<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1999
REGISTRATION NO. 333-86835
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DJ ORTHOPEDICS, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3842 52-2165554
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
DJ ORTHOPEDICS CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3842 52-2157537
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
DONJOY, L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3842 33-0848317
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
2985 SCOTT STREET
VISTA, CALIFORNIA 92083
(800) 336-5690
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
LESLIE H. CROSS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
dj ORTHOPEDICS, LLC
2985 SCOTT STREET
VISTA, CALIFORNIA 92083
(800) 336-5690
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
------------------------
WITH A COPY TO:
JAMES M. LURIE, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 408-2400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------------
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement covers the registration of $100,000,000
aggregate principal amount of 12 5/8% Senior Subordinated Notes due 2009 (the
"New Notes") of dj Orthopedics, LLC and DJ Orthopedics Capital Corporation (the
"Issuers"), guaranteed by DonJoy, LLC (the "Guarantor"), that may be exchanged
for an equal aggregate principal amount of the Issuers' outstanding 12 5/8%
Senior Subordinated Notes due 2009, also guaranteed by the Guarantor. This
Registration Statement also covers the registration of New Notes for resale by
Chase Securities Inc. in market-making transactions. The complete prospectus
relating to the exchange offer (the "Exchange Offer Prospectus") follow this
explanatory note. Following the Exchange Offer Prospectus are certain pages of
the prospectus relating solely to such market-making transactions (the "Market-
Making Prospectus"), including alternate front and back cover pages, a section
entitled "Risk Factors -- Trading Market for the New Notes" to be used in lieu
of the section entitled "Risk Factors -- No Prior Market for the New Notes" and
alternate sections entitled "Use of Proceeds" and "Plan of Distribution." In
addition, the Market-Making Prospectus will not include the following captions
(or the information set forth under those captions) in the Exchange Offer
Prospectus: "Prospectus Summary -- Summary of the Terms of The Exchange Offer,"
"Risk Factors -- Failure to Exchange Old Notes," "The Exchange Offer," "Exchange
and Registration Rights Agreement" and "Certain U.S. Federal Income Tax
Considerations." All other sections of the Exchange Offer Prospectus will be
included in the Market-Making Prospectus.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
dj ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
OFFER TO EXCHANGE ALL OUTSTANDING
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
FOR 12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
THE EXCHANGE OFFER
- We will exchange all old notes that are validly tendered and not validly
withdrawn for an equal principal amount of new notes that are freely
tradable.
- You may withdraw tenders of old notes at any time prior to the expiration
of the exchange offer.
- The exchange offer expires at 5:00 p.m., New York City time, on December
9, 1999, unless we extend the offer.
THE NEW NOTES
- The terms of the new notes to be issued in the exchange offer are
substantially identical to the old notes, except that the new notes will
be freely tradeable.
- No public market currently exists for the notes. We do not intend to list
the new notes on any securities exchange and, therefore, no active public
market is anticipated.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 20 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
The date of this Prospectus is November 9, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More
Information.................. i
Forward-Looking Statements..... ii
Industry Data.................. ii
Prospectus Summary............. 1
Risk Factors................... 20
The Transactions............... 41
The Exchange Offer............. 43
Use of Proceeds................ 55
Capitalization................. 56
Selected Historical
Consolidated Financial
Data......................... 57
Unaudited Pro Forma
Consolidated Financial
Data......................... 60
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 66
Business....................... 83
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management..................... 107
Security Ownership of Certain
Beneficial Owners and
Management................... 113
Certain Relationships and
Related Transactions......... 119
Description of New Credit
Facility..................... 127
Description of the Notes....... 130
Exchange and Registration
Rights Agreement............. 183
Certain U.S. Federal Income Tax
Considerations............... 186
Book-Entry; Delivery and
Form......................... 187
Plan of Distribution........... 191
Legal Matters.................. 191
Experts........................ 192
Index To Consolidated Financial
Statements................... F-1
</TABLE>
-------------------------
WHERE YOU CAN FIND MORE INFORMATION
Upon effectiveness of the Registration Statement of which this prospectus
is a part, we will file annual and quarterly reports and other information with
the Securities and Exchange Commission (the "SEC" or the "Commission"). You may
read and copy any reports, documents and other information we file at the
Commission's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call 1-800-SEC-0330 for further information on the
public reference rooms. Our filings will also be available to the public from
commercial document retrieval services and at the web site maintained by the
Commission at http://www.sec.gov.
We, together with our parent holding company, have filed a Registration
Statement on Form S-4 to register with the Commission the new notes to be issued
in exchange for the old notes. This prospectus is part of that Registration
Statement. As allowed by the Commission's rules, this prospectus does not
contain all of the information you can find in the Registration Statement and
the exhibits to the Registration Statement.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ABOUT US OR THE TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS. IF YOU ARE GIVEN ANY INFORMATION OR
REPRESENTATIONS ABOUT THESE MATTERS THAT IS NOT DISCUSSED IN THIS PROSPECTUS,
YOU MUST NOT RELY ON THAT INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY SECURITIES ANYWHERE OR TO ANYONE WHERE OR
TO WHOM WE ARE NOT PERMITTED TO OFFER OR SELL SECURITIES UNDER APPLICABLE LAW.
THE DELIVERY OF THIS PROSPECTUS DOES NOT, UNDER ANY CIRCUMSTANCES, MEAN THAT
THERE HAS NOT BEEN A CHANGE IN OUR AFFAIRS SINCE THE DATE OF THIS PROSPECTUS. IT
ALSO DOES NOT MEAN THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AFTER THIS
DATE.
i
<PAGE> 5
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 including, in particular, the statements about our plans,
strategies, and prospects under the headings "Prospectus Summary", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, we
can give no assurance that such plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ materially
from those expressed or implied by the forward-looking statements we make in
this prospectus are set forth in this prospectus, including under the heading
"Risk Factors". All forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the cautionary
statements included in this prospectus.
INDUSTRY DATA
Information contained in this prospectus concerning the orthopedic products
industry and its segments, including the orthopedic recovery products industry,
our general expectations concerning that industry and its segments and our
market position and market share within that industry or its segments, both
domestically and internationally, are based on estimates prepared by us using
data from various sources (primarily Frost & Sullivan, an international
marketing consulting firm, as well as data from our internal research) and on
assumptions made by us, based on that data and our knowledge of the orthopedic
products industry and its segments, which we believe to be reasonable. Industry
data is compiled based on the area of usage of the brace or support (i.e. for
the knee, ankle, back, wrist or upper extremities) and includes both the
non-retail market in which we compete and the retail market. Accordingly,
industry data does not correspond to the organization of our operating segments.
Thus, for example, knee braces and supports market data generally cover both
rigid and soft knee braces and supports. We believe data regarding the
orthopedic products industry and its segments and our market position and market
share within that industry or its segments are inherently imprecise, but are
generally indicative of their size and our market position and market share
within that industry or its segments. Data on our market position and market
share within the orthopedic recovery products industry or its segments is based
on U.S. sales. Estimated revenues for the orthopedic recovery products industry
and its segments and the historical growth rates of that industry and its
segments are based on information obtained from Frost & Sullivan. While we are
not aware of any misstatements regarding any industry data presented in this
prospectus, our estimates, in particular as they relate to our general
expectations concerning the orthopedic products industry, involve risks and
uncertainties and are subject to change based on various factors, including
those discussed under the caption "Risk Factors" in this prospectus.
DonJoy(R), ProCare(R), Defiance(R), GoldPoint(R), Monarch(R), RocketSoc(R),
IceMan(R), Air DonJoy(R), Quadrant(R), Legend(TM), TROM(TM), Playmaker(TM),
PainBuster(TM), OPAL(TM) and 4-TiTude(TM) are certain of our registered
trademarks and trademarks for which we have applications pending.
ii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes information about the exchange offer, as well as information
regarding our business, certain recent transactions entered into by us and
detailed financial data. We urge you to read this prospectus in its entirety.
Unless otherwise indicated,
- the terms "Company", "we", "our", "ours" and "us" refer to dj
Orthopedics, LLC and its subsidiaries or, where the context requires, the
operations of our predecessor, the Bracing and Support Systems division
of Smith & Nephew, Inc. ("Smith & Nephew"),
- the term "DJ Capital" refers to DJ Orthopedics Capital Corporation, our
wholly owned subsidiary and a co-obligor on the notes,
- the term "Issuers" refers to dj Orthopedics, LLC and DJ Orthopedics
Capital Corporation,
- the term "DonJoy" refers to DonJoy, L.L.C., our parent company, and
- the term "notes" refers to both the old notes and the new notes.
The financial data included in this prospectus come from the financial
statements of DonJoy. DonJoy is a guarantor of the notes and of our bank
borrowings and has no material assets or operations other than its ownership of
100% of our equity interests. As a result, the consolidated financial position
and results of operations of DonJoy are substantially the same as ours. The pro
forma financial information set forth in this prospectus reflects the
consummation of the Transactions (as defined below) as if they had occurred as
of January 1, 1998 for purposes of the pro forma statements of income data and
as of June 29, 1999 for purposes of the pro forma balance sheet data.
THE COMPANY
OVERVIEW
We are a world leading designer, manufacturer and marketer of orthopedic
recovery products. Based on U.S. sales, we believe we are the leading provider
of orthopedic recovery products and certain complementary products in the United
States. Our broad product lines of rigid knee braces, soft goods and specialty
and other orthopedic products provide a range of solutions for patients and
orthopedic professionals during the various stages of the orthopedic treatment
and recovery process. Our products can be used before, after and as an
alternative to surgery, during and after rehabilitation and for the treatment of
osteoarthritis. We are a market leader in the orthopedic recovery products
industry, selling more than 500 individual products in over 50 countries
throughout the world. We market our products under the DonJoy and ProCare brand
names, each of which we believe enjoys one of the highest levels of brand name
recognition within the orthopedic recovery products industry. In addition to the
typical orthopedic patient, our products are used by professional athletes, NCAA
athletic programs and the U.S. Ski Team. We believe that our leading market
positions, strong brand names, reputation for quality products, broad product
lines, established distribution networks in the United States and commitment to
research and development
1
<PAGE> 7
provide us with significant opportunities to further grow revenues and earnings.
For 1998 and the six months ended June 29, 1999, our net revenues were $101.2
million and $54.7 million, respectively, and our pro forma EBITDA (as defined)
was $22.0 million and $11.5 million, respectively.
Our product lines include rigid knee braces, soft goods and a portfolio of
specialty and other orthopedic products.
- Rigid Knee Braces. Our rigid knee braces include ligament braces, which
provide durable support for knee ligament instabilities, post-operative
braces, which provide both knee immobilization and a protected range of
motion, and osteoarthritic ("OA") braces, which provide relief of knee
pain due to osteoarthritis. These technologically-advanced products are
generally prescribed to a patient by an orthopedic professional. Our
rigid knee braces are either customized braces, utilizing basic frames
which are then custom-manufactured to fit a patient's particular
measurements, or are standard braces which are available "off-the-shelf"
in various sizes and can be easily adjusted to fit the patient in the
orthopedic professional's office. Substantially all of our rigid knee
braces are marketed under the DonJoy brand name. These products
represented approximately 45% of our net revenues for the twelve months
ended June 29, 1999.
- Soft Goods. Our soft goods products, most of which are fabric or
neoprene-based, provide support and/or heat retention and compression for
afflictions of the knee, ankle, back and upper extremities, including the
shoulder, elbow, neck and wrist. Approximately 60% of our soft goods
products are marketed under the ProCare brand name, with the remainder
marketed under the DonJoy brand name. These products represented
approximately 34% of our net revenues for the twelve months ended June
29, 1999.
- Specialty and Other Orthopedic Products. Our portfolio of specialty and
other orthopedic products, which are designed to facilitate orthopedic
rehabilitation, include lower extremity walkers (boots which are an
alternative to lower extremity casting), upper extremity braces (shoulder
and arm braces and slings), cold therapy systems (a form of pain
management which provides continuous cold therapy to assist in the
reduction of pain and swelling) and pain management delivery systems (a
range of ambulatory infusion pumps for the delivery of local anesthetic
directly into a joint following surgery). Approximately 80% of our
specialty and other orthopedic products are marketed under the DonJoy
brand name, with the remainder marketed under the ProCare brand name.
These products represented approximately 21% of our net revenues for the
twelve months ended June 29, 1999.
We sell our DonJoy products primarily to orthopedic surgeons, orthotic and
prosthetic centers, hospitals, surgery centers, physical therapists and trainers
to meet the specific needs of their patients. We sell our ProCare products under
private label brand names primarily to third party distributors who generally
resell our products to large hospital chains, hospital buying groups, primary
care networks and orthopedic physicians. Our products are used by people who
have sustained an injury, have recently completed an orthopedic surgical
procedure and/or suffer from an affliction of the joint. In addition, a number
of high profile
2
<PAGE> 8
professional and amateur athletes who participate in sports such as football,
basketball and skiing, choose to use our products.
INDUSTRY OVERVIEW
The orthopedic recovery products industry, the primary industry in which we
currently compete, is a segment of the worldwide orthopedic products industry,
which had estimated sales in 1998 of $8.5 billion, including estimated U.S.
sales of $5.1 billion. The worldwide orthopedic products industry includes
reconstructive implants, tissue fixation and healing products, orthopedic
recovery products, spinal implants, arthroscopy products and other related
products. The orthopedic recovery products industry includes retail and
non-retail sales of braces and supports for the knee, ankle, back and upper
extremities, including the shoulder, elbow, neck and wrist, and other related
products. The U.S. orthopedic recovery products industry generated estimated
revenues of $630 million in 1998. We currently compete in the non-retail segment
of the U.S. orthopedic recovery products industry, which generated estimated
revenues of $535 million in 1998. The European orthopedic recovery products
industry generated estimated revenues of $330 million in 1998. Comparable data
for the rest of the world is not readily available. Complementary market
segments to the orthopedic recovery products industry within the overall
orthopedic products industry include orthopedic pain management systems and
devices, a market in which we currently compete and which generated estimated
1998 U.S. revenues of $150 million, and soft tissue fixation products and tissue
healing products, which represent attractive markets for us and which generated
estimated 1998 U.S. revenues of $350 million. Comparable data for Europe and the
rest of the world is not readily available.
The orthopedic recovery products industry is highly fragmented and
characterized by competition among a few large, diversified orthopedic companies
and numerous smaller niche competitors. Revenues in the U.S. orthopedic recovery
products industry grew at an estimated compound annual growth rate of 3.5% from
1994 through 1998. This growth has been driven by increased participation in
exercise, sports and other physical activity, the aging "baby boomer" population
including adults suffering from osteoarthritis, and a growing awareness of the
importance of preventative bracing. Comparable data for Europe and the rest of
the world is not readily available.
We believe data set forth in this prospectus regarding the orthopedic
products industry and its segments and our market position and market share
within that industry or its segments are inherently imprecise, but are generally
indicative of their size and our market position and market share within that
industry or its segments. Estimated revenues for the orthopedic recovery
products industry and its segments and the historical growth rates for such
industry and its segments are based on information obtained from Frost &
Sullivan. See "Industry Data."
COMPETITIVE STRENGTHS
We believe that the following competitive strengths provide us with a
strong and stable base to enable us to further enhance growth and profitability:
- Leading market positions for certain of our products;
- Strong brand name recognition and reputation for quality;
3
<PAGE> 9
- Broad product lines;
- Established U.S. distribution networks;
- Successful record of new product development; and
- Experienced and incentivized management team.
For a complete discussion of our competitive strengths, see "Business --
Competitive Strengths."
BUSINESS STRATEGY
Our strategic objectives are to strengthen our leadership position in the
orthopedic recovery products industry and to increase our revenues and
profitability. As a stand alone entity, we will be able to pursue strategic
initiatives which were previously not possible. We intend to:
- Broaden our market reach;
- Enhance and grow our core business; and
- Expand our business platform.
The key elements of our business strategy are to:
- Increase international sales;
- Improve operating efficiencies;
- Introduce new products and product enhancements; and
- Pursue strategic growth opportunities.
For a complete discussion of our business strategy, See "Business -- Business
Strategy."
4
<PAGE> 10
THE TRANSACTIONS
On June 30, 1999, DonJoy consummated a recapitalization pursuant to an
agreement among Chase DJ Partners, LLC ("CDP"), Smith & Nephew, the former owner
of 100% of the equity interests of DonJoy, and DonJoy.
Approximately $208.5 million of cash was required to finance the
recapitalization, including approximately $199.8 million of cash paid to Smith &
Nephew as consideration for the repurchase of Smith & Nephew's equity interests
in DonJoy (other than a retained interest of approximately 7.1%) and $8.7
million in transaction fees and expenses. The amount of cash paid to Smith &
Nephew is subject to a post-closing adjustment. See "The Transactions." The
sources of funds for the recapitalization consisted of:
- a $64.6 million cash investment in the common membership units (the
"Common Units") of DonJoy by CDP;
- a $1.8 million investment in the Common Units of DonJoy by three members
of senior management (the "Management Members"), $1.4 million of which
was financed by loans from DonJoy evidenced by management promissory
notes;
- $30.0 million of net proceeds from the purchase by CB Capital Investors
L.P. ("CB Capital") and First Union Investors, Inc. ("First Union
Investors") of redeemable preferred membership interests (the "Redeemable
Preferred Units" and, together with the Common Units, the "Units") of
DonJoy having an aggregate liquidation preference of $31.4 million. CB
Capital and First Union Investors purchased approximately $21.2 million
and $10.2 million, respectively, of Redeemable Preferred Units before
payment of $1.4 million of fees to them on a pro rata basis; and
- our payment to DonJoy for DonJoy's assets and operations, financed by:
-- approximately $98.0 million from the offering of the old notes, and
-- $15.5 million of borrowings under our new senior secured credit
facility.
The recapitalization, the purchase of the Common Units by CDP and the
Management Members, the purchase of the Redeemable Preferred Units, the sale of
assets by DonJoy to us, the offering of the old notes and the borrowings under
our new credit facility are collectively referred to in this prospectus as the
"Transactions." As a result of the Transactions, we are a wholly-owned direct
subsidiary of DonJoy, holding all of its operating assets.
5
<PAGE> 11
The sources and uses of funds for the recapitalization are presented in the
following table:
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN
MILLIONS)
<S> <C>
SOURCES:
New credit facility(a).............................. $ 15.5
Old notes........................................... 98.0
Redeemable Preferred Units(b)....................... 30.0
Common Unit investment in DonJoy by CDP............. 64.6
Retained Common Unit investment in DonJoy by Smith &
Nephew........................................... 5.4
Common Unit investment in DonJoy by Management
Members.......................................... 1.8
------
Total sources.................................... $215.3
======
USES:
Consideration paid to Smith & Nephew................ $199.8
Retained Common Unit investment in DonJoy by Smith &
Nephew........................................... 5.4
Loans to Management Members......................... 1.4
Fees and expenses................................... 8.7
------
Total uses....................................... $215.3
======
</TABLE>
- -------------------------
(a) Represents the $15.5 million term loan borrowed under our new credit
facility to consummate the recapitalization. Our new credit facility also
provides for borrowings of up to $25.0 million under a revolving credit
facility for working capital and general corporate purposes, including to
finance acquisitions, investments and strategic alliances.
(b) Represents $31.4 million of proceeds received from the sale of Redeemable
Preferred Units, net of $1.4 million of fees paid to CB Capital and First
Union Investors on a pro rata basis.
As a result of the recapitalization, CDP, Smith & Nephew, the Management
Members and the holders of the Redeemable Preferred Units own approximately
85.1%, 7.1%, 2.5% and 5.3%, respectively, of the voting units of DonJoy. In
addition, certain members of our management have been granted options to acquire
up to approximately 15% of DonJoy's equity interests on a fully diluted basis.
See "Management -- 1999 Option Plan".
CDP is a limited liability company formed by CB Capital, First Union
Investors and Fairfield Chase Medical Partners, LLC ("Fairfield Chase"). CB
Capital invested approximately $57.9 million, First Union Investors invested
approximately $6.4 million and Fairfield Chase invested approximately $0.3
million in CDP. CDP and CB Capital are affiliates of Chase Capital Partners
("CCP"). CCP is the private equity group of The Chase Manhattan Corporation, one
of the largest bank holding companies in the United States, and is one of the
largest private equity
6
<PAGE> 12
organizations in the United States, with over $7.0 billion under management.
Through its affiliates, CCP invests in leveraged buyouts, recapitalizations and
venture capital opportunities by providing equity and mezzanine debt capital.
Since its inception in 1984, CCP has made over 700 direct investments in a
variety of industries. CCP has invested approximately $750 million in over 80
health care companies. First Union Investors is the direct equity and mezzanine
investment group of First Union Corporation. Fairfield Chase is a private
venture capital firm targeting middle market medical device companies created by
CCP and Charles T. Orsatti and controlled by Mr. Orsatti. For a description of
the ownership, voting and management arrangements regarding DonJoy and CDP, see
"Security Ownership of Certain Beneficial Owners and Management."
On July 30, 1999, CB Capital and First Union Investors each transferred to
affiliates of TCW/Crescent Mezzanine, L.L.C. ("TCW") approximately $5.0 million
of Redeemable Preferred Units of DonJoy and $1.8 million and $0.2 million,
respectively, of membership interests in CDP.
7
<PAGE> 13
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
On June 30, 1999, we completed the private offering of our 12 5/8% Senior
Subordinated Notes due 2009. We and DonJoy entered into an exchange and
registration rights agreement with the initial purchaser in the private
placement in which we and DonJoy agreed to deliver to you this prospectus and we
agreed to complete the exchange offer within 225 days after the date of original
issuance of the old notes. You are entitled to exchange in the exchange offer
your old notes for new notes which are identical in all material respects to the
old notes except that:
- the new notes have been registered under the Securities Act;
- the new notes are not entitled to certain rights which are applicable to
the old notes under the exchange and registration rights agreement; and
- certain liquidated damages provisions are no longer applicable.
The Exchange Offer....................... We are offering to exchange up to
$100.0 million aggregate principal
amount of 12 5/8% senior
subordinated notes which have been
registered under the Securities Act
for up to $100.0 million aggregate
principal amount of 12 5/8% senior
subordinated notes which were
issued on June 30, 1999 in the
private offering. Old notes may be
exchanged only in integral
multiples of $1,000.
Resales.................................. Based on an interpretation by the
staff of the Commission set forth
in no-action letters issued to
third parties, we believe that the
new notes issued pursuant to the
exchange offer in exchange for old
notes may be offered for resale,
resold and otherwise transferred by
you (unless you are our "affiliate"
within the meaning of Rule 405
under the Securities Act) without
compliance with the registration
and prospectus delivery provisions
of the Securities Act, provided
that you are acquiring the new
notes in the ordinary course of
business and that you have not
engaged in, do not intend to engage
in, and have no arrangement or
understanding with any person to
participate in, a distribution of
the new notes.
Each participating broker-dealer
that receives new notes for its own
8
<PAGE> 14
account pursuant to the exchange
offer in exchange for old notes
that were acquired as a result of
market-making or other trading
activity must acknowledge that it
will deliver a prospectus in
connection with any resale of the
new notes. See "Plan of
Distribution."
Any holder of old notes who
- is our affiliate,
- does not acquire new notes in the
ordinary course of its business,
or
- tenders in the exchange offer
with the intention to
participate, or for the purpose
of participating, in a
distribution of new notes,
cannot rely on the position of the
staff of the SEC enunciated in
Exxon Capital Holdings Corporation,
Morgan Stanley & Co. Incorporated
or similar no-action letters and,
in the absence of an exemption,
must comply with the registration
and prospectus delivery
requirements of the Securities Act
in connection with the resale of
the new notes.
Expiration Date; Withdrawal of Tenders... The exchange offer will expire at
5:00 p.m., New York City time, on
December 9, 1999 or such later date
and time to which we extend it. We
do not currently intend to extend
the expiration date. A tender of
old notes pursuant to the exchange
offer may be withdrawn at any time
prior to the expiration date. Any
old notes not accepted for exchange
for any reason will be returned
without expense to the tendering
holder promptly after the
expiration or termination of the
exchange offer.
Conditions to the Exchange Offer......... The exchange offer is subject to
customary conditions, some of which
we may waive. See "The Exchange
Offer -- Conditions to Exchange
Offer."
9
<PAGE> 15
Procedures for Tendering Old Notes....... If you wish to accept the exchange
offer, you must complete, sign and
date the accompanying letter of
transmittal, or a copy of the
letter of transmittal, according to
the instructions contained in this
prospectus and the letter of
transmittal. You must also mail or
otherwise deliver the letter of
transmittal, or the copy, together
with the old notes and any other
required documents, to the exchange
agent at the address set forth on
the cover of the letter of
transmittal. If you hold old notes
through the Depository Trust
Company ("DTC") and wish to
participate in the exchange offer,
you must comply with the Automated
Tender Offer Program procedures of
DTC, by which you will agree to be
bound by the letter of transmittal.
By signing or agreeing to be bound
by the letter of transmittal, you
will represent to us that, among
other things:
- any new notes that you receive
will be acquired in the ordinary
course of your business;
- you have no arrangement or
understanding with any person or
entity to participate in the
distribution of the new notes;
- if you are a broker-dealer that
will receive new notes for your
own account in exchange for old
notes that were acquired as a
result of market-making
activities, that you will
deliver a prospectus, as
required by law, in connection
with any resale of such new
notes; and
- you are not our "affiliate" as
defined in Rule 405 under the
Securities Act, or, if you are
an affiliate, you will comply
with any applicable registration
and prospectus delivery
requirements of the Securities
Act.
10
<PAGE> 16
Guaranteed Delivery Procedures........... If you wish to tender your old
notes and your old notes are not
immediately available or you cannot
deliver your old notes, the letter
of transmittal or any other
documents required by the letter of
transmittal or comply with the
applicable procedures under DTC's
Automated Tender Offer Program
prior to the expiration date, you
must tender your old notes
according to the guaranteed
delivery procedures set forth in
this prospectus under "The Exchange
Offer -- Guaranteed Delivery
Procedures."
Effect on Holders of Old Notes........... As a result of the making of, and
upon acceptance for exchange of all
validly tendered old notes pursuant
to the terms of, the exchange
offer, we will have fulfilled a
covenant contained in the exchange
and registration rights agreement
and, accordingly, we will not be
obligated to pay liquidated damages
as described in the exchange and
registration rights agreement. If
you are a holder of old notes and
do not tender your old notes in the
exchange offer, you will continue
to hold such old notes and you will
be entitled to all the rights and
limitations applicable to the old
notes in the indenture, except for
any rights under the exchange and
registration rights agreement that
by their terms terminate upon the
consummation of the exchange offer.
Consequences of Failure to Exchange...... All untendered old notes will
continue to be subject to the
restrictions on transfer provided
for in the old notes and in the
indenture. In general, the old
notes may not be offered or sold
unless registered under the
Securities Act, except pursuant to
an exemption from, or in a
transaction not subject to, the
Securities Act and applicable state
securities laws. Other than in
connection with the exchange offer,
11
<PAGE> 17
we do not currently anticipate that
we will register the old notes
under the Securities Act.
Certain U.S. Federal Income Tax
Considerations......................... The exchange of old notes for new
notes in the exchange offer should
not be a taxable event for U.S.
federal income tax purposes. See
"Certain U.S. Federal Income Tax
Considerations."
Use of Proceeds.......................... We will not receive any cash
proceeds from the issuance of the
new notes in the exchange offer.
Exchange Agent........................... The Bank of New York is the
exchange agent for the exchange
offer. The address and telephone
number of the exchange agent are
set forth in the section captioned
"The Exchange Offer -- Exchange
Agent."
12
<PAGE> 18
SUMMARY OF THE TERMS OF THE NEW NOTES
Issuers.................................. dj Orthopedics, LLC and DJ
Orthopedics Capital Corporation.
New Notes Offered........................ $100,000,000 aggregate principal
amount of 12 5/8% Senior
Subordinated Notes due 2009.
Maturity................................. June 15, 2009.
Interest................................. Annual rate: 12 5/8%
Payment frequency: every six months
on June 15 and December 15.
First payment: December 15, 1999.
Holders of old notes whose old
notes are accepted for exchange in
the exchange offer will be deemed
to have waived the right to receive
any payment in respect of interest
on the old notes accrued from June
30, 1999 (the original issue date
of the old notes) to the date of
issuance of the new notes.
Consequently, holders who exchange
their old notes for new notes will
receive the same interest payment
on December 15, 1999 (the first
interest payment date with respect
to the old notes and the new notes
following consummation of the
exchange offer) that they would
have received had they not accepted
the exchange offer.
Optional Redemption...................... On and after June 15, 2004, we may
redeem some or all of the notes at
the redemption prices listed in the
section entitled "Description of
the Notes -- Optional Redemption."
Prior to such date, we may not
redeem the notes, except as
described in the following
paragraph.
At any time prior to June 15, 2002,
we may redeem up to 35% of the
original aggregate principal amount
of the notes with the net cash
proceeds of certain equity
offerings at a redemption price
equal to 112.625% of the principal
amount thereof, plus accrued
interest, so
13
<PAGE> 19
long as (a) at least 65% of the
original aggregate amount of the
notes remains outstanding after
each such redemption and (b) any
such redemption by us is made
within 90 days of such equity
offering.
Change of Control........................ Upon the occurrence of a change of
control, unless we have exercised
our right to redeem all of the
notes as described above, you will
have the right to require us to
repurchase all or a portion of your
notes at a purchase price in cash
equal to 101% of the principal
amount thereof, plus accrued
interest to the date of repurchase.
See "Description of the
Notes -- Change of Control."
Guarantees............................... The new notes will be fully and
unconditionally guaranteed on an
unsecured senior subordinated basis
by DonJoy and certain of our future
subsidiaries. None of our current
subsidiaries will guarantee the new
notes. If we fail to make payments
on the new notes, DonJoy and our
future subsidiaries that are
guarantors, if any, must make them
instead.
Our Mexican subsidiary, currently
our only subsidiary besides DJ
Capital, will not guarantee the new
notes. On a pro forma basis, as of
June 29, 1999, the aggregate amount
of the liabilities of our Mexican
subsidiary as reflected on its
balance sheet would have been $0.1
million and such subsidiary would
have accounted for less than 1% of
our assets.
Guarantees of the new notes will be
subordinated to the guarantees of
our senior indebtedness under our
new credit facility issued by
DonJoy and certain of our future
subsidiaries.
Ranking.................................. The new notes will be unsecured
and:
14
<PAGE> 20
- subordinate to all of our
existing and future senior debt;
- rank equally with all of our
other future senior subordinated
debt, including any old notes not
exchanged for new notes in the
exchange offer;
- rank senior to all of our future
subordinated debt;
- effectively subordinated to our
secured indebtedness to the
extent of the value of the assets
securing such indebtedness; and
- effectively subordinated to all
liabilities of our Mexican
subsidiary and any other future
subsidiary which does not
guarantee the new notes.
Similarly, the guarantees of the
new notes by DonJoy and our future
guarantor subsidiaries, if any,
will be unsecured and:
- subordinate to all of the
applicable guarantor's existing
and future senior debt;
- rank equally with all of the
applicable guarantor's other
future senior subordinated debt,
including its guarantee of any
old notes not exchanged for new
notes in the exchange offer;
- rank senior to all of the
applicable guarantor's future
subordinated debt; and
- effectively subordinated to any
secured indebtedness of such
guarantor to the extent of the
value of the assets securing such
indebtedness.
Assuming we had completed the
Transactions on June 29, 1999 and
that all old notes are exchanged
for
15
<PAGE> 21
new notes in the exchange offer, on
a pro forma basis:
- we would have had $15.5 million
of senior debt to which the notes
would be subordinated (which
amount does not include $25.0
million available under the
revolving credit portion of our
credit facility);
- DonJoy and DJ Capital would have
had no senior debt (other than
their respective guarantees of
our indebtedness under our new
credit facility);
- we and DJ Capital would not have
had any senior subordinated debt
other than the new notes, and
DonJoy would not have had any
senior subordinated debt other
than its guarantee on the new
notes;
- we and DonJoy would not have had
any subordinated debt; and
- our Mexican subsidiary, which is
not a guarantor of the new notes,
would have had $0.1 million of
liabilities as reflected on its
balance sheet.
The indenture relating to the new
notes permits us to incur a
significant amount of additional
senior indebtedness.
Certain Covenants........................ The indenture, among other things,
restricts our ability and the
ability of our subsidiaries to:
- borrow money;
- make distributions, redeem equity
interests or redeem subordinated
debt;
- make investments;
- use assets as security in other
transactions;
- sell assets;
- guarantee other indebtedness;
16
<PAGE> 22
- enter into agreements that
restrict dividends from
subsidiaries;
- merge or consolidate; and
- enter into transactions with
affiliates.
These covenants are subject to a
number of important exceptions. For
more details, see "Description of
the Notes -- Certain Covenants."
RISK FACTORS
You should carefully consider the information under the caption "Risk
Factors" and all other information in this prospectus before participating in
the exchange offer.
-------------------------
dj Orthopedics, LLC is a Delaware limited liability company formed in March
1999 and is a wholly-owned subsidiary of DonJoy, L.L.C., a Delaware limited
liability company formed in December 1998 which acquired the assets and certain
liabilities of the Bracing and Support Systems division of Smith & Nephew. DJ
Orthopedics Capital Corporation, our wholly-owned subsidiary, is a Delaware
corporation formed in March 1999 to serve as a co-issuer of the notes. Our
principal executive offices are located at 2985 Scott Street, Vista, California
92083 and our telephone number is (800) 336-5690.
17
<PAGE> 23
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary historical and pro forma consolidated
financial data of DonJoy. DonJoy is a guarantor of the notes and of the new
credit facility and has no material assets or operations other than its
ownership of 100% of our equity interests. As a result, the consolidated
financial position and results of operations of DonJoy are substantially the
same as ours. The summary historical consolidated financial data for the years
ended December 31, 1996, 1997 and 1998 come from DonJoy's audited consolidated
financial statements included in this prospectus.
The summary historical consolidated financial data for the six months ended
June 27, 1998 and June 29, 1999 come from DonJoy's unaudited consolidated
financial statements included in this prospectus. In the opinion of our
management, the unaudited consolidated financial data reflect all adjustments
(which include normal recurring adjustments) necessary to present fairly
DonJoy's financial position and results of operations for the unaudited periods.
The results of operations for the interim periods are not necessarily indicative
of operating results for the full year.
The summary pro forma consolidated financial data set forth below come from
the unaudited pro forma financial statements included in this prospectus. The
pro forma consolidated statements of income data gives effect to the
Transactions as if they had occurred on January 1, 1998. The pro forma
consolidated balance sheet data gives effect to the Transactions as if they had
occurred on June 29, 1999. The summary pro forma financial data does not purport
to represent what DonJoy's financial position or results of operations would
have been if the Transactions had been completed as of the date or for the
period presented, nor do such data purport to represent DonJoy's financial
position or results of operations for any future date or period.
We urge you to read the financial data set forth below together with
DonJoy's historical consolidated financial statements and the information
included under "The Transactions," "Selected Historical Consolidated Financial
Data," "Unaudited Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
of which is included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL --------------------------------
------------------------------ SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, -------------------- YEAR ENDED SIX MONTHS ENDED
------------------------------ JUNE 27, JUNE 29, DECEMBER 31, JUNE 29,
1996 1997 1998 1998 1999 1998 1999
------- ------- -------- -------- -------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues................... $83,112 $92,741 $101,169 $48,044 $54,653 $101,169 $54,653
Cost of goods sold(a).......... 36,396 39,030 46,329 22,096 25,642 43,080 23,825
------- ------- -------- ------- ------- -------- -------
Gross profit................... 46,716 53,711 54,840 25,948 29,011 58,089 30,828
Operating expenses(a):
Sales and marketing.......... 20,067 22,878 25,296 12,001 13,371 25,296 13,371
General and administrative... 12,941 15,802 16,484 8,269 8,773 13,441 7,362
Research and development..... 1,766 2,055 2,248 1,201 1,048 2,248 1,048
Restructuring costs(b)....... -- -- 2,467 2,467 -- 2,467 --
------- ------- -------- ------- ------- -------- -------
Total operating expenses....... 34,774 40,735 46,495 23,938 23,192 43,452 21,781
------- ------- -------- ------- ------- -------- -------
Income from operations......... 11,942 12,976 8,345 2,010 5,819 14,637 9,047
Interest income (expense),
net.......................... (2,459) (2,072) -- -- -- (15,031) (7,516)
------- ------- -------- ------- ------- -------- -------
Income before income taxes..... 9,483 10,904 8,345 2,010 5,819 (394) 1,531
Provision for income taxes..... 3,828 4,367 3,394 817 2,387 -- --
------- ------- -------- ------- ------- -------- -------
Net income..................... $ 5,655 $ 6,537 $ 4,951 $ 1,193 $ 3,432 $ (394) $ 1,531
======= ======= ======== ======= ======= ======== =======
OTHER DATA:
EBITDA(c)...................... $16,584 $17,779 $ 15,665 $ 6,934 $ 8,270 $ 21,957 $11,498
Adjusted EBITDA(d)............. 19,187 22,090 21,957 10,058 11,498 21,957 11,498
Depreciation and
amortization................. 4,642 4,803 4,853 2,457 2,451 4,853 2,451
Capital expenditures........... 1,848 2,273 3,189 2,742 515 3,189 515
Cash interest expense.......... -- -- -- -- -- 14,029 7,015
Ratio of earnings to fixed
charges...................... 3.94x 4.83x 8.84x 3.61x 15.79x (e) 1.19x
Ratio of EBITDA to cash
interest expense............. -- -- -- -- -- 1.6x 1.6x
Ratio of total debt to
EBITDA....................... -- -- -- -- -- 5.2x 4.9x(f)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 29, 1999
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA
Cash........................................................ $ 1,086 $ --
Working capital............................................. 23,466 23,466
Total assets................................................ 75,627 81,741
Total debt.................................................. -- 113,453
Redeemable Preferred Units(g)............................... -- 30,000
Total equity (deficit)...................................... 64,586 (71,667)
</TABLE>
18
<PAGE> 24
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(a) Historical amounts include various charges and overhead allocations from
Smith & Nephew. See note (d) below.
(b) We recorded restructuring costs in 1998 relating to the consolidation of our
operations at our Vista, California facility. See Note 4 of Notes to
Consolidated Financial Statements, "Unaudited Pro Forma Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Manufacturing Cost
Reduction Initiatives".
(c) "EBITDA" is defined as income from operations plus restructuring costs, and
depreciation and amortization. EBITDA is not a measure of performance under
generally accepted accounting principles. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure of
profitability or liquidity. However, management has included EBITDA because
it may be used by certain investors to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a
company's ability to service debt. Our definition of EBITDA may not be
comparable to that of other companies.
(d) "Adjusted EBITDA" represents EBITDA (as defined above) adjusted to
eliminate:
(1) charges for brand royalties paid by DonJoy to Smith & Nephew for use of
the Smith & Nephew trademarks and trade names;
(2) foreign sales corporation commissions paid by DonJoy on sales to foreign
sales corporations established by Smith & Nephew for tax planning
purposes;
(3) Smith & Nephew overhead allocations for corporate managed accounts and
new business expense and corporate management expense which will not be
incurred following consummation of the recapitalization (the "Eliminated
Allocations");
(4) Smith & Nephew overhead allocations for research and development and for
amounts charged by Smith & Nephew for services provided to us for
finance (risk management, treasury, audit and taxes), human resources
and payroll and legal services (collectively, the "Other Corporate
Allocations");
and adjusted to include the estimated costs we expect to incur to replace
the services previously provided by Smith & Nephew as part of the Other
Corporate Allocations.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, -------------------
--------------------------- JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
EBITDA................................ $16,584 $17,779 $15,665 $ 6,934 $ 8,270
Brand royalties....................... 1,274 1,605 3,249 1,603 1,817
Foreign sales corporation
commissions......................... 492 661 439 219 --
Eliminated Allocations................ 836 1,652 1,726 863 979
Other Corporate Allocations........... 801 1,193 1,678 839 832
Estimated costs to replace Smith &
Nephew services..................... (800) (800) (800) (400) (400)
------- ------- ------- ------- -------
Adjusted EBITDA....................... $19,187 $22,090 $21,957 $10,058 $11,498
======= ======= ======= ======= =======
</TABLE>
Adjusted EBITDA does not reflect adjustments for Smith & Nephew allocations
for bonus, pension and insurance or payroll taxes and benefits or charges
for direct legal expenses incurred by Smith & Nephew on our behalf, which
costs and expenses we believe we would have incurred in approximately the
same amounts on a stand-alone basis, and are of a nature we will continue to
incur following the recapitalization. Accordingly, no adjustments for these
items have been made. For a more complete description of the corporate
charges and allocations, the services to be performed by Smith & Nephew
after the recapitalization and our ability to replace such services, see
Note 3 of Notes to Consolidated Financial Statements, "Risk Factors -- No
Recent Prior Operations as an Independent Company," "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Overview -- Smith & Nephew Allocations and Sales" and "Certain Relationships
and Related Transactions -- Other Agreements between DonJoy and Smith &
Nephew -- Transition Services Agreement."
The adjustments described above are reflected in the consolidated pro forma
financial data presented in this prospectus.
(e) Pro forma earnings were insufficient to cover fixed charges by $0.5 million
for the year ended December 31, 1998.
(f) Annualized
(g) The Redeemable Preferred Units were issued by DonJoy. See "The
Transactions."
19
<PAGE> 25
RISK FACTORS
In addition to the other matters described in this prospectus, you should
carefully consider the specific factors set forth below before participating in
the exchange offer.
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
ABILITY TO OPERATE OUR BUSINESS AND TO FULFILL OUR OBLIGATIONS UNDER THE NOTES.
As a result of the Transactions, we are highly leveraged, which means we
have a large amount of indebtedness in relation to our members' equity
(deficit). The following chart shows certain important credit statistics and is
presented assuming we had completed the Transactions as of June 29, 1999 in the
case of the first three statistics, and as of January 1, 1998 in the case of the
ratios of earnings to fixed charges:
<TABLE>
<CAPTION>
PRO FORMA AT
JUNE 29, 1999
--------------
(IN THOUSANDS)
<S> <C>
Long-term debt.......................... $113,453
Redeemable preferred units.............. $ 30,000
Members' deficit........................ $(71,667)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA FOR THE
-------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 29, 1999
----------------- ----------------
<S> <C> <C>
Ratio of earnings to fixed
charges................. (a) 1.19x
</TABLE>
- -------------------------
(a) Pro forma earnings were insufficient to cover fixed charges by $0.5 million
for the year ended December 31, 1998.
We may also incur additional indebtedness from time to time to finance
acquisitions, investments or strategic alliances or capital expenditures or for
other purposes subject to the restrictions contained in the new credit facility
and the indenture. See "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Description of New Credit Facility" and "Description of the Notes."
Our high degree of leverage could have important consequences to us,
including the following:
- Our ability to obtain additional financing, if necessary, for working
capital, capital expenditures, acquisitions or other purposes may be
impaired or such financing may not be available on favorable terms.
- We will need a substantial portion of our cash flow to pay the principal
and interest on our indebtedness, including indebtedness that we may
incur in the future.
- Payments on our indebtedness will reduce the funds that would otherwise
be available for our operations and future business opportunities.
- Debt under the new credit facility is secured and matures prior to the
notes.
- A substantial decrease in our net operating cash flows could make it
difficult for us to meet our debt service requirements and force us to
modify our operations.
20
<PAGE> 26
- We may be more highly leveraged than our competitors, which may place us
at a competitive disadvantage.
- Our debt level may make us more vulnerable than our competitors to a
downturn in our business or the economy generally.
- Our debt level reduces our flexibility in responding to changing business
and economic conditions.
- Some of our debt has a variable rate of interest, which exposes us to the
risk of increased interest rates.
- There would be a material adverse effect on our business and financial
condition if we are unable to service our indebtedness or obtain
additional financing, as needed.
ABILITY TO SERVICE DEBT -- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to pay principal and interest on the notes and to satisfy our
other obligations will depend upon, among other things:
- Our future financial and operating performance, which performance will be
affected by prevailing economic conditions and financial, business,
regulatory and other factors, certain of which are beyond our control;
- The future availability of borrowings under the new revolving credit
facility or any successor facility, the availability of which is or may
depend on, among other things, our complying with certain covenants. See
"Description of New Credit Facility."
Based on our current and expected levels of operations, we expect that our
operating cash flow and borrowings under the new revolving credit facility
should be sufficient for us to meet our operating expenses, to make necessary
capital expenditures and to service our debt requirements as they become due.
However, our operating results and borrowings under the new revolving credit
facility may not be sufficient to service our indebtedness, including the Notes.
In addition, we may incur additional indebtedness in order to make acquisitions,
investments or strategic alliances. If we cannot service our indebtedness, we
will be forced to take actions such as reducing or delaying acquisitions,
investments, strategic alliances and/or capital expenditures, selling assets,
restructuring or refinancing our indebtedness (which could include the notes),
or seeking additional equity capital or bankruptcy protection. There is no
assurance that any of these remedies can be effected on satisfactory terms, if
at all. In addition, the terms of existing or future debt agreements, including
the new credit facility and the indenture, may restrict us from adopting any of
these alternatives.
SUBORDINATION OF THE NOTES AND THE GUARANTEE; STRUCTURAL SUBORDINATION OF THE
NOTES -- THE NOTES AND THE GUARANTEE BY DONJOY ARE, AND GUARANTEES BY ANY OF OUR
FUTURE SUBSIDIARIES WILL BE, EFFECTIVELY SUBORDINATED TO ALL SENIOR DEBT OF OUR
SUBSIDIARIES.
The notes are subordinated in right of payment to the prior payment in full
of all our existing and future senior indebtedness and the guarantee of the
notes by DonJoy and any future subsidiaries providing a guarantee of the notes
will be subordinated in right of payment to all senior indebtedness of the
applicable guarantor. The indenture requires each of our domestic subsidiaries
that is formed
21
<PAGE> 27
or acquired in the future to guarantee the notes, unless we designate such
subsidiary as an Unrestricted Subsidiary (as defined). As of June 29, 1999,
assuming that we had completed the Transactions on that date, we would have had
approximately $15.5 million of senior indebtedness outstanding (excluding unused
commitments under the new revolving credit facility), all of which would have
been secured, and DonJoy would have had no senior indebtedness outstanding
(other than its guarantee of our borrowings under the new credit facility). In
addition, the indenture permits us and our Restricted Subsidiaries (as defined
in the indenture) to incur additional senior indebtedness, including
indebtedness under the new credit facility.
We or the applicable guarantor may not pay principal, premium (if any),
interest or other amounts on account of the notes or the guarantee by DonJoy or
any subsidiary in the event of a payment default on, or another default that has
resulted in the acceleration of, certain senior indebtedness (including debt
under the new credit facility) unless such indebtedness has been paid in full or
the default has been cured or waived. In the event of certain other defaults
with respect to certain senior indebtedness, we or the applicable guarantor may
not be permitted to pay any amount on account of the notes or the guarantee by
DonJoy or any subsidiary for a designated period of time. In the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to us or a guarantor, our assets or a guarantor's assets, as the case
may be, will be available to pay obligations on the notes or the guarantor's
guarantee, as applicable, only after our senior indebtedness or the senior
indebtedness of that guarantor has been paid in full, and there can be no
assurance that there will be sufficient assets remaining to pay amounts due on
all or any of the notes or any guarantee of the notes.
Our right to receive assets of any subsidiary which is not a guarantor upon
the liquidation or reorganization of that subsidiary (and thus the rights of the
holders of notes to realize any value with respect to those assets) will be
subject to the prior claims of creditors of that subsidiary (including trade
creditors). Accordingly, since our Mexican subsidiary is not a guarantor of the
notes, the notes are effectively subordinated to all liabilities (including
trade payables and contingent liabilities) of our Mexican subsidiary and any of
our future subsidiaries that do not provide a guarantee of the notes except to
the extent that we are recognized as a creditor of such subsidiary. However,
even if we were recognized as a creditor of a subsidiary that does not guarantee
the notes, our claims would still be subordinate to any security interest in the
assets of that subsidiary, and any indebtedness of that subsidiary senior to
that held by us. On a pro forma basis after giving effect to the Transactions,
the aggregate amount of the liabilities of our Mexican subsidiary as reflected
on its balance sheet would have been $0.1 million as of June 29, 1999.
LIMITED VALUE OF DONJOY GUARANTEE -- YOU SHOULD NOT RELY ON THE GUARANTEE BY
DONJOY IN THE EVENT WE CANNOT MAKE PAYMENTS UPON THE NEW NOTES.
As a result of the Transactions, all of the operations of DonJoy are
conducted through us and DonJoy has no material assets other than its ownership
of 100% of our equity interests. Accordingly, DonJoy's cash flow and,
consequently, its ability to service debt, including its guarantee of the notes
and our new credit facility, depends on our operations. As a result, you should
not rely on the guarantee by DonJoy for repayment of the notes.
22
<PAGE> 28
ASSET ENCUMBRANCES TO SECURE THE NEW CREDIT FACILITY -- IF WE DEFAULT UNDER OUR
SENIOR DEBT, OUR SENIOR LENDERS CAN FORECLOSE ON THE ASSETS WE HAVE PLEDGED TO
SECURE PAYMENT OF THE SENIOR DEBT TO YOUR EXCLUSION.
In addition to being contractually subordinated to all existing and future
senior indebtedness, our obligations under the notes (and DonJoy's obligations
under its guarantee) are unsecured while our obligations under the new credit
facility (and DonJoy's obligations under its guarantee of our indebtedness under
the new credit facility) are secured by a security interest in substantially all
of our assets and the assets of DonJoy (which consist principally of 100% of our
equity interests) and each of our existing and subsequently acquired or
organized U.S. and, subject to certain limitations, non-U.S. subsidiaries,
including a pledge of all of the issued and outstanding equity interests in our
existing or subsequently acquired or organized U.S. subsidiaries and 65% of the
equity interests in each of our subsequently acquired or organized non-U.S.
subsidiaries. If we are declared bankrupt or insolvent or if we default under
the new credit facility, the lenders could declare all of the funds borrowed
under our new credit facility, together with accrued interest, immediately due
and payable. If we were unable to repay that indebtedness, the lenders could
foreclose on our equity interests pledged by DonJoy, on the pledged equity
interests of our subsidiaries and on the assets in which they have been granted
a security interest, in each case to your exclusion, even if an event of default
exists under the indenture at such time. Furthermore, if all equity interests of
any future subsidiary guarantor are sold to persons pursuant to an enforcement
of the pledge of equity interests in that subsidiary guarantor for the benefit
of the senior lenders, then the applicable subsidiary guarantor will be released
from its guarantee of the notes automatically and immediately upon such sale.
See "Description of New Credit Facility."
RESTRICTIVE DEBT COVENANTS -- OUR DEBT AGREEMENTS RESTRICT OUR BUSINESS IN MANY
WAYS.
The new credit facility and the indenture impose, and the terms of any
future indebtedness may impose, operating and other restrictions on us. Such
restrictions affect, and in many respects limit or prohibit, among other things,
our ability to:
- incur additional indebtedness,
- issue redeemable equity interests and preferred equity interests,
- pay dividends or make distributions, repurchase equity interests or make
other restricted payments,
- redeem indebtedness that is subordinated in right of payment to the
Notes,
- create liens,
- enter into certain transactions with affiliates,
- make certain investments,
- sell assets, or
- enter into mergers or consolidations.
The new credit facility also requires us to achieve certain financial and
operating results and satisfy certain financial ratios and prohibits us from
prepaying our other indebtedness (including the notes) while indebtedness under
the new credit facility is outstanding. Our ability to comply with such
provisions may be affected by events beyond our control.
23
<PAGE> 29
These restrictions contained in the indenture and the new credit facility
could
- limit our ability to plan for or react to market conditions or meet
capital needs or otherwise restrict our activities or business plans, and
- adversely affect our ability to finance our operations, acquisitions,
investments or strategic alliances or other capital needs or to engage in
other business activities that would be in our interest.
A breach of any of these covenants, ratios, tests or other restrictions
could result in an event of default under the new credit facility and/or the
indenture. Upon the occurrence of an event of default under the new credit
facility, the lenders could elect to declare all amounts outstanding under the
new credit facility, together with accrued interest, to be immediately due and
payable. If we were unable to repay those amounts, the lenders could proceed
against the collateral granted to them to secure such indebtedness. If the
lenders under the new credit facility accelerate the payment of the
indebtedness, there can be no assurance that our assets would be sufficient to
repay in full such indebtedness and our other indebtedness, including the notes.
See "-- Subordination of the Notes and the Guarantee; Structural Subordination
of the Notes," "-- Asset Encumbrances to Secure the New Credit Facility,"
"Description of New Credit Facility" and "Description of the Notes -- Certain
Covenants."
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT -- CHANGES IN REIMBURSEMENT
POLICIES FOR OUR PRODUCTS BY THIRD PARTY PAYORS OR REDUCTIONS IN REIMBURSEMENT
RATES FOR OUR PRODUCTS COULD ADVERSELY AFFECT US.
The ability of our customers (or persons to whom our customers sell our
products) to receive reimbursement for the cost of our products from private
third party payors and, to a lesser extent, Medicare, Medicaid and other
governmental programs, is important to our business. Although we are unable to
give precise data because, subject to certain limited exceptions, we are not
directly involved in the third party reimbursement process, we believe that a
substantial portion of our sales to customers (or by them to their customers)
are reimbursed by third party payors. In the United States, third party
reimbursement is generally based on the medical necessity of the product to the
user, and generally products which are prescribed by doctors are eligible for
reimbursement. As such, we believe that substantially all of our U.S. sales of
rigid knee braces and a substantial portion of our U.S. sales of soft goods and
specialty and other orthopedic products are reimbursed by third party payors. In
response to the historic and forecasted reductions of U.S. reimbursement rates,
we and many of our competitors are introducing new product offerings at lower
prices. Failure by users of our products to obtain sufficient reimbursement from
third party payors for our products or adverse changes in governmental and
private payors' policies toward reimbursement for our products could have a
material adverse effect on our business, financial condition and results of
operations. There can be no assurance that third party reimbursement for our
products will continue to be available or at what rate such products will be
reimbursed.
Congress and certain state legislatures are considering reforms in the
health care industry that may lower reimbursement practices, including controls
on health care spending through limitations on the growth of Medicare and
Medicaid spending. In particular, President Clinton's budget request for 2000
proposes an over $500 million reduction in reimbursement for orthotic and
prosthetic devices,
24
<PAGE> 30
including some of our products. In addition, we believe that as an alternative
to the President's budget proposal, Congress is considering the elimination of
the current 1% annual increase in reimbursement rates for orthotic and
prosthetic devices. The President's proposal is not specific as to how the
reduction in reimbursement would be implemented. We cannot predict whether or in
what form the reduction of, or elimination of the annual increases in,
reimbursement rates will be adopted, or if adopted, what effect such reduction
or elimination will have on reimbursement rates for our products. Private health
insurance plans generally set reimbursement rates at a discount to Medicare. Any
Congressional or regulatory developments that reduce Medicare reimbursement
rates could reduce reimbursement rates for our products, which could have an
adverse effect on our ability to sell our products or cause our customers to use
less expensive products, which could have a material adverse effect on our
results of operations.
Similar to our domestic business, our success in international markets also
depends upon the eligibility of our products for reimbursement through
government sponsored health care payment systems and third party payors,
particularly in Europe and Japan, our principal international markets.
Reimbursement practices vary significantly by country, with certain
jurisdictions, most notably France, requiring products to undergo lengthy
regulatory review in order to be eligible for reimbursement. In addition, health
care cost containment efforts similar to those we face in the United States are
prevalent in many of the foreign jurisdictions in which our products are sold
and these efforts are expected to continue. For example, in Germany, our largest
foreign market representing approximately one-third of international sales in
1998, reimbursement for our products was decreased in 1997 to 80% from 100% by
government sponsored health care payment systems and third party payors. In
Italy, our rigid knee bracing products and cold therapy systems, among others,
are no longer eligible for reimbursement at all. In the United Kingdom, while
reimbursement for our products through the National Health Service ("NHS") is
currently available, the cost of our products is not reimbursed by private
health insurance plans and orthopedic professionals are being pressured by the
NHS to reduce or eliminate the number of rigid knee braces prescribed for
orthopedic patients. In France, while we believe our rigid knee braces would be
eligible for reimbursement, our knee brace products have not gone through the
lengthy regulatory process necessary for reimbursement eligibility and,
accordingly, the cost of these products is not currently reimbursed in France.
Any developments in our foreign markets that eliminate or reduce reimbursement
rates for our products could have an adverse effect on our ability to sell our
products or cause our customers to use less expensive products, which could have
a material adverse effect on our results of operations.
RESPONSES BY HEALTH CARE PROVIDERS TO PRICE PRESSURES; FORMATION OF BUYING
GROUPS -- HEALTHCARE REFORM AND THE EMERGENCE OF MANAGED CARE AND BUYING GROUPS
HAS PUT DOWNWARD PRESSURE ON THE PRICES OF OUR PRODUCTS.
Within the United States, health care reform and the emergence of managed
care are changing the dynamics of the health care industry as it seeks ways to
control rising health care costs. As a result of health care reform, the U.S.
health care industry has seen a rapid expansion of managed care at the expense
of traditional private insurance. The development of managed care programs in
which the providers contract to provide comprehensive health care to a patient
population at a fixed cost per person (referred to as capitation) has given rise
to,
25
<PAGE> 31
and is expected to continue to cause, pressures on health care providers to
lower costs. The advent of managed care has also resulted in greater attention
to the tradeoff between patient need and product cost, so-called demand
matching, where patients are evaluated as to age, need for mobility and other
parameters and are then matched with an orthopedic recovery product that is cost
effective in light of such evaluation. One result of demand matching has been,
and is expected to continue to be, a shift toward lower priced products, and any
such shift in our product mix to lower margin, off-the-shelf products could have
an adverse impact on our operating results. For example, in our rigid knee
bracing segment, we and many of our competitors are offering lower priced,
off-the-shelf products in response to managed care. These lower priced products
have in part contributed to our minimal sales growth in our rigid knee bracing
product lines over the past few years and could have a material adverse effect
on our business, financial condition and results of operations in the future.
A further result of managed care and the related pressure on costs has been
the advent of buying groups in the United States. Such buying groups enter into
preferred supplier arrangements with one or more manufacturers of orthopedic or
other medical products in return for price discounts. The extent to which such
buying groups are able to obtain compliance by their members with such preferred
supplier agreements varies considerably depending on the particular buying
groups. In response to the organization of new buying groups, we have entered
into national contracts with selected groups and believe that the high levels of
product sales to such groups and the opportunity for increased market share can
offset the financial impact of discounting. We believe that our ability to enter
into more of such arrangements will be important to our future success and the
growth of our revenues. However, we may not be able to obtain new preferred
supplier commitments for major buying groups, in which case we could lose
significant potential sales, to the extent such groups are able to command a
high level of compliance by their members. On the other hand, if we receive
preferred supplier commitments from particular groups which do not deliver high
levels of compliance, we may not be able to offset the negative impact of lower
per unit prices or lower margins with any increases in unit sales or in market
share, which could have a material adverse effect on our business, financial
condition and results of operations.
