<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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. [ ]
- ---------------------
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
12 5/8% Senior Subordinated Notes due 2009......... $100,000,000 100% $100,000,000 $27,800
- -----------------------------------------------------------------------------------------------------------------------------------
Guarantee of 12 5/8% Senior Subordinated Notes due
2009............................................. (2) (2) (2) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) DonJoy, L.L.C. will guarantee the obligations of dj Orthopedics, LLC and DJ
Orthopedics Capital Corporation under the 12 5/8% Senior Subordinated Notes
due 2009. Pursuant to Rule 457(n), no additional registration fee is being
paid in respect of the guarantees.
------------------------
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.
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1999
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
, , 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 , 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
, 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
marketed 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 August 1, 1999, we have replaced the Smith & Nephew sales
organizations in Japan, New Zealand and Hong Kong with independent distributors.
We have also given notice to Smith & Nephew that we will terminate 16 of the
remaining 27 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
31
<PAGE> 37
sales of our products may be denominated in foreign currencies which would cause
currency fluctuations to more directly impact our operating results.
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
32
<PAGE> 38
savings presented in the pro forma financial information included in this
prospectus.
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
33
<PAGE> 39
competitive factors or factors not currently foreseen, such as unforeseen costs
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."
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." 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
35
<PAGE> 41
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
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
36
<PAGE> 42
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
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
37
<PAGE> 43
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
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.
38
<PAGE> 44
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
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.
39
<PAGE> 45
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
, 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., Floor 7E
New York, NY 10286
Attn: Reorganization Section
By Facsimile Transmission
(for eligible institutions only):
(212) 815-6339
Confirm facsimile by telephone only:
(---) --------
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 ($15,000 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 August 1, 1999, the
Company has replaced the Smith & Nephew sales organizations in Japan, New
Zealand and Hong Kong with independent distributors. The Company has also given
notice to Smith & Nephew that the Company will terminate 16 of the remaining 27
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 August 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 July 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 it 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 August 1, 1999, the
Company has replaced the Smith & Nephew sales organizations in Japan, New
86
<PAGE> 92
Zealand and Hong Kong with independent distributors. The Company has also given
notice to Smith & Nephew that the Company will terminate 16 of the remaining 27
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.
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 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
94
<PAGE> 100
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
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
95
<PAGE> 101
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 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.
96
<PAGE> 102
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 August 1, 1999, the
Company has replaced the Smith & Nephew sales organizations in Japan, New
Zealand and Hong Kong with independent distributors. The Company has also given
notice to Smith & Nephew that the Company will terminate 16 of the remaining 27
Smith & Nephew sales organizations by the beginning of 2000. The 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
97
<PAGE> 103
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.
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 --
98
<PAGE> 104
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.
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
99
<PAGE> 105
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 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
100
<PAGE> 106
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
(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.
101
<PAGE> 107
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 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
102
<PAGE> 108
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.
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
103
<PAGE> 109
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.
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
104
<PAGE> 110
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 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
105
<PAGE> 111
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. Two additional Managers will be
designated by mutual agreement of the other Managers.
<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......................... 51 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
Miller, Cooper & Co. Ltd. Mr. Talbot earned his B.S. (Accounting/Finance) at
Miami University in Oxford, Ohio and is a Certified Public Accountant.
107
<PAGE> 113
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., LPA Investments, LLC,
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 Corp., Praecis Pharmaceuticals, Inc., Transurgical, Inc., Vitagen,
Inc. and V.I. Technologies, Inc.
108
<PAGE> 114
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, M2 Automotive, Inc. and Homarus.
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
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.
109
<PAGE> 115
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
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
recapitaliza-
110
<PAGE> 116
tion), 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 115,412
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 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
111
<PAGE> 117
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 July 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 3,000,000 Common Units and up
to 100,000 Redeemable Preferred Units. As of July 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
August 31, 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 August 31, 1999, the interest rate on the term
loan was 8.50%. 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 , , 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. 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-17
<PAGE> 215
$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> 216
[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> 217
[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> 218
[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> 219
[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> 220
[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> 221
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> 222
<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> 223
<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>
- -------------------------
* To be filed by amendment
(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> 224
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> 225
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 9th day of September, 1999.
