Option (or, in the case of a
5 year Savings Contract, if the repayment is
taken as including the Maximum Bonus the
earliest date on which the Maximum Bonus is
payable);
"THE COMPANY" DePuy, Inc a company incorporated under the
laws of the State of Delaware;
"CONTROL" has the meaning given to it in Section 840 of
the Taxes Act;
"GRANT DATE" the date on which an Option is granted;
"INDEPENDENT ADVISER" the Company's legal adviser or such other
independent adviser as the Board may select;
"INVITATION" an invitation to apply for an Option issued
under Rule 3.1;
"INVITATION DATE" the date on which an Invitation is issued;
"MAXIMUM BONUS" the additional bonus payable on a 5 year
Savings Contract which is held for 7 years;
"OPTION" a right to acquire Shares granted under the
Scheme;
"PARTICIPANT" a person who holds an Option;
"PARTICIPATING COMPANY" the Company and any Subsidiary to which the
Board has resolved from time to time that the
Scheme extends;
"RELEVANT DATE" the date on which the Scheme is approved by the
Company in general meeting;
"SAVINGS BODY" any body with which a Savings Contract can be
made;
"SAVINGS CONTRACT" an agreement to pay monthly contributions under
the terms of a certified contractual savings
scheme, within the meaning of Section 326 of
the Taxes Act, which has been approved by the
Inland Revenue for the purposes of Schedule 9;
"SCHEDULE 9" Schedule 9 to the Taxes Act;
"THE SCHEME" the DePuy Savings-Related Share Option Scheme
as set out in these Rules but subject to any
alterations or additions made under Rule 8;
"SHARE" a share of Common Stock in the Company which
satisfies the requirements of paragraphs 10 to
14 of Schedule 9;
"SPECIFIED AGE"
65 years;
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"STANDARD BONUS" a bonus which is not a Maximum Bonus payable on
a Savings Contract;
"SUBSIDIARY" a body corporate which is a subsidiary of the
Company within the meaning of Section 736 of
the Companies Act 1985 and is under the Control
of the Company;
"TAXES ACT" the Income and Corporation Taxes Act 1988.
1.2 Expressions not otherwise defined in the Scheme have the same meaning as
they have in Schedule 9.
1.3 Any reference in the Scheme to any enactment includes a reference to that
enactment as from time to time modified, extended or re-extended.
1.4 Expressions used in the Scheme denoting the masculine gender include the
feminine, unless the context otherwise requires.
2. ELIGIBILITY
2.1 Subject to Rule 2.3, an individual is eligible to be granted an Option on
any day if:--
2.1.1 he is an employee or director of a Participating Company; and
2.1.2 he was an employee or full-time director of a Participating Company
on the relevant Invitation Date (or at such other time during a period not
exceeding 5 years ending on the relevant Grant Date as the Board may from
time to time decide); and
2.1.3 he had been an employee or full-time director of a Participating
Company at all times during the qualifying period not exceeding 5 years
ending at that time as the Board may from time to time decide; and
2.1.4 he was chargeable to tax in respect of his employment or office
under Case I of Schedule E on the relevant Invitation Date.
2.2 For the purposes of Rule 2.1 an individual is a full-time director of a
company if he is obliged to devote to the performance of the duties of his
office or employment with the company (or with the company and any other
Participating Company) the whole or substantially the whole of his working time
and in any event not less than 25 hours a week (excluding meal breaks).
2.3 An individual is not eligible to be granted an Option at any time:-
2.3.1 when he is excluded from participating in the Scheme by virtue of
paragraph 8 of Schedule 9; or
2.3.2 if the amount of the monthly contribution under the Savings
Contract proposed to be made in connection with the Option, determined in
accordance with Rule 3, would be less than (Pounds)5 (or such other minimum
amount as may for the time being be prescribed by paragraph 24(2)(b) of
Schedule 9).
3. GRANT OF OPTIONS
3.1 The Board may at any time or times after the Inland Revenue have approved
the Scheme under Schedule 9 issue on similar terms to every person who is at
that time eligible to be granted an Option (as defined in Rule 2) an invitation
to apply for an Option to acquire Shares on the terms of the Scheme, specifying
the date by which it must be accepted (being not less than 14 days after the
Invitation Date).
3.2 No Option may be granted on any day unless:--
3.2.1 that day falls no later than 30 days (or, where Rule 3.8 applies,
42 days) after the day on which the exercise price was calculated under
Rule 3.4; and
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3.2.2 every individual who is eligible to be granted an Option on that
day has been sent an Invitation; and
3.2.3 save to the extent permitted by Rule 3.8, every individual who is
eligible to be granted an Option on that day and who has applied for an
Option and has proposed to make a Savings Contract with a Savings Body
approved by the Board for this purpose, is in fact granted an Option on
that day.
3.3 The consideration for the grant to any individual of an Option will be
his proposing to make a Savings Contract and in all other respects agreeing to
be bound by the provisions of the Scheme.
3.4 The price at which Shares may be acquired by the exercise of an Option
will be specified in US dollars and will be determined by the Board before it
is granted, provided that:
3.4.1 if at the relevant time the Shares are quoted on the New York Stock
Exchange, the price will not be less than 85 per cent. of the closing price
of a Share (as published in the Wall Street Journal) on the last dealing
day but two before the relevant Invitation Date (or such other dealing day
as may be agreed with the Inland Revenue) being not earlier than 30 days
before the Grant Date;
3.4.2 if Rule 3.4.1 does not apply, the price will not be less than 85
per cent. of the market value (within the meaning of Sections 272 to 274
(inclusive) of the Taxation of Chargeable Gains Act 1992) of a Share, as
agreed for the purposes of the Scheme with the Shares Valuation Division of
the Inland Revenue, on the last working day but two before the relevant
Invitation Date (or such other day as may be agreed with the Inland Revenue
being not earlier than 30 days before the Grant Date);
3.4.3 the price will not be less than the par value of a Share.
3.5 When applying for an Option, an individual must specify the amount (in
pounds sterling) he is willing to pay under the Savings Contract. The amount of
the repayment on the Bonus Date will be converted into US dollars at the
exchange rate applying on the date the Option is exercised. The amount of US
dollars arising from conversion of the repayment will determine the maximum
number of Shares that may be acquired on exercise of the Option.
3.6 Subject to Rules 3.8.1, 3.8.2 and 3.8.3, the Board may specify in an
Invitation whether, on that occasion;
3.6.1 the repayment under the Savings Contract will be taken as including
a bonus (or in the case of 5 year Savings Contracts the Maximum Bonus);
3.6.2 Savings Contracts may be for a term of 3 years or 5 years or 7
years.
3.7 For the purposes of Rule 3.5 the amount of the monthly contribution will
be the amount which the individual specifies in his application for the Option
that he is willing to pay under the Savings Contract or, if lower, the maximum
permitted amount, that is to say the lowest of:--
3.7.1 (Pounds)250 (or such other maximum amount as may for the time being
be permitted under Schedule 9) less any monthly contributions the
individual is already making under a certified contractual savings scheme
linked to any scheme approved under Schedule 9;
3.7.2 the maximum amount for the time being permitted under the terms of
the Savings Contract; and
3.7.3 such maximum amount (if any) as may have been determined by the
Board for this purpose and specified in every Invitation issued on that
occasion.
3.8 If the grant of Options on any day would cause any of the limits
mentioned in Rule 7 to be exceeded, then, in relation to Options granted on
that day, the following provisions will be successively applied (in the order
in which they are set out) so far as is necessary to ensure that those limits
are not exceeded:--
3.8.1 for the purposes of Rule 3.5, if the repayment would otherwise be
taken as including the Maximum Bonus, it will be deemed to include only the
Standard Bonus;
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3.8.2 for those purposes with regards to 3 year and 5 year Saving
Contracts if the repayment would otherwise be taken as including a Standard
Bonus it will be deemed to include no bonus;
3.8.3 for those purposes each application for a 5 year Savings Contract
shall be deemed to be an application for a 3 year Savings Contract;
3.8.4 for those purposes the amount of the monthly contribution
determined under Rule 3.6 shall be reduced pro rata to the extent
necessary, but will not be reduced to less than the minimum permitted
amount mentioned in Rule 2.3.2;
3.8.5 if the total number of Shares comprised in all applications
received in response to Invitations on any occasion is such that, after
application of Rules 3.7.1, 3.7.2 and 3.7.3, the grant of Options in
respect of that number of Shares would still result in any of the limits
referred to in Rule 7 being exceeded, the Board will adopt such method of
random selection of applications, based on a monthly Savings Contribution
of (Pounds)5 and the inclusion of no bonus, for acceptance as appears to
the Board in its sole discretion to be fair and reasonable.
3.9 Subject to Rule 4.3, an Option may not be transferred by a Participant
and will lapse forthwith if it is so transferred or if he is adjudicated
bankrupt.
4. EXERCISE OF OPTIONS
4.1 The exercise of any Option will be effected in such form and manner as
the Board may from time to time prescribe, provided that the monies paid for
Shares on exercise will not exceed the amount of the repayment made and any
interest or bonus paid under the Savings Contract made in connection with the
Option, and for this purpose the amount of the repayment will be taken not to
include the amount of any monthly contribution the due date of payment of which
falls more than one month after the date on which repayment is made.
4.2 Subject to Rules 4.3, 4.4, 4.5 and 5, an Option may not be exercised
before the Bonus Date or more than 6 months after the Bonus Date.
4.3 Subject to Rule 4.6, where a Participant dies at a time when he is a
director or employee of a Participating Company:
4.3.1 if he dies before the Bonus Date, the Option may (and must, if at
all) be exercised by his personal representatives within 12 months after
the date of his death;
4.3.2 if he dies within 6 months after the Bonus Date, the Option may
(and must, if at all) be exercised within 12 months after the Bonus Date.
4.4 Subject to Rule 4.6, where a Participant ceases to be a director or
employee of a Participating Company (otherwise than by reason of his death):
4.4.1 if he so ceases by reason of injury, disability, redundancy (within
the meaning of the Employment Protection (Consolidation) Act 1978), or
retirement on reaching the Specified Age or any other age at which he is
bound to retire in accordance with the terms of his contract of employment,
the Option may (and must, if at all) be exercised within 6 months of his so
ceasing;
4.4.2 if he so ceases by reason only that the office or employment is in
a company of which the Company ceases to have Control, or relates to a
business or part of a business which is transferred to a person who is
neither an associated company of the Company (within the meaning given to
that expression by Section 416 of the Taxes Act) nor a company of which the
Company has Control, the Option may (and must, if at all) be exercised
within 6 months of his so ceasing;
4.4.3 if he so ceases for any other reason before the Bonus Date but more
than 3 years after the Grant Date, the Option may (and must, if at all) be
exercised within 6 months of his so ceasing;
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4.4.4 if he so ceases for any other reason on or before the third
anniversary of the Grant Date, the Option may not be exercised at all.
4.5 Subject to Rule 4.6, where any Participant continues to be a director or
employee of a Participating Company after the Specified Age, he may exercise
any Option within 6 months of that date.
4.6 Where, before an Option has become capable of being exercised, the
Participant gives notice that he intends to stop paying monthly contributions
under the Savings Contract made in connection with the Option, or is deemed
under its terms to have given such notice, or makes an application for
repayment of the monthly contributions paid under it, the Option may not be
exercised at all.
4.7 A Participant will not be treated for the purposes of Rule 4.4 as ceasing
to be a director or employee of a Participating Company until such time as he
is no longer a director or employee of any of the Participating Companies. A
Participant (being a woman) who ceases to be a director or employee of a
Participating Company by reason of pregnancy or confinement and who exercises
her right to return to work under Section 45 of the Employment Protection
(Consolidation) Act 1978 before exercising an Option will be treated for those
purposes as not having ceased to be such a director or employee.
4.8 Subject to Rule 4.4, a Participant may only exercise an Option at a time
when he is a director or employee of a Participating Company.
4.9 A Participant may not exercise an Option at any time when he is not
eligible to participate in the Scheme by virtue of paragraph 8 of Schedule 9.
The personal representatives of a Participant may not exercise an Option after
the death of the Participant if the Participant at the date of his death was
not eligible to participate in the Scheme by virtue of paragraph 8 of Schedule
9.
4.10 An Option may not be exercised more than once.
4.11 Within 30 days after an Option has been validly exercised by any person,
the Board on behalf of the Company will allot to him or procure the transfer to
him of the number of Shares in respect of which the Option has been exercised.
4.12 All Shares allotted under the Scheme will rank pari passu in all
respects with the shares of the same class for the time being in issue save as
regards any rights attaching to such shares by reference to a record date prior
to the date of issue.
4.13 Company will apply to the New York Stock Exchange for any Shares issued
under the Scheme to be listed.
5. VARIATION OF CAPITAL
5.1 Subject to Rules 5.3 and 5.4, in the event of any increase or variation
of the share capital of the Company (whenever effected) by way of
capitalisation or rights issue (including a variation in share capital having
an effect similar to a rights issue), or sub-division, consolidation or
reduction, or otherwise, the Board may make such adjustments as it considers
appropriate under Rule 5.2.
5.2 An adjustment made under this Rule will be to one or more of the
following:--
5.2.1 the number of Shares in respect of which any Option may be
exercised;
5.2.2 the price at which Shares may be acquired by the exercise of any
Option (provided that the price cannot be reduced below the nominal value
of the Shares);
5.2.3 where any Option has been exercised but no Shares have been
allotted or transferred pursuant to such exercise, the number of Shares
which may be so allotted or transferred and the price at which they may be
acquired.
5.3 Except in the case of a capitalisation issue, no adjustment under Rule
5.2 may be made without the prior confirmation in writing by the Independent
Adviser that it is in his opinion fair and reasonable.
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5.4 If the Scheme is then approved by the Inland Revenue under Schedule 9, no
adjustment may be made under Rule 5.2 without the prior consent of the Inland
Revenue.
6. LIMITS
6.1 The aggregate of the monthly contributions being made at any time by a
Participant under the Scheme and any other scheme or schemes approved under
Schedule 9 to the Act may not exceed:--
6.1.1 (Pounds)250 per month or such other maximum amount as may for the
time being be permitted under Schedule 9; or
6.1.2 such lower maximum figure as the Board may decide in respect of any
Invitation Date provided that no monthly contribution in respect of any
Option granted prior to that Invitation Date will be reduced due to the
imposition of such lower maximum figure.
6.2 The Board may from time to time specify the maximum number of Shares in
respect of which Options may be granted on any day.
7. ALTERATIONS
7.1 Subject to Rule 7.2, the Board may at any time alter or add to all or any
of the provisions of the Scheme, or the terms of any Option, in any respect. No
amendment shall have effect until approved by the Board of Inland Revenue.
7.2 The prior approval by ordinary resolution of the members of the Company
in general meeting must be obtained for any alteration or addition to the
Scheme to the advantage of Participants or potential Participants except for
any alteration or addition which:-
7.2.1 is a minor alteration or an addition and is made to benefit the
administration of the Scheme; or
7.2.2 is to obtain or maintain favourable tax, exchange control or
regulatory treatment for Participants or for the Company or any
Participating Company.
7.3 As soon as reasonably practicable after making any alteration or addition
under Rule 7.1 the Board will notify in writing any Participant affected by it
and, if the Scheme is then approved by the Inland Revenue under Schedule 9, the
Inland Revenue.
8. MISCELLANEOUS
8.1 The rights and obligations of any individual under the terms of his
office or employment with any Participating Company will not be affected by his
participation in the Scheme or any right which he may have to participate in
it. A Participant whose office or employment is terminated for any reason
whatsoever will not be entitled to claim any compensation for or in respect of
any consequent diminution or extinction of his rights or benefits (actual or
prospective) under any Option then held by him or otherwise in connection with
the Scheme.
8.2 Subject to Rule 8, the Board may from time to time make and vary such
rules and regulations not inconsistent with the Scheme and establish such
procedures for the administration and implementation of the Scheme as it thinks
fit, and in the event of any dispute or disagreement as to the interpretation
of the Scheme, or of any such rule, regulation or procedure, or as to any
question or right arising from or related to the Scheme, the decision of the
Board will be final and binding on all persons.
8.3 The Company and any Participating Company may provide money to the
trustees of any trust or any other person to enable them or him to acquire
Shares to be held for the purposes of the Scheme, or enter into any guarantee
or indemnity for these purposes, to the extent permitted by section 153 of the
Companies Act 1985.
8.4 In any matter in which he is required to act under the Scheme the
Independent Adviser will act as an expert and not as an arbitrator.
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8.5 The Company will at all times keep available sufficient authorised but
unissued Shares for the purposes of the Scheme.
8.6 The Company will endeavour to obtain and maintain the approval of the
Scheme by the Inland Revenue under Schedule 9 and will notify the Inland
Revenue of any event or circumstance which may affect that approval.
8.7 Any notice or other communication under or in connection with the Scheme
may be given by personal delivery or by sending the same by post or by fax, in
the case of a company to its registered office, and in the case of an
individual to his last known address, or, where he is a director or employee of
a Participating Company, either to his last known address or to the address of
the place of business at which he performs the whole or substantially the whole
of the duties of his office or employment, and where a notice or other
communication is given by first class post, it will be deemed to have been
received 48 hours after it was put into the post properly addressed and
stamped, and where a notice or other communication is sent by fax it will be
deemed to have been received ten minutes after it has been duly despatched.
9. TERMINATION
The Board may at any time resolve to cease making further offers of
participation under the Scheme but in such event the subsisting rights of
Participants will not be affected.
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EXHIBIT 10.12
DEPUY, INC.
SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
1. Purpose. The purposes of the DePuy, Inc. Senior Executive Incentive
Compensation Plan (the "Plan") are to provide annual incentive compensation to
designated senior executives of DePuy, Inc. (the "Company") based on the
achievement of established performance goals, to encourage such senior
executives to remain in the employ of the Company, to assist the Company in
attracting and motivating new senior executives and to qualify the incentive
payments awarded under the Plan (the "Awards") as qualified "performance-based
compensation" so that all payments under the Plan shall be deductible in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
2. Eligibility. The Stock Option and Bonus Subcommittee of the Compensation
Committee of the Board of Directors of the Company (the "Committee") shall
each year determine the "Senior Executives" of the Company eligible to
participate in the Plan (the "Participants"). For purposes hereof, Senior
Executives shall mean the Chief Executive Officer of the Company and each
executive of the Company or an Affiliate of the Company who reports directly
to the Chief Executive Officer of the Company and the presidents of the
divisions of the Company or of Affiliates who report directly to the Chief
Operating Officer of the Company. As used herein, "Affiliate" shall mean (i)
any entity that, directly or indirectly, is controlled by or under common
control with the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee.
3. Performance Periods. Each performance period for purposes of the Plan
shall have a duration of one calendar year, commencing January 1 and ending
the next December 31. The first Performance Period under the Plan shall
commence on January 1, 1997.
4. Administration. The Committee shall have the full power and authority to
administer and interpret the Plan and to establish rules for its
administration. Such power and authority shall include proration or adjustment
of awards in the case of retirement, termination, changes in base salary,
dismissal, death and other conditions as appropriate; provided, however, that
the discretion granted above with respect to an Award earned by a Participant
who is a "covered employee" within the meaning of Section 162(m) of the Code
(a "Covered Employee") may only be used by the Committee to reduce or
eliminate such Award and further provided, if the terms of a Participant's
employment with the Company or Affiliate are covered by a written employment
agreement, the payment of Awards hereunder in the event of a Participant's
termination of employment for any reason shall be subject to the terms of such
agreement.
5. Performance Goals. On or before the 90th day of each Performance Period,
the Committee shall establish in writing one or more performance criteria for
the Performance Period. The performance criteria shall in all instances be
determined on the basis of earnings per share at the end of the relevant
Performance Period.
6. Target Incentives and Payout Schedule. On or before the 90th day of each
Performance Period, the Committee shall establish in writing minimum
threshold, target and maximum Awards for each Participant and a payout
schedule specifying the percentage of the Participant's base pay that the
Participant is eligible to earn on various levels of attainment of the
performance criteria established pursuant to Section 5. Such percentages, (i)
in the case of the Chief Executive Officer and the Chief Operating Officer,
shall range from an Award of 30% of base pay if the minimum threshold
performance goal is attained, 60% of base pay if the target performance goal
is attained and 90% of base pay if the maximum performance goal is attained,
and (ii) in the case of all other Participants, shall range from an Award of
25% of base pay if the minimum threshold performance goal is attained, 50% of
base pay if the target performance goal is attained and 75% of base pay if the
maximum performance goal is attained. No Award with respect to any Performance
Period shall be earned if less than the minimum threshold performance goal for
the period is attained. Base pay for purposes hereof shall be determined as
the Participant's base salary actually earned by the Participant during the
relevant Performance Period.
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7. Incentive Payout Calculation. As soon as practicable after release of the
Company's financial results for the Performance Period, the Committee will
certify the Company's attainment of the financial performance criteria
established for such Performance Period pursuant to Section 5 and will
calculate the possible payout of incentive awards for each Participant under
the payout schedule established pursuant to Section 6. To the extent net income
is used as a component of determining earnings per share, it shall mean net
income as reported to stockholders, but before losses resulting from
discontinued operations, extraordinary losses (in accordance with generally
accepted accounting principles, as currently in effect), the cumulative effect
of changes in accounting principles, the effects of acquisitions and
divestitures of assets (including stock) not previously accounted for in the
establishment of the performance criteria, and other unusual, nonrecurring
items of loss that are separately identified and quantified in the Company's
audited financial statements. Pro rata adjustments to reflect changes in the
number of outstanding shares of Company stock or otherwise in the Company's
capital structure during the relevant Performance Period shall also be made. No
adjustment pursuant to this Section 7 shall be made, however, if such
adjustment would cause Awards granted to Covered Employees to fail to be
qualified "performance-based compensation" under Section 162(m) of the Code.
8. Reduction of Calculated Payouts. The Committee shall have the power and
authority to reduce or eliminate for any reason the payout calculated pursuant
to Section 7 that would otherwise be payable to a Participant based on the
established target Award and payout schedule.
9. Payouts. After calculation of incentive payouts pursuant to Section 7 and
any reduction or elimination thereof pursuant to Section 8, the Committee shall
certify the amount of the payout to each Participant under the Plan for the
Performance Period. In no event shall the payout under the Plan to any
Participant for any Performance Period exceed the lesser of (i) the
Participant's base pay for the relevant Performance Period multiplied by the
maximum percentage of the base pay as set forth in Section 6 or (ii) $700,000.
Payment of the Award determined in accordance with the Plan for each
Performance Period shall be made to a Participant in cash.
10. Change in Control. If a Change in Control (as defined below) occurs, then
each Participant who is actively employed by the Company on the date of the
Change in Control shall receive, as soon as practicable following the earlier
of the Participant's termination of employment or the end of the calendar year
in which such Change in Control occurs, not less than 100% of the target award
established for the Participant pursuant to Section 6 for the Performance
Period in which the Change in Control occurs, subject to upward adjustment
based on the criteria established by the Committee prior to the Change in
Control. For purposes hereof, a Change in Control shall be deemed to have
occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934 as amended (the "Exchange Act") (other
than the Company, an Affiliate, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or an Affiliate, or
any Company owned, directly or indirectly, by the stockholders of the Company
in substantially the same proportions as their ownership of common stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities; (ii) during any period of two consecutive years (not
including any period prior to the adoption of the Plan), individuals who at the
beginning of such period constitute the board of directors of the Company, and
any new director (other than a director designated by a person who has entered
into an agreement with the Company to effect a transaction described in clause
(i), (iii), or (iv) of this paragraph whose election by the board of directors
of the Company or nomination for election by the Company stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the two-year period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute at least a majority of the board of directors of the
Company; (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation which is not an
Affiliate, other than a merger that would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) more than 50% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately
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after such merger or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the Company or an
Affiliate (or similar transaction) in which no person acquires more than 30% of
the combined voting power of the Company's then outstanding securities shall
not constitute a Change in Control of the Company, or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially
all of the Company's assets. If any of the events enumerated in clauses (i)
through (iv) occur, the Committee shall determine the effective date of the
Change in Control resulting therefrom, for purposes of the Plan.