In international markets, where the movement toward health care reform and
the development of managed care are generally not as advanced as in the United
States, we have experienced similar downward pressure on product pricing and
other effects of health care reform as we have experienced in the United States.
We expect health care reform and managed care to continue to develop in our
primary international markets, including Europe and Japan, which we expect will
result in further downward pressure in product pricing. The timing and the
effects on us of health care reform and the development of managed care in
international markets cannot currently be predicted.
POTENTIAL REGULATION LIMITING CUSTOMER BASE -- PROPOSED LAWS COULD LIMIT THE
TYPES OF ORTHOPEDIC PROFESSIONALS WHO CAN FIT, SELL OR SEEK REIMBURSEMENT FOR
OUR PRODUCTS.
Congress and state legislatures have from time to time, in response to
pressure from certain orthopedic professionals, considered proposals which would
have the effect of limiting the types of orthopedic professionals who can fit
and/or
26
<PAGE> 32
sell our products or who can seek reimbursement for our products. In particular,
Texas and Florida have adopted legislation which prohibits the practice of
orthotics and prosthetics, including the measuring, fitting and adjusting of
certain medical devices, without a license. The effect of such laws could be to
substantially limit our potential customers in those jurisdictions in which such
legislation or regulations are enacted and could provide the authorized
providers of our products with greater purchasing power. In such event, we would
seek to ensure that orthopedic professionals continue to prescribe our products
and enhance our relationships with authorized providers. However, we may not be
successful in responding to such laws and therefore the adoption of such laws
could have a material adverse effect on our business, financial condition and
results of operations.
PATENTS AND PROPRIETARY KNOW-HOW -- WE RELY ON INTELLECTUAL PROPERTY TO DEVELOP
AND MANUFACTURE OUR PRODUCTS AND OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE
LOSE OUR INTELLECTUAL PROPERTY RIGHTS.
We hold U.S. and foreign patents relating to certain of our components and
products and have patent applications pending with respect to certain components
and products. We also anticipate that we will apply for additional patents as we
deem appropriate. We believe that certain of our existing patents, particularly
the patents for our:
- "Four Points of Leverage" system, the critical element in the design of
all of our ligament braces,
- Custom Contour Measuring System, which serves as an integral part of the
measurement process for patients ordering our customized ligament and OA
braces,
- series of hinges for our post-operative braces, and
- pneumatic pad design and production technologies which utilize air
inflatable cushions that allow the patient to vary the location and
degree of support provided by braces such as the Defiance and the Patient
Ready Monarch,
are and will continue to be extremely important to our success. However, we
cannot assure you that:
- our existing or future patents, if any, will afford us adequate
protection,
- our patent applications will result in issued patents, or
- our patents will not be circumvented or invalidated.
The patent for our "Four Points of Leverage" system expires in January 2005. The
expiration of this patent could have a material adverse effect on our business,
financial condition and results of operations.
In addition, we hold licenses from third parties to utilize certain
patents, patents pending and technology utilized in the design of some of our
existing products and products under development, including the IceMan and the
VISTA system. If we lost these licenses, we would not be able to manufacture and
sell these products, which could have a material adverse effect on our business,
financial condition and results of operations.
Our success also depends on non-patented proprietary know-how, trade
secrets, processes and other proprietary information. We employ various methods
to protect our proprietary information, including confidentiality agreements and
27
<PAGE> 33
proprietary information agreements with vendors, employees, consultants and
others who have access to our proprietary information. However, these methods
may not provide us with adequate protection. Our proprietary information may
become known to, or be independently developed by, competitors, or our
proprietary rights in intellectual property may be challenged, any of which
could have a material adverse effect on our business, financial condition and
results of operations. See "Business -- Intellectual Property."
PATENT LITIGATION -- WE COULD BE ADVERSELY AFFECTED IF WE BECOME INVOLVED IN
LITIGATION REGARDING OUR PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS.
The medical device industry has experienced extensive litigation regarding
patents and other intellectual property rights. We or our products may become
subject to patent infringement claims or litigation or interference proceedings
declared by the United States Patent and Trademark Office ("USPTO") to determine
the priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time-consuming. We have from time to time needed
to, and may in the future need to, litigate to enforce our patents, to protect
our trade secrets or know-how or to determine the enforceability, scope and
validity of the proprietary rights of others. Any future litigation or
interference proceedings will result in substantial expense to us and
significant diversion of effort by our technical and management personnel. An
adverse determination in litigation or interference proceedings to which we may
become a party could:
- subject us to significant liabilities to third parties,
- require disputed rights to be licensed from a third party for royalties
that may be substantial, or
- require us to cease using such technology.
Any one of these outcomes could have a material adverse effect on us.
Furthermore, we may not be able to obtain necessary licenses on satisfactory
terms, if at all. Accordingly, adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling certain of our products, which would have a
material adverse effect on our business, financial condition and results of
operations.
UNCERTAINTY OF DOMESTIC AND FOREIGN REGULATORY CLEARANCE AND APPROVAL -- WE MAY
NOT RECEIVE REGULATORY CLEARANCE OR APPROVAL FOR OUR PRODUCTS OR OPERATIONS IN
THE UNITED STATES OR ABROAD.
Our products and operations are subject to extensive regulation in the
United States by the Federal Food and Drug Administration ("FDA"). The FDA
regulates the research, testing, manufacturing, safety, labeling, storage,
recordkeeping, promotion, distribution, and production of medical devices in the
United States to ensure that medical products distributed domestically are safe
and effective for their intended uses. In particular, in order for us to market
certain products for clinical use in the United States, we generally must first
obtain clearance from the FDA, pursuant to Section 510(k) of the Federal Food,
Drug, and Cosmetic Act ("FFDCA"). Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally
marketed device. In addition, if we develop products in the future that are not
considered to be substantially equivalent to a legally marketed device, we will
be required to obtain FDA approval
28
<PAGE> 34
by submitting a premarket approval application ("PMA"). All of our currently
manufactured products hold the relevant exemption or premarket clearance under
the FFDCA. See "Business -- Government Regulation."
The FDA may not act favorably or quickly in its review of our 510(k) or PMA
submissions, or we may encounter significant difficulties and costs in our
efforts to obtain FDA clearance or approval, all of which could delay or
preclude sale of new products in the United States. Furthermore, the FDA may
request additional data, require us to conduct further testing, or compile more
data, including clinical data, in support of a 510(k) submission. The FDA may
also, instead of accepting a 510(k) submission, require us to submit a PMA,
which is typically a much more complex application than a 510(k). To support a
PMA, the FDA would likely require that we conduct one or more clinical studies
to demonstrate that the device is safe and effective, rather than substantially
equivalent to another legally marketed device. We may not be able to meet the
requirements to obtain 510(k) clearance or PMA approval, or the FDA may not
grant any necessary clearances or approvals. In addition, the FDA may place
significant limitations upon the intended use of our products as a condition to
a 510(k) clearance or PMA approval. Product applications can also be denied or
withdrawn due to failure to comply with regulatory requirements or the
occurrence of unforeseen problems following approval. Failure to obtain FDA
clearance or approvals of new products we develop, any limitations imposed by
the FDA on new product use or the costs of obtaining FDA clearance or approvals
could have a material adverse effect on our business, financial condition and
results of operations.
In order to conduct a clinical investigation involving human subjects for
the purpose of demonstrating the safety and effectiveness of a device, a company
must, among other things, apply for and obtain Institutional Review Board
("IRB") approval of the proposed investigation. In addition, if the clinical
study involves a "significant risk" (as defined by the FDA) to human health, the
sponsor of the investigation must also submit and obtain FDA approval of an
investigational device exemption ("IDE") application. We may not be able to
obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any
new devices we intend to market in the United States in the future. If we obtain
such approvals, we may not be able to comply with the IDE and other regulations
governing clinical investigations or the data from any such trials may not
support clearance or approval of the investigational device. Failure to obtain
such approvals or to comply with such regulations could have a material adverse
effect on our business, financial condition and results of operations.
Once the medical device sponsor obtains clearance or approval for a
product, rigorous regulatory requirements apply to medical devices. These
requirements include, among other things, the Quality System Regulation ("QSR"),
recordkeeping regulations, labeling requirements and adverse event reporting
regulations. See "Business -- Government Regulation -- Medical Device
Regulation." Failure to comply with applicable FDA medical device regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil penalties, repairs, replacements, refunds, recalls or
seizures of products, total or partial suspension of production, the FDA's
refusal to grant future premarket clearances or approvals, withdrawals or
suspensions of current product applications, and criminal prosecution. Any of
these actions, in combination or alone,
29
<PAGE> 35
could have a material adverse effect on our business, financial condition, and
results of operations.
In many of the foreign countries in which we market our products, we are
subject to regulations affecting, among other things, product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. Many of the regulations applicable to
our devices and products in such countries are similar to those of the FDA,
including those in Germany, our largest foreign market. In addition, in many
countries the national health or social security organizations require our
products to be qualified before they can be marketed with the benefit of
reimbursement eligibility. Failure to receive, or delays in the receipt of,
relevant foreign qualifications could also have a material adverse effect on our
business, financial condition, and results of operations. See
"Business -- Government Regulation." Due to the movement towards harmonization
of standards in the European Union, we expect a changing regulatory environment
in Europe characterized by a shift from a country-by-country regulatory system
to a European Union wide single regulatory system. The timing of this
harmonization and its effect on us cannot currently be predicted. Any such
developments could have a material adverse effect on our business, financial
condition and results of operations.
DEPENDENCE ON ORTHOPEDIC PROFESSIONALS, AGENTS AND DISTRIBUTORS -- WE RELY
HEAVILY ON OUR RELATIONSHIPS WITH ORTHOPEDIC PROFESSIONALS, AGENTS AND
DISTRIBUTORS FOR MARKETING OUR PRODUCTS.
The sales of our rigid knee braces depend to a significant extent on the
prescription and/or recommendation of such products by widely recognized
orthopedic surgeons and sports medicine specialists. We have developed and
maintain close relationships with a number of widely recognized orthopedic
surgeons and sports medicine specialists who assist in product research,
development and marketing. These professionals often become product "champions",
speaking about our products at medical seminars, assisting in the training of
other professionals in the use and/or fitting of our products and providing us
with feedback on the industry's acceptance of our new products. The failure of
our rigid knee braces to retain the support of such surgeons or specialists, or
the failure of our new rigid knee braces to secure and retain similar support
from leading surgeons or specialists, could have a material adverse effect on
our business, financial condition and results of operations.
Our marketing success in the United States also depends largely upon
marketing arrangements with independent agents and distributors. Our success
depends upon our agents' and distributors' sales and service expertise and
relationships with the customers in the marketplace. Our failure to maintain
relationships with agents and distributors could have a material adverse effect
on our business, financial condition and results of operations. See "Business --
Sales, Marketing and Distribution."
TRANSITION TO NEW INDEPENDENT DISTRIBUTORS IN INTERNATIONAL MARKETS -- WE COULD
BE ADVERSELY AFFECTED IF WE ARE NOT SUCCESSFUL IN FINDING AND RETAINING NEW
INDEPENDENT DISTRIBUTORS IN INTERNATIONAL MARKETS.
In international markets our products have historically been sold through
30 Smith & Nephew sales organizations and 14 independent distributors, with
approximately 55% of our international sales having been made through Smith &
30
<PAGE> 36
Nephew sales organizations. As a result of the recapitalization, we intend to
replace most of the Smith & Nephew sales organizations with independent
distributors. As of October 1, 1999, we have replaced 11 Smith & Nephew sales
organizations with independent distributors. We have also given notice to Smith
& Nephew that we will terminate 8 of the remaining 19 Smith & Nephew sales
organizations by the beginning of 2000. We believe that we will be able to
increase sales by switching to independent distributors who will be responsible
for achieving sales targets and focused on building strong relationships with
our targeted customers. However, we may not be able to find and retain
independent distributors on favorable terms or successfully effect the
transition to such new distributors without a significant disruption or loss of
sales in the applicable foreign jurisdiction. In addition, the new distributors
may not become technically proficient in the use and benefits of our products in
a timely manner, if at all. Accordingly, our transition to new independent
distributors could have a material adverse effect on our business, financial
condition and results of operations.
In connection with the recapitalization, we entered into a distribution
agreement pursuant to which the 30 Smith & Nephew sales organizations which sell
our products will continue to do so. However, Smith & Nephew has the right to
cease distributing our products in a specific territory on either 30 or 60 days
notice (which notice may not be given with respect to certain territories prior
to September 1, 1999 or December 31, 1999), depending on the territory. See
"Certain Relationships and Related Transactions -- Other Agreements between
DonJoy and Smith & Nephew -- Distribution Agreement." If Smith & Nephew
terminates the distribution of our products in a territory, we may not be able
to find a new independent distributor to replace the Smith & Nephew sales
organization, which could have a material adverse effect on our sales in such
jurisdiction. The termination of distribution by Smith & Nephew in a sufficient
number of jurisdictions prior to the time we are able to replace the Smith &
Nephew sales organizations being terminated with new independent distributors
could have a material adverse effect on our business, financial condition and
results of operations.
INTERNATIONAL OPERATIONS -- OUR INTERNATIONAL SALES MAY BE ADVERSELY AFFECTED BY
FOREIGN CURRENCY EXCHANGE FLUCTUATIONS AND OTHER RISKS.
Sales in foreign markets, primarily Europe and Japan, represented
approximately 16% of our net revenues for the twelve months ended June 29, 1999,
with Germany representing approximately one-third of international net revenues.
See Note 7 of Notes to Consolidated Financial Statements. We expect that our
international sales will increase. See "Business -- Business Strategy." Since
our international sales are denominated in U.S. dollars, our operating results
are not directly impacted by foreign currency exchange fluctuations. However,
the volume and product mix of our international sales may be adversely impacted
by foreign currency exchange fluctuations as changes in the rate of exchange
between the U.S. dollar and the applicable foreign currency will affect the cost
of our products to our foreign customers and thus may impact the overall level
of customer purchases or result in the customer purchasing less expensive, lower
margin products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." In addition, future sales of
our products may be denominated in foreign currencies which would cause currency
fluctuations to more directly impact our operating results.
31
<PAGE> 37
We are also subject to other risks inherent in international operations
including political and economic conditions, foreign regulatory requirements,
exposure to different legal requirements and standards, potential difficulties
in protecting intellectual property, import and export restrictions, increased
costs of transportation or shipping, difficulties in staffing and managing
international operations, labor disputes, difficulties in collecting accounts
receivable and longer collection periods and potentially adverse tax
consequences. As we continue to expand our international business, our success
will be dependent, in part, on our ability to anticipate and effectively manage
these and other risks. These and other factors may have a material adverse
effect on our international operations or on our business, financial condition
and results of operations.
INTERNATIONAL OPERATIONS -- OUR LACK OF MANUFACTURING OPERATIONS OUTSIDE THE
UNITED STATES MAY CAUSE OUR PRODUCTS TO BE LESS COMPETITIVE IN INTERNATIONAL
MARKETS.
We currently have no manufacturing operations in any foreign jurisdiction
other than Mexico. The cost of transporting our products to foreign
jurisdictions is currently borne by our customers, who are also often required
to pay foreign import duties on our products. As a result, the cost of our
products to customers who use or distribute them outside the United States is
often greater than products manufactured in the local foreign jurisdiction. In
addition, foreign manufacturers of competitive products often receive various
local tax concessions which lower their overall manufacturing costs. In order to
compete successfully in international markets, we may be required to open or
acquire manufacturing operations abroad, which would increase our exposure to
the risks of doing business in international jurisdictions. We may not be able
to successfully operate off-shore manufacturing operations, which could have a
material adverse effect on our international operations or on our business,
financial condition and results of operations.
NO RECENT PRIOR OPERATIONS AS AN INDEPENDENT COMPANY -- WE ARE NO LONGER A
DIVISION OF SMITH & NEPHEW AND MUST NOW PROVIDE FOR CERTAIN ADMINISTRATIVE
SERVICES EITHER INTERNALLY OR THROUGH THIRD PARTIES.
Prior to the consummation of the recapitalization, DonJoy operated as a
division of Smith & Nephew, which provided DonJoy with certain administrative
services, such as legal, tax, treasury, risk management, cash management and
benefits administration services. In connection with the recapitalization, Smith
& Nephew agreed to provide, as requested by DonJoy, many of these services until
December 31, 1999, after which time we are required to provide for such services
either internally or through third parties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview -- Smith &
Nephew Allocations and Sales" and "Certain Relationships and Related
Transactions -- Other Agreements between DonJoy and Smith & Nephew." As of the
date of this prospectus, we have begun to provide most of these services
internally. We cannot assure you that we will be able to obtain replacement
sources for any of the remaining services previously provided by Smith & Nephew,
or that if obtained, we can obtain such services on terms as favorable as those
provided by Smith & Nephew. In addition, we cannot assure you that we will be
able to achieve the cost savings presented in the pro forma financial
information included in this prospectus.
32
<PAGE> 38
LOSS OF SMITH & NEPHEW NAME -- WE MAY BE ADVERSELY AFFECTED BECAUSE WE ARE NO
LONGER ABLE TO USE THE SMITH & NEPHEW TRADEMARK AND TRADE NAMES.
As a result of the recapitalization, we no longer have the right to use the
Smith & Nephew trademark and trade names. We believe that the sale of our
products have benefited from the use of the Smith & Nephew trademark and trade
names, particularly in international markets where some of our products have
been resold by Smith & Nephew sales organizations under Smith & Nephew brand
names, as well as in obtaining national contracts with buying groups. The impact
on our business and operations of our no longer using such trademarks and trade
names cannot be fully predicted and could have a material adverse effect on our
business, financial condition and results of operations.
RISKS GENERALLY ASSOCIATED WITH STRATEGIC GROWTH OPPORTUNITIES -- WE INTEND TO
PURSUE, BUT MAY NOT BE ABLE TO IDENTIFY, FINANCE OR SUCCESSFULLY COMPLETE
STRATEGIC GROWTH OPPORTUNITIES.
One element of our growth strategy is to pursue acquisitions, investments
and strategic alliances that either expand or complement our business. We may
not be able to identify acceptable opportunities or complete any acquisitions,
investments or strategic alliances on favorable terms or in a timely manner.
Acquisitions and, to a lesser extent, investments and strategic alliances
involve a number of risks, including:
- the diversion of management's attention to the assimilation of the
operations and personnel of the new business,
- adverse short-term effects on our operating results, and
- the inability to successfully integrate the new businesses with our
existing business, including financial reporting, management and
information technology systems.
In addition, we may require additional debt or equity financings for future
acquisitions, investments or strategic alliances which may not be available on
favorable terms, if at all. We may not be able to successfully integrate or
operate profitably any new business we acquire and we cannot assure you that any
other investments we make or strategic alliances we enter into will be
successful.
IMPLEMENTATION OF BUSINESS STRATEGY -- IF WE CANNOT SUCCESSFULLY IMPLEMENT OUR
BUSINESS STRATEGY, WE MAY NOT BE ABLE TO SERVICE OUR INDEBTEDNESS.
Our business strategy is to:
- increase international sales,
- improve operating efficiencies,
- introduce new products and product enhancements, and
- pursue strategic growth opportunities.
Our ability to achieve our objectives is subject to a variety of factors,
many of which are beyond our control, and we may not be successful in
implementing our strategy. In addition, the implementation of our strategy may
not improve our operating results. We may decide to alter or discontinue certain
aspects of our business strategy and may adopt alternative or additional
strategies due to competitive factors or factors not currently foreseen, such as
unforeseen costs
33
<PAGE> 39
and expenses or events beyond our control, such as an economic downturn. See
"-- Substantial Leverage and Ability to Service and Refinance Debt."
Any failure to successfully implement our business strategy may adversely
affect our ability to service our indebtedness, including our ability to make
principal and interest payments on the notes.
DEPENDENCE UPON KEY PERSONNEL -- WE MAY BE ADVERSELY AFFECTED IF WE LOSE ANY
MEMBER OF OUR SENIOR MANAGEMENT.
We are dependent on the continued services of our senior management team,
including Leslie H. Cross, our President and Chief Executive Officer, Cyril
Talbot III, our Vice President -- Finance and Chief Financial Officer, and
Michael R. McBrayer, our Vice President -- Domestic Sales. The loss of these key
personnel could have a material adverse effect on us. See
"Management -- Employment Agreements."
COMPETITION -- WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT.
The orthopedic recovery products industry is highly competitive and
fragmented. Our competitors include numerous smaller niche companies and a few
large, diversified orthopedic companies. Some of our competitors are part of
corporate groups that have significantly greater financial, marketing and other
resources than us. As such, we may be at a competitive disadvantage with respect
to these competitors. Our primary competitors in the rigid knee brace market
include DePuy OrthoTech (a division of Johnson & Johnson), Innovation Sports
Incorporated, Townsend Industries Inc., Bledsoe Brace Systems (a division of
Medical Technology, Inc.) and Generation II USA, Inc. We compete in the non-
retail sector of the soft goods products market and our competitors include
DeRoyal Industries, Zimmer, Inc. (a division of Bristol-Meyers Squibb Company)
and Tecnol Orthopedics (a division of Kimberly Clark Corp.). We compete with a
variety of manufacturers of specialty and other orthopedic products, depending
on the type of product. In addition, in certain foreign countries, we compete
with one or more local competitors.
TECHNOLOGICAL CHANGE -- WE MAY NOT BE ABLE TO DEVELOP AND MARKET NEW PRODUCTS OR
PRODUCT ENHANCEMENTS TO REMAIN COMPETITIVE.
Our competitors may develop new medical procedures, technologies or
products that are more effective than ours or that would render our technology
or products obsolete or uncompetitive which could have a material adverse effect
on us. For example, the recent development and use of joint lubricants to treat
osteoarthritis in the knee may prove to be an effective alternative to the use
of our OA braces.
Further, our ongoing success requires the continued development of new
products and the enhancement of our existing products. We may not be able to:
- continue to develop successful new products and enhance existing
products,
- obtain required regulatory approvals for such products,
- market such products in a commercially viable manner, or
- gain market acceptance for such products.
34
<PAGE> 40
Our failure to develop and market new products and product enhancements could
have a material adverse effect on our business, financial condition and results
of operations. See "Business -- Competition."
DISTRIBUTION RIGHTS -- WE ARE CURRENTLY ENGAGED IN DISCUSSIONS WITH THE
MANUFACTURER OF PAINBUSTER PRODUCTS RELATING TO ISSUES UNDER OUR DISTRIBUTION
AGREEMENT.
We entered into an arrangement in 1998 with I-Flow Corporation ("I-Flow")
for the exclusive North American distribution rights for the PainBuster pain
management and relief systems manufactured by I-Flow for use after orthopedic
surgical procedures. Certain interpretive questions have arisen under the
agreement. We and I-Flow are currently engaged in an exchange of information as
a result of these issues. While we continue to make the Painbuster products
available for sale, pending clarification or resolution of the issues, we have,
however, withheld a license payment due I-Flow. Our management believes that a
satisfactory resolution of the issues can be reached without the filing of a
claim by either party or termination of the agreement. However, no assurance in
this regard can be made. In the event the agreement is terminated, our ability
to penetrate the surgical market and the orthopedic pain management system and
device segment of the orthopedic recovery products industry might be adversely
affected unless we developed, or obtained marketing rights to, one or more
comparable products currently available in the marketplace. See
"Business -- Products."
PRODUCT LIABILITY EXPOSURE -- WE COULD BE ADVERSELY AFFECTED IF A PRODUCT
LIABILITY CLAIM IS BROUGHT AGAINST US AND WE DON'T HAVE ADEQUATE INSURANCE.
The manufacturing and marketing of our products entails risks of product
liability and from time to time we have been subject to product liability
claims. Although we maintain product liability insurance in amounts which we
believe to be reasonable and standard in the industry, the amount and scope of
any coverage may be inadequate to protect us in the event of a substantial
adverse product liability judgment.
CONCENTRATION OF OWNERSHIP AND CONTROL OF THE COMPANY -- WE ARE CONTROLLED BY
CDP, FAIRFIELD CHASE AND THEIR MEMBERS AND THEIR INTERESTS MAY NOT BE ALIGNED
WITH YOURS.
As a result of the recapitalization, CDP owns approximately 85.1% of the
outstanding voting units of our parent company, DonJoy, which owns all of our
equity interests. The members of CDP are CB Capital, First Union Investors,
Fairfield Chase and TCW. CB Capital owns a majority of the interests of CDP and
Fairfield Chase, which is controlled by Charles T. Orsatti, is the initial
managing member of CDP. In addition, through their ownership of Redeemable
Preferred Units, CB Capital and First Union Investors also directly own
approximately 2.5% of the outstanding voting units of DonJoy and TCW owns
approximately 2.5% of the outstanding voting units of DonJoy. Accordingly, CDP,
Fairfield Chase, which as managing member initially controls CDP, and their
members have the power, subject to certain exceptions, to control us and DonJoy.
Under certain circumstances CB Capital can become the managing member of CDP.
For a description of the ownership, voting and management arrangements regarding
DonJoy and CDP, see "Security Ownership of Certain Beneficial Owners and
Management."
35
<PAGE> 41
The interests of CDP, Fairfield Chase and their members may not in all cases be
aligned with yours.
PURCHASE OF THE NOTES UPON CHANGE OF CONTROL -- WE MAY NOT HAVE THE ABILITY TO
RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
Upon a change of control, we are required to offer to purchase all of the
notes then outstanding at 101% of the principal amount thereof plus accrued
interest. If a change of control were to occur, we may not have sufficient funds
to pay the purchase price for the outstanding notes tendered, and we expect that
we would require third-party financing. However, we may not be able to obtain
such financing on favorable terms, if at all. In addition, the new credit
facility restricts our ability to repurchase the notes, including pursuant to an
offer in connection with a change of control. A change of control under the
indenture may also result in an event of default under the new credit facility
and may cause the acceleration of other senior indebtedness, if any, in which
case the subordination provisions of the notes would require payment in full of
the new credit facility and any other senior indebtedness before repurchase of
the notes. Our future indebtedness may also contain restrictions on our ability
to repay the notes upon certain events or transactions that could constitute a
change of control under the indenture. The inability to repay senior
indebtedness upon a change of control or to purchase all of the tendered notes,
would each constitute an event of default under the indenture. See "Description
of the Notes -- Change of Control" and "Description of New Credit Facility."
The change of control provision in the indenture will not necessarily
afford you protection in the event of a highly leveraged transaction, including
a reorganization, restructuring, merger or other similar transaction involving
us, that may adversely affect you. Such transaction may not involve a change in
voting power or beneficial ownership, or, even if it does, may not involve a
change of the magnitude required under the definition of change of control in
the indenture to trigger these provisions. Except as described under
"Description of the Notes -- Change of Control", the Indenture does not contain
provisions that permit the holders of the notes to require us to repurchase or
redeem the notes in the event of a takeover, recapitalization or similar
transaction.
YEAR 2000 -- OUR OPERATIONS MAY BE ADVERSELY AFFECTED BY THE YEAR 2000 PROBLEM.
The "Year 2000" problem relates to computer systems that are designed using
two digits, rather than four, to represent a given year. Therefore, such systems
may recognize "00" as the year 1900 rather than 2000, possibly resulting in
major system failures or miscalculations and causing disruptions in our
operations. We have assessed our readiness for the Year 2000 by focusing on four
key areas: (1) internal infrastructure readiness, by addressing internal
hardware and software, and non-information technology systems; (2) product
readiness, by addressing the functionality of the processes by which our
products are developed, manufactured and distributed; (3) supplier readiness, by
addressing the preparedness of our key suppliers; and (4) customer readiness, by
addressing customer support and transactional activity. For each readiness area,
we are performing a risk assessment, conducting testing and remediation,
developing contingency plans to mitigate unknown risk and communicating with
36
<PAGE> 42
employees, suppliers, customers and other third parties to raise awareness of
the Year 2000 issue.
We believe our current remediation and replacement programs will adequately
address the Year 2000 issues with respect to our internal systems in all
material respects. However, these programs may experience minor disruptions. In
addition, our suppliers and customers may not resolve their own Year 2000 issues
in a timely manner. We have received written responses from some of our
suppliers and customers acknowledging the Year 2000 issue and stating their
present intention to be compliant. We have not received responses from all of
our suppliers and customers and we cannot assure you that all of our key
suppliers or customers will become compliant in time to avoid a disruption to
our business which could have a material adverse effect on us. If we or our
suppliers or customers fail to completely overcome the Year 2000 issue, our
business, financial condition and results of operations could be adversely
affected.
During 1998 and the first six months of 1999 we expensed $337,000 for
consulting services and software related to compliance with Year 2000
requirements. We estimate that the future costs of complying with the Year 2000
requirements will be approximately $40,000 in additional consulting and software
and hardware purchases. Our forecasted costs and the expected completion of our
Year 2000 programs by the end of the third quarter of 1999 are based on our best
estimates, which in turn are based on numerous assumptions of future events,
including the continued availability and cost of necessary personnel and other
resources, third party modification plans and other factors. We cannot be
certain that these estimates will be achieved and actual results could differ
materially from these estimates.
IMPACT OF ENVIRONMENTAL AND OTHER REGULATION -- WE ARE SUBJECT TO A VARIETY OF
ENVIRONMENTAL LAWS AND OTHER REGULATIONS WHICH COULD ADVERSELY AFFECT US.
We are subject to the requirements of federal, state and local
environmental and occupational health and safety laws and regulations of the
U.S. and foreign countries. We cannot assure you that we have been or will be at
all times in complete compliance with all such requirements or that we will not
incur material costs or liabilities in connection with such requirements in the
future. These requirements are complex, constantly changing and have tended to
become more stringent over time. It is possible that these requirements may
change or liabilities may arise in the future in a manner that could have a
material effect on our business. For more information about our environmental
compliance and potential environmental liabilities see
"Business -- Environmental and Other Matters."
REGULATION OF FRAUD AND ABUSE IN HEALTH CARE -- WE MAY NEED TO CHANGE OUR
BUSINESS PRACTICES TO COMPLY WITH HEALTH CARE FRAUD AND ABUSE REGULATIONS.
We are subject to various federal and state laws pertaining to health care
fraud and abuse, including antikickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state health care programs, including Medicare, Medicaid, VA health
programs and CHAMPUS. We have never been challenged by a governmental authority
under any of these laws and believe that our operations are in material
compliance with such laws. However, because of the far-reaching nature of these
laws, we may be required to alter one or more of our practices to be in
37
<PAGE> 43
compliance with these laws. In addition, we cannot assure you that the
occurrence of one or more violations of these laws would not result in a
material adverse effect on our business, financial condition and results of
operations. If there is a change in law, regulation or administrative or
judicial interpretations, we may have to change our business practices or our
existing business practices could be challenged as unlawful, which could have a
material adverse effect on our business, financial condition and results of
operations. See "Business -- Government Regulation."
FRAUDULENT CONVEYANCE STATUTES -- FEDERAL AND STATE LAWS PERMIT A COURT TO VOID
THE NOTES AND GUARANTEES UNDER CERTAIN CIRCUMSTANCES.
The new notes will be issued in exchange for the old notes. We used the net
proceeds from the offering of the old notes, together with borrowings under the
term loan portion of our new credit facility, to purchase the assets and
operations of DonJoy. DonJoy used such amounts, together with the proceeds from
the issuance of the Common Units to CDP and the Management Members and the
Redeemable Preferred Units to repurchase a portion of the equity interests of
DonJoy owned by Smith & Nephew. The obligations we incurred under the indenture
and the old notes and the obligations incurred by DonJoy under the indenture and
its guarantee may be subject to review under federal bankruptcy law or relevant
state fraudulent conveyance and similar statutes in a bankruptcy or
reorganization case or lawsuit commenced by or on behalf of our or DonJoy's
unpaid creditors. Under these laws, if a court were to find that, at the time we
issued the old notes or DonJoy issued its guarantee of the old notes, we or
DonJoy, as the case may be:
- incurred such indebtedness with the intent of hindering, delaying or
defrauding present or future creditors, or
- received less than the reasonably equivalent value or fair consideration
for incurring such indebtedness, and
- were insolvent or rendered insolvent by reason of any of the
Transactions,
- were engaged or about to engage in a business or transaction for which
our or DonJoy's assets constituted unreasonably small capital to carry
on our or its business, or
- intended to incur, or did incur, or believed that we or DonJoy would
incur, debts beyond our or its ability to pay as they matured or
became due
then, such court might:
- subordinate the notes or DonJoy's guarantee of the notes to our or
DonJoy's presently existing or future indebtedness,
- void the issuance of the notes (in our case) or DonJoy's Guarantee, or
- take other actions detrimental to holders of the notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. However, we or DonJoy generally
38
<PAGE> 44
would be considered insolvent at the time we incurred indebtedness under the old
notes or DonJoy issued its guarantee, as the case may be, if either:
- the fair salable value of our or DonJoy's assets, as applicable, were
less than the amount required to pay our or DonJoy's probable liability
on our or its total existing debts and liabilities (including contingent
liabilities) as they become absolute or matured, or
- the sum of our or DonJoy's debts (including contingent liabilities) were
greater than our or DonJoy's assets, at fair valuation.
We cannot predict:
- what standard a court would apply in order to determine whether we or
DonJoy were insolvent as of the date we or DonJoy issued the old notes or
its guarantee, or that regardless of the method of valuation a court
would determine that we or DonJoy were insolvent on that date, or
- whether a court would not determine that the payments constituted
fraudulent transfers on another ground.
In rendering their opinions in connection with the Transactions, our
counsel and counsel to the initial purchaser of the old notes did not express
any opinion as to the applicability of federal bankruptcy or state fraudulent
transfer and conveyance laws.
To the extent a court voids DonJoy's guarantee as a fraudulent conveyance
or holds it unenforceable for any other reason, holders of the notes would cease
to have any claim in respect of DonJoy and would be creditors solely of us.
Based upon financial and other information available to us, we believe that
we and DonJoy issued the old notes and the guarantee of the old notes for proper
purposes and in good faith and that at the time we and DonJoy issued the old
notes and the guarantee of the old notes, we and DonJoy (i) were not insolvent
or rendered insolvent thereby, (ii) had sufficient capital to run our business
and (iii) were able to pay our debts as they mature or become due. In reaching
these conclusions, we relied on various valuations and estimates of future cash
flow that necessarily involve a number of assumptions and choices of
methodology. However, a court may not adopt the assumptions and methodologies we
have chosen or concur with our conclusion as to our solvency.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against us
or DonJoy within 90 days after any payment by us with respect to the notes or by
DonJoy under its guarantee of the notes, or if we or DonJoy anticipated becoming
insolvent at the time of such payment, all or a portion of such payment could be
avoided as a preferential transfer and the recipient of such payment could be
required to return such payment.
In the event there are any subsidiary guarantors in the future, the
foregoing would apply their guarantees.
FAILURE TO EXCHANGE OLD NOTES -- IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES,
YOU WILL CONTINUE TO HOLD UNREGISTERED OLD NOTES AND YOUR ABILITY TO TRANSFER
OLD NOTES WILL BE ADVERSELY AFFECTED.
We will only issue new notes in exchange for old notes that are timely
received by the exchange agent together with all required documents, including a
39
<PAGE> 45
properly completed and signed letter of transmittal. Therefore, you should allow
sufficient time to ensure timely delivery of the old notes and you should
carefully follow the instructions on how to tender your old notes. Neither we
nor the exchange agent are required to tell you of any defects or irregularities
with respect to your tender of the old notes. If you do not tender your old
notes or if we do not accept your old notes because you did not tender your old
notes properly, then, after we consummate the exchange offer, you will continue
to hold old notes that are subject to the existing transfer restrictions and,
except in certain limited circumstances, you will no longer have any
registration rights or be entitled to any liquidated damages with respect to the
old notes. In addition:
- if you tender your old notes for the purpose of participating in a
distribution of the new notes, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the new notes, and
- if you are a broker-dealer that receives new notes for your own account
in exchange for old notes that you acquired as a result of market-making
activities or any other trading activities, you will be required to
acknowledge that you will deliver a prospectus in connection with any
resale of those new notes.
We have agreed that, for a period of 180 days after the exchange offer is
consummated, we will make this prospectus available to any broker-dealer for use
in connection with any such resale.
After the exchange offer is consummated, if you continue to hold any old
notes, you may have difficulty selling them because there will be less old notes
outstanding. In addition, if a large amount of old notes are not tendered or are
tendered improperly, the limited amount of new notes that would be issued and
outstanding after we consummate the exchange offer could lower the market price
of such new notes.
NO PRIOR MARKET FOR THE NEW NOTES -- YOU CANNOT BE SURE THAT AN ACTIVE TRADING
MARKET WILL DEVELOP FOR THE NEW NOTES.
The new notes are a new issue of securities with no established trading
market and will not be listed on any securities exchange. The liquidity of the
trading market in the new notes, and the market price quoted for the new notes,
may be adversely affected by changes in the overall market for high yield
securities and by changes in our financial performance or prospects or in the
prospects for companies in our industry generally. As a result, you cannot be
sure that an active trading market will develop for the new notes.
40
<PAGE> 46
THE TRANSACTIONS
On June 30, 1999, DonJoy consummated a recapitalization pursuant to a
recapitalization agreement dated as of April 29, 1999 among CDP, Smith & Nephew
and DonJoy. As a result of the recapitalization, CDP, Smith & Nephew, the
Management Members and the holders of the Redeemable Preferred Units own
approximately 85.1%, 7.1%, 2.5% and 5.3%, respectively, of the outstanding
voting Units of DonJoy.
Pursuant to the recapitalization, CDP made a $64.6 million cash investment
in the common units of DonJoy. The Management Members also made a $1.8 million
investment in the Common Units of DonJoy, $1.4 million of which was financed by
loans from DonJoy. In addition, DonJoy issued the Redeemable Preferred Units for
an aggregate purchase price of $31.4 million, with CB Capital purchasing
approximately $21.2 million and First Union Investors purchasing approximately
$10.2 million of such Redeemable Preferred Units before payment of $1.4 million
of fees to them on a pro rata basis. DonJoy sold all of its assets (other than
the cash proceeds from the equity contribution by CDP and the Management Members
and the issuance of the Redeemable Preferred Units) to the Company. The Company
funded the asset sale using the proceeds from the offering of the old notes and
$15.5 million of borrowings under the new credit facility. DonJoy used the
$208.5 million of proceeds from the asset sale, the issuance of the Redeemable
Preferred Units and the issuance of the Common Units to CDP and the Management
Members (excluding $1.4 million which was financed through loans to the
Management Members to repurchase from Smith & Nephew its Common Units in DonJoy
(other than a retained interest of approximately 7.1%) for approximately $199.8
million, subject to adjustment as described below, and to pay transaction fees
and expenses of $8.7 million. The consideration paid to Smith & Nephew will be
increased (decreased) on a dollar for dollar basis to the extent the value of
our net operating assets (as defined in the recapitalization agreement) on the
closing date of the recapitalization exceeded (was less than) $33.4 million.
The sources and uses of funds for the recapitalization are presented in the
following table:
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN
MILLIONS)
<S> <C>
SOURCES:
New credit facility(a)...................... $ 15.5
Old notes................................... 98.0
Redeemable Preferred Units(b)............... 30.0
Common Unit investment in DonJoy by CDP..... 64.6
Retained Common Unit investment in DonJoy by
Smith & Nephew........................... 5.4
Common Unit investment in DonJoy by
Management Members....................... 1.8
------
Total sources....................... $215.3
</TABLE>
41
<PAGE> 47
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN
MILLIONS)
<S> <C>
======
USES:
Consideration paid to Smith & Nephew........ $199.8
Retained Common Unit investment in DonJoy by
Smith & Nephew........................... 5.4
Loans to Management Members................. 1.4
Fees and expenses........................... 8.7
------
Total uses.......................... $215.3
======
</TABLE>
- -------------------------
(a) Represents the $15.5 million term loan borrowed under the new credit
facility to consummate the recapitalization. The new credit facility also
provides for borrowings of up to $25.0 million under the revolving credit
facility for working capital and general corporate purposes, including to
finance acquisitions, investments and strategic alliances.
(b) Represents $31.4 million of proceeds received from the sale of Redeemable
Preferred Units, net of $1.4 million of fees paid to CB Capital and First
Union Investors on a pro rata basis.
The loans to the Management Members bear interest at the rate of 5.3% and
have a seven year maturity. Annual interest payments are required until the
maturity date, at which time the entire principal amount of the loan must be
repaid. The loans to the Management Members are full recourse and secured by a
pledge of the Common Units issued to the applicable Management Members.
In connection with the recapitalization, DonJoy and Smith & Nephew entered
into agreements providing for the continuation or transfer and transition of
certain aspects of the Company's business operations. See "Certain Relationships
and Related Transactions -- Additional Agreements between DonJoy and Smith &
Nephew."
Upon consummation of the recapitalization, DonJoy adopted an option plan
entitling certain members of management to acquire, subject to certain
conditions, up to approximately 15% of DonJoy's equity interests on a fully
diluted basis. See "Management -- 1999 Option Plan."
On July 30, 1999, CB Capital and First Union Investors each transferred to
TCW approximately $5.0 million of Redeemable Preferred Units of DonJoy and $1.8
million and $0.2 million, respectively, of membership interests in CDP.
42
<PAGE> 48
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We and DonJoy have entered into an exchange and registration rights
agreement with the initial purchaser of the old notes in which we and DonJoy
agreed, under certain circumstances, to file a registration statement relating
to an offer to exchange the old notes for new notes. The registration statement
of which this prospectus forms a part was filed in compliance with this
obligation. We also agreed to use our reasonable best efforts to cause the
exchange offer to be consummated within 225 days following the original issuance
of the old notes. The new notes will have terms substantially identical to the
old notes except that the new notes will not contain terms with respect to
transfer restrictions, registration rights and liquidated damages for failure to
observe certain obligations in the exchange and registration rights agreement.
The old notes were issued on June 30, 1999.
Under the circumstances set forth below, we will use our reasonable best
efforts to cause the SEC to declare effective a shelf registration statement
with respect to the resale of the old notes and keep the shelf registration
statement effective for up to two years after the effective date of the shelf
registration statement. These circumstances include:
- if pursuant to any changes in law, SEC rules or regulations or applicable
interpretations thereof by the staff of the SEC do not permit us to
effect the exchange offer as contemplated by the exchange and
registration rights agreement;
- if any old notes validly tendered in the exchange offer are not exchanged
for new notes within 225 days after the original issue of the old notes;
- if the initial purchaser of the old notes so requests (but only with
respect to any old notes not eligible to be exchanged for new notes in
the exchange offer); or
- if any holder of the old notes notifies us that it is not permitted to
participate in the exchange offer or would not receive fully tradable new
notes pursuant to the exchange offer.
Each holder of old notes that wishes to exchange old notes for transferable
new notes in the exchange offer will be required to make the following
representations:
- any new notes will be acquired in the ordinary course of its business;
- such holder has no arrangement or understanding with any person to
participate in the distribution of the new notes; and
- such holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if it is an affiliate, that it will comply with
applicable registration and prospectus delivery requirements of the
Securities Act.
43
<PAGE> 49
RESALE OF NEW NOTES
Based on interpretations of the SEC staff set forth in no action letters
issued to unrelated third parties, we believe that new notes issued in the
exchange offer in exchange for old notes may be offered for resale, resold and
otherwise transferred by any new note holder without compliance with the
registration and prospectus delivery provisions of the Securities Act, if:
- such holder is not an "affiliate" of ours within the meaning of Rule 405
under the Securities Act;
- such new notes are acquired in the ordinary course of the holder's
business; and
- the holder does not intend to participate in the distribution of such new
notes.
Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the new notes:
- cannot rely on the position of the staff of the SEC enunciated in "Exxon
Capital Holdings Corporation" or similar interpretive letters; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, for the resale or for
other retransfer of new notes only as specifically set forth in this prospectus.
With regard to broker-dealers, only broker-dealers that acquired the old notes
as a result of market-making activities or other trading activities may
participate in the exchange offer. Each broker-dealer that receives new notes
for its own account in exchange for old notes, where such old notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. Please read the section captioned
"Plan of Distribution" for more details regarding the transfer of new notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not withdrawn prior to the expiration date. We will issue
$1,000 principal amount of new notes in exchange for each $1,000 principal
amount of old notes surrendered under the exchange offer. Old notes may be
tendered only in integral multiples of $1,000.
The form and terms of the new notes will be substantially identical to the
form and terms of the old notes except the new notes will be registered under
the Securities Act, will not bear legends restricting their transfer and will
not provide for any liquidated damages upon failure of the Issuers to fulfill
their obligations under the exchange and registration rights agreement to file,
and cause to be effective, a registration statement. The new notes will evidence
the same debt as the old notes. The new notes will be issued under and entitled
to the benefits of the same indenture that authorized the issuance of the old
notes. Consequently, both series will be treated as a single class of debt
securities under that indenture.
44
<PAGE> 50
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $100.0 million aggregate principal
amount of the old notes are outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of old notes. There will be
no fixed record date for determining registered holders of old notes entitled to
participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the exchange and registration rights agreement, the applicable requirements
of the Securities Act and the Securities Exchange Act of 1934 and the rules and
regulations of the SEC. Old notes that are not tendered for exchange in the
exchange offer will remain outstanding and continue to accrue interest and will
be entitled to the rights and benefits such holders have under the indenture
relating to the old notes.
We will be deemed to have accepted for exchange properly tendered old notes
when we have given oral or written notice of the acceptance to the exchange
agent. The exchange agent will act as agent for the tendering holders for the
purposes of receiving the new notes from the Issuers and delivering exchange
notes to such holders. Subject to the terms of the exchange and registration
rights agreement, we expressly reserve the right to amend or terminate the
exchange offer, and not to accept for exchange any old notes not previously
accepted for exchange, upon the occurrence of any of the conditions specified
below under the caption "-- Certain Conditions to the Exchange Offer."
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees, or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than certain applicable taxes described
below, in connection with the exchange offer. It is important that you read the
section labeled "-- Fees and Expenses" below for more details regarding fees and
expenses incurred in the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time on December
9, 1999, unless we extend it in our sole discretion.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
old notes of the extension no later than 9:00 a.m., New York City time, on the
business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
- to delay accepting for exchange any old notes;
- to extend the exchange offer or to terminate the exchange offer and to
refuse to accept old notes not previously accepted if any of the
conditions set forth below under "-- Certain Conditions to the Exchange
Offer" have not been satisfied, by giving oral or written notice of such
delay, extension or termination to the exchange agent; or
45
<PAGE> 51
- subject to the terms of the exchange and registration rights agreement,
to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of old notes. If we amend the exchange offer in a manner that
we determine to constitute a material change, we will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of old notes
of such amendment.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to a financial news service.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any new notes for, any old notes, and we may
terminate the exchange offer as provided in this prospectus before accepting any
old notes for exchange if in our reasonable judgment:
- the new notes to be received will not be tradable by the holder without
restriction under the Securities Act or the Exchange Act and without
material restrictions under the blue sky or securities laws of
substantially all of the states of the United States;
- the exchange offer, or the making of any exchange by a holder of old
notes, would violate applicable law or any applicable interpretation of
the staff of the SEC; or
- any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer.
In addition, we will not be obligated to accept for exchange the old notes
of any holder that has not made:
- the representations described under "-- Purpose and Effect of the
Exchange Offer", "-- Procedures for Tendering" and "Plan of
Distribution", and
- such other representations as may be reasonably necessary under
applicable SEC rules, regulations or interpretations to make available to
us an appropriate form for registration of the new notes under the
Securities Act.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any old notes by giving oral or written notice of such
extension to the registered holders of the old notes. During any such
extensions, all old notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange unless they have been
previously withdrawn. We will return any old notes that we do not accept for
exchange for any reason
46
<PAGE> 52
without expense to their tendering holder as promptly as practicable after the
expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any old notes not previously accepted for exchange,
upon the occurrence of any of the conditions of the exchange offer specified
above. We will give oral or written notice of any extension, amendment,
non-acceptance or termination to the registered holders of the old notes as
promptly as practicable. In the case of any extension, such notice will be
issued no later than 9:00 a.m., New York City time, on the business day after
the previously scheduled expiration date.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances that may give rise to them or waive them in whole or in
part at any or at various times in our sole discretion. If we fail at any time
to exercise any of the foregoing rights, that failure will not constitute a
waiver of such right. Each such right will be deemed an ongoing right that we
may assert at any time or at various times.
In addition, we will not accept for exchange any old notes tendered, and
will not issue new notes in exchange for any such old notes, if at such time any
stop order is threatened or in effect with respect to the registration statement
of which this prospectus constitutes a part or the qualification of the
indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of old notes may tender such old notes in the exchange offer.
To tender in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
such letter of transmittal or facsimile to the exchange agent prior to
the expiration date; or
- comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
- the exchange agent must receive old notes along with the letter of
transmittal; or
- the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such old notes into the exchange
agent's account at DTC according to the procedures for book-entry
transfer described below or a properly transmitted agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "-- Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between such holder and us in accordance with the
terms
47
<PAGE> 53
and subject to the conditions set forth in this prospectus and in the letter of
transmittal.
The method of delivery of old notes, the letter of transmittal and all
other required documents to the exchange agent is at the holder's election and
risk. Rather than mail these items, the Issuers recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or old notes to the
Issuers. Holders may request their respective brokers, dealers, commercial
banks, trust companies or other nominees to effect the above transactions for
them.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owners' behalf. If such beneficial owner wishes to tender on its
own behalf, it must, prior to completing and executing the letter of transmittal
and delivering its old notes; either:
- make appropriate arrangements to register ownership of the old notes in
such owner's name; or
- obtain a properly completed bond power from the registered holder of old
notes.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or another "eligible institution" within the meaning of Rule 17Ad-15
under the Exchange Act, unless the old note tendered pursuant thereto are
tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
- for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes listed on the old notes, such old notes must
be endorsed or accompanied by a properly completed bond power. The bond power
must be signed by the registered holder as the registered holder's name appears
on the old notes and an eligible institution must guarantee the signature on the
bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing. Unless waived by the Issuers, they
should also submit evidence satisfactory to the Issuers of their authority to
deliver the letter of transmittal.
48
<PAGE> 54
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
program to tender. Participant in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the old notes to the exchange agent in
accordance with its procedures for transfer. DTC will then send an agent's
message to the exchange agent. The term "agent's message" means a message
transmitted by DTC, received by the exchange agent and forming part of the
book-entry confirmation, to the effect that:
- DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering old notes that are the
subject of such book-entry confirmation;
- such participant has received and agrees to be bound by the terms of the
letter of transmittal (or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery); and
- the agreement may be enforced against such participant.
The Issuers will determine in their sole discretion all questions as to the
validity, form, eligibility (including time of receipt), acceptance of tendered
old notes and withdrawal of tendered old notes. Our determination will be final
and binding. We reserve the absolute right to reject any old notes not properly
tendered or any old notes the acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as we shall determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
old notes, neither we, the exchange agent nor any other person will incur any
liability for failure to give such notification. Tenders of old notes will not
be deemed made until such defects or irregularities have been cured or waived.
Any old notes received by the exchange agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned to the exchange agent without cost to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In all cases, the Issuers will issue new notes for old notes that they have
accepted for exchange under the exchange offer only after the exchange agent
timely receives:
- old notes or a timely book-entry confirmation of such old notes into the
exchange agent's account at DTC; and
- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
49
<PAGE> 55
By signing the letter of transmittal, each tendering holder of old notes
will represent to the Issuers that, among other things:
- any new notes that the holder receives will be acquired in the ordinary
course of its business;
- the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the new notes;
- if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the new notes;
- if the holder is a broker-dealer that will receive new notes for its own
account in exchange for old notes that were acquired as a result of
market-making activities, that it will deliver a prospectus, as required
by law, in connection with any resale of such new notes; and
- the holder is not an "affiliate", as defined in Rule 405 of the
Securities Act, of either of the Issuers or, if the holder is an
affiliate, it will comply with any applicable registration and prospectus
delivery requirements of the Securities Act.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at DTC for purposes of the exchange offer promptly after the
date of this prospectus; and any financial institution participant in DTC's
system may make book-entry delivery of old notes by causing DTC to transfer such
old notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfer. Holders of old notes who are unable to deliver
confirmation of the book-entry tender of their old notes into the exchange
agent's account at DTC or all other documents of transmittal to the exchange
agent on or prior to the expiration date must tender their old notes according
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their old notes but whose old notes are not
immediately available or who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent or comply with
the applicable procedures under DTC's Automated Tender Offer Program prior to
the expiration date may tender if:
- the tender is made through an eligible institution;
- prior to the expiration date, the exchange agent receives from such
eligible institution either a properly completed and duly executed notice
of guaranteed delivery (by facsimile transmission, mail or hand delivery)
or a properly transmitted agent's message and notice of guaranteed
delivery:
-- setting forth the name and address of the holder, the registered
number(s) of such old notes and the principal amount of old notes
tendered;
-- stating that the tender is being made thereby; and
50
<PAGE> 56
-- guaranteeing that, within three (3) New York Stock Exchange trading
days after the expiration date, the letter of transmittal (or facsimile
thereof) together with the old notes or a book-entry confirmation, and
any other documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange agent; and
- the exchange agent receives such properly completed and executed letter
of transmittal (or facsimile thereof), as well as all tendered old notes
in proper form for transfer or a book-entry confirmation, and all other
documents required by the letter of transmittal, within three (3) New
York State Exchange trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of old notes may
withdraw their tenders at any time prior to the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice (which may be by
telegram, telex, facsimile transmission or letter) of withdrawal at one
of the addresses set forth below under "-- Exchange Agent", or
- holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system.
Any such notice of withdrawal must:
- specify the name of the person who tendered the old notes to be
withdrawn;
- identify the old notes to be withdrawn (including the principal amount of
such old notes); and
- where certificates for old notes have been transmitted, specify the name
in which such old notes were registered, if different from that of the
withdrawing holder.
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of such certificates, the
withdrawing holder must also submit:
- the serial numbers of the particular certificates to be withdrawn; and
- a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution.
If old notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn old notes and
otherwise comply with the procedures of such facility. We will determine all
questions as to the validity, form and eligibility (including time of receipt)
of such notices, and our determination shall be final and binding on all
parties. We will deem any old notes so withdrawn not to have validity tendered
for exchange for
51
<PAGE> 57
purposes of the exchange offer. Any old notes that have been tendered for
exchange but that are not exchanged for any reason will be returned to their
holder without cost to the holder (or, in the case of old notes tendered by
book-entry transfer into the exchange agent's account at DTC according to the
procedures described above, such old notes will be credited to an account
maintained with DTC for old notes) as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. Properly withdrawn old
notes may be retendered by following one of the procedures described under
"Procedures for Tendering" above at any time on or prior to the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
For Overnight Delivery, Delivery by Hand
or Delivery by Registered or Certified Mail:
The Bank of New York
101 Barclay St., Reorg 7 East
New York, NY 10286
Attn: Gertrude Jean Pierre
By Facsimile Transmission
(for eligible institutions only):
(212) 815-6339
Confirm facsimile by telephone only:
(212) 815-5920
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitations by
telegraph, telephone or in person by its officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
52
<PAGE> 58
Our expenses in connection with the exchange offer include:
- SEC registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees and printing costs; and
- related fees and expenses.
TRANSFER TAXES
The Issuers will pay all transfer taxes, if any, applicable to the exchange
of old notes under the exchange offer. The tendering holder, however, will be
required to pay any transfer taxes (whether imposed on the registered holder or
any other person) if:
- certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of old notes
tendered;
- tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
notes under the exchange offer.
If satisfactory evidence of payment of such taxes is not submitted with the
letter of transmittal, the amount of such transfer taxes will be billed to that
tendering holder.
Holders who tender their old notes for exchange will not be required to pay
any transfer taxes. However, holders who instruct the Issuers to register new
notes in the name of, or request that old notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder will be required to pay any applicable transfer tax.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of old notes who do not exchange their old notes for new notes
under the exchange offer will remain subject to the restrictions on transfer
applicable to the old notes:
- as set forth in the legend printed on the old notes as a consequence of
the issuance of the old notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
- otherwise as set forth in the offering memorandum distributed in
connection with the private offering of the old notes.
In general, you may not offer or sell the old notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the exchange and registration rights agreement, the
Issuers do not intend to register resales of the old notes under the Securities
Act. Based on interpretations of the SEC staff, new notes issued pursuant to the
exchange offer may be offered for
53
<PAGE> 59
resale, resold or otherwise transferred by their holders (other than any such
holder that is our "affiliate" within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the holders acquired the new
notes in the ordinary course of the holders' business and the holders have no
arrangement or understanding with respect to the distribution of the new notes
to be acquired in the exchange offer. Any holder who tenders in the exchange
offer for the purpose of participating in a distribution of the new notes:
- could not rely on the applicable interpretations of the SEC; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
The Issuers will record the new notes in their accounting records at the
same carrying value as the old notes, as reflected in our accounting records on
the date of exchange. Accordingly, the Issuers will not recognize any gain or
loss for accounting purposes in connection with the exchange offer. The Issuers
will record the expenses of the exchange offer as incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
The Issuers may in the future seek to acquire untendered old notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Issuers have no present plans to acquire any old notes that
are not tendered in the exchange offer or to file a registration statement to
permit resales of any untendered old notes.
54
<PAGE> 60
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes.
In consideration for issuing the new notes as contemplated in this prospectus,
we will receive in exchange old notes in like principal amount, which will be
canceled and as such will not result in any increase in our indebtedness.
55
<PAGE> 61
CAPITALIZATION
The following table sets forth DonJoy's consolidated capitalization as of
June 29, 1999 on an historical basis and a pro forma basis adjusted to give
effect to the Transactions as if they had been consummated on such date. This
table should be read in conjunction with the consolidated financial statements,
including the notes thereto, "The Transactions," "Unaudited Pro Forma
Consolidated Financial Data," "Selected Historical Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 29, 1999
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash.................................................... $ 1,086 $ --
======= ========
Debt:
New credit facility(a)................................ $ -- $ 15,500
Old notes(b).......................................... -- 97,953
------- --------
Total debt.................................... -- 113,453
Redeemable preferred units(c)........................... -- 30,000
Members' equity (deficit)............................... 64,586 (71,667)
------- --------
Total capitalization.......................... $64,586 $ 71,786
======= ========
</TABLE>
- -------------------------
(a) Represents the $15.5 million term loan borrowed under the new credit
facility to consummate the recapitalization. Up to $25.0 million is
available under the revolving credit facility for working capital and
general corporate purposes, including to finance acquisitions, investments
and strategic alliances.
(b) Net of unamortized debt discount of approximately $2.0 million.