DJ ORTHOPEDICS, LLC
By: /s/ LESLIE H. CROSS
------------------------------------
Leslie H. Cross
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned members of the Board of Managers and officers of DJ
ORTHOPEDICS, LLC, do hereby constitute and appoint LESLIE H. CROSS and JOHN J.
DAILEADER, or either of them, our true and lawful attorneys and agents, to do
any and all acts and things in our name and on our behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorneys and agents, or
either of them, may deem necessary or advisable to enable said Company to comply
with the Securities Act of 1933 and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto; and we do
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ LESLIE H. CROSS President, Chief Executive September 9, 1999
- ------------------------------------------ Officer and Manager (Principal
Leslie H. Cross Executive Officer)
/s/ CYRIL TALBOT III Vice President, Chief Financial September 9, 1999
- ------------------------------------------ Officer and Secretary
Cyril Talbot III (Principal Financial and
Accounting Officer)
/s/ CHARLES T. ORSATTI Manager September 9, 1999
- ------------------------------------------
Charles T. Orsatti
/s/ MITCHELL J. BLUTT, M.D. Manager September 9, 1999
- ------------------------------------------
Mitchell J. Blutt, M.D.
/s/ SHAHAN D. SOGHIKIAN Manager September 9, 1999
- ------------------------------------------
Shahan D. Soghikian
/s/ DAMION E. WICKER, M.D. Manager September 9, 1999
- ------------------------------------------
Damion E. Wicker, M.D.
/s/ JOHN J. DAILEADER Manager September 9, 1999
- ------------------------------------------
John J. Daileader
/s/ IVAN R. SABEL Manager September 9, 1999
- ------------------------------------------
Ivan R. Sabel
</TABLE>
II-5
<PAGE> 226
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 9th day of September, 1999.
DJ ORTHOPEDICS CAPITAL CORPORATION
By: /s/ LESLIE H. CROSS
------------------------------------
Leslie H. Cross
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of DJ ORTHOPEDICS CAPITAL
CORPORATION, do hereby constitute and appoint LESLIE H. CROSS and JOHN J.
DAILEADER, or either of them, our true and lawful attorneys and agents, to do
any and all acts and things in our name and on our behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorneys and agents, or
either of them, may deem necessary or advisable to enable said Company to comply
with the Securities Act of 1933 and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto; and we do
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ LESLIE H. CROSS President, Chief Executive September 9, 1999
- ------------------------------------------ Officer and Manager (Principal
Leslie H. Cross Executive Officer)
/s/ CYRIL TALBOT III Vice President, Chief Financial September 9, 1999
- ------------------------------------------ Officer and Secretary
Cyril Talbot III (Principal Financial and
Accounting Officer)
/s/ CHARLES T. ORSATTI Director September 9, 1999
- ------------------------------------------
Charles T. Orsatti
/s/ MITCHELL J. BLUTT, M.D. Director September 9, 1999
- ------------------------------------------
Mitchell J. Blutt, M.D.
/s/ SHAHAN D. SOGHIKIAN Director September 9, 1999
- ------------------------------------------
Shahan D. Soghikian
/s/ DAMION E. WICKER, M.D. Director September 9, 1999
- ------------------------------------------
Damion E. Wicker, M.D.
/s/ JOHN J. DAILEADER Director September 9, 1999
- ------------------------------------------
John J. Daileader
/s/ IVAN R. SABEL Director September 9, 1999
- ------------------------------------------
Ivan R. Sabel
</TABLE>
II-6
<PAGE> 227
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 9th day of September, 1999.
DONJOY, L.L.C.
By: /s/ LESLIE H. CROSS
------------------------------------
Leslie H. Cross
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned members of the Board of Managers and officers of
DONJOY, L.L.C., do hereby constitute and appoint LESLIE H. CROSS and JOHN J.