11. Miscellaneous Provisions.
(a) The Board of Directors of the Company shall have the right to suspend or
terminate the Plan at any time and may amend or modify the Plan with respect to
future Performance Periods prior to the beginning of any Performance Period,
provided that no such amendment or modification which is expected to materially
increase benefits payable to Covered Employees who are Participants under the
Plan shall be made unless such measures as the Committee deems necessary for
the increased benefit to be deductible pursuant to Section 162(m) of the Code
have been taken.
(b) Nothing contained in the Plan or any agreement related hereto shall
affect or be construed as affecting the terms of the employment or employment
agreement, if any, of any Participant except as specifically provided herein or
therein. Nothing contained in the Plan or any agreement related hereto shall
impose or be construed as imposing any obligation on (i) the Company to
continue the employment of any Participant or (ii) any Participant to remain in
the employ of the Company.
(c) No person shall have any claim to be granted an Award under the Plan and
there is no obligation of uniformity of treatment of eligible employees under
the Plan. Awards under the Plan may not be assigned or alienated.
(d) The Company or Affiliate, as applicable, shall have the right to deduct
from any Award to be paid under the Plan, any federal, state or local taxes
required by law to be withheld with respect to such payment.
(e) If any provision of the Plan would cause the Awards granted to a Covered
Employee not to be qualified "performance-based compensation" under Section
162(m), that provision, insofar as it pertains to such Covered Employee shall
be severed from, and shall be deemed not to be a part of, the Plan, but the
other provisions hereof shall remain in full force and effect.
12. Adoption. The Plan shall become effective as of January 1, 1997, subject to
approval by the stockholders of the Company.
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Exhibit 10.15
DEPUY, INC.
SUPPLEMENTAL RETIREMENT PLAN
(PLAN NO. 1)
(As Amended and Restated
Effective as of October 1, 1996)
<PAGE>
DEPUY, INC. SUPPLEMENTAL RETIREMENT PLAN (PLAN NO. 1)
(As Amended and Restated Effective as of October 1, 1996)
CONTENTS
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
ARTICLE I. ESTABLISHMENT OF THE PLAN
1.1 Establishment and Restatement 1
1.2 Purpose 1
ARTICLE II. DEFINITIONS AND CONSTRUCTION
2.1 Definitions 2
2.2 Gender and Number 6
2.3 Employment Rights 7
2.4 Applicable Law 7
ARTICLE III. ADMINISTRATION
3.1 Administration 8
3.2 Finality of Determination 8
3.3 Indemnification and Exculpation 8
ARTICLE IV. PARTICIPATION
4.1 Participation 9
4.2 Other Retirement Income 9
ARTICLE V. BENEFITS
5.1 Retirement Benefits 10
5.2 Death Benefits 12
5.3 Supplemental Deferred Vested Benefits 13
5.4 Commencement of Payments 13
5.5 Form of Payments 14
5.6 Calculation of Offsets and Actuarial Equivalence 14
5.7 Reductions for Certain Surviving Spouses 16
5.8 DETERMINATION OF BENEFITS. 16
5.9 Transferred Employees from
Boehringer Mannheim Corporation. 17
5.10 Participants Transferring to Boehringer
Mannheim Corporation. 17
</TABLE>
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DEPUY, INC. SUPPLEMENTAL RETIREMENT PLAN (PLAN NO. 1)
(As Amended and Restated Effective as of October 1, 1996)
CONTENTS
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
ARTICLE VI. OTHER TERMINATIONS OF EMPLOYMENT
6.1 Termination Before Five or Ten Years of Service 18
6.2 Termination for Cause 18
ARTICLE VII. NONCOMPETITION
7.1 Noncompetition 19
ARTICLE VIII. MISCELLANEOUS
8.1 Amendment and Termination 21
8.2 Funding 21
8.3 Tax Liability 22
8.4 Assignment 22
8.5 Successors 22
8.6 Severability 22
8.7 Nonuniform Determinations 22
8.8 Separation From Other Plans 23
8.9 Effective Date 23
</TABLE>
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ARTICLE I. ESTABLISHMENT OF THE PLAN
1.1 ESTABLISHMENT AND RESTATEMENT
Boehringer Mannheim U.S. Holdings, Inc. previously established and maintained a
supplemental benefits plan on behalf of its subsidiaries and other affiliated
corporations. Such plan was last amended and restated effective as of January 1,
1993. Effective as of January 1, 1994, sponsorship of the plan was assumed by
Corange U.S. Holdings, Inc., and the plan became known as the Corange U.S.
Holdings, Inc. Supplemental Retirement Plan (Plan No. 1). Effective as of
October 1, 1996, the assets and liabilities held under this plan which related
to Participants employed by Boehringer Mannheim Corporation or affiliates of
Boehringer Mannheim Corporation were spun off and transferred to a new plan
known as the Boehringer Mannheim Corporation Supplemental Retirement Plan (Plan
No. 1) and a related trust agreement. The original plan is hereby amended and
restated effective as of October 1, 1996, and shall be renamed the "DePuy, Inc.
Supplemental Retirement Plan, Plan No. 1" (the "Plan"). The Plan sponsor shall
be changed from Corange U.S. Holdings, Inc. to DePuy, Inc.
1.2 PURPOSE
The Plan is intended to ensure a competitive level of retirement benefits to a
select group of senior executives of DePuy in order to attract and retain
talented executives.
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ARTICLE II. DEFINITIONS AND CONSTRUCTION
2.1 DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the meaning
specified unless a contrary intention is specifically and clearly indicated.
(a) "ACTUARIAL EQUIVALENT" means a benefit having the same present value as the
benefit it replaces. For purposes of establishing actuarial equivalence,
present value shall be determined on the bases of the 1984-UP Mortality
Table and the Assumed Interest Rate.
(b) "ADMINISTRATOR" means DePuy.
(c) "ASSUMED INTEREST RATE" means a rate equal to 120 percent of the interest
rate used, by the Pension Benefit Guaranty Corporation, for valuing
immediate annuities upon termination of defined benefit plans. The Assumed
Interest Rate used under the Plan during any Fiscal Year shall be based on
120 percent of the PBGC rate in effect on the first day of the month in
which payment of a Participant's Benefits will commence.
(d) "BENEFITS" means any amounts payable under the Plan as Supplemental
Retirement Benefits, Supplemental Early Retirement Benefits, Disability
Retirement Benefits, Death Benefits, or Supplemental Deferred Vested
Benefits, to or on behalf of a Participant who has met the requirements of
the Plan for eligibility for such payments. For the purpose of calculating
a Participant's total service with DePuy, all service with any company(s)
in the worldwide DePuy group shall be included, subject to the provisions
of section 5.8 of the Plan.
(e) "BOARD" means the Board of Directors of DePuy.
(f) "CEO" means the Chief Executive Officer of DePuy.
(g) "CODE" means the Internal Revenue Code of 1986, as it may be amended from
time to time. Reference to a section of the Code shall also include any
comparable provision of the Code that supersedes said section.
(h) "DEATH BENEFITS" means benefits payable to a Surviving Spouse upon the
death of a Participant pursuant to section 5.2.
(i) "DEPUY" means DePuy, Inc., a Delaware corporation, or any successor
corporation resulting from a merger or consolidation with DePuy or transfer
of substantially all of the assets of DePuy.
(j) "DEPUY AFFILIATED GROUP" means DePuy, together with--
(1) any subsidiary of DePuy and any other entity which, together with
DePuy, is a member of a "controlled group" of corporations (as
described in section 414(b) of the Code);
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(2) any other entity which has been merged into or acquired by DePuy or by
any subsidiary of DePuy which is included in the DePuy controlled
group (as defined above), as long as the merged or acquired entity was
part of the same controlled group as DePuy (or the DePuy subsidiary)
in which it was merged or by which it was acquired immediately prior
to the merger or the acquisition; and
(3) any successor entity resulting from a merger or consolidation with
DePuy or from the transfer of substantially all of the assets of
DePuy.
(k) "DEPUY INCOME" means the total amount of income received by a Participant
in the form of base salary in a Fiscal Year, plus one half of the annual
cash bonus, paid to the Participant from the DePuy Affiliated Group,
calculated in United States dollars. DePuy Income shall also include any
Participant deferrals pursuant to a cash or deferred arrangement under
section 401(k) of the Code maintained by DePuy, any salary deferred under
any nonqualified deferred compensation arrangement maintained by DePuy, and
any amounts excluded from wages by reason of any Participant election
pursuant to a cafeteria plan under section 125 of the Code maintained by
DePuy. Except for the annual cash bonus, DePuy Income shall not include any
incentive compensation (deferred or otherwise) or any other forms of
compensation provided by DePuy to an employee.
(l) "DISABILITY" means that because of injury or sickness a Participant cannot
perform substantially all of the material duties of his position as they
existed immediately prior to such injury or sickness.
(m) "DISABILITY RETIREMENT DATE" means the date upon which a Participant ceases
Employment as the result of a Disability.
(n) "EARLY RETIREMENT" means Retirement by a Participant at any time on or
after the Participant's Early Retirement Date, but before his Normal
Retirement Date.
(o) "EARLY RETIREMENT DATE" means, the date upon which a Participant retires
from Employment with the DePuy Affiliated Group, at any time earlier than
the Participant's Normal Retirement Date and after the Participant both
attains age 55 and completes five years of service within the DePuy
Affiliated Group.
(p) "EMPLOYMENT" means employment with the DePuy Affiliated Group as determined
by DePuy. However, the Administrative Committee may (in its sole
discretion) treat any material diminution in a Participant's
responsibilities or any change from active, full-time status as
constituting a termination of Employment.
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(q) "FINAL AVERAGE DEPUY INCOME" means the annual average of a Participant's
DePuy Income for the 36-month period ending on the date of the
Participant's termination of Employment (by reason of Retirement or
otherwise) or the Participant's Disability. If a Participant completed
fewer than 36 months of service within the DePuy Affiliated Group, his
Final Average DePuy Income shall mean the Participant's annual average
DePuy Income for his entire period of service with the DePuy Affiliated
Group.
(r) "FISCAL YEAR" means the fiscal year of DePuy, which is the calendar year,
unless changed by the Board.
(s) "INDEPENDENT ACTUARY" means a person (or a firm of which he is a member)
who is an "enrolled actuary" under the Employee Retirement Income Security
Act of 1974 ("ERISA") and who is chosen by the Administrative Committee to
assist in performing calculations under the Plan.
(t) "LONG-TERM DISABILITY PLAN" means any long-term disability plan maintained
by an affiliate within the DePuy Affiliated Group and covering a
Participant, including benefits paid thereunder.
(u) "NORMAL RETIREMENT" means Retirement by a Participant on or after the
Participant's Normal Retirement Date.
(v) "NORMAL RETIREMENT DATE" means the last day of the DePuy pay period
immediately following a Participant's sixty-fifth birthday.
(w) "OTHER RETIREMENT INCOME" means, the total amount of annual retirement
income payable to a Participant, calculated in United States dollars, from
any employment source other than the DePuy Affiliated Group. Other
Retirement Income shall include--
(1) any employer-provided benefits that a Participant is entitled to
receive (whether or not waived or deferred) from any plan that is a
qualified retirement plan under section 401(a) of the Code and that is
subject to the minimum funding requirements of section 412 of the
Code;
(2) any employer-derived benefits that a Participant is entitled to
receive (whether or not waived) under a defined benefit retirement
plan maintained outside of the United States;
(3) one-half of any primary Social Security benefits that a Participant is
entitled to receive (whether or not waived or deferred); and
(4) any benefits that a Participant is entitled to receive (whether or not
waived or deferred) under a program that is comparable to
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<PAGE>
the United States Social Security program and that is maintained by a
government other than the United States government.
In calculating any Death Benefits payable under section 5.2(a), "Other
Retirement Income" shall not include any primary Social Security benefits
under paragraph (3) or any benefits comparable to Social Security benefits
under paragraph (4). In calculating benefits under paragraph (1) or (2)
above, employer-derived benefits shall be taken into account only if the
period of employment to which they relate occurred prior to the
Participant's employment within the DePuy Affiliated Group.
(x) "PARTICIPANT" means an employee of DePuy selected to participate in the
Plan as described under section 4.1 and who has formally agreed to
participate in the Plan. An individual shall continue as a Participant
after his termination of Employment with DePuy until all Benefits payable
hereunder with respect to the individual have been paid or forfeited under
the Plan. The word "Participant" shall not include any references to the
spouse of an employee or of a former employee who participates in the Plan.
(y) "PLAN" means this DePuy, Inc. Supplemental Retirement Plan (Plan No. 1).
(z) "RETIREMENT" means the total cessation of Employment within the DePuy
Affiliated Group by a Participant after attaining age 55 and completing at
least five years of service within the DePuy Affiliated Group or after
attaining age 60.
(aa) "RETIREMENT DATE" means the date that a Participant begins receiving
benefits under this Plan due to Retirement, Disability, or other
termination of Employment.
(bb) "RIP PLAN" means the DePuy, Inc. Retirement Income Plan.
(cc) "SUPPLEMENTAL DEFERRED VESTED BENEFITS" means Benefits payable pursuant to
section 5.3, to a Participant whose Employment has ceased for a reason
other than death, Disability, or Retirement and who is eligible for a
benefit pursuant to the other provisions of the Plan.
(dd) "SUPPLEMENTAL DISABILITY RETIREMENT BENEFITS" means Benefits payable
pursuant to section 5.1(c), to a Participant whose Employment has ceased as
a result of Disability.
(ee) "SUPPLEMENTAL EARLY RETIREMENT BENEFITS" means reduced Benefits payable
pursuant to section 5.1(b), upon Early Retirement.
(ff) "SUPPLEMENTAL RETIREMENT BENEFITS" means Benefits payable to a Participant
who retires, pursuant to section 5.1(a).
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<PAGE>
(gg) "SURVIVING SPOUSE" means the legally married spouse of a Participant who
survives that Participant's death.
(hh) "TERMINATION FOR CAUSE" means that a Participant's Employment within the
DePuy Affiliated Group has terminated because the Participant engaged in a
willful or deliberate act of commission or omission which is injurious to
the finances or reputation of DePuy or any affiliate within the DePuy
Affiliated Group. Termination for Cause shall include, but is not limited
to--
(1) committing any material breach of this Plan, including, without
limitation, the provisions of Article VII regarding non-competition;
(2) committing any dishonest, unethical, fraudulent, or felonious act
either in respect to duties to DePuy or an affiliate within the DePuy
Affiliated Group, or which results in material damage to the business,
reputation, or goodwill of DePuy or an affiliate within the DePuy
Affiliated Group;
(3) gross negligence or intentional wrongdoing in connection with
employment, which has a substantial adverse effect on DePuy or an
affiliate within the DePuy Affiliated Group, its business, or
reputation;
(4) prolonged unexcused absence from duties;
(5) material breach of any employment or other agreement with DePuy or an
affiliate within the DePuy Affiliated Group; or
(6) entering into unauthorized negotiations with any organization which is
competitive with the then present business of DePuy or an affiliate
within the DePuy Affiliated Group regarding the rendering of personal
services for such organization.
If a Participant resigns from Employment with DePuy or an affiliate within
the DePuy Affiliated Group, and the Administrative Committee determines
that the resignation was in anticipation of Termination for Cause, the
Participant's resignation shall be deemed a Termination for Cause.
(ii) "VALUATION DATE" means the first day of the calendar year for which a
contribution is made.
2.2 GENDER AND NUMBER
Except when otherwise indicated by the context, words in the masculine gender
shall include the feminine and neuter genders; the plural shall include the
singular and the singular shall include the plural.
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2.3 EMPLOYMENT RIGHTS
Establishment of the Plan shall not be construed to give any Participant the
right to be retained in the employment of the DePuy Affiliated Group or to any
benefits not specifically provided by the Plan.
2.4 APPLICABLE LAW
This Plan is fully exempt from Titles II, III, and IV of ERISA. The Plan shall
be governed by and construed in accordance with Title I of ERISA and the laws of
the State of Indiana.
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ARTICLE III. ADMINISTRATION
3.1 ADMINISTRATION
Except as specifically provided elsewhere in the Plan, the Administrator shall
have all such powers as may be necessary to carry out the provisions of the Plan
and the transaction of the Plan's business. The authority granted under this
Article shall be subject to the right of the Board to amend or terminate the
Plan, as provided in section 8.1.
3.2 FINALITY OF DETERMINATION
The determination of the Administrator as to any disputed questions arising
under this Plan, including questions of construction and interpretation shall be
final, binding, and conclusive upon all persons; except where the right to make
such determination is reserved to the CEO or the Board.
3.3 INDEMNIFICATION AND EXCULPATION
Any individual who is directed by DePuy to carry out responsibilities or duties
imposed by the Plan shall be indemnified and held harmless by DePuy or an
affiliate within the DePuy Affiliated Group against and from any and all loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
them in connection with or resulting from any claim, action, suit, or proceeding
to which they may be a party or in which they may be involved by reason of any
action taken or failure to act under this Plan and against and from any and all
amounts paid by them in settlement (with DePuy's written approval) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding. The
foregoing provision shall not be applicable to any person if the loss, cost,
liability, or expense is due to such person's gross negligence or willful
misconduct.
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ARTICLE IV. PARTICIPATION
4.1 PARTICIPATION
Participants in the Plan shall be selected by the CEO or the Board from senior
executives within the DePuy Affiliated Group. Selections will be based upon the
CEO's or the Board's determination of the past, present, and expected future
contributions by executives to the long-term performance and growth of DePuy and
other affiliates within the DePuy Affiliated Group. Executives selected by the
CEO or the Board must accept participation in the Plan by written notice to the
Administrator. As a condition of participation in the Plan, candidates for
participation shall be required to execute such other documents and agreements
and to agree to such other conditions as the Administrator may impose.
4.2 OTHER RETIREMENT INCOME
(a) Executives who agree to participate also agree to submit a complete
description of their Other Retirement Income, as defined in this Plan, at
the time they accept participation and to update the description of Other
Retirement Income at the beginning of each Fiscal Year. Foreign source
income includable in Other Retirement Income will be translated into United
States dollars using the rate of exchange accepted by the Internal Revenue
Service for the preceding tax year. Upon DePuy's written request, the
Participant agrees to submit the last full year tax return filed with the
Internal Revenue Service to the outside auditor of DePuy's choice, in order
to verify the Other Retirement Income reported by the Participant.
(b) A Participant who has received or receives a distribution in any form
(including a lump sum payment under a non-DePuy retirement plan) will
report that amount as Other Retirement Income.
(c) The final determination of the exact amount of Other Retirement Income
shall be made by the Administrator and shall be binding upon all
Participants.
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ARTICLE V. BENEFITS
5.1 RETIREMENT BENEFITS
(a) A Participant who attains his Normal Retirement Date while employed within
the DePuy Affiliated Group shall be eligible to receive Supplemental
Retirement Benefits under the Plan. The Supplemental Retirement Benefits
will begin as soon as practical following the date of the Participant's
Normal Retirement. A Participant's Supplemental Retirement Benefit will be
an annual amount, payable for the Participant's lifetime, equal to--
(1) sixty percent of the Participant's Final Average DePuy Income, reduced
by
(2) the sum of the Participant's Other Retirement Income, the benefit
payable to the Participant under the RIP Plan, and any benefit payable
to the Participant under any defined benefit retirement arrangement
maintained by DePuy or by any non-United States based affiliate of
DePuy.
(b) A Participant who attains his Early Retirement Date while employed within
the DePuy Affiliated Group and retires before his Normal Retirement Date
shall be eligible to receive Supplemental Early Retirement Benefits under
the Plan. The Supplemental Early Retirement Benefits will begin as soon as
practical following the Participant's Early Retirement. Except as adjusted
below, a Participant's Supplemental Early Retirement Benefits will be an
annual amount computed in the same manner as Supplemental Retirement
Benefits under subsection (a). The following calculations shall be applied
in determining the Supplemental Early Retirement Benefit:
(1) The amount determined in section 5.1(a)(1) (before the application of
the offset in section 5.1(a)(2)) shall be reduced to reflect the early
commencement of the Benefit. The reduction for early commencement
shall be .25 percent for each of the first 60 months and .41667
percent for each of the next 60 months (if any), that commencement of
the Supplemental Early Retirement Benefits precedes the Participant's
Normal Retirement Date.
(2) Additionally, if the Participant entered the Predecessor Plan after
January 1, 1992 and has completed fewer than ten complete years of
service within the DePuy Affiliated Group, his Supplemental Early
Retirement Benefit (after reduction for early commencement) will be
further reduced. The reduction shall be .41667 percent for each whole
or fractional month that the Participant's years of service are less
than ten years. This service reduction (in addition to the early
commencement reduction)
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shall be applied to the amount determined under section 5.1(a)(1)
before the application of the offset in section 5.1(a)(2), but after
the application of the reduction in paragraph (1).
(3) Instead of the reductions described in paragraph (2), if the
Participant entered the Plan before January 1, 1992 and has completed
fewer than five complete years of service with Boehringer, his
Supplemental Early Retirement Benefit (after reduction for early
commencement) will be further reduced. The reduction shall be .833
percent for each whole or fractional month that the Participant's
years of service are less than five years, and this service reduction
(in addition to the early commencement reduction) shall be applied to
the amount determined under section 5.1(a)(1) before the application
of the offset in section 5.1(a)(2), but after the application of the
reduction in paragraph (1).
(c) A Participant who incurs a Disability while employed within the DePuy
Affiliated Group shall be eligible to receive Supplemental Disability
Retirement Benefits under the Plan if the Participant completed five years
of service within the DePuy Affiliated Group or attained age 60 prior to
the Participant's Disability Retirement Date. If a Participant is not
enrolled in the Long-Term Disability Plan, the Participant shall receive no
Supplemental Disability Retirement Benefits under this Plan. The
Supplemental Disability Retirement Benefits will begin as soon as practical
following the Participant's Disability Retirement Date. A Participant's
Supplemental Disability Retirement Benefit will be an annual amount,
payable for the Participant's lifetime, equal to--
(1) sixty percent of the Participant's Final Average DePuy Income, reduced
by
(2) the sum of--
(A) the amount the Participant would be eligible to receive under the
Long-Term Disability Plan (assuming the Participant selected the
highest level of coverage available under such Plan); plus
(B) the sum of the Participant's Other Retirement Income and the
benefit payable to the Participant under the RIP Plan.
The Participant's Supplemental Disability Retirement Benefit will not be reduced
to reflect commencement thereof before the Participant's Normal Retirement Date
or the Participant's failure to complete five years of service within the DePuy
Affiliated Group. If a Participant recovers from a Disability, his Supplemental
Disability Retirement Benefits shall cease. Upon his subsequent Retirement or
other termination of employment, he
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shall receive a benefit pursuant to the remaining provisions of this Plan, to
the extent that he has satisfied the Plan requirements for such Benefits.
5.2 DEATH BENEFITS
(a) The Surviving Spouse of a Participant will be eligible to receive a death
benefit under this section 5.2(a) if the Participant dies while employed by
DePuy and prior to the commencement of benefits under section 5.1, but
after either--
(1) completing five years of service within the DePuy Affiliated Group; or
(2) attaining age 60.
The amount of such benefit will be an annual amount equal to 50 percent of the
annual amount of Supplemental Retirement Benefits which would have been payable
to the Participant, based on his DePuy Income at his death, if the Participant
had retired on his Normal Retirement Date and been entitled to receive benefits
under section 5.1(a). Such payments will begin on the first day of the month
next following the date of the Participant's death.