(c) Represents $31.4 million of proceeds received from the sale of Redeemable
Preferred Units, net of $1.4 million of fees paid. The $1.4 million of fees
will be accreted as dividends over the term of the Redeemable Preferred
Units. The Redeemable Preferred Units were issued by DonJoy. See "The
Transactions."
56
<PAGE> 62
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial and
other data of DonJoy as of and for the dates and periods indicated. DonJoy is a
guarantor of the notes and of the new credit facility and has no material assets
or operations other than its ownership of 100% of our equity interests. As a
result, the consolidated financial position and results of operations of DonJoy
are substantially the same as those of the Company. The historical consolidated
financial data at December 31, 1997 and 1998 and for the years ended December
31, 1996, 1997 and 1998 are derived from the audited consolidated financial
statements of DonJoy and the related notes thereto included elsewhere in this
prospectus. The historical financial data at December 31, 1996 (audited) and at
and for the years ended December 31, 1994 (unaudited) and 1995 (unaudited) are
derived from consolidated financial statements of DonJoy that are not included
in this prospectus. In September 1995, the Company acquired Professional Care
Products Incorporated and its operating results have been included in DonJoy's
consolidated financial statements since the date of acquisition. The selected
financial data at and for the six-month periods ended June 27, 1998 and June 29,
1999 are derived from the unaudited consolidated financial statements of DonJoy
and the related notes thereto included elsewhere in this prospectus (except for
the balance sheet data at June 27, 1998 which is not included in this
prospectus). In the opinion of management of DonJoy, the unaudited consolidated
financial data reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations for the unaudited periods. The results of operations for the interim
periods are not necessarily indicative of operating results for the full year.
The consolidated financial data set forth below should be read in conjunction
with the historical consolidated financial statements and the related notes
thereto, "Unaudited Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, -----------------------------
------------------------------------------------ JUNE 27, JUNE 29,
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues.............. $59,134 $67,756 $83,112 $92,741 $101,169 $48,044 $54,653
Cost of goods sold(a)..... 20,471 25,193 36,396 39,030 46,329 22,096 25,642
------- ------- ------- ------- -------- ------- -------
Gross profit.............. 38,663 42,563 46,716 53,711 54,840 25,948 29,011
Operating expenses(a):
Sales and marketing..... 17,318 18,148 20,067 22,878 25,296 12,001 13,371
General and
administrative........ 7,932 10,178 12,941 15,802 16,484 8,269 8,773
Research and
development........... 1,767 1,808 1,766 2,055 2,248 1,201 1,048
Restructuring
costs(b).............. -- -- -- -- 2,467 2,467 --
------- ------- ------- ------- -------- ------- -------
Total operating
expenses................ 27,017 30,134 34,774 40,735 46,495 23,938 23,192
------- ------- ------- ------- -------- ------- -------
Income from operations.... 11,646 12,429 11,942 12,976 8,345 2,010 5,819
Interest income (expense),
net..................... 297 (989) (2,459) (2,072) -- -- --
------- ------- ------- ------- -------- ------- -------
Income before income
taxes................... 11,943 11,440 9,483 10,904 8,345 2,010 5,819
</TABLE>
57
<PAGE> 63
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, -----------------------------
------------------------------------------------ JUNE 27, JUNE 29,
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Provision for income
taxes................... 4,902 4,535 3,828 4,367 3,394 817 2,387
------- ------- ------- ------- -------- ------- -------
Net income................ $ 7,041 $ 6,905 $ 5,655 $ 6,537 $ 4,951 $ 1,193 $ 3,432
======= ======= ======= ======= ======== ======= =======
OTHER DATA:
EBITDA(c)................. $13,574 $15,183 $16,584 $17,779 $ 15,665 $ 6,934 $ 8,270
Adjusted EBITDA(d)........ NM NM 19,187 22,090 21,957 10,058 11,498
Depreciation and
amortization............ 1,928 2,754 4,642 4,803 4,853 2,457 2,451
Capital expenditures...... 1,758 1,044 1,848 2,273 3,189 2,742 515
Ratio of earnings to fixed
charges(e).............. 32.71x 8.45x 3.94x 4.83x 8.84x 3.61x 15.79x
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash...................... $ 347 $ 718 $ 557 $ 910 $ 809 $ 285 $ 1,086
Working capital........... 7,253 8,511 9,675 9,749 15,625 11,744 23,533
Total assets.............. 31,172 73,184 70,787 71,288 77,056 75,413 75,560
Obligations to Smith &
Nephew (including
current portion)........ 2,824 44,456 53,428 45,027 45,227 46,853 1,628
Total equity.............. 19,183 12,593 1,344 7,881 12,832 9,074 64,586
</TABLE>
- -------------------------
NM: Not meaningful
(a) Includes various charges and overhead allocations from Smith & Nephew. See
note (d) below.
(b) DonJoy recorded restructuring costs in 1998 relating to the consolidation of
its operations at its Vista, California facility. See Note 4 of Notes to
Consolidated Financial Statements, "Unaudited Pro Forma Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Manufacturing Cost
Reduction Initiatives."
(c) "EBITDA" is defined as income from operations plus restructuring costs, and
depreciation and amortization. EBITDA is not a measure of performance under
generally accepted accounting principles. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure of
profitability or liquidity. However, management has included EBITDA because
it may be used by certain investors to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a
company's ability to service debt. The Company's definition of EBITDA may
not be comparable to that of other companies.
(d) "Adjusted EBITDA" represents EBITDA (as defined above) adjusted to eliminate
(1) charges for brand royalties paid by DonJoy to Smith & Nephew for use of
the Smith & Nephew trademarks and trade names;
(2) foreign sales corporation commissions paid by DonJoy on sales to
foreign sales corporations established by Smith & Nephew for tax
planning purposes;
58
<PAGE> 64
(3) Smith & Nephew overhead allocations for corporate managed accounts and
new business expense and corporate management expense which will not be
incurred following consummation of the Recapitalization (the
"Eliminated Allocations");
(4) Smith & Nephew overhead allocations for research and development and
for amounts charged by Smith & Nephew for services provided to DonJoy
for finance (risk management, treasury, audit and taxes), human
resources and payroll and legal services (collectively, the "Other
Corporate Allocations");
and adjusted to include the estimated costs expected to be incurred by
DonJoy to replace the services previously provided by Smith & Nephew as
part of the Other Corporate Allocations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, -----------------------------
--------------------------- JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
EBITDA.................... $16,584 $17,779 $15,665 $ 6,934 $ 8,270
Brand royalties........... 1,274 1,605 3,249 1,603 1,817
Foreign sales corporation
commissions............. 492 661 439 219 --
Eliminated Allocations.... 836 1,652 1,726 863 979
Other Corporate
Allocations............. 801 1,193 1,678 839 832
Estimated costs to replace
Smith & Nephew
services................ (800) (800) (800) (400) (400)
------- ------- ------- ------- -------
Adjusted EBITDA........... $19,187 $22,090 $21,957 $10,058 $11,498
======= ======= ======= ======= =======
</TABLE>
Adjusted EBITDA does not reflect adjustments for Smith & Nephew allocations
for bonus, pension and insurance or payroll taxes and benefits or charges
for direct legal expenses incurred by Smith & Nephew on DonJoy's behalf,
which costs and expenses DonJoy believes it would have incurred in
approximately the same amounts on a stand-alone basis, and are of a nature
it will continue to incur following the recapitalization. Accordingly, no
adjustments for these items have been made. For a more complete description
of the corporate charges and allocations, the services performed by Smith &
Nephew after the recapitalization and the ability of DonJoy to replace such
services, see Note 3 of Notes to Consolidated Financial Statements, "Risk
Factors -- No Recent Prior Operations as an Independent Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Smith & Nephew Allocations and Sales" and
"Certain Relationships and Related Transactions -- Other Agreements between
DonJoy and Smith & Nephew -- Transition Services Agreement."
(e) Earnings consist of income before income taxes plus fixed charges. Fixed
charges consist of (i) interest, whether expensed or capitalized, (ii)
amortization of debt issuance costs, whether expensed or capitalized, and
(iii) an allocation of one-third of the rental expense from operating leases
which management considers to be a reasonable approximation of the interest
factor of rental expense.
59
<PAGE> 65
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data of DonJoy
give effect to the Transactions. DonJoy is a guarantor of the notes and of the
new credit facility and has no material assets or operations other than its
ownership of 100% of our equity interests. As a result, the consolidated
financial position and results of operations of DonJoy are substantially the
same as ours. The unaudited pro forma consolidated balance sheet gives effect to
the Transactions as if they had occurred on June 29, 1999. The unaudited pro
forma consolidated statements of income for the year ended December 31, 1998 and
the six-month period ended June 29, 1999 give effect to the Transactions as if
they had occurred on January 1, 1998. The recapitalization will have no impact
on the historical basis of DonJoy's assets and liabilities as reflected in the
consolidated financial statements except for the elimination of the intercompany
accounts.
The pro forma financial data assume a purchase price for the redemption of
Smith & Nephew's Common Units in DonJoy in the recapitalization of $199.8
million. The consideration paid to Smith & Nephew will be increased (decreased)
on a dollar for dollar basis to the extent DonJoy's net operating assets (as
defined in the recapitalization agreement) on the closing date of the
recapitalization exceeded (was less than) $33.4 million. The determination of
any such adjustment will be made subsequent to the closing date of the
recapitalization. If any additional payment is to be made to Smith & Nephew
pursuant to the foregoing, the Company may borrow such amount under the new
revolving credit facility for distribution to DonJoy for payment to Smith &
Nephew.
The pro forma adjustments are based upon available information and certain
assumptions that DonJoy believes are reasonable under the circumstances. The
unaudited pro forma consolidated financial data do not purport to represent what
DonJoy's consolidated financial position or consolidated results of operations
would have actually been if the Transactions had in fact occurred on the dates
indicated and are not necessarily representative of DonJoy's consolidated
financial position or results of operations for any future date or period. The
unaudited pro forma consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
60
<PAGE> 66
DONJOY, L.L.C.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 29, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................. $ 1,086 $ (1,086)(a) $ --
Accounts receivable, net of allowance
for doubtful accounts of $697...... 16,415 -- 16,415
Accounts receivable, related
parties............................ 1,983 -- 1,983
Inventories, net...................... 14,441 -- 14,441
Other current assets.................. 582 -- 582
------- --------- --------
Total current assets............... 34,507 (1,086) 33,421
Property, plant and equipment, net.... 6,377 -- 6,377
Intangible assets, net................ 34,609 -- 34,609
Other assets.......................... 134 7,200(b) 7,334
------- --------- --------
Total assets............................ $75,627 $ 6,114 $ 81,741
======= ========= ========
LIABILITIES AND MEMBERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...................... $ 6,306 $ -- $ 6,306
Accounts payable, related parties..... 157 -- 157
Accrued compensation.................. 1,669 -- 1,669
Accrued commissions................... 794 -- 794
Intercompany obligations.............. 1,695 (1,086)(c) 609
Other accrued liabilities............. 420 -- 420
------- --------- --------
Total current liabilities.......... 11,041 (1,086)(c) 9,955
Long-term debt........................ -- 113,453(d) 113,453
Redeemable Preferred Units.............. -- 30,000(e) 30,000
Members' equity (deficit)............... 64,586 (136,253)(f) (71,667)
------- --------- --------
Total liabilities and members' equity
(deficit)............................. $75,627 $ 6,114 $ 81,741
======= ========= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
61
<PAGE> 67
DONJOY, L.L.C.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
BALANCE SHEET
(DOLLARS IN THOUSANDS IN ALL TABLES)
(a) Entry records elimination of cash retained by Smith & Nephew in
accordance with the recapitalization agreement.
(b) The Company incurred fees and expenses of $8.7 million in connection
with the Transactions, of which approximately $1.5 million will be
charged against equity in the third quarter of 1999. The adjustment
reflects the balance of $7.2 million in debt issuance costs which will
be amortized over the terms of the related debt instruments.
(c) Pursuant to the recapitalization agreement, all cash was to be retained
by Smith & Nephew. However, due to timing of deposits, cash held by the
Company on June 29, 1999 could not be transferred to Smith & Nephew in
accordance with the recapitalization agreement. Accordingly, the
Company recorded at June 29, 1999, a liability to Smith & Nephew in the
amount of the cash. Entry records elimination of the liability for cash
held by the Company but owed to Smith & Nephew.
(d) Reflects the new long-term debt of the Company consisting of the $15.5
million term loan, and the old notes. The notes are reflected net of
unamortized discount of approximately $2.0 million. The discount will
be charged to earnings over the term of the notes. Total borrowings of
up to $25.0 million under the new revolving credit facility are also
available for working capital and general corporate purposes, including
to finance acquisitions, investments and strategic alliances.
(e) Reflects the issuance of the redeemable preferred units by DonJoy, net
of $1.4 million of fees paid to CB Capital and First Union investors on
a pro rata basis. The $1.4 million of fees will be accreted as
dividends over the term of the Redeemable Preferred Units.
(f) Consists of the following adjustments to members' equity (deficit):
<TABLE>
<S> <C>
Equity investments by CDP......................... $ 64,550
Equity investment by Management Members........... 1,850
Less: Note receivable from Management Members..... (1,400)
Consideration paid to Smith & Nephew.............. (199,756)
Transaction fees.................................. (1,497)
---------
$(136,253)
=========
</TABLE>
62
<PAGE> 68
DONJOY, L.L.C.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1998 SIX MONTHS ENDED JUNE 29, 1999
-------------------------------------- --------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues........................... $101,169 $ -- $101,169 $54,653 $ -- $54,653
Cost of goods sold..................... 46,329 (3,249)(a) 43,080 25,642 (1,817)(a) 23,825
-------- -------- -------- ------- ------- -------
Gross profit......................... 54,840 3,249 58,089 29,011 1,817 30,828
Operating expenses:
Sales and marketing.................. 25,296 -- 25,296 13,371 -- 13,371
General and administrative........... 16,484 (3,043)(b) 13,441 8,773 (1,411)(b) 7,362
Research and development............. 2,248 -- 2,248 1,048 -- 1,048
Restructuring costs.................. 2,467 -- 2,467 -- -- --
-------- -------- -------- ------- ------- -------
Total operating expenses............... 46,495 (3,043) 43,452 23,192 (1,411) 21,781
Income from operations................. 8,345 6,292 14,637 5,819 3,228 9,047
Interest income (expense), net......... -- (15,031)(c) (15,031) -- (7,516)(c) (7,516)
-------- -------- -------- ------- ------- -------
Income (loss) before income taxes.... 8,345 (8,739) (394) 5,819 (4,288) 1,531
Provision (benefit) for income taxes... 3,394 (3,394)(d) -- 2,387 (2,387)(d) --
-------- -------- -------- ------- ------- -------
Net income (loss)...................... $ 4,951 $ (5,345) $ (394) $ 3,432 $(1,901) $ 1,531
======== ======== ======== ======= ======= =======
EBITDA(e).............................. $ 15,665 $ 21,957 $ 8,270 $11,498
======== ======== ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of Income.
63
<PAGE> 69
DONJOY, L.L.C.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS IN ALL TABLES)
(a) Entry records elimination of brand royalties charged by Smith & Nephew
for use of Smith & Nephew's trademarks and trade names. Following the
recapitalization, the Company does not have the license to use any of
the Smith & Nephew trademarks or tradenames.
(b) Entry records the elimination of (i) foreign sales corporation
commissions paid by DonJoy on sales to foreign sales corporations
established by Smith & Nephew for tax planning purposes, (ii) Smith &
Nephew overhead allocations for corporate managed accounts and new
business expense and corporate management expense which the Company
will not incur following the recapitalization (the "Eliminated
Allocations"), (iii) Smith & Nephew overhead allocations for research
and development and for amounts charged by Smith & Nephew for services
provided to DonJoy for finance (risk management, treasury, audit and
taxes), human resources and payroll and legal services (collectively,
the "Other Corporate Allocations"); and the inclusion of (iv) the
estimated costs to replace the services previously provided by Smith &
Nephew as part of the Other Corporate Allocations, as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 29, 1999
----------------- -------------
<S> <C> <C>
Foreign sales corporation
commissions.................... $ 439 $ --
Eliminated Allocations........... 1,726 979
Other Corporate Allocations...... 1,678 832
Estimated cost to replace Smith &
Nephew services................ (800) (400)
------ ------
$3,043 $1,411
====== ======
</TABLE>
The pro forma statements of income do not reflect adjustments for Smith
& Nephew allocations for bonus, pension and insurance or payroll taxes
and benefits or charges for direct legal expenses incurred by Smith &
Nephew on DonJoy's behalf, which costs and expenses DonJoy believes it
would have incurred on a stand-alone basis in approximately the same
amounts during the pro forma periods presented, and are of a nature it
will continue to incur following the recapitalization. Accordingly, no
pro forma adjustments for these items have been made. For a more
complete description of the corporate charges and allocations, the
services performed by Smith & Nephew after the recapitalization and the
ability of DonJoy to replace such services, see Note 3 of Notes to
Consolidated Financial Statements, "Risk Factors -- No Recent Prior
Operations as an Independent Company," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview --
64
<PAGE> 70
Smith & Nephew Allocations and Sales" and "Certain Relationships and
Related Transactions -- Other Agreements between DonJoy and Smith &
Nephew -- Transition Services Agreement."
(c) Pro forma adjustments to interest expense as a result of the
Transactions are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 29, 1999
----------------- -------------
<S> <C> <C>
New credit facility ($15,500 at
assumed weighted average rate
of 8.25%)...................... $ 1,279 $ 639
Old notes........................ 12,625 6,313
Commitment fee on unused portion
of new revolving credit
facility ($25,000 at 0.5%)..... 125 63
------- ------
Total pro forma cash interest
expense........................ 14,029 7,015
Amortization of debt issuance
costs.......................... 802 401
Amortization of discount......... 200 100
------- ------
Total pro forma interest
expense........................ $15,031 $7,516
======= ======
</TABLE>
(d) Eliminates provision for income taxes. DonJoy and the Company are
limited liability companies; as such neither will be subject to tax
following the recapitalization as DonJoy's earnings will be included in
the taxable income of its members. The indenture and the new credit
facility permit the Company to make distributions to DonJoy in certain
amounts to allow DonJoy to make distributions to its members to pay
income taxes on such allocated earnings.
(e) EBITDA is defined as income from operations plus restructuring costs,
and depreciation and amortization. EBITDA is not a measure of
performance under generally accepted accounting principles. EBITDA
should not be considered in isolation or as a substitute for net
income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with generally accepted
accounting principles, or as a measure of profitability or liquidity.
However, management has included EBITDA because it may be used by
certain investors to analyze and compare companies on the basis of
operating performance, leverage and liquidity and to determine a
company's ability to service debt. The Company's definition of EBITDA
may not be comparable to that of other companies.
65
<PAGE> 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DonJoy is a guarantor of the notes and of the new credit facility and has
no material assets or operations other than its ownership of all of our equity
interests. As a result, the discussion below of the historical consolidated
financial position and results of operations of DonJoy is substantially the same
as ours.
The following discussion and analysis of DonJoy's financial condition and
results of operations covers periods prior to the consummation of the
Transactions. Accordingly, the discussion and analysis of historical periods
does not reflect the significant impact that the Transactions will have on
DonJoy and the Company, including significantly increased leverage and liquidity
requirements. See "Risk Factors," "Capitalization," "Unaudited Pro Forma
Consolidated Financial Data," and "-- Liquidity and Capital Resources." The
following discussion should be read in conjunction with DonJoy's historical
consolidated financial statements and the related notes thereto and the other
financial data included elsewhere in this prospectus.
OVERVIEW
SEGMENTS. The Company designs, manufactures and markets orthopedic
recovery products and complementary products. The Company's product lines
include rigid knee braces, soft goods and a portfolio of specialty and other
orthopedic products. The Company's rigid knee braces include ligament braces,
which provide durable support for knee ligament instabilities, post-operative
braces, which provide both knee immobilization and a protected range of motion,
and OA braces, which provide relief of knee pain due to osteoarthritis. The
Company's soft goods products, most of which are fabric or neoprene-based,
provide support and/or heat retention and compression for afflictions of the
knee, ankle, back and upper extremities, including the shoulder, elbow, neck and
wrist. The Company's portfolio of specialty and other orthopedic products, which
are designed to facilitate orthopedic rehabilitation, include lower extremity
walkers, upper extremity braces, cold therapy systems and pain management
delivery systems. The rigid knee brace product lines and the soft goods product
lines constitute reportable segments under generally accepted accounting
principles. See Note 7 of Notes to Consolidated Financial Statements. Set forth
below is revenue and gross profit information for the Company's three product
lines for the years ended December 31, 1996, 1997 and 1998 and the first six
months of 1998 and 1999. Gross profit information is presented before brand
royalties charged by Smith & Nephew for use of Smith & Nephew trademarks and
trade names (which charges are no longer incurred by the Company following the
recapitalization) and certain other cost of goods sold, primarily manufacturing
variances, which have not been directly allocated to any of the product lines.
See Note 7 of Notes to Consolidated Financial Statements.
66
<PAGE> 72
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------
----------------------------- JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
------- ------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rigid knee braces:
Net revenues......... $47,849 $48,371 $48,777 $24,405 $24,031
Gross profit......... 32,092 33,910 34,460 16,924 17,238
Gross profit
margin............ 67.1% 70.1% 70.6% 69.3% 71.7%
Soft goods:
Net revenues......... $27,194 $31,737 $34,364 $16,102 $18,775
Gross profit......... 12,965 15,541 16,637 7,805 9,130
Gross profit
margin............ 47.7% 49.0% 48.4% 48.5% 48.6%
Specialty and other
orthopedic products:
Net revenues......... $ 8,069 $12,633 $18,028 $ 7,537 $11,847
Gross profit......... 3,814 6,132 8,978 3,678 5,895
Gross profit
margin............ 47.3% 48.5% 49.8% 48.8% 49.8%
</TABLE>
The Company's total gross profit margin before brand royalties and other cost of
goods sold not allocable to specific product lines was 58.8%, 59.9%, 59.4%,
59.1% and 59.0% in 1996, 1997 and 1998 and the first six months of 1998 and
1999, respectively.
The Company's products are marketed globally under the DonJoy and ProCare
brand names through several distribution channels. DonJoy brand product sales
represented approximately 75% of total net revenues in 1998. The Company markets
substantially all of its rigid knee braces, approximately 80% of its specialty
and other orthopedic products and approximately 40% of its soft goods products
under the DonJoy brand name. ProCare brand product sales represented
approximately 25% of total net revenues in 1998. The Company markets
approximately 60% of its soft goods products, approximately 20% of its specialty
and other orthopedic products and a small percentage of its rigid knee braces
under the ProCare brand name.
DOMESTIC SALES. In the United States, DonJoy brand products are marketed
to orthopedic surgeons, orthotic and prosthetic centers, hospitals, surgery
centers, physical therapists and trainers by 26 commissioned agents who employ
approximately 185 sales representatives. After a product order is received by a
sales representative, the Company ships and bills the product directly to the
orthopedic professional and the Company pays a sales commission to the agent.
The gross profit and gross profit margins on DonJoy products sold in the United
States do not include the commissions paid to the agents on sales of such
products, which commissions are reflected in sales and marketing expense in the
consolidated financial statements. Domestic sales of DonJoy brand products
represented approximately 60% of total net revenues in 1998.
ProCare products are sold in the United States to third party distributors,
including large, national distributors, regional specialty dealers and medical
products buying groups who generally purchase such products at a discount from
list prices. These distributors then resell ProCare products to large hospital
chains,
67
<PAGE> 73
hospital buying groups, primary care networks and orthopedic physicians for use
by the patients. Domestic sales of ProCare products represented approximately
20% of total net revenues in 1998.
INTERNATIONAL SALES. International sales, primarily in Europe and Japan,
accounted for approximately 20%, 18%, 18%, 20% and 16% of the Company's net
revenues in 1996, 1997 and 1998 and the first six months of 1998 and 1999,
respectively. Sales in Germany, the Company's largest foreign market, accounted
for approximately one-third of the Company's 1998 international net revenues,
with no other country accounting for more than approximately 10% of the
Company's 1998 international net revenues. Sales in Europe, primarily Germany,
the United Kingdom, France, Spain and Italy, accounted for approximately 69% of
the Company's 1998 international net revenues. Sales in Japan accounted for
approximately 7% of the Company's 1998 international net revenues. The Company
expects its international net revenues to increase as a percentage of its total
net revenues in the future.
International sales are currently made through two distinct channels: Smith
& Nephew sales organizations within each major country (such as the United
Kingdom, France, Italy and Spain) and independent third party distributors (such
as in Germany). Distributors in both of these channels buy and resell the
Company's products and have the ability to sell DonJoy and ProCare brand
products within their designated countries. DonJoy brand products constituted
approximately 80% of total international sales during 1998. ProCare products are
currently generally resold by the Smith & Nephew sales organizations under the
Smith & Nephew name. Approximately 55% of international sales in 1998 were
generated through the Smith & Nephew sales organizations. The Company believes
future opportunities for sales growth within international markets are
significant. The Company expects to increase international sales by reorganizing
and expanding its international distribution network and implementing the
marketing and distribution strategies which it has successfully utilized in the
United States and certain international territories, most notably Germany. In
particular, the Company intends to replace most of its existing Smith & Nephew
sales organizations with independent distributors who will focus on building
strong relationships with the Company's targeted customers and will be
responsible for achieving specified sales targets. As of October 1, 1999, the
Company has replaced 11 Smith & Nephew sales organizations with independent
distributors. The Company has also given notice to Smith & Nephew that the
Company will terminate 8 of the remaining 19 Smith & Nephew sales organizations
by the beginning of 2000. See "Risk Factors -- Transition to New Independent
Distributors in International Markets" and "Business -- Business
Strategy -- Increase International Sales."
The Company's international sales are made in United States dollars.
Accordingly, the Company's results of operations are not directly impacted by
foreign currency exchange fluctuations. However, the volume and product mix of
international sales may be impacted by foreign currency exchange fluctuations as
changes in the rate of exchange between the U.S. dollar and the foreign currency
will affect the cost of our products to our customers and thus may impact the
overall level of customer purchases or result in the customer purchasing less
expensive products. See "Risk Factors -- International Operations."
68
<PAGE> 74
THIRD PARTY REIMBURSEMENT; HEALTH CARE REFORM; MANAGED CARE. While
national health care reform and the advent of managed care has impacted the
orthopedic recovery products industry, its impact has not been as dramatic as
experienced by other sectors of the health care market, such as long term care,
physician practice management and managed care (capitation) programs. In recent
years, efforts to control medical costs within the U.S. orthopedic recovery
products industry have been directed towards scrutiny of medical device
reimbursement codes, whereby devices are classified to determine the dollar
amount eligible for reimbursement, and their applicability toward certain
orthopedic procedures. Reimbursement codes covering certain of the Company's
products have been lowered or narrowed, thereby reducing the breadth of products
for which reimbursement can be sought. The Company expects that a reduction in
the total dollar value eligible for reimbursement will occur in the future as
the reform process continues.
In international markets, while the movement toward health care reform and
the development of managed care are generally not as advanced as in the United
States, the Company has experienced similar downward pressure on product pricing
and other effects of health care reform as it has experienced in the United
States. The Company expects health care reform and managed care to continue to
develop in its primary international markets, including Europe and Japan, which
the Company expects will result in further downward pressure in product pricing.
In response to the historic and forecasted reductions of reimbursement
rates and the impact of demand matching (where patients are evaluated as to age,
need for mobility and other parameters and are then matched with an orthopedic
recovery product that is cost effective in light of such evaluation), the
Company and many of its competitors are introducing new product offerings at
lower prices. This is particularly evident within the U.S. rigid knee bracing
segment of the orthopedic recovery products industry where the Company and many
of its competitors are offering lower priced, off-the-shelf products. The
minimal sales growth in the Company's rigid knee bracing product lines over the
past few years has in part resulted from these price pressures.
The Company believes that it will not be materially adversely affected by
U.S. or international health care reform. The Company currently does not have
any capitated health care service arrangements. The Company believes that to the
extent it responds to price pressures through lower prices for its products, it
will be able to substantially offset the effect of this price erosion through
reductions in its manufacturing and other costs. In addition, because of the
quality, functionality and reputation of its products, its marketing and sales
programs which emphasize strong relationships with customers and the service it
provides to its customers, the Company believes it will be able to compete even
if reimbursement rates are materially altered. For example, revenues from the
IceMan from 1997 to 1998 increased despite elimination of its eligibility for
reimbursement.
A further result of managed care and the related pressure on costs has been
the advent of buying groups in the United States which enter into preferred
supplier arrangements with one or more manufacturers of orthopedic or other
medical products in return for price discounts. The Company has entered into
national contracts with selected buying groups and expects to enter into
additional national contracts in the future. The Company believes that the high
level of
69
<PAGE> 75
product sales to such groups, to the extent such groups are able to command a
high level of compliance by their members with the preferred supplier
arrangements, and the opportunity for increased market share can offset the
financial impact of the price discounting under such contracts. Accordingly,
although there can be no assurance, the Company believes that such price
discounting will not have a material adverse effect on the Company's operating
results in the future. See "Risk Factors -- Responses by Health Care Providers
to Price Pressures; Formation of Buying Groups" and "Business -- Sales,
Distribution and Marketing -- United States."
OFFICECARE PROGRAM. In 1996, in response to the needs of its customers,
the Company launched OfficeCare, an inventory management and insurance billing
program for its U.S. orthopedic physician customers. Under the OfficeCare
program, the Company provides the orthopedic physician with an inventory of
orthopedic products for immediate disbursement to the physician's patients. The
Company then directly seeks reimbursement from the patient's insurance company,
other third party payor or from the patient where self-pay is applicable.
Since its inception, the OfficeCare program has been promoted specifically
to provide the Company's orthopedic physician customers with a full complement
of soft goods and certain specialty products (including products of competitors)
for immediate patient use. The OfficeCare program is intended to introduce new
orthopedic physicians to the Company's product lines without financial risk to
the potential customer.
The OfficeCare program represented approximately 6% and 7.5% of the
Company's net revenues for 1998 and the first six months of 1999, respectively,
with sales of soft goods representing the majority of such sales. As a result of
the growth of the program, the Company's working capital needs have
significantly increased due to higher levels of accounts receivable and
inventories necessary to operate the program. In addition, OfficeCare has
expanded the Company's involvement in the third party reimbursement process, or
in certain cases directly with the patient. The collection period for these
receivables as compared to other segments of the Company's business is
significantly longer and has also resulted in a need to increase the Company's
bad debt allowance requirements.
SMITH & NEPHEW ALLOCATIONS AND SALES. Prior to December 29, 1998, the
Company's business was operated as the Bracing & Support Systems Division (the
"Division") of Smith & Nephew. Effective December 29, 1998, Smith & Nephew
contributed the Division's net assets and shares of a Mexican subsidiary to
DonJoy, then a newly formed Delaware limited liability company, the sole member
of which was Smith & Nephew. Accordingly, the contribution has been accounted
for on a predecessor basis for financial reporting purposes.
As a result of the Company formerly being a division of Smith & Nephew, the
Company's historical results of operations reflect certain direct charges from
Smith & Nephew as well as certain allocations of Smith & Nephew's overhead and
other expenses. These amounts were charged or allocated to the Company on the
basis of direct usage where identifiable, with the remainder allocated to the
Company on the basis of its annual sales or the capital employed by Smith &
Nephew in the Company's business. See Note 3 of Notes to Consolidated Financial
Statements.
70
<PAGE> 76
The following is a summary of such charges and allocations and their
applicability to the Company on a stand-alone basis following the
recapitalization. See "Unaudited Pro Forma Consolidated Financial Data".
(1) Charges for brand royalties historically included in the Company's
cost of goods sold resulting from the use by the Company of the Smith &
Nephew trademarks and trade name. These charges were $1.3 million, $1.6
million, $3.2 million, $1.6 million and $1.8 million in 1996, 1997 and 1998
and the first six months of 1998 and 1999, respectively. As a result of the
recapitalization, the Company no longer has the right to use the Smith &
Nephew trademarks and trade names and, accordingly, these charges are no
longer incurred by the Company.
(2) Foreign sales corporation commissions historically included in the
Company's general and administrative expense paid by the Company on sales
to foreign sales corporations established by Smith & Nephew. The use of
foreign sales corporations was a tax planning strategy for Smith & Nephew.
These charges were $0.5 million, $0.7 million, $0.4 million, $0.2 million
and $0 in 1996, 1997 and 1998 and the first six months of 1998 and 1999,
respectively. Following the recapitalization, the Company no longer incurs
these charges.
(3) Smith & Nephew allocations for a portion of its corporate managed
accounts and new business expense and corporate management expense
historically included in the Company's general and administrative expense.
These allocations (referred to in this prospectus as the "Eliminated
Allocations") were $0.8 million, $1.7 million, $1.7 million, $0.9 million
and $1.0 million in 1996, 1997 and 1998 and the first six months of 1998
and 1999, respectively. These allocations were for a portion of Smith &
Nephew's overhead expenses that the Company will not incur or replace
following the recapitalization.
(4) Smith & Nephew allocations for research and development and for
finance (risk management, treasury, audit and taxes), human resources and
payroll, and legal services historically provided by Smith & Nephew to the
Company which were included in the Company's general and administrative
expense. These allocations (referred to in this prospectus collectively as
the "Other Corporate Allocations") were $0.8 million, $1.2 million, $1.7
million, $0.8 million and $0.8 million in 1996, 1997 and 1998 and the first
six months of 1998 and 1999, respectively. These allocations were for a
portion of Smith & Nephew's overhead expenses. The Company on a stand-alone
basis will need to replace these services provided by Smith & Nephew
following the recapitalization, and will incur additional expenses
associated with external auditing and periodic filings with the Securities
and Exchange Commission. The Company estimates that the aggregate cost of
replacing these services and such additional expenses will be approximately
$800,000 following the recapitalization.
(5) Other allocations relating to bonuses, pension and insurance
historically included in the Company's cost of goods sold, sales and
marketing expense and general and administrative expense, and charges for
payroll taxes and benefits and direct legal expenses incurred by Smith &
Nephew on the Company's behalf included in the Company's general and
administrative
71
<PAGE> 77
expense. These costs and expenses are of a nature the Company expects to
continue to incur on a stand-alone basis following the recapitalization.
Under a transition services agreement entered into in connection with the
recapitalization, Smith & Nephew will continue to provide certain of the
administrative services referred to in paragraph (4) above as required by the
Company through December 31, 1999 at no cost to the Company except that the
Company will reimburse Smith & Nephew for all payments made by Smith & Nephew to
third parties in conjunction with providing the services. Based on prior
practice, such payments are not expected to be material. See "Certain
Relationships and Related Transactions -- Other Agreements between DonJoy and
Smith & Nephew -- Transition Services Agreement." The Company believes that
prior to the termination of the transition services agreement, it will replace
the services provided by Smith & Nephew either with internal staff, including
through the addition of new employees, or through arrangements with third party
providers. As noted above, the Company estimates that the services described in
paragraph (4) above (which will be reflected as general and administrative
expense following the recapitalization) will cost the Company approximately
$800,000 following the recapitalization. However, there can be no assurance that
the Company will be able to obtain suitable replacement sources for such
services, either internally or through or outsourcing arrangements, or that if
obtained, such services will not cost significantly in excess of the Company's
estimates.
For the years ended December 31, 1996, 1997 and 1998 and the first six
months of 1998 and 1999, the Company's sales to Smith & Nephew and its
affiliates (including Smith & Nephew's sales organizations) were $9.7 million,
$11.8 million, $10.7 million, $5.7 million and $5.2 million, respectively, or
12%, 13%, 11%, 12% and 10%, respectively, of total sales for these periods.
International sales represented the vast majority of sales to Smith & Nephew and
its affiliates, accounting for approximately 89%, 74%, 91%, 92% and 89% of total
sales to Smith & Nephew and its affiliates in 1996, 1997 and 1998 and in the
first six months of 1998 and 1999, respectively. See Note 7 of Notes to
Consolidated Financial Statements. Domestic sales to Smith & Nephew and its
affiliates were higher in 1997 as a result of sales to a Smith & Nephew
affiliate, which then resold the Company's products to a third party. Beginning
in 1998, the Company made these sales directly to the third party. In connection
with the recapitalization, Smith & Nephew and its sales organizations which
distribute the Company's products internationally entered into agreements with
the Company regarding the purchase of Company products following consummation of
the recapitalization. However, neither Smith & Nephew nor such sales
organizations have any obligation to purchase any specific or minimum quantity
of products pursuant to such agreements. See "Certain Relationships and Related
Transactions -- Other Agreements between DonJoy and Smith & Nephew -- Supply
Agreement" and "-- Distribution Agreement". Accordingly, while the Company
believes that Smith & Nephew and its sales organizations will continue to
purchase Company products following the recapitalization, there can be no
assurance that sales to Smith & Nephew following the recapitalization will
continue at historical levels or that such sales in the future will not be
significantly reduced.
MANUFACTURING COST REDUCTION INITIATIVES. Over the past several years, the
Company has undertaken two initiatives designed to lower its overall
manufacturing cost structure. First, in order to take advantage of the lower
labor costs in
72
<PAGE> 78
Mexico, the Company in 1993 began manufacturing certain of its labor intensive
products, principally soft goods products, subassemblies and pads used in rigid
knee braces and covers, in two facilities in Tijuana, Mexico. Secondly, in 1998
the Company completed the consolidation of its domestic operations into one
location in Vista, California. As a result, the Company incurred $2.5 million of
restructuring costs (net of $0.3 million of deferred rent reflected on its
balance sheet which related to the vacated facility) in 1998 substantially all
of which related to lease termination costs on the vacated facility. In 1998 and
the first six months of 1999, $2.0 million of the restructuring reserve was
utilized through payments on the vacated facility net of sublease income and
write-off of certain abandoned fixed assets of the vacated facility. Pursuant to
the recapitalization agreement, the remainder of the restructuring reserve,
which amounted to $0.9 million at June 29, 1999 and consisted of the remaining
lease obligations on the vacated facility, was assumed by Smith & Nephew. See
"Unaudited Pro Forma Consolidated Financial Data." In addition, 1998 general and
administrative expense included $0.2 million of costs related to moving costs
resulting from the consolidation of the facilities. Operating results for the
first three quarters of 1998 were adversely affected by the consolidation due to
disruption caused as the Company totally integrated manufacturing operations of
the DonJoy and ProCare brands which were previously separate and distinct, but
returned to prior levels in the fourth quarter of 1998 and the first six months
of 1999.
The Company intends to continue to pursue opportunities to reduce
manufacturing costs and improve operating efficiencies. The Company will move as
appropriate greater portions of its labor intensive operations to its facilities
in Mexico to generate further labor cost savings for its more labor intensive
products and utilize the resulting additional capacity in its U.S. facilities to
manufacture its more technologically advanced products. By upgrading its
computer systems to achieve more efficient production, the Company expects to
achieve material and labor cost reductions as well as economies of scale across
its manufacturing operation. In addition, the Company intends to further
automate its manufacturing operations through the use of more technologically
advanced fabrication and equipment systems. The Company will continue to
rationalize raw materials used in the production of its existing products,
thereby enabling the Company to leverage its purchasing power. Finally, in order
to achieve further cost savings, the Company intends to further reduce its
number of stock keeping units (SKUs) without impacting service or breadth of the
Company's product range.
BASIS OF PRESENTATION; TAXES. The recapitalization had no impact on the
historical basis of the Company's assets and liabilities as reflected in the
consolidated financial statements except for the elimination of the intercompany
accounts. However, as a result of the recapitalization, for federal income tax
purposes, the Company will record an increase in the tax basis of its fixed and
intangible assets in an amount approximately equal to the taxable gain
recognized by Smith & Nephew on the sale of its interest in DonJoy. As a result,
after the recapitalization, for tax purposes the Company will be able to
depreciate assets with a higher tax basis than for financial reporting purposes.
Prior to the recapitalization, the Company's results of operations were included
in the consolidated federal income tax returns which Smith & Nephew filed in the
United States and the historical financial statements reflect a provision for
income taxes assuming that DonJoy had filed a separate federal income tax
return. As limited
73
<PAGE> 79
liability companies, DonJoy and the Company are not subject to income taxes
following the recapitalization. See "Unaudited Pro Forma Consolidated Financial
Data." Instead, DonJoy's earnings following the recapitalization will be
allocated to its members and included in the taxable income of its members. The
indenture and the new credit facility permit the Company to make distributions
to DonJoy in certain amounts to allow DonJoy to make distributions to its
members to pay income taxes in respect of their allocable share of taxable
income of DonJoy and its subsidiaries, including the Company.
RESULTS OF OPERATIONS
The Company operates its business on a manufacturing calendar, with its
fiscal year always ending on December 31. Each quarter is 13 weeks, consisting
of one five-week and two four-week periods. The first and fourth quarters may
have more or less working days from year to year based on what day of the week
holidays fall on. See "-- Six Months Ended June 29, 1999 Compared to Six Months
Ended June 27, 1998."
The following table sets forth the Company's operating results as a
percentage of net revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, SIX MONTHS ENDED
--------------------- -------------------
JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues
Rigid knee bracing............... 57.6% 52.2% 48.2% 50.8% 44.0%
Soft goods....................... 32.7 34.2 34.0 33.5 34.3
Specialty and other orthopedic
products...................... 9.7 13.6 17.8 15.7 21.7
----- ----- ----- ----- -----
Total consolidated net revenues.... 100.0 100.0 100.0 100.0 100.0
Cost of goods sold allocable to
product lines.................... 41.2 40.1 40.6 40.9 41.0
----- ----- ----- ----- -----
Gross profit exclusive of brand
royalties and other cost of goods
sold............................. 58.8 59.9 59.4 59.1 59.0
Brand royalties.................. 1.5 1.7 3.2 3.3 3.3
Other cost of goods sold......... 1.1 .3 2.0 1.8 2.6
----- ----- ----- ----- -----
Gross profit....................... 56.2 57.9 54.2 54.0 53.1
Sales and marketing................ 24.1 24.7 25.0 25.0 24.5
General and administrative......... 15.6 17.0 16.3 17.2 16.0
Research and development........... 2.1 2.2 2.2 2.5 1.9
Restructuring costs................ -- -- 2.4 5.1 --
----- ----- ----- ----- -----
Income from operations............. 14.4 14.0 8.3 4.2 10.7
Interest income (expense), net..... (3.0) (2.2) -- -- --
----- ----- ----- ----- -----
Income before income taxes......... 11.4 11.8 8.3 4.2 10.7
Provision for income taxes......... 4.6 4.7 3.4 1.7 4.4
----- ----- ----- ----- -----
Net income......................... 6.8% 7.1% 4.9% 2.5% 6.3%
===== ===== ===== ===== =====
</TABLE>
74
<PAGE> 80
The following table summarizes certain of the Company's operating results
by quarter for 1997 and 1998 and the first six months of 1999.
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------------- ------------------------------------- -----------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $22,930 $21,843 $23,166 $24,802 $24,568 $23,476 $24,770 $28,355 $28,651 $26,002
Gross profit......... 13,050 12,960 13,200 14,501 12,940 13,008 13,272 15,620 15,051 13,960
Income from
operations......... 3,444 2,948 2,881 3,703 79 1,931 2,174 4,161 3,080 2,739
Number of operating
days............... 62 63 63 64 60 63 63 65 64 61
</TABLE>
SIX MONTHS ENDED JUNE 29, 1999 COMPARED TO SIX MONTHS ENDED JUNE 27, 1998
NET REVENUES. Net revenues increased $6.6 million, or 13.8%, to $54.7
million for the first six months of 1999 from $48.0 million for the first six
months of 1998. The first six months of 1999 contained two more business days
than the first six months of 1998 which resulted in approximately $900,000 more
revenue in the first six months of 1999 as compared to the first six months of
1998. Net revenues for the rigid knee bracing segment decreased marginally
between periods. Higher unit sales of ligament and post-operative braces were
offset by lower unit sales of OA braces. Soft goods sales increased by $2.7
million over the prior period due primarily to increased sales volumes of
neoprene bracing products, wrist splints and other soft good supports. These
increases primarily reflect the effect of national contracts entered into in the
second half of 1998. Specialty and other orthopedic products sales increased by
$4.3 million over the prior period due primarily to the recently introduced
Painbuster pain management delivery systems and to increased sales of lower
extremity walkers.
GROSS PROFIT. Gross profit increased $3.1 million, or 11.8%, to $29.0
million for the first six months of 1999 from $25.9 million for the first six
months of 1998. Gross profit margin, exclusive of brand royalties and other cost
of goods sold not allocable to specific product lines, was consistent between
periods. Gross profit for the rigid knee bracing segment increased $0.3 million,
with gross profit margin increasing to 71.7% from 69.3%. These increases
reflected the improved product mix. Gross profit for the soft goods segment
increased $1.3 million as a result of increased sales volume at substantially
the same margin as the prior period. Gross profit for the specialty and other
orthopedic products segment increased $2.2 million, with gross profit margin
increasing to 49.8% from 48.8%. These changes reflect the change in product mix.
Brand royalties charged by Smith & Nephew for the use of its trademarks and
trade names were relatively consistent with the prior period as a percentage of
net revenues. In the first six months of 1999, other cost of goods sold not
allocable to specific product lines increased primarily due to the OfficeCare
program and the amortization of the Painbuster pain management delivery system
distribution rights.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $1.4
million, or 11.4%, to $13.4 million for the first six months of 1999 from $12.0
million for the first six months of 1998. The increase primarily reflected an
increase in commissions associated with higher sales of DonJoy products in the
United States.
75
<PAGE> 81
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.5 million, or 6.1%, to $8.8 million for the first six months of
1999 from $8.3 million for the first six months of 1998. The increase was
primarily due to an increase in corporate allocations from Smith & Nephew of
$0.3 million and increases in salaries and benefits during the first six months
of 1999. However, general and administrative expenses declined as a percentage
of revenues to 16.1% from 17.2%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately equal over the two periods. Significant resources within the
department were re-deployed to focus primarily on the development of the VISTA
System during the first six months of 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues increased $8.4 million, or 9.1%, to $101.2
million in 1998 from $92.7 million in 1997. Net revenues in the rigid knee
bracing segment increased marginally between the periods. Lower unit sales of
ligament and OA braces were offset by an increase in unit sales of
post-operative braces and an overall improvement in product mix. Soft goods
sales increased by $2.6 million over the prior year period due to increased
sales volumes of wrist splints, slings and immobilizers and other soft good
supports. The increased sales volumes of these products were primarily the
result of growth in the OfficeCare program. Specialty and other orthopedic
products sales increased $5.4 million over the prior year period primarily due
to increased sales volumes of lower extremity walkers, shoulder products, cold
therapy units and other specialty products. In addition, the introduction of the
PainBuster pain management delivery systems during the fourth quarter of 1998
contributed to increased sales within this segment.
GROSS PROFIT. Gross profit increased $1.1 million, or 2.1%, to $54.8
million in 1998 from $53.7 million in 1997. Gross profit margin, exclusive of
brand royalties and other cost of goods sold not allocable to specific product
lines, decreased to 59.4% in 1998 from 59.9% in 1997. Gross profit for the rigid
knee bracing segment increased $0.6 million, with gross profit margin increasing
to 70.6% from 70.1%. These increases reflected the improved product mix. Gross
profit for the soft goods segment increased $1.1 million, with gross profit
margin decreasing to 48.4% from 49.0%, reflecting increased sales of lower
margin products. Gross profit for the specialty and other orthopedic products
segment increased $2.8 million, with gross profit margin increasing to 49.8%
from 48.5%. These changes reflected the change in product mix. Brand royalties
charged by Smith & Nephew which are included within cost of goods sold increased
to 3.0% of revenues from 1.5% over the prior year period. Other cost of goods
sold not allocable to specific product lines increased to $2.0 million in 1998
from $0.3 million in 1997. This increase primarily resulted from the disruption
caused as the Company totally integrated manufacturing operations of the DonJoy
and ProCare brands which were previously separate. By the fourth quarter of
1998, manufacturing operations had returned to previous levels.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $2.4
million, or 10.6%, to $25.3 million in 1998 from $22.9 million in 1997. This
increase primarily reflected an increase in commissions associated with higher
76
<PAGE> 82
sales of DonJoy products in the United States, as well as advertising and
delivery expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.7 million, or 4.3%, to $16.5 million in 1998 from $15.8 million in
1997. The increase was primarily due to $0.3 million in year 2000 compliance
costs, $0.2 million in moving costs related to the Company's consolidation of
its two U.S. facilities and a $0.2 million increase in corporate allocations
from Smith & Nephew. However, these expenses declined as a percentage of
revenues to 16.3% from 17.0%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately equal over the two periods. As a result of the Company's research
and development efforts, the OPAL OA knee brace, the enhanced Defiance custom
knee brace and the TROM post-operative brace were introduced during 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues increased $9.6 million, or 11.6%, to $92.7
million in 1997 from $83.1 million in 1996. Net revenues in the rigid knee
bracing segment increased marginally between the periods. Lower unit sales of
ligament braces were offset by an increase in unit sales of post-operative
braces and an overall improvement in product mix. Soft goods sales increased by
$4.5 million over the prior year period due to increased sales volumes of
general soft goods supports, slings and immobilizers and Drytex based support
products. Specialty and other orthopedic products sales increased $4.6 million
over the prior year period primarily due to increased sales volumes of lower
extremity walkers and cold therapy units.
GROSS PROFIT. Gross profit increased $7.0 million, or 15.0%, to $53.7
million in 1997 from $46.7 million in 1996. Gross profit margin, exclusive of
brand royalties and other cost of goods sold not allocable to specific product
lines, increased to 59.9% in 1997 from 58.8% in 1996, which reflected the
benefits of utilizing the existing vertically integrated manufacturing
capabilities of Professional Care Products Incorporated, purchased in the latter
part of 1995, within the DonJoy brand manufacturing operations in order to
produce in-house components previously purchased from outside sources. The
ProCare brand manufacturing capabilities included metal stamping capabilities,
tool and die development, injection molding and in-house fabricated strapping
material. In addition, increased purchasing power for materials used in DonJoy
and ProCare brand products not manufactured in-house contributed to the increase
in gross profit. Gross profit for the rigid knee bracing segment increased $1.8
million, with gross profit margin increasing to 70.1% from 67.1%. These
increases reflect the improved product mix. Gross profit for the soft goods
segment increased $2.6 million, with gross profit margin increasing to 49.0%
from 47.7%, reflecting lower production costs for labor intensive products which
were transferred to the Mexican manufacturing facilities. Gross profit for the
specialty and other orthopedic products segment increased $2.3 million, with
gross profit margin increasing to 48.5% from 47.3%, also reflecting lower
manufacturing costs. Brand royalties charged by Smith & Nephew remained
relatively constant over the period. Other cost of goods sold not allocable to
specific product lines decreased to $0.3 million in 1997 from $0.9 million in
1996 reflecting a decline in manufacturing variances resulting from the
integration of the ProCare manufacturing operations discussed above.
77
<PAGE> 83
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $2.8
million, or 14.0%, to $22.9 million in 1997 from $20.1 million in 1996. This
increase primarily reflected an increase in commissions associated with higher
sales of DonJoy products in the United States.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $2.9 million, or 22.1%, to $15.8 million in 1997 from $12.9 million in
1996. The increase was primarily due to a $1.9 million increase in corporate
allocations from Smith & Nephew in 1997 over the prior year period. In addition,
there was an additional $0.5 million in direct legal expenses primarily related
to a single patent defense action in which the Company prevailed. These expenses
increased a percentage of revenues to 17.0% from 15.6%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$2.1 million in 1997 as compared to $1.8 million in 1996. During 1997, the
Walkabout was introduced and many enhancements and modifications were
incorporated within existing product lines.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are to service its debt and
meet its working capital and capital expenditure needs. At December 31, 1997 and
December 31, 1998, the Company had long-term intercompany obligations to Smith &
Nephew of $43.5 million and $44.0 million, respectively. On June 29, 1999, all
long-term intercompany obligations and certain other current liabilities owed to
Smith & Nephew were contributed to members equity in accordance with the
recapitalization agreement. The Company's long-term indebtedness at June 29,
1999 on a pro forma basis after giving effect to the Transactions would have
been approximately $113.5 million.
Net cash provided by operating activities was $9.6 million, $11.1 million,
$3.7 million, $0.2 million and $7.3 million in 1996, 1997, and 1998 and the
first six months of 1998 and 1999, respectively. The increase of $7.1 million in
the first six months of 1999 reflects the increase in net income in the first
six months of 1999 as compared to the first six months of 1998, a decrease in
inventories and a general increase in working capital. The decrease of $7.4
million in 1998 was primarily due to the decrease in net income in 1998 as
compared to 1997, the increased levels in accounts receivable and inventories
offset in part by an increase in accounts payable and the effect of the
restructuring in 1998. The increase of $1.4 million in 1997 as compared to 1996
was primarily a result of the increase in net income in 1997 as compared to
1996, the increased level of accounts payable offset in part by an increase in
accounts receivables and inventories and an approximately $1.0 million use of
cash in 1996 relating to a restructuring reserve established in connection with
the acquisition of Professional Care Products Incorporated in 1995.
Cash flows used in investing activities were $1.9 million, $2.3 million,
$4.0 million, $2.6 million and $2.8 million in 1996, 1997, 1998 and the first
six months of 1998 and 1999, respectively. Capital expenditures in the first six
months of 1999 primarily reflected a payment relating to the exclusive North
American distribution rights for the PainBuster pain management and relief
systems. Capital expenditures in the first six months of 1998 reflected
leasehold improvements on the expanded Vista, California facility. The increase
of $1.7 million in 1998 as compared to 1997 related to increased capital
expenditures related to leasehold
78
<PAGE> 84
improvements on the expanded Vista facility and a payment relating to the
purchase of intellectual property rights from IZEX Technologies to design,
manufacture and distribute the VISTA System. Capital expenditures in 1996 and
1997 remained relatively constant.
Cash flows provided by (used in) financing activities were $(7.9) million,
$(8.4) million, $0.2 million, $1.8 million and $(4.2) million in 1996, 1997,
1998 and the first six months of 1998 and 1999, respectively. The changes are a
result of the change in intercompany obligations. Prior to the recapitalization,
the Company participated in Smith & Nephew's central cash management program,
wherein all of the Company's cash receipts are remitted to Smith & Nephew and
all cash disbursements are funded by Smith & Nephew. Following the
recapitalization, the Company no longer participates in Smith & Nephew's cash
management program. See Note 3 of Notes to Consolidated Financial Statements.
Interest payments on the old notes and on borrowings under the new credit
facility have significantly increased the Company's liquidity requirements. The
new credit facility provides for the term loan of $15.5 million, which was
borrowed in connection with the recapitalization, and up to $25.0 million of
revolving credit borrowings under the new revolving credit facility, which are
available for working capital and general corporate purposes, including
financing of acquisitions, investments and strategic alliances. As of October
31, 1999, the Company had no borrowings outstanding under the new revolving
credit facility. Borrowings under the term loan and the new revolving credit
facility bear interest at variable rates plus an applicable margin. See
"Description of New Credit Facility."
The following table sets forth the principal payments on the term loan for
the years 1999 through its maturity in 2005:
<TABLE>
<CAPTION>
PRINCIPAL
YEAR PAYMENT
---- ----------
<S> <C>
1999...................................... $ 250,000
2000...................................... $ 500,000
2001...................................... $ 500,000
2002...................................... $ 500,000
2003...................................... $ 500,000
2004...................................... $6,750,000
2005...................................... $6,500,000
</TABLE>
In addition, commencing with the year ending December 31, 1999, the Company
is required to make annual mandatory prepayments of the term loan under the new
credit facility in an amount equal to 50% of excess cash flow (as defined in the
new credit facility) (75% if the Company's leverage ratio exceeds a certain
level). In addition, the term loan is subject to mandatory prepayments in an
amount equal to (a) 100% of the net cash proceeds of certain equity and debt
issuances by DonJoy, the Company or any of its subsidiaries and (b) 100% of the
net cash proceeds of certain asset sales or other dispositions of property by
DonJoy, the Company or any of its subsidiaries, in each case subject to certain
exceptions.
The new credit facility and the indenture impose certain restrictions on
the Company, including restrictions on its ability to incur indebtedness, pay
dividends, make investments, grant liens, sell its assets and engage in certain
other activities.
79
<PAGE> 85
In addition, the new credit facility requires the Company to maintain certain
financial ratios. Indebtedness under the new credit facility is secured by
substantially all of the assets of the Company, including the Company's real and
personal property, inventory, accounts receivable, intellectual property and
other intangibles. See "Description of New Credit Facility."
The Company incurred fees and expenses of $8.7 million in connection with
the Transactions. Approximately $7.2 million, principally relating to financing
fees and expenses, will be capitalized and amortized over the terms of the
related debt instruments.
In addition to its debt service obligations, the Company will require
liquidity for capital expenditures and working capital needs. The Company
expects 1999 capital expenditures to be approximately $7.0 million, $2.7 million
of which is expected to be used for product development, systems upgrades and
machinery and equipment, $2.0 million of which relates to payments due to I-Flow
for the distribution rights to the PainBuster and $2.3 million of which relates
to payments to IZEX Technologies for the license of technology and know-how for
the design, manufacture and distribution of the VISTA System, an advanced
rehabilitation bracing system. Capital expenditures through the first six months
of 1999 totaled $2.7 million, $2.0 million of which relates to payments for the
exclusive North American distribution rights for the PainBuster pain management
and relief systems.
As part of its strategy the Company intends to pursue acquisitions,
investments and strategic alliances. The Company may require new sources of
financing to consummate any such transactions, including additional debt or
equity financing. There can be no assurance that such additional sources of
financing will be available on acceptable terms if at all.
The Company's ability to satisfy its debt obligations and to pay principal
and interest on its indebtedness, including the notes, fund working capital
requirements and make anticipated capital expenditures will depend on its future
performance, which is subject to general economic, financial and other factors,
some of which are beyond its control. Management believes that based on current
levels of operations and anticipated growth, cash flow from operations, together
with other available sources of funds including the availability of borrowings
under the new revolving credit facility, will be adequate for the foreseeable
future to make required payments of principal and interest on the Company's
indebtedness, including the notes, to fund anticipated capital expenditures and
for working capital requirements. There can be no assurance, however, that the
Company's business will generate sufficient cash flow from operations or that
future borrowings will be available under the new revolving credit facility in
an amount sufficient to enable the Company to service its indebtedness,
including the notes, or to fund its other liquidity needs.
MARKET RISK
The Company is exposed to certain market risks as part of its ongoing
business operations. Primary exposure following consummation of the Transactions
includes changes in interest rates. The Company, as a matter of policy, does not
enter into derivative or other financial investments for trading or speculative
purposes.