DAILEADER, or either of them, our true and lawful attorneys and agents, to do
any and all acts and things in our name and on our behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorneys and agents, or
either of them, may deem necessary or advisable to enable said Company to comply
with the Securities Act of 1933 and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto; and we do
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ LESLIE H. CROSS President, Chief Executive September 9, 1999
- ------------------------------------------ Officer and Manager (Principal
Leslie H. Cross Executive Officer)
/s/ CYRIL TALBOT III Vice President, Chief Financial September 9, 1999
- ------------------------------------------ Officer and Secretary
Cyril Talbot III (Principal Financial and
Accounting Officer)
/s/ CHARLES T. ORSATTI Manager September 9, 1999
- ------------------------------------------
Charles T. Orsatti
/s/ MITCHELL J. BLUTT, M.D. Manager September 9, 1999
- ------------------------------------------
Mitchell J. Blutt, M.D.
/s/ SHAHAN D. SOGHIKIAN Manager September 9, 1999
- ------------------------------------------
Shahan D. Soghikian
/s/ DAMION E. WICKER, M.D. Manager September 9, 1999
- ------------------------------------------
Damion E. Wicker, M.D.
/s/ JOHN J. DAILEADER Manager September 9, 1999
- ------------------------------------------
John J. Daileader
/s/ IVAN R. SABEL Manager September 9, 1999
- ------------------------------------------
Ivan R. Sabel
</TABLE>
II-7
<PAGE> 228
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> 229
<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>
- ---------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
DJ ORTHOPEDICS, LLC
AMENDED AND RESTATED OPERATING AGREEMENT (the "Agreement") of DJ
Orthopedics, LLC, a Delaware limited liability company, made effective as of
June 30, 1999 by DonJoy, L.L.C., a Delaware limited liability company, as the
sole member (the "Member").
1. Formation of the Company. By execution of this Agreement, the Member
hereby ratifies, confirms and approves any and all actions taken by Todd H.
Greene as its duly authorized agent, including, without limitation, the filing
of a certificate of formation (the "Certificate") with the Secretary of State of
Delaware for the purpose of forming DJ Orthopedics, LLC (the "Company"), a
limited liability company formed under the Delaware Limited Liability Company
Act, Del. C. Section 18-101, et seq. (the "Act"), and any other actions taken
regarding the qualification of the Company to do business in various states of
the United States of America.
2. Name of the Company. The name of the Company stated in the Certificate
and the limited liability company governed by this Agreement is DJ Orthopedics,
LLC.
3. Purpose. This Company is formed for the object and purpose of, and the
nature of the business to be conducted and promoted by the Company is, engaging
in any lawful act or activity for which limited liability companies may be
formed under the Act and engaging in any and all activities necessary or
incidental to the foregoing.
4. Registered Office; Registered Agent. The registered office of the
Company in the State of Delaware is located at 9 East Loockerman Street, City of
Dover, County of Kent. The registered agent of the Company at such address is
National Registered Agents, Inc.
5. Membership Units. The Company shall be authorized to issue one hundred
(100) membership units ("Membership Units"), all of which shall be issued to the
Member. Membership Units shall for all purposes be personal property.
6. Certificate of Membership Units. The Company shall issue to the Member
a limited liability company certificate in the form annexed hereto as Exhibit A
(a "Certificate"), evidencing the Membership Units in the Company held by such
Member. The Certificate shall be transferable only on the books of the Company,
to be kept by the Secretary of the Company, on surrender thereof by the
registered holder in person or by attorney, and until so transferred, the
Company may treat the registered holder of a Certificate as the owner of the
interest evidenced thereby for all purposes whatsoever. Nothing contained in
this Section 6 shall authorize or permit the Member to transfer its interest
except as contemplated by Section 8. For the purposes of Article 8 in any
Uniform Commercial Code, each interest in the Company as evidenced by a
Certificate shall be deemed to be a security, as such term is defined in any
Uniform Commercial Code.
<PAGE> 2
7. Agreement to Pledge Membership Units. Notwithstanding any provision
herein to the contrary, the Member shall pledge such Member's Membership Units
in the Company to secure the indebtedness of the Company or its subsidiaries.