(b) The Surviving Spouse of a Participant will be eligible to receive a death
benefit under this section 5.2(b) if the Participant dies after the
commencement of Benefits under section 5.1 or 5.3. The amount of such
benefit will be an annual amount equal to 50 percent of the annual amount
of the Benefits payable to the Participant during his lifetime; provided,
however, that for purposes of determining the amount of death benefit
payable, the Benefits payable during the Participant's lifetime shall be
recalculated by excluding from Other Retirement Income any primary Social
Security benefit payable to the Surviving Spouse by reason of the
Participant's death and by including any payments to the Surviving Spouse
under the Long-Term Disability Plan. Such payments will begin on the first
day of the month next following the date of the Participant's death.
(c) The Surviving Spouse of a Participant will be eligible to receive a death
benefit under this section 5.2(c) if the Participant dies after termination
of employment within the DePuy Affiliated Group and prior to the
commencement of Supplemental Deferred Vested Benefits under section 5.3,
but after completing ten years of service within the DePuy Affiliated Group
(five years if the Participant entered the Plan before January 1, 1992).
The amount of such benefit will be an annual amount equal to 50 percent of
the annual amount of Supplemental Deferred Vested Benefits which would have
been payable to the Participant under section 5.3 on the first day of the
month next following the Participant's sixty-fifth birthday. Such payments
will
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begin on the first day of the month next following the date the Participant
would have attained his sixty-fifth birthday.
(d) Payments under this section shall be continued to the Surviving Spouse
until the Surviving Spouse's death.
5.3 SUPPLEMENTAL DEFERRED VESTED BENEFITS
A Participant whose Employment within the DePuy Affiliated Group is terminated
after completing ten years of service within the DePuy Affiliated Group (five
years if the Participant entered the Plan before January 1, 1992) but before
becoming eligible for Supplemental Retirement Benefits or Supplemental Early
Retirement Benefits, shall be eligible to receive Supplemental Deferred Vested
Benefits under the Plan. The Supplemental Deferred Vested Benefits will begin on
the first day of the month coincident with or next following the Participant's
sixty-fifth birthday. A Participant's Supplemental Deferred Vested Benefit will
be an annual amount computed in the same manner as Supplemental Retirement
Benefits under section 5.1(a), based on his Final Average DePuy Income at his
termination of employment and his projected age 65 Other Retirement Income and
benefit under the RIP Plan.
5.4 COMMENCEMENT OF PAYMENTS
(a) Except as otherwise specified in this section 5.4, benefits payable under
sections 5.1, 5.2, and 5.3 will commence on the dates specified therein.
(b) A Participant eligible for a benefit under 5.3 or a Surviving Spouse
eligible for a benefit under section 5.2(c) may request earlier
commencement of such benefit. The Administrator may allow Benefits payable
with respect to the Participant or Surviving Spouse to commence at any time
after the Participant attains (or would have attained) age 55.
(c) The Administrator may grant early commencement of benefits upon the written
petition of the Participant or, if the Participant is deceased, the
Participant's Surviving Spouse. The approval or denial of such petition
shall be in the sole discretion of the Administrator. However, such
petition may not be approved unless the Participant or Surviving Spouse can
demonstrate either--
(1) proof of financial need;
(2) that such payment is in the best interest of DePuy; or
(3) that such payment will not result in a significant financial detriment
to DePuy.
If benefits commence early under this section, they shall be reduced to
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<PAGE>
reflect the early commencement thereof and shall be the Actuarial
Equivalent of the Benefits otherwise payable under the Plan.
5.5 FORM OF PAYMENTS
(a) Benefit payments under the Plan shall normally be made for the life of the
Participant and his Surviving Spouse, as described elsewhere in this
Article V. However, upon the written petition of the Participant (or the
Participant's Surviving Spouse if the Participant is dead), the
Administrator may provide for all or any part of the benefits payable with
respect to a Participant to be made in a single lump sum payment. The
approval or denial of such petition shall be in the sole discretion of the
Administrator; provided, however, such petition may not be approved unless
the Participant (or Surviving Spouse) can demonstrate either--
(1) proof of financial need;
(2) that such payment is in the best interest of DePuy; or
(3) that such payment will not result in a significant financial detriment
to DePuy.
As a condition of the Administrator's approval, a Participant or Surviving
Spouse who requests a lump sum payment, shall execute such other documents
and agreements as are consistent with the terms of this Plan as the
Administrator may impose.
(b) Lump sum payments under this section shall be the Actuarial Equivalent of
the Benefits payable with respect to the Participant or Surviving Spouse.
5.6 CALCULATION OF OFFSETS AND ACTUARIAL EQUIVALENCE
(a) The Administrator is authorized to interpret the terms of the Plan and
calculate all Benefits payable under the Plan. Such interpretations shall
comply with the rules contained in this section. Such calculations shall be
made by, or with the guidance of, the Independent Actuary. However,
subsection (d) shall only apply to Participants who entered the Plan after
January 1, 1992.
(b) The offset under this Plan for a married Participant's Other Retirement
Income and under the RIP Plan shall be calculated as a 50 percent joint and
survivor annuity (with the Participant's Surviving Spouse as the contingent
annuitant) beginning at the later of--
(1) the Participant's Retirement Date; or
(2) the earliest date that the Other Retirement Income or RIP payments are
available.
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<PAGE>
The offset under this Plan for an unmarried Participant's Other
Retirement Income and under the RIP Plan shall be calculated as a
single life annuity beginning on the later of--
(A) the Participant's Retirement Date or
(B) the earliest date that the Other Retirement Income or RIP Plan
payments are available.
Such annuities shall be the Actuarial Equivalent of the amount of
Other Retirement Income or the amount under the RIP Plan actually
payable (or paid) to the Participant.
(c) In the case of a Participant (or his Surviving Spouse) who is receiving
payments under this Plan in a lump sum--
(1) If the Participant's Other Retirement Income or benefit under the RIP
Plan is either maintained in an individually maintained account or is
paid as a lump sum, then the offset for the Other Retirement Income or
the benefit under the RIP Plan (as applicable) shall be determined on
the basis of such account balance or lump sum as of the Retirement
Date.
(2) If the Participant's Other Retirement Income is maintained under a
defined benefit plan, then the offset for the Other Retirement Income
shall be determined as of the date payment of the lump sum under this
Plan is payable.
(d) If the payment of Other Retirement Income begins before the payment of
Benefits under this Plan, the offset for the Other Retirement Income shall
be based on the sum of--
(1) the amount of such Other Retirement Income payments made when Benefits
are payable under this Plan and
(2) the annuity equivalent of all payments made before Benefits are
payable under this Plan, plus interest thereon.
For purposes of this subsection (d), interest on any payments of Other
Retirement Income shall be based on 120 percent of the interest rate used,
by the Pension Benefit Guaranty Corporation, for valuing immediate
annuities upon termination of defined benefit plans. The interest rate used
shall be based on such PBGC rates as in effect on the first day of each
Plan Year for the period between payment of the Other Retirement Income and
the commencement of Benefits under this Plan.
(e) For purposes of applying this section 5.6--
(1) If a benefit under this Plan is payable as a lump sum, a Participant's
primary Social Security benefit will be based on the law in effect on
his Retirement Date and will be determined on the assumption that the
maximum Social Security benefits will increase at an annual rate equal
to the Assumed Interest Rate in
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<PAGE>
effect at the date on which payment of a Participant's Benefits
commence, minus 200 basis points.
(2) If a benefit under this Plan is payable as an annuity beginning before
a Participant's sixty-second birthday, the Participant's primary
Social Security benefit will equal the maximum primary Social Security
benefit based on the law in effect on the later of the Participant's
Retirement Date or the Participant's sixty-second birthday.
(f) In calculating Disability retirement benefits under section 5.3, the Social
Security benefit used under paragraph (3) will be based on the actual
Social Security disability award to the Participant.
(g) The offset under this Plan for benefits under any defined benefit
retirement arrangement shall be calculated by the Administrator, in its
sole discretion, consistent with section 5.6(b) above.
(h) For purposes of section 5.1(c) and section 5.2(b), the offsets for amounts
payable under the Long-Term Disability Plan shall only be effected for the
calendar months in which amounts are actually payable under the Long-Term
Disability Plan.
5.7 REDUCTIONS FOR CERTAIN SURVIVING SPOUSES
If a Surviving Spouse is entitled to Benefits under this Article V, and if the
Surviving Spouse is more than ten years younger than the Participant, the amount
otherwise payable to the Surviving Spouse hereunder shall be reduced to reflect
the actuarial value of such age difference. The Surviving Spouse's benefit shall
be reduced so that it is the Actuarial Equivalent of the benefit payable to a
Surviving Spouse who is ten years younger than the Participant.
5.8 DETERMINATION OF BENEFITS.
In determining the amount of a retirement or other benefit payable to a
Participant or Surviving Spouse under this Article V, the following provisions
shall apply:
(a) YEARS OF SERVICE. The Administrator shall have the sole authority to
determine a Participant's years of service under this Plan. In the case of
a Participant--
(1) who is employed by DePuy during a period when he does not participate
in the Plan;
(2) whose employment relationship with DePuy terminates; and
(3) who is subsequently rehired and becomes a Participant in the Plan,
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<PAGE>
such Participant's years of service shall not include the initial period of
DePuy employment. Notwithstanding the preceding sentence, the Administrator
shall have the discretion at any time to retroactively include service for
such Participant's initial period of employment with DePuy.
(b) ESTIMATED BENEFITS. Notwithstanding any other provision of this Plan, in
determining the amount of any benefit payable under this Article V, or any
individual offset or other component of such a benefit, the Administrator
shall have the sole discretion to estimate such amount. Such an estimate
shall be calculated on the basis of the most current and most accurate data
reasonably available at the time of performing the benefit calculation, as
determined by the Administrator. The Administrator shall have the sole
discretion to consider such an estimate as a final calculation, or to
subsequently modify such benefit, and adjust Plan payments accordingly, if
and when additional data or information becomes available.
5.9 TRANSFERRED EMPLOYEES FROM BOEHRINGER MANNHEIM CORPORATION.
In the case of a person who becomes a Participant on or after October 1, 1996,
and who was transferred from a position of employment with Boehringer Mannheim
Corporation or one of its subsidiaries or affiliates, the person shall be
treated as a new employee, except as otherwise permitted under section 5.8(a).
5.10 PARTICIPANTS TRANSFERRING TO BOEHRINGER MANNHEIM CORPORATION.
A Participant who transfers from the DePuy Affiliated Group to a position of
employment within the Boehringer Mannheim Corporation controlled group, on or
after October 1, 1996, shall be treated as any other Participant who retires or
otherwise leaves the DePuy Affiliated Group.
17
<PAGE>
ARTICLE VI. OTHER TERMINATIONS OF EMPLOYMENT
6.1 TERMINATION BEFORE FIVE OR TEN YEARS OF SERVICE
If a Participant's Employment within the DePuy Affiliated Group terminates for
any reason other than Retirement, death, or Disability before the Participant
completes ten years of service within the DePuy Affiliated Group (five years in
the case of a Participant who entered the Plan before January 1, 1992), the
Participant (and his Surviving Spouse) will not be entitled to any benefits
under the Plan. If a Participant's Employment within the DePuy Affiliated Group
terminates due to death or Disability, and before the Participant completes five
years of service within the DePuy Affiliated Group or attains age 60, the
Participant (and his Surviving Spouse) will not be entitled to any benefits
under the Plan.
6.2 TERMINATION FOR CAUSE
Notwithstanding anything to the contrary contained elsewhere in this Plan, any
Participant whose employment is terminated under circumstances that constitute
Termination for Cause will not be entitled to any benefits under the Plan. This
provision shall apply without regard to the Participant's age or years of
service within the DePuy Affiliated Group at the time of such termination.
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<PAGE>
ARTICLE VII. NONCOMPETITION
7.1 NONCOMPETITION
The Participant's right to receive Benefits provided in this Plan and to have
any Benefits paid to his Surviving Spouse under this Plan are further
conditioned upon the following terms and conditions--
(a) The Participant will not act, directly or indirectly, as a stockholder,
officer, director, employee, agent, sole proprietor, partner, or consultant
of, or otherwise participate in, any enterprise or organization which is
competitive with the then present business of DePuy or an affiliate within
the DePuy Affiliated Group, as it is now being conducted or may be
conducted during the payment of Benefits under the Plan. This does not
include a financial interest in widely held corporations which are quoted
and sold on the open market, unless--
(1) the amount held is in excess of ten percent of the outstanding stock
of that corporation; or
(2) the stock has a value representing more than 100 percent of the
individual's personal net worth.
(b) The Participant will not knowingly participate, directly or indirectly, in
the employment, solicitation for employment, or advice or recommendation to
any person or business entity that he or it employ, or solicit for
employment, any individual now or hereafter employed in other than an
hourly paid capacity by DePuy or an affiliate within the DePuy Affiliated
Group, including any dealer, distributor, or independent contractor acting
as an agent of DePuy or an affiliate within the DePuy Affiliated Group,
with respect to the sale or distribution of products sold by DePuy or an
affiliate within the DePuy Affiliated Group, without the prior express
written consent of DePuy.
(c) The Participant will not solicit, contact, or communicate with any
physician, scientist, or other person who is or has been involved in the
development of products of DePuy or an affiliate within the DePuy
Affiliated Group, during the Participant's employment with DePuy,
concerning the development of products reasonably related to the present
business of DePuy, as it is now being conducted or may be conducted during
the payment of Benefits under the Plan without the express prior written
consent of DePuy.
(d) The Participant will treat as confidential and will not, without prior
written authorization from DePuy, directly or indirectly disclose to any
person, firm, association, or corporation, or use for Participant's own
benefit, any financial statements, information, plans, products,
19
<PAGE>
data, results of tests or surveys, customer or supplier lists, or any other
trade secrets or confidential material or information regarding DePuy, or
an affiliate within the DePuy Affiliated Group, including any and all
information and instructions, technical or otherwise, obtained, compiled,
prepared, issued, or communicated for the use of DePuy, or an affiliate
within the DePuy Affiliated Group, or any information concerning the
present or future products, processes or methods of operation of DePuy or
an affiliate within the DePuy Affiliated Group, or information concerning
improvements or inventions or know-how relating to the same or any part
thereof, it being the intent of DePuy to restrict Participant from
disseminating or using for Participant's own benefit any information
belonging directly or indirectly to DePuy or an affiliate within the DePuy
Affiliated Group, or agents which is not readily available to the general
public.
(e) The Participant agrees to return to DePuy or an affiliate within the DePuy
Affiliated Group all data, drawings, prints, and other written information
(including all copies thereof) in the Participant's possession or under the
Participant's control which were prepared by or for the Participant or
furnished Participant by DePuy or an affiliate within the DePuy Affiliated
Group, or its employees, agents, or consultants during the term of the
Participant's employment by DePuy or an affiliate within the DePuy
Affiliated Group, prior to termination.
(f) The Participant will not, directly or indirectly, take any action which
could or would interfere with, damage, or destroy the goodwill and
reputation of DePuy or an affiliate within the DePuy Affiliated Group, or
any of its directors, officers, employees, operations, or products.
20
<PAGE>
ARTICLE VIII. MISCELLANEOUS
8.1 AMENDMENT AND TERMINATION
The CEO or the Board may at any time terminate or amend the Plan in any respect.
However, a termination or amendment of the Plan shall not, without the written
consent of the Participant reduce the amount payable with respect to the
Participant, based on--
(a) the Participant's DePuy Income at the time the amendment is adopted,
(b) the Plan provisions in effect at the time the amendment is adopted, and
(c) the value of offsets for Other Retirement Income as determined when Benefit
payments under this Plan commence.
8.2 FUNDING
(a) All benefits paid under the Plan shall be paid from the general assets of
DePuy, except to the extent paid from any "grantor trust" (under sections
671 through 677 of the Code) maintained by DePuy or any affiliate within
the DePuy Affiliated Group, in connection with the Plan. Said trust is
subject to the claims of creditors of DePuy or any affiliate within the
DePuy Affiliated Group, in the event of insolvency. This Plan shall not be
interpreted to provide any Participant or Surviving Spouse with any secured
interest or right to any assets of DePuy, and no Participant or Surviving
Spouse shall acquire any interest greater than that of an unsecured
creditor.
(b) DePuy shall make contributions to the trust no less often than twice per
year. The Administrator shall ensure that contributions are calculated
using the guidance and methodology of Financial Accounting Standards Board
statement No. 87. The first contribution required hereunder each year, to
be made no later than July 1 of such year, shall fund the annual cost for
the Participants on June 30 of such year. The second contribution required
hereunder will be made no later than December 31 of each year. The second
contribution shall fund the annual cost for individuals who become
Participants in this Plan between July 1 and December 31 of such year.
DePuy may, in its sole discretion, make additional contributions to the
trust to fund benefits accrued under this Plan.
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<PAGE>
8.3 TAX LIABILITY
DePuy may withhold, or direct the withholding of, from any payment of Benefits
hereunder any taxes required to be withheld and such sum as
DePuy may reasonably estimate to be necessary to cover any taxes for which DePuy
may be liable and which may be assessed with regard to such payment.
8.4 ASSIGNMENT
The Participant (or Surviving Spouse) may not assign, pledge, or otherwise
transfer or encumber any of the Participant's (or Surviving Spouse's) Benefits
except as permitted by agreement of the CEO or the Board.
8.5 SUCCESSORS
The Plan and the rights and obligations of DePuy or any affiliate within the
DePuy Affiliated Group hereunder shall be binding upon, and inure to the
benefits of the Participants and their Surviving Spouses only, and the
successors and assigns of DePuy or any affiliate within the DePuy Affiliated
Group.
8.6 SEVERABILITY
In the event that any one or more of the provisions of this Plan shall be held
to be invalid, illegal, or unenforceable, the validity, legality, or
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
8.7 NONUNIFORM DETERMINATIONS
The determinations of the CEO, the Board, or the Administrator under the Plan
need not be uniform and may be made selectively among Participants (and
Surviving Spouses) who receive, or are eligible to receive, Benefits under the
Plan, whether or not such Participants (or Surviving Spouses) are similarly
situated. Such determinations, however, may not result in payment to a
Participant or Surviving Spouse of an amount that is less than the amount that
is otherwise provided for under the terms of this Plan. The Administrator may,
with the approval of the CEO or the Board, waive the application of specific
provisions of the Plan for individual Participants or Surviving Spouses. Such
waivers may not adversely affect the Participant or Surviving Spouse, and can be
granted only if the waiver will not have a material adverse economic or
competitive impact on the Plan or DePuy or any affiliate within the DePuy
Affiliated Group.
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<PAGE>
8.8 SEPARATION FROM OTHER PLANS
Except as otherwise required by law, no Benefits under the Plan shall be taken
into account in determining any benefit under any other pension, retirement,
thrift, profit sharing, 401(k), group insurance, or other benefit plan
maintained or hereafter established by DePuy or any affiliate within the DePuy
Affiliated Group.
8.9 EFFECTIVE DATE
This Plan, as initially adopted, was effective January 1, 1985. The Plan as
restated shall be effective as of October 1, 1996.
* * * * * * * * * *
IN WITNESS WHEREOF, DePuy, Inc. has caused this instrument to be executed by its
duly authorized officers on this 31 day of December, 1996, effective as
of the first day of October 1996.
DEPUY, INC.
ATTEST:
By /s/ G. Taylor Seward
_______________________________
By /s/ Carol Hadley
_______________________________
23
<PAGE>
EXHIBIT A
DEPUY, INC. SUPPLEMENTAL RETIREMENT PLAN (PLAN NO. 1)
ELECTION FORM
The undersigned, an employee of DePuy, Inc. (including its subsidiaries and
affiliates), having been selected by the CEO or the Board of Directors of DePuy,
Inc. to participate in the DePuy, Inc. Supplemental Retirement Plan (Plan No. 1)
does hereby acknowledge having read the Supplemental Retirement Plan, prior to
executing this Election Form, understanding the same and in consideration of
becoming a Participant under the Plan, agrees to be bound by the terms and
conditions of the Plan in all respects.
* * * * * * * * * *
24
<PAGE>
IN WITNESS WHEREOF, I have executed this Election Form to the DePuy, Inc.
Supplemental Retirement Plan (Plan No. 1), effective ______________________.
WITNESS: PARTICIPANT
- ------------------------------- -------------------------------
Signature
-------------------------------
Printed or Typed Name
Received and Acknowledged:
DePuy, Inc.
By_____________________________
Signature
- -------------------------------
- -------------------------------
Printed or Typed Name and Title
Date___________________________
25
<PAGE>
Exhibit 10.16
DEPUY, INC.
SUPPLEMENTAL RETIREMENT PLAN
(PLAN NO. 2)
(As Amended and Restated
Effective as of October 1, 1996)
<PAGE>
DEPUY, INC. SUPPLEMENTAL RETIREMENT PLAN (PLAN NO. 2)
(As Amended and Restated Effective as of October 1, 1996)
CONTENTS
- -----------------------------------------------------
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
ARTICLE I. ESTABLISHMENT OF THE PLAN
1.1 Establishment and Restatement 1
1.2 Purpose 1
ARTICLE II. DEFINITIONS AND CONSTRUCTION
2.1 Definitions 2
2.2 Gender and Number 7
2.3 Employment Rights 7
2.4 Applicable Law 7
ARTICLE III. ADMINISTRATION
3.1 Administration 8
3.2 Finality of Determination 8
3.3 Indemnification and Exculpation 8
ARTICLE IV. PARTICIPATION
4.1 Participation 9
4.2 Other Retirement Income 9
ARTICLE V. BENEFITS
5.1 Retirement Benefits 10
5.2 Death Benefits 11
5.3 Supplemental Deferred Vested Benefits 12
5.4 Commencement of Payments 13
5.5 Form of Payments 13
5.6 Calculation of Offsets and Actuarial
Equivalence 14
5.7 Reductions for Certain Surviving Spouses 16
5.8 Determination of Benefits. 16
</TABLE>
i
<PAGE>
DEPUY, INC. SUPPLEMENTAL RETIREMENT PLAN (PLAN NO. 2)
(As Amended and Restated Effective as of October 1, 1996)
CONTENTS
- -----------------------------------------------------
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
5.9 Transferred Employees from Boehringer
Mannheim Corporation. 17
5.10 Participants Transferring to Boehringer
Mannheim Corporation. 17
ARTICLE VI. OTHER TERMINATIONS OF
EMPLOYMENT
6.1 Termination Before Five or Ten Years
of Service 18
6.2 Termination for Cause 18
ARTICLE VII. NONCOMPETITION
7.1 Noncompetition 19
ARTICLE VIII. MISCELLANEOUS
8.1 Amendment and Termination 21
8.2 Funding 21
8.3 Tax Liability 22
8.4 Assignment 22
8.5 Successors 22
8.6 Severability 22
8.7 Nonuniform Determinations 22
8.8 Separation From Other Plans 23
8.9 Effective Date 23
</TABLE>
ii
<PAGE>
ARTICLE I. ESTABLISHMENT OF THE PLAN
1.1 ESTABLISHMENT AND RESTATEMENT
Boehringer Mannheim U.S. Holdings, Inc. previously established and maintained a
supplemental benefits plan on behalf of its subsidiaries and other affiliated
corporations. Such plan was last amended and restated effective as of January 1,
1993. Effective as of January 1, 1994, sponsorship of the plan was assumed by
Corange U.S. Holdings, Inc., and the plan became known as the Corange U.S.
Holdings, Inc. Supplemental Retirement Plan (Plan No. 2). Effective as of
October 1, 1996, the assets and liabilities held under this plan which related
to Participants employed by Boehringer Mannheim Corporation or affiliates of
Boehringer Mannheim Corporation were spun off and transferred to a new plan
known as the Boehringer Mannheim Corporation Supplemental Retirement Plan (Plan
No. 2) and a related trust agreement. The original plan is hereby amended and
restated effective as of October 1, 1996, and shall be renamed the "DePuy, Inc.