80
<PAGE> 86
The Company will manage its interest rate risk by balancing the amount of
fixed and variable debt. For fixed rate debt, interest rate changes affect the
fair market value but do not impact earnings or cash flows. Conversely for
variable rate debt, interest rate changes generally do not affect the fair
market value but do impact future earnings and cash flows, assuming other
factors are held constant. As of October 31, 1999, the Company had $100 million
principal amount of fixed rate debt represented by the old notes and $15.5
million of variable rate debt represented by borrowings under the new credit
facility. Up to $25.0 million of variable rate borrowings is available under the
new revolving credit facility. The Company may use derivative financial
instruments, where appropriate, to manage its interest rate risks.
SEASONALITY
The Company generally records its highest net revenues in the first and
fourth quarters due to the greater number of orthopedic surgeries and injuries
resulting from increased sports activity, particularly football and skiing. In
addition, during the fourth quarter, a patient has a greater likelihood of
having satisfied his annual insurance deductible than in the first three
quarters of the year, and thus there is an increase in the number of elective
orthopedic surgeries. Conversely, the Company generally has lower net revenues
during its second and third quarters as a result of decreased sports activity
and fewer orthopedic surgeries. The Company's results of operations would be
adversely and disproportionately affected if the Company's sales were
substantially lower than those normally expected during its first and fourth
quarters.
YEAR 2000
The Company has assessed its readiness for the Year 2000 by focusing on
four key areas: (1) internal infrastructure readiness, by addressing internal
hardware and software, and non-information technology systems; (2) product
readiness, by addressing the functionality of the Company's processes by which
its products are developed, manufactured and distributed; (3) supplier
readiness, by addressing the preparedness of key suppliers of the Company; and
(4) customer readiness, by addressing customer support and transactional
activity. For each readiness area, the Company is performing a risk assessment,
conducting testing and remediation, developing contingency plans to mitigate
unknown risk, and communicating with employees, suppliers, customers and other
third parties to raise awareness of the Year 2000 issue.
INTERNAL INFRASTRUCTURE READINESS. The Company, assisted by third parties,
has conducted an assessment of internal applications and computer hardware. Most
software applications have been made Year 2000 compliant, and resources have
been assigned to address other applications based on their importance and the
time required to make them Year 2000 compliant. The Year 2000 compliance
evaluation of hardware, including servers, desktops, telecommunication equipment
and non-information technology systems, has been completed. All software and
hardware remediation is expected to be completed no later than the third quarter
of 1999.
PRODUCT READINESS. The Company has conducted an assessment to identify and
resolve possible Year 2000 issues existing in the Company's processes by which
it develops, manufactures and distributes its products. To date, the Company has
not identified any Year 2000 issues with such processes.
81
<PAGE> 87
SUPPLIER READINESS. The Company has identified and contacted key suppliers
to solicit information on their Year 2000 readiness. To date, the responses the
Company has received indicate that the Company's key suppliers are in compliance
with Year 2000 requirements. Based on the Company's assessment of each
supplier's progress to adequately address the Year 2000 issue, the Company will
develop a supplier action list and contingency plans.
CUSTOMER READINESS. The Company has contacted key customers to assess
their Year 2000 readiness. Based on the Company's assessment of each customer's
progress to adequately address the Year 2000 issue, the Company will develop a
customer action list and contingency plans.
During 1998 and the first six months of 1999, the Company expensed $337,000
for consulting services and software related to compliance with Year 2000
requirements. The Company estimates that the future costs of complying with the
Year 2000 requirements will be approximately $40,000 in additional consulting
and software and hardware purchases. The Company is continuing its assessments
and developing alternatives that will necessitate refinement of this estimate
over time. There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, the remedial actions described in this
section.
Since the efforts described above are ongoing, all potential Year 2000
complications may have not yet been identified. Therefore, while the Company
continues to believe the Year 2000 issues discussed above will not have a
materially adverse impact on its business, financial condition or results of
operations, it is not possible to determine with certainty whether or to what
extent the Company may be affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This standard is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments and
unrealized gains and losses on investments, shall be reported, net of their tax
related tax effect, to arrive at comprehensive income. The adoption of SFAS 130
resulted in comprehensive income that was the same as net income.
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 superseded SFAS No. 14 Financial Reporting for
Segments of a Business Enterprise. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position, but did affect the
disclosure of segment information. See Note 7 of Notes to Consolidated Financial
Statements for information regarding industry segments.
82
<PAGE> 88
BUSINESS
OVERVIEW
The Company is a world leading designer, manufacturer and marketer of
orthopedic recovery products. Based on U.S. sales, the Company believes it is
the leading provider of orthopedic recovery products and certain complementary
products in the United States. The Company's broad product lines of rigid knee
braces, soft goods and specialty and other orthopedic products provide a range
of solutions for patients and orthopedic professionals during the various stages
of the orthopedic treatment and recovery process. The Company's products can be
used before, after and as an alternative to surgery, during and after
rehabilitation and for the treatment of osteoarthritis. The Company is a market
leader in the orthopedic recovery products industry, selling more than 500
individual products in over 50 countries throughout the world. The Company sells
its products under the DonJoy and ProCare brand names, each of which the Company
believes enjoys one of the highest levels of brand name recognition within the
orthopedic recovery products industry. In addition to the typical orthopedic
patient, the Company's products are used by professional athletes, NCAA athletic
programs and the U.S. Ski Team. The Company believes that its leading market
positions, strong brand names, reputation for quality products, broad product
lines, established distribution networks in the United States and commitment to
research and development provide it with significant opportunities to further
grow revenues and earnings. For 1998 and the six months ended June 29, 1999, the
Company's net revenues were $101.2 million and $54.7 million, respectively, and
the Company's pro forma EBITDA (as defined) was $22.0 million and $11.5 million,
respectively.
The Company's product lines include rigid knee braces, soft goods and a
portfolio of specialty and other orthopedic products.
- RIGID KNEE BRACES. The Company's rigid knee braces include ligament
braces, which provide durable support for knee ligament instabilities,
post-operative braces, which provide both knee immobilization and a
protected range of motion; and OA braces, which provide relief of knee
pain due to osteoarthritis. These technologically-advanced products are
generally prescribed to a patient by an orthopedic professional. The
Company's rigid knee braces are either customized braces, utilizing basic
frames which are then custom-manufactured to fit a patient's particular
measurements, or are standard braces which are available "off-the-shelf"
in various sizes and can be easily adjusted to fit the patient in the
orthopedic professional's office. Substantially all of the Company's
rigid knee braces are marketed under the DonJoy brand name. These
products represented approximately 45% of the Company's net revenues for
the twelve months ended June 29, 1999.
- SOFT GOODS. The Company's soft goods products, most of which are fabric
or neoprene-based, provide support and/or heat retention and compression
for afflictions of the knee, ankle, back and upper extremities, including
the shoulder, elbow, neck and wrist. Approximately 60% of the Company's
soft goods products are marketed under the ProCare brand name, with the
remainder marketed under the DonJoy brand name. These products
represented approximately 34% of the Company's net revenues for the
twelve months ended June 29, 1999.
83
<PAGE> 89
- SPECIALTY AND OTHER ORTHOPEDIC PRODUCTS. The Company's portfolio of
specialty and other orthopedic products, which are designed to facilitate
orthopedic rehabilitation, include lower extremity walkers (boots which
are an alternative to lower extremity casting), upper extremity braces
(shoulder and arm braces and slings), cold therapy systems (a form of
pain management which provides continuous cold therapy to assist in the
reduction of pain and swelling) and pain management delivery systems (a
range of ambulatory infusion pumps for the delivery of local anesthetic
directly into a joint following surgery). Approximately 80% of the
Company's specialty and other orthopedic products are marketed under the
DonJoy brand name, with the remainder marketed under the ProCare brand
name. These products represented approximately 21% of the Company's net
revenues for the twelve months ended June 29, 1999.
The Company sells its DonJoy products primarily to orthopedic surgeons,
orthotic and prosthetic centers, hospitals, surgery centers, physical therapists
and trainers to meet the specific needs of their patients. The Company sells its
ProCare products under private label brand names primarily to third party
distributors who generally resell the Company's products to large hospital
chains, hospital buying groups, primary care networks and orthopedic physicians.
The Company's products are used by people who have sustained an injury, have
recently completed an orthopedic surgical procedure and/or suffer from an
affliction of the joint. In addition, a number of high profile professional and
amateur athletes who participate in sports such as football, basketball and
skiing, choose to use the Company's products.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths provide it
with a strong and stable base to enable the Company to further enhance growth
and profitability.
LEADING MARKET POSITIONS. The Company is a world leading designer,
manufacturer and marketer of orthopedic recovery products and, based on U.S.
sales, the Company believes it is the leading provider of orthopedic recovery
products and certain complementary products in the United States, with an
estimated market share of 20%. Based on U.S. sales, the Company believes it
holds the leading U.S. market position for ligament and post-operative braces,
with estimated market shares of 28% and 25%, respectively, the number two market
position for OA braces, with an estimated market share of 13%, and leading
positions in the markets for certain of the Company's other products. The
Company has established its leadership positions:
- by delivering innovative products that provide patients with superior
quality and value;
- through successful marketing and sales programs which focus on gaining
the support of widely recognized orthopedic professionals and maintaining
strong relationships with the Company's customers; and
- by delivering quality products with a high standard of customer service,
including by shipping the majority of the Company's products within 24
84
<PAGE> 90
hours of receipt of the customer order, or 72 hours in the case of
customized knee braces.
STRONG BRAND NAME RECOGNITION AND REPUTATION FOR QUALITY. The Company's
products have achieved a high degree of brand name recognition and loyalty from
its customers. The Company believes DonJoy is the most recognized brand name of
knee braces in the orthopedic recovery products industry. In addition, the
Company's ProCare brand name is well recognized by third party distributors of
soft goods in the orthopedic recovery products industry. The Company's other
trademarks include product names that are well known among orthopedic
professionals which the Company believes provide it with a significant
competitive advantage. The Company's products are known for their design,
quality construction and durability. The Company's braces are used by a number
of professional athletes and NCAA athletic programs. The Company is also the
official and exclusive supplier of braces and supports to the U.S. Ski Team and
the Company believes it is the leading supplier of knee braces to players in the
National Football League.
BROAD PRODUCT LINES. The Company believes that it has one of the broadest
product lines in the orthopedic recovery products industry. The Company markets
over 500 individual products which provide solutions to patients and orthopedic
professionals in addressing the various stages of the orthopedic treatment and
recovery process.
- The Company's quality soft goods products are used by patients to address
a wide range of orthopedic injuries and afflictions.
- The Company's customized and off-the-shelf rigid knee braces are used as
an alternative to surgery, to help bring patients back to pre-injury
levels post-surgery or to support the normal functioning of the knee for
patients who have returned to pre-injury activity levels.
- The Company's other specialized devices such as cold therapy systems and
pain management delivery systems are used by patients who have just
undergone orthopedic surgery.
ESTABLISHED U.S. DISTRIBUTION NETWORKS. The Company has established broad
distribution networks within the United States. The Company's DonJoy product
lines are marketed by 26 commissioned sales organizations (referred to as agents
in this prospectus) which employ approximately 185 sales representatives. These
sales representatives undergo extensive training by both the Company and the
agent and use their technical expertise to market our products to orthopedic
surgeons, orthotic and prosthetic centers, hospitals, surgery centers, physical
therapists and trainers. The Company sells its ProCare products primarily to
large, national third party distributors, including Owens & Minor Inc., McKesson
Corp., General Medical Corp. and Bergen Brunswig Corp., as well as to regional
medical surgical dealers and medical products buying groups. The Company
believes that its strong distribution networks in the United States provide the
Company with an established base from which to introduce new or enhanced
products and expand sales of existing product lines.
SUCCESSFUL RECORD OF NEW PRODUCT DEVELOPMENT. The Company has developed a
reputation as a research and development leader by introducing a steady flow of
product enhancements and new products into the market. Since 1995, the
85
<PAGE> 91
Company introduced 8 significant new products, sales of which represented
approximately 25% of the Company's net revenues for the year ended December 31,
1998. The Company owns or has licensing rights to more than 60 patents,
including the "Four Points of Leverage" system, which is a critical element in
the design of the Company's ligament braces. In addition, the Company maintains
close relationships with a number of widely recognized orthopedic surgeons and
sports medicine specialists who assist in product research, development and
marketing. These professionals often become product "champions," speaking about
the Company's products at medical seminars, assisting in the training of other
professionals in the use and/or fitting of the products and providing us with
feedback on the industry's acceptance of the new products.
EXPERIENCED AND INCENTIVIZED MANAGEMENT TEAM. The Company's management
team has extensive experience in the orthopedic recovery products industry. The
Company's six senior executives have an average of 11 years of experience with
the Company and an average of over 20 years of experience within the orthopedic
recovery products industry. As a result of the recapitalization, management owns
or has the right to acquire pursuant to options, subject to certain conditions,
up to approximately 17% of DonJoy's equity interests on a fully diluted basis.
BUSINESS STRATEGY
The Company's strategic objectives are to strengthen its leadership
position in the orthopedic recovery products industry and to increase its
revenues and profitability. As a stand alone entity, the Company will be able to
pursue strategic initiatives which were previously not possible. The Company
intends to:
- broaden its market reach,
- enhance and grow its core business, and
- expand its business platform.
The key elements of its business strategy are to:
INCREASE INTERNATIONAL SALES. International sales, primarily in Europe and
Japan, accounted for approximately 16% of the Company's net revenues for the
twelve months ended June 29, 1999, and represent a significant area for
potential growth. The Company plans to increase its international sales by
reorganizing and expanding its international distribution network and
implementing the marketing and distribution strategies which the Company
successfully utilizes in the United States and certain international
territories. For example, in Germany, the Company's largest international market
representing approximately one-third of international revenues in 1998, where
the Company markets its products through an independent distributor, the Company
believes it has achieved market shares comparable to those it has achieved in
the United States through an independent distributor. Historically,
approximately 55% of the Company's international sales were made through 30
Smith & Nephew sales organizations, with the remainder made through 14
independent distributors. The Company intends to replace most of its existing
Smith & Nephew sales organizations with independent distributors who will focus
on building strong relationships with its targeted customers and will be
responsible for achieving specified sales targets. As of October 1, 1999, the
Company has replaced 11 Smith & Nephew sales organizations with independent
86
<PAGE> 92
distributors. The Company has also given notice to Smith & Nephew that the
Company will terminate 8 of the remaining 19 Smith & Nephew sales organizations
by the beginning of 2000. In addition, the Company plans to develop
relationships with orthopedic professionals who are well recognized in our
targeted countries, some of whom the Company expects will become product
"champions," similar to orthopedic professionals in the United States. The
Company will focus on implementing its strategies in the United Kingdom, France,
Italy and Spain and will continue its focus in Germany, all countries with
substantial per capita health care expenditures.
IMPROVE OPERATING EFFICIENCIES. The Company is actively pursuing
opportunities to improve the efficiencies of its vertically integrated
manufacturing operations. By upgrading its computer systems to achieve more
efficient production, the Company expects to achieve material and labor cost
reductions as well as economies of scale across its entire manufacturing
operation. The Company also plans to further automate its manufacturing
operations through the use of more technologically advanced fabrication
equipment and systems. In addition, the Company will continue to move portions
of its labor intensive operations to its facilities in Mexico to generate labor
cost savings and utilize the resulting additional capacity in its U.S. facility
to manufacture its more technologically advanced products. The Company will
continue to rationalize the raw materials used in the production of its existing
products, thereby enabling the Company to leverage its purchasing power. The
Company also plans to achieve cost savings by further reducing the number of
stock keeping units (SKUs) without impacting service or breadth of the Company's
product range.
INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS. The Company intends to
maintain its position as a leading innovator of orthopedic recovery products
through its commitment to research and development and its close working
relationships with orthopedic professionals. Using its materials, process and
design expertise in bracing and supports, the Company will continue to enhance
its current range of products to address changing customer needs. In addition,
the Company intends to add complementary products through its own research and
development efforts and arrangements with third parties. For example, the
Company has introduced two pain management systems, the IceMan, a cold therapy
system which it developed, and, more recently, the PainBuster product line, a
range of ambulatory infusion pumps which it distributes under a licensing
arrangement and which the Company believes provides it with a platform for
further opportunities in the surgical market. The Company is also currently
developing the VISTA System, a computerized post-operative brace designed to
optimize a patient's rehabilitation in the treatment of knee injuries, which the
Company believes is the only such system currently under development.
PURSUE STRATEGIC GROWTH OPPORTUNITIES. The orthopedic recovery products
industry is highly fragmented and provides the Company with a number of
potential acquisition, investment and strategic alliance opportunities. The
Company intends to pursue strategic growth opportunities that will allow it to
leverage its existing distribution networks, brand name recognition and
expertise in research and development to increase revenues and cash flow. For
example, the Company
87
<PAGE> 93
will seek growth opportunities through acquisitions, investments or strategic
alliances that will:
- expand the Company's core business,
- enable the Company to offer complementary products, and
- diversify into the broader orthopedic products industry.
INDUSTRY
The orthopedic recovery products industry, the primary industry in which
the Company currently competes, is a segment of the worldwide orthopedic
products industry, which had estimated sales in 1998 of $8.5 billion, including
estimated U.S. sales of $5.1 billion. The worldwide orthopedic products market
includes reconstructive implants, tissue fixation and healing products,
orthopedic recovery products, spinal implants, arthroscopy products, and other
related products. The orthopedic recovery products industry includes retail and
non-retail sales of braces and supports for the knee, ankle, back and upper
extremities, including the shoulder, elbow, neck and wrist and other related
products. The U.S. orthopedic recovery products industry generated estimated
revenues of $630 million in 1998. The Company currently competes in the
non-retail segment of the U.S. orthopedic recovery products industry, which
generated estimated revenues of $535 million in 1998. The European orthopedic
recovery products industry generated estimated revenues of $330 million in 1998.
Comparable data for the rest of the world is not readily available.
Complementary market segments to the orthopedic recovery products industry
within the overall orthopedic products industry include orthopedic pain
management systems and devices, a market in which the Company currently
competes, and which generated estimated 1998 U.S. revenues of $150 million, and
soft tissue fixation products and tissue healing products, which represent
attractive markets for the Company and which generated estimated 1998 U.S.
revenues of $350 million. Comparable data for Europe and the rest of the world
is not readily available.
The orthopedic recovery products industry is highly fragmented and
characterized by competition among a few large, diversified orthopedic companies
and numerous smaller niche competitors. Revenues in the U.S. orthopedic recovery
products industry grew at an estimated compound annual growth rate of 3.5% from
1994 through 1998. This growth has been driven by increased participation in
exercise, sports and other physical activity, the aging "baby boomer" population
including adults suffering from osteoarthritis, and a growing awareness of the
importance of preventative bracing. Comparable data for Europe and the rest of
the world is not readily available.
The Company believes data set forth in this prospectus regarding the
orthopedic products industry and its segments and the Company's market position
and market share within that industry or its segments are inherently imprecise,
but are generally indicative of their relative size and the Company's market
position and market share within that industry or its segments. Estimated
revenues for the orthopedic recovery products industry and its segments and the
historical growth rates for such industry and its segments are based on
information obtained from Frost & Sullivan. See "Industry Data."
88
<PAGE> 94
The following are descriptions of segments of the U.S. orthopedic recovery
products industry. Comparable data for Europe and the rest of the world is not
readily available.
KNEE BRACES AND SUPPORTS
The retail and non-retail knee brace and support market generated estimated
revenues of $272 million in 1998, of which approximately $242 million was
generated in the non-retail segment in which the Company competes. The knee
brace and support market consists of ligament braces, post-operative braces,
osteoarthritic braces, and soft knee supports. Revenues in this segment of the
industry grew at an estimated compound annual growth rate of 3.0% from 1994
through 1998. This stable market growth is characterized by increased volume and
modestly declining prices. Knee injuries are the most common affliction treated
by orthopedic professionals, with approximately 644,000 knee procedures
performed in 1998, including ligament repair, tissue repair and total knee
replacement procedures.
The Company believes it is the U.S. market leader in ligament braces and
post-operative braces with an estimated 28% and 25% market share, respectively,
and the number two U.S. provider of OA braces, with an estimated 13% market
share. The knee brace and support market is highly fragmented. Many of the
participants in this market are primarily suppliers of soft knee supports.
ANKLE BRACES AND SUPPORTS
The retail and non-retail ankle brace and support market generated
estimated revenues of $157 million in 1998, of which approximately $131 million
was generated in the non-retail segment in which the Company competes. The ankle
brace and support market consists of lower extremity walkers, rigid ankle
stirrups and soft ankle supports sold through an orthopedic prescribing
professional and other soft ankle supports sold primarily in the retail segment.
Revenues in this segment of the industry grew at an estimated compound annual
growth rate of 6.6% from 1994 through 1998. In 1998, over 2,000,000 people
sought medical attention for ankle and foot injuries. In the non-retail segment,
the Company believes it is the market leader in soft ankle supports with an
estimated 17% market share and one of the market leaders of lower extremity
walkers with an estimated 10% market share.
BACK, WRIST, AND UPPER EXTREMITY BRACES AND SUPPORTS
The retail and non-retail back, wrist and upper extremity markets
collectively generated estimated revenues of $175 million in 1998, of which
approximately $147 million was generated in the non-retail segment in which the
Company competes. The back, wrist and upper extremity markets consist of
orthopedic braces and supports to address afflictions of the back, wrist,
shoulder, elbow and neck which are sold in the prescriptive non-retail segment
as well as in the retail segment. Aggregate revenues in these segments of the
industry grew at an estimated compound annual growth rate of 3.1% from 1994
through 1998. The Company believes certain of the Company's products enjoy
leading market positions in these markets.
89
<PAGE> 95
COMPLEMENTARY ORTHOPEDIC PRODUCTS
Complementary orthopedic products include orthopedic pain management
systems and devices, markets in which the Company currently competes, and soft
tissue fixation and tissue healing products, which represent attractive markets
for the Company. These products represented revenues of approximately $150
million and approximately $350 million, respectively, in 1998. Pain management
systems and devices include infusion pumps that administer local anesthetic into
the joint after a patient has undergone surgery. Soft tissue fixation products
include devices to reattach soft tissue to the bone and tissue healing products
include bone growth stimulation products.
PRODUCTS
The Company offers a broad range of products that provide a range of
solutions for patients and orthopedic professionals during various stages of the
orthopedic treatment and recovery process. The Company's core products are rigid
knee braces and soft goods. In addition, the Company offers a growing number of
complementary specialty and other orthopedic products. The Company's product
lines provide a range of treatment during the orthopedic recovery process, from
soft goods which are generally used after injury, whether or not surgery is
contemplated, to rigid knee braces and other specialty products which are
generally prescribed for use after surgery and during and after rehabilitation.
The Company markets its products under the DonJoy and ProCare brand names.
The Company marketed approximately 97% of its rigid knee braces, 83% of its
specialty and other orthopedic products and 40% of its soft goods products under
the DonJoy brand name during the twelve months ended June 29, 1999. The Company
believes DonJoy is the most recognized brand name of knee braces in the
orthopedic recovery products industry. The Company marketed approximately 60% of
its soft goods products, 17% of its specialty and other orthopedic products and
3% of its rigid knee braces under the ProCare brand name during the twelve
months ended June 29, 1999. The ProCare brand name is well recognized by third
party distributors of soft goods in the orthopedic recovery products industry.
RIGID KNEE BRACING
The Company designs, manufactures and markets a broad range of rigid knee
bracing products, including ligament braces, post-operative braces and OA
braces. These technologically-advanced products are generally prescribed to a
patient by an orthopedic professional. The Company's rigid knee braces are
either customized braces, utilizing basic frames which are then
custom-manufactured to fit a patient's particular measurements, or are standard
braces which are available "off-the-shelf" in various sizes and can be easily
adjusted to fit the patient in the orthopedic professional's office. Rigid knee
bracing products represented approximately 45% of the Company's net revenues for
the twelve months ended June 29, 1999.
LIGAMENT BRACES. Ligament braces provide durable support for moderate to
severe knee ligament instabilities to help patients regain range-of-motion
capability so they can successfully complete rehabilitation and resume the
activities of daily living after knee surgery or injury. They are generally
prescribed six to eight weeks
90
<PAGE> 96
after knee surgery, often after use of a more restrictive post-operative brace.
The Company's ligament braces can also be used to support the normal functioning
of the knee for patients who have returned to pre-injury activity levels. The
Company's ligament bracing product line includes premium customized braces
generally designed for strenuous athletic activity and off-the-shelf braces
generally designed for use in less rigorous activity. All of the Company's
ligament braces are designed using the Company's patented "Four Points of
Leverage" system.
POST-OPERATIVE BRACES. Post-operative braces limit a patient's range of
motion after knee surgery and protect the repaired ligaments/joints from stress
and strain which would otherwise slow or prevent a healthy healing process. The
products within this line provide both immobilization and a protected range of
motion, depending on the rehabilitation protocol prescribed by the orthopedic
surgeon. The Company's post-operative bracing product line includes a range of
premium to lower-priced off-the-shelf braces and accessory products.
OA BRACES. OA braces are used to treat patients suffering from
osteoarthritis, a form of damage to the articular surface of the knee joint. The
Company's line of customized and off-the-shelf OA braces is designed to shift
the resultant load going through the knee, providing additional stability and
reducing pain, and in some cases may serve as a cost-efficient alternative to
total knee replacement.
91
<PAGE> 97
The following table sets forth information on the Company's primary
products within the three rigid knee bracing product lines, all of which are
sold under the DonJoy brand name:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEAR
PRODUCT TYPE OF BRACE INTRODUCED FUNCTION/DESCRIPTION
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEFIANCE CUSTOM KNEE BRACE Ligament/OA 1992 The Company's hallmark
ENHANCED DEFIANCE CUSTOM premium brace. Custom-
KNEE BRACE 1998 built, lightweight, strong
and durable. Designed for
strenuous athletic activity.
4-TITUDE BRACE Ligament 1999 The Company's newest off-
the-shelf brace. Introduced
in June 1999.
LEGEND BRACE Ligament 1995 Sturdy, low-profile,
off-the-shelf brace.
Designed for athletic use.
GOLDPOINT BRACE Ligament 1991 The Company's first genera-
tion off-the-shelf ligament
brace.
- ---------------------------------------------------------------------------------------------------
TROM POST-OPERATIVE BRACE Post-operative 1998 Allows for both immobiliza-
tion and protected range of
motion after surgery.
Utilizes the Company's
easy-to-use patented hinge
assembly.
TROM REHABILITATION BRACE Post-operative 1998 Designed to provide protec-
tion for the recovering knee
for up to 8 months within a
program of aggressive long-
term rehabilitation.
Utilizes the Company's
easy-to-use patented hinge
assembly.
IROM BRACE Post-operative 1992 Used for ligament instabili-
ties. Allows for both
immobilization and protected
range of motion.
- ---------------------------------------------------------------------------------------------------
MONARCH CUSTOM OA BRACE OA 1994 Custom-built or
PATIENT READY MONARCH OA 1996 off-the-shelf, flexible
BRACE premium braces recommended
MONARCH II BRACE 1999 for relief of OA pain and
ease of use. Can be easily
adjusted by the patient. The
Monarch II is the newest
off-the-shelf OA brace and
is expected to be introduced
by the end of 1999.
OPAL OA KNEE BRACE OA 1998 Off-the-shelf, comfortable,
light-weight, low-profile,
slip-on sleeve-style Drytex
brace. Specifically designed
for women.
- ---------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE> 98
SOFT GOODS
The Company's soft goods products, most of which are fabric or neoprene-
based, provide support and/or heat retention and compression for afflictions of
the knee, ankle, back and upper extremities, including the shoulder, elbow, neck
and wrist. The Company currently offers products ranging from simple neoprene
knee sleeves to complex products that incorporate advanced materials and
features such as air-inflated cushions and metal alloy hinge components. The
Company's soft goods products include the RocketSoc, an ankle support designed
for chronic sprains, the Playmaker, a neoprene knee brace for mild to moderate
ligament instabilities, and the Air DonJoy, a line of knee sleeves with air
inflatable cushions designed to treat and ease pain from knee malalignment. Soft
goods products represented approximately 34% of the Company's net revenues for
the twelve months ended June 29, 1999.
SPECIALTY AND OTHER ORTHOPEDIC PRODUCTS
The Company has a portfolio of specialty and other orthopedic recovery
products designed to facilitate orthopedic rehabilitation, including lower
extremity walkers, upper extremity braces, cold therapy systems, pain management
delivery systems and other related products and accessories. These products
represented approximately 21% of the Company's net revenues for the twelve
months ended June 29, 1999.
LOWER EXTREMITY WALKERS. These products are boots which fit on a patient's
foot and provide comfort and stability for ankle and foot injuries. Because they
can be removed for showering or therapy, the Company's walkers are used as an
alternative to traditional casts. Sales of walkers represented approximately
half of the net revenues from specialty and other orthopedic products in 1998.
UPPER EXTREMITY BRACES. The Company offers a line of shoulder and arm
braces and slings, including the Quadrant Shoulder Brace and the UltraSling. The
Quadrant Shoulder Brace is technologically advanced and designed for
immobilization after shoulder surgery and allows for controlled motion. The
UltraSling is a durable oversized sling which offers lower-priced immobilization
and support for mild shoulder sprains and strains.
COLD THERAPY SYSTEMS. The Company manufactures, markets and sells the
IceMan, a cold therapy product which was introduced in 1996, as well as other
cold therapy products such as ice packs and wraps. The IceMan is a portable
device used after surgery or injury to reduce swelling, minimize the need for
post-operative pain medications and accelerate the rehabilitation process. The
product consists of a durable quiet pump and control system which is used to
circulate cold water from a reservoir to a pad which is designed to fit the
afflicted area, such as the ankle, knee or shoulder. The IceMan uses a patented
circulation system to provide constant fluid flow rates, thereby minimizing
temperature fluctuations which can reduce device effectiveness and create the
potential for tissue or nerve damage.
PAIN MANAGEMENT DELIVERY SYSTEMS. The Company entered into an arrangement
in 1998 with I-Flow Corporation ("I-Flow") for the exclusive North American
distribution rights for the PainBuster pain management and relief systems
93
<PAGE> 99
manufactured by I-Flow for use after orthopedic surgical procedures. These pain
management and relief systems provide a continuous infusion of local anesthetic
dispensed by the physician directly into the wound site following surgical
procedures. The portable PainBuster delivery systems consist of a range of
introducer needles, catheters for easy insertion and connection during surgery
and pumps for continuous infusion for up to 96 hours. The PainBuster systems are
intended to provide direct pain relief, reduce hospital stays and allow earlier
and greater ambulation. The Company believes that the PainBuster provides it
with a platform for further opportunities in the surgical market.
Certain interpretive questions have arisen under the agreement as a result
of the distribution of the product in North America by another company and
concerning the regulatory registration for the distribution rights granted by
I-Flow to the Company under the agreement. The Company and I-Flow are currently
engaged in an exchange of information as a result of these issues. While the
Company continues to make the Painbuster products available for sale, pending
clarification or resolution of the issues, the Company has, however, withheld a
license payment due I-Flow in September 1999 under the agreement. Based on
discussions to date between the companies, management of the Company believes
that a satisfactory resolution of the issues can be reached without the filing
of a claim by either party or termination of the agreement. However, no
assurance in this regard can be made. In the event the agreement is terminated,
the Company's ability to penetrate the surgical market and the orthopedic pain
management system and device segment of the orthopedic recovery products
industry might be adversely affected unless the Company developed, or obtained
marketing rights to, one or more comparable products currently available in the
marketplace.
RESEARCH AND DEVELOPMENT
The Company's research and development program is aimed at developing and
enhancing products, processes and technologies to maintain the Company's
position as a leading innovator in the orthopedic recovery products industry.
The Company's research and development expenditures were $2.2 million, $2.1
million and $1.8 million during the years ended December 31, 1998, 1997 and
1996, respectively.
The Company's research and development activities are conducted in its
Vista facility by a group of 12 product engineers and designers who have an
average of 11 years experience in developing and designing products using
advanced technologies, processes and materials. The research and development
team uses a variety of computational tools and computer aided design (CAD)
systems during the development process, which allow a design to be directly
produced on computer-based fabrication equipment, reducing both production time
and costs.
The Company's current research and development activities are focused on
using new materials, innovative designs and state of the art manufacturing
processes to develop new products and to enhance the Company's existing
products. The Company is also pursuing strategic initiatives to identify areas
for technological innovation and to develop products that improve rehabilitation
by utilizing advanced technologies. For example, the Company is currently
developing
94
<PAGE> 100
the VISTA system, a computerized post-operative brace designed to optimize a
patient's rehabilitation in the treatment of knee injuries, which the Company
believes is the only such system currently under development.
The Company has developed and maintains close relationships with a number
of widely recognized orthopedic surgeons and sports medicine specialists who
assist in product research, development and marketing. These professionals often
become product "champions", speaking about the Company's products at medical
seminars, assisting in the training of other professionals in the use and/or
fitting of the products and providing the Company with feedback on the
industry's acceptance of the new products. Some of these surgeons and
specialists who participate in the design of products and/or provide consulting
services have contractual relationships with the Company under which they
receive royalty payments or consultant fees in connection with the development
of particular products with which they have been involved. See "-- Government
Regulation."
The Company maintains the Clinical Education Research Facility (CERF)
Laboratory in its Vista facility which is used by orthopedic surgeons to
practice surgical techniques. These surgeons often provide the Company with
feedback which assists the Company in the development and enhancement of
products. In addition, the Company utilizes its biomechanical laboratory in its
Vista facility to test the effectiveness of the Company's products. The Company
believes it is the only orthopedic recovery products manufacturer which has both
surgical techniques and biomechanical laboratories, the combination of which
allows professionals to practice procedures and then to measure the
effectiveness of those procedures. In addition, the Company provides external
clinical and academic research grants to leading health care professionals and
institutions.
SALES, MARKETING AND DISTRIBUTION
The Company distributes its products in the U.S. and international markets
primarily through networks of agents and distributors who market and sell to
orthopedic surgeons, orthotic and prosthetic centers, third party distributors,
hospitals, surgery centers, physical therapists and trainers within the
orthopedic community. The Company's products are used by people who have
sustained an injury, have recently completed an orthopedic surgical procedure
and/or suffer from an affliction of the joint. In addition, a number of high
profile professional and amateur athletes who participate in sports such as
football, basketball and skiing, choose to use the Company's products. The
Company is the official and exclusive supplier of braces and supports to the
U.S. Ski Team. In addition, the Company believes it is the leading supplier of
knee braces to players in the National Football League, among whom use of knee
braces has more than tripled over the last two years according to a recent
survey of NFL team physicians. No individual agent or distributor accounted for
more than 10% of the Company's net revenues for the year ended December 31,
1998.
The Company is committed to providing its customers with a superior
standard of customer service. The Company's 37 customer service representatives
strive for prompt product processing and delivery by coordinating between the
customer and the Company's sales, operations and shipping departments. The
Company ships the majority of its products within 24 hours of receipt of the
95
<PAGE> 101
customer order, or 72 hours in the case of customized braces. In addition,
customer service representatives provide follow-up and technical support.
UNITED STATES
The Company markets products in the United States under the DonJoy and
ProCare brands through two distinct sales and distribution channels as well as
under national contracts and through the OfficeCare program. Sales in the United
States accounted for approximately 84% of the Company's net revenues for the
twelve months ended June 29, 1999.
DONJOY. DonJoy products are marketed by 26 commissioned sales
organizations (referred to herein as agents) which employ approximately 185
sales representatives. These sales representatives market to orthopedic
surgeons, orthotic and prosthetic centers, hospitals, surgery centers, physical
therapists and trainers. Because the DonJoy product line generally requires
customer education on the application and use of the product, the sales
representatives are technical specialists who receive extensive training from
both the Company and the agent and use their technical expertise to help fit the
patient with the Company's product and assist the orthopedic professional in
choosing the appropriate product to meet the patient's needs. After a product
order is received by a sales representative, the Company ships and bills the
product directly to the orthopedic professional and the Company pays a sales
commission to the agent.
The Company enjoys long-standing relationships with most of its 26 agents,
many of which have marketed DonJoy products for over 10 years. Under the
arrangements with the agents, each agent is granted an exclusive geographic
territory for sales of the Company's products and is not permitted to market
products, or represent competitors who sell or distribute products, that compete
with the Company. The agents receive a commission which varies based on the type
of product being sold. If an agent fails to achieve specified sales quotas
during any quarter, the Company may terminate the agent, which the Company has
done in the past.
PROCARE. ProCare products are sold in non-exclusive territories under
private label brand names to third party distributors. These distributors
include large, national third party distributors such as Owens & Minor Inc.,
McKesson Corp., General Medical Corp., Allegiance Corp., PSS World Medical Inc.
and Bergen Brunswig Corp.; regional medical surgical dealers; and medical
products buying groups which consist of a number of dealers who make purchases
through the buying group. These distributors generally resell the ProCare
products to large hospital chains, hospital buying groups, primary care networks
and orthopedic physicians for use by the patient. Unlike DonJoy products,
ProCare products generally do not require significant customer education for
their use.
NATIONAL CONTRACTS. In response to the emergence of managed care and the
formation of buying groups, national purchasing contracts and various bidding
procedures imposed by hospitals and buying groups, the Company has entered into
national contracts for DonJoy and ProCare products with large health care
providers and buying groups, such as Kaiser Permanente, HealthSouth Corp.,
NovaCare Inc., Premier Purchasing Partners, L.P., AmeriNet Inc. and US
Government/Military hospitals. Under these contracts, the Company provides
discounted
96
<PAGE> 102
pricing to the buying group and is generally designated as one of several
preferred purchasing sources for the members of the buying group for specified
products, although the members are not obligated to purchase the Company's
products. The Company expects that in the future it will enter into additional
national contracts with other health care providers and buying groups. See "Risk
Factors -- Responses by Health Care Providers to Price Pressures; Formation of
Buying Groups" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview -- Third Party Reimbursement; Health Care
Reform; Managed Care."
OFFICECARE. The Company provides an inventory management and insurance
billing system to orthopedic physicians in the U.S. through its OfficeCare
program, which was initiated in 1996. The Company supplies the physician with a
working inventory of orthopedic products for immediate disbursement to the
physician's patients. The Company then directly seeks reimbursement from the
patient's insurance company or other third party payor or from the patient where
self-pay is applicable.
INTERNATIONAL
The Company markets products in 50 countries, primarily in Europe and
Japan, under the DonJoy and ProCare brand names. International sales accounted
for approximately 18% and 16% of the Company's net revenues for the year ended
December 31, 1998 and the twelve months ended June 29, 1999, respectively. Sales
in Germany, the Company's largest foreign market, accounted for approximately
one-third of the Company's 1998 international net revenues, with no other
country accounting for more than approximately 10% of the Company's 1998
international net revenues. Sales in Europe, primarily Germany, the United
Kingdom, France, Spain and Italy, accounted for approximately 69% of the
Company's 1998 international net revenues. Sales in Japan accounted for
approximately 7% of the Company's 1998 international net revenues. The Company
expects its international net revenues to increase as a percentage of its total
net revenues in the future.
Historically, the Company has sold and distributed its products in foreign
markets through 30 Smith & Nephew sales organizations and 14 independent
distributors. The Company plans to increase its international sales by
reorganizing and expanding its international distribution network and
implementing the marketing and distribution strategies which the Company
successfully utilizes in the United States and certain international
territories. For example, in Germany, where the Company markets its products
through an independent distributor, the Company believes it has achieved market
shares comparable to those it has achieved in the United States. Historically,
approximately 55% of the Company's international sales have been made through
Smith & Nephew sales organizations. The Company intends to replace most of its
existing Smith & Nephew sales organizations with independent distributors who
will focus on building strong relationships with its targeted customers and will
be responsible for achieving specified sales targets. As of October 1, 1999, the
Company has replaced 11 Smith & Nephew sales organizations with independent
distributors. The Company has also given notice to Smith & Nephew that the
Company will terminate 8 of the remaining 19 Smith & Nephew sales organizations
by the beginning of 2000. The
97
<PAGE> 103
Company is currently negotiating to have its German distributor distribute the
Company's products in one or more additional European countries. In addition,
the Company plans to develop relationships with orthopedic professionals who are
well recognized in targeted countries and who are expected to become product
"champions", similar to orthopedic professionals in the United States. The
Company will focus on implementing its strategies in the United Kingdom, France,
Italy and Spain and will continue its focus in Germany, all countries with
substantial per capita health care expenditures. See "Risk Factors -- Transition
to New Independent Distributors in International Markets," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- International Sales," "-- Business Strategy."
MANUFACTURING
The Company manufactures substantially all of its products at its three
facilities in the United States and Mexico. See "-- Facilities." The Company
operates a vertically integrated manufacturing operation at its Vista,
California facility and is capable of producing a majority of its subassemblies
and components in-house. These include metal stamped parts, injection molding
components and fabric-strapping materials. The Company also has extensive in-
house tool and die fabrication capabilities which provide savings in the
development of typically expensive tools and molds as well as flexibility to
capitalize on market opportunities as they are identified. Utilizing a variety
of computational tools and computer aided design (CAD) systems during the
development process, the Company can produce a design directly on computer-based
fabrication equipment, reducing both production time and costs.
The Company has achieved ISO 9001 certification, EN46001 certification and
Certification to the European Medical Device Directive at its Vista facility.
These certifications are internationally recognized quality standards for
manufacturing and assist the Company in marketing its products in certain
foreign markets.
As a result of its use of production technology in its Vista facility, the
Company is able to reduce the labor content of many of its products. For labor
intensive operations, primarily sewing, the Company utilizes its two facilities
in Mexico for subassembly and finished product manufacturing. The Company will
continue to move portions of its labor intensive operations to its facilities in
Mexico to generate labor cost savings and utilize the resulting additional
capacity in its Vista facility to manufacture its more technologically advanced
products.
The Company's manufacturing operations use new and innovative technologies
and materials including thermoplastics, various composites and polypropylene
glass, as well as a variety of light weight metals and alloys. The Company also
uses Velcro(TM) and neoprene, as well as Drytex, a warp-knit nylon and polyester
composite, in the manufacture of its products. All of the raw materials used by
the Company in the manufacture of its products are available from more than one
source and are generally readily available on the open market.
The Company purchases a small amount of certain finished products from
manufacturers in China. In addition, the Company distributes the PainBuster
systems which are manufactured by I-Flow as well as certain other products which
are manufactured by third parties.
98
<PAGE> 104
FACILITIES
The Company is headquartered in Vista, California and operates 3
manufacturing facilities. Manufacturing operations in the United States were
consolidated in 1998 into the Vista facility which consists of three buildings.
The Vista facility is subleased from Smith & Nephew. See "Certain Relationships
and Related Transactions -- Other Agreements between DonJoy and Smith &
Nephew -- Sublease." The two other facilities are located in Tijuana, Mexico,
within 100 miles of Vista, and are managed from the Vista facility.
<TABLE>
<CAPTION>
OWNED/ LEASE TERMINATION SIZE
LOCATION USE LEASED DATE (SQUARE FEET)
- -------- --- ------ ----------------- -------------
<S> <C> <C> <C> <C>
Vista, California Corporate Leased February 2008 266,000
Headquarters
Research &
Development
Manufacturing &
Distribution
Warehousing
Tijuana, Mexico Manufacturing Leased December 2000(1) 48,600
Tijuana, Mexico Manufacturing Owned 13,000
</TABLE>
- -------------------------
(1) The lease for the Tijuana facility automatically renews for additional one
year periods unless terminated by either party on 30 days prior written
notice.
COMPETITION
The orthopedic recovery products industry is highly competitive and
fragmented. The Company's competitors include a few large, diversified
orthopedic companies and numerous smaller niche companies. Some of the Company's
competitors are part of corporate groups that have significantly greater
financial, marketing and other resources than the Company. The Company's primary
competitors in the rigid knee brace market include DePuy OrthoTech (a division
of Johnson & Johnson), Innovation Sports Incorporated, Townsend Industries Inc.,
Bledsoe Brace Systems (a division of Medical Technology, Inc.) and Generation II
USA, Inc. The Company competes in the non-retail sector of the soft goods
products market and its competitors include DeRoyal Industries, Zimmer, Inc. (a
division of Bristol-Meyers Squibb Company) and Technol Orthopedic Products (a
division of Kimberly Clark Corp.). The Company competes with a variety of
manufacturers of specialty and other orthopedic products, depending on the type
of product. In addition, in certain foreign countries, the Company competes with
one or more local competitors.
Competition in the rigid knee brace market is primarily based on product
technology, quality and reputation, relationships with customers, service and
price, whereas competition in the soft goods market is less dependent on
innovation and technology and is primarily based on product range, service and
price. Competition in specialty and other orthopedic products is based on a
variety of factors, depending on the type of product.
99
<PAGE> 105
The Company believes that its extensive product lines, advanced product
design, strong U.S. distribution networks, reputation with leading orthopedic
surgeons and sports medicine specialists and customer service performance
provide it with a competitive advantage over its competitors. In particular, the
Company believes that its broad product lines provide it with a competitive
advantage over the smaller niche companies which generally have innovative
technology in a focused product category, while its established distribution
networks and relationship-based selling efforts provide it with a competitive
advantage over larger manufacturers.
INTELLECTUAL PROPERTY
The Company's most significant intellectual property rights are its
patents, trademarks, including the Company's DonJoy and ProCare brand names, and
proprietary know-how.
The Company owns or has licensing rights to over 60 patents and has several
pending patent applications. The Company anticipates that it will apply for
additional patents in the future as it develops new products and product
enhancements. The Company's most significant patent involves the bracing
technology and design which it has patented as the "Four Points of Leverage"
system. All of the Company's ligament bracing products have been designed using
the "Four Points of Leverage" system which effectively produces pressure to the
upper portion of the tibia, which, in turn, reduces strain on the damaged,
reconstructed or torn ligament. Because this system is patented, the Company's
competitors are prohibited from designing products which apply pressure to the
tibia using the Company's technique. The Company's patent covering the "Four
Points of Leverage" system expires in January 2005. The Company's other
significant patents include the Custom Contour Measuring Instrument, which
serves as an integral part of the measurement process for patients ordering the
Company's customized ligament and OA braces. In addition, the Company owns
patents covering a series of hinges for its post-operative braces, as well as
pneumatic pad design and production technologies (which utilize air inflatable
cushions that allow the patient to vary the location and degree of support) used
in braces such as the Defiance and the Patient Ready Monarch. The Company also
has patents relating to its OA braces and specific mechanisms in a number of the
Company's products. In addition to these patents, the Company relies on non-
patented know-how, trade secrets, process and other proprietary information,
which the Company protects through a variety of methods, including
confidentiality agreements and proprietary information agreements with vendors,
employees, consultants and others who have access to the Company's proprietary
information. See "Risk Factors -- Patents and Proprietary Know-How."
The Company owns or has the licensing rights to a number of trademarks. In
addition to the DonJoy(R) and ProCare(R) brand names, the Company's most
significant trademarks are Defiance(R), GoldPoint(R), Monarch(R), RocketSoc(R),
IceMan(R), Air DonJoy(R), Quadrant(R), Legend(TM), TROM(TM), Playmaker(TM),
PainBuster(TM) and OPAL(TM).
In August 1998, Smith & Nephew entered into a five-year exclusive
arrangement with IZEX Technologies to license know-how and technology for the
design, manufacture and distribution of the VISTA System, a computerized
post-operative
100
<PAGE> 106
brace designed to optimize a patient's rehabilitation in the treatment of knee
injuries, which the Company believes is the only such system currently under
development. In connection with the recapitalization, Smith & Nephew assigned
this license to the Company.
The Company believes that its patents, trademarks and other proprietary
rights are important to the development and conduct of its business and the
marketing of its products. As a result, the Company aggressively protects its
intellectual property rights.
EMPLOYEES
As of June 29, 1999, the Company had 816 employees. The Company's workforce
is not unionized. The Company has not experienced any strikes or work stoppages,
and management generally considers its relationships with its employees to be
satisfactory.
GOVERNMENT REGULATION
MEDICAL DEVICE REGULATION
UNITED STATES. The Company's products and operations are subject to
extensive and rigorous regulation by the FDA. The FDA regulates the research,
testing, manufacturing, safety, labeling, storage, recordkeeping, promotion,
distribution, and production of medical devices in the United States to ensure
that medical products distributed domestically are safe and effective for their
intended uses. In addition, the FDA regulates the export of medical devices
manufactured in the United States to international markets.
Under the Federal Food, Drug, and Cosmetic Act (the "FFDCA"), medical
devices are classified into one of three classes -- Class I, Class II or Class
III -- depending on the degree of risk associated with each medical device and
the extent of control needed to ensure safety and effectiveness. The Company's
current products are all Class I or Class II medical devices. All of the
Company's currently marketed products hold the relevant exemption or premarket
clearance required under the FFDCA.
Class I devices are those for which safety and effectiveness can be assured
by adherence to a set of guidelines, which include compliance with the
applicable portions of the FDA's Quality System Regulation ("QSR"), facility
registration and product listing, reporting of adverse medical events, and
appropriate, truthful and non-misleading labeling, advertising, and promotional
materials (the "General Controls"). Some Class I devices also require premarket
clearance by the FDA through the 510(k) premarket notification process described
below.
Class II devices are those which are subject to the General Controls and
most require premarket demonstration of adherence to certain performance
standards or other special controls, as specified by the FDA, and clearance by
the FDA. Premarket review and clearance by the FDA for these devices is
accomplished through the 510(k) premarket notification procedure. For most Class
II devices, the manufacturer must submit to the FDA a premarket notification
submission, demonstrating that the device is "substantially equivalent" to
either
101
<PAGE> 107
(1) a device that was legally marketed prior to May 28, 1976, the date upon
which the Medical Device Amendments of 1976 were enacted, or
(2) to another commercially available, similar device which was
subsequently cleared through the 510(k) process.
If the FDA agrees that the device is substantially equivalent, it will grant
clearance to commercially market the device. By regulation, the FDA is required
to clear a 510(k) within 90 days of submission of the application. As a
practical matter, clearance often takes longer; however, the Company's products
have generally been cleared within the 90-day time period. The FDA may require
further information, including clinical data, to make a determination regarding
substantial equivalence. If the FDA determines that the device, or its intended
use, is not "substantially equivalent", the FDA will place the device, or the
particular use of the device, into Class III, and the device sponsor must then
fulfill much more rigorous premarketing requirements.
A Class III product is a product which has a new intended use or uses
advanced technology that is not substantially equivalent to a use or technology
with respect to a legally marketed device. The safety and effectiveness of Class
III devices cannot be assured solely by the General Controls and the other
requirements described above. These devices almost always require formal
clinical studies to demonstrate safety and effectiveness.
Approval of a premarket approval application ("PMA") from the FDA is
required before marketing of a Class III product can proceed. The PMA process is
much more demanding than the 510(k) premarket notification process. A PMA
application, which is intended to demonstrate that the device is safe and
effective, must be supported by extensive data, including data from preclinical
studies and human clinical trials and existing research material, and must
contain a full description of the device and its components, a full description
of the methods, facilities, and controls used for manufacturing, and proposed
labeling. Following receipt of a PMA application, once the FDA determines that
the application is sufficiently complete to permit a substantive review, the FDA
will accept the application for review. The FDA, by statute and by regulation,
has 180 days to review a filed PMA application, although the review of an
application more often occurs over a significantly longer period of time, up to
several years. In approving a PMA application or clearing a 510(k) application,
the FDA may also require some form of post-market surveillance, whereby the
manufacturer follows certain patient groups for a number of years and makes
periodic reports to the FDA on the clinical status of those patients when
necessary to protect the public health or to provide additional safety and
effectiveness data for the device.
When FDA approval of a Class I, Class II or Class III device requires human
clinical trials, if the device presents a "significant risk" (as defined by the
FDA) to human health, the device sponsor is required to file an investigational
device exemption ("IDE") application with the FDA and obtain IDE approval prior
to commencing the human clinical trial. If the device is considered a
"non-significant" risk, IDE submission is not required. Instead, only approval
from the Institutional Review Board conducting the clinical trial is required.
Human clinical studies are generally required in connection with approval of
Class III devices and to a much
102
<PAGE> 108
lesser extent for Class I and II devices. None of the Company's current products
have required human clinical trials for approval.
In addition, the Company's manufacturing processes are required to comply
with the applicable portions of the QSR, which covers the methods and
documentation of the design, testing, production, processes, controls, quality
assurance, labeling, packaging, and shipping of the Company's products. The QSR
also, among other things, requires maintenance of a device master record, device
history record, and complaint files. The Company's domestic facility, records,
and manufacturing processes are subject to periodic unscheduled inspections by
the FDA. The Company's Mexican facilities, which export products to the United
States, may also be inspected by the FDA. The Company's U.S. facility was
recently inspected by the FDA and was found to be in compliance with the
applicable QSR regulations. Based on the Company's own internal audits of its
Mexican facilities, the Company believes that its Mexican facilities are in
substantial compliance with the applicable QSR regulations.
Failure to comply with the applicable U.S. medical device regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil penalties, repairs, replacements, refunds, recalls or
seizures of products, total or partial suspension of production, the FDA's
refusal to grant future premarket clearances or approvals, withdrawals or
suspensions of current product applications, and criminal prosecution. There are
currently no adverse regulatory compliance issues or actions pending with the
FDA at any of the Company's facilities or relating to the Company's products and
none of the recent FDA audits of its Vista, California facility has resulted in
any enforcement actions by the FDA.
There are no restrictions under U.S. law on the export from the United
States of any medical device that can be legally distributed in the United
States. In addition, there are only limited restrictions under U.S. law on the
export from the United States of medical devices that cannot be legally
distributed in the United States. If a Class I or Class II device does not have
510(k) clearance, but is eligible for approval under the 510(k) process, then
the device can be exported to a foreign country for commercial marketing without
the submission of any type of export request or prior FDA approval, if it
satisfies certain limited criteria relating primarily to specifications of the
foreign purchaser and compliance with the laws of the country to which it is
being exported. Class III devices which do not have PMA approval may be exported
to any foreign country, if the product complies with the laws of that country
and, with respect to the following countries, has valid marketing authorization
under the laws of such country: Australia, Canada, Israel, Japan, New Zealand,
Switzerland, South Africa, the European Union, a country in the European
Economic Area or such other countries as may be approved by the FDA. The
unapproved device must also satisfy the criteria required to be satisfied by
Class I and Class II devices as well as additional criteria applicable to the
devices. All of the Company's products which are exported to foreign countries
currently comply with the restrictions described in this paragraph.
Certificates for export (certifying the status of a product under the
FFDCA) are not required by the FDA for export. However, they are often required
by the foreign country importing the product.
103
<PAGE> 109
INTERNATIONAL. In many of the foreign countries in which the Company
markets its products, it is subject to regulations affecting, among other
things, 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, including those in Germany, the Company's
largest foreign market. In many countries, the national health or social
security organizations require the Company's products to be qualified before
they can be marketed with the benefit of reimbursement eligibility. To date, the
Company has not experienced difficulty in complying with these regulations. Due
to the movement towards harmonization of standards in the European Union, the
Company expects a changing regulatory environment in Europe characterized by a
shift from a country-by-country regulatory system to a European Union wide
single regulatory system. The timing of this harmonization and its effect on the
Company cannot currently be predicted.
The Company is implementing policies and procedures intended to position
itself for the expected international harmonization of regulatory requirements.
The ISO 9000 series of standards have been developed as an internationally
recognized set of guidelines that are aimed at ensuring the design and
manufacture of quality products. ISO 9001 is the highest level of ISO
certification, covering both the quality system for manufacturing as well as
that for product design control; ISO 9002 covers the quality system for
manufacturing operations that do not include product design. The Company's Vista
facility has received ISO 9001 certification. See "-- Manufacturing." A company
that passes an ISO audit and obtains ISO registration becomes internationally
recognized as functioning under a competent quality system. In certain foreign
markets, it may be necessary or advantageous to obtain ISO 9000 series
certification, which, in certain respects, is analogous to compliance with the
FDA's QSR requirements. The European Economic Community has promulgated rules
which require that medical products receive a CE mark. All of the Company's
products currently distributed in Europe have received the CE mark. A CE mark is
an international symbol indicating that the device meets common European
standards of performance and safety.
FRAUD AND ABUSE
The Company is subject to various federal and state laws pertaining to
health care fraud and abuse, including antikickback laws and physician
self-referral laws. Violations of these laws are punishable by criminal and/or
civil sanctions, including, in some instances, imprisonment and exclusion from
participation in federal and state health care programs, including Medicare,
Medicaid, VA health programs and CHAMPUS. The Company has never been challenged
by a governmental authority under any of these laws and believes that its
operations are in material compliance with such laws. However, because of the
far-reaching nature of these laws, there can be no assurance that the Company
would not be required to alter one or more of its practices to be in compliance
with these laws. In addition, there can be no assurance that the occurrence of
one or more violations of these laws would not result in a material adverse
effect on the Company's financial condition and results of operations.
104
<PAGE> 110
ANTIKICKBACK LAWS. The Company's operations are subject to federal and
state antikickback laws. 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, or in return for the recommendation, arrangement,
purchase, lease or order of items or services that are covered by Medicare or
state health programs. Violation of the Medicare Fraud and Abuse Statute is a
felony, punishable by fines up to $25,000 per violation and imprisonment for up
to five years. In addition, the Department of Health and Human Services may
impose civil penalties and exclude violators from participation in Medicare or
state health programs. Many states have adopted similar prohibitions against
payments intended to induce referrals to Medicaid and other third party payor
patients.
PHYSICIAN SELF-REFERRAL LAWS. The Company is also subject to federal and
state physician self-referral laws. Federal physician self-referral legislation
(known as the "Stark" law) prohibits, subject to certain exceptions, 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. The Stark law also prohibits the entity
receiving the referral from billing any good or service furnished pursuant to an
unlawful referral. The penalties for violations include a prohibition on payment
by these government programs and civil penalties of as much as $15,000 for each
violative referral and $100,000 for participation in a "circumvention scheme."
Various state laws also contain similar provisions and penalties.
The Company provides compensation to physicians pursuant to certain
consulting and licensing agreements and through its OfficeCare program. The
consulting agreements generally provide for the payment of a flat fee in return
for a fixed number of hours or days of consulting services and the licensing
agreements generally provide for the payment of a fixed percentage of sales of
products developed by the physician. In the OfficeCare program, the Company pays
participating physicians a rental fee for office space used for inventory
storage and, in some cases, a pro rata portion of the salary of a member of the
physician's staff who assists in fitting products and/or handling paperwork.
While the payment of compensation to physicians who refer patients to the
Company can implicate the Medicare Fraud and Abuse Statute and the Stark law,
the Company believes that its relationships with physicians described above fall
within recognized safe harbors and exceptions in both statutes. In addition to
structuring relationships with referring physicians in order to comply with the
relevant statutes, the Company also monitors these relationships on an ongoing
basis in an attempt to ensure continued compliance.