The Member hereby agrees to take any and all actions and execute such
instruments, agreements and other documents to effect the pledge of such
Member's Membership Units.
8. Pledge of Membership Units. To secure, among other things, the payment
and performance of the obligations of the Company under that certain Credit
Agreement which is to be entered into and dated as of June 30, 1999, among First
Union National Bank as Administrative Agent and collateral agent (in such
capacity the "Collateral Agent"), The Chase Manhattan Bank ("Chase") as Issuing
Bank, Administrative Agent and Syndication Agent, the Lenders from time to time
party thereto, the Member as Parent and the Company (as amended from time to
time, the "Credit Agreement"), the Member will pledge 100% of its Membership
Units in the Company to the Collateral Agent, for the benefit of itself and the
other Secured Parties (as defined in the Credit Agreement). Such pledge is
hereby authorized by the Member and the Company. The books and records of the
Company shall be marked to reflect the pledge of the Membership Units to the
Collateral Agent, for the benefit of itself and the other Secured Parties. For
so long as any Loans (as defined in the Credit Agreement) remain outstanding, no
Membership Interest or any rights relating thereto will be transferred or
further encumbered and no new Members will be admitted without the written
consent of the Collateral Agent and, if the Company is advised by the Collateral
Agent that an event of default has occurred under the Credit Agreement, the
Company will comply with the provisions of the Pledge Agreement (as defined in
the Credit Agreement) which is to be entered into and dated as of June 30, 1999.
No exercise by the Collateral Agent of its rights under such Pledge Agreement
shall constitute a violation of or be prohibited by this Agreement and the
Collateral Agent shall become a member upon such exercise.
9. Capital Contribution by the Member. The Member has contributed to the
Company on the date hereof, by delivery of a counterpart of a Bill of Sale,
Assignment and Assumption Agreement providing for the sale and transfer of
certain assets and liabilities to the Company for less than the fair market
value of such assets (net of such liabilities); such difference shall be treated
as a contribution to capital by the Member. The Member shall not be obligated to
make any further capital contributions to the Company and the Membership Units
shall not be assessable by the Company.
10. Allocation of Profits and Losses. The Company's profits and losses
shall be allocated entirely to the Member, and the Member's distributive share
of income, gain, loss, deduction, or credit (or item thereof) shall be
determined and allocated in accordance with this Section 10 to the fullest
extent permitted by Sections 704(b) and (c) of the Internal Revenue Code of
1986, as amended, and the treasury regulations promulgated thereunder.
11. Distributions. Subject to any limitations on distributions set forth
in any agreements with respect to indebtedness of the Company, distributions
shall be made to the Member at the times and in the aggregate amounts determined
by the Board of Managers (the "Board") of the Company.
2
<PAGE> 3
12. Management of the Company. Subject to the delegation of rights and
powers provided for herein and in the By-laws of the Company (as such By-laws
may be amended from time to time, and as such are expressly incorporated by
reference into this Agreement and made a part hereof), the Board shall have the
sole right to manage the business of the Company and shall have all powers and
rights necessary, appropriate or advisable to effectuate and carry out the
purposes and business of the Company. The Board of Managers shall consist of
that number of managers as shall be selected by the Member.
13. Execution of Contracts, Assignments, etc. All contracts, agreements,
endorsements, assignments, transfers, stock powers, or other instruments shall
be signed by the Chief Executive Officer, and President, any Vice President,
Chief Financial Officer, any Secretary or any Assistant Secretary, except where
required or permitted by law to be otherwise signed, and except when the signing
and execution thereof shall be expressly delegated by the Board to some other
officer and agent of the Company.
14. Limitations on Authority. The authority of the Board over the conduct
of the business and affairs of the Company shall be subject only to such
limitations as are expressly stated in this Agreement or in the Act.
15. Indemnification. The Company shall, to the fullest extent authorized
by the Act, indemnify and hold harmless the Member, any member of the Board, or
any officer or employee of the Company from and against any and all claims and
demands arising by reason of the fact that such person is, or was, the Member,
member of the Board, officer or employee of the Company.