Supplemental Retirement Plan, Plan No. 2" (the "Plan"). The Plan Sponsor shall
be changed from Corange U.S. Holdings, Inc. to DePuy, Inc.
1.2 PURPOSE
The Plan is intended to ensure a competitive level of retirement benefits to a
select group of senior executives of DePuy in order to attract and retain
talented executives.
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<PAGE>
ARTICLE II. DEFINITIONS AND CONSTRUCTION
2.1 DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the meaning
specified unless a contrary intention is specifically and clearly indicated.
(a) "ACTUARIAL EQUIVALENT" means a benefit having the same present value as the
benefit it replaces. For purposes of establishing actuarial equivalence,
present value shall be determined on the bases of the 1984-UP Mortality
Table and the Assumed Interest Rate.
(b) "ADMINISTRATOR" means DePuy.
(c) "ASSUMED INTEREST RATE" means a rate equal to 120 percent of the interest
rate used, by the Pension Benefit Guaranty Corporation, for valuing
immediate annuities upon termination of defined benefit plans. The Assumed
Interest Rate used under the Plan during any Fiscal Year shall be based on
120 percent of the PBGC rate in effect on the first day of the month in
which payment of a Participant's Benefits will commence.
(d) "BENEFITS" means any amounts payable under the Plan as Supplemental
Retirement Benefits, Supplemental Early Retirement Benefits, Disability
Retirement Benefits, Death Benefits, or Supplemental Deferred Vested
Benefits, to or on behalf of a Participant who has met the requirements of
the Plan for eligibility for such payments. For the purpose of calculating
a Participant's total service with DePuy, all service with any company(s)
in the worldwide DePuy group shall be included, subject to the provisions
of section 5.8 of the Plan.
(e) "BOARD" means the Board of Directors of DePuy.
(f) "CEO" means the Chief Executive Officer of DePuy.
(g) "CODE" means the Internal Revenue Code of 1986, as it may be amended from
time to time. Reference to a section of the Code shall also include any
comparable provision of the Code that supersedes said section.
(h) "DEATH BENEFITS" means benefits payable to a Surviving Spouse upon the
death of a Participant pursuant to section 5.2.
(i) "DEPUY" means DePuy, Inc., a Delaware corporation, or any successor
corporation resulting from a merger or consolidation with DePuy or transfer
of substantially all of the assets of DePuy.
2
<PAGE>
(j) "DEPUY AFFILIATED GROUP" means DePuy, together with--
(1) any subsidiary of DePuy and any other entity which, together with DePuy, is
a member of a "controlled group" of corporations (as described in section
414(b) of the Code);
(2) any other entity which has been merged into or acquired by DePuy or by any
subsidiary of DePuy which is included in the DePuy controlled group (as
defined above), as long as the merged or acquired entity was part of the
same controlled group as DePuy (or the DePuy subsidiary) in which it was
merged or by which it was acquired immediately prior to the merger or the
acquisition; and
(3) any successor entity resulting from a merger or consolidation with DePuy or
from the transfer of substantially all of the assets of DePuy.
(k) "DEPUY INCOME" means the total amount of income, calculated in United
States dollars, received by a Participant from the DePuy Affiliated Group
in the form of base salary in a Fiscal Year. DePuy Income shall also
include any Participant deferrals pursuant to a cash or deferred
arrangement under section 401(k) of the Code maintained by DePuy, any
salary deferred under any nonqualified deferred compensation arrangement
maintained by DePuy, and any amounts excluded from wages by reason of any
Participant election pursuant to a cafeteria plan under section 125 of the
Code maintained by DePuy. DePuy Income shall not include any incentive
compensation (deferred or otherwise) or any other forms of compensation
provided by DePuy to an employee.
(l) "DISABILITY" means that because of injury or sickness a Participant cannot
perform substantially all of the material duties of his position as they
existed immediately prior to such injury or sickness.
(m) "DISABILITY RETIREMENT DATE" means the date upon which a Participant ceases
Employment as the result of a Disability.
(n) "EARLY RETIREMENT" means Retirement by a Participant at any time on or
after the Participant's Early Retirement Date, but before his Normal
Retirement Date.
(o) "EARLY RETIREMENT DATE" means, the date upon which a Participant retires
from Employment with the DePuy Affiliated Group, at any time earlier than
the Participant's Normal Retirement Date and after the Participant both
attains age 55 and completes five years of service within the DePuy
Affiliated Group.
3
<PAGE>
(p) "EMPLOYMENT" means employment with the DePuy Affiliated Group as determined
by DePuy. However, the Administrative Committee may (in its sole
discretion) treat any material diminution in a Participant's
responsibilities or any change from active, full-time status as
constituting a termination of Employment.
(q) "FINAL AVERAGE DEPUY INCOME" means the annual average of a Participant's
DePuy Income for the 36-month period ending on the date of the
Participant's termination of Employment (by reason of Retirement or
otherwise) or the Participant's Disability. If a Participant completed
fewer than 36 months of service within the DePuy Affiliated Group, his
Final Average DePuy Income shall mean the Participant's annual average
DePuy Income for his entire period of service with the DePuy Affiliated
Group.
(r) "FISCAL YEAR" means the fiscal year of DePuy, which is the calendar year,
unless changed by the Board.
(s) "INDEPENDENT ACTUARY" means a person (or a firm of which he is a member)
who is an "enrolled actuary" under the Employee Retirement Income Security
Act of 1974 ("ERISA") and who is chosen by the Administrative Committee to
assist in performing calculations under the Plan.
(t) "LONG-TERM DISABILITY PLAN" means any long-term disability plan maintained
by an affiliate within the DePuy Affiliated Group and covering a
Participant, including benefits paid thereunder.
(u) "NORMAL RETIREMENT" means Retirement by a Participant on or after the
Participant's Normal Retirement Date.
(v) "NORMAL RETIREMENT DATE" means the last day of the DePuy pay period
immediately following a Participant's sixty-fifth birthday.
(w) "OTHER RETIREMENT INCOME" means the total amount of annual retirement
income payable to a Participant, calculated in United States dollars, from
any employment source other than the DePuy Affiliated Group. Other
Retirement Income shall include--
(1) any employer-provided benefits that a Participant is entitled to receive
(whether or not waived or deferred) from any plan that is a qualified
retirement plan under section 401(a) of the Code and that is subject to the
minimum funding requirements of section 412 of the Code;
(2) any employer-derived benefits that a Participant is entitled to receive
(whether or not waived) under a defined benefit retirement plan maintained
outside of the United States;
4
<PAGE>
(3) one-half of any primary Social Security benefits that a Participant is
entitled to receive (whether or not waived or deferred); and
(4) any benefits that a Participant is entitled to receive (whether or not
waived or deferred) under a program that is comparable to the United States
Social Security program and that is maintained by a government other than
the United States government.
In calculating any Death Benefits payable under section 5.2(a), "Other
Retirement Income" shall not include any primary Social Security benefits under
paragraph (3) or any benefits comparable to Social Security benefits under
paragraph (4). In calculating benefits under paragraph (1) or (2) above,
employer-derived benefits shall be taken into account only if the period of
employment to which they relate occurred prior to the Participant's employment
within the DePuy Affiliated Group.
(x) "PARTICIPANT" means an employee of DePuy selected to participate in the
Plan as described under section 4.1 and who has formally agreed to
participate in the Plan. An individual shall continue as a Participant
after his termination of Employment with DePuy until all Benefits payable
hereunder with respect to the individual have been paid or forfeited under
the Plan. The word "Participant" shall not include any references to the
spouse of an employee or of a former employee who participates in the Plan.
(y) "PLAN" means this DePuy, Inc. Supplemental Retirement Plan (Plan No. 2).
(z) "RETIREMENT" means the total cessation of Employment within the DePuy
Affiliated Group by a Participant after attaining age 55 and completing at
least five years of service within the DePuy Affiliated Group or after
attaining age 60.
(aa) "RETIREMENT DATE" means the date that a Participant begins receiving
benefits under this Plan due to Retirement, Disability, or other
termination of Employment.
(bb) "RIP PLAN" means the DePuy, Inc. Retirement Income Plan.
(cc) "SUPPLEMENTAL DEFERRED VESTED BENEFITS" means Benefits payable pursuant to
section 5.3, to a Participant whose Employment has ceased for a reason
other than death, Disability, or Retirement and who is eligible for a
benefit pursuant to the other provisions of the Plan.
(dd) "SUPPLEMENTAL DISABILITY RETIREMENT BENEFITS" means Benefits payable
pursuant to section 5.1(c), to a Participant whose Employment has ceased as
a result of Disability.
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(ee) "SUPPLEMENTAL EARLY RETIREMENT BENEFITS" means reduced Benefits payable
pursuant to section 5.1(b), upon Early Retirement.
(ff) "SUPPLEMENTAL RETIREMENT BENEFITS" means Benefits payable to a Participant
who retires, pursuant to section 5.1(a).
(gg) "SURVIVING SPOUSE" means the legally married spouse of a Participant who
survives that Participant's death.
(hh) "TERMINATION FOR CAUSE" means that a Participant's Employment within the
DePuy Affiliated Group has terminated because the Participant engaged in a
willful or deliberate act of commission or omission which is injurious to
the finances or reputation of DePuy or any affiliate within the DePuy
Affiliated Group. Termination for Cause shall include, but is not limited
to--
(1) committing any material breach of this Plan, including, without
limitation, the provisions of Article VII regarding non-competition;
(2) committing any dishonest, unethical, fraudulent, or felonious act
either in respect to duties to DePuy or an affiliate within the DePuy
Affiliated Group, or which results in material damage to the business,
reputation, or goodwill of DePuy or an affiliate within the DePuy
Affiliated Group;
(3) gross negligence or intentional wrongdoing in connection with
employment, which has a substantial adverse effect on DePuy or an
affiliate within the DePuy Affiliated Group, its business, or
reputation;
(4) prolonged unexcused absence from duties;
(5) material breach of any employment or other agreement with DePuy or an
affiliate within the DePuy Affiliated Group; or
(6) entering into unauthorized negotiations with any organization which is
competitive with the then present business of DePuy or an affiliate
within the DePuy Affiliated Group regarding the rendering of personal
services for such organization.
If a Participant resigns from Employment with DePuy or an affiliate within the
DePuy Affiliated Group, and the Administrative Committee determines that the
resignation was in anticipation of Termination for Cause, the Participant's
resignation shall be deemed a Termination for Cause.
(ii) "VALUATION DATE" means the first day of the calendar year for which a
contribution is made.
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2.2 GENDER AND NUMBER
Except when otherwise indicated by the context, words in the masculine gender
shall include the feminine and neuter genders; the plural shall include the
singular and the singular shall include the plural.
2.3 EMPLOYMENT RIGHTS
Establishment of the Plan shall not be construed to give any Participant the
right to be retained in the employment of the DePuy Affiliated Group or to any
benefits not specifically provided by the Plan.
2.4 APPLICABLE LAW
This Plan is fully exempt from Titles II, III, and IV of ERISA. The Plan shall
be governed by and construed in accordance with Title I of ERISA and the laws of
the State of Indiana.
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ARTICLE III. ADMINISTRATION
3.1 ADMINISTRATION
Except as specifically provided elsewhere in the Plan, the Administrator shall
have all such powers as may be necessary to carry out the provisions of the Plan
and the transaction of the Plan's business. The authority granted under this
Article shall be subject to the right of the Board to amend or terminate the
Plan, as provided in section 8.1.
3.2 FINALITY OF DETERMINATION
The determination of the Administrator as to any disputed questions arising
under this Plan, including questions of construction and interpretation shall be
final, binding, and conclusive upon all persons; except where the right to make
such determination is reserved to the CEO or the Board.
3.3 INDEMNIFICATION AND EXCULPATION
Any individual who is directed by DePuy to carry out responsibilities or duties
imposed by the Plan shall be indemnified and held harmless by DePuy or an
affiliate within the DePuy Affiliated Group against and from any and all loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
them in connection with or resulting from any claim, action, suit, or proceeding
to which they may be a party or in which they may be involved by reason of any
action taken or failure to act under this Plan and against and from any and all
amounts paid by them in settlement (with DePuy's written approval) or paid by
them in satisfaction of a judgment in any such action, suit, or proceeding. The
foregoing provision shall not be applicable to any person if the loss, cost,
liability, or expense is due to such person's gross negligence or willful
misconduct.
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ARTICLE IV. PARTICIPATION
4.1 PARTICIPATION
Participants in the Plan shall be selected by the CEO or the Board from senior
executives within the DePuy Affiliated Group. Selections will be based upon the
CEO's or the Board's determination of the past, present, and expected future
contributions by executives to the long-term performance and growth of DePuy and
other affiliates within the DePuy Affiliated Group. Executives selected by the
CEO or the Board must accept participation in the Plan by written notice to the
Administrative Committee. As a condition of participation in the Plan,
candidates for participation shall be required to execute such other documents
and agreements and to agree to such other conditions as the Administrative
Committee may impose.
4.2 OTHER RETIREMENT INCOME
(a) Executives who agree to participate also agree to submit a complete
description of their Other Retirement Income, as defined in this Plan, at
the time they accept participation and to update the description of Other
Retirement Income at the beginning of each Fiscal Year. Foreign source
income includable in Other Retirement Income will be translated into United
States dollars using the rate of exchange accepted by the Internal Revenue
Service for the preceding tax year. Upon DePuy's written request, the
Participant agrees to submit the last full year tax return filed with the
Internal Revenue Service to the outside auditor of DePuy's choice, in order
to verify the Other Retirement Income reported by the Participant.
(b) A Participant who has received or receives a distribution in any form
(including a lump sum payment under a non-DePuy retirement plan) will
report that amount as Other Retirement Income.
(c) The final determination of the exact amount of Other Retirement Income
shall be made by the Administrative Committee and shall be binding upon all
Participants.
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ARTICLE V. BENEFITS
5.1 RETIREMENT BENEFITS
(a) A Participant who attains his Normal Retirement Date while employed within
the DePuy Affiliated Group shall be eligible to receive Supplemental
Retirement Benefits under the Plan. The Supplemental Retirement Benefits
will begin as soon as practical following the date of the Participant's
Normal Retirement. A Participant's Supplemental Retirement Benefit will be
an annual amount, payable for the Participant's lifetime, equal to--
(1) sixty percent of the Participant's Final Average DePuy Income, reduced
by
(2) the sum of the Participant's Other Retirement Income, the benefit
payable to the Participant under the RIP Plan, and any benefit payable
to the Participant under any defined benefit retirement arrangement
maintained by DePuy or by any non-United States based affiliate of
DePuy.
(b) A Participant who attains his Early Retirement Date while employed within
the DePuy Affiliated Group and retires before his Normal Retirement Date
shall be eligible to receive Supplemental Early Retirement Benefits under
the Plan. The Supplemental Early Retirement Benefits will begin as soon as
practical following the Participant's Early Retirement. Except as adjusted
below, a Participant's Supplemental Early Retirement Benefits will be an
annual amount computed in the same manner as Supplemental Retirement
Benefits under subsection (a). The following calculations shall be applied
in determining the Supplemental Early Retirement Benefit:
(1) The amount determined in section 5.1(a)(1) (before the application of
the offset in section 5.1(a)(2)) shall be reduced to reflect the early
commencement of the Benefit. The reduction for early commencement
shall be .25 percent for each of the first 60 months and .41667
percent for each of the next 60 months (if any), that commencement of
the Supplemental Early Retirement Benefits precedes the Participant's
Normal Retirement Date.
(2) Additionally, if the Participant has completed fewer than ten complete
years of service within the DePuy Affiliated Group, his Supplemental
Early Retirement Benefit (after reduction for early commencement) will
be further reduced. The reduction shall be .41667 percent for each
whole or fractional month that the Participant's years of service are
less than ten years. This service reduction (in addition to the early
commencement reduction)
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shall be applied to the amount determined under section 5.1(a)(1) before the
application of the offset in section 5.1(a)(2), but after the application of the
reduction in paragraph (1).
(c) A Participant who incurs a Disability while employed within the DePuy
Affiliated Group shall be eligible to receive Supplemental Disability
Retirement Benefits under the Plan if the Participant completed five years
of service within the DePuy Affiliated Group or attained age 60 or to the
Participant's Disability Retirement Date. If a Participant is not enrolled
in the Long-Term Disability Plan, the Participant shall receive no
Supplemental Disability Retirement Benefits under this Plan. The
Supplemental Disability Retirement Benefits will begin as soon as practical
following the Participant's Disability Retirement Date. A Participant's
Supplemental Disability Retirement Benefit will be an annual amount,
payable for the Participant's lifetime, equal to--
(1) sixty percent of the Participant's Final Average DePuy Income, reduced
by
(2) the sum of--
(A) the amount the Participant would be eligible to receive under the
Long-Term Disability Plan (assuming the Participant selected the
highest level of coverage available under such Plan); plus
(B) the sum of the Participant's Other Retirement Income and the
benefit payable to the Participant under the RIP Plan.
The Participant's Supplemental Disability Retirement Benefit will not be reduced
to reflect commencement thereof before the Participant's Normal Retirement Date
or the Participant's failure to complete five years of service within the DePuy
Affiliated Group. If a Participant recovers from a Disability, his Supplemental
Disability Retirement Benefits shall cease. Upon his subsequent Retirement or
other termination of employment, he shall receive a benefit pursuant to the
remaining provisions of this Plan, to the extent that he has satisfied the Plan
requirements for such Benefits.
5.2 DEATH BENEFITS
(a) The Surviving Spouse of a Participant will be eligible to receive a death
benefit under this section 5.2(a) if the Participant dies while employed by
DePuy and prior to the commencement of benefits under section 5.1, but
after either--
(1) completing five years of service within the DePuy Affiliated Group; or
(2) attaining age 60.
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The amount of such benefit will be an annual amount equal to 50 percent of the
annual amount of Supplemental Retirement Benefits which would have been payable
to the Participant, based on his DePuy Income at his death, if the Participant
had retired on his Normal Retirement Date and been entitled to receive benefits
under section 5.1(a). Such payments will begin on the first day of the month
next following the date of the Participant's death.
(b) The Surviving Spouse of a Participant will be eligible to receive a death
benefit under this section 5.2(b) if the Participant dies after the
commencement of Benefits under section 5.1 or 5.3. The amount of such
benefit will be an annual amount equal to 50 percent of the annual amount
of the Benefits payable to the Participant during his lifetime; provided,
however, that for purposes of determining the amount of death benefit
payable, the Benefits payable during the Participant's lifetime shall be
recalculated by excluding from Other Retirement Income any primary Social
Security benefit payable to the Surviving Spouse by reason of the
Participant's death and by including any payments to the Surviving Spouse
under the Long-Term Disability Plan. Such payments will begin on the first
day of the month next following the date of the Participant's death.
(c) The Surviving Spouse of a Participant will be eligible to receive a death
benefit under this section 5.2(c) if the Participant dies after termination
of employment within the DePuy Affiliated Group and prior to the
commencement of Supplemental Deferred Vested Benefits under section 5.3,
but after completing ten years of service within the DePuy Affiliated
Group. The amount of such benefit will be an annual amount equal to 50
percent of the annual amount of Supplemental Deferred Vested Benefits which
would have been payable to the Participant under section 5.3 on the first
day of the month next following the Participant's sixty-fifth birthday.
Such payments will begin on the first day of the month next following the
date the Participant would have attained his sixty-fifth birthday.
(d) Payments under this section shall be continued to the Surviving Spouse
until the Surviving Spouse's death.
5.3 SUPPLEMENTAL DEFERRED VESTED BENEFITS
A Participant whose Employment within the DePuy Affiliated Group is terminated
after completing ten years of service within the DePuy Affiliated Group but
before becoming eligible for Supplemental Retirement Benefits or Supplemental
Early Retirement Benefits, shall be eligible to receive Supplemental Deferred
Vested Benefits under the Plan. The Supplemental Deferred Vested Benefits will
begin on the first day of the
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month coincident with or next following the Participant's sixty-fifth birthday.
A Participant's Supplemental Deferred Vested Benefit will be an annual amount
computed in the same manner as Supplemental Retirement Benefits under section
5.1(a), based on his Final Average DePuy Income at his termination of employment
and his projected age 65 Other Retirement Income and benefit under the RIP Plan.
5.4 COMMENCEMENT OF PAYMENTS
(a) Except as otherwise specified in this section 5.4, benefits payable under
sections 5.1, 5.2, and 5.3 will commence on the dates specified therein.
(b) A Participant eligible for a benefit under 5.3 or a Surviving Spouse
eligible for a benefit under section 5.2(c) may request earlier
commencement of such benefit. The Administrator may allow Benefits payable
with respect to the Participant or Surviving Spouse to commence at any time
after the Participant attains (or would have attained) age 55.
(c) The Administrator may grant early commencement of benefits upon the written
petition of the Participant or, if the Participant is deceased, the
Participant's Surviving Spouse. The approval or denial of such petition
shall be in the sole discretion of the Administrator. However, such
petition may not be approved unless the Participant or Surviving Spouse can
demonstrate either--
(1) proof of financial need;
(2) that such payment is in the best interest of DePuy; or
(3) that such payment will not result in a significant financial detriment
to DePuy.
If benefits commence early under this section, they shall be reduced to reflect
the early commencement thereof and shall be the Actuarial Equivalent of the
Benefits otherwise payable under the Plan.
5.5 FORM OF PAYMENTS
(a) Benefit payments under the Plan shall normally be made for the life of the
Participant and his Surviving Spouse, as described elsewhere in this
Article V. However, upon the written petition of the Participant (or the
Participant's Surviving Spouse if the Participant is dead), the
Administrator may provide for all or any part of the benefits payable with
respect to a Participant to be made in a single lump sum payment. The
approval or denial of such petition shall be in the sole discretion of the
Administrator; provided, however, such petition may not be approved unless
the Participant (or Surviving Spouse) can
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demonstrate either--
(1) proof of financial need;
(2) that such payment is in the best interest of DePuy; or
(3) that such payment will not result in a significant financial detriment
to DePuy.
As a condition of the Administrator's approval, a Participant or Surviving
Spouse who requests a lump sum payment, shall execute such other documents and
agreements as are consistent with the terms of this Plan as the Administrator
may impose.
(b) Lump sum payments under this section shall be the Actuarial Equivalent of
the Benefits payable with respect to the Participant or Surviving Spouse.
5.6 CALCULATION OF OFFSETS AND ACTUARIAL EQUIVALENCE
(a) The Administrator is authorized to interpret the terms of the Plan and
calculate all Benefits payable under the Plan. Such interpretations shall
comply with the rules contained in this section. Such calculations shall be
made by, or with the guidance of, the Independent Actuary.
(b) The offset under this Plan for a married Participant's Other Retirement
Income and under the RIP Plan shall be calculated as a 50 percent joint and
survivor annuity (with the Participant's Surviving Spouse as the contingent
annuitant) beginning at the later of--
(1) the Participant's Retirement Date; or
(2) the earliest date that the Other Retirement Income or RIP payments are
available.
The offset under this Plan for an unmarried Participant's Other Retirement
Income and under the RIP Plan shall be calculated as a single life annuity
beginning on the later of (A) the Participant's Retirement Date or (B) the
earliest date that the Other Retirement Income or RIP Plan payments are
available. Such annuities shall be the Actuarial Equivalent of the amount of
Other Retirement Income or the amount under the RIP Plan actually payable (or
paid) to the Participant.
(c) In the case of a Participant (or his Surviving Spouse) who is receiving
payments under this Plan in a lump sum--
(1) If the Participant's Other Retirement Income or benefit under the RIP
Plan is either maintained in an individually maintained account or is
paid as a lump sum, then the offset for the Other
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Retirement Income or the benefit under the RIP Plan (as applicable)
shall be determined on the basis of such account balance or lump sum
as of the Retirement Date.