ENVIRONMENTAL AND OTHER MATTERS
The Company's facilities and operations are subject to federal, state and
local environmental and occupational health and safety requirements of the U.S.
and foreign countries, including those relating to discharges of substances to
the air, water and land, the handling, storage and disposal of wastes and the
cleanup of properties affected by pollutants. The Company believes it is
currently in
105
<PAGE> 111
compliance with such requirements and does not currently anticipate any material
adverse effect on its business or financial condition as a result of its efforts
to comply with such requirements.
In the future, federal, state, local or foreign governments could enact new
or more stringent laws or issue new or more stringent regulations concerning
environmental and worker health and safety matters that could effect the
Company's operations. Also, in the future, contamination may be found to exist
at the Company's current or former facilities or off-site locations where the
Company has sent wastes. The Company could be held liable for such
newly-discovered contamination which could have a material adverse effect on the
Company's business or financial condition. In addition, changes in environmental
and worker health and safety requirements or liabilities from newly-discovered
contamination could have a material effect on the Company's business or
financial condition.
LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, including product liability claims, none of which
is currently expected to have a material adverse effect on the Company. The
Company maintains product liability insurance in amounts which it believes to be
reasonable and standard in the industry.
106
<PAGE> 112
MANAGEMENT
BOARD OF MANAGERS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to persons
who are members of the Board of Managers (each a "Manager") of DonJoy and
executive officers of DonJoy or the Company. One additional Manager will be
designated by CDP and one additional Manager will be designated by mutual
agreement of the other Managers, however, such individuals have not yet been
identified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Leslie H. Cross.................... 48 President, Chief Executive Officer
and Manager
Charles Bastyr..................... 48 Senior Vice President -- Research &
Business Development
Cyril Talbot III................... 44 Vice President -- Finance, Chief
Financial Officer and Secretary
Michael R. McBrayer................ 40 Vice President -- Domestic Sales
Peter Bray......................... 52 Vice President -- International
Business
Kent Bachman....................... 36 Vice President -- Operations
Charles T. Orsatti................. 55 Manager
Mitchell J. Blutt, M.D. ........... 42 Manager
Shahan D. Soghikian................ 40 Manager
Damion E. Wicker, M.D. ............ 38 Manager
John J. Daileader.................. 34 Manager
Ivan R. Sabel, CPO................. 54 Manager
</TABLE>
Leslie H. Cross has served as President of the Company since July 1995 and
became the Chief Executive Officer and a Manager of DonJoy upon consummation of
the recapitalization. From 1990 to 1994, Mr. Cross held the position of Senior
Vice President of Marketing and Business Development. He was a Managing Director
of two different divisions of Smith & Nephew from 1982 to 1990. Prior to that
time, he worked at American Hospital Supply Corporation. Mr. Cross earned a
diploma in Medical Technology from Sydney Technical College in Sydney, Australia
and studied Business at the University of Cape Town in Cape Town, South Africa.
Charles Bastyr has served as Senior Vice President -- Research & Business
Development since 1996 and has been with the Company since 1987. He was Vice
President of Engineering from 1994 to 1996 and Director of Engineering prior to
that time. Mr. Bastyr received his B.S. (Mechanical Engineering) from San Diego
State University and is a Registered Professional Mechanical Engineer with the
State of California.
Cyril Talbot III has served as Vice President -- Finance since 1994 and
became the Chief Financial Officer of DonJoy upon consummation of the
recapitalization. He joined the Company in 1991 as Director of Finance. From
1981 to 1991, he held several management positions at American Hospital Supply
Corporation and McGaw, Inc. Prior to that time, he was an Audit Manager at
107
<PAGE> 113
Miller, Cooper & Co. Ltd. Mr. Talbot earned his B.S. (Accounting/Finance) at
Miami University in Oxford, Ohio and is a Certified Public Accountant.
Michael R. McBrayer has served as Vice President -- Domestic Sales since
1993. He held several managerial positions after joining the Company in 1987 as
a national sales manager for the retail product line. Mr. McBrayer received his
B.S. (Marketing and Management) at Northern Arizona University in Flagstaff,
Arizona.
Peter Bray has served as Vice President -- International Business since
1998. From 1996 to 1998, he was the Vice President -- Anatomical Supports. Prior
to joining the Company, he held several management positions with Baxter
HealthCare Corporation. Mr. Bray earned a Bachelors of Commerce (Accounting and
Marketing) in South Africa and is an active Fellow of the Royal Institute of
Chartered Management Accountants in the United Kingdom.
Kent Bachman has served as Vice President -- Operations since 1998. He held
several managerial positions after joining the Company in 1987 as a
manufacturing assembler. Prior to joining the Company, Mr. Bachman was a
professional baseball player for the Montreal Expos and the Milwaukee Brewers
from 1984 to 1987. Mr. Bachman earned a B.S. (Industrial Technology) at
California Polytechnic State University at San Luis Obispo.
Charles T. Orsatti became a Manager of DonJoy upon consummation of the
recapitalization. He has been a partner of Fairfield Chase since 1998. From 1995
to 1998, Mr. Orsatti was a senior consultant to CCP. Prior to that, he was the
Chairman and Chief Executive Officer of Fairfield Medical Products Corporation,
a worldwide manufacturer of critical care products sold to hospitals and
alternative care facilities. Mr. Orsatti earned a B.S. (Management and
Marketing) from Pennsylvania State University. He serves as a director of
Vitagen, Inc.
Mitchell J. Blutt, M.D. became a Manager of DonJoy upon consummation of the
recapitalization. He has been an Executive Partner of CCP since 1992 and was a
General Partner of CCP from 1988 to 1992. Dr. Blutt has a B.A. and a M.D. from
the University of Pennsylvania and an M.B.A. from The Wharton School of the
University of Pennsylvania. He serves as a director of FHC, Fisher Scientific
International, Inc., Hanger Orthopedic Group, Inc., La Petite Academy, Inc.,
Medical Arts Press, Inc., Senior Psychology Services Management, Inc., UtiliMED,
Inc., Vista Healthcare Asia Pte. Ltd. and IBC Asia Health Care Ltd.
Shahan D. Soghikian became a Manager of DonJoy upon consummation of the
recapitalization. He has been a General Partner of CCP since 1992. Prior to
joining CCP, Mr. Soghikian was a member of the mergers and acquisitions groups
of Bankers Trust and Prudential Securities, Inc. Mr. Soghikian has a B.A. from
Pitzer College and an M.B.A. from the Anderson Graduate School of Management at
UCLA. He serves as a director of American Floral Services, Inc., Nextec Ltd. and
Link Investment Management.
Damion E. Wicker, M.D. became a Manager of DonJoy upon consummation of the
recapitalization. He has been a General Partner of CCP since 1997. Prior to
joining CCP, Dr. Wicker was President of Adams Scientific and held positions
with MBW Venture Partners and Alexon, Inc. Dr. Wicker received a B.S. with
honors from The Massachusetts Institute of Technology, an M.D. from Johns
Hopkins and an M.B.A. from the Wharton School of the University of Pennsylvania.
He serves as a director of Genomic Solutions, Inc., Landec Corporation, Optiscan
Biomedical
108
<PAGE> 114
Corp., Praecis Pharmaceuticals, Inc., Transurgical, Inc., Vitagen, Inc. and V.I.
Technologies, Inc.
John J. Daileader became a Manager of DonJoy upon consummation of the
recapitalization. He has been a Principal of CCP since 1997. Prior to joining
CCP, Mr. Daileader worked in the Merchant Banking Group at The Chase Manhattan
Bank and held strategic planning positions at Chemical Bank, Manufacturers
Hanover Trust Company and National Westminster Bank USA. Mr. Daileader has a
B.S. from Rensselaer Polytechnic Institute and an M.B.A. from New York
University. He serves as a director of Vinings Industries, Inc., Mackie
Automotive Systems and M2 Automotive, Inc.
Ivan R. Sabel, CPO, became a Manager of DonJoy in August 1999. Mr. Sabel
has been the Chairman of the Board of Directors and Chief Executive Officer of
Hanger Orthopedic Group since August 1995 and was President of Hanger Orthopedic
Group from November 1987 to July 1, 1999. Mr. Sabel also served as the Chief
Operating Officer of Hanger Orthopedic Group from November 1987 until August
1995. Prior to that time, Mr. Sabel had been Vice President -- Corporate
Development from September 1986 to November 1987. Mr. Sabel was the founder,
owner and President of Capital Orthopedics, Inc. from 1968 until that company
was acquired by Hanger Orthopedic Group in 1986. Hanger Orthopedic Group is a
portfolio investment of CCP. Mr. Sabel is a Certified Prosthetist and Orthotist
("CPO"), a member of the Board of Directors of the American Orthotic and
Prosthetic Association ("AOPA"), a former Chairman of the National Commission
for Health Certifying Agencies, a former member of the Strategic Planning
Committee and a current member of the Veterans Administration Affairs Committee
of AOPA and a former President of the American Board for Certification in
Orthotics and Prosthetics. Mr. Sabel serves on the Board of Nurse Finders Inc.
and is a member of their compensation and audit committee. Mr. Sabel is also a
current member of the Board of Directors of Mid-Atlantic Medical Services, Inc.,
a company engaged in the health care management services business.
COMMITTEES OF THE BOARD OF MANAGERS
The Board of Managers has an Executive Committee, currently consisting of
Messrs. Blutt, Cross and Orsatti. The Board of Managers has a Compensation
Committee/Stock Option Committee (the "Compensation Committee") that determines
compensation for executive officers of DonJoy and the Company and administers
DonJoy's Option Plan. Currently, Messrs. Orsatti, Daileader and Sabel serve on
the Compensation Committee. The Board has an Audit Committee (the "Audit
Committee") that reviews the scope and results of audits and internal accounting
controls and all other tasks performed by the independent public accountants of
DonJoy. Currently, Messrs. Wicker, Soghikian and Daileader serve on the Audit
Committee.
COMPENSATION OF BOARD OF MANAGERS
The members of the Board of Managers do not receive compensation for their
service on the Board of Managers but are reimbursed for their out-of-pocket
expenses. Managers who are neither officers of DonJoy or the Company nor
affiliated with CDP may receive customary compensation for services on the Board
of Managers. The Company, DonJoy and Charles T. Orsatti intend to enter into an
109
<PAGE> 115
agreement pursuant to which the Company will agree to pay Mr. Orsatti up to
$250,000 per year if the Company achieves certain performance objectives to be
established by negotiation among such parties, CDP and CCP.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company for the year ended December 31, 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
- --------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Leslie H. Cross........................... $226,825 $183,258 $ 2,669
President and Chief Executive Officer
Charles Bastyr............................ 193,500 69,946 3,350
Senior Vice President -- Research &
Business Development
Cyril Talbot III.......................... 146,100 48,397 1,888
Vice President -- Finance and Chief
Financial Officer
Michael R. McBrayer....................... 148,300 47,923 2,363
Vice President -- Domestic Sales
Peter Bray................................ 156,750 50,649 3,350
Vice President -- International Business
</TABLE>
- -------------------------
(1) Includes contributions to the Company's 401(K) Plan.
1999 OPTION PLAN
DonJoy has adopted the 1999 Option Plan (the "Plan") pursuant to which
options with respect to 15% of the voting Units of DonJoy on a fully diluted
basis are available for grant to certain members of management (each an
"Optionee"). The Plan is administered by the Compensation Committee appointed
from time to time by the Board of Managers. The Plan expires on June 30, 2014
unless earlier terminated by the Board of Managers of DonJoy. Options granted
under the Plan will be nonqualified options.
Options will be granted in amounts to be agreed upon by the Compensation
Committee. Options will vest either
- ratably at specified annual intervals from the date of grant (the "Time-
Vesting Options") (provided that the maximum number of such Time-Vesting
Options granted shall not exceed 6% of the number of Common Units of
DonJoy outstanding on a fully diluted basis on the closing date of the
Recapitalization) or
- upon the occurrence of a Liquidity Event or Material Transaction (each as
defined below) and then only to the extent the Common Units of DonJoy
owned by CDP have provided CDP with specified internal rates of return
(as set forth in the Plan) since the closing date of the recapitalization
(the "Event-Vesting Options") (provided that the maximum number of such
110
<PAGE> 116
Event-Vesting Options vesting based on achievement of specified internal
rates of return shall not exceed 9% of the number of Common Units
outstanding on a fully diluted basis on the closing date of the
recapitalization), provided that if no Liquidity Event has occurred by
December 31, 2007, such options shall become vested and exercisable.
A Liquidity Event means a sale or other disposition of all or substantially all
of the assets of DonJoy or all or substantially all of the outstanding equity
interests in DonJoy or a registered public offering of the common equity
interests in DonJoy resulting in a market capitalization of more than $150
million for a period of at least 20 consecutive trading days. A Material
Transaction means a dissolution or liquidation of DonJoy, a reorganization,
merger or consolidation in which DonJoy is not the surviving corporation, or
sale of all or substantially all of the assets of DonJoy. The exercise price for
the options will be the fair market value of the Common Units of DonJoy on the
date each such option is granted. The options will expire upon the earliest of
(i) the fifteenth anniversary of the date of grant, (ii) 12 months after the
date an Optionee's employment is terminated due to the Optionee's death or
permanent disability, (iii) immediately upon an Optionee's termination of
employment by the Company "for cause" (as defined in the Plan), (iv) 90 days
after the date an Optionee ceases to be an employee (other than as listed in
(ii) and (iii) above), (v) the effective date of a Material Transaction if
provision is made in connection with such transaction for the assumption of
outstanding options by, or the substitution for such option of new options
covering equity securities of, the surviving, successor or purchasing
corporation, or (vi) the expiration of such other period of time or the
occurrence of such other event as the Compensation Committee, in its discretion,
may provide in any option agreement. Common Units in DonJoy purchased by an
Optionee upon exercise of an option may be repurchased by DonJoy (or its
designee) upon terms and at a price determined in accordance with the provisions
of the applicable option agreement.
As of July 31, 1999, DonJoy has granted options to purchase up to 115,512
Units under the Plan, of which 40% are Time-Vesting Options and 60% are Event-
Vesting Options, to members of management. The Time-Vesting Options vest over a
four year period beginning on June 30, 2000.
401(k) AND INCENTIVE PLANS
DonJoy has established its own 401(k) Plan, which is substantially the same
as the plan previously provided by Smith & Nephew. The assets funding the Smith
& Nephew plan were transferred to the DonJoy 401(k) Plan.
EMPLOYMENT AGREEMENTS
In connection with the recapitalization, the Company entered into
employment agreements with Leslie H. Cross, Cyril Talbot III and Michael R.
McBrayer. The employment agreements terminate on June 30, 2002. Pursuant to
their respective employment agreement, Mr. Cross serves as President of the
Company at an annual base salary of $235,900, Mr. Talbot serves as Vice
President of Finance of the Company at an annual base salary of $151,945 and Mr.
McBrayer serves as Vice President of Domestic Sales of the Company at an annual
base salary of $155,715. These base salaries are subject to annual review and
adjustment by the
111
<PAGE> 117
Board of Managers of the Company. In addition, each executive is entitled to
such annual bonuses as may be determined by the Board of Mangers, four weeks
paid vacation per year, a car allowance and, for 1999 only, club membership dues
and tax preparation fees. Each executive may be terminated at any time during
the term of the applicable employment agreement with or without "cause" (as
defined in the applicable employment agreement). In the event of an executive's
termination without cause, the executive will be entitled to receive his base
salary from the date of termination until the first anniversary of the date of
termination. Pursuant to the applicable employment agreement, each executive has
agreed that until the fourth anniversary of the date of termination or
expiration of his employment with the Company, he will not
(1) induce or attempt to induce any employee of the Company or any
affiliate of the Company to leave the employ of the Company or any such
affiliate, or in any way interfere with the relationship between the Company or
any such affiliate and any employee thereof,
(2) hire any person who was an employee of the Company until six months
after such person's employment with the Company or any affiliate thereof was
terminated, or
(3) induce or attempt to induce any customer, supplier, licensee or other
business relation of the Company or any affiliate to cease doing business with
the Company or such affiliate, or in any way interfere with the relationship
between any such customer, supplier, licensee or business relation and the
Company or any such affiliate.
Each employment agreement also contains customary non-disclosure provisions. In
addition, each executive has agreed that any inventions or other developments
relating to the Company or its products or services conceived, developed or made
by the executive while employed by the Company belong to the Company.
RETENTION AGREEMENTS
In December 1998, Smith & Nephew entered into retention agreements with
certain members of management of the Company (each, a "Management Employee"),
including the persons listed in the summary compensation table, to induce each
Management Employee to remain an employee of the Company in the event of a
Change of Control or Division Divestiture (as defined in the retention
agreement). The recapitalization constituted a Change of Control or Division
Divestiture. Each such Management Employee who remained in his position through
the consummation of the Change of Control or Division Divestiture received a
special retention bonus. Pursuant to the recapitalization agreement, such
special bonus was paid by Smith & Nephew. In addition, pursuant to the retention
agreements with certain Management Employees, if within one year of a Change of
Control or Division Divestiture, a Management Employee's employment with DonJoy
is terminated for other than Cause (as defined in the retention agreement), then
the Management Employee will be entitled to one year's base salary plus one
year's taxable bonus (calculated as maximum normal bonus, excluding the
retention bonus) and such amounts are payable by DonJoy.
112
<PAGE> 118
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Company's membership units are owned by DonJoy and all of DJ
Capital's equity securities are owned by the Company. The following table sets
forth information with respect to the ownership of the Common Units of DonJoy as
of October 31, 1999 by
- each person known to own beneficially more than 5% of the Units,
- each Manager of DonJoy,
- each executive officer of the Company and DonJoy, and
- all executive officers and Managers of the Company and DonJoy as a group.
The Redeemable Preferred Units which vote together with the Common Units as a
single class (see "-- Description of Operating Agreement") are owned
approximately 51% by CB Capital, an affiliate of CDP, approximately 33% by TCW
and approximately 16% by First Union Investors.
The amounts and percentages of Units beneficially owned are reported on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
"beneficial owner" of a security if that person has or shares voting power or
investment power, which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Securities that can be so acquired are deemed to be
outstanding for purposes of computing such person's ownership percentage, but
not for purposes of computing any other person's percentage. Under these rules,
more than one person may be deemed beneficial owner of the same securities and a
113
<PAGE> 119
person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER UNITS CLASS
- ------------------------------------ --------- ----------
<S> <C> <C>
Chase DJ Partners, LLC(1)............................. 645,500 85.1%
CB Capital Investors L.P.(1).......................... 665,927(2) 87.8%
Smith & Nephew, Inc.(3)............................... 54,000 7.1%
Charles T. Orsatti(4)................................. 645,500 85.1%
Leslie H. Cross(5).................................... 12,500 1.6%
Cyril Talbot III(5)................................... 3,000 0.4%
Michael R. McBrayer(5)................................ 3,000 0.4%
Charles Bastyr(5)..................................... 0 0%
Peter Bray(5)......................................... 0 0%
Mitchell J. Blutt, M.D.(6)............................ (7) (7)
Shahan D. Soghikian(6)................................ (7) (7)
Damion E. Wicker, M.D.(6)............................. (7) (7)
John J. Daileader(6).................................. (7) (7)
All directors and executive officers as a group (11
persons)............................................ 684,427 90.3%
</TABLE>
- -------------------------
(1) The address of CDP and CB Capital is c/o Chase Capital Partners, 380 Madison
Avenue, New York, New York 10017. CDP was formed by CB Capital, an affiliate
of CCP, First Union Investors and Fairfield Chase. CB Capital owns
approximately 87.0%, First Union Investors owns approximately 9.6%, TCW owns
approximately 3.0% and Fairfield Chase owns approximately 0.4% of the
membership interests in CDP. TCW and First Union Investors also own 13,395
and 6,362 Redeemable Preferred Units, respectively. Fairfield Chase is the
managing member of CDP except that under the circumstances described below,
CB Capital will become the managing member of CDP. CB Capital is a licensed
small business investment company (an "SBIC") and as such is subject to
certain restrictions imposed upon SBICs by the regulations established and
enforced by the United States Small Business Administration. Among these
restrictions are certain limitations on the extent to which an SBIC may
exercise control over companies in which it invests. As a result of these
restrictions, CB Capital will only become the managing member of CDP if
certain events described in the constituent documents of CDP occur. See
"Description of Members' Agreement and By-Laws."
(2) Includes (i) 20,427 Redeemable Preferred Units owned by CB Capital and (ii)
the Common Units owned by CDP of which CB Capital may be deemed the
beneficial owner given its status as a member of CDP owning approximately
87% of CDP's membership interests.
(3) The address of Smith & Nephew, Inc. is 1450 Brooks Road, Memphis, Tennessee
38116.
114
<PAGE> 120
(4) Includes the Common Units owned by CDP given Mr. Orsatti's status as the
person controlling Fairfield Chase, which is the managing member of CDP. As
the managing member of CDP, Fairfield Chase may also be deemed to be the
beneficial owner of these Units. The address of Mr. Orsatti is c/o Fairfield
Chase Medical Partners, LLC, 600 Cleveland Street, Suite 1100, Clearwater,
Florida 83755.
(5) The address of Messrs. Cross, Talbot, McBrayer, Bastyr and Bray is c/o
DonJoy, LLC, 2985 Scott Street, Vista, California 92083.
(6) The address of Messrs. Blutt, Soghikian, Wicker and Daileader is c/o Chase
Capital Partners, 380 Madison Avenue, New York, New York 10017.
(7) Such person may be deemed the beneficial owner of Units owned by CDP and CB
Capital due to his status as a Partner (in the cases of Messrs. Blutt,
Soghikian and Wicker) and a Principal (in the case of Mr. Daileader) of
Chase Capital Partners.
DESCRIPTION OF OPERATING AGREEMENT
The Company and DonJoy are each limited liability companies organized under
the Delaware Limited Liability Company Act. DonJoy is the sole member and
managing member of the Company and controls the Company's policies and
operations. DonJoy's operations are governed by a Second Amended and Restated
Operating Agreement among DonJoy, CDP, CB Capital, First Union Investors, Smith
& Nephew, the Management Members and TCW (each a "member" and collectively the
"members"). The operating agreement, together with the members' agreement
described below, governs the relative rights and duties of the members.
UNITS. DonJoy is authorized to issue up to 2,900,000 Common Units and up
to 100,000 Redeemable Preferred Units. As of October 31, 1999, 718,000 Common
Units and 40,184 Redeemable Preferred Units were issued and outstanding, and 15%
of the Common Units on a fully diluted basis have been duly reserved for
issuance to employees, directors and independent consultants and contractors of
DonJoy or any subsidiary thereof pursuant to the 1999 Option Plan.
The Redeemable Preferred Units accrue a cumulative preferred return at a
fixed rate of 14.0% per annum, subject to increase to 16.0% per annum upon the
occurrence of certain events of non-compliance, including
- the failure to pay or distribute when required any amounts with respect
to the Redeemable Preferred Units,
- breaches of representations and warranties, covenants (which are
substantially similar to the covenants contained in the indenture) and
other agreements contained in the documentation relating to the
Redeemable Preferred Units,
- an event of default under the new credit facility, the indenture or other
indebtedness having an outstanding principal amount of $15 million or
more and
115
<PAGE> 121
- certain events of bankruptcy, insolvency or reorganization with respect
to DonJoy or any of its subsidiaries (an "event of non-compliance").
Distributions with respect to the preferred return (other than tax distributions
as described below) are at the option of DonJoy, but to the extent the preferred
return is not paid, the accrued amount of the preferred return will compound
quarterly. Since the ability of the Company to make distributions to DonJoy
(other than distributions to enable DonJoy to make tax distributions as
described below) will be limited by the terms of the new credit facility and the
indenture, DonJoy expects that the preferred return will accrue and compound.
See "Description of New Credit Facility" and "Description of the
Notes -- Certain Covenants -- Limitation on Restricted Payments". In addition to
the rights with respect to the preferred return (including related tax
distributions and distributions to the holders of Redeemable Preferred Units of
their original capital investment in the Redeemable Preferred Units) the
Redeemable Preferred Units will share ratably with the Common Units in any
distributions (including related tax distributions and upon liquidation) made by
DonJoy in respect of the Common Units (the "Redeemable Preferred Units
Participating Interest").
The Redeemable Preferred Units (other than the Redeemable Preferred Units
Participating Interest) are subject to mandatory redemption 10 and one-half
years following the closing of the recapitalization and may be redeemed at
DonJoy's option at any time. Upon a change of control (which is defined in the
operating agreement to be the same as a change of control under the indenture),
holders of Redeemable Preferred Units will have the right, subject to certain
conditions, to require DonJoy to redeem their Redeemable Preferred Units
(including the Redeemable Preferred Units Participating Interest). In addition,
at any time following the sixth anniversary of the closing of the
recapitalization, holders whose Redeemable Preferred Units have been redeemed as
described above, will have the right, subject to certain conditions, to require
DonJoy to redeem their Redeemable Preferred Units Participating Interest. Unless
equity proceeds or other funds are available to DonJoy for the purpose, the
ability of DonJoy to make any of the foregoing payments will be subject to
receipt of distributions from the Company in amounts sufficient to make such
payments and such distributions will be subject to the restrictions contained in
the new credit facility and the indenture. See "Description of New Credit
Facility" and "Description of the Notes -- Certain Covenants -- Limitations on
Restricted Payments."
VOTING. Except as otherwise required by applicable law or as set forth in
the operating agreement or the members' agreement, holders of Common Units and
Redeemable Preferred Units shall vote together as a single class on all matters
to be voted on by the members, with each Unit being entitled to one vote.
MANAGEMENT. The Board of Managers consists of at least nine members as
designated pursuant to the members' agreement. Upon the occurrence of an event
of non-compliance, the Board of Managers will be increased to 11 members and the
holders of the Redeemable Preferred Units will have the right to elect as a
separate class two members to the Board of Managers of DonJoy.
Under the members' agreement, any Manager may be removed with or without
cause, except that a Manager shall not be removed without the consent of the
Member or Managers entitled to nominate such Manager. The Member or
116
<PAGE> 122
Managers entitled to nominate any Manager may remove such Manager and may fill
the vacancy created by such removal.
TAX DISTRIBUTIONS. Subject to receipt of distributions from the Company to
the extent permitted by restrictions contained in the new credit facility and
the indenture, DonJoy will make distributions in agreed upon amounts to its
members to enable them to pay income taxes payable in respect of their allocable
share of the taxable income of DonJoy and its subsidiaries, including the
Company.
RESTRICTIONS ON TRANSFER. Subject to certain exceptions, no member may
transfer its Units without having obtained the prior written consent of members
holding greater than 50% of the number of Units outstanding at the time
(excluding members that are transferring Units), which consent may be withheld
in their sole discretion.
DESCRIPTION OF MEMBERS' AGREEMENT AND BY-LAWS
DonJoy, CDP, CB Capital, First Union Investors, Smith & Nephew, the
Management Members and TCW are parties to a members' agreement. The members'
agreement contains provisions with respect to the transferability and
registration of the Units. The members' agreement also contains provisions
regarding the designation of the members of the Board of Managers and other
voting arrangements. The members' agreement terminates on a sale of the Company,
whether by merger, consolidation, sale of Units, a sale of assets or otherwise
(a "sale of the company").
The members' agreement
- restricts transfers of Units subject to certain exceptions,
- grants the members (other than CDP and the Management Members) (the
"Non-CDP Members") the right to tag along on certain sales of Common
Units by CDP to unaffiliated third parties,
- grants the Non-CDP Members certain preemptive rights,
- grants certain rights of first refusal to DonJoy and CDP with respect to
transfers of Common Units by Non-CDP Members and the Management Members,
- grants DonJoy or its designee the right to repurchase a Management
Member's Units if such Management Member's employment is terminated, and
- requires the members to participate in and cooperate in consummating a
sale of the company approved by CDP.
Under the members' agreement, subject to certain limitations, the members have
been granted piggyback registration rights with respect to registrable Units
held by them and CDP and holders of Redeemable Preferred Units have been granted
certain demand registration rights, to which all members may piggyback. The
members' agreement contains customary terms and provisions with respect to the
registration rights contained therein.
117
<PAGE> 123
The members' agreement provides that the Board of Managers of DonJoy is to
consist of nine Managers:
- one Management Member (initially Leslie H. Cross) designated by
Management Members holding at least a majority of all Units then held by
all Management Members, provided that such Management Member shall be a
member of the Board for only so long as he is both an employee and a
holder of Units,
- five individuals nominated by CDP,
- an additional individual (initially Charles T. Orsatti) nominated by CDP
and having special voting power as described below, and
- two individuals with industry expertise designated by mutual agreement of
the other Managers. Mr. Sabal was appointed to the Board of Managers in
August 1999 pursuant to this provision.
The constituent documents of CDP provide that the five individuals nominated by
CDP shall be designated by CB Capital and that the additional individual
nominated by CDP and having special voting power shall be designated by the
managing member of CDP. The managing member of CDP is initially Fairfield Chase,
except that upon the occurrence of certain events (including where CB Capital
has determined that it is reasonably necessary for it to assume control of CDP
for the protection of its investment or that any other event has occurred which
would permit CB Capital to assume control of CDP under applicable law), CB
Capital will become the managing member of CDP. The managing member of CDP
controls CDP, including the exercise of its rights under the operating agreement
and the members' agreement. Upon becoming the managing member of CDP, CB Capital
will have the ability, through CDP, to designate Managers having a majority of
the voting power of all Managers.
The By-laws of DonJoy also provide that each Manager is entitled to one
vote on each matter on which the Managers are entitled to vote, except that one
individual appointed by the managing member of CDP (initially Charles T.
Orsatti) has six votes on each matter on which the Managers are entitled to
vote.
118
<PAGE> 124
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RECAPITALIZATION AGREEMENT
In addition to providing for the sale of the Common Units of DonJoy to CDP
and the Management Members, and the repurchase of a portion of Smith & Nephew's
interests in DonJoy, the recapitalization agreement provides for certain other
matters in furtherance of the transactions contemplated by the recapitalization,
including those set forth below. The description below of certain provisions of
the recapitalization agreement is subject to, and is qualified in its entirety
by reference to, the definitive recapitalization agreement, a copy of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
COVENANTS NOT TO COMPETE. Smith & Nephew has agreed that until June 30,
2004, neither it nor any of its affiliates will, subject to certain exceptions,
engage anywhere in the world in a Non-Compete Business (as defined below) in
competition with the business of the Company as it existed on June 30, 1999.
"Non-Compete Business" means the developing, manufacturing or marketing of
lower-leg walkers, post-operative hinged knee braces, functional hinged knee
braces, osteoarthitic hinged knee braces, cold therapy and pain management
systems, certain high-tech hinged knee braces, including high-tech hinged knee
braces that incorporate technology covered by the Victoria Patents referred to
below, and computer-assisted rehabilitation systems using the aforementioned
hinged knee braces together with other electronic devices such as sensors and
transducers.
In connection with certain products and proprietary information relating to
a rounded cannulated interference ("RCI") screw system (the "Proprietary RCI
Screw Products"), a tissue fixation product developed by the Company but
transferred to and retained by Smith & Nephew prior to the consummation of the
recapitalization, CDP has agreed that neither it nor DonJoy or any of its
subsidiaries, including the Company, will, subject to certain exceptions,
develop or market with the cooperation of certain physicians who developed such
Proprietary RCI Screw Products, any product which competes with the Proprietary
RCI Screw Products.
SMITH & NEPHEW NAME. Subject to certain limited exceptions, the Company
has agreed that following the recapitalization, it shall not, and shall not
permit any of its subsidiaries to, use any of Smith & Nephew's trademarks or
trade names (including, without limitation, "Smith & Nephew").
VICTORIA PATENTS. Smith & Nephew has agreed to assist the Company in
obtaining from Victoria University of Manchester, England an exclusive worldwide
license for the development, manufacturing and marketing of products within the
Non-Compete Business employing technology covered by certain patents and patent
applications owned by Victoria University relating to the use of
electrostimulation products for skeletal muscle rehabilitation (the "Victoria
Patents"). In the event the Company is not able to obtain such a license, Smith
& Nephew has agreed to use commercially reasonable efforts to enter into an
exclusive license with Victoria University relating to the Victoria Patents and,
subject to approval of Victoria University, to enter into an exclusive worldwide
sublicense with the Company for the right to manufacture, use and sell products
within the Non-
119
<PAGE> 125
Compete Business employing the Victoria Patents. No assurance can be given that
the Company will enter into any such license or sublicense agreement, or, if any
such agreement is entered into, that the Company will be able to develop and/or
successfully market products using such technology.
INDEMNIFICATION. Smith & Nephew has agreed to indemnify CDP and its
affiliates, including the Company and its subsidiaries, for all losses and
expenses incurred by them as a result of
- any breach by Smith & Nephew of its representations and warranties,
covenants and agreements in the recapitalization agreement,
- any tax liabilities for which Smith & Nephew is liable pursuant to the
recapitalization agreement and
- certain excluded liabilities.
However, the recapitalization agreement provides that with respect to breaches
of its representations and warranties, Smith & Nephew shall not be required to
make indemnification payments with respect to any such breach unless the
aggregate amount of the losses and expenses with respect thereto exceeds $3
million ($750,000 in the case of environmental matters) and that the aggregate
amount of such payments shall not exceed $75 million ($7.5 million in the case
of environmental matters). Smith & Nephew's indemnification obligations with
respect to breaches of its representations, warranties, covenants and agreements
in the recapitalization agreement terminate 15 months after the closing date of
the recapitalization except as otherwise set forth in the recapitalization
agreement.
OTHER AGREEMENTS BETWEEN DONJOY AND SMITH & NEPHEW
In connection with the recapitalization, DonJoy and Smith & Nephew entered
into several additional agreements providing for the continuation or transfer
and transition of certain aspects of the business operations. Such agreements
were assigned to the Company in connection with the consummation of the
Recapitalization. The description below of these agreements is subject to, and
is qualified in its entirety by reference to, the definitive agreements, copies
of which have been filed as exhibits to the registration statement of which this
prospectus is a part.
SUPPLY AGREEMENT
Pursuant to a supply agreement between DonJoy and Smith & Nephew entered
into in connection with the Recapitalization, the Company has agreed to supply
to Smith & Nephew to the extent ordered by Smith & Nephew:
(1) all ProCare line products,
(2) all DonJoy products currently listed in Smith & Nephew's 1999
Rehabilitation Division catalog for the United States and any replacements,
substitutions and improvements to such products and
(3) such other products as may be mutually agreed (collectively, the
"Supply Agreement Products").
120
<PAGE> 126
So as not to interfere with the Company's international business plans (see
Business -- Business Strategy -- Increase International Sales) Smith & Nephew
has agreed not to export any products listed in clause (2) above from the United
States after March 31, 2000. Through December 31, 1999, the Company will sell
Supply Agreement Products to Smith & Nephew at the same prices at which such
products were sold to Smith & Nephew prior to the recapitalization, which prices
were consistent with prices at which products were sold to third party
international distributors. Commencing January 1, 2000 and for each year
thereafter until termination of the supply agreement, the Company will sell the
Supply Agreement Products to Smith & Nephew at its best distributor prices
(including discounts and rebates offered to distributors) if and to the extent
agreed to by Smith & Nephew and pursuant to purchase orders for the Company's
products.
Smith & Nephew has no obligation to purchase any specific or minimum
quantity of products pursuant to the supply agreement. However, Smith & Nephew
has agreed not to purchase from anyone other than the Company Supply Agreement
Products which are included within the Non-Compete Business subject to certain
limited exceptions including the failure of the Company to supply such products.
The supply agreement provides that Smith & Nephew may manufacture or purchase
from third party suppliers Supply Agreement Products which are not included
within the Non-Compete Business.
Pursuant to the supply agreement, DonJoy and the Company have agreed to
indemnify Smith & Nephew and its officers and affiliates with respect to
- any injury, death or property damage arising out of DonJoy's, the
Company's or any of their employees or agents negligence or willful
misconduct,
- DonJoy's or the Company's negligent acts or omissions,
- DonJoy's or the Company's misstatements or false claims with respect to
the Supply Agreement Products,
- any product liability claims relating to the Supply Agreement Products
(other than those claims ("Non-Indemnifiable Claims") resulting from
Smith & Nephew's or a third party's fault which do not give rise to an
indemnifiable claim against DonJoy by Smith & Nephew under the
Recapitalization Agreement),
- any governmentally-required recall of the Supply Agreement Products
(other than Non-Indemnifiable Claims),
- its failure to comply with its obligations under the Supply Agreement,
and
- any claim of infringement by any third party of any patents or any
claimed violation of any other intellectual property right of any third
party arising in connection with the sale or distribution of Supply
Agreement Products.
In order to ensure performance of its indemnity obligations, DonJoy has agreed
to maintain at least $3 million of product liability and general public
liability insurance with a deductible or self-insurance of no more than $100,000
and shall name Smith & Nephew as an additional insured. In addition, Smith &
Nephew has agreed
121
<PAGE> 127
to indemnify DonJoy, the Company and its officers, managers, equity holders and
affiliates with respect to
- any injury, death or property damage arising out of Smith & Nephew's or
its employees or agents negligence or willful misconduct,
- Smith & Nephew's negligent act or omission,
- Smith & Nephew's misstatements or false claims with respect to the Supply
Agreement Products,
- Smith & Nephew's misuse of Supply Agreement Product literature, or
- Smith & Nephew's failure to comply with its obligations under the supply
agreement.
The supply agreement terminates in June 2004 unless extended by mutual
agreement of DonJoy and Smith & Nephew.
DISTRIBUTION AGREEMENT
Pursuant to a distribution agreement entered into in connection with the
recapitalization among DonJoy, Smith & Nephew and the affiliates of Smith &
Nephew which distributed the Company's products outside the United States as of
the closing date of the recapitalization (each an "S&N Group Company"), each S&N
Group Company will continue to distribute the Company's products in the specific
international market (the "Territories") in which such S&N Group Company
distributed such products prior to the recapitalization. Through December 31,
1999, the Company will sell products to the S&N Group Companies at the same
prices at which such products were sold to the S&N Group Companies prior to the
recapitalization. Thereafter, the Company and S&N will negotiate the sale price
of any product in good faith. During the term of the distribution agreement with
respect to a Territory, each S&N Group Company has a royalty-free right to use
the Company's trademarks in connection with its distribution of the Company's
products.
The S&N Group Companies have no obligation to purchase any minimum quantity
of products pursuant to the distribution agreement. However, Smith & Nephew has
agreed to use its commercially reasonable efforts to have the S&N Group
Companies purchase from the Company the same quantity of products reflected in
DonJoy's 1999 budgets (the "1999 Purchase Level") and the Company has agreed to
sell to the S&N Group Companies pursuant to applicable purchase orders
quantities of products at least equal to the 1999 Purchase Level. Smith & Nephew
has also agreed to use its commercially reasonable efforts to have each S&N
Group Company distribute and resell products in the same geographical markets
within the Territories as such S&N Group Company distributed and sold Company
products prior to the recapitalization, and Smith & Nephew and each S&N Group
Company agrees to employ efforts and methods to sell and promote the sale of the
products in its Territory that are substantially the same as the efforts and
methods employed prior to the consummation of the recapitalization. The S&N
Group Companies may not, subject to certain limited exceptions, sell or supply
Company products or other similar products to anyone outside the Territories.
During the time any Territory is subject to the distribution
122
<PAGE> 128
agreement, no S&N Group Company may import, sell or promote the sale of any
products which are included within the Non-Compete Business other than products
purchased from the Company. Pursuant to the distribution agreement, DonJoy and
the Company have agreed to indemnify Smith & Nephew and the S&N Group Companies
and their officers and affiliates, and Smith & Nephew have agreed to indemnify
DonJoy and its officers, managers, equity holders and affiliates to the same
extent that DonJoy and Smith & Nephew indemnify each other under the supply
agreement.
Smith & Nephew has the right to terminate the distribution agreement
(1) on 60 days notice, with respect to Austria, Denmark, Finland, France,
Germany and Eastern Europe, Holland, Japan, Norway, New Zealand, Portugal,
Sweden, Switzerland and the United Kingdom, and
(2) on 60 days notice, which notice may not be given prior to November 1,
1999, with respect to Australia, Belgium, Canada, Dubai, Hong Kong, India,
Ireland, Italy, Korea, Malaysia, Mexico, Philippines, Puerto Rico, Singapore,
South Africa, Spain, Taiwan and Thailand.
DonJoy has the right to terminate the distribution agreement
(1) on 30 days notice with respect to the Territories listed in clause (1)
above,
(2) on 60 days notice, which notice may not be given prior to August 1,
1999, with respect to the Territories listed in clause (2) above other than
Australia and Canada, and
(3) on 60 days notice, which notice may not be given prior to November 1,
1999, with respect to Australia and Canada.
Upon termination of the distribution agreement with respect to a Territory, the
applicable S&N Group Company has agreed to assist the Company in the transition
to any new third party distributor designated by the Company. Subject to certain
limited exceptions, any products remaining in the inventory of any terminated
S&N Group Company (the "Repurchased Inventory") upon termination of the
distribution agreement with respect to a Territory, will be repurchased by the
Company, or any new third party distributor designated by the Company with
respect to the Territory for an amount equal to
(1) the original purchase price of such Repurchased Inventory plus any duty
and tax paid by such S&N Group Company and the cost paid by such S&N Group
Company in shipping the Repurchased Inventory to such S&N Group Company plus
(2) any sales tax, VAT, duty or fee incurred by such S&N Group Company with
respect to the delivery of such Repurchased Inventory to the Company or such new
distributor.
If a dispute arises concerning the applicable repurchase price of the
Repurchased Inventory and the parties are not able to resolve such dispute with
ten business days, the applicable S&N Group Company has the right to sell and
distribute the
123
<PAGE> 129
products that are the subject of the dispute within or outside the Territories.
The Distribution Agreement continues until the termination of the last
Territory.
TRANSITION SERVICES AGREEMENT
Pursuant to a transition services agreement among DonJoy and Smith &
Nephew, Smith & Nephew has agreed to assist in the transfer and transition of
certain services provided by Smith & Nephew prior to the recapitalization as
required by the Company, including human resources, payroll, sales tax
reporting, insurance coverage, legal and treasury and cash management. Smith &
Nephew will also act as authorized European Agent/representative/distributor for
DonJoy for purposes of CE regulation. DonJoy will not pay any additional
consideration to Smith & Nephew for such services, but will reimburse Smith &
Nephew for all payments to third parties in connection with any of the foregoing
services. Based on prior practice, such amounts are not expected to be material.
In addition, Smith & Nephew will continue to employ two individuals as
employees of Smith & Nephew's affiliates in the United Kingdom and Belgium (the
"International Employees") until the earlier of 15 days following receipt of
notice from DonJoy requesting termination of the services of such employees or
December 31, 1999. DonJoy will reimburse Smith & Nephew for all compensation,
expenses and benefits paid or provided to or on behalf of the International
Employees.
Smith & Nephew has also agreed to assist in the transition of master group
buying contracts relating to ProCare products with NovaCare, Inc., Premier
Purchasing Partners, L.P. and AmeriNet Inc. (the "Group Buying Contracts") to
separate agreements or arrangements between such companies and the Company.
Pending the execution of such separate agreements or arrangements, Smith &
Nephew will permit the Company to continue to sell products under the Group
Buying Contracts. Through December 31, 1999, the Company will not be required to
pay Smith & Nephew any fee for products sold under the Group Buying Contracts.
If the Company decides to continue selling under the Group Buying Contracts, the
Company will be required to pay Smith & Nephew a fee equal to 1.5% of the
Company's gross sales for products sold under the Group Buying Contracts.
Smith & Nephew agreed to indemnify DonJoy, the Company and its officers,
managers, equity holders and affiliates with respect to
- any injury, death or property damage arising out of Smith & Nephew or its
employees or agents negligence or willful misconduct,
- Smith & Nephew's negligent act or omission or
- Smith & Nephew's failure to comply with its obligations under the
transition services agreement. DonJoy has agreed to indemnify Smith &
Nephew to the same extent as the foregoing and also with respect to any
claim made in respect of the International Employees for actions or
omissions after the consummation of the recapitalization and any claim
made in respect of any product sold by the Company under any Group Buying
Contract. Each party agrees to maintain insurance in the amount of at
least $3 million per
124
<PAGE> 130
occurrence for bodily injury or death and $3 million per occurrence with respect
to property damage with a deductible of no more than $250,000.
DonJoy has the right to terminate any service provided under the transition
services agreement on thirty days notice to Smith & Nephew. Except as it relates
to Group Buying Contracts, the transition services agreement terminates on
December 31, 1999.
GROUP RESEARCH CENTRE TECHNOLOGY AGREEMENT
Pursuant to a Group Research Centre Technology Agreement (the "GRC
Agreement") between DonJoy and Smith & Nephew entered into in connection with
the recapitalization, Smith & Nephew conveyed and assigned to DonJoy an
undivided 50% interest in and to the GRC Technology (as defined below). In
addition, Smith & Nephew has agreed to, among other things, grant to the Company
exclusive or non-exclusive worldwide, royalty-free rights to manufacture, use,
import and sell products included within the Non-Compete Business which products
are based on certain specified technology and other proprietary information
developed as of the closing date of the recapitalization by Group Research
Centre, an affiliate of Smith & Nephew (the "GRC Technology"). The licenses
granted under the GRC Agreement continue with respect to any particular patent
incorporating any such technology until such patent expires, is cancelled or is
declared invalid or unenforceable. No assurance can be given that the Company
will be able to develop and/or successfully market products based on the
technology and proprietary information licensed to the Company pursuant to the
GRC Agreement. Any restriction contained in the GRC Agreement with respect to
non-patented GRC Technology expires on June 30, 2009.
SUBLEASE
Pursuant to a sublease between the Company and Smith & Nephew entered into
in connection with the recapitalization, the Company is subleasing the premises
occupied by the Vista facility from Smith & Nephew. The Company will pay rent
during the term of the sublease in an amount equal to the amount required to be
paid by Smith & Nephew as tenant under the master lease for the Vista facility
together with all taxes and other amounts which are the responsibility of Smith
& Nephew under the master lease. The initial minimum rent payable by the Company
under the sublease is $145,694 per month. DonJoy has guaranteed the payment of
rent and other amounts owing under the sublease by the Company. The sublease
expires on February 19, 2008 unless sooner terminated as provided in the master
lease or the sublease.
CERF LABORATORIES AGREEMENT
Pursuant to a CERF Laboratories Agreement (the "CERF Agreement") between
DonJoy and Smith & Nephew, the Company will allow Smith & Nephew and its
employees, agents, representatives and invitees to use the Company's Clinical
Education Research Facility ("CERF") laboratory, the equipment and supplies in
the CERF laboratory and services offered at the CERF laboratory. Smith & Nephew
will pay the Company a quarterly fee calculated in the same manner as it was
calculated prior to the recapitalization. For 1998 and the first half
125
<PAGE> 131
of 1999, Smith & Nephew paid DonJoy $63,516 and $20,540, respectively, for use
of the CERF laboratory. DonJoy and Smith & Nephew have agreed to indemnify each
other and their respective officers, managers, equity holders and affiliates
with respect to
- any injury, death or property damage arising out of its or its employees
or agents negligence or willful misconduct,
- its negligent act or omission, or
- its failure to comply with its obligations under the CERF Agreement.
In addition, each party has agreed to maintain insurance in the amount of at
least $3 million per occurrence for bodily injury or death and $3 million per
occurrence with respect to property damage with a deductible of no more than
$250,000. The CERF Agreement expires on June 30, 2001 unless renewed upon mutual
agreement or unless sooner terminated by Smith & Nephew upon 30 days notice.
OTHER ARRANGEMENTS WITH AFFILIATES OF CDP
In connection with the recapitalization, the Issuers entered into the new
credit facility with Chase Securities Inc. ("CSI"), as arranger and book
manager, and The Chase Manhattan Bank ("Chase"), as syndication agent and a
lender, both of which are affiliates of CDP. In connection with the new credit
facility, Chase receives customary fees for acting in such capacities. CSI also
acted as financial advisor to Smith & Nephew in connection with the
recapitalization and was paid a fee of $2.0 million by Smith & Nephew upon
consummation of the recapitalization.
126
<PAGE> 132
DESCRIPTION OF NEW CREDIT FACILITY
The following is a summary of the material terms of the new credit facility
among the Company, DonJoy, certain financial institutions party thereto (the
"Lenders"), First Union National Bank, as administrative agent and collateral
agent, and Chase, as syndication agent. The following summary is qualified in
its entirety by reference to the definitive documentation for the new credit
facility, copies of which have been filed as an exhibit to the registration
statement of which this prospectus is a part.
THE FACILITIES
STRUCTURE. The new credit facility provides for
- the term loan in an aggregate principal amount of $15.5 million, and
- the new revolving credit facility providing for revolving loans to the
Company, swingline loans to the Company and the issuance of letters of
credit for the account of the Company in an aggregate principal amount
(including swingline loans and the aggregate stated amount of letters of
credit) of $25.0 million.
AVAILABILITY. The full amount of the term loan was drawn on the closing
date of the recapitalization and amounts repaid or prepaid will not be permitted
to be reborrowed. Availability under the new revolving credit facility will be
subject to various conditions precedent typical of bank loans. Amounts under the
new revolving credit facility will be available on a revolving basis. As of
September 30, 1999, the Company had no borrowings outstanding under the new
revolving credit facility.
INTEREST
Borrowings under the new credit facility bear interest at a variable rate
per annum equal (at the Company's option) to:
- an adjusted London inter-bank offered rate ("LIBOR") plus a percentage
based on the Company's financial performance or
- a rate equal to the highest of the administrative agent's published prime
rate, a certificate of deposit rate plus 1% and the Federal Funds
effective rate plus 1/2 of 1% ("ABR")
plus, in each case, a margin based on the Company's financial performance. The
borrowing margins applicable to the term loan is initially 3.25% for LIBOR loans
and 2.25% for ABR loans. As of October 31, 1999, the interest rate on the term
loan was 8.8125%. The borrowing margins applicable to the new revolving credit
facility are initially 2.75% for LIBOR loans and 1.75% for ABR loans. Borrowing
margins for each of the term loan and new revolving credit facility are subject
to downward adjustment based upon the Company's consolidated leverage ratio.
Amounts outstanding under the new credit facility not paid when due bear
interest at a default rate equal to 2.00% above the rates otherwise applicable
to the loans under the new credit facility.
127
<PAGE> 133
FEES
The Company has agreed to pay certain fees with respect to the new credit
facility, including
- fees on the unused commitments of the Lenders equal to 0.50% on the
undrawn portion of the commitments in respect of the new revolving credit
facility (subject to a reduction based on the Company's consolidated
leverage ratio);
- letter of credit fees on the aggregate face amount of outstanding letters
of credit equal to the then applicable borrowing margin for LIBOR loans
under the new revolving credit facility and a 0.25% per annum issuing
bank fee for the issuing bank;
- annual administration fees; and
- agent, arrangement and other similar fees.
SECURITY; GUARANTEES
The obligations of the Company under the new credit facility are
irrevocably guaranteed, jointly and severally, by DonJoy and DJ Capital and will
be irrevocably guaranteed, jointly and severally, by each subsequently acquired
or organized domestic (and, to the extent no adverse tax consequences would
result therefrom, foreign) subsidiary of the Company. The Company's Mexican
subsidiary (its only existing subsidiary besides DJ Capital) is not a guarantor
of the Company's obligations under the new credit facility. In addition, the new
credit facility and the guarantees thereunder are secured by substantially all
the assets of DonJoy, the Company and DJ Capital and will be secured by
substantially all the assets of each subsequently acquired or organized domestic
(and, to the extent no adverse tax consequences to the Company would result
therefrom, foreign) subsidiary, including but not limited to, in each case
subject to certain exceptions:
- a first priority pledge of all the membership interests in the Company,
- a first-priority pledge of all the capital stock, membership interests
and other equity interests held by DonJoy, the Company or any domestic
(or, subject to the foregoing limitation, foreign) subsidiary of the
Company of each existing and subsequently acquired or organized
subsidiary of the Company (which pledge, in the case of any foreign
subsidiary, shall be limited to 65% of the capital stock, membership
interests or other equity interests of such foreign subsidiary to the
extent the pledge of any greater percentage would result in adverse tax
consequences to the Company), and
- a perfected first priority security interest in, and mortgage on,
substantially all tangible and intangible assets of the Company (not
including the Company's Mexican subsidiary) and the guarantors
(including, but not limited to, accounts receivable, documents,
inventory, trademarks, other intellectual property, licensing agreements,
equipment, the Company's sub-lease of the Vista, California facility,
cash and cash accounts and proceeds of the foregoing).
128
<PAGE> 134
COMMITMENT REDUCTIONS AND REPAYMENTS
The term loan matures on June 30, 2005. The term loan amortizes in an
amount equal to, in each case subject to certain exceptions:
- $0.5 million in each of the first five years of the term loan, and
- $13.0 million in the sixth year thereof.
In addition, the term loan is subject to mandatory prepayments and reductions in
an amount equal to
- 100% of the net cash proceeds of certain equity issuances by DonJoy, the
Company or any of its subsidiaries,
- 100% of the net cash proceeds of certain debt issuances of DonJoy, the
Company or any of its subsidiaries,
- 50% of the Company's excess cash flow (subject to an increase to 75% in
the event the Company's consolidated leverage ratio exceeds a certain
level), and
- 100% of the net cash proceeds of certain asset sales or other
dispositions of property by DonJoy, the Company or any of its
subsidiaries.
The new revolving credit facility is available until June 30, 2004, and
extensions of credit outstanding thereunder on such date will mature on the
fifth business day prior to such date.
AFFIRMATIVE, NEGATIVE AND FINANCIAL COVENANTS
The new credit facility contains a number of covenants that, among other
things, restrict the ability of DonJoy, the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, incur or guarantee
obligations, prepay other indebtedness or amend other debt instruments, pay
dividends or make other distributions (except for certain tax distributions as
described in the definitive documentation for the new credit facility), redeem
or repurchase membership interests or capital stock, create liens on assets,
make investments, loans or advances, make acquisitions, engage in mergers or
consolidations, change the business conducted by the Company and its
subsidiaries, make capital expenditures, or engage in certain transactions with
affiliates and otherwise engage in certain activities. In addition, the new
credit facility requires DonJoy and its subsidiaries to comply with specified
financial ratios and tests, including a maximum consolidated leverage ratio test
and a minimum consolidated interest coverage ratio test. The new credit facility
also contains provisions that prohibit any modifications of the Indenture in any
manner adverse to the Lenders under the new credit facility and that limit the
Company's ability to refinance or otherwise prepay the notes without the consent
of such Lenders.
EVENTS OF DEFAULT
The new credit facility contains customary events of default, including
non-payment of principal, interest or fees, violation of covenants, inaccuracy
of representations or warranties in any material respect, cross default to
certain other indebtedness, bankruptcy, ERISA events, material judgments and
liabilities, actual or asserted invalidity of any material security interest and
change of control.
129
<PAGE> 135
DESCRIPTION OF THE NOTES
Definitions of certain terms used in this Description of the Notes may be
found under the heading "Certain Definitions." For the purposes of this section,
the term "Company" refers only to dj Orthopedics, LLC and not any of its
subsidiaries, "DJ Capital" refers to DJ Orthopedics Capital Corporation, a
Wholly Owned Subsidiary of the Company with nominal assets which conducts no
operations, and the "Issuers" refers to the Company and DJ Capital. The parent
of the Company, DonJoy, L.L.C., is a guarantor of the notes. Although certain of
the Company's subsidiaries formed or acquired in the future, if any, are
required to guarantee the notes, the Company's only existing subsidiary (other
than DJ Capital), Smith & Nephew DonJoy de Mexico, S.A. de C.V., a corporation
formed under the laws of Mexico ("DonJoy Mexico"), is not a guarantor of the
notes. Each company which guarantees the notes is referred to in this section as
a "Note Guarantor." Each such guarantee is termed a "Note Guarantee."
The Issuers issued the old notes and will issue the new notes under the
indenture, dated as of June 30, 1999, among the Company, DJ Capital, DonJoy and
The Bank of New York, as trustee (the "Trustee"), a copy of which has been filed
as an exhibit to the registration statement of which this prospectus is a part.
The indenture contains provisions which define your rights under the notes. In
addition, the indenture governs the obligations of the Issuers and of each Note
Guarantor under the notes. The terms of the notes include those stated in the
indenture and those made part of the Indenture by reference to the TIA.
On June 30, 1999, the Issuers issued $100.0 million aggregate principal
amount of old notes under the indenture. The terms of the new notes are
identical in all material respects to the old notes, except the new notes will
not contain transfer restrictions and holders of new notes will no longer have
any registration rights or be entitled to any liquidated damages. The Trustee
will authenticate and deliver new notes for original issue only in exchange for
a like principal amount of old notes. Any old notes that remain outstanding
after the consummation of the exchange offer, together with the new notes, will
be treated as a single class of securities under the indenture. Accordingly, all
references in this section to specified percentages in aggregate principal
amount of the outstanding new notes shall be deemed to mean, at any time after
the exchange offer is consummated, such percentage in aggregate principal amount
of the old notes and new notes then outstanding.
The following description is meant to be only a summary of certain
provisions of the indenture. It does not restate the terms of the indenture in
their entirety. We urge that you carefully read the indenture as it, and not
this description, governs your rights as Holders.
130
<PAGE> 136
OVERVIEW OF THE NOTES AND THE NOTE GUARANTEES
THE NOTES
These notes:
- are general unsecured obligations of the Issuers;
- will be subordinated in right of payment to all existing and future
Senior Indebtedness of each of the Issuers;
- will rank pari passu in right of payment with all future Senior
Subordinated Indebtedness of each of the Issuers;
- will be senior in right of payment to any future Subordinated Obligations
of each of the Issuers;
- will be effectively subordinated to any Secured Indebtedness of the
Company, DJ Capital and the other Subsidiaries of the Company to the
extent of the value of the assets securing such Indebtedness; and
- will be effectively subordinated to all liabilities of DonJoy Mexico,
which is not guaranteeing the notes, and any other future Subsidiaries
which do not guarantee the notes.
DJ Capital has no, and the terms of the indenture prohibit it from having
any, obligations other than the notes and its guarantee in respect of the new
credit facility.
THE NOTE GUARANTEES
The old notes are, and the new notes will be, guaranteed by DonJoy but are
not and will not be guaranteed by DonJoy Mexico, the Company's only existing
subsidiary (other than DJ Capital).
DonJoy's Note Guarantee and all Note Guarantees, if any, made by future
subsidiaries of the Company:
- are general unsecured obligations of the applicable Note Guarantor;
- will be subordinated in right of payment to all future Senior
Indebtedness of such Note Guarantor;
- will rank pari passu in right of payment with all future Senior
Subordinated Indebtedness of such Note Guarantor;
- will be senior in right of payment to any future Subordinated Obligations
of such Note Guarantor; and
- will be effectively subordinated to any Secured Indebtedness of such Note
Guarantor to the extent of the value of the assets securing such
Indebtedness.
131
<PAGE> 137
PRINCIPAL, MATURITY AND INTEREST
We issued the old notes in an aggregate principal amount of $100 million.