16. Dissolution. The Company shall dissolve, and its affairs shall be
wound up, upon the first to occur of the following: (a) the written consent of
the Board to such effect; and (b) the entry of a decree of judicial dissolution
under Section 18-802 of the Act.
17. Consents. Any action that may be taken by the Member at a meeting may
be taken without a meeting if a consent in writing, setting forth the action so
taken, is signed by the Member.
18. Amendments. Except as otherwise provided in this Agreement or in the
Act, this Agreement may be amended only by the written consent of the Member to
such effect.
19. Governing Law. This Agreement shall be construed and enforced in
accordance with, and governed by, the laws of the State of Delaware.
* * * * *
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have duly executed this Amended
and Restated Operating Agreement as of the date first written above.
DONJOY, L.L.C.
By: /s/ Leslie H. Cross
--------------------------------
Name: Leslie H. Cross
Title: President and CEO
DJ ORTHOPEDICS, LLC
By: /s/ Leslie H. Cross
--------------------------------
Name: Leslie H. Cross
Title: President and CEO
4
<PAGE> 1
DONJOY, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
JULY 30, 1999
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINED TERMS...................................................................................... 1
1.1 DEFINED TERMS...................................................................................... 1
1.2 INTERPRETATION OF DEFINED TERMS.................................................................... 7
ARTICLE II ORGANIZATION...................................................................................... 7
2.1 COMPANY NAME AND ADDRESS........................................................................... 7
2.2 PURPOSE............................................................................................ 8
2.3 PREVIOUS ACTIONS................................................................................... 8
ARTICLE III UNITS............................................................................................ 8
3.1 GENERAL............................................................................................ 8
3.2 VOTING OF UNITS.................................................................................... 9
3.3 PREFERRED DISTRIBUTIONS, LIQUIDATION PREFERENCE.................................................... 9
3.4 EVENTS OF NON-COMPLIANCE........................................................................... 10
3.5 PAYMENT OF PREFERRED UNITS......................................................................... 11
3.6 COVENANTS APPLICABLE WHILE THE PREFERRED UNITS HAVE UNRETURNED ORIGINAL COST....................... 14
3.7 UNIT SPLITS, UNIT DISTRIBUTIONS, ETC............................................................... 15
ARTICLE IV MANAGEMENT OF THE COMPANY......................................................................... 15
4.1 BOARD OF MANAGERS; VOTING.......................................................................... 15
4.2 OBSERVER........................................................................................... 16
ARTICLE V MEMBERS; REPRESENTATIONS........................................................................... 17
5.1 MEMBERS GENERALLY.................................................................................. 17
5.2 REPRESENTATIONS WITH RESPECT TO UNITS.............................................................. 17
5.3 REGULATORY RESTRICTIONS ON FIRST UNION INVESTORS' VOTING RIGHTS.................................... 18
5.4 REGULATORY COMPLIANCE BY FIRST UNION............................................................... 18
ARTICLE VI CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS............................... 19
6.1 CAPITAL CONTRIBUTIONS.............................................................................. 19
6.2 CAPITAL ACCOUNTS; ALLOCATIONS...................................................................... 19
6.3 DISTRIBUTIONS...................................................................................... 22
6.4 LIABILITY FOR RETURN OF CAPITAL.................................................................... 23
6.5 ADMINISTRATIVE MATTERS............................................................................. 23
ARTICLE VII TRANSFERABILITY OF THE MEMBERS' INTEREST......................................................... 23
7.1 LIMITATIONS ON TRANSFERABILITY OF UNITS............................................................ 23
7.2 OTHER PROVISIONS WITH RESPECT TO TRANSFERABILITY OF UNITS.......................................... 24
ARTICLE VIII ADDITION OF MEMBERS, WITHDRAWAL OF MEMBERS...................................................... 25
8.1 ADDITION OF MEMBERS................................................................................ 25
8.2 WITHDRAWAL OF MEMBERS.............................................................................. 25
ARTICLE IX DISSOLUTION OF THE COMPANY; CONTINUATION.......................................................... 25
9.1 DISSOLUTION OF THE COMPANY......................................................................... 25
9.2 CONTINUATION OF THE COMPANY........................................................................ 26
ARTICLE X MISCELLANEOUS...................................................................................... 26
10.1 LIMITATION ON LIABILITY............................................................................ 26
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
10.2 AMENDMENTS............................................................................................. 27
10.3 GOVERNING LAW.......................................................................................... 27
</TABLE>
<PAGE> 4
SCHEDULES AND EXHIBITS
SCHEDULES
Schedule I - Schedule of Members
EXHIBITS
Exhibit A - Bylaws of the Company
Exhibit B - Certificate of Formation
Exhibit C - Common Certificate
Exhibit D - Preferred Certificate
<PAGE> 5
SECOND AMENDED AND RESTATED OPERATING AGREEMENT dated as of
July 30, 1999 of DONJOY, L.L.C., a Delaware limited liability company (the
"Company"), among the parties listed on SCHEDULE I.