(2) If the Participant's Other Retirement Income is maintained under a
defined benefit plan, then the offset for the Other Retirement Income
shall be determined as of the date payment of the lump sum under this
Plan is payable.
(d) If the payment of Other Retirement Income begins before the payment of
Benefits under this Plan, the offset for the Other Retirement Income shall
be based on the sum of--
(1) the amount of such Other Retirement Income payments made when Benefits
are payable under this Plan and
(2) the annuity equivalent of all payments made before Benefits are
payable under this Plan, plus interest thereon.
For purposes of this subsection (d), interest on any payments of Other
Retirement Income shall be based on 120 percent of the interest rate used, by
the Pension Benefit Guaranty Corporation, for valuing immediate annuities upon
termination of defined benefit plans. The interest rate used shall be based on
such PBGC rates as in effect on the first day of each Plan Year for the period
between payment of the Other Retirement Income and the commencement of Benefits
under this Plan.
(e) For purposes of applying this section 5.6--
(1) If a benefit under this Plan is payable as a lump sum, a Participant's
primary Social Security benefit will be based on the law in effect on
his Retirement Date and will be determined on the assumption that the
maximum Social Security benefits will increase at an annual rate equal
to the Assumed Interest Rate in effect at the date on which payment of
a Participant's Benefits commence, minus 200 basis points.
(2) If a benefit under this Plan is payable as an annuity beginning before
a Participant's sixty-second birthday, the Participant's primary
Social Security benefit will equal the maximum primary Social Security
benefit based on the law in effect on the later of the Participant's
Retirement Date or the Participant's sixty-second birthday.
(f) In calculating Disability retirement benefits under section 5.3, the Social
Security benefit used under paragraph (3) will be based on the actual
Social Security disability award to the Participant.
(g) The offset under this Plan for benefits under any defined benefit
retirement arrangement shall be calculated by the Administrator, in its
sole discretion, consistent with section 5.6(b) above.
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(h) For purposes of section 5.1(c) and section 5.2(b), the offsets for amounts
payable under the Long-Term Disability Plan shall only be effected for the
calendar months in which amounts are actually payable under the Long-Term
Disability Plan.
5.7 REDUCTIONS FOR CERTAIN SURVIVING SPOUSES
If a Surviving Spouse is entitled to Benefits under this Article V, and if the
Surviving Spouse is more than ten years younger than the Participant, the amount
otherwise payable to the Surviving Spouse hereunder shall be reduced to reflect
the actuarial value of such age difference. The Surviving Spouse's benefit shall
be reduced so that it is the Actuarial Equivalent of the benefit payable to a
Surviving Spouse who is ten years younger than the Participant.
5.8 DETERMINATION OF BENEFITS.
In determining the amount of a retirement or other benefit payable to a
Participant or Surviving Spouse under this Article V, the following provisions
shall apply:
(a) YEARS OF SERVICE. The Administrator shall have the sole authority to
determine a Participant's years of service under this Plan. In the case of
a Participant--
(1) who is employed by DePuy during a period when he does not participate
in the Plan;
(2) whose employment relationship with DePuy terminates; and
(3) who is subsequently rehired and becomes a Participant in the Plan,
such Participant's years of service shall not include the initial period of
DePuy employment. Notwithstanding the preceding sentence, the Administrator
shall have the discretion at any time to retroactively include service for
such Participant's initial period of employment with DePuy.
(b) ESTIMATED BENEFITS. Notwithstanding any other provision of this Plan, in
determining the amount of any benefit payable under this Article V, or any
individual offset or other component of such a benefit, the Administrator
shall have the sole discretion to estimate such amount. Such an estimate
shall be calculated on the basis of the most current and most accurate data
reasonably available at the time of performing the benefit calculation, as
determined by the Administrator. The Administrator shall have the sole
discretion to consider such an
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estimate as a final calculation, or to subsequently modify such benefit,
and adjust Plan payments accordingly, if and when additional data or
information becomes available.
5.9 TRANSFERRED EMPLOYEES FROM BOEHRINGER MANNHEIM CORPORATION.
In the case of a person who becomes a Participant on or after October 1, 1996,
and who was transferred from a position of employment with Boehringer Mannheim
Corporation or one of its subsidiaries or affiliates, the person shall be
treated as a new employee, except as otherwise permitted under section 5.8(a).
5.10 PARTICIPANTS TRANSFERRING TO BOEHRINGER MANNHEIM CORPORATION.
A Participant who transfers from the DePuy Affiliated Group to a position of
employment within the Boehringer Mannheim Corporation controlled group, on or
after October 1, 1996, shall be treated as any other Participant who retires or
otherwise leaves the DePuy Affiliated Group.
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ARTICLE VI. OTHER TERMINATIONS OF EMPLOYMENT
6.1 TERMINATION BEFORE FIVE OR TEN YEARS OF SERVICE
If a Participant's Employment within the DePuy Affiliated Group terminates for
any reason other than Retirement, death, or Disability before the Participant
completes ten years of service within the DePuy Affiliated Group, the
Participant (and his Surviving Spouse) will not be entitled to any benefits
under the Plan. If a Participant's Employment within the DePuy Affiliated Group
terminates due to death or Disability, and before the Participant completes five
years of service within the DePuy Affiliated Group or attains age 60, the
Participant (and his Surviving Spouse) will not be entitled to any benefits
under the Plan.
6.2 TERMINATION FOR CAUSE
Notwithstanding anything to the contrary contained elsewhere in this Plan, any
Participant whose employment is terminated under circumstances that constitute
Termination for Cause will not be entitled to any benefits under the Plan. This
provision shall apply without regard to the Participant's age or years of
service within the DePuy Affiliated Group at the time of such termination.
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ARTICLE VII. NONCOMPETITION
7.1 NONCOMPETITION
The Participant's right to receive Benefits provided in this Plan and to have
any Benefits paid to his Surviving Spouse under this Plan are further
conditioned upon the following terms and conditions:
(a) The Participant will not act, directly or indirectly, as a stockholder,
officer, director, employee, agent, sole proprietor, partner, or consultant
of, or otherwise participate in, any enterprise or organization which is
competitive with the then present business of DePuy or an affiliate within
the DePuy Affiliated Group, as it is now being conducted or may be
conducted during the payment of Benefits under the Plan. This does not
include a financial interest in widely held corporations which are quoted
and sold on the open market, unless--
(1) the amount held is in excess of ten percent of the outstanding stock
of that corporation; or
(2) the stock has a value representing more than 100 percent of the
individual's personal net worth.
(b) The Participant will not knowingly participate, directly or indirectly, in
the employment, solicitation for employment, or advice or recommendation to
any person or business entity that he or it employ, or solicit for
employment, any individual now or hereafter employed in other than an
hourly paid capacity by DePuy or an affiliate within the DePuy Affiliated
Group, including any dealer, distributor, or independent contractor acting
as an agent of DePuy or an affiliate within the DePuy Affiliated Group,
with respect to the sale or distribution of products sold by DePuy or an
affiliate within the DePuy Affiliated Group, without the prior express
written consent of DePuy.
(c) The Participant will not solicit, contact, or communicate with any
physician, scientist, or other person who is or has been involved in the
development of products of DePuy or an affiliate within the DePuy
Affiliated Group, during the Participant's employment with DePuy,
concerning the development of products reasonably related to the present
business of DePuy, as it is now being conducted or may be conducted during
the payment of Benefits under the Plan without the express prior written
consent of DePuy.
(d) The Participant will treat as confidential and will not, without prior
written authorization from DePuy, directly or indirectly disclose to any
person, firm, association, or corporation, or use for Participant's own
benefit, any financial statements, information, plans, products,
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data, results of tests or surveys, customer or supplier lists, or any other
trade secrets or confidential material or information regarding DePuy, or
an affiliate within the DePuy Affiliated Group, including any and all
information and instructions, technical or otherwise, obtained, compiled,
prepared, issued, or communicated for the use of DePuy, or an affiliate
within the DePuy Affiliated Group, or any information concerning the
present or future products, processes or methods of operation of DePuy or
an affiliate within the DePuy Affiliated Group, or information concerning
improvements or inventions or know-how relating to the same or any part
thereof, it being the intent of DePuy to restrict Participant from
disseminating or using for Participant's own benefit any information
belonging directly or indirectly to DePuy or an affiliate within the DePuy
Affiliated Group, or agents which is not readily available to the general
public.
(e) The Participant agrees to return to DePuy or an affiliate within the DePuy
Affiliated Group all data, drawings, prints, and other written information
(including all copies thereof) in the Participant's possession or under the
Participant's control which were prepared by or for the Participant or
furnished Participant by DePuy or an affiliate within the DePuy Affiliated
Group, or its employees, agents, or consultants during the term of the
Participant's employment by DePuy or an affiliate within the DePuy
Affiliated Group, prior to termination.
(f) The Participant will not, directly or indirectly, take any action which
could or would interfere with, damage, or destroy the goodwill and
reputation of DePuy or an affiliate within the DePuy Affiliated Group, or
any of its directors, officers, employees, operations, or products.
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ARTICLE VIII. MISCELLANEOUS
8.1 AMENDMENT AND TERMINATION
The CEO or the Board may at any time terminate or amend the Plan in any respect.
However, a termination or amendment of the Plan shall not, without the written
consent of the Participant reduce the amount payable with respect to the
Participant, based on--
(a) the Participant's DePuy Income at the time the amendment is adopted,
(b) the Plan provisions in effect at the time the amendment is adopted, and
(c) the value of offsets for Other Retirement Income as determined when Benefit
payments under this Plan commence.
8.2 FUNDING
(a) All benefits paid under the Plan shall be paid from the general assets of
DePuy, except to the extent paid from any "grantor trust" (under sections
671 through 677 of the Code) maintained by DePuy or any affiliate within
the DePuy Affiliated Group, in connection with the Plan. Said trust is
subject to the claims of creditors of DePuy or any affiliate within the
DePuy Affiliated Group, in the event of insolvency. This Plan shall not be
interpreted to provide any Participant or Surviving Spouse with any secured
interest or right to any assets of DePuy, and no Participant or Surviving
Spouse shall acquire any interest greater than that of an unsecured
creditor.
(b) DePuy shall make contributions to the trust no less often than twice per
year. The Administrator shall ensure that contributions are calculated
using the guidance and methodology of Financial Accounting Standards Board
statement No. 87. The first contribution required hereunder each year, to
be made no later than July 1 of such year, shall fund the annual cost for
the Participants on June 30 of such year. The second contribution required
hereunder will be made no later than December 31 of each year. The second
contribution shall fund the annual cost for individuals who become
Participants in this Plan between July 1 and December 31 of such year.
DePuy may, in its sole discretion, make additional contributions to the
trust to fund benefits accrued under this Plan.
21
<PAGE>
8.3 TAX LIABILITY
DePuy may withhold, or direct the withholding of, from any payment of Benefits
hereunder any taxes required to be withheld and such sum as
DePuy may reasonably estimate to be necessary to cover any taxes for which DePuy
may be liable and which may be assessed with regard to such payment.
8.4 ASSIGNMENT
The Participant (or Surviving Spouse) may not assign, pledge, or otherwise
transfer or encumber any of the Participant's (or Surviving Spouse's) Benefits
except as permitted by agreement of the CEO or the Board.
8.5 SUCCESSORS
The Plan and the rights and obligations of DePuy or any affiliate within the
DePuy Affiliated Group hereunder shall be binding upon, and inure to the
benefits of the Participants and their Surviving Spouses only, and the
successors and assigns of DePuy or any affiliate within the DePuy Affiliated
Group.
8.6 SEVERABILITY
In the event that any one or more of the provisions of this Plan shall be held
to be invalid, illegal, or unenforceable, the validity, legality, or
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
8.7 NONUNIFORM DETERMINATIONS
The determinations of the CEO, the Board, or the Administrator under the Plan
need not be uniform and may be made selectively among Participants (and
Surviving Spouses) who receive, or are eligible to receive, Benefits under the
Plan, whether or not such Participants (or Surviving Spouses) are similarly
situated. Such determinations, however, may not result in payment to a
Participant or Surviving Spouse of an amount that is less than the amount that
is otherwise provided for under the terms of this Plan. The Administrator may,
with the approval of the CEO or the Board, waive the application of specific
provisions of the Plan for individual Participants or Surviving Spouses. Such
waivers may not adversely affect the Participant or Surviving Spouse, and can be
granted only if the waiver will not have a material adverse economic or
competitive impact on the Plan or DePuy or any affiliate within the DePuy
Affiliated Group.
22
<PAGE>
8.8 SEPARATION FROM OTHER PLANS
Except as otherwise required by law, no Benefits under the Plan shall be taken
into account in determining any benefit under any other pension, retirement,
thrift, profit sharing, 401(k), group insurance, or other benefit plan
maintained or hereafter established by DePuy or any affiliate within the DePuy
Affiliated Group.
8.9 EFFECTIVE DATE
This Plan, as initially adopted, was effective January 1, 1985. The Plan as
restated shall be effective as of October 1, 1996.
* * * * * * * * * *
IN WITNESS WHEREOF, DePuy, Inc. has caused this instrument to be executed by its
duly authorized officers on this 31 day of December, 1996, effective as
of the first day of October 1996.
DEPUY, INC.
ATTEST:
By /s/ G. Taylor Seward
____________________________
By /s/ Carol Hadley
_____________________________
23
<PAGE>
EXHIBIT A
DEPUY, INC. SUPPLEMENTAL RETIREMENT PLAN (PLAN NO. 2)
ELECTION FORM
The undersigned, an employee of DePuy, Inc. (including its subsidiaries and
affiliates), having been selected by the CEO or the Board of Directors of DePuy,
Inc. to participate in the DePuy, Inc. Supplemental Retirement Plan (Plan No. 2)
does hereby acknowledge having read the Supplemental Retirement Plan, prior to
executing this Election Form, understanding the same and in consideration of
becoming a Participant under the Plan, agrees to be bound by the terms and
conditions of the Plan in all respects.
* * * * * * * * * *
24
<PAGE>
IN WITNESS WHEREOF, I have executed this Election Form to the DePuy, Inc.
Supplemental Retirement Plan (Plan No. 2), effective ______________________.
WITNESS: PARTICIPANT
- ------------------------------- ------------------------------
Signature
------------------------------
Printed or Typed Name
Received and Acknowledged:
DePuy, Inc.
By_____________________________
Signature
- -------------------------------
- -------------------------------
Printed or Typed Name and Title
Date___________________________
25
<PAGE>
Exhibit 10.20
DEPUY, INC.
RETIREMENT EXCESS PLAN
(As Amended and in Effect as of
October 1, 1996)
<PAGE>
DEPUY, INC.
RETIREMENT EXCESS PLAN
(As Amended and in Effect as of October 1, 1996)
<TABLE>
<CAPTION>
CONTENTS
- -----------------------------------------------------------------
SECTION PAGE
<S> <C> <C>
ARTICLE I. ESTABLISHMENT OF THE PLAN
1.1 Establishment and Restatement. 1
1.2 Purpose of Plan. 1
ARTICLE II. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. 2
2.2 Gender and Number. 2
2.3 Employment Rights. 2
2.4 Applicable Law. 2
ARTICLE III. ADMINISTRATION
3.1 Administration. 3
3.2 Finality of Determination. 3
3.3 Indemnification and Exculpation. 3
ARTICLE IV. PARTICIPATION AND BENEFITS
4.1 Participation. 4
4.2 Establishment of Accounts. 4
4.3 Earnings. 4
4.4 Payment of Accounts. 4
4.5 Payments Upon Death. 4
Article V. Limitations
5.1 Vesting. 5
5.2 Maximum Benefits. 5
</TABLE>
i
<PAGE>
DePuy, Inc.
Retirement Excess Plan
(As Amended and in Effect as of October 1, 1996)
<TABLE>
<CAPTION>
CONTENTS
- -----------------------------------------------------------------
SECTION PAGE
<S> <C> <C>
ARTICLE VI. MISCELLANEOUS
6.1 Amendment and Termination. 6
6.2 Funding. 6
6.3 Tax Liability. 6
6.4 Assignment. 6
6.5 Successors. 6
6.6 Severability. 7
6.7 Nonuniform Determinations. 7
6.8 Separation From Other Plans. 7
6.9 Effective Date. 7
</TABLE>
ii
<PAGE>
ARTICLE I. ESTABLISHMENT OF THE PLAN
1.1 ESTABLISHMENT AND RESTATEMENT.
Boehringer Mannheim U.S. Holdings, Inc. previously established an excess benefit
plan on behalf of itself, its subsidiaries, and other affiliated corporations.
Such plan was adopted, effective as of January 1, 1991, and was originally known
as the "Boehringer Mannheim U.S. Holdings, Inc. Excess Benefit Retirement Plan"
(the "Plan").
The name of the Plan (and Plan sponsor) was subsequently changed, and on
September 30, 1996, the Plan was known as the Corange U.S. Holdings, Inc.
Retirement Excess Plan. Effective as of October 1, 1996, the liabilities under
the Plan which related to Participants employed by Boehringer Mannheim
Corporation or its participating affiliates were spun off and transferred to a
new plan, known as the Boehringer Mannheim Corporation Retirement Excess Plan.
The Plan is hereby renamed and will be known as the DePuy, Inc. Retirement
Excess Plan.
1.2 PURPOSE OF PLAN.
The Company sponsors the DePuy, Inc. Retirement Income Plan (the "RIP Plan"),
for the benefit of U.S. employees of the Employers and their beneficiaries. The
RIP Plan is intended to operate as a "qualified plan" as that term is defined
under the Internal Revenue Code (the "Code").
The RIP Plan is subject to limitations under section 415 of the Code that
sometimes result in the diminution of allocations on behalf of certain
employees. This Plan is established to offset this diminution for eligible
employees, is intended as an unfunded excess benefit plan as defined in section
3(36) of ERISA, and is fully exempt from the provisions of ERISA pursuant to
section 4(b)(5) thereof.
1
<PAGE>
ARTICLE II. DEFINITIONS AND CONSTRUCTION
2.1 DEFINITIONS.
Whenever the following terms are used in this Plan, they shall have the meaning
specified unless a contrary intention is specifically and clearly indicated.
(a) "ADMINISTRATOR" means the Company.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as it may be amended from
time to time. Reference to a section of the Code shall also include any
comparable provision of the Code that supersedes said section.
(d) "COMPANY" means DePuy, Inc. an Delaware corporation, or any successor
corporation resulting from a merger or consolidation with the Company or
transfer of substantially all of the assets of the Company.
(e) "EMPLOYER" means the Company and any other entity which is an "Employer" as
that term is defined in the RIP Plan.
(f) "PARTICIPANT" means an employee of an Employer who has met the
participation requirements set forth in section 4.1 of the Plan.
(g) "PLAN" means this DePuy, Inc. Retirement Excess Plan.
2.2 GENDER AND NUMBER.
Except when otherwise indicated by the context, words in the masculine gender
shall include the feminine and neuter genders; the plural shall include the
singular and the singular shall include the plural.
2.3 EMPLOYMENT RIGHTS.
Establishment of the Plan shall not be construed to give any Participant the
right to be retained in the employment of an Employer or to any benefits not
specifically provided by the Plan.
2.4 APPLICABLE LAW.
This Plan provides benefits limited by Section 415 of the Code; therefore, it is
fully exempt from the provisions of ERISA pursuant to Section 4(b)(5) thereof
and shall be governed and construed in accordance with the laws of the State of
Indiana.
2
<PAGE>
ARTICLE III. ADMINISTRATION
3.1 ADMINISTRATION.
Except as specifically provided elsewhere in the Plan, the Administrator shall
have all such powers as may be necessary to carry out the provisions of the Plan
and the transaction of the Plan's business. The authority granted under this
Article shall be subject to the right of the Board to amend or terminate the
Plan, as provided in section 8.1.
3.2 FINALITY OF DETERMINATION.
The determination of the Administrator as to any disputed questions arising
under this Plan, including questions of construction and interpretation shall be
final, binding, and conclusive upon all persons.
3.3 INDEMNIFICATION AND EXCULPATION.
Any individual who is directed by the Company to carry out responsibilities or
duties imposed by the Plan shall be indemnified and held harmless by the Company
against and from any and all loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by them in connection with or resulting from
any claim, action, suit, or proceeding to which they may be a party or in which
they may be involved by reason of any action taken or failure to act under this
Plan and against and from any and all amounts paid by them in settlement (with
the Company's written approval) or paid by them in satisfaction of a judgment in
any such action, suit, or proceeding. The foregoing provision shall not be
applicable to any person if the loss, cost, liability, or expense is due to such
person's gross negligence or willful misconduct.
3
<PAGE>
ARTICLE IV. PARTICIPATION AND BENEFITS
4.1 PARTICIPATION.
An employee will become eligible to participate in this Plan on the first day of
a year following any calendar year in which the amounts allocable to his account
under the RIP Plan are limited by the defined contribution limit under section
415(c)(1) of the Code. Notwithstanding the preceding sentence, no Employer
contributions shall be credited to the account of an employee during a calendar
year in which the employee is a participant in another nonqualified retirement
plan sponsored by any Employer.
4.2 ESTABLISHMENT OF ACCOUNTS.
The Company shall establish an account on its books on behalf of each
Participant in this Plan. A Participant's account will be credited with the
employer contribution that would have been credited to his account under the RIP
Plan if the contributions to the RIP Plan were not limited by the defined
contribution limit under section 415(c)(1) of the Code, reduced by the employer
contribution actually credited to his account under the RIP Plan.
4.3 EARNINGS.
The account established for each Participant pursuant to section 4.2 shall be
adjusted to reflect an assumed rate of earnings. Such rate shall be the rate of
earnings achieved by the GIC Fund maintained under the RIP Plan.
4.4 PAYMENT OF ACCOUNTS.
The account established for each Participant under section 4.2, increased for
earnings under section 4.3, shall be payable to the Participant when such
Participant becomes eligible to receive benefits under the RIP Plan. The account
shall be paid in a single lump sum payment.
4.5 PAYMENTS UPON DEATH.
Each Participant shall have the right to designate a beneficiary to receive
death benefits under this Plan. In the absence of such a designation, the
beneficiary of the Participant under the RIP Plan will be the beneficiary of the
Participant's benefits under this Plan. In the event of a Participant's death
prior to the payment of benefits under section 4.4, the Participant's
beneficiary shall receive the balance in the Participant's account under section
4.3 in a single lump sum payment as soon as practicable following the death of
the Participant.
4
<PAGE>
ARTICLE V. LIMITATIONS
5.1 VESTING.
Notwithstanding anything to the contrary in Article IV, a Participant shall
forfeit any portion of his account under this Plan (and any earnings thereon) if
the Participant's employment with the Company and all affiliates terminates
before the Participant completes five years of service with the Company.
5.2 MAXIMUM BENEFITS.
The maximum amount allocable to a Participant under section 4.2 for any single
calendar year shall be $10,000.
5
<PAGE>
ARTICLE VI. MISCELLANEOUS
6.1 AMENDMENT AND TERMINATION.
The Board may at any time terminate or amend the Plan in any respect. A
termination or amendment of the Plan shall not, without the written consent of a
Participant, adversely affect the rights of the Participant with respect to
amounts credited to the Participant's account under Article V prior to such
termination or amendment.
6.2 FUNDING.
All amounts paid under this Plan shall be paid in cash from the general assets
of the Employer, unless paid from a grantor trust established under section 671
of the Code. Such amounts shall be reflected on the accounting records of the
Employer but shall not be construed to create, or require the creation of, a
trust, custodial or escrow account. No employee shall have any right, title or
interest whatever in or to any investment reserves, accounts or funds that the
Employer may purchase, establish or accumulate to aid in providing the benefits
under this Plan. Nothing contained in this Plan, and no action taken pursuant to
its provisions, shall create a trust or fiduciary relationship of any kind
between the Employer and an employee or any other person. Neither an employee or
beneficiary of an employee shall acquire any interest greater than that of an
unsecured creditor.