The notes are limited to $100,000,000 in aggregate principal amount and will
mature on June 15, 2009. The old notes are, and the new notes will be, in fully
registered form, without coupons, in denominations of $1,000 and any integral
multiple of $1,000.
Each note bears interest at a rate of 12 5/8% per annum from the Closing
Date, or from the most recent date to which interest has been paid or provided
for. We will pay interest semiannually on June 15 and December 15 of each year,
commencing December 15, 1999 to Holders of record at the close of business on
the June 1 or December 1 immediately preceding the interest payment date. We
will pay interest on overdue principal and, to the extent lawful, overdue
installments of interest at the rate borne by the notes.
Holders of old notes whose old notes are accepted for exchange in the
exchange offer will be deemed to have waived the right to receive any payment in
respect of interest on the old notes accrued from June 30, 1999 (the original
issue date of the old notes) to the date of issuance of the new notes.
Consequently, Holders who exchange their old notes for new notes will receive
the same interest payment on December 15, 1999 (the first interest payment date
with respect to the old notes and the new notes following consummation of the
exchange offer) that they would have received had they not accepted the exchange
offer.
PAYING AGENT AND REGISTRAR
We will pay the principal of, premium, if any, and interest on the notes at
any office of ours or any agency designated by us which is located in the
Borough of Manhattan, The City of New York. We have initially designated the
corporate trust office of the Trustee to act as our agent in such matters. The
location of the corporate trust office is 101 Barclay Street, New York, New York
10286. We, however, reserve the right to pay interest to Holders by check mailed
directly to Holders at their registered addresses.
Holders may exchange or transfer their notes at the same location given in
the preceding paragraph. No service charge will be made for any registration of
transfer or exchange of notes. We, however, may require Holders to pay any
transfer tax or other similar governmental charge payable in connection with any
such transfer or exchange.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Issuers may not redeem
the notes prior to June 15, 2004. On or after that date, the Issuers may redeem
the notes, in whole or in part, on not less than 30 nor more than 60 days' prior
notice, at the following redemption prices (expressed as percentages of
principal amount), plus accrued and unpaid interest and liquidated damages
thereon, if any, to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if
132
<PAGE> 138
redeemed during the 12-month period commencing on June 15 of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2004............................................... 106.313%
2005............................................... 104.208%
2006............................................... 102.104%
2007 and thereafter................................ 100.000%
</TABLE>
Prior to June 15, 2002, the Issuers may, on one or more occasions, also
redeem up to a maximum of 35% of the original aggregate principal amount of the
notes with the Net Cash Proceeds of one or more Equity Offerings (1) by the
Company or (2) by DonJoy to the extent the Net Cash Proceeds thereof are
contributed to the Company or used to purchase Equity Interests (other than
Disqualified Equity Interests) of the Company from the Company, at a redemption
price equal to 112.625% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages thereon, if any, to the redemption date (subject
to the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date); provided, however, that
after giving effect to any such redemption:
(1) at least 65% of the original aggregate principal amount of the
notes remains outstanding; and
(2) any such redemption by the Issuers must be made within 90 days of
such Equity Offering and must be made in accordance with certain procedures
set forth in the indenture.
SELECTION
If we partially redeem notes, the Trustee will select the notes to be
redeemed on a pro rata basis, by lot or by such other method as the Trustee in
its sole discretion shall deem to be fair and appropriate, although no note of
$1,000 in original principal amount will be redeemed in part. If we redeem any
note in part only, the notice of redemption relating to such note shall state
the portion of the principal amount thereof to be redeemed. A new note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancelation of the original note. On and after
the redemption date, interest will cease to accrue on notes or portions thereof
called for redemption so long as we have deposited with the Paying Agent funds
sufficient to pay the principal of, plus accrued and unpaid interest and
liquidated damages, if any, on, the notes to be redeemed.
RANKING
The notes are unsecured Senior Subordinated Indebtedness of the Issuers,
are subordinated in right of payment to all existing and future Senior
Indebtedness of each of the Issuers, rank pari passu in right of payment with
all existing and future Senior Subordinated Indebtedness of each of the Issuers
and are senior in right of payment to all existing and future Subordinated
Obligations of each of the
133
<PAGE> 139
Issuers. DJ Capital has no, and the terms of the indenture prohibit it from
having any, obligations other than the notes and its guarantee of the new credit
facility. The notes also are effectively subordinated to any Secured
Indebtedness of the Company, DJ Capital and the other Subsidiaries of the
Company to the extent of the value of the assets securing such Indebtedness.
However, payment from the money or the proceeds of U.S. Government Obligations
held in any defeasance trust described below under the caption "-- Defeasance"
will not be subordinated to any Senior Indebtedness or subject to the
restrictions described herein.
The Company currently conducts certain of its operations through DonJoy
Mexico, its only Subsidiary (other than DJ Capital). DonJoy Mexico is not a
guarantor of the notes. The indenture does not restrict the ability of the
Company to create, acquire or capitalize Subsidiaries in the future. Creditors
of DonJoy Mexico and any future Subsidiary that does not Guarantee the notes,
including trade creditors and preferred equity holders (if any), generally will
have priority with respect to the assets and earnings of DonJoy Mexico or such
future Subsidiary over the claims of the Company's and DJ Capital's creditors,
including Holders. The notes, therefore, are effectively subordinated to claims
of creditors, including trade creditors and preferred equity holders (if any),
of DonJoy Mexico and any other Subsidiaries of the Company formed or acquired in
the future that do not guarantee the notes. As of June 29, 1999, on a pro forma
basis after giving effect to the Transactions, DonJoy Mexico's total
liabilities, including trade payables, as reflected on its balance sheet, were
approximately $0.1 million. Although the indenture limits the Incurrence of
Indebtedness by and the issuance of Preferred Equity Interests of DonJoy Mexico
and certain of the Company's future Subsidiaries, such limitation is subject to
a number of significant qualifications.
Assuming that we had completed the Transactions as of June 29, 1999, there
would have been outstanding:
(1) $15.5 million of Senior Indebtedness of the Company, all of which
would have been Secured Indebtedness (exclusive of unused commitments under
the new revolving credit facility);
(2) no Senior Subordinated Indebtedness of the Company (other than the
notes) and no indebtedness of the Company that is subordinate or junior in
right of payment to the notes;
(3) no Indebtedness of DJ Capital (other than the notes and its
guarantee in respect of the Credit Agreement);
(4) no Senior Indebtedness of DonJoy, the only Note Guarantor (other
than its guarantee of Indebtedness under the Credit Agreement); and
(5) no Senior Subordinated Indebtedness of DonJoy, currently the only
Note Guarantor (other than its Note Guarantee), and no Indebtedness of
DonJoy that is subordinate or junior in right of payment to its Note
Guarantee.
Subject to certain conditions, the indenture permits us to incur
substantial amounts of additional Indebtedness. Such Indebtedness may be Senior
Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness" below.
134
<PAGE> 140
"Senior Indebtedness" of the Company, DJ Capital or any Note Guarantor, as
the case may be, means the principal of, premium (if any) and accrued and unpaid
interest on (including interest accruing on or after the filing of any petition
in bankruptcy or for reorganization of the Company, DJ Capital or any Note
Guarantor, as applicable, regardless of whether or not a claim for post-filing
interest is allowed in such proceedings), and fees and all other amounts owing
in respect of, Bank Indebtedness and all other Indebtedness of the Company, DJ
Capital or any Note Guarantor, as applicable, whether outstanding on the Closing
Date or thereafter Incurred, unless in the instrument creating or evidencing the
same or pursuant to which the same is outstanding it is provided that such
obligations are not superior in right of payment to the notes or such Note
Guarantor's Note Guarantee; provided, however, that Senior Indebtedness shall
not include:
(1) any obligation of the Company to any Subsidiary of the Company or
of any Note Guarantor or DJ Capital to the Company or any other Subsidiary
of the Company;
(2) any liability for federal, state, local or other taxes owed or
owing by the Company, DJ Capital or any Note Guarantor;
(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(4) any Indebtedness or obligation of the Company, DJ Capital or any
Note Guarantor (and any accrued and unpaid interest in respect thereof)
that by its terms is subordinate or junior in right of payment to any other
Indebtedness or obligation of the Company, DJ Capital or such Note
Guarantor, as applicable, including any Senior Subordinated Indebtedness
and any Subordinated Obligations;
(5) any obligations with respect to any Equity Interest; or
(6) any Indebtedness Incurred in violation of the indenture.
Only Indebtedness of the Company or DJ Capital that is Senior Indebtedness
will rank senior to the notes. The notes will rank pari passu in all respects
with all other Senior Subordinated Indebtedness of the Company or DJ Capital.
The Issuers have agreed in the indenture that each of them will not Incur,
directly or indirectly, any Indebtedness which is subordinate or junior in right
of payment to Senior Indebtedness of such Issuer unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is not
deemed to be subordinate or junior to Secured Indebtedness merely because it is
unsecured.
The Issuers may not pay principal of, premium (if any) or interest on the
notes, or make any deposit pursuant to the provisions described under
"Defeasance" below, and may not otherwise repurchase, redeem or otherwise retire
any notes (collectively, "pay the notes") if:
(1) any Designated Senior Indebtedness of either of the Issuers is not
paid when due, or
135
<PAGE> 141
(2) any other default on such Designated Senior Indebtedness occurs
and the maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms unless, in either case,
(x) the default has been cured or waived and any such acceleration
has been rescinded, or
(y) such Designated Senior Indebtedness has been paid in full;
provided, however, that the Issuers may pay the notes without regard to the
foregoing if the Issuers and the Trustee receive written notice approving such
payment from the Representative of the Designated Senior Indebtedness with
respect to which either of the events set forth in clause (1) or (2) above has
occurred and is continuing.
During the continuance of any default (other than a default described in
clause (1) or (2) above) with respect to any Designated Senior Indebtedness of
either Issuer pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Issuers may not pay the notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Issuers) of
written notice, specified as a "Notice of Default" and describing with
particularity the default under such Designated Senior Indebtedness (a "Blockage
Notice"), of such default from the Representative of such Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated:
(1) by written notice to the Trustee and the Issuers from the Person
or Persons who gave such Blockage Notice,
(2) by repayment in full of such Designated Senior Indebtedness, or
(3) because the default giving rise to such Blockage Notice is no
longer continuing).
Notwithstanding the provisions described in the immediately preceding
sentence (but subject to the provisions contained in the second preceding
sentence), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of such Designated
Senior Indebtedness, the Issuers may resume payments on the notes after the end
of such Payment Blockage Period.
Not more than one Blockage Notice may be given in any consecutive 360-day
period, irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period. However, if any Blockage Notice within such
360-day period is given by or on behalf of any holders of Designated Senior
Indebtedness other than the Bank Indebtedness, the Representative of the Bank
Indebtedness may give another Blockage Notice within such period. In no event,
however, may the total number of days during which any Payment Blockage Period
or Periods is in effect exceed 179 days in the aggregate during any 360
consecutive day period. For purposes of this paragraph, no default or event of
default that existed or was continuing on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior Indebtedness
136
<PAGE> 142
initiating such Payment Blockage Period shall be, or be made, the basis of the
commencement of a subsequent Payment Blockage Period by the Representative of
such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such default or event of default shall have been cured
or waived for a period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of the Company or DJ Capital
to their respective creditors upon a total or partial liquidation or a total or
partial dissolution of the Company or DJ Capital or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property or DJ Capital or its property:
(1) the holders of Senior Indebtedness of the Company or DJ Capital,
as the case may be, will be entitled to receive payment in full of such
Senior Indebtedness before the Holders of the notes are entitled to receive
any payment of principal of or interest on the notes; and
(2) until such Senior Indebtedness is paid in full, any payment or
distribution to which Holders would be entitled but for the subordination
provisions of the indenture will be made to holders of such Senior
Indebtedness as their interests may appear, except that Holders of the
notes may receive Equity Interests and any debt securities that are
subordinated to such Senior Indebtedness to at least the same extent as the
notes.
If a payment or distribution is made to Holders of the notes that due to
the subordination provisions of the indenture should not have been made to them,
such Holders will be required to hold it in trust for the benefit of the holders
of Senior Indebtedness of the Company or DJ Capital, as the case may be, and pay
it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default, the
Issuers or the Trustee shall promptly notify the holders of each Issuer's
Designated Senior Indebtedness (or their Representative) of the acceleration. If
any such Designated Senior Indebtedness is outstanding, the Issuers may not pay
the notes until five Business Days after such holders or the Representative of
such Designated Senior Indebtedness receive notice of such acceleration and,
thereafter, may pay the notes only if the subordination provisions of the
indenture otherwise permit payment at that time.
By reason of the subordination provisions of the indenture, in the event of
insolvency, creditors of the Issuers who are holders of Senior Indebtedness may
recover more, ratably, than the Holders of the notes, and creditors of the
Issuers who are not holders of Senior Indebtedness may recover less, ratably,
than holders of Senior Indebtedness and may recover more, ratably, than the
holders of the notes.
NOTE GUARANTEES
DonJoy and certain future Subsidiaries of the Company (as described below),
as primary obligors and not merely as sureties, will jointly and severally
unconditionally Guarantee on an unsecured senior subordinated basis the
performance and full and punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all obligations of the Issuers under the
indenture
137
<PAGE> 143
(including obligations to the Trustee) and the notes, whether for payment of
principal of or interest on or liquidated damages in respect of the old notes,
expenses, indemnification or otherwise (all such obligations guaranteed by such
Note Guarantors being herein called the "Guaranteed Obligations"). Such Note
Guarantors will agree to pay, in addition to the amount stated above, any and
all costs and expenses (including reasonable counsel fees and expenses) incurred
by the Trustee or the Holders in enforcing any rights under the Note Guarantees.
Each Note Guarantee will be limited in amount to an amount not to exceed the
maximum amount that can be Guaranteed by the applicable Note Guarantor without
rendering the Note Guarantee, as it relates to such Note Guarantor, void or
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally. The
Company has agreed to cause each Domestic Subsidiary to execute and deliver to
the Trustee a supplemental indenture pursuant to which such Restricted
Subsidiary will Guarantee payment of the notes. See "-- Certain
Covenants -- Future Note Guarantors" below.
The obligations of a Note Guarantor under its Note Guarantee are senior
subordinated obligations. As such, the rights of Holders to receive payment by a
Note Guarantor pursuant to its Note Guarantee will be subordinated in right of
payment to the rights of holders of Senior Indebtedness of such Note Guarantor.
The terms of the subordination provisions described above with respect to the
Issuers' obligations under the notes apply equally to a Note Guarantor and the
obligations of such Note Guarantor under its Note Guarantee.
Each Note Guarantee is a continuing guarantee and shall
- remain in full force and effect until payment in full of all the
Guaranteed Obligations,
- be binding upon each Note Guarantor and its successors, and
- inure to the benefit of, and be enforceable by, the Trustee, the Holders
and their successors, transferees and assigns.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Issuers to repurchase
all or any part of such Holder's notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest (and, in the
case of the old notes, liquidated damages, if any), to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that notwithstanding the occurrence of a Change of Control, the Issuers shall
not be obligated to repurchase the notes pursuant to this covenant in the event
that the Issuers have exercised their right to redeem all the notes under the
terms of the section titled "Optional Redemption":
(1) prior to the earlier to occur of
(A) the first public offering of common Equity Interests of DonJoy
or
138
<PAGE> 144
(B) the first public offering of common Equity Interests of the
Company,
the Permitted Holders cease to be the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting Equity
Interests of the Company or DonJoy, whether as a result of issuance of
securities of DonJoy or the Company, any merger, consolidation, liquidation
or dissolution of DonJoy or the Company, any direct or indirect transfer of
securities by any Permitted Holder or otherwise (for purposes of this
clause (1) and clause (2) below, the Permitted Holders shall be deemed to
beneficially own any Voting Equity Interests of an entity (the "specified
entity") held by any other entity (the "parent entity") so long as the
Permitted Holders beneficially own (as so defined), directly or indirectly,
in the aggregate a majority of the voting power of the Voting Equity
Interests of the parent entity);
(2) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than one or more Permitted
Holders, is or becomes the beneficial owner (as defined in clause (1)
above, except that for purposes of this clause (2) a person (including a
Permitted Holder) shall be deemed to have "beneficial ownership" of all
Equity Interests that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time,
upon the happening of any event or otherwise), directly or indirectly, of
more than 35% of the total voting power of the Voting Equity Interests of
the Company or DonJoy, and
(B) the Permitted Holders "beneficially own" (as defined in clause (1)
above), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Equity Interests of the Company or DonJoy
than such other person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the Governing Board of the Company or DonJoy, as the case may be (for
the purposes of this clause (2), such other person shall be deemed to
beneficially own any Voting Equity Interests of a specified entity held by
a parent entity, if such other person is the beneficial owner (as defined
in this clause (2)), directly or indirectly, of more than 35% of the voting
power of the Voting Equity Interests of such parent entity and the
Permitted Holders "beneficially own" (as defined in clause (1) above),
directly or indirectly, in the aggregate a lesser percentage of the voting
power of the Voting Equity Interests of such parent entity and do not have
the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Governing Board of such parent
entity);
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Governing Board of the Company or
DonJoy, as the case may be (together with any new persons (A) elected in
accordance with the Members' Agreement so long as such agreement is in
effect or (B) whose election by such Governing Board of the Company or
139
<PAGE> 145
DonJoy, as the case may be, or whose nomination for election by the equity
holders of the Company or DonJoy, as the case may be, was approved by a
vote of at least a majority of the members of the Governing Board of the
Company or DonJoy, as the case may be, then still in office who were either
members of the Governing Board at the beginning of such period or who were
selected in accordance with the Members' Agreement or whose election or
nomination for election was previously so approved), cease for any reason
to constitute a majority of the Governing Board of the Company or DonJoy,
as the case may be, then in office;
(4) the adoption of a plan relating to the liquidation or dissolution
of the Company, DJ Capital or DonJoy;
(5) the merger or consolidation of the Company or DonJoy with or into
another Person or the merger of another Person with or into the Company or
DonJoy, or the sale of all or substantially all the assets of the Company
or DonJoy to another Person (other than a Person that is controlled by the
Permitted Holders), and, in the case of any such merger or consolidation,
the securities of the Company or DonJoy that are outstanding immediately
prior to such transaction and which represent 100% of the aggregate voting
power of the Voting Equity Interests of the Company or DonJoy are changed
into or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving Person or
transferee that represent immediately after such transaction, at least a
majority of the aggregate voting power of the Voting Equity Interests of
the surviving Person or transferee; or
(6) the Company ceases to own, of record or beneficially, all the
Equity Interests of DJ Capital.
In the event that at the time of a Change of Control the terms of any
agreement governing Indebtedness of the Company or its Subsidiaries restrict or
prohibit the repurchase of notes pursuant to this covenant, then prior to the
mailing of the notice to Holders provided for in the immediately following
paragraph but in any event within 30 days following any Change of Control, the
Company shall:
(1) repay in full all such Indebtedness or offer to repay in full all
such Indebtedness and repay the Indebtedness of each lender who has
accepted such offer, or
(2) obtain the requisite consent of the lenders under such agreements
to permit the repurchase of the notes as provided for below.
If the Company does not obtain such consents or repay such Indebtedness,
the Company will remain prohibited from repurchasing the notes pursuant to this
covenant. In such event the Company's failure to make an offer to purchase notes
pursuant to this covenant would constitute an Event of Default under the
indenture which in turn would constitute a default under the Credit Agreement.
In such circumstances, the subordination provisions of the indenture would
likely prohibit payments to Holders of the notes.
140
<PAGE> 146
Within 30 days following any Change of Control, the Issuers shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control Offer")
stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Issuers to purchase such Holder's notes at a purchase
price in cash equal to 101% of the principal amount thereof, plus accrued
and unpaid interest (and, in the case of the old notes, liquidated damages,
if any) to the date of repurchase (subject to the right of Holders of
record on the relevant record date to receive interest on the relevant
interest payment date);
(2) the circumstances and relevant facts and financial information
regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Issuers, consistent with this
covenant, that a Holder must follow in order to have its notes purchased.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by the Issuers and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations among
the Issuers and the initial purchaser of the old notes in the private offering.
Management has no present intention to engage in a transaction involving a
Change of Control, although it is possible that the Issuers would decide to do
so in the future. Subject to the limitations discussed below, the Issuers could,
in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the indenture, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect the Issuers' capital structures or
credit ratings. Restrictions on the ability of the Issuers to incur additional
Indebtedness are contained in the covenants described under "-- Certain
Covenants -- Limitation on Indebtedness" and "-- Limitation on the Conduct of
Business of DJ Capital". Such restrictions can only be waived with the consent
of the Holders of a majority in principal amount of the notes then outstanding.
Except for the limitations contained in such covenants, however, the indenture
will not contain any covenants or provisions that may afford Holders protection
in the event of a highly leveraged transaction.
141
<PAGE> 147
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness may contain prohibitions of certain events which would constitute a
Change of Control or require such Senior Indebtedness to be repurchased upon a
Change of Control. Moreover, the exercise by the Holders of their right to
require the Issuers to repurchase the notes could cause a default under such
Senior Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Issuers. Finally, the Issuers'
ability to pay cash to the Holders upon a repurchase may be limited by the
Issuers' then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. The provisions under the indenture relative to the Issuers'
obligation to make an offer to repurchase the notes as a result of a Change of
Control may be waived or modified with the written consent of the Holders of a
majority in principal amount of the notes.
CERTAIN COVENANTS
The indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Company or any Restricted Subsidiary that is a Note
Guarantor may Incur Indebtedness if on the date of such Incurrence and after
giving effect thereto the Consolidated Coverage Ratio would be greater than
2.00:1.00 if such Indebtedness is Incurred on or prior to December 31, 2000 and
2.25:1.00 if such Indebtedness is Incurred thereafter. Notwithstanding the
foregoing, the Company will not permit DJ Capital to Incur any Indebtedness
other than the notes and its guarantee in respect of the new credit facility.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries (other than DJ Capital) may Incur the following
Indebtedness:
(1) Indebtedness Incurred pursuant to the Credit Agreement in an
aggregate principal amount not to exceed $40.5 million at any one time
outstanding less the aggregate amount of all repayments of principal of
such Indebtedness pursuant to the covenant described under "-- Limitation
on Sales of Assets and Subsidiary Equity Interests";
(2) Indebtedness of the Company owed to and held by any Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by
the Company or any Restricted Subsidiary; provided, however, that
(A) any subsequent issuance or transfer of any Equity Interests or
any other event that results in any such Restricted Subsidiary ceasing
to be a Restricted Subsidiary or any subsequent transfer of any such
Indebtedness (except to the Company or a Restricted Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Indebtedness
by the issuer thereof,
(B) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the notes,
142
<PAGE> 148
(C) if a Restricted Subsidiary is the obligor on such Indebtedness,
such Indebtedness is made pursuant to an intercompany note, and
(D) if a Note Guarantor is the obligor on such Indebtedness, such
Indebtedness is subordinated in right of payment to the Note Guarantee
of such Note Guarantor;
(3) Indebtedness
(A) represented by the notes and the Note Guarantees,
(B) outstanding on the Closing Date (other than the Indebtedness
described in clauses (1) and (2) above),
(C) consisting of Refinancing Indebtedness Incurred in respect of
any Indebtedness described in this clause (3) (including Indebtedness
Refinancing Refinancing Indebtedness) or the foregoing paragraph (a) and
(D) consisting of Guarantees of any Indebtedness permitted under
clauses (1) and (2) of this paragraph (b);
(4) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred as consideration
in, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Subsidiary of or was
otherwise acquired by the Company) and
(B) Refinancing Indebtedness Incurred by a Restricted Subsidiary in
respect of Indebtedness Incurred by such Restricted Subsidiary pursuant to
this clause (4);
(5) Indebtedness of the Company or a Restricted Subsidiary
(A) in respect of performance bonds, bankers' acceptances, letters of
credit and surety or appeal bonds provided by the Company and the
Restricted Subsidiaries in the ordinary course of their business, and
(B) under Interest Rate Agreements and Currency Agreements entered
into for bona fide hedging purposes of the Company or any Restricted
Subsidiary in the ordinary course of business; provided, however, that
such Interest Rate Agreements or Currency Agreements do not increase the
principal amount of Indebtedness of the Company and its Restricted
Subsidiaries outstanding at any time other than as a result of
fluctuations in interest rates or foreign currency exchange rates or by
reason of fees, indemnities and compensation payable thereunder;
(6) Indebtedness (including Capitalized Lease Obligations) Incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal), equipment or other
assets (in each case whether through the direct purchase of assets or the
Equity Interests of any Person owning such assets) in an aggregate
principal amount which, when aggregated with the principal amount of all
other
143
<PAGE> 149
Indebtedness then outstanding and Incurred pursuant to this clause (6) and
all Refinancing Indebtedness Incurred to refund, refinance or replace any
Indebtedness Incurred pursuant to this clause (6), does not exceed $10.0
million;
(7) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course, provided that such Indebtedness is extinguished within
five Business Days of Incurrence;
(8) Indebtedness of the Company and its Restricted Subsidiaries
arising from agreements of the Company or a Restricted Subsidiary providing
for indemnification, adjustment of purchase price or similar obligations,
in each case incurred or assumed in connection with the disposition of any
business, assets or a Subsidiary of the Company in accordance with the
terms of the indenture, other than Guarantees by the Company or any
Restricted Subsidiary of Indebtedness Incurred by any Person acquiring all
or any portion of such business, assets or a Subsidiary of the Company for
the purpose of financing such acquisition; provided, however, that
(A) such Indebtedness is not reflected on the consolidated balance
sheet of the Company and
(B) the maximum aggregate liability in respect of all such
Indebtedness shall not exceed the gross proceeds, including the fair
market value as determined in good faith by a majority of the Governing
Board of noncash proceeds (the fair market value of such noncash
proceeds being measured at the time it is received and without giving
effect to any subsequent changes in value), actually received by the
Company and its Restricted Subsidiaries in connection with such
disposition; or
(9) Indebtedness of the Company and its Restricted Subsidiaries (in
addition to Indebtedness permitted to be Incurred pursuant to the foregoing
paragraph (a) or any other clause of this paragraph (b)) in an aggregate
principal amount on the date of Incurrence that, when added to all other
Indebtedness Incurred pursuant to this clause (9) and then outstanding,
shall not exceed $15.0 million.
(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease, retire, refund or
refinance any Subordinated Obligations unless such Indebtedness will be
subordinated to the notes to at least the same extent as such Subordinated
Obligations. The Company may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in right of payment to any Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness. In addition, the Company
may not Incur any Secured Indebtedness which is not Senior Indebtedness unless
contemporaneously therewith effective provision is made to secure the notes
equally and ratably with (or on a senior basis to, in the case of Indebtedness
subordinated in right of payment to the notes) such Secured Indebtedness for so
long as such Secured
144
<PAGE> 150
Indebtedness is secured by a Lien, except for Senior Subordinated Indebtedness
and Subordinated Obligations secured by Liens on the assets of any entity
existing at the time such entity is acquired by, and becomes a Restricted
Subsidiary of, the Company, whether by merger, consolidation, purchase of assets
or otherwise, provided that such Liens
(1) are not created, incurred or assumed in connection with, or in
contemplation of such entity being acquired by the Company, and
(2) do not extend to any other assets of the Company or any of its
Subsidiaries.
A Note Guarantor may not Incur any Indebtedness if such Indebtedness is by its
terms expressly subordinate or junior in right of payment to any Senior
Indebtedness of such Note Guarantor unless such Indebtedness is Senior
Subordinated Indebtedness of such Note Guarantor or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness of such Note Guarantor. In
addition, a Note Guarantor may not Incur any Secured Indebtedness that is not
Senior Indebtedness of such Note Guarantor unless contemporaneously therewith
effective provision is made to secure the Note Guarantee of such Note Guarantor
equally and ratably with (or on a senior basis to, in the case of Indebtedness
subordinated in right of payment to such Note Guarantee) such Secured
Indebtedness for as long as such Secured Indebtedness is secured by a Lien,
except for Senior Subordinated Indebtedness and Subordinated Obligations of such
Note Guarantor secured by Liens on the assets of any entity existing at the time
such entity is acquired by such Note Guarantor, whether by merger,
consolidation, purchase of assets or otherwise, provided that such Liens
(1) are not created, incurred or assumed in connection with or in
contemplation of such assets being acquired by such Note Guarantor and
(2) do not extend to any other assets of the Company or any of its
Subsidiaries.
(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of determining
the outstanding principal amount of any particular Indebtedness Incurred
pursuant to this covenant:
(1) Indebtedness Incurred pursuant to the Credit Agreement prior to or
on the Closing Date shall be treated as Incurred pursuant to clause (1) of
paragraph (b) above,
(2) Guarantees or obligations in respect of letters of credit relating
to Indebtedness which is otherwise included in the determination of a
particular amount of Indebtedness shall not be included,
(3) The principal amount of any Disqualified Equity Interests or
Preferred Equity Interests shall be equal to the greater of the maximum
mandatory redemption or repurchase price (not including, in either case,
any redemption or repurchase premium) or the maximum liquidation
preference,
145
<PAGE> 151
(4) The principal amount of Indebtedness, Disqualified Equity
Interests or Preferred Equity Interests issued at a price less than the
principal amount thereof, the maximum fixed redemption or repurchase price
thereof or liquidation preference thereof, as applicable, will be equal to
the amount of the liability or obligation in respect thereof determined in
accordance with GAAP,
(5) If such Indebtedness is denominated in a currency other than U.S.
dollars, the U.S. dollar equivalent principal amount thereof shall be
calculated based on the relevant currency exchange rates in effect on the
date such Indebtedness was Incurred,
(6) The accrual of interest, accrual of dividends, the accretion of
accreted value, the payment of interest in the form of additional
Indebtedness and the payment of dividends or distributions in the form of
additional Equity Interests shall not be deemed an incurrence of
Indebtedness for purposes of this covenant,
(7) Indebtedness permitted by this covenant need not be permitted
solely by reference to one provision permitting such Indebtedness but may
be permitted in part by one such provision and in part by one or more other
provisions of this covenant permitting such Indebtedness, and
(8) In the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in this covenant, the Company, in
its sole discretion, shall classify such Indebtedness and only be required
to include the amount of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to:
(1) declare or pay any dividend or make any distribution of any kind
on or in respect of its Equity Interests (including any payment in
connection with any merger or consolidation involving the Company) or
similar payment to the direct or indirect holders (in their capacities as
such) of its Equity Interests except dividends or distributions payable
solely in its Equity Interests (other than Disqualified Equity Interests)
and except dividends or distributions payable to the Company or another
Restricted Subsidiary (and, if such Restricted Subsidiary has equity
holders other than the Company or other Restricted Subsidiaries, to its
other equity holders on a pro rata basis),
(2) purchase, redeem, retire or otherwise acquire for value any Equity
Interests of DonJoy (or any other direct or indirect parent company of the
Company), the Company or any Restricted Subsidiary held by Persons other
than the Company or another Restricted Subsidiary,
(3) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations (other than
(A) the purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due
within one year of the date of acquisition and
146
<PAGE> 152
(B) Indebtedness described in clause (2) of paragraph (b) of the
covenant described under "-- Limitation on Indebtedness"), or
(4) make any Investment (other than a Permitted Investment) in any
Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein
referred to as a "Restricted Payment") if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment:
(A) a Default will have occurred and be continuing (or would result
therefrom);
(B) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or
(C) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to
be determined in good faith by the Governing Board, whose determination
will be conclusive and evidenced by a resolution of the Governing Board)
declared or made subsequent to the Closing Date would exceed the sum,
without duplication, of:
(i) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter during
which the Closing Date occurs to the end of the most recent fiscal
quarter ending prior to the date of such Restricted Payment for
which consolidated financial statements of the Company are publicly
available (or, in case such Consolidated Net Income will be a
deficit, minus 100% of such deficit);
(ii) the aggregate Net Cash Proceeds received by the Company
- as capital contributions to the Company after the
Closing Date or
- from the issue or sale of its Equity Interests (other
than Disqualified Equity Interests) subsequent to the
Closing Date
(other than a capital contribution from or an issuance or
sale to
- a Subsidiary of the Company or
- an employee equity ownership or participation plan or
other trust established by the Company or any of its
Subsidiaries);
(iii) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance sheet
upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Closing Date of any Indebtedness of the
Company or its Restricted Subsidiaries issued after the Closing
147
<PAGE> 153
Date which is convertible or exchangeable for Equity Interests
(other than Disqualified Equity Interests) of DonJoy or the Company
(less the amount of any cash or the fair market value of other
property distributed by the Company or any Restricted Subsidiary
upon such conversion or exchange);
(iv) 100% of the aggregate amount received by the Company or
any Restricted Subsidiary in cash from the sale or other
disposition (other than to
- the Company or a Subsidiary of the Company or
- an employee equity ownership or participation plan or
other trust established by the Company or any of its
Subsidiaries)
of Restricted Investments made by the Company or any Restricted
Subsidiary after the Closing Date and from repurchases and
redemptions of such Restricted Investments from the Company or any
Restricted Subsidiary by any Person (other than
- the Company or any of its Subsidiaries or
- an employee equity ownership or participation plan or
other trust established by the Company or any of its
Restricted Subsidiaries)
and from repayments of loans or advances which constituted
Restricted Investments; provided, however, that the amount included
in this clause (iv) with respect to any particular Restricted
Investment shall not exceed the amount of cash expended by the
Company or any Restricted Subsidiary in connection with making such
Restricted Investment; and
(v) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from
- payments of dividends, repayments of the principal of
loans or advances or other transfers of assets to the Company
or any Restricted Subsidiary from Unrestricted Subsidiaries or
- the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in
the definition of "Investment") not to exceed, in the case of
any Unrestricted Subsidiary, the amount of Investments
previously made by the Company or any Restricted Subsidiary in
such Unrestricted Subsidiary, which amount was included in the
calculation of the amount of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any purchase, repurchase, retirement or other acquisition or
retirement for value of, or other distribution in respect of, Equity
Interests of the Company made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Equity Interests of the Company or
capital contributions to the Company after the Closing Date (other than
Disqualified Equity Interests
148
<PAGE> 154
and other than Equity Interests issued or sold to, or capital contributions
from, a Subsidiary of the Company or an employee equity ownership or
participation plan or other trust established by the Company or any of its
Subsidiaries); provided, however, that:
(A) such Restricted Payment will be excluded in the calculation of
the amount of Restricted Payments, and
(B) the Net Cash Proceeds from such sale or capital contribution
applied in the manner set forth in this clause (1) will be excluded from
the calculation of amounts under clause (4)(C)(ii) of paragraph (a)
above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company or a Restricted Subsidiary made by exchange for, or out of the
proceeds of the substantially concurrent sale of,
(A) Equity Interests of DonJoy or the Company (other than
Disqualified Equity Interests) or
(B) Subordinated Obligations of the Company or a Restricted
Subsidiary that are permitted to be Incurred pursuant to the covenant
described under "-- Limitation on Indebtedness;"
provided, however, that such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value will be excluded
in the calculation of the amount of Restricted Payments;
(3) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant described under "--
Limitation on Sales of Assets and Subsidiary Equity Interests;" provided,
however, that such purchase or redemption will be excluded in the
calculation of the amount of Restricted Payments;
(4) dividends or other distributions paid to holders of, or
redemptions from holders of, Equity Interests within 60 days after the date
of declaration thereof, or the giving of formal notice of redemption, if at
such date of declaration such dividends or other distributions or
redemptions would have complied with this covenant; provided, however, that
such dividend, distribution or redemption will be included in the
calculation of the amount of Restricted Payments;
(5) payment of dividends, other distributions or other amounts by the
Company for the purposes set forth in clauses (A) and (B) below; provided,
however, that such dividend, distribution or amount set forth in clause (A)
shall be excluded and in clause (B) shall be included in the calculation of
the amount of Restricted Payments for the purposes of paragraph (a) above:
(A) to DonJoy in amounts equal to the amounts required for DonJoy
to pay franchise taxes and other fees required to maintain its existence
and provide for all other operating costs of DonJoy, including, without
limitation, in respect of director fees and expenses, administrative,
legal and accounting services provided by third parties and other costs
and
149
<PAGE> 155
expenses of being a public company, including, all costs and expenses
with respect to filings with the SEC, of up to $500,000 per fiscal year;
and
(B) to DonJoy in amounts equal to amounts expended by DonJoy to
repurchase Equity Interests of DonJoy owned by officers, directors,
consultants and employees or former officers, directors, consultants or
employees of DonJoy, the Company or its Subsidiaries or their assigns,
estates and heirs; provided, however, that the aggregate amount of
dividends, distributions or other amounts to DonJoy pursuant to this
clause (B) shall not, in the aggregate, exceed $3.0 million per fiscal
year of the Company, up to a maximum aggregate amount of $7.0 million
during the term of the indenture;
(6) for so long as the Company is treated as a pass-through entity for
United States Federal income tax purposes, Tax Distributions; provided,
however, that such Tax Distributions shall be excluded in the calculation
of the amount of Restricted Payments;
(7) in the event DonJoy is not treated as a pass-through entity for
United States Federal income tax purposes, dividends or distributions to
DonJoy in amounts equal to amounts required for DonJoy to pay Federal,
state and local income taxes to the extent such income taxes are
attributable to the income of the Company and its Restricted Subsidiaries
(and, to the extent of amounts actually received from its Unrestricted
Subsidiaries, in amounts required to pay such taxes to the extent
attributable to the income of such Unrestricted Subsidiaries); provided,
however, that such distributions shall be excluded in the calculation of
the amount of Restricted Payments;
(8) the payment of dividends or distributions to DonJoy to fund the
payment by DonJoy of dividends on DonJoy's common Equity Interests
following the first public offering of common Equity Interests of DonJoy
after the Closing Date, of up to 6% per annum of the net proceeds
contributed to the Company by DonJoy from such public offering; provided,
however, that such dividends or distributions will be included in the
calculation of the amount of Restricted Payments; or
(9) dividends or distributions to DonJoy in an amount equal to the
purchase price adjustment, if any, which DonJoy is required to pay to Smith
& Nephew in connection with the recapitalization pursuant to Article III of
the recapitalization agreement as such agreement is in effect on the
Closing Date; provided, however, that such distributions shall be excluded
in the calculation of the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Equity
Interests or pay any Indebtedness or other obligations owed to the Company;
(2) make any loans or advances to the Company; or
150
<PAGE> 156
(3) transfer any of its property or assets to the Company, except:
(A) any encumbrance or restriction pursuant to applicable law or
any applicable rule, regulation or order, or an agreement in effect at
or entered into on the Closing Date;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Equity Interests or
Indebtedness of such Restricted Subsidiary, in each case Incurred by
such Restricted Subsidiary prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Equity Interests or
Indebtedness Incurred as consideration in, in contemplation of, or to
provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
otherwise acquired by the Company) and outstanding on such date;
(C) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (A) or (B) of this covenant or this
clause (C) or contained in any amendment to an agreement referred to in
clause (A) or (B) of this covenant or this clause (C); provided,
however, that the encumbrances and restrictions contained in any such
Refinancing agreement or amendment are no more restrictive, taken as a
whole, than the encumbrances and restrictions contained in such
predecessor agreements;
(D) in the case of clause (3), any encumbrance or restriction
(i) that restricts in a customary manner the assignment of any
lease, license or similar contract or the subletting, assignment or
transfer of any property or asset that is subject to a lease,
license or similar contract,
(ii) that is or was created by virtue of any transfer of,
agreement to transfer or option or right with respect to any
property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture,
(iii) contained in security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such encumbrance or
restriction restricts the transfer of the property subject to such
security agreements, or
(iv) encumbrances or restrictions relating to Indebtedness
permitted to be Incurred pursuant to clause (b)(6) of the covenant
described under "-- Limitation on Indebtedness" for property
acquired in the ordinary course of business that only imposes
encumbrances or restrictions on the property so acquired;
(E) with respect to a Restricted Subsidiary, any restriction
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Equity Interests or assets
of such Restricted Subsidiary pending the closing of such sale or
disposition;
151
<PAGE> 157
(F) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business; and
(G) net worth provisions in leases and other agreements entered
into by the Company or any Restricted Subsidiary in the ordinary course
of business.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY EQUITY INTERESTS. (a) The
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
(including by way of relief from, or by any other Person assuming sole
responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value of the
Equity Interests and assets subject to such Asset Disposition,
(2) at least 80% of the consideration thereof received by the Company
or such Restricted Subsidiary is in the form of
(A) cash or Temporary Cash Investments,
(B) properties and assets to be owned by the Company or any
Restricted Subsidiary and used in a Permitted Business, or
(C) Voting Equity Interests in one or more Persons engaged in a
Permitted Business that are or thereby become Restricted Subsidiaries of
the Company, and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be)
(A) FIRST,
(i) to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, redeem or purchase
Senior Indebtedness of the Company or Indebtedness (other than any
Disqualified Equity Interests) of a Restricted Subsidiary (in each
case other than Indebtedness owed to the Company or an Affiliate of
the Company and other than Preferred Equity Interests) or
(ii) to the extent the Company or such Restricted Subsidiary
elects, to reinvest in Additional Assets (including by means of an
Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by the Company or another Restricted
Subsidiary or the application by the Company of the Net Available
Cash received by a Restricted Subsidiary of the Company),
in each case within 320 days from the later of such Asset Disposition or
the receipt of such Net Available Cash, provided that pending the final
application of any such Net Available Cash, the Company and its Restricted
Subsidiaries may temporarily reduce Indebtedness or otherwise invest such
Net Available Cash in any manner not prohibited by the indenture;
152
<PAGE> 158
(B) SECOND, within 365 days from the later of such Asset
Disposition or the receipt of such Net Available Cash, to the extent of
the balance of such Net Available Cash after such application in
accordance with clause (A), to make an Offer (as defined below) to
purchase notes pursuant to and subject to the conditions set forth in
section (b) of this covenant; provided, however, that if the Company
elects (or is required by the terms of any other Senior Subordinated
Indebtedness), such Offer may be made ratably to purchase the notes and
other Senior Subordinated Indebtedness of the Company; and
(C) THIRD, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) (other than the proviso
thereof) and (B), for any general corporate purpose not restricted by
the terms of the indenture;
provided, however that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (B) above, the
Company or such Restricted Subsidiary will retire such Indebtedness and
will cause the related loan commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions that is not applied in accordance
with this covenant exceeds $5.0 million.
For the purposes of this covenant, the following are deemed to be cash:
- the assumption of any liabilities of the Company (other than Disqualified
Equity Interests of the Company) or any Restricted Subsidiary and the
release of the Company or such Restricted Subsidiary from all liability
on such liabilities in connection with such Asset Disposition, and
- securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
notes (and other Senior Subordinated Indebtedness) pursuant to clause (a)(3)(B)
of this covenant, the Issuers will be required to purchase notes (and other
Senior Subordinated Indebtedness) tendered pursuant to an offer by the Issuers
for the notes (and other Senior Subordinated Indebtedness) (the "Offer") at a
purchase price of 100% of their principal amount plus accrued and unpaid
interest and liquidated damages thereon, if any, to the date of purchase in
accordance with the procedures (including prorating in the event of
oversubscription), set forth in the indenture. If the aggregate purchase price
of notes (and other Senior Subordinated Indebtedness) tendered pursuant to the
Offer is less than the Net Available Cash allotted to the purchase of the notes
(and other Senior Subordinated Indebtedness), the Company may apply the
remaining Net Available Cash for any general corporate purpose not restricted by
the terms of the Indenture. The Issuers will not be required to make an Offer
for notes (and other Senior
153
<PAGE> 159
Subordinated Indebtedness) pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clause
(a)(3)(A)) is less than $5.0 million for any particular Asset Disposition (which
lesser amount will be carried forward for purposes of determining whether an
Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition). Upon completion of the Offer, the amount of Net Available
Cash shall be reduced to zero.
(c) The Issuers will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuers will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the Company
(an "Affiliate Transaction") unless such transaction is on terms:
(1) that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the
time of such transaction in arm's-length dealings with a Person who is not
such an Affiliate,
(2) that, in the event such Affiliate Transaction involves an
aggregate amount in excess of $1.0 million,
(A) are set forth in writing, and
(B) except as provided in clause (a)(3) below, have been approved
by a majority of the members of the Governing Board having no personal
stake in such Affiliate Transaction (if any such members exist), and
(3) that, in the event
(A) such Affiliate Transaction involves an amount in excess of $5.0
million, or
(B) if there are no members of the Governing Board having no
personal stake in such Affiliate Transaction and such Affiliate
Transaction involves an aggregate amount in excess of $1.0 million,
have been determined by a nationally recognized appraisal, accounting or
investment banking firm to be fair, from a financial standpoint, to the
Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not
prohibit:
(1) any Restricted Payment permitted to be paid pursuant to the
covenant described under "-- Limitation on Restricted Payments,"
154
<PAGE> 160
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, options to purchase Equity Interests of DonJoy or the Company
and equity ownership or participation plans approved by the Governing
Board,
(3) the grant of options (and the exercise thereof) to purchase Equity
Interests of DonJoy or the Company or similar rights to employees and
directors of DonJoy or the Company pursuant to plans approved by the
Governing Board,
(4) loans or advances to officers, directors or employees in the
ordinary course of business, but in any event not to exceed $1.5 million in
the aggregate outstanding at any one time,
(5) the payment of reasonable fees to directors of DonJoy or the
Company and its Subsidiaries who are not employees of DonJoy or the Company
or its Subsidiaries and other reasonable fees, compensation, benefits and
indemnities paid or entered into by the Company or its Restricted
Subsidiaries in the ordinary course of business to or with the officers,
directors or employees of the Company and its Restricted Subsidiaries,
(6) any transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries,
(7) the provision by Persons who may be deemed Affiliates or
stockholders of the Company (other than Chase Capital Partners and Persons
controlled by Chase Capital Partners) of investment banking, commercial
banking, trust, lending or financing, investment, underwriting, placement
agent, financial advisory or similar services to the Company or its
Subsidiaries,
(8) sales of Equity Interests to Permitted Holders approved by a
majority of the members of the Governing Board who do not have a material
direct or indirect financial interest in or with respect to the transaction
being considered,
(9) (A) the existence or performance by the Company or any Restricted
Subsidiary under any agreement as in effect as of the Closing Date or any
amendment thereto or replacement agreement therefor or any transaction
contemplated thereby (including pursuant to any amendment thereto or
replacement agreement therefor) so long as such amendment or replacement is
not more disadvantageous to the Holders of the notes in any material
respect than the original agreement as in effect on the Closing Date, and
(B) the execution, delivery and performance of the contemplated
agreement among the Company, DonJoy and Charles T. Orsatti described in
this prospectus under the heading "Management -- Compensation of Board of
Managers"; provided that the amount payable to Mr. Orsatti pursuant to such
agreement shall not exceed $250,000 per year,
(10) any tax sharing agreement or payments pursuant thereto among the
Company and its Subsidiaries and any other Person with which the Company or
its Subsidiaries is required or permitted to file a consolidated tax return
or with which the Company or any of its Restricted Subsidiaries is or could
be part of a consolidated group for tax purposes, which payments are not in
155
<PAGE> 161
excess of the tax liabilities attributable solely to the Company and its
Restricted Subsidiaries (as a consolidated group),or
(11) any contribution to the capital of the Company by DonJoy or any
purchase of Equity Interests of the Company by DonJoy.
SEC REPORTS. Notwithstanding that the Issuers may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the SEC (if permitted by SEC practice and applicable law and
regulations) and provide the Trustee and Holders and prospective Holders (upon
request) within 15 days after it files them with the SEC (or if not permitted,
within 15 days after it would have otherwise been required to file them with the
SEC), copies of the Company's or DonJoy's annual report and the information,
documents and other reports that are specified in Sections 13 and 15(d) of the
Exchange Act. In addition, following an Equity Offering, the Issuers shall
furnish to the Trustee and the Holders, promptly upon their becoming available,
copies of the annual report to equity holders and any other information provided
by the Company or DonJoy to its public equity holders generally. The Issuers
also will comply with the other provisions of Section 314(a) of the TIA.
FUTURE NOTE GUARANTORS. The Company will cause each Domestic Subsidiary to
become a Note Guarantor, and, if applicable, execute and deliver to the Trustee
a supplemental indenture in the form set forth in the indenture pursuant to
which such Domestic Subsidiary will Guarantee payment of the Notes. Each Note
Guarantee will be limited to an amount not to exceed the maximum amount that can
be Guaranteed by that Domestic Subsidiary without rendering the Note Guarantee,
as it relates to such Domestic Subsidiary, void or voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
LIMITATION ON LINES OF BUSINESS. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business, other than a Permitted
Business.
LIMITATION ON THE CONDUCT OF BUSINESS OF DJ CAPITAL. DJ Capital will not
conduct any business or other activities, own any property, enter into any
agreements or Incur any Indebtedness or other liabilities, other than in
connection with serving as an Issuer and obligor with respect to the notes and
its guarantee in respect of the new credit facility.
MERGER AND CONSOLIDATION
Neither the Company nor DJ Capital will consolidate with or merge with or
into, or convey, transfer or lease all or substantially all its assets to, any
Person; provided, however, that the Company may consolidate with or merge with
or into, or convey, transfer or lease all or substantially all its assets to,
any Person if:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation, partnership or limited liability company
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia and the Successor Company (if not
the Company) will expressly assume, by a supplemental indenture, executed
156
<PAGE> 162
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the notes and the indenture;
(2) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company or
any Restricted Subsidiary as a result of such transaction as having been
Incurred by the Successor Company or such Restricted Subsidiary at the time
of such transaction), no Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness under
paragraph (a) of the covenant described under "--Limitation on
Indebtedness"; and
(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay the
principal of and interest on the notes.
In addition, the Company will not permit any Note Guarantor (other than
DonJoy) to consolidate with or merge with or into, or convey, transfer or lease
all or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person will be a
corporation, partnership or limited liability company organized and
existing under the laws of the United States of America, any State thereof
or the District of Columbia, and such Person (if not such Note Guarantor)
will expressly assume, by a supplemental indenture, executed and delivered
to the Trustee, in form satisfactory to the Trustee, all the obligations of
such Note Guarantor under its Note Guarantee;
(2) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been Incurred
by such Person at the time of such transaction), no Default shall have
occurred and be continuing; and
(3) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
Notwithstanding any of the foregoing:
(A) any Restricted Subsidiary (other than DJ Capital) may
consolidate with, merge into or transfer all or part of its properties
and assets to the Company or a Subsidiary that is a Note Guarantor, and
157
<PAGE> 163
(B) the Company may merge with an Affiliate incorporated solely for
- the purpose of incorporating the Company or
- organizing the Company in another jurisdiction to realize
tax or other benefits.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in any payment of interest or liquidated damages on any
note when due and payable, whether or not prohibited by the provisions
described under "Ranking" above, continued for 30 days,
(2) a default in the payment of principal of any note when due and
payable at its Stated Maturity, upon required redemption or repurchase,
upon declaration or otherwise, whether or not such payment is prohibited by
the provisions described under "Ranking" above,
(3) the failure by either Issuer to comply with its obligations under
the covenant described under "Merger and Consolidation" above,
(4) the failure by either Issuer to comply for 30 days after written
notice (specifying the default and demanding that the same be remedied)
with any of its obligations under the covenants described under "Change of
Control" or "Certain Covenants" above (in each case, other than a failure
to purchase notes),
(5) the failure by either Issuer or any Note Guarantor to comply for
60 days after written notice (specifying the default and demanding that the
same be remedied) with its other agreements contained in the notes or the
indenture,
(6) the failure by either Issuer or any Restricted Subsidiary of the
Company to pay any Indebtedness within any applicable grace period after
final maturity or the acceleration of any such Indebtedness by the holders
thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $10.0 million or its foreign currency
equivalent (the "cross acceleration provision") and such failure continues
for 10 days after receipt of the notice specified in the indenture,
(7) certain events of bankruptcy, insolvency or reorganization of
either Issuer or a Significant Subsidiary (the "bankruptcy provisions"),
(8) the rendering of any judgment or decree for the payment of money
in excess of $10.0 million (net of any amounts with respect to which a
reputable and creditworthy insurance company has acknowledged liability in
writing) or its foreign currency equivalent against the Company, DJ Capital
or a Restricted Subsidiary of the Company if:
(A) an enforcement proceeding thereon is commenced by any creditor
or
158
<PAGE> 164
(B) such judgment or decree remains outstanding for a period of 60
days following such judgment and is not discharged, waived or stayed
(the "judgment default provision"), or
(9) any Note Guarantee ceases to be in full force and effect (except
as contemplated by the terms thereof) or any Note Guarantor or Person
acting by or on behalf of such Note Guarantor denies or disaffirms such
Note Guarantor's obligations under the Indenture or any Note Guarantee and
such Default continues for 10 days after receipt of the notice specified in
the indenture.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clauses (4), (5), (6) or (9) will not constitute
an Event of Default until the Trustee or the Holders of at least 25% in
principal amount of the outstanding notes notify the Issuers of the default and
the Issuers do not cure such default within the time specified in clauses (4),
(5), (6) or (9) after receipt of such notice.
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company or DJ Capital)
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the outstanding notes by written notice to the Issuers and
the Trustee specifying the Event of Default and that it is a "notice of
acceleration" may declare the principal of and accrued but unpaid interest and
liquidated damages on all the notes to be due and payable. Upon such a
declaration, such principal and interest and liquidated damages will be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company or DJ Capital occurs,
the principal of and interest and liquidated damages on all the notes will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders of
a majority in principal amount of the outstanding notes may rescind any such
acceleration with respect to the notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the indenture or the notes unless:
(1) such Holder has previously given the Trustee notice that an Event
of Default is continuing,
(2) Holders of at least 25% in principal amount of the outstanding
notes have requested the Trustee in writing to pursue the remedy,
159
<PAGE> 165
(3) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense,
(4) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and
(5) the Holders of a majority in principal amount of the outstanding
notes have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding notes will be given the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the indenture or that the Trustee determines is unduly prejudicial to the rights
of any other Holder or that would involve the Trustee in personal liability.
Prior to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
If a Default occurs and is continuing and is known to the Trustee, the
Trustee must mail to each Holder notice of the Default within the earlier of 90
days after it occurs or 30 days after it is known to a Trust Officer or written
notice of it is received by the Trustee. Except in the case of a Default in the
payment of principal of, premium (if any) or interest on any note (including
payments pursuant to the redemption provisions of such note), the Trustee may
withhold notice if and so long as a committee of its Trust Officers in good
faith determines that withholding notice is in the interests of the Holders. In
addition, the Issuers will be required to deliver to the Trustee, within 120
days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Issuers will also be required to deliver to the Trustee, within 30 days after
the occurrence thereof, written notice of any event which would constitute
certain Events of Default, their status and what action the Issuers are taking
or propose to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture or the notes may be amended
with the written consent of the Holders of a majority in principal amount of the
notes then outstanding and any past default or compliance with any provisions
may be waived with the consent of the Holders of a majority in principal amount
of the notes then outstanding. However, without the consent of each Holder of an
outstanding note affected, no amendment may, among other things:
(1) reduce the amount of notes whose Holders must consent to an
amendment,
(2) reduce the rate of or extend the time for payment of interest or
any liquidated damages on any note,
(3) reduce the principal of or extend the Stated Maturity of any note,
160
<PAGE> 166
(4) reduce the premium payable upon the redemption of any note or
change the time at which any note may be redeemed as described under
"Optional Redemption" above,
(5) make any note payable in money other than that stated in the note,
(6) make any change to the subordination provisions of the Indenture
that adversely affects the rights of any Holder,
(7) impair the right of any Holder to receive payment of principal of,
and interest or any liquidated damages on, such Holder's notes on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder's notes,
(8) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions or
(9) modify the Note Guarantees in any manner adverse to the Holders.
Without the consent of any Holder, the Issuers and Trustee may amend the
indenture to:
(1) cure any ambiguity, omission, defect or inconsistency,
(2) provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture,
(3) provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f)(2)(B) of
the Code),
(4) make any change in the subordination provisions of the indenture
that would limit or terminate the benefits available to any holder of
Senior Indebtedness of the Company or DJ Capital (or any representative
thereof) under such subordination provisions,
(5) add additional Guarantees with respect to the notes,
(6) secure the notes,
(7) add to the covenants of the Issuers for the benefit of the Holders
or to surrender any right or power conferred upon the Issuers,
(8) make any change that does not materially and adversely affect the
rights of any Holder, subject to the provisions of the indenture,
(9) provide for the issuance of the new notes, or
(10) comply with any requirement of the SEC in connection with the
qualification of the indenture under the TIA.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Indebtedness
of the Company, DJ Capital or any Note Guarantor then outstanding unless the
161
<PAGE> 167
holders of such Senior Indebtedness (or any group or representative thereof
authorized to give a consent) consent to such change.
The consent of the Holders will not be necessary to approve the particular
form of any proposed amendment. It will be sufficient if such consent approves
the substance of the proposed amendment.
After an amendment becomes effective, the Issuers are required to mail to
Holders a notice briefly describing such amendment. However, the failure to give
such notice to all Holders, or any defect therein, will not impair or affect the
validity of the amendment.
TRANSFER AND EXCHANGE
Subject to compliance with the restrictions on transfer and exchange set
forth in the Indenture, a Holder will be able to transfer or exchange notes.
Upon any transfer or exchange, the registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Issuers may require a Holder to pay any taxes required by law
or permitted by the Indenture. The Issuers will not be required to transfer or
exchange any note selected for redemption or to transfer or exchange any note
for a period of 15 days prior to a selection of notes to be redeemed. The notes
will be issued in registered form and the Holder will be treated as the owner of
such note for all purposes.
DEFEASANCE
The Issuers may at any time terminate all their obligations under the notes
and the indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the notes, to replace mutilated, destroyed, lost or
stolen notes and to maintain a registrar and paying agent in respect of the
notes. In addition, the Issuers may at any time terminate:
(1) their obligations under the covenants described under "Change of
Control" and "Certain Covenants",
(2) the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries, the judgment default
provision and the Note Guarantee provision described under "Defaults" above
and the limitations contained in clauses (3) under the first paragraph of
"Merger and Consolidation" above ("covenant defeasance").
In the event that the Issuers exercise their legal defeasance option or
their covenant defeasance option, each Note Guarantor will be released from all
of its obligations with respect to its Note Guarantee.
The Issuers may exercise their legal defeasance option notwithstanding
their prior exercise of their covenant defeasance option. If the Issuers
exercise their legal defeasance option, payment of the notes may not be
accelerated because of an Event of Default with respect thereto. If the Issuers
exercise their covenant defeasance option, payment of the notes may not be
accelerated because of an Event of Default specified in clause (4), (6), (7)
(with respect to Significant
162
<PAGE> 168
Subsidiaries only), (8) or (9) under "Defaults" above or because of the failure
of the Issuers to comply with clause (3) under the first paragraph of "Merger
and Consolidation" above.