Certain of the parties originally entered into an Operating
Agreement dated as of December 31, 1998 (the "Original Agreement") for the
purpose of forming a limited liability company pursuant to the provisions
of the Delaware Limited Liability Company Act, 6 Del. C. Section 18-101 et
seq. (the "Delaware Act").
Certain of the parties subsequently entered into an Amended
and Restated Operating Agreement dated as of June 30, 1999 (the "Amended
Agreement"), which amended and restated the Original Agreement.
The parties wish to amend and restate the Amended Agreement as
set forth herein and to add certain parties hereto.
ACCORDINGLY, in consideration of the mutual covenants and
agreements contained in this Agreement, the sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINED TERMS
1.1 DEFINED TERMS.
(a) The defined terms used in this Agreement shall, unless the context
otherwise requires, have the meanings specified in this ARTICLE I:
"Amended Agreement" shall have the meaning ascribed to such term in the
caption to this Agreement.
"Applicable Percentage" shall have the meaning ascribed to such term in
Section 3.5.
"Bank Indebtedness" shall have the meaning ascribed to such term in the
Indenture.
"Board of Managers" means the board of managers of the Company.
"Board's Determination" is defined in the definition of Fair Market Value.
"Bylaws" means the Bylaws of the Company as amended from time to time and
the initial form of which is attached hereto as EXHIBIT A.
"Capital Contribution" means, with respect to any Member, the amount of
capital contributed by such Member to the Company, as determined in accordance
with ARTICLE VI.
<PAGE> 6
"Certificate" has the meaning ascribed to such term in Section 2.3(a).
"Change of Control" shall have the meaning ascribed to such term in the
Indenture.
"Change of Control Notice" shall have the meaning ascribed to such term in
Section 3.5(b).
"Chase" means Chase DJ Partners, LLC.
"Common Certificate" shall have the meaning ascribed to such term in
Section 3.1(c).
"Common Unit" means one common unit of the Company providing the holder
thereof to the rights provided by this Agreement.
"Company" shall have the meaning ascribed to such term in the caption to
this Agreement.
"Cumulated Preferred Return" is defined in the definition of Unreturned
Original Cost.
"Delaware Act" has the meaning ascribed to such term in the caption to this
Agreement.
"Determination Notice" is defined in the definition of Fair Market Value.
"DJO" means DJ Orthopedics, LLC, a Delaware limited liability company and
wholly-owned subsidiary of the Company.
"Event of Non-Compliance" has the meaning ascribed to such term in Section
3.4(b).
"Event of Withdrawal of a Member" means, (i) with respect to a Member that
is an entity, the bankruptcy or dissolution of such Member or (ii) the
occurrence of any other similar event that terminates the continued membership
of a Member in the Company.