6.3 TAX LIABILITY.
The Company may withhold, or direct the withholding of, from any payment of
benefits hereunder any taxes required to be withheld and such sum as the Company
may reasonably estimate to be necessary to cover any taxes for which the Company
may be liable and which may be assessed with regard to such payment.
6.4 ASSIGNMENT.
The Participant may not assign, pledge, or otherwise transfer or encumber any of
Participant's benefits under this Plan.
6.5 SUCCESSORS.
The Plan and the rights and obligations of the company hereunder shall be
binding upon, and inure to the benefit of the Participants and their
beneficiaries only, and the successors and assigns of the Company.
6
<PAGE>
6.6 SEVERABILITY.
In the event that any one or more of the provisions of this Plan shall be held
to be invalid, illegal, or unenforceable, the validity, legality, or
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
6.7 NONUNIFORM DETERMINATIONS.
The determinations of the Administrator under the Plan need not be uniform and
may be made selectively among Participants who receive, or are eligible to
receive, benefits under the Plan, whether or not such Participants are similarly
situated. Such determinations, however, may not result in payment to a
Participant of an amount that is less than the amount that is otherwise provided
for under the terms of this Plan.
6.8 SEPARATION FROM OTHER PLANS.
Except as otherwise required by law, no benefits under the Plan shall be taken
into account in determining any benefit under any other pension, retirement,
thrift, profit sharing, 401(k), group insurance, or other benefit plan
maintained or hereafter established by the Company.
6.9 EFFECTIVE DATE.
This Plan, as initially adopted, is effective as of January 1, 1991.
* * * * * * * * * *
IN WITNESS WHEREOF, DePuy, Inc. has caused this instrument to be executed by its
duly authorized officers on this 31 day of December, 1996, effective as
of the 1st day of October, 1996.
DEPUY, INC.
ATTEST:
By /s/ G. Taylor Seward
____________________________
By /s/ Carol Hadley
_________________________
7
<PAGE>
Exhibit 10.21
================================================================================
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
Dated as of October 30, 1996
Among
DEPUY, INC.,
BOEHRINGER MANNHEIM CORPORATION
and
CORANGE LIMITED
================================================================================
<PAGE>
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT (the "Agreement")
dated as of October 30, 1996 among
DEPUY, INC., a Delaware Corporation
(the "Company"),
BOEHRINGER MANNHEIM CORPORATION, an Indiana corporation
("BMC") and CORANGE LIMITED,
a Bermuda corporation ("Corange").
WHEREAS, each of the Company and BMC is an indirect, wholly-owned
subsidiary of Corange, which is the ultimate holding company within the Corange
Limited group of companies (the "Corange Group"), and each of various
subsidiaries in the Corange Group listed in Exhibit A hereto is engaged in the
manufacture and/or the distribution of orthopaedic products for the DePuy
division of the Corange Group;
WHEREAS, Corange U.S. Holdings Inc., an Indiana corporation ("CUSHI") was
the common parent corporation, within the meaning of Section 1502 of the
Internal Revenue Code of 1986, as amended (the "Code"), of an affiliated group
of corporations (the "Affiliated Group") filing consolidated Federal income tax
returns and consolidated, combined or unitary state income tax returns, pursuant
to which CUSHI, BMC, and other members of the Affiliated Group have paid taxes
on a consolidated, combined or unitary basis;
WHEREAS, in connection with an overall plan of reorganization affecting
those corporations within the DePuy division of the Corange Group, which plan
was approved by the Board of Directors of Corange in resolutions adopted at a
meeting held on July 11, 1996: (i) CUSHI has sold all of the outstanding shares
of BMC to Pharminvest S.A., a Luxembourg corporation in the Corange Group (the
"BMC Share Sale"), (ii) Corange and certain direct and indirect subsidiaries of
Corange have sold or otherwise transferred to CUSHI or to newly-created
subsidiaries of CUSHI, their shareholding in certain subsidiaries within the
DePuy division of the Corange Group, and certain assets related to the DePuy
business previously owned by a foreign distribution subsidiary of Corange
affiliated with the Boehringer Mannheim business of the Corange Group, and (iii)
CUSHI has merged with and into the Company (the "Merger"), with the Company
being the surviving corporation in the Merger (collectively, the "Pre-Offering
Reorganization");
WHEREAS, pursuant to the Pre-Offering Reorganization, CUSHI ceased to be
the common parent of the Affiliated Group, BMC ceased to be a member of the
Affiliated Group, and the Company became the common parent corporation of the
Affiliated Group;
WHEREAS, Corange, BMC and the Company desire to allocate the liability for
the taxes (including any interest or penalties thereon) of members of the
Affiliated Group for any taxable period beginning before the Pre-Offering
Reorganization and to provide for certain other tax-related matters;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree as follows.
<PAGE>
1. Indemnification by Corange and BMC. (a) Corange shall indemnify and
hold harmless on an After-Tax Basis (as hereinafter defined) the Company
and the DePuy Subsidiaries (as hereinafter defined) against any Corange Tax
Liabilities (as hereinafter defined). The term "Corange Tax Liabilities"
shall mean any Taxes (as hereinafter defined): (i) imposed (x) with respect
to any taxable period that ends prior to the date upon which the Closing of
the public offering of the stock of the Company occurs (the "Closing Date")
and (y) with respect to a taxable period that begins before and ends after
the Closing Date, the portion of such period up to and including the the
Closing Date (each period described in clause (x) or clause (y), being
hereinafter referred to as a "Pre-Closing Tax Period"), or (ii) imposed as
a result of the Pre-Offering Reorganization; provided, however, that the
Taxes subject to indemnification as Corange Tax Liabilities under this
Section 1(a) shall not include any "BMC Tax Liabilities" (as hereinafter
defined) subject to indemnification by BMC under Section 1(b) hereof or any
"DePuy Tax Liabilities" (as hereinafter defined) subject to indemnification
by the Company and the DePuy Subsidiaries under Section 2 hereof.
(b) BMC shall indemnify and hold harmless on an After-Tax Basis the
Company and the DePuy Subsidiaries against any BMC Tax Liabilities. The
term "BMC Tax Liabilities" shall mean: (i) the full amount of the Taxes of
BMC or a BMC Subsidiary (as hereinafter defined), as the case may be, for
any taxable period for which the Tax liability of BMC or a BMC Subsidiary,
as applicable, is determined on the basis of a separate Tax return, and
(ii) in the case of any taxable period for which the Tax liability of BMC
or a BMC Subsidiary, as applicable, is determined on the basis of a
Consolidated Return (as hereinafter defined), the portion of the Taxes of
the Consolidated Group (as hereinafter defined) attributable to BMC or to a
BMC Subsidiary, as determined under Section 6 with respect to consolidated
or combined returns, and under Section 7 with respect to unitary returns;
provided, however, that the term "BMC Tax Liabilities" shall include no
liabilities for Taxes imposed as a result of the Pre-Offering
Reorganization.
(c) Corange hereby guarantees BMC's obligation to indemnify and hold
harmless on an After-Tax Basis the Company and the DePuy Subsidiaries
against the BMC Tax Liabilities. In the event that BMC defaults on its
obligations to make indemnification payments with respect to any BMC Tax
Liabilities in accordance with this Agreement, the Company and the DePuy
Subsidiaries shall be entitled to collect such indemnification payments
from Corange; provided, however, that the Company and the DePuy
Subsidiaries shall in no event be entitled to receive more than the full
amount of one indemnification payment with respect to any single claim for
Taxes under this Agreement.
2. Indemnification by the Company. The Company and each DePuy
Subsidiary shall indemnify and hold harmless on an After-Tax Basis Corange,
BMC, the Corange Subsidiaries (as hereinafter defined) and the BMC
Subsidiaries against any and all DePuy Tax Liabilities. The term "DePuy
Tax Liabilities" shall mean: (i) the full
2
<PAGE>
amount of the Taxes of the Company or a DePuy Subsidiary, as the case may
be, for any taxable period for which the Tax liability of the Company or a
DePuy Subsidiary, as applicable, is determined on the basis of a separate
Tax return, (ii) in the case of any taxable period for which the Tax
liability of the Company or a DePuy Subsidiary, as applicable, is
determined on the basis of a Consolidated Return, that portion of the Taxes
of the Consolidated Group attributable to the Company or to a DePuy
Subsidiary, as determined under Section 6 with respect to consolidated or
combined returns, and as determined under Section 7 with respect to unitary
returns, and (iii) Taxes imposed as a result of the Pre-Offering
Reorganization solely by reason of one or more actions taken by the Company
or any DePuy Subsidiary in violation of any of its obligations under the
agreements entered into with respect to the Pre-Offering Reorganization;
provided, however, that the term "DePuy Tax Liabilities" shall include (x)
no liabilities for Taxes imposed as a result of the Pre-Offering
Reorganization except for liabilities for Taxes described in clause (iii)
hereof, and (y) no liabilities for any interest or any penalties relating
to any taxes, tariffs or governmental charges, in the case of liabilities
for Taxes described in clauses (i) and (ii) hereof, and all such
liabilities for interest and penalties shall be deemed to be Corange Tax
Liabilities subject to indemnification by Corange under Section 1(a)
hereof.
3. Definitions. (a) The term "Tax" or "Taxes" means Federal, state,
local and foreign income, franchise, property, sales, excise, transfer,
withholding (with respect to amounts paid or received), employment or other
taxes, tariffs or governmental charges (and all interest and penalties
relating thereto) imposed by a governmental authority pursuant to the
exercise of its power to tax.
(b) The term "After-Tax Basis" means, with respect to any payment, an
amount calculated by taking into account the Tax consequences of the
receipt of such payment, as well as any Tax benefit associated with the
liability giving rise to the payment. In the case of any item which gives
rise to a deduction, the Tax benefit of such deduction shall be determined
at the maximum statutory tax rate in effect during the relevant taxable
period, whether or not the taxpayer actually realizes currently such Tax
benefit. For this purpose, all indemnification payments made by Corange
under this Agreement shall be deemed to be capital contributions to the
Company.
(c) The term "DePuy Subsidiary" shall mean each entity listed in
Exhibit A hereto and shall be deemed to include any predecessor or
transferee of (or successor or transferor to) the Company or any entity
listed in Exhibit A, but shall not include CUSHI for any period prior to
the Merger or any subsidiary in the Corange Group affiliated with the
Boehringer Mannheim business of the Corange Group; provided, however, that
the DePuy division of BMC, which was a predecessor of DePuy, Inc.
(incorporated on January 1, 1992) shall be deemed to be a DePuy Subsidiary.
The term "BMC Subsidiary" shall mean any subsidiary of BMC, and shall be
deemed to include any predecessor or transferee of (or successor or
transferor to) BMC or any subsidiary of BMC, but shall not include CUSHI
(or any predecessor thereof or transferor thereto),
3
<PAGE>
the Company or any DePuy Subsidiary. The term "Corange Subsidiary" shall
mean any subsidiary in the Corange Group, including CUSHI, and shall be
deemed to include any predecessor or transferee of (or successor or
transferor to) Corange or any subsidiary of Corange, but shall not include
the Company, any DePuy Subsidiary, BMC or any BMC Subsidiary.
(d) The term "Tax Asset" shall mean any net operating loss, net
capital loss, investment tax credit, foreign tax credit, target jobs tax
credit, low income housing credit, research and experimentation credit,
charitable deduction or any other credit or tax attribute, including
additions to basis of property, which could reduce any tax, including,
without limitation, deductions, credits, or alternative minimum net
operating loss carryforwards related to alternative minimum taxes.
(e) The term "BMC Sale Date" shall mean the date upon which the BMC
Share Sale occurs, and the term "Pre-BMC Sale Tax Period" shall mean (i)
any taxable period that ends prior to the BMC Sale Date and (ii) with
respect to a taxable period that begins before and ends after the BMC Sale
Date, the portion of such period up to and including the BMC Sale Date.
(f) The term "Consolidated Group" shall mean (i) the Affiliated Group
and (ii) any group filing consolidated, combined or unitary tax returns for
state tax purposes for any taxable period beginning before the BMC Sale
Date which, for such taxable period, is comprised of at least one
corporation which is a BMC Subsidiary and at least one corporation which is
a DePuy Subsidiary. The term "Consolidated Return" shall mean any Federal
income tax return or any state tax return filed by the Consolidated Group
on a consolidated, combined or unitary basis.
4. Tax Return Filing and Related Matters. (a) The Company shall
prepare all Consolidated Returns of the Consolidated Group for taxable
periods beginning on or after January 1, 1996 and ending on or before
December 31, 1996, and all separate Tax returns of the Company and the
DePuy Subsidiaries. With respect to any Consolidated Returns referred to
in the first sentence of this Section 4(a), BMC shall provide pro forma tax
returns and other relevant data to the Company at least forty-five (45)
days prior to the due date of such Tax returns (taking into account any
applicable extensions). The Company shall provide BMC with preliminary
draft copies of such Tax returns at least thirty (30) days prior to the due
date for filing (taking into account any applicable extensions) for review
and approval by BMC with respect to BMC Tax Liabilities. If BMC objects to
any matter reflected in such draft Tax returns with respect to BMC Tax
Liabilities, BMC shall inform the Company within ten (10) days of receipt
of the draft Tax returns, and the Company shall revise such Tax returns as
so directed by BMC, and shall sign and timely file such Tax returns with
the appropriate taxing authorities.
(b) BMC shall prepare all Consolidated Returns of the Consolidated
Group for taxable priods ending on or before December 31, 1995, all
separate Tax returns of
4
<PAGE>
CUSHI for taxable periods ending on or before the Merger, and all separate
Tax returns of BMC and the BMC Subsidiaries. The provisions of this
Section 4 shall apply with respect to any action or inaction after the date
of this Agreement in connection with the preparation and filing of any such
Tax returns. With respect to any Consolidated Returns referred to in the
first sentence of this Section 4(b), the Company shall provide pro forma
tax returns and other relevant data to BMC at least forty-five (45) days
prior to the due date of such Tax returns (taking into account any
applicable extensions). BMC shall provide the Company with preliminary
draft copies of such Tax returns at least thirty (30) days prior to the due
date for filing (taking into account any applicable extensions) for review
and approval by the Company with respect to DePuy Tax Liabilities. If the
Company objects to any matter reflected in such draft Tax returns with
respect to DePuy Tax Liabilities, the Company shall inform BMC within ten
(10) days of receipt of the draft Tax returns and BMC shall revise such Tax
returns as so directed by the Company, and shall sign and timely file such
Tax returns with the appropriate taxing authorities.
(c) With respect to Consolidated Returns of the Consolidated Group for
taxable periods beginning on or after January 1, 1996 and ending on or
before December 31, 1996, BMC shall pay, or cause to be paid, to the
Company an amount equal to (1) BMC's share of the Consolidated Group's
consolidated Federal Tax liability and consolidated state Tax liability,
determined in accordance with Section 6, and (2) BMC's share of the
Consolidated Group's unitary state Tax liability, determined in accordance
with Section 7, as provided below.
(i) Promptly after the Company makes an estimated Tax payment
with respect to any such Consolidated Return, the Company shall in
good faith determine the amount of BMC's share of such estimated Tax
payment in accordance with Section 6, in the case of any consolidated
Federal Tax liability or any consolidated state Tax liability of the
Consolidated Group, and in accordance with Section 7 using 1995
apportionment factors, adjusted for significant dispositions or
transfers of assets, in the case of any unitary state Tax liability of
the Consolidated Group. The Company shall deliver a written statement
to BMC reflecting the determination described above. Within ten (10)
business days after delivery of such written statement, BMC shall
notify the Company whether BMC agrees with such determination. BMC
shall pay to the Company or the Company shall pay to BMC, as
appropriate, the amount determined to be payable hereunder (x) within
ten (10) business days thereafter, if BMC agrees with such
determination, or (y) if the Company and BMC cannot agree on the
determination, within ten (10) business days after the date of the
determination of the amount payable pursuant to Section 11 hereof.
(ii) Promptly after the Company files an application to extend
the due date of any such Consolidated Return, the Company shall in
good faith determine the estimated amount of BMC's share of the
Consolidated Group's consolidated Federal Tax liability or
consolidated state Tax liability for such Consolidated
5
<PAGE>
Return in accordance with Section 6 or, in the case of a unitary state
Tax return, in accordance with Section 7 using 1995 apportionment
factors, adjusted for significant dispositions or transfers of assets.
The amount payable hereunder shall equal the difference, if any,
between (x) the amounts so determined and (y) the aggregate amount of
estimated installments paid with respect to BMC's share of such Tax
liability for such Consolidated Return, adjusted to take into account
amounts previously paid or received by BMC in connection with any
previous extension payments. The Company shall deliver to BMC a
written statement of the amount payable hereunder, as described above.
Within ten (10) business days after delivery of such written
statement, BMC shall notify the Company whether BMC agrees with such
determination. BMC shall pay to the Company or the Company shall pay
to BMC, as appropriate, the amount determined to be payable hereunder
(x) within ten (10) business days thereafter, if BMC agrees with such
determination, or (y) if the Company and BMC cannot agree on the
determination, within ten (10) business days after the date of the
determination of the amount payable pursuant to Section 11 hereof.
(iii) Promptly after the Company files any such Consolidated
Return, the Company shall deliver to BMC a written statement setting
forth the difference between (x) BMC's share of the Consolidated
Group's consolidated Federal Tax liability, consolidated state Tax
liability or unitary state Tax liability for such Consolidated Return,
determined in accordance with Section 6 or Section 7, as the case may
be, and (y) the aggregate amount of payments with respect to BMC's
share of such Tax liability for such Consolidated Return previously
made pursuant to this Section. Within ten (10) business days of
delivery of such written statement, BMC shall notify the Company
whether BMC agrees with such determination. BMC shall pay to the
Company or the Company shall pay to BMC, as appropriate, the amount
equal to such difference, if any, (x) within ten (10) business days
thereafter, if BMC agrees with such determination, or (y) if the
Company and BMC cannot agree on the determination, within ten (10)
business days after the date of the determination of the amount
payable pursuant to Section 11 hereof.
(d) With respect to Consolidated Returns of the Consolidated Group for
taxable periods ending on or before December 31, 1995, the Company shall
pay, or cause to be paid, to BMC the Company's share of the Consolidated
Group's consolidated Federal Tax liability, consolidated state Tax
liability, and unitary state Tax liability, determined in accordance with
past practices.
(e) In the case of Consolidated Returns of the Consolidated Group for
taxable periods beginning on or after January 1, 1996 and ending on or
before December 31, 1996, if the Company determines that it will be
necessary to incur incremental out-of-pocket costs for legal, accounting or
other related professional fees and disbursements attributable to the
preparation of tax returns for BMC or the BMC Subsidiaries, the
6
<PAGE>
Company shall obtain from BMC its written approval of such incremental out-
of-pocket costs prior to incurring such costs. BMC shall reimburse the
Company for such incremental out-of-pocket costs which have been approved
by BMC pursuant to this Section 4(e) within thirty (30) days of delivery of
a written statement of such costs specifying such costs in reasonable
detail.
(f) Without the prior written consent of BMC (in the case of BMC Tax
Liabilities), which shall not be unreasonably withheld, and the prior
written consent of Corange (in the case of Corange Tax Liabilities), which
shall not be unreasonably withheld, the Company shall refrain, and shall
cause each of the DePuy Subsidiaries to refrain, (i) from making, filing or
amending any Tax return that includes any Pre-Closing Tax Period or any
Pre-BMC Sale Tax Period that would materially affect the Tax liability of
Corange, BMC, the Corange Subsidiaries or the BMC Subsidiaries, and (ii)
from making any material tax election that would bind, or materially affect
the Tax liability of, Corange, BMC, the Corange Subsidiaries or the BMC
Subsidiaries.
5. Contests. (a) If the Company or any DePuy Subsidiary receives
oral or written notice from the Internal Revenue Service or any other
taxing authority of the commencement of an audit, the assertion of a claim,
an assessment, or other dispute with respect to Taxes for which Corange or
BMC are or may be required to indemnify, in whole or in part, under this
Agreement, the Company shall provide notice to Corange and BMC (in the case
of Corange Tax Liabilities), or shall provide notice to BMC and Corange (in
the case of BMC Tax Liabilities) of the same in writing within ten (10)
business days, specifying in reasonable detail the basis of such claim and
the facts pertaining thereto, and shall not make payment of the Tax claimed
for at least thirty (30) days after the giving of such notice. Corange (in
the case of Corange Tax Liabilities) or BMC (in the case of BMC Tax
Liabilities), at its own cost and expense, shall be entitled to control any
such contest, including the determination of whether and when to settle any
such contest; provided, however, that Corange or BMC, as the case may be,
will consider in good faith any reasonable requests by the Company
regarding the conduct of such contest and will promptly, and in any event
within ten (10) business days, notify the Company of any action taken or
proposed to be taken from time to time by Corange or BMC, as the case may
be, with respect to such contest, and provided, further, that Corange and
BMC will not settle any such contest that would materially affect the Tax
liability of the Company or the DePuy Subsidiaries without the prior
written consent of the Company, which shall not be unreasonably withheld.
The Company agrees to provide to Corange and BMC (in the case of a contest
regarding Corange Tax Liabilities) or to BMC and Corange (in the case of a
contest regarding BMC Tax Liabilities) promptly, and in any event within
ten (10) business days, copies of any correspondence or notices received
from time to time from the Internal Revenue Service or any other taxing
authority with respect to such contest.
(b) If Corange, BMC, any Corange Subsidiary or any BMC Subsidiary
receives any oral or written notices from the Internal Revenue Service or
any other
7
<PAGE>
taxing authority that relate to the Company or the DePuy Subsidiaries,
Corange (on behalf of Corange or such Corange Subsidiary) or BMC (on behalf
of BMC or such BMC Subsidiary) shall provide written notice to the Company
of the same in writing within ten (10) business days. The Company, at its
cost and expense, shall be entitled to control any contests with respect to
the Tax liability of the Company or the DePuy Subsidiaries, except for
contests subject to control by Corange and BMC pursuant to this Agreement.
(c) Indemnification payments required pursuant to this Agreement shall
become due and payable upon a final determination of the liability for
Taxes of the relevant taxpayer; provided, however, that indemnification
payments which Corange is required to pay as guarantor pursuant to Section
1(c) hereof shall be due and payable ten (10) business days after the
Company notifies Corange that BMC has defaulted on its obligations to make
such indemnification payments in accordance with this Agreement. A "final
determination" shall be deemed to occur with respect to a contest when (i)
there is a decision, judgment, decree or other order by any court of
competent jurisdiction, which decision, judgment, decree or other order has
become final with respect to the taxpayer (i.e., all allowable appeals have
been exhausted by either party to the action or the time period within
which such appeal may be filed has expired), (ii) there is a closing
agreement or other administrative settlement with the Internal Revenue
Service or other taxing authority, (iii) the time for instituting a claim
for refund in respect of the taxpayer has expired, or, if a claim was
filed, the time for instituting suit with respect thereto has expired, or
(iv) the Taxes which are the subject of such contest are paid, and pursuant
to written agreement between the Company and Corange or BMC, no claim for
refund is filed and no further contest is pursued.