In order to exercise either defeasance option, the Issuers must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that Holders will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and defeasance
and will be subject to Federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service or
other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the indenture and has been
appointed by the Issuers as Registrar and Paying Agent with regard to the notes.
GOVERNING LAW
The indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Equity
Interests) to be used by the Company or a Restricted Subsidiary in a
Permitted Business or any improvements to any property or assets that are
used by the Company or a Restricted Subsidiary in a Permitted Business;
(2) Equity Interests of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Equity Interests by the Company or
another Restricted Subsidiary; or
(3) Equity Interests constituting a minority interest in any Person
that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clauses
(2) or (3) above is primarily engaged in a Permitted Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of
163
<PAGE> 169
voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
provisions described under "-- Certain Covenants -- Limitation on Transactions
with Affiliates" and "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Equity Interests" only, "Affiliate" shall also mean any beneficial
owner of Equity Interests representing 5% or more of the total voting power of
the Voting Equity Interests (on a fully diluted basis) of DonJoy (or any other
direct or indirect parent company of the Company) or the Company or of rights or
warrants to purchase such Voting Equity Interests (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease (other than an operating lease
entered into in the ordinary course of business), transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation, or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any Equity Interests of a Restricted Subsidiary (other than
directors' qualifying Equity Interests or Equity Interests required by
applicable law to be held by a Person other than the Company or a
Restricted Subsidiary),
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary
other than, in the case of (1), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary,
(B) for purposes of the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Equity
Interests" only, the making of a Permitted Investment or a disposition
subject to the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments",
(C) a disposition of obsolete or worn out property or equipment or
property or equipment that is no longer useful in the conduct of
business of the Company and its Restricted Subsidiaries, and
(D) any other disposition of assets with a fair market value, as
conclusively determined by senior management of the Company in good
faith, of less than $500,000.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
164
<PAGE> 170
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Equity Interests, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of such Indebtedness or redemption or similar payment with respect to such
Preferred Equity Interests multiplied by the amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement and any Refinancing Indebtedness with respect thereto,
as amended from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, guarantees and all other amounts payable
thereunder or in respect thereof.
"Business Day" means each day which is not a Legal Holiday.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
"Closing Date" means the date of the indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of:
(1) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial statements are
publicly available ending prior to the date of such determination to
(2) Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
(A) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding
on such date of determination or if the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day
of such period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such
165
<PAGE> 171
new Indebtedness as if such discharge had occurred on the first day of
such period,
(B) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on
the date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense
for such period shall be calculated on a pro forma basis as if such
discharge had occurred on the first day of such period and as if the
Company or such Restricted Subsidiary has not earned the interest income
actually earned during such period in respect of cash or Temporary Cash
Investments used to repay, repurchase, defease or otherwise discharge
such Indebtedness,
(C) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA
for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets that are the subject of
such Asset Disposition for such period or increased by an amount equal
to the EBITDA (if negative) directly attributable thereto for such
period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if the
Equity Interests of any Restricted Subsidiary are sold, the Consolidated
Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale),
(D) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person that becomes a
Restricted Subsidiary or is merged with and into the Company) or an
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating
unit of a business, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such period, and
(E) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant to
166
<PAGE> 172
clause (C) or (D) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition of
assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given
to an Investment or acquisition of assets, the amount of income or earnings
relating thereto and the amount of Consolidated Interest Expense associated with
any Indebtedness Incurred in connection therewith, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
Officer of the Company. Any such pro forma calculations may include operating
expense reductions for such period resulting from the acquisition which is being
given pro forma effect that
(a) would be permitted pursuant to Article XI of Regulation S-X under the
Securities Act or
(b) have been realized or for which the steps necessary for realization
have been taken or are reasonably expected to be taken within six months
following any such acquisition, including, but not limited to, the execution or
termination of any contracts, the termination of any personnel or the closing
(or approval by the Governing Board of any closing) of any facility, as
applicable,
provided that, such adjustments are set forth in an Officers' Certificate signed
by the Company's chief financial officer and another Officer which states
- the amount of such adjustment or adjustments,
- that such adjustment or adjustments are based on the reasonable good
faith beliefs of the officers executing such Officers' Certificate at the
time of such execution and
- that any related Incurrence of Indebtedness is permitted pursuant to the
Indenture.
In addition, to the extent not covered by the foregoing, if the Transactions
have occurred in the four quarter period used to determine the Consolidated
Coverage Ratio, then the Consolidated Coverage Ratio shall be determined giving
pro forma effect on the basis given in the offering memorandum dated June 17,
1999 used in connection with the private offering of the old notes to the
Transactions, with all calculations relating thereto to be made at the date of
determination by the Company's chief financial officer, and set forth in an
Officer's Certificate signed by the chief financial officer and another Officer
and meeting the requirements for the Officer's Certificate described in the
preceding sentence.
If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest expense on such Indebtedness shall be calculated
as if the rate in effect on the date of determination had been the applicable
rate for the entire period (taking into account any Interest Rate Agreement or
Currency Agreement applicable to such Indebtedness if such Interest Rate
Agreement or Currency Agreement has a remaining term as at the date of
determination in excess of 12 months).
167
<PAGE> 173
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Consolidated Restricted Subsidiaries (excluding
amortization and write-off of debt issuance costs) plus, to the extent Incurred
by the Company and its Restricted Subsidiaries in such period but not included
in such interest expense:
(1) interest expense attributable to Capitalized Lease Obligations and
the interest expense attributable to leases constituting part of a
Sale/Leaseback Transaction,
(2) amortization of debt discount,
(3) capitalized interest,
(4) non-cash interest expense,
(5) commissions, discounts and other fees and charges attributable to
letters of credit and bankers' acceptance financing,
(6) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by the Company or any Restricted
Subsidiary,
(7) net costs associated with Hedging Obligations (including
amortization of fees),
(8) dividends and distributions in respect of all Disqualified Equity
Interests of the Company and all Preferred Equity Interests of any of the
Subsidiaries of the Company, to the extent held by Persons other than the
Company or a Wholly Owned Subsidiary,
(9) interest Incurred in connection with investments in discontinued
operations and
(10) the cash contributions to any employee equity ownership or
participation plan or similar trust to the extent such contributions are
used by such plan or trust to pay interest or fees to any Person (other
than the Company) in connection with Indebtedness Incurred by such plan or
trust.
Notwithstanding anything to the contrary contained herein, commissions,
discounts, yield and other fees and charges Incurred in connection with any
transaction pursuant to which the Company or any Subsidiary of the Company may
sell, convey or otherwise transfer or grant a security interest in any accounts
receivable or related assets shall be included in Consolidated Interest Expense.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its Consolidated Subsidiaries for such period; provided,
however, that there shall not be included in such Consolidated Net Income:
(1) any net income (loss) of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that:
(A) subject to the limitations contained in clause (4), (5) and (6)
below, the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up to
168
<PAGE> 174
the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution made to a Restricted Subsidiary, to the limitations
contained in clause (3) below) and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income to
the extent such loss has been funded with cash from the Company or a
Restricted Subsidiary;
(2) other than for purposes of clauses (D) and (E) of the definition
of Consolidated Coverage Ratio, any net income (or loss) of any Person
acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition;
(3) any net income (or loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions or loans or
intercompany advances by such Restricted Subsidiary, directly or
indirectly, to the Company, except that:
(A) subject to the limitations contained in clause (4), (5) and (6)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed, loaned
or advanced by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend, distribution,
loan or advance (subject, in the case of a dividend, distribution, loan
or advance made to another Restricted Subsidiary, to the limitation
contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain (loss) realized upon the sale or other disposition of any
asset of the Company or its Consolidated Subsidiaries (including pursuant
to any Sale/Leaseback Transaction) that is not sold or otherwise disposed
of in the ordinary course of business and any gain (loss) realized upon the
sale or other disposition of any Equity Interests of any Person;
(5) any extraordinary gain or loss; and
(6) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purpose of the covenant described
under "-- Certain Covenants -- Limitation on Restricted Payments" only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from Unrestricted Subsidiaries to
the Company or a Restricted Subsidiary to the extent such dividends, repayments
or transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(4)(C)(v) thereof.
169
<PAGE> 175
"Consolidation" means the consolidation of the amounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in an Unrestricted Subsidiary will
be accounted for as an investment. The term "Consolidated" has a correlative
meaning.
"Credit Agreement" means the credit agreement dated as of the Closing Date
among the Company, DonJoy, the lenders named therein, First Union National Bank,
as administrative agent and collateral agent, and The Chase Manhattan Bank, as
syndication agent, in each case as amended, modified, supplemented, restated,
renewed, refunded, replaced, restructured, repaid or refinanced from time to
time (including any agreement extending the maturity thereof or increasing the
amount of available borrowings thereunder or adding Restricted Subsidiaries of
the Company as additional borrowers or guarantors thereunder) whether with the
original agents and lenders or otherwise and whether provided under the original
credit agreement or other credit agreements or otherwise.
"Currency Agreement" means with respect to any Person any foreign exchange
contract, currency swap agreements or other similar agreement or arrangement to
which such Person is a party or of which it is a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" of the Company means
(1) the Bank Indebtedness and
(2) any other Senior Indebtedness of the Company that, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to at least $15.0 million and is specifically designated by the
Company in the instrument evidencing or governing such Senior Indebtedness
as "Designated Senior Indebtedness" for purposes of the indenture.
"Designated Senior Indebtedness" of DJ Capital or a Note Guarantor has a
correlative meaning.
"Disqualified Equity Interest" means, with respect to any Person, any
Equity Interest of such Person which by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable) or upon the happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified
Equity Interests (excluding Equity Interests convertible or exchangeable
solely at the option of the Company or a Restricted Subsidiary, provided,
that any such conversion or exchange shall be deemed an issuance of
Indebtedness or an issuance of Disqualified Equity Interests, as
applicable) or
170
<PAGE> 176
(3) is redeemable at the option of the holder thereof, in whole or in
part,
in each case on or prior to 91 days after the Stated Maturity of the notes;
provided, however, that only the portion of the Equity Interests which so
matures or is mandatorily redeemable, is so convertible or exchangeable or is so
redeemable at the option of the holder thereof prior to such date will be deemed
Disqualified Equity Interests; provided, further, any Equity Interests that
would not constitute Disqualified Equity Interests but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Equity Interests upon the occurrence of an "asset sale" or "change of
control" shall not constitute Disqualified Equity Interests if the "asset sale"
or "change of control" provisions applicable to such Equity Interests provide
that such Person may not repurchase or redeem such Equity Interests pursuant to
such provisions unless such Person has first complied with the provisions
described under "Change of Control" and the provisions of the covenant described
under "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary
Equity Interests", as applicable; and provided, further that any class of Equity
Interests of such Person that, by its terms, authorizes such Person to satisfy
in full its obligations with respect to payment of dividends or upon maturity,
redemption (pursuant to a sinking fund or otherwise) or repurchase thereof or
other payment obligations or otherwise by delivery of Equity Interests that are
not Disqualified Equity Interests, and that is not convertible, puttable or
exchangeable for Disqualified Equity Interests or Indebtedness, shall not be
deemed Disqualified Equity Interests so long as such Person satisfies its
obligations with respect thereto solely by the delivery of Equity Interests that
are not Disqualified Equity Interests.
"Domestic Subsidiary" means any Restricted Subsidiary of the Company other
than a Foreign Subsidiary.
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income:
(1) income tax expense of the Company and its Consolidated Restricted
Subsidiaries,
(2) Consolidated Interest Expense,
(3) depreciation expense of the Company and its Consolidated
Restricted Subsidiaries,
(4) amortization expense of the Company and its Consolidated
Restricted Subsidiaries (excluding amortization expense attributable to a
prepaid cash item that was paid in a prior period), and
(5) other non-cash charges of the Company and its Consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
it represents an accrual of or reserve for cash expenditures in any future
period).
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary of the Company shall be added to Consolidated Net Income
to compute EBITDA only to the extent (and in the same proportion) that the net
171
<PAGE> 177
income (loss) of such Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended, loaned or advanced to the Company by
such Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its equity holders.
"Equity Interest" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Equity Interests, but excluding any debt securities convertible into such
equity.
"Equity Offering" means any public or private sale of common Equity
Interests of the Company or DonJoy, as applicable, other than public offerings
with respect to the Company's or DonJoy's common Equity Interests registered on
Form S-8 or other issuances upon exercise of options by employees of the Company
or any of its Restricted Subsidiaries.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Management Stockholders" means each of Leslie H. Cross, Cyril
Talbot III and Michael McBrayer.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company that is
not organized under the laws of the United States of America or any State
thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants,
(2) statements and pronouncements of the Financial Accounting
Standards Board,
(3) such other statements by such other entities as are approved by a
significant segment of the accounting profession, and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
All ratios and computations based on GAAP contained in the indenture shall
be computed in conformity with GAAP.
"Governing Board" of the Company or any other Person means, (i) the
managing member or members or any controlling committee of members of the
Company or such Person, for so long as the Company or such Person is a limited
liability company, (ii) the board of directors of the Company or such Person, if
the Company or such Person is a corporation or (iii) any similar governing body.
172
<PAGE> 178
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name a note is registered on the
Registrar's books.
"Income Tax Liabilities" means an amount determined by multiplying
(a)(1) all taxable income and gains of the Company for such calendar year
(the "Taxable Amount") minus
(2) an amount (not to exceed the Taxable Amount for such calendar year)
equal to all losses of the Company in any of the three prior calendar years that
have not been previously subtracted pursuant to this clause (2) from the Taxable
Amount for any prior year by
(b) forty-four percent (44%).
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Equity Interests of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of indebtedness
of such Person for borrowed money;
(2) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
173
<PAGE> 179
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables and other
accrued liabilities arising in the ordinary course of business which are
not overdue), which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title
thereto or the completion of such services;
(5) all Capitalized Lease Obligations and all Attributable Debt of
such Person;
(6) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Equity
Interests or, with respect to any Subsidiary of such Person, any Preferred
Equity Interests (but excluding, in each case, any accrued dividends);
(7) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of Indebtedness of such Person shall be
the lesser of:
(A) the fair market value of such asset at such date of
determination and
(B) the amount of such Indebtedness of such other Persons;
(8) to the extent not otherwise included in this definition, the net
obligations under Hedging Obligations of such Person;
(9) to the extent not otherwise included, the amount then outstanding
(i.e., advanced, and received by, and available for use by, such Person)
under any receivables financing (as set forth in the books and records of
such Person and confirmed by the agent, trustee or other representative of
the institution or group providing such receivables financing); and
(10) all obligations of the type referred to in clauses (1) through
(9) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded
174
<PAGE> 180
as accounts receivable on the balance sheet of the lender) or other extension of
credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Equity Interests, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Company shall be deemed to continue to have a permanent "Investment" in
an Unrestricted Subsidiary in an amount (if positive) equal to:
(A) the Company's "Investment" in such Subsidiary at the time of
such redesignation less
(B) the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer,
in each case as determined in good faith by
- the senior management of the Company if the amount thereof is less than
$1.0 million and
- the Governing Board if in excess thereof.
"Legal Holiday" means a Saturday, Sunday or other day on which banking
institutions in New York State are authorized or required by law to close.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Members' Agreement" means the Members' Agreement among DonJoy, Chase DJ
Partners, LLC, Smith & Nephew, Inc., Leslie H. Cross, Cyril Talbot III and
Michael R. McBrayer, as such agreement shall be in effect on the Closing Date
and any amendments, modifications, supplements or waivers thereto (collectively,
"amendments"), other than any such amendment to the provisions thereof relating
to the election or appointment of members of the Governing Board of the Company
or DonJoy that are materially adverse to the Holders of the notes.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the
175
<PAGE> 181
form of assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case net
of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all
Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset
Disposition,
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of
the proceeds from such Asset Disposition,
(3) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition and
(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the property
or other assets disposed of in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Equity
Interests, means the cash proceeds of such issuance or sale net of attorneys'
fees, accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Note Guarantee" means each Guarantee of the obligations with respect to
the notes issued by a Person pursuant to the terms of the indenture. Each such
Note Guarantee will have subordination provisions equivalent to those contained
in the indenture and will be substantially in the form prescribed in the
indenture.
"Note Guarantor" means any Person that has issued a Note Guarantee.
"Officer" of either Issuer, as the case may be, means the Chairman of the
Board, the Chief Executive Officer, the Chief Financial Officer, the President,
any Vice President, the Treasurer or the Secretary of such Issuer.
"Officers' Certificate" of either Issuer, as the case may be, means a
certificate signed by two Officers of such Issuer.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Business" means the design, manufacture and/or marketing of
orthopedic products, devices, accessories or services, other medical products,
176
<PAGE> 182
devices, accessories or services or any businesses that are reasonably related,
ancillary or complementary thereto.
"Permitted Holders" means each of
(1) Chase Capital Partners and its Affiliates,
(2) Chase DJ Partners, LLC and its Affiliates,
(3) First Union Capital Corporation and its Affiliates,
(4) Fairfield Chase Medical Partners, LLC and its Affiliates,
(5) Charles T. Orsatti and his Related Parties,
(6) the Existing Management Stockholders and their Related Parties and
(7) any Person acting in the capacity of an underwriter in connection with
a public or private offering of the Company's or DonJoy's Equity Interests.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Permitted Business;
(2) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary
(other than DJ Capital); provided, however, that such Person's primary
business is a Permitted Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary
(other than DJ Capital) if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary trade
terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary
deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(6) loans or advances to officers, directors, consultants or employees
made in the ordinary course of business and not exceeding $1.5 million in
the aggregate outstanding at any one time;
(7) Equity Interests, obligations or securities received in settlement
of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments or
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of a debtor;
177
<PAGE> 183
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition that was
made pursuant to and in compliance with the covenant described under
"-- Certain Covenants -- Limitation on Sale of Assets and Subsidiary Equity
Interests";
(9) Hedging Obligations entered into in the ordinary course of
business;
(10) endorsements of negotiable instruments and documents in the
ordinary course of business;
(11) assets or Equity Interests of a Person acquired by the Company or
a Restricted Subsidiary to the extent the consideration for such
acquisition consists of Equity Interests (other than Disqualified Equity
Interests) of the Company or DonJoy;
(12) Investments in existence on the Closing Date;
(13) Investments of a Person or any of its Subsidiaries existing at
the time such Person becomes a Restricted Subsidiary of the Company or at
the time such Person merges or consolidates with the Company or any of its
Restricted Subsidiaries, in either case in compliance with the Indenture,
provided that such Investments were not made by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such merger or consolidation; and
(14) additional Investments having an aggregate fair market value (as
determined in good faith by (i) senior management of the Company if such
fair market value is less than $1.0 million or (ii) by the Governing Board
of the Company if in excess thereof), taken together with all other
Investments made pursuant to this clause (14) that are at the time
outstanding, not to exceed the greater of 10% of Total Assets or $10.0
million at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value).
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Equity Interests", as applied to the Equity Interests of any
Person, means Equity Interests of any class or classes (however designated) that
are preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Equity Interests of any other class of such Person.
"principal" of a note means the principal of the note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) any Indebtedness of the Company or any Restricted
Subsidiary existing on the Closing Date or Incurred in compliance with the
178
<PAGE> 184
indenture (including Indebtedness of the Company or a Restricted Subsidiary that
Refinances Refinancing Indebtedness); provided, however, that:
(1) the Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being Refinanced,
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced,
(3) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate
issue price) (whether in U.S. dollars or a foreign currency) that is equal
to or less than the aggregate principal amount (or if issued with original
issue discount, the aggregate accreted value) (in U.S. dollars or such
foreign currency, as applicable) then outstanding (plus, without
duplication, accrued interest, fees and expenses, including premium and
defeasance costs) of the Indebtedness being Refinanced and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the notes or a Note Guarantee of a Note Guarantor, such
Refinancing Indebtedness is subordinated in right of payment to the notes
or the Note Guarantee at least to the same extent as the Indebtedness being
Refinanced;
provided further, however, that Refinancing Indebtedness shall not include:
(A) Indebtedness of a Restricted Subsidiary that is not a Note
Guarantor that Refinances Indebtedness of the Company or
(B) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Parties" means with respect to a Person that is a natural person
(a) (1) any spouse, parent or lineal descendant of such Person or
(2) the estate of such Person during any period in which such estate
holds Equity Interests of DonJoy or the Company for the benefit of any
person referred to in clause (a)(1) and
(b) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially owning an interest of
more than 50% of which consist of such Person and/or such other Persons referred
to in the immediately preceding clause (a).
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means DJ Capital and any other Subsidiary of the
Company other than an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or a Restricted Subsidiary transfers such property to a Person and
the Company or such Restricted Subsidiary leases it from such Person, other than
leases between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries.
179
<PAGE> 185
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company or DJ Capital
secured by a Lien. "Secured Indebtedness" of a Note Guarantor has a correlative
meaning.
"Senior Subordinated Indebtedness" of the Company means the notes and any
other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness. "Senior Subordinated
Indebtedness" of DJ Capital or a Note Guarantor has a correlative meaning.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Closing Date or thereafter Incurred) that is subordinate or
junior in right of payment to the notes pursuant to a written agreement.
"Subordinated Obligation" of DJ Capital or a Note Guarantor has a correlative
meaning.
"Subsidiary" of any Person means any corporation, association, partnership,
limited liability company or other business entity of which more than 50% of the
total voting power of Equity Interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, representatives, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by:
(1) such Person,
(2) such Person and one or more Subsidiaries of such Person or
(3) one or more Subsidiaries of such Person.
"Tax Distribution" means any distribution by the Company to its members
which
(1) with respect to quarterly estimated tax payments due in each
calendar year shall be equal to twenty-five percent (25%) of the Income Tax
Liabilities for such calendar year as estimated in writing by the chief
financial officer of the Company and
(2) with respect to tax payments to be made with income tax returns
filed for a full calendar year or with respect to adjustments to such
returns imposed by the Internal Revenue Service or other taxing authority,
shall be equal to the Income Tax Liabilities for each calendar year minus
the aggregate amount distributed for such calendar year as provided in
clause (1) above.
180
<PAGE> 186
In the event the amount determined under clause (2) is a negative amount, the
amount of any Tax Distributions in the succeeding calendar year (or, if
necessary, any subsequent calendar years) shall be reduced by such negative
amount.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency or instrumentality thereof or obligations Guaranteed
or insured by the United States of America or any agency or instrumentally
thereof,
(2) investments in checking accounts, savings accounts, time deposit
accounts, certificates of deposit, bankers' acceptances and money market
deposits maturing within 180 days of the date of acquisition thereof issued
by a bank or trust company that is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250,000,000 (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act),
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above,
(4) investments in commercial paper, maturing not more than 270 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Service, a division of The McGraw-Hill Companies, Inc. ("S&P"),
(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or "A" by Moody's Investors Service, Inc., and
(6) investments in money market funds that invest substantially all of
their assets in securities of the types described in clauses (1) through
(5) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.
77aaa-77bbbb) as in effect on the Closing Date.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Transactions" has the meaning specified in this prospectus.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
181
<PAGE> 187
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Governing Board in
the manner provided below and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Governing Board may designate any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary of the Company), other than DJ
Capital, to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Equity Interests in or Indebtedness of, or owns or holds
any Lien on any property of, the Company or any other Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; provided,
however, that either:
- the Subsidiary to be so designated has total Consolidated assets of
$1,000 or less or
- if such Subsidiary has Consolidated assets greater than $1,000, then
such designation would be permitted under the covenant entitled
"Limitation on Restricted Payments."
The Governing Board may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation:
- the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and
- no Default shall have occurred and be continuing.
Any such designation of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary by the Governing Board shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Governing
Board giving effect to such designation and an Officers' Certificate certifying
that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Equity Interests" of a Person means the Equity Interests in a
corporation or other Person with voting power under ordinary circumstances
(without regard to the occurrence of any contingency) entitling the holders
thereof to elect or appoint the board of managers, board of directors, executive
committee, management committee or other governing body of such corporation or
Person.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Equity Interests of which (other than directors' qualifying Equity
Interests) are owned by the Company or another Wholly Owned Subsidiary.
182
<PAGE> 188
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Issuers, DonJoy and the initial purchaser of the old notes entered into
the exchange and registration rights agreement on June 30, 1999. Pursuant to the
exchange and registration rights agreement, the Issuers and DonJoy agreed to
- file with the Commission on or prior to 75 days after the date of
issuance of the old notes a registration statement on Form S-1 or Form
S-4, if the use of such form is then available relating to a registered
exchange offer for the notes under the Securities Act; and
- use their reasonable best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act
within 180 days after the date of issuance of the old notes.
As soon as practicable after the effectiveness of the exchange offer
registration statement, the Issuers will offer to the holders of transfer
restricted securities (as defined below) who are not prohibited by any law or
policy of the Commission from participating in the exchange offer the
opportunity to exchange their transfer restricted securities for a second series
of notes that are identical in all material respects to the old notes (except
that the new notes will not contain terms with respect to transfer restrictions)
and that would be registered under the Securities Act. The Issuers and DonJoy
will keep the exchange offer open for not less than 30 days (or longer, if
required by applicable law) after the date on which notice of the exchange offer
is mailed to the holders of the old notes.
If
- because of any change in law or applicable interpretations thereof by the
staff of the Commission, the Issuers and DonJoy determine in good faith
after consultation with counsel that they are not permitted to effect the
exchange offer as contemplated hereby;
- any old notes validly tendered pursuant to the exchange offer are not
exchanged for new notes within 225 days after the date of issuance of the
old notes;
- the initial purchaser so requests with respect to old notes not eligible
to be exchanged for new notes in the exchange offer;
- any applicable law or interpretations do not permit any holder of old
notes to participate in the exchange offer;
- any holder of old notes that participates in the exchange offer notifies
the Company in writing within 30 days following the consummation of the
exchange offer that such holder may not resell the new notes acquired by
it in the exchange offer to the public without delivering a prospectus,
and the prospectus contained in the exchange offer registration statement
is not legally available for such resales by such holder; or
- the Issuers so elect,
then the Issuers and DonJoy will file with the Commission a shelf registration
statement to cover resales of transfer restricted securities by such holders who
satisfy certain conditions relating to the provision of information in
connection with
183
<PAGE> 189
the shelf registration statement. For purposes of the foregoing, "transfer
restricted securities" means each old note until
(1) the date on which such note has been exchanged for a freely
transferable new note in the exchange offer;
(2) the date on which such old note has been effectively registered under
the Securities Act and disposed of in accordance with the shelf
registration statement or
(3) the date on which such old note is distributed to the public pursuant
to Rule 144 under the Securities Act or is salable pursuant to Rule
144(k) under the Securities Act.
The Issuers and DonJoy will use their reasonable best efforts to have the
exchange offer registration statement or, if applicable, the shelf registration
statement declared effective by the Commission as promptly as practicable after
the filing thereof. Unless the exchange offer would not be permitted by a policy
of the Commission, the Company will commence the exchange offer and will use its
reasonable best efforts to consummate the exchange offer as promptly as
practicable, but in any event prior to 225 days after the date of issuance of
the old notes. If applicable, the Issuers and DonJoy will use their reasonable
best efforts to keep the shelf registration statement effective for a period of
two years after the date of issuance of the old notes.
If
(1) the applicable registration statement is not filed with the Commission
on or prior to the date specified in the exchange and registration
rights agreement;
(2) the exchange offer registration statement or the shelf registration
statement, as the case may be, is not declared effective on or prior to
the date specified in the exchange and registration rights agreement;
(3) exchange offer is not consummated on or prior to 225 days after the
date of issuance of the old notes (other than in the event the Issuers
file a shelf registration statement); or
(4) the shelf registration statement is filed and declared effective on or
prior to the date specified in the exchange and registration rights
agreement but shall thereafter cease to be effective (at any time that
the Issuers and DonJoy are obligated to maintain the effectiveness
thereof) without being succeeded within 60 days by an additional
registration statement filed and declared effective (each such event
referred to in clauses (1) through (4), a "registration default"),
the Issuers and DonJoy will be obligated to pay liquidated damages to each
holder of transfer restricted securities (but not in respect of any transfer
restricted securities for any period after such securities cease to be transfer
restricted securities pursuant to clause (3) of the definition thereof set forth
above) during the period of one or more such registration defaults, in an amount
equal to $0.192 per week per $1,000 principal amount of the old notes
constituting transfer restricted securities held by such holder until the
applicable registration statement is filed, the exchange offer registration
statement is declared effective and the exchange offer is consummated or the
shelf registration statement is declared
184
<PAGE> 190
effective or again becomes effective, as the case may be. All accrued liquidated
damages shall be paid to holders in the same manner as interest payments on the
old notes on semi-annual payment dates which correspond to interest payment
dates for the old notes. Following the cure of all registration defaults, the
accrual of liquidated damages will cease.
The exchange and registration rights agreement also provides that the
Issuers and DonJoy
- shall make available for a period of 180 days after the consummation of
the exchange offer a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale
of any such Exchange Notes and
- shall pay all expenses incident to the exchange offer (including the
expense of one counsel to the holders of the Notes) and will jointly and
severally indemnify certain holders of the Notes (including any
broker-dealer) against certain liabilities, including liabilities under
the Securities Act.
A broker-dealer which delivers such a prospectus to purchasers in connection
with such resales will be subject to the civil liability provisions under the
Securities Act and will be bound by the provisions of the exchange and
registration rights agreement (including certain indemnification rights and
obligations).
The foregoing description of the exchange and registration rights agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the exchange and registration rights
agreement, a copy of which is filed as an exhibit to the registration statement
of which this prospectus is a part.
185
<PAGE> 191
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The exchange of an old note for a new note should not constitute a taxable
exchange for U.S. federal income tax purposes. Consequently, no gain or loss
should be recognized by holders that exchange old notes for new notes pursuant
to the exchange offer. For purposes of determining gain or loss upon the
subsequent sale or exchange of new notes, a holder's tax basis in a new note
should be the same as such holder's tax basis in the old note exchanged
therefor. Holders should be considered to have held the new notes from the time
of their acquisition of the old notes. PERSONS CONSIDERING THE EXCHANGE OF OLD
NOTES FOR NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S.
FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL
AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
186
<PAGE> 192
BOOK-ENTRY; DELIVERY AND FORM
The new notes will initially be represented by one or more permanent global
notes in definitive, fully registered book-entry form, without interest coupons
that will be deposited with, or on behalf of, DTC and registered in the name of
DTC or its nominee, on behalf of the acquirers of new notes represented thereby
for credit to the respective accounts of the acquirers, or to such other
accounts as they may direct, at DTC, or Morgan Guaranty Trust Company of New
York, Brussels Office, as operator of the Euroclear System, or Cedel Bank,
societe anonyme. See "The Exchange Offer -- Book Entry Transfer".
Except as set forth below, the global notes may be transferred, in whole
and not in part, solely to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the global notes may not be exchanged for
notes in physical, certificated form except in the limited circumstances
described below.
All interests in the global notes, including those held through Euroclear
or Cedel, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Cedel may also be subject to the procedures
and requirements of such systems.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. Neither
the Issuers nor DonJoy takes any responsibility for these operations or
procedures, and investors are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised the Issuers and DonJoy that it is
(1) a limited purpose trust company organized under the laws of the State
of New York,
(2) a "banking organization" within the meaning of the New York Banking
Law,
(3) a member of the Federal Reserve System,
(4) a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
(5) a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
participants include securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations. Indirect access to DTC's
system is also available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Investors who are not participants
may beneficially own securities held by or on behalf of DTC only through
participants or indirect participants.
The Issuers and DonJoy expect that pursuant to procedures established by
DTC ownership of the new notes will be shown on, and the transfer of ownership
187
<PAGE> 193
thereof will be effected only through, records maintained by DTC (with respect
to the interests of participants) and the records of participants and the
indirect participants (with respect to the interests of persons other than
participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the new notes represented by a
global note to such persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests through participants, the ability of a person having an interest
in new notes represented by a global note to pledge or transfer such interest to
persons or entities that do not participate in DTC's system, or to otherwise
take actions in respect of such interest, may be affected by the lack of a
physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a global note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the notes represented by the global note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a global
note
- will not be entitled to have new notes represented by such global note
registered in their names,
- will not receive or be entitled to receive physical delivery of
certificated new notes, and
- will not be considered the owners or holders thereof under the indenture
for any purpose, including with respect to the giving of any direction,
instruction or approval to the trustee thereunder.
Accordingly, each holder owning a beneficial interest in a global note must rely
on the procedures of DTC and, if such holder is not a participant or an indirect
participant, on the procedures of the participant through which such holder owns
its interest, to exercise any rights of a holder of notes under the indenture or
such global note. The Company understands that under existing industry practice,
in the event that the Company requests any action of holders of notes, or a
holder that is an owner of a beneficial interest in a global note desires to
take any action that DTC, as the holder of such global note, is entitled to
take, DTC would authorize the participants to take such action and the
participants would authorize holders owning through such participants to take
such action or would otherwise act upon the instruction of such holders. Neither
the Issuers, DonJoy nor the trustee will have any responsibility or liability
for any aspect of the records relating to or payments made on account of notes
by DTC, or for maintaining, supervising or reviewing any records of DTC relating
to such new notes.
Payments with respect to the principal of, and premium, if any, and
interest on, any new notes represented by a global note registered in the name
of DTC or its nominee on the applicable record date will be payable by the
trustee to or at the direction of DTC or its nominee in its capacity as the
registered holder of the global note representing the new notes under the
indenture. Under the terms of the indenture, the Issuers, DonJoy and the trustee
may treat the persons in whose names the new notes, including the global notes,
are registered as the owners thereof for the purpose of receiving payment
thereon and for any and all other purposes whatsoever. Accordingly, neither the
Issuers, DonJoy nor the trustee has or will have any responsibility or liability
for the payment of such amounts to owners of beneficial interests in a global
note (including principal, premium, if any,
188
<PAGE> 194
liquidated damages, if any, and interest). Payments by the participants and the
indirect participants to the owners of beneficial interests in a global note
will be governed by standing instructions and customary industry practice and
will be the responsibility of the participants or the indirect participants and
DTC.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case
may be, by its respective depositary; however, such cross-market transactions
will require delivery of instructions to Euroclear or Cedel, as the case may be,
by the counterpart in such system in accordance with the rules and procedures
and within the established deadlines (Brussels time) of such system. Euroclear
or Cedel, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the relevant global notes in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Euroclear participants and Cedel participants may not deliver instructions
directly to the depositaries for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a global note from a participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following the
settlement date of DTC. Cash received in Euroclear or Cedel as a result of sales
of interest in a global note by or through a Euroclear or Cedel participant to a
participant in DTC will be received with value on the settlement date of DTC but
will be available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the global notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to continue
to perform such procedures, and such procedures may be discontinued at any time.
Neither the Issuers, DonJoy nor the trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED NOTES
If
- the Company notifies the trustee in writing that DTC is no longer willing
or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation,
- the Company, at its option, notifies the trustee in writing that it
elects to cause the issuance of notes in definitive form under the
indenture or
189
<PAGE> 195
- upon the occurrence of certain other events as provided in the indenture,
then, upon surrender by DTC of the global notes, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the global notes. Upon any such issuance, the trustee is required
to register such certificated notes in the name of such person or persons (or
the nominee of any thereof) and cause the same to be delivered thereto.
Neither the Issuers, DonJoy nor the trustee shall be liable for any delay
by DTC or any participant or indirect participant in identifying the beneficial
owners of the related notes and each such person may conclusively rely on, and
shall be protected in relying on, instructions from DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the notes to be issued).
YEAR 2000
DTC management is aware that some computer applications, systems and the
like for processing data that are dependent upon calendar dates, including dates
before, on and after January 1, 2000, may encounter "year 2000 problems." DTC
has informed its participants and other members of the financial community that
it has developed and is implementing a program so that its systems, as the same
relate to the timely payment of distributions (including principal and income
payments) to securityholders, book-entry deliveries and settlement of trades
within DTC, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third-party vendors from whom DTC licenses software and hardware, and
third-party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the industry that it is contacting (and will
continue to contact) third-party vendors from whom DTC acquires services to:
- impress upon them the importance of such services being year 2000
compliant; and
- determine the extent of their efforts for year 2000 remediation (and, as
appropriate, testing) of their services.
In addition, DTC is in the process of developing such contingency plans as it
deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
190
<PAGE> 196
PLAN OF DISTRIBUTION
Until 90 days after the date of this prospectus, all dealers effecting
transactions in the new notes, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes only
where such old notes were acquired as a result of market-making activities or
other trading activities. The Issuers have agreed that, for a period of 180 days
from the date on which the exchange offer is consummated, they will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Issuers will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any new notes. Any
broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days from the date on which the exchange offer is
consummated, the Issuers will promptly send additional copies of this prospectus
and any amendment or supplement to this prospectus to any broker-dealer that
requests such documents in the letter of transmittal. The Issuers have agreed to
pay all expenses incident to the exchange offer (including the expenses of one
counsel for holders of the notes) other than commissions or concessions of any
broker-dealers and will indemnify the holders of the notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the new notes offered hereby and the guarantee of DonJoy
will be passed upon for the Issuers and DonJoy by O'Sullivan Graev & Karabell,
LLP, New York, New York.
191
<PAGE> 197
EXPERTS
The financial statements of DonJoy, L.L.C. at December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 included
in this prospectus have been audited by Ernst & Young LLP, independent auditors,
as set forth in their reports with respect thereto appearing herein and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
192
<PAGE> 198
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DONJOY, L.L.C.
Report of Ernst & Young LLP, Independent Auditors......... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998 and June 29, 1999 (unaudited)..................... F-3
Consolidated Statements of Income for each of the three
years in the period ended December 31, 1998 and the six
months ended June 27, 1998 (unaudited) and June 29,
1999 (unaudited)....................................... F-4
Consolidated Statements of Changes in Member's Equity for
each of the three years in the period ended December
31, 1998 and for the six months ended June 29, 1999
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1998 and
the six months ended June 27, 1998 (unaudited) and June
29, 1999 (unaudited)................................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 199
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors of Smith & Nephew, Inc.
DonJoy, L.L.C.
We have audited the accompanying consolidated balance sheets of DonJoy,
L.L.C. as of December 31, 1997 and 1998, and the related consolidated statements
of income, member's equity and cash flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DonJoy, L.L.C.
at December 31, 1997 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
March 11, 1999,
except for Note 8, as to which the date is
June 30, 1999
F-2
<PAGE> 200
DONJOY, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 29,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 910 $ 809 $ 1,086
Accounts receivable, net of allowance for
doubtful accounts of $412 and $356 at
December 31, 1997 and 1998,
respectively ($745 at June 29, 1999,
unaudited)............................. 13,304 17,543 16,415
Accounts receivable, related parties...... 2,724 2,301 1,983
Inventories, net.......................... 11,608 14,368 14,441
Other current assets...................... 714 811 582
------- ------- -------
Total current assets........................ 29,260 35,832 34,507
Property, plant and equipment, net.......... 6,518 7,400 6,377
Intangible assets, net...................... 35,344 33,758 34,609
Other assets................................ 166 66 134
------- ------- -------
Total assets................................ $71,288 $77,056 $75,627
======= ======= =======
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Accounts payable.......................... $ 7,858 $ 8,481 $ 6,306
Accounts payable, related parties......... 265 137 157
Accrued compensation...................... 1,424 1,250 1,669
Accrued commissions....................... 1,568 1,191 794
Current and deferred income taxes due to
Parent................................. 6,384 5,640 --
Intercompany obligations.................. 1,500 1,210 1,695
Restructuring reserve..................... -- 1,639 --
Other accrued liabilities................. 512 659 420
------- ------- -------
Total current liabilities................... 19,511 20,207 11,041
Deferred rent............................... 369 -- --
Intercompany obligations, less current
portion................................... 43,527 44,017 --
Commitments
Member's equity............................. 7,881 12,832 64,586
------- ------- -------
Total liabilities and member's equity....... $71,288 $77,056 $75,627
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 201
DONJOY, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------
---------------------------- JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
------- ------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Third parties........... $73,413 $80,934 $ 90,467 $42,322 $49,406
Related parties......... 9,699 11,807 10,702 5,722 5,247
------- ------- -------- ------- -------
Total net revenues........ 83,112 92,741 101,169 48,044 54,653
Cost of goods sold........ 36,396 39,030 46,329 22,096 25,642
------- ------- -------- ------- -------
Gross profit.............. 46,716 53,711 54,840 25,948 29,011
Operating expenses:
Sales and marketing..... 20,067 22,878 25,296 12,001 13,371
General and
administrative....... 12,941 15,802 16,484 8,269 8,773
Research and
development.......... 1,766 2,055 2,248 1,201 1,048
Restructuring costs..... -- -- 2,467 2,467 --
------- ------- -------- ------- -------
Total operating expenses.. 34,774 40,735 46,495 23,938 23,192
------- ------- -------- ------- -------
Income from operations.... 11,942 12,976 8,345 2,010 5,819
Interest income (expense),
net..................... (2,459) (2,072) -- -- --
------- ------- -------- ------- -------
Income before income
taxes................... 9,483 10,904 8,345 2,010 5,819
Provision for income
taxes................... 3,828 4,367 3,394 817 2,387
------- ------- -------- ------- -------
Net income................ $ 5,655 $ 6,537 $ 4,951 $ 1,193 $ 3,432
======= ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 202
DONJOY, L.L.C.
STATEMENTS OF CHANGES IN CONSOLIDATED MEMBER'S EQUITY
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1995................................ $ 12,593
Dividend in connection with the merger of Smith & Nephew
DonJoy, Inc. into Smith & Nephew, Inc.................. (23,895)
Capital contribution in connection with the merger of
Smith & Nephew DonJoy, Inc. into Smith & Nephew,
Inc.................................................... 10,000
Dividends to Smith & Nephew, Inc.......................... (3,009)
Net income................................................ 5,655
--------
Balance at December 31, 1996................................ 1,344
Net income................................................ 6,537
--------
Balance at December 31, 1997................................ 7,881
Net income................................................ 4,951
--------
Balance at December 31, 1998................................ 12,832
Capital contribution by Parent in connection with the
Recapitalization (unaudited)........................... 48,322
Net income (unaudited).................................... 3,432
--------
Balance at June 29, 1999 (unaudited)........................ $ 64,586
========
</TABLE>
See accompanying notes.
F-5
<PAGE> 203
DONJOY, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, -------------------
--------------------------- JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
-------- ------- ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 5,655 $ 6,537 $4,951 $ 1,193 $ 3,432
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 4,642 4,803 4,853 2,457 2,451
Restructuring costs......................... -- -- 2,467 2,467 --
Deferred rent............................... (42) (78) -- -- --
Changes in operating assets and liabilities:
Accounts receivable...................... 994 (1,440) (4,239) (1,993) 1,128
Accounts receivable, related parties..... (448) (1,042) 423 798 318
Inventories.............................. (962) (591) (2,760) (2,642) (74)
Other current assets..................... (130) 444 (97) (286) 229
Accounts payable......................... 902 2,341 623 (1,033) (2,179)
Accounts payable, related parties........ 115 (20) (128) (201) 20
Accrued compensation..................... 9 422 (174) (136) 419
Accrued commissions...................... (448) 110 (377) (740) (397)
Current and deferred income taxes due to
Parent................................. 93 363 (744) 1,005 2,516
Restructuring reserve.................... (957) -- (1,197) (732) (340)
Other accrued liabilities................ 208 (773) 147 36 (233)
-------- ------- ------ ------- -------
Net cash provided by operating activities..... 9,631 11,076 3,748 193 7,290
INVESTING ACTIVITIES
Purchases of property, plant and equipment.... (1,848) (2,273) (3,189) (2,742) (515)
Acquisition of intangible asset rights........ -- -- (960) -- (2,205)
Other assets.................................. (12) (49) 100 98 (68)
-------- ------- ------ ------- -------
Net cash used in investing activities......... (1,860) (2,322) (4,049) (2,644) (2,788)
FINANCING ACTIVITIES
Capital contribution.......................... 10,000 -- -- -- --
Dividends to Smith & Nephew, Inc. ............ (26,904) -- -- -- --
Intercompany obligations...................... 8,972 (8,401) 200 1,826 (4,225)
-------- ------- ------ ------- -------
Net cash (used in) provided by financing
activities.................................. (7,932) (8,401) 200 1,826 (4,225)
Net (decrease) increase in cash............... (161) 353 (101) (625) 277
Cash at beginning of year..................... 718 557 910 910 809
-------- ------- ------ ------- -------
Cash at end of year........................... $ 557 $ 910 $ 809 $ 285 $ 1,086
======== ======= ====== ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Settlement of note payable through
intercompany obligations.................... $ -- $38,000 $ -- $ -- $ --
======== ======= ====== ======= =======
Capital contribution in connection with the
Recapitalization............................ $ -- $ -- $ -- $ -- $48,322
======== ======= ====== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 204
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 28, 1998 AND APRIL 3, 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
DonJoy, L.L.C. (the "Company") designs, manufactures and markets various
lines of external recovery products and accessories.
The Company was established in December 1982 as DonJoy, Inc. The Company
was acquired by Smith & Nephew, Inc. (formerly Smith & Nephew Consolidated,
Inc., the "Parent") effective September 18, 1987 through a purchase of all the
then outstanding shares of the Company's stock. Smith & Nephew, Inc. is a
wholly-owned subsidiary of Smith & Nephew plc., a United Kingdom company. In
November 1996, Smith & Nephew DonJoy, Inc. was merged into Smith & Nephew, Inc.
and began to operate as a division. Effective December 29, 1998, the Parent
contributed the Company's net assets and shares of a Mexican subsidiary into
DonJoy, L.L.C. a newly formed Delaware limited liability company and became the
sole member of the new entity.
As described in Note 8, in June 1999, the Parent sold 90% of its member's
interest back to the Company in connection with a series of Recapitalization
transactions. The accompanying consolidated financial statements present the
historical consolidated financial position and results of operations of the
Company and include the accounts of the Company and the accounts of its
wholly-owned Mexican subsidiary that manufactures a portion of the Company's
products under Mexico's maquiladora program. The maquiladora program allows
foreign manufacturers to take advantage of Mexico's lower cost production
sharing capabilities. The accompanying results of operations reflect only the
operations of the business involved in the Recapitalization transactions and
exclude any operations remaining in the control of the Parent. All intercompany
accounts and transactions have been eliminated in consolidation. The Company's
assets are also available for the satisfaction of other debts of the Parent, not
solely debts appearing in the accompanying consolidated balance sheets. Certain
expenses reflected in the accompanying consolidated statements of income are
allocations from the Parent and Smith & Nephew plc and may therefore differ from
the expenses which would have occurred had the Company operated as an autonomous
entity (see Note 3).
INTERIM FINANCIAL INFORMATION
The Company's fiscal year ends on December 31. Each quarter consists of one
five-week and two four-week periods. The first and fourth quarters may have more
or less working days from year to year based on what day of the week holidays
fall on. The accompanying consolidated financial statements at June 29, 1999 and
for the six-months ended June 27, 1998 and June 29, 1999 are unaudited but
include all adjustments (consisting of normal recurring accruals) which, in the
opinion of management, are necessary for a fair statement of the financial
position and the operating results and cash flows for the interim date and
periods presented. Results for the interim period ended June 29, 1999 are not
F-7
<PAGE> 205
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
necessarily indicative of results to be achieved for the entire year or future
periods. The six-month period ended June 29, 1999 contained two more business
days than the six-month period ended June 27, 1998 which resulted in the Company
recognizing approximately $900,000 more in revenue in 1999 versus in 1998.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 periods. Actual results could differ from those estimates.
LONG-LIVED ASSETS
Property, plant and equipment and intangible assets are recorded at cost.
The Company provides for depreciation on property, plant and equipment and
intangible assets using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the lesser of their
estimated useful life or the term of the related lease.
The Company periodically reviews its long-lived assets, including
intangibles, for indicators of impairment. If indicators exist, an analysis of
future undiscounted cash flows would be performed. If such future undiscounted
cash flows are less than the net book value of the assets, the carrying value
would be reduced to estimated fair value.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out (FIFO) basis. In connection with the Recapitalization
transactions described in Note 8, the Company changed its method of valuing its
inventory from the last-in, first-out method (LIFO) to the FIFO method because
management believes the FIFO method is preferable. This change was implemented
during 1998, retroactively for all periods presented. The effect of the change
was an increase (decrease) in net income of $152,000 in 1996, $(125,000) in 1997
and $346,000 in 1998.
REVENUE RECOGNITION
Revenues and costs are recognized as products are shipped. Revenues from
third-party payors are recorded net of contractual allowances. Products have a
limited warranty and estimated warranty costs are accrued in the period sales
are recognized.
F-8
<PAGE> 206
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$93,000, $95,000 and $122,000 in advertising costs for the years ended December
31, 1996, 1997 and 1998.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the functional currency of its Mexican
operations is the U.S. dollar. Accordingly, assets and liabilities are
translated at the ending exchange rate in effect during the period except for
long-term non-monetary assets and equity, which are translated at their
historical exchange rates. Depreciation and amortization expense of the related
long-term assets is also translated at historical exchange rates. Translation
adjustments are reported as income or expense in the periods presented.
CONCENTRATION OF CREDIT RISK
The Company sells the majority of its products in the United States through
26 manufacturer's representative organizations (referred to as distributors).
Products which are generic are sold through large distributors, specialty
dealers and buying groups. International sales comprise 20%, 18% and 18% in
1996, 1997 and 1998, respectively, of total revenues and are primarily sold
through Smith & Nephew plc companies and also independent distributors. Credit
is extended based on an evaluation of the customer's financial condition and
generally collateral is not required. The Company also provides a reserve for
estimated sales returns. Both credit losses and returns have been within
management's estimates.
During the three years ended December 31, 1998 and the six months ended
June 29, 1999, the Company had no individual customer or distributor which
accounted for 10% or more of total annual revenues.
INCOME TAXES
The Company's Parent files a consolidated federal income tax return which
includes all of it's eligible subsidiaries and divisions, including the Company.
The provision for income taxes has been presented assuming the Company filed a
separate federal income tax return.
The provision for income taxes for the six months ended June 27, 1998 and
June 29, 1999 have been recorded based on the Company's annual effective rate.
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events
F-9
<PAGE> 207
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and circumstances from non-owner sources. Net income and other comprehensive
income, including foreign currency translation adjustments and unrealized gains
and losses on investments, shall be reported, net of their related tax effect,
to arrive at comprehensive income. The adoption of SFAS 130 resulted in
comprehensive income that was the same as net income.
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 superseded SFAS No. 14 Financial Reporting for
Segments of a Business Enterprise. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position, but did affect the
disclosure of segment information. See Note 7.
2. FINANCIAL STATEMENT INFORMATION
INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 29,
1997 1998 1999
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................. $ 6,812 $ 6,443 $ 6,560
Work-in-progress........................... 676 1,614 1,448
Finished goods............................. 4,870 6,867 7,131
------- ------- -------
12,358 14,924 15,139
Less reserve for excess and obsolete....... (750) (556) (698)
------- ------- -------
$11,608 $14,368 $14,441
======= ======= =======
</TABLE>
F-10
<PAGE> 208
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 29,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Buildings and leasehold improvements..... $ 2,570 $ 5,285 $ 3,499
Office furniture, fixtures and equipment
and other.............................. 13,242 14,488 14,689
Construction in progress................. 1,200 337 516
-------- -------- --------
17,012 20,110 18,704
Less accumulated depreciation and
amortization........................... (10,494) (12,710) (12,327)
-------- -------- --------
$ 6,518 $ 7,400 $ 6,377
======== ======== ========
</TABLE>
INTANGIBLE ASSETS
Intangible assets arose from the initial acquisition of the Company in 1987
and from the Company's acquisition of Professional Care Products, Inc. in 1995.
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL -------------------- JUNE 29
LIFE 1997 1998 1999
------ -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Goodwill........................ 20 $ 24,742 $ 24,742 $ 24,742
Patented technology............. 5-20 13,477 14,437 14,437
Customer base................... 20 11,600 11,600 11,600
Distribution rights............. 5 -- -- 2,000
Assembled workforce............. 6 250 250 250
Other........................... 5-20 195 195 399
-------- -------- --------
50,264 51,224 53,428
Less accumulated amortization... (14,920) (17,466) (18,819)
-------- -------- --------
$ 35,344 $ 33,758 $ 34,609
======== ======== ========
</TABLE>
3. RELATED PARTY TRANSACTIONS
The intercompany obligations included in the accompanying balance sheets
represent a net balance as the result of various transactions between the
Company, its Parent and its affiliates. There are no terms of settlement or
interest charges associated with the account balance. The balance results from
the Company's participation in the Parent's central cash management program,
wherein all the Company's cash receipts are remitted to the Parent and all cash
F-11
<PAGE> 209
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disbursements are funded by the Parent. Several other transactions are recorded
through the intercompany obligations account as detailed below.
Included in the January 1, 1996 balance of intercompany obligations, is a
note payable of $38 million related to the acquisition of Procare. The note was
repaid in 1997.
An analysis of intercompany transactions are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------ JUNE 29,
1996 1997 1998 1999
-------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period........ $ 44,456 $ 53,428 $ 45,027 $45,227
Net cash remitted to Parent......... (16,722) (27,362) (18,256) (16,115)
Net intercompany sales.............. (4,556) (4,116) (5,078) (112)
Net fixation device sales........... 380 307 256 --
Share of Parent's current income tax
liability........................ 3,558 4,192 4,287 (134)
Corporate management expense
allocations...................... 3,157 5,418 5,664 3,159
Cash owed to Parent................. -- -- -- 1,002
I-Flow licensing agreement.......... -- -- -- 800
Dividend in connection with the
merger of Smith & Nephew Don Joy,
Inc. into Smith & Nephew, Inc.... 23,895 -- -- --
Capital contribution................ (10,000) -- -- (38,865)
Dividends to Smith & Nephew,
Inc. ............................ 3,009 -- -- --
Interest on note payable............ 2,581 2,565 -- --
Direct charges:
Brand royalties.................. 1,274 1,605 3,249 1,817
Payroll taxes and benefits....... 1,881 6,787 8,635 4,651
Direct legal expenses............ 224 735 324 67
Foreign Sales Corporation (FSC)
commission..................... 492 661 439 --
Miscellaneous other administrative
expenses......................... (201) 807 680 131
-------- -------- -------- -------
Balance at end of period.............. 53,428 45,027 45,227 1,628
Less current portion.................. (1,035) (1,500) (1,210) (1,628)
-------- -------- -------- -------
Long-term intercompany obligations.... $ 52,393 $ 43,527 $ 44,017 $ --
======== ======== ======== =======
Average balance during the period..... $ 48,942 $ 49,227 $ 45,127 $23,427
======== ======== ======== =======
</TABLE>
F-12
<PAGE> 210
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Parent and Smith & Nephew, plc provide certain management, financial,
administrative and legal services to the Company. These expenses and all other
central operating costs, are charged on the basis of direct usage when
identifiable, with the remainder allocated among the Parent's subsidiaries and
divisions on the basis of their respective annual sales or percentage of capital
employed.
Parent allocations consist of the following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
------------------------ JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
------ ------ ------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Corporate managed accounts and
new business.................. $ 194 $ 368 $ 394 $ 197 $ 195
Finance (risk management,
treasury, audit, and taxes)... 198 260 310 164 177
Human resources and payroll..... 101 130 291 136 147
Legal........................... 153 177 223 112 128
Research and development........ 349 626 854 427 380
Corporate management expense.... 642 1,284 1,332 666 784
Bonus........................... 168 879 503 252 467
Pension......................... 318 495 514 257 267
Insurance....................... 1,034 1,199 1,243 622 614
------ ------ ------ ------ ------
$3,157 $5,418 $5,664 $2,833 $3,159
====== ====== ====== ====== ======
Amounts included in:
Cost of goods sold............ $ 671 $ 977 $ 991 $ 496 $ 495
Sales and marketing........... 129 174 179 90 94
General and administrative.... 2,319 4,229 4,439 2,219 2,553
Research and development...... 38 38 55 28 17
------ ------ ------ ------ ------
$3,157 $5,418 $5,664 $2,833 $3,159
====== ====== ====== ====== ======
</TABLE>
The Company also participates in the Parent's corporate insurance programs
for workers' compensation, product and general liability. These charges are
settled with the Parent currently, and thus, accruals for related liabilities,
if any, are maintained by the Parent and are not reflected in the accompanying
consolidated balance sheets.
4. RESTRUCTURING
In March 1998, the Company combined its two operating facilities into one
location in Vista, California and accrued $2,467,000 in costs resulting from the
restructuring which had no future economic benefit. These costs relate primarily
to remaining lease obligations on the vacated facility, net of projected
sublease
F-13
<PAGE> 211
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income, and severance costs associated with the termination of twelve employees.
Included in general and administrative costs are $248,000 of costs also related
to the combination of the facilities.
5. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various noncancellable operating leases for
land, equipment, vehicles and office space through February 2008. Certain of the
leases provide that the Company pay all or a portion of taxes, maintenance,
insurance and other operating expenses, and certain of the rents are subject to
adjustment for changes as determined by certain consumer price indices and
exchange rates. The Company's corporate office lease agreement provides for
deferred payment terms. For financial reporting purposes, rent expense is
recorded on the straight-line basis over the term of the lease. Accordingly,
deferred rent in the accompanying consolidated balance sheets represents the
difference between rent expense accrued and amounts paid under the lease
agreement.
Minimum annual lease commitments for noncancellable operating leases as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................. $ 2,942
2000................................................. 2,508
2001................................................. 1,840
2002................................................. 1,796
2003 and thereafter.................................. 9,036
-------
$18,122
=======
</TABLE>
Aggregate rent expense was approximately $2,296,000, $2,324,000 and
$3,193,000 for the years ended December 31, 1996, 1997 and 1998 and $1,544,000
and $1,180,000 for the six months ended June 27, 1998 and June 29, 1999,
respectively.
LICENSE AGREEMENT
In August of 1998, the Company entered into an exclusive license agreement
with IZEX Technologies, Incorporated (IZEX) to acquire the intellectual property
rights and to retain IZEX to consult on the design and development of an
advanced rehabilitation bracing system. In consideration for this exclusive
agreement, the Company has agreed to a series of payments tied to the
achievement of specific milestone events (such as the granting of FDA approval),
for a total of $3.5 million. Under the license, the Company also has the
worldwide exclusive rights to manufacture, use and sell developed products. At
December 31, 1998, $960,000 is included in intangible assets (patented
technology) in the accompanying balance sheet.
F-14
<PAGE> 212
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
normal course of business. While the outcome of the proceedings and claims
cannot be predicted with certainty, management does not believe that the outcome
of any of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
6. RETIREMENT PLANS
Substantially all of the Company's employees participate in a defined
benefit pension plan sponsored by the Parent. Benefits related to this plan are
computed using formulas which are generally based on age and years of service.