"Fair Market Value" shall mean, as of any date of determination, the Fair
Value of each Paid Preferred Unit, determined as follows: At any time that the
Fair Market Value shall be required to be determined hereunder, the Board of
Managers shall make a good faith determination (the "Board's Determination") of
the Fair Value of each Paid Preferred Unit within 30 days of the delivery by a
Member to the Company of an exercise notice with respect to the Put Right, and
the Board of Managers shall provide to the Member with respect to whose Paid
Preferred Unit such determination is being made a written notice of the Board's
Determination which notice shall set forth supporting data in respect of such
calculation (the "Determination Notice"). The Member shall have 10 days
following receipt of the Determination Notice within which to deliver to the
Company a written notice (the "Objection Notice") of an objection, if any, to
the Board's Determination, which Objection Notice shall set forth the Member's
good faith
2
<PAGE> 7
determination (the "Member's Determination") of the Fair Value of
each Paid Preferred Unit. The failure by the Member to deliver the Objection
Notice within such 10-day period shall constitute the Member's acceptance of the
Board's Determination as conclusive. In the event of the timely delivery of an
Objection Notice, the Company and the Member shall attempt in good faith to
arrive at an agreement with respect to the Fair Value, which agreement shall be
set forth in writing within 15 days following delivery of the Objection Notice.
If the Company and the Member are unable to reach an agreement within such
15-day period, the matter shall be promptly referred for determination to a
regionally or nationally recognized investment banking or valuation firm (the
"Valuer") reasonably acceptable to the Company and the Member. The Company and
the Member will cooperate with each other in good faith to select such Valuer.
The Valuer may select the Board's Determination or the Member's Determination as
the Fair Value or may select any other amount. The Valuer's selection will be
furnished to the Company and the Member in writing and conclusive and binding
upon the Company and the Member. The fees and expenses of the Valuer shall be
borne equally by the Company and the Member with respect to whose Paid Preferred
Units such determination relates.
"Fair Value" shall mean an amount per Paid Preferred Unit (calculated on a
fully diluted basis, including the exercise of all outstanding warrants, options
and other similar rights to purchase Common Units) assuming that the Company (or
DJO and each other Subsidiary) is sold to an unaffiliated third Person as a
going concern; provided that no discount for (i) lack of liquidity of such Paid
Preferred Unit, or (ii) such Paid Preferred Unit's (or such Paid Preferred Unit
holder's) minority position in the Company, shall be applied.
"First Union" shall have the meaning ascribed to such term in Section 5.3.
"Indebtedness" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by (or which
customarily would be evidenced by) bonds, debentures, notes or similar
instruments, (c) all reimbursement obligations of such Person with respect to
letters of credit and similar instruments, (d) all obligations of such Person
under conditional sale or other title retention agreements relating to property
or assets purchased by such Person, (e) all obligations of such Person incurred,
issued or assumed as the deferred purchase price of property or services other
than accounts payable incurred and paid on terms customary in the business of
such Person (it being understood that the "deferred purchase price" in
connection with any purchase of property or assets shall include only that
portion of the purchase price which shall be deferred beyond the date on which
the purchase is actually consummated), (f) all obligations secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed, (g)
all obligations of such Person under forward sales, futures, options and other
similar hedging arrangements (including interest rate hedging or protection
agreements), (h) all obligations of such Person to purchase or otherwise pay for
merchandise, materials, supplies, services or other property under an
arrangement which provides that payment for such merchandise, materials,
supplies, services or other property shall be made regardless of whether
delivery of such merchandise, materials, supplies, services or other property is
ever made or tendered, (i) all guaranties by such Person of obligations of
others and (j) all capitalized lease obligations of such Person.
3
<PAGE> 8
"Indenture" means that certain Indenture dated June 30, 1999 among DJO and
DJ Orthopedics Capital Corporation, a Delaware corporation, as issuers, the
Company, as guarantor, and The Bank of New York as trustee relating to the
issuers' 12 5/8% Senior Subordinated Notes due 2009.
"Interest" means the ownership interest of a Member in the Company as
represented by such Member's Units, consisting of (i) such Member's right to
receive a portion of distributions, (ii) such Member's right to vote or grant or
withhold consents with respect to Company matters as provided herein or in the
Delaware Act and (iii) such Member's other rights and privileges as provided
herein or in the Delaware Act.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder.