6. Consolidated or Combined Tax Liability. (a) With respect to any
consolidated Federal Tax liability or consolidated state Tax liability, BMC
and the BMC Subsidiaries shall be responsible for the aggregate amount of
such Tax liability of BMC and all BMC Subsidiaries that are members of the
relevant Consolidated Group, and the Company and the DePuy Subsidiaries
shall be responsible for the aggregate amount of such Tax liability of the
Company and all DePuy Subsidiaries that are members of the relevant
Consolidated Group. A member's share of such Taxes shall be calculated as
if such member were not and never were part of the Consolidated Group, but
rather were a corporation filing separate income tax returns; provided,
however, that (i) the applicable Tax rate shall be the relevant maximum
statutory rate in effect during the relevant taxable period (with any
applicable surtax exemption being ratably apportioned among the members),
and (ii) in no event shall the Company's and the DePuy Subsidiaries' share
of any consolidated Federal Tax liability or consolidated state Tax
liability exceed the amount that would have constituted the Company's and
the DePuy Subsidiaries' share of such Tax liability if such share had been
calculated in the manner set forth in Treasury Regulation Sections 1.1552-
1(a)(2) and 1.1502-33(d)(2).
8
<PAGE>
(b) For purposes of paragraph (a) above, "Tax liability" (1) shall
exclude any liability for the payment of alternative minimum tax, and (2)
shall refer to an actual out-of-pocket payment to any taxing authority,
after taking into account the utilization of net operating losses and any
other Tax Assets.
(c) Any alternative minimum Tax liability (and any Tax Assets
attributable to such Tax liability) and any environmental Tax imposed under
Section 59A of the Code shall be allocated among the members of the
Consolidated Group in accordance with the formulas referenced in Proposed
Treasury Regulation Section 1.1502-5(b)(6). With respect to foreign tax
credits under the Code, any consolidated unused foreign tax credits of the
Consolidated Group shall be apportioned to the members of such Consolidated
Group pursuant to Treasury Regulation Section 1.1502-79(d).
(d) Any interest imposed in connection with any Tax liability shall be
allocated in the same manner as the underlying Tax liability, as provided
above.
(e) Any penalty imposed in connection with any Tax liability shall be
the responsibility of the party whose action or inaction resulted in the
imposition of such penalty; provided, however, that if such a determination
cannot be made, the penalty shall be allocated in the same manner as the
underlying Tax liability, as provided above.
7. Unitary Tax Liability. (a) BMC's share of any unitary state Tax
liability shall be, with respect to each state, the aggregate amount of
unitary state Tax liability of BMC and all BMC Subsidiaries that are
members of the relevant Consolidated Group. The Company's share of any
unitary state Tax liability shall be, with respect to each state, the
aggregate amount of unitary state Tax liability of the Company and all
DePuy Subsidiaries that are members of the relevant Consolidated Group. A
member's liability for its share of unitary state Tax shall be determined
in accordance with paragraph (c) of this Section 7; provided, however, that
credits and any minimum taxes shall be allocated to the member responsible
for the generation of such credit or minimum taxes.
(b) BMC's share of any unitary state Tax Assets shall be, with respect
to each state, the aggregate amount of unitary state Tax Assets of BMC and
all BMC Subsidiaries that are members of the relevant Consolidated Group.
The Company's share of any unitary state Tax Assets shall be, with respect
to each state, the aggregate amount of unitary state Tax Assets of the
Company and all DePuy Subsidiaries that are memebers of the relevant
Consolidated Group. A member's share of such unitary state Tax Assets
shall be determined in accordance with paragraph (c) of this Section 7.
(c) In the case of a member of the Consolidated Group, such member's
share of any unitary state Tax liability or unitary state Tax Asset shall
be determined in accordance with past practices.
9
<PAGE>
(d) Any interest imposed in connection with any Tax liability shall be
allocated in the same manner as the underlying Tax liability, as provided
above.
(e) Any penalty imposed in connection with any Tax liability shall be
the responsibility of the party whose action or inaction resulted in the
imposition of such penalty; provided, however, that if such a determination
cannot be made, the penalty shall be allocated in the same manner as the
underlying Tax liability, as provided above.
8. Allocation of Taxes To Certain Tax Periods. In the case of any
taxable period that includes but does not end on either the Closing Date or
the BMC Sale Date (any such taxable period, being hereinafter referred to
as a "Straddle Period"),
(a) real, personal and intangible property Taxes, other than transfer
and similar Taxes, ("Property Taxes") allocated to the Pre-Closing Tax
Period or the Pre-BMC Sale Tax Period, as the case may be, shall be equal
to the amount of such Property Taxes for the entire Straddle Period
multiplied by a fraction, the numerator of which is the number of days
during the Straddle Period that are in the Pre-Closing Tax Period or the
Pre-BMC Sale Tax Period, as applicable, and the denominator of which is the
number of days in the Straddle Period; and
(b) all Taxes (other than Property Taxes) for the Pre-Closing Tax
Period or the Pre-BMC Sale Tax Period, as the case may be, shall be
computed in accordance with the principles of Treasury Regulation Section
1.1502-76; provided, however, that the transfers and transactions
(including Taxes attributable thereto) which occur to effectuate the Pre-
Offering Reorganization shall be allocated to the Pre-Closing Tax Period or
the Pre-BMC Sale Tax Period, as the case may be, and provided, further,
however, that in the case of any Taxes attributable to the ownership of any
equity interest in any partnership or other "flow through" entity, the
Taxes allocated to the Pre-Closing Tax Period or the Pre-BMC Sale Tax
Period, as the case may be, shall be determined on a daily proration basis.
9. Credits and Refunds. (a) If the Company or any DePuy Subsidiary
receives from any taxing authority any refunds or credits of Taxes which
are attributable to any item of income, loss, credit, deduction or other
tax attribute of Corange, BMC, a Corange Subsidiary, or a BMC Subsidiary,
the Company shall pay, or cause to be paid, the amount of such refund or
credit, together with any related interest actually received or credited,
to Corange (if attributable to an item or other tax attribute of Corange or
a Corange Subsidiary) or to BMC (if attributable to an item or other tax
attribute of BMC or a BMC Subsidiary) within twenty (20) business days of
receipt.
(b) If Corange, BMC, a Corange Subsidiary or a BMC Subsidiary receives
from any taxing authority any refunds or credits of Taxes which are
attributable to any item of income, loss, credit, deduction or other tax
attribute of the Company or a DePuy Subsidiary, Corange (in the case of
refunds or credits received by Corange or a Corange
10
<PAGE>
Subsidiary) or BMC (in the case of refunds or credits received by BMC or a
BMC Subsidiary) shall pay, or caused to be paid, the amount of such refund
or credit, together with any related interest actually received or
credited, to the Company or to such DePuy Subsidiary within twenty (20)
business days of receipt.
(c) The determination as to whether a refund or credit is attributable
to an item or other tax attribute of Corange, BMC, a Corange Subsidiary, a
BMC Subsidiary, the Company or a DePuy Subsidiary, as the case may be,
shall be made under Section 6 hereof with respect to consolidated or
combined returns, under Section 7 hereof with respect to unitary returns,
and on a separate return basis with respect to separate returns.
10. Cooperation. Corange, BMC and the Company agree to cooperate in
all reasonable respects with respect to Tax matters contemplated by this
Agreement, which cooperation shall include executing and filing such
waivers, consents, forms, court petitions, refund claims (including filing
refund claims as may be directed by another party hereto), complaints,
powers of attorney and other documents needed from time to time in
connection with such Tax matters. The Company agrees to furnish timely,
and to cause each of the DePuy Subsidiaries to so furnish, Corange and BMC
with any and all information reasonably requested by Corange and BMC in
order to carry out the provisions of this Agreement. Corange and BMC agree
to furnish timely, and to cause each of their subsidiaries to so furnish,
the Company with any and all information reasonably requested by the
Company in order to carry out the provisions of this Agreement.
11. Computations. If Corange or BMC and the Company cannot agree on
any computation of any amount payable under this Agreement, such
computation shall be made by a nationally recognized independent public
accounting firm acceptable to both such parties and the decision of such
firm shall be final and binding. The fees and expenses incurred in
connection with such calculation shall be borne equally by the disputing
parties.
12. Offsets. No payment shall be required to be made by one party
(the "first party") to another party (the "second party") pursuant to this
Agreement to the extent that there is an amount then due and payable under
this Agreement by the second party to the first party.
13. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole
or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon, inure to the benefit of,
and be enforceable by, the parties hereto and their respective successors
and assigns.
11
<PAGE>
14. Survival. The provisions of this Agreement shall survive for the
full period of all applicable statutes of limitations (giving effect to any
waiver or extensions thereof) and sixty (60) days thereafter.
15. Notices. All notices, requests or other communications hereunder
shall be given or made in writing and shall be (i) delivered personally
(including commercial courier), (ii) sent by registered or certified
airmail, postage prepaid, or (iii) sent by telecopier, addressed to the
party to whom they are directed at the following addresses, or at such
other address as may be designated by notice from such party.
To the Company:
DePuy, Inc.
700 Orthopaedic Drive
Warsaw, Indiana 46581
Attention: Mr. Thomas J. Oberhausen
Senior Vice President and Chief Financial Officer
with a copy to:
DePuy, Inc.
700 Orthopaedic Drive
Warsaw, Indiana 46581
Attention: Steven L. Artusi, Esq.
Senior Vice President, General Counsel
and Secretary
To BMC:
Boehringer Mannheim Corporation
9115 Hague Road
Indianapolis, Indiana 46250
Attention: Mr. John D. Kellar
Vice President, Taxes
with a copy to:
Boehringer Mannheim Corporation
9115 Hague Road
Indianapolis, Indiana 46250
Attention: Steven Oldham, Esq.
General Counsel and Secretary
12
<PAGE>
To Corange:
Corange Limited
22 Church Street
HM 11
P.O. Box HM 2026
Hamilton, HM HX
Bermuda
with a copy to:
Anthony Williams, Esq.
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Any notice, request or other communication given or made in the manner
prescribed in this Section shall be deemed to have been given and to be
effective upon receipt or refusal by the addressee, or if later upon such
later date as is specified therein. Any party may change its address for
notices hereunder, effective upon giving of notice of such change hereunder
to the other parties.
16. Governing Law. This Agreement is made and shall be construed in
all respects in accordance with the laws of the State of New York without
regards to its conflicts of laws principles. Any controversy concerning the
interpretation or operation of this Agreement shall be resolved first by
resort to good faith negotiation between the parties for up to thirty (30)
days and, if that fails, by submitting the issue to arbitration in
accordance with the commercial arbitration rules of Conciliation and
Arbitration of the International Chamber of Commerce by three (3)
arbitrators approved in accordance with such rules. Such arbitration shall
be conducted in New York City, New York. The award of the arbitrator(s)
shall be final and binding on the parties. Judgement upon the award
rendered by the arbitration may be entered in any court having jurisdiction
thereof.
17. Entire Agreement. This Agreement (a) constitutes the entire
agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter of
this Agreement and (b) is not intended to confer upon any person other than
the parties hereto any rights or remedies.
18. Counterparts. This Agreement may be executed in any number of
duplicate counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
13
<PAGE>
19. Severability. In the event any of the provisions of this
Agreement are held to be unenforceable or invalid by any court of competent
jurisdiction, unless the unenforceability or invalidity thereof causes a
substantial departure from the underlying intent and sense of the remainder
of this Agreement, the validity and enforceability of the remaining
provisions shall not be affected thereby, except those remaining provisions
of which the unenforceable or invalidated provisions comprise an integral
part or from which they are otherwise clearly inseparable. In the event
any provision is held unenforceable or invalid, the parties shall use their
best efforts to agree upon an enforceable and valid provision which shall
be a reasonable substitute for such unenforceable or invalid provision in
light of the purpose of this Agreement and, upon so agreeing, shall
incorporate such substitute provision in this Agreement.
20. Headings. Headings of sections in this Agreement are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
21. Amendments. This Agreement may be modified, amended or
supplemented only by the mutual written agreement of the parties hereto.
[Remainder Of Page Intentionally Left Blank.]
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
DEPUY, INC.
By: /s/ James A. Lent
------------------
Name: James A. Lent
Title: Chairman and Chief Executive
Officer
BOEHRINGER MANNHEIM
CORPORATION
By: /s/ Hubert Rehkaemper
----------------------
Name: Hubert Rehkaemper
Title: President & CEO
CORANGE LIMITED
By: /s/ Anthony Williams
---------------------
Name: Anthony Willams
Title: Vice Chairman
15
<PAGE>
EXHIBIT A
---------
DEPUY SUBSIDIARIES
Name and Registered Office/Principal Place of Business of Subsidiaries
----------------------------------------------------------------------
DePuy Orthopadie GmbH DePuy Japan Incorporated
Mellinweg 16 Noto Building
66280 Sulzbach 22-1 Shinkawa 2-Chome
Germany Chuo-ku, Tokyo 104
Japan
De Puy A.G.
Alte Steinhauserstrasse 19 DePuy Korea, Inc.
6330 Cham 12th Floor
Switzerland Yooksung Building
706-725 Yoksam-Dong
DePuy Orthopedie SA Kangnam-ku
2 rue de Bois Sauvage Seoul
91055 Evry Cedex Korea
France
DePuy Far East Pte Ltd.
DePuy Italia S.r.L. 21 Collyer Quay
Palazzo Marco Polo #14-02/03 (c/o May Oh & Wee)
Il Girasole Hong Kong Bank Building
20084 Lacchiarella Singapore 0104
Milan
Italy DePuy GmbH
Torfstecherstrasse 1
DePuy Iberica, S.A. 5111 Burmoos
Avenida Melchor Fernandez Austria
Almagro 23
28029 Madrid DePuy Olmed AB
Spain Dag Hammerskjolds vag 12
75183 Uppsala
Medical Trivest SL Sweden
Calle Museu 6
Baedalona 08915 DePuy Hungary
Barcelona Kereskedelmi Kft
Spain 1134 Budapest
Apaly vtoa 4/A
1X em 36
Hungary
<PAGE>
DePuy CZ s.r.o. DePuy Canada Ltd.
Konopistska 16 6695 Millcreek Drive
CZ-101 00 Prague 10 Unit 3
Czech Republic Mississauga, Ontario
L5N 5R8
DePuy New Zealand Canada
Limited
15 Rakino Way DePuy Orthopaedics, Inc.
Mount Wellington P.O. Box 988
Auckland, New Zealand 700 Orthopaedic Drive
Warsaw, IN 46581
Corange U.K. Holdings Ltd.
St. Anthony's Road DePuy Orthopaedic Technology, Inc.
Leeds LS11 8DT 1905 North MacArthur Drive
England Tracy, CA 95376
DePuy International Ltd. DePuy ACE Medical Company
St. Anthony's Road 2260 East El Segundo Blvd.
Leeds LS11 8DT El Segundo, CA 90245
England
DePuy DuPont Orthopedics Partnership
DePuy Joints S.A. P.O. Box 988
Uribu 663 700 Orthopaedic Drive
1027 Buenos Aires Warsaw, IN 46581
Argentina (50% owned)
DePuy Taiwan DePuy Motech, Inc.
20th Floor P.O. Box 988
510 Chungshiao East Road 700 Orthopaedic Drive
Section 5 Warsaw, IN 46581
Taipei, Taiwan (80% owned)
Republic of China
Expanded Optics, Inc.
DePuy Australia Pty Limited 7382 Bolsa Avenue
1113 Palmer Court Westminster, CA 92683
P.O. Box 476
Mount Waverly, Victoria 3149 DePuy Overseas Trading Ltd.
Australia 22 Church Street
Hamilton, HM 11, Bermuda
DePuy Mexico S.A. De C.V.
Huizaches 25
Colonia Ranchos los Colorines
Mexico D.F. 14386
Mexico
2
<PAGE>
Exhibit 10.22
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (the "Agreement"), is made and entered
into as of the 30th day of October 1996, by and among DePuy, Inc., a Delaware
corporation (the "Company"), Corange Limited, a company organized and existing
under the laws of Bermuda ("Corange"), Corange International Limited, a company
organized and existing under the laws of Bermuda ("CIL"), Corange International
Holdings B.V., a corporation organized and existing under the laws of the
Netherlands ("CIHBV"), and Pharminvest S.A., a company organized and existing
under the laws of Luxembourg ("Pharminvest").
WHEREAS, Corange, CIL, CIHBV and Pharminvest (collectively, the "Corange
Stockholders") are currently the owners of all of the shares of common stock,
par value $.01 per share (the "Common Stock"), of the Company; and
WHEREAS, the Company and certain of the Corange Stockholders intend to sell
Common Stock in a public offering (the "Offering"); and
WHEREAS, in consideration of certain actions by the Corange Stockholders in
connection with the Offering, the Corange Stockholders have requested that the
Company grant them the registration rights set forth below with respect to the
Registrable Securities (as defined below).
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
-----------
the following respective meanings:
The term "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 and a reference
to a particular section thereof shall be deemed to include a reference to the
comparable section, if any, of any such similar successor federal statute.
The term "Holders" shall mean Corange, CIL, CIHBV, Pharminvest and persons
(other than the Company) to whom Common Stock is transferred by any of the
foregoing (such transferees hereinafter "Permitted Transferees"), and any
combination of them, and the term "Holder" shall mean any such person.
<PAGE>
The term "person" shall mean an individual, partnership, corporation,
limited liability company, trust, unincorporated organization or government or
political department or agency thereof or other entity.
The term "Registrable Securities" shall mean shares of Common Stock
(excluding any warrants or other securities convertible into Common Stock) that
the Corange Stockholders may own (whether now owned or acquired after the date
hereof). As to any Registrable Securities, such securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of pursuant to such effective
registration statement, (ii) such securities shall have been distributed
pursuant to Rule 144, Rule 144A, or any similar provision then in force, under
the Securities Act, (iii) such securities shall have been otherwise transferred,
new certificates or other evidences of ownership for them not bearing a legend
restricting further transfer and not subject to any stop transfer order or other
restrictions on transfer shall have been delivered by the Company and subsequent
disposition of such securities shall not require registration or qualification
of such securities under the Securities Act or any state securities laws then in
force or (iv) such securities shall cease to be outstanding.
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 the applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
The term "Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with this Agreement, including without
limitation, all SEC and stock exchange or National Association of Securities
Dealers, Inc. ("NASD") registration and filing fees and expenses, fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel for the underwriters in connection with blue
sky qualifications of the Registrable Securities), printing expenses, messenger
and delivery expenses, internal expenses (including without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the fees and expenses incurred in connection with the
listing of the securities to be registered on each securities exchange on which
such securities are listed, fees and disbursements of counsel for the Company
and all independent certified public accountants (including the expenses of any
annual audit or comfort letters required by or incident to such performance and
compliance), the fees and disbursements of underwriters customarily paid by
issuers or sellers of securities and fees and expenses of other persons retained
by the Company (but not including (i) fees and disbursements of counsel for the
Holders, (ii) any underwriting discounts or selling commissions applicable to
the sale of Registrable Securities attributable to the sale of Registrable
Securities by the Holders of such Registrable Securities, (iii) in the case of a
registration pursuant to Section 2 hereof, the costs and expenses of any special
audit of the Company's interim financial statements to the extent that the
Company has been advised by the managing underwriter that such special audit is
necessary in connection with such registration of Registrable Securities by
2
<PAGE>
the Holders of such Registrable Securities (a "Special Audit") and (iv) any
transfer taxes payable by the Holders of Registrable Securities in connection
with the sale of Registrable Securities).
The terms "Rule 144," "Rule 144A," and "Rule 145" shall mean Rules 144,
144A and 145 as promulgated by the SEC under the Securities Act, as such Rules
may be amended from time to time, or any similar successor rule that may be
promulgated by the SEC.
The term "Rule 415" shall mean Rule 415 as promulgated by the SEC 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 SEC.
The term "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute then in effect, and a reference to a
particular section thereof shall be deemed to include a reference to the
comparable section, if any, of any such similar federal statute.
The term "SEC" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act or the
Exchange Act.
The term "Selling Expenses" shall mean all underwriting discounts and
selling commissions 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).
2. Registration on Request.
-----------------------
(a) Request for Registration. Upon the written request of a Holder or a
------------------------
group of Holders holding Registrable Securities representing twenty-five percent
(25%) or more of the outstanding Common Stock (the "Requesting Holder" or the
"Requesting Holders") requesting that the Company effect the registration under
the Securities Act of all or part of such Holder's or Holders' Registrable
Securities and specifying the intended method of disposition thereof, the
Company will promptly give written notice of such requested registration to all
other Holders of Registrable Securities, and thereupon will, 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 laws or other state securities laws and appropriate
compliance under the Securities Act) of:
(i) the Registrable Securities which the Company has been so
requested to register by the Requesting Holder(s); and
(ii) all other Registrable Securities which the Company has been
requested to register by any other Holder thereof by written request given
to the Company within ten (10) days after such written notice is mailed or
delivered by the
3
<PAGE>
Company (which request shall specify the intended method of disposition of
such Registrable Securities)
all to the extent necessary to permit the disposition (in accordance with the
intended methods thereof as aforesaid) of the Registrable Securities so to be
registered; provided, however, that if the Requesting Holder(s) shall have
-------- -------
requested the Company to effect a registration under this Section 2 and prior to
the effective date of the registration statement relating to such registration
such Holders shall have revoked such request pursuant to the last sentence of
this Section 2(a), then the Company shall not be obligated to file a
registration statement relating to a registration request under this Section 2
within a period of one hundred eighty (180) days after the date which is forty-
five (45) days after the date of receipt by the Company of the registration
request that was subsequently revoked. Promptly after the expiration of the ten
(10) day period referred to in subsection (ii) above, the Company will notify
all the Holders to be included in the registration of the other Holders and the
number of shares of Registrable Securities requested to be included therein.
All of the Requesting Holders acting jointly may, at any time prior to the
effective date of the registration statement relating to such registration,
revoke such request by providing a written notice to the Company revoking such
request.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 2:
(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 three such registrations pursuant
to this Section 2 (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 Holders have not elected to bear the Registration Expenses
pursuant to Section 4 hereof and would, absent such election, have been
required to bear such expenses) or after the tenth anniversary of the
completion of the Company's initial public offering of Common Stock;
(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;
(D) If the Requesting Holder(s) propose to dispose of shares of
Registrable Securities which may be immediately registered on Form S-3
pursuant to a request made under Section 2(e) hereof;
4
<PAGE>
(E) If the Requesting Holder(s) do not request that such offering be
firmly underwritten by underwriters selected by the Requesting Holder(s)
(subject to the consent of the Company, which consent will not be
unreasonably withheld); or
(F) If the Company and the Requesting Holder(s) are unable to obtain
the commitment of the underwriter described in clause (E) above to firmly
underwrite the offer.
(b) Deferment. Subject to the foregoing clauses (A) through (F) of
---------
Section 2(a), the Company shall file a registration statement covering the
Registrable Securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Requesting Holder(s); provided,
--------
however, that if (i) in the good faith judgment of the Board of Directors of the
- -------
Company, such registration could interfere with or otherwise adversely affect
any financing, acquisition, corporate reorganization, or other material
transaction or development involving the Company or require the Company to
disclose material non-public information which the Company has a bona fide
business purpose for preserving as confidential 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
such Holders a certificate signed by the President of the Company stating that
in the good faith judgment of the Board of Directors of the Company, it is
essential to defer the filing of such registration statement, then the Company
shall have the right to defer such filing for the period during which such
filing would have the effect described in (b)(i) above, provided, that (except
--------
as provided in clause (C) above) the Company may not defer the filing for a
period of more than one hundred eighty (180) days after the receipt of the
request of the Requesting Holder(s), and, provided, further, that the Company
-------- -------
shall not defer its obligations in this manner more than once in any twelve-
month period.
The registration statement filed pursuant to the request of the Requesting
Holder(s) may, subject to the provisions of Sections 2(b) and 2(g) 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) Underwriting. The right of any Holder to register pursuant to
------------
Section 2 shall be conditioned upon such Holder's participation in the
underwritten offering and the inclusion of such Holder's Registrable Securities
in the underwriting (unless otherwise mutually agreed by a majority in interest
of the Requesting Holder(s) and such Holder with respect to such participation
and inclusion) to the extent provided herein. A Holder may elect to include in
such underwriting all or a part of the Registrable Securities he holds.