Aggregate pension prepayments and liabilities related to this plan are recorded
by the Parent. Pension expense allocated (based on relative participation) to
the Company related to this plan was as follow (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Service costs.................................. $291 $449 $466
Interest costs................................. 27 46 48
---- ---- ----
Total pension expense allocated................ $318 $495 $514
==== ==== ====
</TABLE>
The Company's employees participate in a separate 401(k) plan under which
participants may contribute a percentage of their compensation to the plan.
These plans are sponsored by the Parent. Contributions to the 401(k) plan are
matched by the Parent with certain limitations. Liabilities related to these
plans are maintained by the Parent. Expenses incurred by the Company related to
this plan was $223,000, $255,000 and $299,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
7. SEGMENT AND RELATED INFORMATION
The Company has two reportable segments as defined by Financial Accounting
Standards Board SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Company's reportable segments are business units that
offer different products and are managed separately because each business
requires different technology and marketing strategies. The rigid knee bracing
segment designs, manufactures and sells rigid framed ligament and osteoarthritis
knee braces and post-operative splints and accounted for 48% of net revenues in
1998. The soft goods segment designs, manufactures and sells fabric, neoprene
and Drytex based products for the knee, ankle, shoulder, back and wrist and
accounted for 34% of net revenues in 1998. The Company's other operating
segments are included in specialty and other orthopedic products. None of the
F-15
<PAGE> 213
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other segments met any of the quantitative thresholds for determining reportable
segments. Information regarding industry segments is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------
------------------------------ JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
------- ------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Rigid knee
bracing.......... $47,849 $48,371 $ 48,777 $24,405 $24,031
Soft goods.......... 27,194 31,737 34,364 16,102 18,775
------- ------- -------- ------- -------
Net revenues for
reportable
segments....... 75,043 80,108 83,141 40,507 42,806
Specialty and
other
orthopedic
products....... 8,069 12,633 18,028 7,537 11,847
------- ------- -------- ------- -------
Total consolidated net
revenues............ $83,112 $92,741 $101,169 $48,044 $54,653
======= ======= ======== ======= =======
Gross profit:
Rigid knee
bracing.......... $32,092 $33,910 $ 34,460 $16,924 $17,238
Soft goods.......... 12,965 15,541 16,637 7,805 9,130
------- ------- -------- ------- -------
Gross profit for
reportable
segments......... 45,057 49,451 51,097 24,729 26,368
Specialty and other
orthopedic
products......... 3,814 6,132 8,978 3,678 5,895
Brand royalties..... (1,274) (1,605) (3,249) (1,603) (1,817)
Other cost of goods
sold............. (881) (267) (1,986) (856) (1,435)
------- ------- -------- ------- -------
Total consolidated
gross profit........ $46,716 $53,711 $ 54,840 $25,948 $29,011
======= ======= ======== ======= =======
</TABLE>
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
allocates resources and evaluates the performance of segments based on gross
profit. Intersegment sales were not significant for any period.
For the three years ended December 31, 1998 and the six months ended June
29, 1999, the Company had no individual customer or distributor within a segment
which accounted for 10% or more of total annual revenues.
F-16
<PAGE> 214
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assets located in foreign countries were not significant. Net revenues to
customers, attributed to countries based on the location of the customer, were
as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------
---------------------------- JUNE 27, JUNE 29,
1996 1997 1998 1998 1999
------- ------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States:
Third parties............... $65,072 $73,093 $ 82,403 $37,924 $45,469
Related parties............. 1,110 3,048 936 478 586
------- ------- -------- ------- -------
66,182 76,141 83,339 38,402 46,055
Europe:
Third parties............... 7,426 7,131 7,412 4,003 3,632
Related parties............. 4,921 5,235 4,964 3,341 2,334
------- ------- -------- ------- -------
12,347 12,366 12,376 7,344 5,966
Other foreign countries
Third parties............... 915 710 652 395 305
Related parties............. 3,668 3,524 4,802 1,903 2,327
------- ------- -------- ------- -------
4,583 4,234 5,454 2,298 2,632
------- ------- -------- ------- -------
Total consolidated net
revenues.................... $83,112 $92,741 $101,169 $48,044 $54,653
======= ======= ======== ======= =======
</TABLE>
The Company does not allocate assets to reportable segments because all
property and equipment are shared by all segments of the Company.
8. SUBSEQUENT EVENTS
On June 30, 1999, the Company consummated a $215.3 million recapitalization
(the "Recapitalization"). Under the Recapitalization, new investors, including
Chase DJ Partners, L.L.C. ("CDP") and affiliates of CDP, invested new capital of
$94.6 million in the Company. In addition, certain members of management
invested $1.8 million in equity which was financed by $1.4 million in interest-
bearing, full recourse loans from the Company and the Parent retained $5.4
million of the recapitalization value. In connection with the recapitalization
transactions, the Company established dj Orthopedics, LLC ("dj Ortho") and DJ
Orthopedics Capital Corporation ("DJ Capital"). The Company sold all of its net
assets to dj Ortho for cash, which was funded with the net proceeds of $100
million of 12 5/8% senior subordinated notes (the "Notes") issued by dj Ortho
and DJ Capital, as co-issuers, and the remainder by funds borrowed by dj Ortho
under a senior credit facility. The Notes are fully and unconditionally
guaranteed by the Company. dj Ortho is a wholly-owned subsidiary of the Company
and represents substantially all of the revenues and net income of the Company.
DJ Capital is a wholly-owned subsidiary of dj Ortho, has no significant assets
or operations and
F-17
<PAGE> 215
DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was formed solely for the purpose of being a co-issuer of the Notes. Separate
financial statements of dj Ortho and DJ Capital have not been presented because,
in the opinion of management, such information is not material to the
noteholders.
The proceeds of the equity investment together with $113.5 million of debt
financing were used (i) for approximately $199.8 million of consideration paid
to redeem a portion of member's equity from the Company's parent, and (ii)
approximately $8.7 million of costs and fees paid in association with the
Recapitalization. The consideration paid to the Parent will be increased
(decreased) on a dollar for dollar basis to the extent the value of the
Company's net operating assets (as defined in the Recapitalization Agreement) on
the closing date of the Recapitalization exceeded (was less than) $33.4 million.
F-18
<PAGE> 216
$100,000,000
DJ ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
OFFER TO EXCHANGE ALL OUTSTANDING
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
FOR 12 5/8% SENIOR SUBORDINATED NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
<PAGE> 217
[ALTERNATIVE FRONT COVER FOR MARKET-MAKING PROSPECTUS]
Prospectus
DJ ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
We issued the 12 5/8% Senior Subordinated Notes due 2009 which have been
registered under the Securities Act of 1933 in exchange for our 12 5/8% Senior
Subordinated Notes due 2009 in our exchange offer.
MATURITY
- - The notes will mature on June 15, 2009.
INTEREST
- - Interest on the notes will be payable on June 15 and December 15 of each year,
beginning December 15, 1999.
REDEMPTION
- - We may redeem some or all of the notes at any time after June 15, 2004.
- - We may also redeem up to $35,000,000 of the notes before June 15, 2002 using
the proceeds of certain equity offerings.
- - The redemption prices are described on page .
CHANGE OF CONTROL
- - If we experience a change of control, we must offer to purchase the notes.
SECURITY AND RANKING
- - The notes are unsecured. The notes will be subordinated to all of our existing
and future senior debt, will rank equally with all of our other senior
subordinated debt and will rank senior to all of our future subordinated debt.
GUARANTEES
- - If we fail to make payments on the notes, our parent company must make them
instead. This guarantee will be a senior subordinated obligation of our parent
company. Our existing subsidiary will not guarantee the notes.
We prepared this prospectus for use by Chase Securities Inc. ("CSI") in
connection with offers and sales related to market-making transactions of the
new notes. CSI may act as principal or agent in these transactions. These sales
will be made at prices related to prevailing market prices at the time of sale.
We will not receive any of the proceeds of these sales.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE OF THIS
PROSPECTUS IN EVALUATING AN INVESTMENT IN THE NEW NOTES.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
CHASE SECURITIES INC.
-------------------------
The date of this Prospectus is , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 218
[ALTERNATIVE SECTION FOR MARKET-MAKING PROSPECTUS]
TRADING MARKET FOR THE NEW NOTES -- YOU CANNOT BE SURE THAT AN ACTIVE TRADING
MARKET WILL DEVELOP FOR THE NEW NOTES.
We do not intend to apply for a listing of the new notes on a securities
exchange of any automated dealer quotation system. We have been advised by CSI
that as of the date of this prospectus CSI intends to make a market in the new
notes. CSI is not obligated to do so, however, and any market-making activities
with respect to the new notes may be discontinued at any time without notice. In
addition, such market-making activity will be subject to limits imposed by the
Securities Act and the Exchange Act. Because CSI is our affiliate, CSI is
required to deliver a current "market-making" prospectus and otherwise comply
with the registration requirements of the Securities Act in any secondary market
sale of the new notes. Accordingly, the ability of CSI to make a market in the
new notes may, in part, depend on our ability to maintain a current
market-making prospectus.
The liquidity of the trading market in the new notes, and the market price
quoted for the new notes, may be adversely affected by changes in the overall
market for high yield securities and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally. As a
result, you cannot be sure that an active trading market will develop for the
new notes.
<PAGE> 219
[ALTERNATIVE SECTION FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the new notes
by CSI in market-making transactions. We will not receive any of the proceeds
from these transactions.
<PAGE> 220
[ALTERNATIVE SECTION FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This prospectus has been prepared for use by CSI in connection with offers
and sales of the new notes in market-making transactions effected from time to
time. CSI may act as a principal or agent in these transactions, including as
agent for the counterparty when acting as principal or as agent for both
parties, and may receive compensation in the form of discounts and commissions,
including from both counterparties when it acts as agent for both. These sales
will be made at prevailing market prices at the time of sale, at prices related
thereto or at negotiated prices. The Issuers will not receive any of the
proceeds of these sales. The Issuers have agreed to indemnify CSI against
certain liabilities, including liabilities under the Securities Act, and to
contribute payments which CSI might be required to make in respect thereof.
As of the date of this prospectus, affiliates of CSI own approximately
87.8% of the voting units of DonJoy. See "Security Ownership of Certain
Beneficial Owners and Management." CSI has informed the Issuers that it does not
intend to confirm sales of the new notes to any accounts over which it exercises
discretionary authority without the prior specific written approval of these
transactions by the customer.
The Issuers have been advised by CSI that, subject to applicable laws and
regulations, CSI currently intends to make a market in the new notes following
completion of the exchange offer. However, CSI is not obligated to do so and any
such market-making may be interrupted or discontinued at any time without
notice. In addition, such market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act. There can be no assurance
that an active trading market will develop or be sustained. See "Risk Factors
- -- Trading Market for the New Notes."
<PAGE> 221
[ALTERNATIVE BACK COVER FOR MARKET-MAKING PROSPECTUS]
$100,000,000
DJ ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
CHASE SECURITIES INC.
<PAGE> 222
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. Pursuant to Section 102(b)(7) of the DGCL, the
Certificate of Incorporation of DJ Capital provides that the directors of DJ
Capital, individually or collectively, shall not be held personally liable to DJ
Capital Corp or its stockholders for monetary damages for breaches of fiduciary
duty as directors, except that any director shall remain liable (1) for any
breach of the director's fiduciary duty of loyalty to DJ Capital Corp or its
stockholders, (2) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (3) for liability under
Section 174 of the DGCL or (4) for any transaction from which the director
derived an improper personal benefit. The by-laws of DJ Capital provide for
indemnification of its officers and directors to the full extent authorized by
law.
Section 18-108 of the Delaware Limited Liability Company Act (the "Act")
provides that, subject to such standards and restrictions, if any, as are set
forth in a limited liability company's operating agreement, a limited liability
company may, and shall have the power to, indemnify and hold harmless any member
or manager or other person from and against any and all claims and demands
whatsoever. The Bylaws of the Company and DonJoy provide that the Company and
DonJoy shall, to the fullest extent authorized under the Act, indemnify and hold
harmless against all expense, liability and loss (including attorneys' fees,
judgments, fines, excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered, any manager or officer of the Company or
DonJoy, as the case may be, including indemnification for negligence or gross
negligence but excluding indemnification (i) for acts or omissions involving
actual fraud or willful misconduct or (ii) with respect to any transaction from
which the indemnitee derived an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<C> <S>
3.1 Amended and Restated Operating Agreement of dj Orthopedics,
LLC
3.2 Second Amended and Restated Operating Agreement of DonJoy,
LLC
3.3 Certificate of Amendment to Certificate of Incorporation of
DJ Orthopedics Capital Corporation
3.4 By-laws of dj Orthopedics, LLC
3.5 By-laws of DonJoy, LLC
3.6 By-laws of DJ Orthopedics Capital Corporation
</TABLE>
II-1
<PAGE> 223
<TABLE>
<C> <S>
4.1 Indenture dated as of June 30, 1999 among the Issuers,
DonJoy and The Bank of New York, as Trustee
4.2 Form of New Note (included as Exhibit B to Exhibit 4.1)
4.3 Exchange and Registration Rights Agreement dated as of June
30, 1999 among the Issuers, DonJoy and Chase Securities
Inc., as Initial Purchaser
5.1* Opinion of O'Sullivan Graev & Karabell, LLP
10.1 Recapitalization Agreement dated as of April 29, 1999 among
CDP, DonJoy and Smith & Nephew
10.2 Group Research Centre Technology Agreement dated as of June
30, 1999 between DonJoy and Smith & Nephew
10.3 Supply Agreement dated as of June 30, 1999 between DonJoy
and Smith & Nephew
10.4 Transition Services Agreement dated as of June 30, 1999
between DonJoy and Smith & Nephew
10.5 Distribution Agreement dated as of June 30, 1999 between
DonJoy, Smith & Nephew and the affiliates of Smith & Nephew
listed on Schedule I thereto
10.6 CERF Laboratories Agreement dated as of June 30, 1999
between DonJoy and Smith & Nephew
10.7 Subleases dated as of June 30, 1999 between the Company and
Smith & Nephew
10.8 Guaranties dated as of June 30, 1999 executed by DonJoy
10.9 Preferred Unit Purchase Agreement dated as of June 30, 1999
among DonJoy, CB Capital and First Union Investors
10.10 Members' Agreement dated as of June 30, 1999 among DonJoy,
CDP, CB Capital, First Union Investors, Smith & Nephew and
the Management Members
10.11 Credit Agreement dated as of June 30, 1999 among the
Issuers, DonJoy, the Lenders party thereto and First Union
National Bank, as Administrative Agent
10.12 Indemnity, Subrogation and Contribution Agreement dated as
of June 30, 1999 among the Company, DJ Capital and First
Union National Bank, as Collateral Agent
10.13 Parent Guarantee Agreement dated as of June 30, 1999 between
DonJoy and First Union National Bank, as Collateral Agent
10.14 Subsidiary Guarantee Agreement dated as of June 30, 1999
between DJ Capital and First Union National Bank, as
Collateral Agent
10.15 Pledge Agreement dated as of June 30, 1999 among the
Company, DonJoy and First Union National Bank, as Collateral
Agent
10.16 Security Agreement dated as of June 30, 1999 among the
Company, DonJoy, DJ Capital and First Union National Bank,
as Collateral Agent
10.17 Leasehold Deed of Trust, Security Agreement and Assignment
of Leases and Rents dated as of June 30, 1999 by the
Company, as grantor, to First American Title Insurance
Company, as trustee
10.18 Employment Agreement dated as of June 30, 1999 between the
Company and Leslie H. Cross
10.19 Employment Agreement dated as of June 30, 1999 between the
Company and Cyril Talbot III
</TABLE>
II-2
<PAGE> 224
<TABLE>
<C> <S>
10.20 Employment Agreement dated as of June 30, 1999 between the Company and Michael R. McBrayer
10.21 1999 Option Plan of DonJoy
10.22 Retention Agreement dated December 14, 1998 between Smith & Nephew and Les Cross
10.23 Retention Agreement dated December 14, 1998 between Smith & Nephew and Cy Talbot
10.24 Retention Agreement dated December 14, 1998 between Smith & Nephew and Michael McBrayer
10.25 Retention Agreement dated December 14, 1998 between Smith & Nephew and Chuck Bastyr
10.26 Retention Agreement dated December 14, 1998 between Smith & Nephew and Peter Bray
12.1 Statement re: computation of ratios of earning to fixed charges
21.1 Subsidiaries of the Registrants
23.1* Consent of O'Sullivan Graev & Karabell, LLP (included in Exhibit 5.1)
23.2* Consent of Ernst & Young LLP
24.1 Powers of Attorney (included on the signature pages)
25.1 Statement of Eligibility and Qualifications under the Trust Indenture Act of 1939 of The Bank
of New York as Trustee
27.1 Financial Data Schedule
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
99.3* Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
99.4* Form of Letter to Clients
</TABLE>
- -------------------------
* Filed herewith
(b) FINANCIAL STATEMENT SCHEDULES
Schedules other than the above have been omitted because they are either
not applicable or the required information has been disclosed in the financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the Corporation Law, the Certificate of Incorporation
and By-laws, or otherwise, the Registrants have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrants of expenses incurred or paid by a director,
officer or controlling person of the Registrants in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
II-3
<PAGE> 225
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrants hereby undertake:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
4. That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-4
<PAGE> 226
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 4th day of
November, 1999.
DJ ORTHOPEDICS, LLC
By: /s/ LESLIE H. CROSS
------------------------------------
Leslie H. Cross
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed on the 4th day of November,
1999 by the following persons on behalf of the registrant and in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C> <C>
/s/ LESLIE H. CROSS President, Chief Executive
- ------------------------------------------ Officer and Manager (Principal
Leslie H. Cross Executive Officer)
* Vice President, Chief Financial
- ------------------------------------------ Officer and Secretary
Cyril Talbot III (Principal Financial and
Accounting Officer)
* Manager
- ------------------------------------------
Charles T. Orsatti
* Manager
- ------------------------------------------
Mitchell J. Blutt, M.D.
* Manager
- ------------------------------------------
Shahan D. Soghikian
* Manager
- ------------------------------------------
Damion E. Wicker, M.D.
* Manager
- ------------------------------------------
John J. Daileader
* Manager
- ------------------------------------------
Ivan R. Sabel
*By: /s/ LESLIE H. CROSS
- -----------------------------------------
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 227
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 4th day of
November, 1999.
DJ ORTHOPEDICS CAPITAL CORPORATION
By: /s/ LESLIE H. CROSS
------------------------------------
Leslie H. Cross
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed on the 4th day of November,
1999 by the following persons on behalf of the registrant and in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C> <C>
/s/ LESLIE H. CROSS President, Chief Executive
- ------------------------------------------ Officer and Manager (Principal
Leslie H. Cross Executive Officer)
* Vice President, Chief Financial
- ------------------------------------------ Officer and Secretary
Cyril Talbot III (Principal Financial and
Accounting Officer)
* Director
- ------------------------------------------
Charles T. Orsatti
* Director
- ------------------------------------------
Mitchell J. Blutt, M.D.
* Director
- ------------------------------------------
Shahan D. Soghikian
* Director
- ------------------------------------------
Damion E. Wicker, M.D.
* Director
- ------------------------------------------
John J. Daileader
* Director
- ------------------------------------------
Ivan R. Sabel
*By: /s/ LESLIE H. CROSS
- -----------------------------------------
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 228
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 4th day of
November, 1999.
DONJOY, L.L.C.
By: /s/ LESLIE H. CROSS
------------------------------------
Leslie H. Cross
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed on the 4th day of November,
1999 by the following persons on behalf of the registrant and in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C> <C>
/s/ LESLIE H. CROSS President, Chief Executive
- ------------------------------------------ Officer and Manager (Principal
Leslie H. Cross Executive Officer)
* Vice President, Chief Financial
- ------------------------------------------ Officer and Secretary
Cyril Talbot III (Principal Financial and
Accounting Officer)
* Manager
- ------------------------------------------
Charles T. Orsatti
* Manager
- ------------------------------------------
Mitchell J. Blutt, M.D.
* Manager
- ------------------------------------------
Shahan D. Soghikian
* Manager
- ------------------------------------------
Damion E. Wicker, M.D.
* Manager
- ------------------------------------------
John J. Daileader
* Manager
- ------------------------------------------
Ivan R. Sabel
*By: /s/ LESLIE H. CROSS
- -----------------------------------------
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 229
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------- EXHIBIT
<C> <S>
3.1 Amended and Restated Operating Agreement of dj Orthopedics,
LLC
3.2 Second Amended and Restated Operating Agreement of DonJoy,
L.L.C.
3.3 Certificate of Amendment to Certificate of Incorporation of
DJ Orthopedics Capital Corporation
3.4 By-Laws of dj Orthopedics, LLC
3.5 By-Laws of DonJoy, L.L.C.
3.6 By-Laws of DJ Orthopedics Capital Corporation
4.1 Indenture dated as of June 30, 1999 among the Issuers,
DonJoy and The Bank of New York, as Trustee
4.2 Form of New Note (included as Exhibit B to Exhibit 4.1)
4.3 Exchange and Registration Rights Agreement dated as of June,
30, 1999 among the Issuers, DonJoy and Chase Securities
Inc., as Initial Purchaser
5.1* Opinion of O'Sullivan Graev & Karabell, LLP
10.1 Recapitalization Agreement dated as of April 29, 1999 among
CDP, DonJoy and Smith & Nephew
10.2 Group Research Centre Technology Agreement dated as of June
30, 1999 between DonJoy and Smith & Nephew
10.3 Supply Agreement dated as of June 30, 1999 between DonJoy
and Smith & Nephew
10.4 Transition Services Agreement dated as of June 30, 1999
between DonJoy and Smith & Nephew
10.5 Distribution Agreement dated as of June 30, 1999 between
DonJoy, Smith & Nephew and the affiliates of Smith & Nephew
listed on Schedule I thereto
10.6 CERF Laboratories Agreement dated as of June 30, 1999
between DonJoy and Smith & Nephew
10.7 Subleases dated as of June 30, 1999 between the Company and
Smith & Nephew
10.8 Guaranties dated as of June 30, 1999 executed by DonJoy
10.9 Preferred Unit Purchase Agreement dated as of June 30, 1999
among DonJoy, CB Capital and First Union Investors
10.10 Members' Agreement dated as of June 30, 1999 among DonJoy,
CDP, CB Capital, First Union Investors, Smith & Nephew and
the Management Members
10.11 Credit Agreement dated as of June 30, 1999 among the
Issuers, DonJoy, the Lenders party thereto and First Union
National Bank, as Administrative Agent
10.12 Indemnity, Subrogation and Contribution Agreement dated as
of June 30, 1999 among the Company, DJ Capital and First
Union National Bank, as Collateral Agent
10.13 Parent Guarantee Agreement dated as of June 30, 1999 between
DonJoy and First Union National Bank, as Collateral Agent
10.14 Subsidiary Guarantee Agreement dated as of June 30, 1999
between DJ Capital and First Union National Bank, as
Collateral Agent
10.15 Pledge Agreement dated as of June 30, 1999 among the
Company, DonJoy and First Union National Bank, as Collateral
Agent
10.16 Security Agreement dated as of June 30, 1999 among the
Company, DonJoy, DJ Capital and First Union National Bank,
as Collateral Agent
</TABLE>
<PAGE> 230
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------- EXHIBIT
<C> <S>
10.17 Leasehold Deed of Trust, Security Agreement and Assignment
of Leases and Rents dated as of June 30, 1999 between the
Company and First American Title Insurance Company, as
trustee
10.18 Employment Agreement dated as of June 30, 1999 between the
Company and Leslie H. Cross
10.19 Employment Agreement dated as of June 30, 1999 between the
Company and Cyril Talbot III
10.20 Employment Agreement dated as of June 30, 1999 between the
Company and Michael R. McBrayer
10.21 1999 Option Plan of DonJoy
10.22 Retention Agreement dated as of December 14, 1998 between
Smith & Nephew and Les Cross
10.23 Retention Agreement dated as of December 14, 1998 between
Smith & Nephew and Cy Talbot
10.24 Retention Agreement dated as of December 14, 1998 between
Smith & Nephew and Michael McBrayer
10.25 Retention Agreement dated December 14, 1998 between Smith &
Nephew and Chuck Bastyr
10.26 Retention Agreement dated December 14, 1998 between Smith &
Nephew and
Peter Bray
12.1 Statement re: computation of ratio of earnings to fixed
charges
21.1 Subsidiaries of the Registrants
23.1* Consent of O'Sullivan Graev & Karabell, LLP (included in
Exhibit 5.1)
23.2* Consent of Ernst & Young LLP
24.1 Powers of Attorney (included on the signature pages)
25.1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of The Bank of New York as Trustee
27.1 Financial Data Schedule
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
99.3* Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees
99.4* Form of Letter to Clients
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
Exhibit 5.1
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NY 10112
November 4, 1999
dj Orthopedics, LLC
DJ Orthopedics Capital Corporation
DonJoy, L.L.C.
2985 Scott Street
Vista, California 92083
Ladies and Gentlemen:
We have acted as special counsel to dj Orthopedics, LLC (the
"Company"), DJ Orthopedics Capital Corporation ("DJ Capital" and together with
the Company, the "Issuers") and DonJoy, L.L.C. ("DonJoy") in connection with the
Issuers' offer (the "Exchange Offer") to exchange their 12 5/8% Senior
Subordinated Notes due 2009 (the "Old Notes"), which are guaranteed by DonJoy,
for a like principal amount of any or all of their outstanding 12 5/8% Senior
Subordinated Notes due 2009 (the "New Notes"), which will be guaranteed by
DonJoy (the "Guarantee").
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments as we have deemed
necessary or advisable for the purpose of rendering this opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The New Notes have been duly authorized and, assuming the
due execution and delivery of the New Notes, when the New Notes are executed,
authenticated and delivered in accordance with the Indenture dated as of June
30, 1999 (the "Indenture") among the Issuers, DonJoy and the Bank of New York,
as Trustee, in exchange for the Old Notes in accordance with the Indenture and
the Exchange Offer, the New Notes will be valid and binding obligations of the
Issuers enforceable against the Issuers in accordance with their terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and similar laws affecting creditors' rights generally and subject to
general principles of equity.
2. When the New Notes have been duly executed, authenticated
and delivered in accordance with the Indenture in exchange for the Old Notes in
accordance with the Indenture and the Exchange Offer, the Guarantee will be the
valid and binding obligation of DonJoy enforceable against DonJoy in accordance
with it terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance and similar laws affecting creditors' rights
generally and subject to general principles of equity.
<PAGE> 2
dj Orthopedics, LLC
DJ Orthopedics Capital Corporation
DonJoy, L.L.C.
2985 Scott Street
Vista, California 92083
Page 2
We are members of the Bar of the State of New York and the
foregoing opinion is limited to the laws of the State of New York, the federal
laws of the United States of America, the General Corporation Law of the State
of Delaware and the Limited Liability Company Act of the State of Delaware.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement relating to the Exchange Offer. We also consent to
the reference to us under the caption "Legal Matters" in the Prospectus
contained in such Registration Statement.
This opinion is rendered solely to you in connection with the
above matter. This opinion may not be relied upon by you for any other purpose
or relied upon by or furnished to any other person without our prior written
consent.
Very truly yours,
/s/ O'Sullivan Graev & Karabell, LLP
---------------------------------------
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 11, 1999 (except for Note 8, as to which the
date is June 30, 1999) included in Amendment No. 1 to the Registration Statement
(Form S-4 No. 333-86835) and related Prospectus of dj Orthopedics, LLC, DJ
Orthopedics Capital Corporation and DonJoy, L.L.C. for the registration of
$100,000,000 of 12 5/8% Senior Subordinated Notes due 2009.
/s/ ERNST & YOUNG LLP
--------------------------------------------
San Diego, California
November 3, 1999
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
OF
DJ ORTHOPEDICS, LLC
AND
DJ ORTHOPEDICS CAPITAL CORPORATION
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999 (THE "EXPIRATION DATE")
UNLESS EXTENDED.
The Exchange Agent is:
THE BANK OF NEW YORK
For Overnight Delivery, Delivery by Hand or Delivery by Registered or Certified
Mail:
The Bank of New York
101 Barclay Street, Reorg 7 East
New York, New York 10286
Attention: Gertrude Jean Pierre
By Facsimile Transmission
(for Eligible Institutions only):
(212) 815-6339
Confirm facsimile by telephone only:
(212) 815-5920
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated ,
1999 (the "Prospectus") of DJ Orthopedics, LLC and DJ Orthopedics Capital
Corporation (together, the "Issuers"), and this Letter of Transmittal (the
"Letter of Transmittal"), which together describe the Issuers' offer (the
"Exchange Offer") to exchange their 12 5/8% Senior Subordinated Notes due 2009
(the "New Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), for an equal aggregate principal amount of
their outstanding 12 5/8% Senior Subordinated Notes due 2009 (the "Old Notes"
and, together with the New Notes, the "Notes") from the holders thereof. The Old
Notes are, and the New Notes will be, guaranteed by DonJoy, L.L.C.
The terms of the New Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the Old
Notes for which they may be exchanged pursuant to the Exchange Offer, except
that the New Notes are freely transferable by holders thereof (except as
provided herein or in the Prospectus).
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus.
<PAGE> 2
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE
INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND
THE PROSPECTUS CAREFULLY BEFORE CHECKING ANY BOX BELOW.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the certificate numbers and aggregate
principal amounts should be listed on a separate signed schedule affixed hereto.
The minimum permitted tender is $1,000 in principal amount. All other tenders
must be in integral multiples of $1,000.
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL AMOUNT
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY OLD PRINCIPAL
PLEASE FILL IN NUMBER(S)* NOTES* AMOUNT TENDERED**
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered
the full aggregate principal amount represented by such Old Notes. See
instruction 2.
Holders of Old Notes whose Old Notes are not immediately available or who
cannot deliver all other required documents to the Exchange Agent on or prior to
the Expiration Date or who cannot complete the procedures for book-entry
transfer on a timely basis, must tender their Old Notes according to the
guaranteed delivery procedures set forth in the Prospectus.
Unless the context otherwise requires, the term "holder" for purposes of
this Letter of Transmittal means any person in whose name Old Notes are
registered or any other person who has obtained a properly completed bond power
from the registered holder or any person whose Old Notes are held of record by
The Depository Trust Company ("DTC").
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes. If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. A broker-dealer may not participate in the Exchange Offer
with respect to Old Notes acquired other than as a result of market-making
activities or other trading activities. Any holder who is an "affiliate" of the
Issuers or who has an arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer, or
any broker-dealer who purchased Old Notes from the Issuers to resell pursuant to
Rule 144A under
2
<PAGE> 3
the Securities Act or any other available exemption under the Securities Act
must comply with the registration and prospectus delivery requirements under the
Securities Act.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)
- --------------------------------------------------------------------------------
Window Ticket Number (if any)
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
- --------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery
- -------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO AND COMPLETE THE FOLLOWING:
Name(s)
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
------------------------------------------------------------
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4 AND 5)
To be completed ONLY if certificates for Old Notes in a principal
amount not tendered, or New Notes issued in exchange for Old Notes
accepted for exchange, are to be issued in the name of someone other than
the undersigned.
Issue certificate(s) to:
Name
----------------------------------------------------
(PLEASE PRINT)
Address
-------------------------------------------------
------------------------------------------------------------
(INCLUDE ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
------------------------------------------------------------
------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4 AND 5)
To be completed ONLY if certificates for Old Notes in a principal
amount not tendered, or New Notes issued in exchange for Old Notes
accepted for exchange, are to be sent to someone other than the
undersigned, or to the undersigned at an address other than that shown
above.
Deliver certificate(s) to:
Name
----------------------------------------------------
(PLEASE PRINT)
Address
-------------------------------------------------
------------------------------------------------------------
(INCLUDE ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
------------------------------------------------------------
3
<PAGE> 4
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Issuers the principal amount of the Old Notes
indicated above. Subject to, and effective upon, the acceptance for exchange of
all or any portion of the Old Notes tendered herewith in accordance with the
terms and conditions of the Exchange Offer (including, if the Exchange Offer is
extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby exchanges, assigns and transfers to, or upon
the order of, the Issuers all right, title and interest in and to such Old Notes
as are being tendered herewith. The undersigned hereby irrevocably constitutes
and appoints the Exchange Agent as its true and lawful agent and attorney-in-
fact of the undersigned (with full knowledge that the Exchange Agent also acts
as the agent of the Issuers, in connection with the Exchange Offer) to cause the
Old Notes to be assigned, transferred and exchanged.
The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Notes and to acquire
New Notes issuable upon the exchange of such tendered Old Notes, and that, when
the same are accepted for exchange, the Issuers will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim. The
undersigned and any beneficial owner of the Old Notes tendered hereby further
represent and warrant that (i) the New Notes acquired by the undersigned and any
such beneficial owner of Old Notes pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, (ii) neither the undersigned nor any such beneficial owner has an
arrangement with any person to participate in the distribution of such New
Notes, (iii) neither the undersigned nor any such beneficial owner nor any such
other person is engaging in or intends to engage in a distribution of such New
Notes and (iv) neither the undersigned nor any such other person is an
"affiliate", as defined under Rule 405 promulgated under the Securities Act, of
the Issuers. The undersigned and each beneficial owner acknowledge and agree
that any person who is an affiliate of the Issuers or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a resale transaction of the New Notes
acquired by such person and may not rely on the position of the staff of the
Securities and Exchange Commission set forth in the no-action letters discussed
in the Prospectus under the caption "The Exchange Offer -- Purpose and Effect of
the Exchange Offer." The undersigned and each beneficial owner will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Issuers to be necessary or desirable to complete the sale,
assignment and transfer of the Old Notes tendered hereby.
For purposes of the Exchange Offer, the Issuers shall be deemed to have
accepted validly tendered Old Notes when, as and if the Issuers have given oral
notice (confirmed in writing) or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer because of an invalid tender, the occurrence of certain other
events set forth in the Prospectus or otherwise, any such unaccepted Old Notes
will be returned, without expense, to the undersigned at the address shown below
or at a different address as may be indicated herein under "Special Delivery
Instructions" as promptly as practicable after the Expiration Date.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
4
<PAGE> 5
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Issuers upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer -- Withdrawal of Tenders."
Unless otherwise indicated under "Special Exchange Instructions," please
cause the New Notes to be issued, and return any Old Notes not tendered or not
accepted for exchange, in the name(s) of the undersigned (and, in the case of
Old Notes tendered by book-entry transfer, by credit to the account at DTC).
Similarly unless otherwise indicated under "Special Delivery Instructions,"
please mail any certificates for Old Notes not tendered or not accepted for
exchange (and accompanying documents, as appropriate), and any certificates for
New Notes, to the undersigned at the address shown below the undersigned's
signature(s). If both "Special Exchange Instructions" and "Special Delivery
Instructions" are completed, please cause the New Notes to be issued, and return
any Old Notes not tendered or not accepted for exchange, in the name(s) of, and
deliver any certificates for such Old Notes or New Notes to, the person(s) so
indicated (and in the case of Old Notes tendered by book-entry transfer, by
credit to the account at DTC so indicated). The undersigned recognizes that the
Issuers have no obligation, pursuant to the "Special Exchange Instructions," to
transfer any Old Notes from the name of the registered holder(s) thereof if the
Issuers do not accept for exchange any of the Old Notes so tendered.
Holders of Old Notes whose Old Notes are not immediately available or who
cannot deliver all other required documents to the Exchange Agent on or prior to
the Expiration Date or who cannot complete the procedures for book-entry
transfer on a timely basis, must tender their Old Notes according to the
guaranteed delivery procedures set forth in the Prospectus.
5
<PAGE> 6
TENDERING HOLDER(S) SIGN HERE
- ------------------------------------------------------
- ------------------------------------------------------
(SIGNATURE OF REGISTERED HOLDER(S)
OR AUTHORIZED SIGNATORY)
- ------------------------------------------------------
(Date)
- ------------------------------------------------------
(Date)
(MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) FOR OLD NOTES HEREBY TENDERED OR IN WHOSE NAME OLD NOTES ARE
REGISTERED ON THE BOOKS OF DTC OR ONE OF ITS PARTICIPANTS, OR BY ANY PERSON(S)
AUTHORIZED TO BECOME THE REGISTERED HOLDER(S) BY ENDORSEMENTS AND DOCUMENTS
TRANSMITTED HEREWITH. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR, ADMINISTRATOR,
GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR OTHER PERSON ACTING IN A
FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET FORTH THE FULL TITLE OF SUCH
PERSON. SEE INSTRUCTION 3.)
Names(s):
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------
(PLEASE PRINT)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
------------------------------------------------------------------------
(INCLUDING ZIP CODE)
Area Code and Telephone Number:
- ------------------------------------------------------------------------------
Taxpayer Identification No.:
- --------------------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTION 3)
Authorized Signature:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
Title:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
------------------------------------------------------------------------
(INCLUDING ZIP CODE)
Name of Firm:
- --------------------------------------------------------------------------------
Area Code and Telephone No.:
- --------------------------------------------------------------------------------
Dated: , 1999
6
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES.
A holder of Old Notes may tender the same by (i) properly completing and
signing this Letter of Transmittal or a facsimile hereof (all references in the
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates,
if applicable, representing the Old Notes being tendered and any required
signature guarantees and any other documents required by this Letter of
Transmittal, to the Exchange Agent at its address set forth above on or prior to
the Expiration Date, or (ii) complying with the procedure for book-entry
transfer described below, or (iii) complying with the guaranteed delivery
procedures described below.
Holders of Old Notes may tender Old Notes by book-entry transfer by
crediting the Old Notes to the Exchange Agent's account at DTC in accordance
with DTC's Automated Tender Offer Program ("ATOP") and by complying with
applicable ATOP procedures with respect to the Exchange Offer. DTC participants
that are accepting the Exchange Offer should transmit their acceptance to DTC,
which will edit and verify the acceptance and execute a book-entry delivery to
the Exchange Agent's account at DTC. DTC will then send a computer-generated
message (an "Agent's Message") to the Exchange Agent for its acceptance in which
the holder of the Old Notes acknowledges and agrees to be bound by the terms of,
and makes the representations and warranties contained in, this Letter of
Transmittal, the DTC participant confirms on behalf of itself and the beneficial
owners of such Old Notes all provisions of this Letter of Transmittal (including
any representations and warranties) applicable to it and such beneficial owner
as fully as if it had completed the information required herein and executed and
transmitted this Letter of Transmittal to the Exchange Agent. Delivery of the
Agent's Message by DTC will satisfy the terms of the Exchange Offer as to
execution and delivery of a Letter of Transmittal by the participant identified
in the Agent's Message. DTC participants may also accept the Exchange Offer by
submitting a Notice of Guaranteed Delivery through ATOP.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ANY
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT
AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO PERMIT TIMELY
DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE ISSUERS.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other required documents to the Exchange Agent on or
prior to the Expiration Date or comply with book-entry transfer procedures on a
timely basis must tender their Old Notes pursuant to the guaranteed delivery
procedure set forth in the Prospectus. Pursuant to such procedure: (i) such
tender must be made by or through an Eligible Institution (as defined below);
(ii) on or prior to the Expiration Date, the Exchange Agent must have received
from such Eligible Institution a letter, telegram or facsimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) setting forth the name and address of the tendering holder,
the names in which such Old Notes are registered, and, if applicable, the
certificate numbers of the Old Notes to be tendered; and (iii) all tendered Old
Notes (or a confirmation of any book-entry transfer of such Old Notes into the
Exchange Agent's account at a book-entry transfer facility) as well as this
Letter of Transmittal and all other documents required by this Letter of
Transmittal, must be received by the
7
<PAGE> 8
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such letter, telegram or facsimile transmission, all as provided
in the Prospectus.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
Tenders of Old Notes will be accepted only in integral multiples of $1,000.
If less than the entire principal amount of Old Notes evidenced by a submitted
certificate is tendered, the tendering holder must fill in the aggregate
principal amount of Old Notes tendered in the box entitled "Description of Old
Notes Tendered Herewith." A newly issued certificate for the Old Notes submitted
but not tendered will be sent to such holder as soon as practicable after the
Expiration Date. All Old Notes delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise clearly indicated.
If not yet accepted, a tender pursuant to the Exchange Offer may be
withdrawn prior to the Expiration Date.
To be effective with respect to the tender of Old Notes, a written notice
of withdrawal must: (i) be received by the Exchange Agent at one of the
addresses for the Exchange Agent set forth above before the Issuers notify the
Exchange Agent that they have accepted the tender of Old Notes pursuant to the
Exchange Offer; (ii) specify the name of the person who tendered the Old Notes
to be withdrawn; (iii) identify the Old Notes to be withdrawn (including the
principal amount of such Old Notes, or, if applicable, the certificate numbers
shown on the particular certificates evidencing such Old Notes and the principal
amount of Old Notes represented by such certificates); (iv) include a statement
that such holder is withdrawing its election to have such Old Notes exchanged;
and (v) be signed by the holder in the same manner as the original signature on
this Letter of Transmittal (including any required signature guarantee). The
Exchange Agent will return the properly withdrawn Old Notes promptly following
receipt of notice of withdrawal. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer, any notice of withdrawal must specify the
name and number of the account at the book-entry transfer facility to be
credited with the withdrawn Old Notes or otherwise comply with the book-entry
transfer facility's procedures. All questions as to the validity of notices of
withdrawals, including time of receipt, will be determined by the Issuers, and
such determination will be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus at any time prior to the Expiration Date.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
8
<PAGE> 9
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the Old Notes) of Old Notes listed and tendered hereby, no endorsements
of certificates or separate written instruments of transfer or exchange are
required unless New Notes issued in exchange therefor are to be issued, or Old
Notes are not tendered or not exchanged are to be returned, in the name of any
person other than the registered holder. Signatures on any such certificates or
separate written instruments of transfer or exchange must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of the Old Notes listed, such Old Notes must be
endorsed or accompanied by separate written instruments of transfer or exchange
in form satisfactory to the Issuers and duly executed by the registered holder,
in either case signed exactly as the name or names of the registered holder or
holders appear(s) on the Old Notes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Issuers, proper evidence
satisfactory to the Issuers of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution, unless Old Notes are tendered: (i) by a holder who has not
completed the box entitled "Special Exchange Instructions" or "Special Delivery
Instructions" on this Letter of Transmittal; or (ii) for the account of an
Eligible Institution (as defined below). In the event that the exhibit
signatures in this Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by an eligible
guarantor institution which is a member of a firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or another "eligible institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended (an "Eligible
Institution"). If Old Notes are registered in the name of a person other than
the signer of this Letter of Transmittal, the Old Notes surrendered for exchange
must be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Issuers, in
their sole discretion, duly executed by the registered holder with the signature
thereon guaranteed by an Eligible Institution.
4. SPECIAL EXCHANGE AND DELIVERY INSTRUCTIONS.
Tendering holders should indicate, as applicable, the name and address to
which the New Notes or certificates for Old Notes not tendered or not accepted
for exchange are to be issued or sent, if different from the name and address of
the person signing this Letter of Transmittal. In the case of issuance in a
different name, the tax identification number of the person named must also be
indicated. Holders tendering Old Notes by book-entry transfer may request that
Old Notes not
9
<PAGE> 10
exchanged be credited to such account maintained at the book-entry transfer
facility as such holder may designate.
5. TRANSFER TAXES.
The Issuers shall pay all transfer taxes, if any, applicable to the
transfer and exchange of Old Notes to them or their order pursuant to the
Exchange Offer. If, however, New Notes or Old Notes not tendered or accepted for
exchange are to be delivered to, or are registered or issued in the name of any
person other than the registered holder of the Old Notes tendered hereby, or if
tendered Old Notes are registered in the name of any person other than the
person signing this Letter of Transmittal, or it a transfer tax is imposed for
any reason other than the transfer and exchange of Old Notes to the Issuers or
their order pursuant to the Exchange Offer, the amount of any such transfer
taxes (whether imposed on the registered holder or any other person) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exception therefrom is not submitted herewith the amount of such
transfer taxes will be billed directly to such tendering holder.
6. WAIVER OF CONDITIONS.
The Issuers reserve the absolute right to waive, in whole or in part, any
of the conditions to the Exchange Offer set forth in the Prospectus.
7. MUTILATED, LOST, STOLEN OR DESTROYED SECURITIES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed,
should contact the Exchange Agent at the address indicated below for further
instructions.
8. IRREGULARITIES.
All questions as to the validity, form, eligibility (including time of
receipt), and acceptance of Letters of Transmittals or Old Notes will be
resolved by the Issuers, whose determination will be final and binding. The
Issuers reserve the absolute right to reject any or all Letters of Transmittal
or tenders that are not in proper form or the acceptance of which would, in the
opinion of the Issuers' counsel, be unlawful. The Issuers also reserve the right
to waive any irregularities or conditions of tender as to the particular Old
Notes covered by any Letter of Transmittal or tendered pursuant to such letter.
None of the Issuers, the Exchange Agent or any other person will be under any
duty to give notification of any defects or irregularities in tenders or incur
any liability for failure to give any such notification. The Issuers'
interpretation of the terms and conditions of the Exchange Offer shall be final
and binding.
9. SUBSTITUTE FORM W-9.
Each holder of Old Notes whose Old Notes are accepted for exchange (or
other payee) is required to provide a correct taxpayer identification number
("TIN"), generally the holder's Social Security or federal employer
identification number, and certain other information, on Substitute Form W-9,
which is provided under "Important Tax Information" below, and to certify that
the holder (or other payee) is not subject to backup withholding. Failure to
provide the information on the Substitute Form W-9 may subject the holder (or
other payee) to a $50 penalty imposed by the Internal Revenue Service and 31%
federal income tax backup withholding on payments made in connection with the
Old Notes.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and
10
<PAGE> 11
telephone number set forth above. In addition, all questions relating to the
Exchange Offer, as well as requests for assistance or additional copies of the
Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent
at the address and telephone number indicated above.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE OR COPY THEREOF
(TOGETHER WITH CERTIFICATES OF OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER
AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
11
<PAGE> 12
IMPORTANT TAX INFORMATION
The Holder is required to give the Exchange Agent the social security
number or employer identification number of the Holder of the Old Notes. If the
Old Notes are in more than one name or are not in the name of the actual owner,
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional guidance on which number to report.
- --------------------------------------------------------------------------------
Name of Holder
(if joint, list first and circle the name of the person or entity whose number
you enter in Part I below)
- --------------------------------------------------------------------------------
Address
(if Holder does not complete, signature below will constitute a certification
that the above address is correct)
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: dj Orthopedics, LLC and DJ Orthopedics Capital Corporation
- -----------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND
FORM W-9 CERTIFY BY SIGNING AND DATING BELOW. If you do not have a
number, see How to Obtain a "TIN" in the enclosed -------------------------
Guidelines. Social Security Number
OR
-------------------------
Employer Identification Number
------------------------------------------------------------------------------------------------
Department of the Treasury PART 2 -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING, SEE THE ENCLOSED GUIDELINES FOR
Internal CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 Certification -- Under
Revenue Service penalties of perjury, I certify that:
PAYOR'S REQUEST FOR
TAXPAYER IDENTIFICATION (1) The number shown on this form is my correct Taxpayer Identification Number (or I am
NUMBER (TIN) waiting for a number to be issued for me); and
(2) I am not subject to backup withholding either because I have not been notified by the
Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the IRS has notified me that I am no
longer subject to backup withholding.
------------------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by
the IRS that you are subject to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that you were
subject to backup withholding, do not cross item (2). (Also see instruction in the enclosed
Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SIGNATURE DATE
----------------------------------------- ---------------------
NAME
-------------------------------------------------------------------------
(Please Print)
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31 PERCENT OF ANY PAYMENTS MADE TO YOU UNDER THE NOTES. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
(DO NOT WRITE IN SPACE BELOW)
Certificate Surrendered Old Notes Tendered Old Notes Accepted
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Delivery
Prepared By Checked By Date
---------------- ------------------- -------------
12
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ALL OUTSTANDING
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
IN EXCHANGE FOR
NEW 12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
OF
DJ ORTHOPEDICS, LLC
AND
DJ ORTHOPEDICS CAPITAL CORPORATION
Registered holders of outstanding 12 5/8% Senior Subordinated Notes due
2009 (the "Old Notes") who wish to tender their Old Notes in exchange for a like
principal amount of new 12 5/8% Senior Subordinated Notes due 2009 (the "New
Notes") and whose Old Notes are not immediately available or who cannot deliver
their Old Notes and Letter of Transmittal (and any other documents required by
the Letter of Transmittal) to The Bank of New York (the "Exchange Agent") prior
to the Expiration Date, may use this Notice of Guaranteed Delivery or one
substantially equivalent hereto. This Notice of Guaranteed Delivery may be
delivered by hand or sent by facsimile transmission (receipt confirmed by
telephone and an original delivered by guaranteed overnight courier) or mail to
the Exchange Agent. See "The Exchange Offer -- Procedures for Tendering" in the
Prospectus dated , 1999 of dj Orthopedics, LLC and DJ Orthopedics
Capital Corporation (the "Prospectus").
The Exchange Agent for the Exchange Offer is:
THE BANK OF NEW YORK
For Overnight Delivery, Delivery by Hand or Delivery by Registered or Certified
Mail:
The Bank of New York
101 Barclay Street, Reorg 7 East
New York, New York 10286
Attention: Gertrude Jean Pierre
By Facsimile Transmission
(for eligible institutions only):
(212) 815-6339
Confirm facsimile by telephone only:
(212) 815-5920
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER
THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an eligible institution (as defined in the Prospectus), such
signature guarantee must appear in the applicable space provided on the Letter
of Transmittal for Guarantee of Signatures.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders for exchange to the Issuers, upon the terms
and subject to the conditions set forth in the Prospectus and the Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures."
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1999, unless extended
by the Issuers. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on , 1999 unless the Exchange Offer is extended as provided in the
Prospectus, in which case the term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
SIGNATURE
- -------------------------------------------------------- Date: ---------------
- -------------------------------------------------------- Date: ---------------
(Signature(s) of Holder(s) or Authorized
Signatory)
Area Code and Telephone Number:
- ------------------------------------------------------------------------------
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title), if signing in a fiduciary or representative capacity:
- -------------------------------------
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security No.:
- ------------------------------------------------------------------
Principal Amount of Old Notes Tendered (must be in integral multiples of
$1,000):
- -----------------------
Certificate Number(s) of Old Notes (if available):
- -------------------------------------------------------------
Aggregate Principal Amount Represented by Certificate(s):
- --------------------------------------------------
IF OLD NOTES WILL BE TENDERED BY BOOK-ENTRY TRANSFER, PROVIDE THE FOLLOWING
INFORMATION:
DTC Account Number:
- ------------------------------------------------
Transaction Number:
- --------------------------------------------------
2
<PAGE> 3
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended, hereby guarantees to deliver to the Exchange Agent at one of
its addresses set forth on the reverse hereof, the certificates representing the
Old Notes (or a confirmation of book-entry transfer of such Old Notes into the
Exchange Agent's account at the book-entry transfer facility), together with a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees, and any other documents
required by the Letter of Transmittal within three New York Stock Exchange
trading days after the Expiration Date (as defined in the Letter of
Transmittal).
<TABLE>
<S> <C>
Name of Firm: --------------------------------------
-----------------------------------------------------
(AUTHORIZED SIGNATURE)
Address: -------------------------------------------- Title:
-------------------------------------------------
Name: -----------------------------------------------
- -----------------------------------------------------
(ZIP CODE) (PLEASE TYPE OR PRINT)
Area Code and Date:
------------------------------------------------
Telephone No.: -------------------------------------
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD NOTES
SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE> 1
EXHIBIT 99.3
DJ ORTHOPEDICS, LLC
AND
DJ ORTHOPEDICS CAPITAL CORPORATION
OFFER TO EXCHANGE UP TO $100,000,000 OF THEIR
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
FOR ANY AND ALL OF THEIR OUTSTANDING
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED.
November , 1999
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
dj Orthopedics, LLC and DJ Orthopedics Capital Corporation (together, the
"Issuers"), are offering, upon the terms and subject to the conditions set forth
in the Prospectus dated , 1999 (the "Prospectus") and the
accompanying Letter of Transmittal enclosed herewith (which together constitute
the "Exchange Offer"), to exchange their 12 5/8% Senior Subordinated Notes due
2009 (the "New Notes") for an equal principal amount of their 12 5/8% Senior
Subordinated Notes due 2009 (the "Old Notes" and together with the New Notes,
the "Notes"). As set forth in the Prospectus, the terms of the New Notes are
identical in all material respects to the Old Notes, except that the New Notes
have been registered under the Securities Act of 1933, as amended, and therefore
will not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of liquidated damages to the holders of the
Old Notes under certain circumstances relating to the Exchange and Registration
Rights Agreement dated as of June 30, 1999 among the Issuers, DonJoy, L.L.C. and
Chase Securities Inc.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CERTAIN CONDITIONS TO
THE EXCHANGE OFFER. SEE "THE EXCHANGE OFFER -- CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. the Prospectus, dated , ;
2. the Letter of Transmittal for your use (unless Old Notes are
tendered by an Agent's Message) and for the information of your clients
(facsimile copies of the Letter of Transmittal may be used to tender Old
Notes);
3. a form of letter which may be sent to your clients for whose
accounts you hold Old Notes registered in your name or in the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Exchange Offer;
4. a Notice of Guaranteed Delivery;
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9; and
<PAGE> 2
6. a return envelope addressed to The Bank of New York, the Exchange
Agent.
YOUR PROMPT ACTION IS REQUESTED. PLEASE NOTE THE EXCHANGE OFFER WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED.
PLEASE FURNISH COPIES OF THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR
WHOM YOU HOLD OLD NOTES REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR NOMINEE
AS QUICKLY AS POSSIBLE.
In all cases, exchanges of Old Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(a) certificates representing such Old Notes, or confirmation of book entry
transfer of such Old Notes, as the case may be, (b) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, or an Agent's
Message and (c) any other required documents.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or an Agent's Message and in either case together with any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date must tender their Old Notes according to the guaranteed
delivery procedures set forth under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures" in the Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Issuers will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange Offer.
The Issuers will, however, upon request, reimburse you for customary clerical
and mailing expenses incurred by you in forwarding any of the enclosed materials
to your clients. The Issuers will pay or cause to be paid any transfer taxes
payable on the transfer of Notes to them, except as otherwise provided in
Instruction 5 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent by telephone at (212) 815-5920 or by facsimile at (212) 815-6339.
Very truly yours,
DJ ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE ISSUERS, OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY DOCUMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE> 1
EXHIBIT 99.4
DJ ORTHOPEDICS, LLC
AND
DJ ORTHOPEDICS CAPITAL CORPORATION
OFFER TO EXCHANGE UP TO $100,000,000 OF THEIR
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
FOR ANY AND ALL OF THEIR OUTSTANDING
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999 UNLESS EXTENDED.
To Our Clients:
Enclosed for your consideration is a Prospectus dated , 1999
(the "Prospectus") and a Letter of Transmittal (which together constitute the
"Exchange Offer") relating to the offer by dj Orthopedics, LLC and DJ
Orthopedics Capital Corporation (together, the "Issuers") to exchange their
12 5/8% Senior Subordinated Notes due 2009 (the "New Notes") for an equal
principal amount of their outstanding 12 5/8% Senior Subordinated Notes due 2009
(the "Old Notes" and together with the New Notes, the "Notes"). As set forth in
the Prospectus, the terms of the New Notes are identical in all material
respects to the Old Notes, except that the New Notes have been registered under
the Securities Act of 1933, as amended, and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing for
the payment of liquidated damages to the holders of the Old Notes under certain
circumstances relating to the Exchange and Registration Rights Agreement dated
as of June 30, 1999 among the Issuers, DonJoy, L.L.C. and Chase Securities Inc.
(the "Exchange and Registration Rights Agreement"). Old Notes may be tendered
only in integral multiples of $1,000.
The enclosed material is being forwarded to you as the beneficial owner of
Old Notes carried by us for your account or benefit but not registered in your
name. An exchange of any Old Notes may only be made by us as the registered
Holder and pursuant to your instructions. Therefore, the Issuers urge beneficial
owners of Old Notes registered in the name of a broker, dealer, commercial bank,
trust company or other nominee to contact such Holder promptly if they wish to
exchange Old Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Old Notes held by us for your account or benefit, pursuant to
the terms and conditions set forth in the Prospectus and Letter of Transmittal.
We urge you to read carefully the Prospectus and Letter of Transmittal before
instructing us to exchange your Old Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exchange Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer expires at 5:00 p.m., New
York City time, on , 1999, unless extended. The term "Expiration
Date" shall mean 5:00 p.m., New York City time, on , 1999, unless
the Exchange Offer is extended as provided in the Prospectus, in which case the
term "Expiration Date" shall mean the latest date and time to which the
<PAGE> 2
Exchange Offer is extended. A tender of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount
of the New Notes for each $1,000 principal amount of the Old Notes, of
which $100,000,000 aggregate principal amount was outstanding as of
, 1999. The terms of the New Notes are identical in all
respects to the Old Notes, except that the New Notes have been registered
under the Securities Act of 1933, as amended, and therefore will not bear
legends restricting their transfer and will not contain certain provisions
providing for the payment of liquidated damages to the holders of the Old
Notes under certain circumstances relating to the Exchange and Registration
Rights Agreement.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CONDITIONS. SEE
"THE EXCHANGE OFFER -- CERTAIN CONDITIONS TO THE EXCHANGE OFFER" IN THE
PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m.,
New York City time, on , , unless extended.
4. The Issuers have agreed to pay the expenses of the Exchange Offer.
5. Any transfer taxes incident to the transfer of Old Notes from the
tendering Holder to the Issuers will be paid by the Issuers, except as
provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish us to tender any or all of your Old Notes held by us for your
account or benefit, please so instruct us by completing, executing and returning
to us the attached instruction form. The accompanying Letter of Transmittal is
furnished to you for informational purposes only and may not be used by you to
exchange Old Notes held by us and registered in our name for your account or
benefit.
2
<PAGE> 3
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of dj Orthopedics,
LLC and DJ Orthopedics Capital Corporation.
This will instruct you to tender for exchange the aggregate principal
amount of Old Notes indicated below (or, if no aggregate principal amount is
indicated below, all Old Notes) held by you for the account or benefit of the
undersigned, pursuant to the terms of and conditions set forth in the Prospectus
and the Letter of Transmittal.
Aggregate Principal Amount of Old Notes to be tendered for exchange:
$
* I (we) understand that if I (we) sign this instruction form without indicating
an aggregate principal amount of Old Notes in the space above, all Old Notes
held by you for my (our) account will be tendered for exchange.
- --------------------------------------------------------------------------------
Signature(s)
- --------------------------------------------------------------------------------
Capacity (full title), if signing in a fiduciary or representative capacity
- --------------------------------------------------------------------------------
Name(s) and address, including zip code
Date:
- ------------------------------------------------------
- --------------------------------------------------------------------------------
Area Code and Telephone Number
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security No.
3