(d) Procedures. If the Company shall request inclusion in any
----------
registration pursuant to Section 2 of securities being sold for its own account,
or if other persons shall request inclusion in any registration pursuant to
Section 2, the Requesting Holder(s) 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 Section 2 and
Section 5.
5
<PAGE>
The Company shall (together with all Holders and other persons proposing to
distribute their securities through such underwriting) 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 Requesting Holder(s), which underwriters are reasonably
acceptable to the Company. Notwithstanding any other provision of this Section
2, if the representative of the underwriters advises the Requesting Holders in
writing that marketing factors require a limitation on the number of shares to
be underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 2(g) hereof. 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 Requesting
Holder(s). The securities so excluded shall also be withdrawn from
registration. Any Registrable Securities or other securities excluded 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
2(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 2(g).
(e) Registration on Form S-3. (i) After its initial public offering,
------------------------
the Company shall use its best efforts to qualify for registration on Form S-3
or any comparable or successor form or forms. After the Company has qualified
for the use of Form S-3, in addition to the rights contained in the foregoing
provisions of this Agreement, 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 the Company shall not be obligated
-------- -------
to effect any such registration if (i) 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, or (ii) in
the event that the Company shall furnish the certification described in Section
2(b)(ii) (but subject to the limitations set forth therein) or (iii) in a given
twelve-month period, after the Company has effected one (1) such registration in
any such period or (iv) it is to be effected more than five (5) years after the
Company's initial public offering.
(ii) If a request complying with the requirements of Section 2(e)(i)
hereof is delivered to the Company, the provisions of Sections 2(a) and Section
2(b) hereof shall apply to such registration. If the registration is for an
underwritten offering, the provisions of Sections 2(c) and (d) hereof shall
apply to such registration.
(iii) If a registration requested pursuant to this Section 2 which
is proposed by the Company to be effected by the filing of a registration
statement on Form S-3 (or any successor or similar short-form registration
statement) shall be in connection with any
6
<PAGE>
underwritten public offering and if the managing underwriter shall advise the
Company in writing that, in its opinion, the use of another form of registration
statement is of material importance to the success of such proposed offering,
then such registration shall be effected on such other form.
(f) Effective Registration Statement. A registration requested
--------------------------------
pursuant to this Section 2 will not be deemed to have been effected unless the
registration statement relating thereto has become effective under the
Securities Act and all or any portion of the Registrable Securities initially
requesting such registration have actually been sold thereunder; provided,
--------
however, that if, after such registration statement has become effective,
- -------
registration is interfered with by any stop order, injunction or other order or
requirement of the SEC or other governmental agency or court, such registration
will be deemed not to have been effected.
(g) Pro Rata Participation in Requested Registration. If a requested
------------------------------------------------
registration pursuant to this Section 2 involves an underwritten offering and
the managing underwriter shall advise the Company in writing that, in its
opinion, the number of securities requested to be included in such registration
(including securities of the Company which are not Registrable Securities)
exceeds the number which would have an adverse effect on such offering,
including the price at which such shares or securities can be sold, the Company
will include in such registration (i) first, all Registrable Securities
requested to be included in such registration by the Requesting Holders pursuant
to this Section 2 (provided, that if the number of such Registrable Securities
--------
exceeds the number which the Company has been advised can be sold in such
offering without having the adverse effect referred to above, the number of such
Registrable Securities included in such registration shall be allocated pro rata
among the Requesting Holders on the basis of the relative number of shares of
Registrable Securities each such Holder has requested to be included in such
registration), and (ii) second, to the extent that the Registrable Securities of
the Requesting Holders requested to be included in such registration pursuant to
this Section 2 are less than the number of securities which the Company has been
advised can be sold in such offering, without having the adverse effect referred
to above, the securities proposed to be sold by other Holders, allocated pro
rata among such other Holders on the basis of the number of shares of
Registrable Securities each such Holder has requested to be included in such
registration, and (iii) third, to the extent that the Registrable Securities of
the Requesting Holders requested to be included in such registration pursuant to
this Section 2 and the securities proposed to be sold by other Holders are less
than the number of securities which the Company has been advised can be sold in
such offering without having the adverse affect referred to above, any
securities proposed to be sold by the Company.
3. Incidental Registration.
-----------------------
(a) Right to Include Registrable Securities. If the Company at any
---------------------------------------
time proposes to register any of its securities under the Securities Act (other
than a registration on Form S-8 or any successor or similar form or a
registration relating solely to a Rule 145 transaction, or a registration on any
registration form that does not permit secondary sales and other than pursuant
to a registration under Section 2 hereof), whether or not for sale for its own
7
<PAGE>
account, it will each such time give prompt written notice to all Holders of
Registrable Securities of its intention to do so and of such Holders' rights
under this Section 3. Upon the written request of any such Holder made within
ten (10) days after the receipt of any such notice (which request shall specify
the Registrable Securities intended to be disposed of by such Holder and the
intended method of disposition thereof), the Company will use its best efforts
to effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by the Holders
thereof, to the extent requisite to permit the disposition (in accordance with
such intended methods thereof) of the Registrable Securities so to be
registered; provided, that if such registration involves an underwritten
--------
offering, all Holders or Registrable Securities requesting to be included in the
Company's registration must sell their Registrable Securities to the
underwriters selected by the Company on the same terms and conditions as apply
to the Company. If a registration requested pursuant to this Section 3(a)
involves an underwritten public offering, any Holder of Registrable Securities
requesting to be included in such registration may elect, in writing prior to
the effectiveness of the registration statement filed in connection with such
registration, not to register such securities in connection with such
registration. No registration effected under this Section 3 shall relieve the
Company of its obligations to effect registration upon request under Section 2.
The Company will pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this Section 3
including, for purposes of this Section 3, the costs and expenses of any Special
Audit.
(b) Priority in Incidental Registrations. Notwithstanding any other
------------------------------------
provision of this Section 3, if a registration pursuant to this Section 3
involves an underwritten offering and 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 Company may exclude all Registrable
Securities from, or limit the number of Registrable Securities to be included
in, the registration and underwriting. The Company may limit, to the extent so
advised by the underwriters, the amount of securities to be included in the
registration by the Company's stockholders (including the Holders). 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 (i) allocated first to the Company for
securities being sold for its own account, and thereafter (ii) shall be
allocated pro rata among all such requesting Holders on the basis of the
relative number of shares of Registrable Securities and other securities each
Holder has requested to be included in such registration, and (iii) third, the
number of Registrable Securities requested to be included in such registration
by other persons, which number, in the opinion of such underwriters, can be sold
without having the adverse effect referred to above, such amount to be allocated
pro rata among all such requesting other persons on the basis of the relative
number of shares of Registrable Securities and other securities each such other
person has requested to be included in such registration. If any person does
not agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company or the underwriter. Any
Registrable Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
8
<PAGE>
If shares are so withdrawn from the registration or 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 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 2(g) hereof.
4. Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Sections 2(e) and 3 hereof, and the first three registrations pursuant to
Section 2(a) hereof shall be borne by the Company; provided, however, that if
-------- -------
the Holders bear the Registration Expenses for any registration proceeding begun
pursuant to Section 2(a) and subsequently withdrawn by the Holders registering
shares therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 2(a) hereof, except in the event that such
withdrawal 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 2(a), in which event such
registration shall not be treated as a counted registration for purposes of
Section 2(a) 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.
5. Holdback Agreements. If any registration shall be in connection with
-------------------
an underwritten public offering, each Holder of Registrable Securities agrees
not to effect any public sale or distribution, including any sale pursuant to
Rule 144 or Rule 144A under the Securities Act, of any Registrable Securities,
and to use such Holder's best efforts not to effect any such public sale or
distribution of any other equity security of the Company or of any security
convertible into or exchangeable or exercisable for any equity security, of the
Company (in each case, other than as part of such underwritten public offering)
within seven (7) days before or one hundred eighty (180) days after the
effective date of such registration, and the Company hereby also so agrees and
agrees to cause other holders of any equity security, or of any security
convertible into or exchangeable or exercisable for any equity security, of the
Company purchased from the Company (at any time other than in a public offering)
to so agree.
The obligations described in this Section 5 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 Commission Rule 145 transaction on Form S-4 or similar
forms that my be promulgated in the future. The Company may impose stop-
transfer instructions with respect to the shares (or securities) subject to the
foregoing restriction until the end of such one hundred eighty (180) day period.
9
<PAGE>
6. Registration Procedures.
-----------------------
If and whenever the Company is required to use its best efforts to
effect or cause the registration of any Registrable Securities under the
Securities Act as provided in this Agreement, the Company will, as expeditiously
as possible:
(a) prepare and file with the SEC within sixty (60) days after receipt
of a request for registration with respect to such Registrable Securities, a
registration statement on any form for which the Company then qualifies or which
counsel for the Company shall deem appropriate, subject to 2(e) hereof, as the
case may be, and which form shall be available for the sale of the registrable
Securities in accordance with the intended methods of distribution thereof, and
use its best efforts to cause such registration statement to become effective;
provided, that before filing with the SEC a registration statement or prospectus
- --------
or any amendments or supplements thereto, the Company will (i) furnish to one
counsel selected by the Holders of a majority of the Registrable Securities
covered by such registration statement copies of all such documents proposed to
be filed, which documents will be subject to the review of such counsel, and
(ii) notify each Holder of Registrable Securities covered by such registration
statement of any stop order issued or threatened by the SEC and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered;
(b) 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 one hundred twenty (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 one hundred twenty
(120) day period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided,
--------
that Rule 415, 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 (x) includes any prospectus required by Section 10(a)(3) of the Securities
Act or (y) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference of the information required to be included in (x) and
(y) above to be contained in periodic reports filed pursuant to Sections 13 or
15(d) of the Exchange Act in the registration statement;
(c) prepare and file with the SEC such amendments and supplements to
such registration statements 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;
10
<PAGE>
(d) furnish to each Holder of such Registrable Securities covered by
such registration statement such number of copies of such registration
statement, each amendment and supplement thereto (in each case including all
exhibits thereto), the prospectus included in such registration statement
(including each preliminary prospectus), in conformity with the requirements of
the Securities Act and such other documents as such Holder may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Holder;
(e) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions
within the United States as any Holder of Registrable Securities covered by such
registration statement reasonably requests and do any and all other acts and
things which may be reasonably necessary or advisable to enable such Holder to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by such Holder; provided, that the Company will not be required to (i)
--------
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph (e), (ii) subject itself
to taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction;
(f) immediately notify each Holder of such Registrable Securities 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 contains an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing, and will promptly prepare and furnish to such
Holder a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing;
(g) use its best efforts to cause all such Registrable Securities to
be listed on each securities exchange on which similar securities issued by the
Company are then listed, if the applicable listing requirements are satisfied;
(h) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as the Holders of a
majority of the Registrable Securities being sold or the underwriters retained
by such Holders, if any, reasonably request in order to expedite or facilitate
the disposition of such Registrable Securities, including customary
indemnification;
(i) make available for inspection by any Holder of Registrable
Securities covered by such registration statement, any underwriter participating
in any disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such Holder or underwriter
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company (collectively, the "Records")
as shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the
11
<PAGE>
Company officers, directors and employees to supply all information reasonably
requested by any such Inspector in connection with such registration statement;
and
(j) use its best efforts to obtain a comfort letter from the Company's
independent public accountants in customary form and covering such matters of
the type customarily covered by cold comfort letters as the Holders of a
majority of the Registrable Securities being sold reasonably request.
Each Holder of Registrable Securities agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 6(f) hereof, such Holder will forthwith discontinue disposition of
Registrable Securities pursuant to the registration statement covering such
Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 6(f) hereof, and, if
so directed by the Company, such Holder will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the period mentioned in Section 6(b) hereof shall be
extended by the greater of (i) three months or (ii) the number of days during
the period from and including the date of the giving of such notice pursuant to
Section 6(f) hereof to and including the date when each Holder of Registrable
Securities covered by such registration statement shall have received the copies
of the supplemented or amended prospectus contemplated by Section 6(f) hereof.
7. Indemnification.
---------------
(a) Indemnification by the Company. The Company will, and it hereby
------------------------------
does, indemnify and hold harmless, to the full extent permitted by law, each of
the Holders of any Registrable Securities covered by such registration
statement, its directors and officers or general partners, limited partners and
managing directors thereof, each other person who participates as an underwriter
in the offering or sale of such securities and each other person, if any, who
controls such Holder or any such underwriter within the meaning of Section 15 of
the Securities Act, against any and all losses, claims, damages or liabilities,
joint or several, and expenses (including any amounts personally paid in any
settlement) to which such Holder, any such director or officer or general or
limited partner or managing director or any such underwriter or controlling
person may become subject under the Securities Act, common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) or expenses arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such securities were registered under
the Securities Act, any preliminary, final or summary prospectus contained
therein, or any amendment or supplement thereto, or (ii) 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 the Company will
reimburse such Holder and each such director, officer, general partner, limited
partner, managing director or underwriter and controlling person for any legal
or any other expenses reasonably incurred by them in connection
12
<PAGE>
with investigating or defending such loss, claim, liability, action or
proceedings; provided, that the Company shall not be liable in any such case to
--------
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expenses arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement or amendment or supplement thereto or in any such
preliminary, final or summary prospectus in reliance upon and in conformity with
written information furnished to the Company by such Holder or underwriter for
use in the preparation thereof; and provided, further, that the Company will
-------- -------
not be liable to any such Holder or any person who participates as an
underwriter in the offering or sale of Registrable Securities or any other
person, if any, who controls such underwriter within the meaning of the
Securities Act, under the indemnity agreement in this Section 7(a) with respect
to any preliminary prospectus as amended or supplemented as the case may be, to
the extent that any such loss, claim, damage or liability of such Holder,
underwriter or controlling person results from the fact that such Holder or
underwriter sold Registrable Securities to a person to whom there was not sent
or given, at or prior to the written confirmation of such sale, a copy of the
final prospectus (including any documents incorporated by reference therein),
whichever is most recent, if the Company has previously furnished copies thereof
to such Holder or underwriter and such final prospectus, as then amended or
supplemented, has corrected any such misstatement or omission. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Holder or any such director, officer, general partner, limited
partner, managing director, underwriter or controlling person and shall survive
the transfer of such securities by such Holder. It is agreed that the indemnity
agreement contained in this Section 7(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 has not
been unreasonably withheld).
(b) Indemnification by the Holders. 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 and hold harmless (in the same manner and to the same extent as set
forth in subdivision (a) of this Section 7) the Company and its controlling
persons within the meaning of Section 15 of the Securities Act and all other
prospective sellers and their respective controlling persons with respect to any
statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary, final or summary prospectus contained
therein, or any amendment or supplement, if such statement or alleged statement
or omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Holder for use in the
preparation of such registration statement, preliminary, final or summary
prospectus or amendment or supplement, or a document incorporated by reference
into any of the foregoing. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company or any of
the Holders or any of their respective directors, officers and controlling
persons and shall survive the transfer of such securities by such Holder;
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
13
<PAGE>
such settlement is effected without the consent of such Holder (which consent
shall not be unreasonably withheld).
(c) Notices of Claims, Etc. Each party entitled to indemnification
-----------------------
under this Section 7 (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 unreasonably be 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
7, to the extent such failure is not prejudicial. 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 litigating. 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) Contribution. If the indemnification provided for in this Section
------------
7 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
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 statements 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.
(e) Conflicts. Notwithstanding the foregoing, to the extent that the
---------
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting agreement shall
control.
14
<PAGE>
8. Miscellaneous.
-------------
(a) The Company shall take such measures and file such information,
documents and reports as shall be required by the SEC as a condition to the
availability of Rule 144 and Rule 144A, or any successor provisions.
(b) 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 Agreement.
(c) The Company will not hereafter enter into any agreement with
respect to its securities which is inconsistent with the rights granted to the
Holders of Registrable Securities in this Agreement. The Company has not
previously entered into any agreement with respect to any of its debt or equity
securities granting any registration rights to any person.
(d) The Company acknowledges and agrees that in the event of any
breach of this Agreement by it, the Holders would be irreparably harmed and
could not be made whole by monetary damages. The Company accordingly agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate and that the Holders, in addition to any other remedy to which
they may be entitled at law or in equity, shall be entitled to compel specific
performance of this Agreement in any action instituted in the United States
District Court for the Southern District of New York, or, in the event said
Court would not have jurisdiction for such action, in any court of the United
States or any state thereof having subject matter jurisdiction for such action.
(e) This Agreement constitutes the entire agreement and understanding
of the parties hereto in respect of the subject matter contained herein, and
there are no restrictions, promises, representations, warranties, covenants, or
undertakings with respect to the subject matter hereof, other than those
expressly set forth or referred to herein. This Agreement supersedes all prior
agreements and understandings between the parties hereto with respect to the
subject matter hereof.
(f) Any notice, request, instruction or other document to be given
hereunder by any party hereto to another party hereto shall be in writing, shall
be delivered personally or sent by registered mail, postage prepaid, return
receipt requested, addressed (i) if to a Holder, to the address of the Holder
set forth in Appendix I hereto or, in the case of a Permitted Transferee, to
the address set forth in the written agreement executed pursuant to Section 8(i)
hereof, or to such other address as the party to whom notice is to be given may
provide in a written notice to the Company, a copy of which written notice shall
be on file with the Secretary or (ii) if to the Company, at 700 Orthopaedic
Drive, Warsaw, Indiana 46581, Attention: Steven L. Artusi, Esq., or at such
other address as the Company shall have furnished to each Holder in writing. No
notice shall be effective except upon actual delivery.
15
<PAGE>
(g) The laws of the State of New York shall govern the interpretation,
validity and performance of the terms of this Agreement, regardless of the law
that might be applied under applicable principles of conflicts of laws.
(h) The invalidity or unenforceability of any provisions of this
Agreement in any jurisdiction shall not affect the validity or enforceability of
the remainder of this Agreement in that jurisdiction or the validity or
enforceability of this Agreement, including that provision, in any other
jurisdiction.
(i) Notwithstanding anything to the contrary contained in this
Agreement, no shares of Registrable Securities or any securities of the Company
convertible into, or exercisable or exchangeable for, Registrable Securities,
may be sold, transferred or otherwise disposed of to any Permitted Transferee,
unless such Permitted Transferee, prior to such sale, transfer or other
disposition, agrees in writing to be bound by the terms of this Agreement to the
same extent and in the same manner as the transferor of such shares or
securities, a copy of which agreement shall be on file with the Secretary of the
Company.
(j) Nothing contained in this Agreement shall be deemed to be a waiver
of, or release from, any obligations any party hereto may have under, or any
restrictions on the transfer of Registrable Securities or other securities of
the Company imposed by, any other agreement.
(k) Each of the Holders agrees that substantially the following legend
shall be placed on the certificates representing any shares of Registrable
Securities acquired by it:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY BE OFFERED AND SOLD
ONLY IF REGISTERED PURSUANT TO THE ACT OR IF THE COMPANY IS PROVIDED AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION UNDER THE
ACT IS NOT REQUIRED."
(l) The provisions of this Agreement shall be binding upon and accrue
to the benefit of the parties hereto and their respective heirs, successors and
assigns. Notwithstanding the foregoing, neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof shall be
assignable by the Company or any Holder without the prior written consent of the
Holders of twenty five percent (25%) of the Registrable Securities; and
provided, further, that a Holder may assign his rights, remedies, obligations
- -------- --------
and liabilities hereunder concurrently with a transfer of his shares of
Registrable Securities to a Permitted Transferee in accordance with Section 8(i)
hereof without obtaining the prior written consent of the Company or the Holders
specified in this Section 8(l).
16
<PAGE>
(m) A default by any party to the Agreement in such party's compliance
with any of the conditions or covenants hereof or performance of any of the
obligations of such party hereunder shall not constitute a default by any other
party.
(n) This Agreement may not be amended, modified or supplemented and no
waivers of or consents to departures from the provisions hereof may be given
unless consented to in writing by the Company and the Holders specified in
Section 8(l) hereof.
(o) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same Agreement.
(p) In any action or proceeding brought to enforce any provision of
this Agreement, or where any provision hereof is validly asserted as a defense,
the successful party shall be entitled to recover reasonable attorneys' fees in
addition to any other available remedy.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
DEPUY, INC.
By: /s/ James A. Lent
------------------
Name: James A. Lent
Title: Chairman and Chief Executive Officer
CORANGE LIMITED
By: /s/ Anthony Williams
---------------------
Name: Anthony Williams
Title: Vice Chairman
CORANGE INTERNATIONAL LIMITED
By: /s/ Anthony Williams
--------------------------------------------
Name: Anthony Williams
Title: Vice President
CORANGE INTERNATIONAL HOLDINGS B.V.
By: /s/ J. Menten
--------------------------------
Name: J. Menten
Title: CFO
PHARMINVEST S.A.
By: /s/ Bernhard Kubitza
---------------------------------------------
Name: Bernhard Kubitza
Title: Executive Vice President
By: /s/ Jurgen Friedrich
---------------------
Name: Jurgen Friedrich
Title: Senior Vice President
18
<PAGE>
EXHIBIT 11.1
Pro Forma Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995
------------------ ------------------
<S> <C> <C>
Net Income (in 000's).................................... $ 106,748 $ 94,929
----------- -----------
Pro forma weighted average number of shares outstanding.. 91,430,000 90,000,000
----------- -----------
Pro forma earnings per share............................. 1.17 1.05
=========== ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARY LIST
---------------
<TABLE>
<CAPTION>
<S> <C>
Corange U.K. Holdings Ltd.
DePuy Orthopadie GmbH DePuy International Ltd.
De Puy A.G. DePuy Joints S.A.
DePuy Orthopedie SA DePuy Taiwan
DePuy Italia S.r.L. DePuy Australia Pty Limited
DePuy Iberica, S.A. DePuy Mexico S.A. De C.V.
Medical Trivest SL DePuy Canada Ltd.
DePuy Japan Incorporated DePuy Orthopaedics, Inc.
DePuy Korea, Inc. DePuy Orthopaedic Technology, Inc.
DePuy Far East Pte Ltd. DePuy ACE Medical Company
DePuy GmbH DePuy DuPont Orthopaedics (partnership)
DePuy Olmed AB DePuy Motech, Inc.
DePuy Hungary Expanded Optics, Inc.
DePuy CZ s.r.o. DePuy Overseas Trading Ltd.
DePuy New Zealand Ltd. DePuy Development, Inc.
Sanatmetal CFT France
DePuy Hong Kong Ltd. Orthogenesis Italy
DePuy Medical Pte Ltd. Tweedbank
DePuy, S.A. 7 Dormant Coys
DePuy Portugal Lta.
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-17277 and No. 333-15163) of DePuy, Inc. of our
report dated February 21, 1997 appearing in this Annual Report on Form 10-K.
Price Waterhouse LLP
Indianapolis, Indiana
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995, AND FOR THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 209,387
<SECURITIES> 4,640
<RECEIVABLES> 126,465
<ALLOWANCES> 8,534
<INVENTORY> 151,406
<CURRENT-ASSETS> 546,719
<PP&E> 89,601
<DEPRECIATION> 86,745
<TOTAL-ASSETS> 908,377
<CURRENT-LIABILITIES> 177,601
<BONDS> 0
0
0
<COMMON> 986
<OTHER-SE> 669,642
<TOTAL-LIABILITY-AND-EQUITY> 908,377
<SALES> 697,273
<TOTAL-REVENUES> 697,273
<CGS> 208,976
<TOTAL-COSTS> 208,976
<OTHER-EXPENSES> 34,018
<LOSS-PROVISION> 2,973
<INTEREST-EXPENSE> 6,811
<INCOME-PRETAX> 185,022
<INCOME-TAX> 78,689
<INCOME-CONTINUING> 106,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,748
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
</TABLE>