"IPO" shall have the meaning ascribed to such term in Section 3.5(a).
"IRR" means, with respect to any Preferred Unit, the pre-tax, compounded
annual internal rate of return realized thereon, including, as a return on such
Preferred Unit, any (i) portion of the Application Fee and the Closing Fee (as
such terms are defined in the Preferred Unit Purchase Agreement) paid to the
original holder of such Preferred Unit with respect to such Preferred Unit
pursuant to the Preferred Unit Purchase Agreement, (ii) proceeds from the sale
or other disposition (including a redemption by the Company) of the related Paid
Preferred Unit at the time that payment with respect to such Preferred Unit is
made in accordance with Section 3.5(a), and (iii) cash distributions made by the
Company or any Subsidiary thereof in respect of such Preferred Unit (other than
tax distributions in respect of income allocated to the holder of such Preferred
Unit in respect of the Preferred Return thereon (i.e., distributions pursuant to
Section 6.3(a) with respect to income allocated to such Preferred Unit pursuant
to clause 2 and 3 of Section 6.2(a)(iii)(A)(first)), provided that such tax
distributions in respect of Preferred Return shall be treated for purposes of
the calculation as if the aggregate amount thereof was received on the day such
Preferred Unit became a Paid Preferred Unit).
"Liquidation Event" shall mean any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company.
"Majority in Interest of Members" means, at any time, the Members who hold
in the aggregate greater than 50% of the number of Units outstanding at such
time.
"Majority in Interest of Preferred Members" means, at any time, the Members
who hold in the aggregate greater than 50% of the number of Preferred Units
outstanding at such time.
"Management Members" shall have the meaning ascribed to such term in
Section 6.1(a).
"Manager" means a member of the Board of Managers as designated in, or
selected pursuant to, Section 4.1.
"Mandatory Redemption Date" means December 31, 2009.
4
<PAGE> 9
"Member" shall mean any Person holding a Unit or any Person who shall be
admitted as an additional or substituted Member pursuant to this Agreement, for
so long as they remain Members.
"Members' Agreement" means the Members' Agreement dated as of June 30,
1999, among the Company and certain holders of Units, as amended from time to
time.
"Member's Determination" is defined in the definition of Fair Market Value.
"Net Profits and Net Losses" means the net taxable income or net taxable
loss of the Company, respectively, as determined for federal income tax
purposes, for each fiscal year of the Company, plus any income that is exempt
from federal income tax and minus expenditures that are not deductible in
computing federal taxable income and not properly chargeable to capital
accounts, in each case to the extent such items are not otherwise taken into
account in computing Net Profits or Net Losses; provided however that (i) items
of income, gain, loss and deduction attributable to Section 704(c) Property
shall be determined in accordance with the principles of Treasury Regulation
Section 1.704-1(b)(2)(iv)(g) and (ii) the Net Profits and Net Losses of the
Company shall be computed without regard to the amount of any items of income,
gain, loss or deduction that are specially allocated pursuant to Section
6.2(c)(ii).
"Non-Compliance" shall have the meaning ascribed to such term in Section
3.4.
"Objection Notice" is defined in the definition of Fair Market Value.
"Original Agreement" shall have the meaning ascribed to such term in the
caption to this Agreement.
"Paid Preferred Unit" has the meaning ascribed to such term in Section
3.5(d).
"Payment Right" has the meaning ascribed to such term in Section
3.5(b)(iii).
"Person" shall be construed broadly and shall include an individual, a
partnership, a corporation, an association, a joint stock company, a limited
liability company, a trust, a joint venture, an unincorporated organization and
a governmental entity or any department, agency or political subdivision
thereof.
"Preferred Certificate" shall have the meaning ascribed to such term in
Section 3.1(c).
"Preferred Contribution Amount" is defined in the definition of Unreturned
Original Cost.
"Preferred Liquidation Preference" shall have the meaning ascribed to such
term in Section 3.3(b).
"Preferred Managers" shall have the meaning ascribed to such term in
Section 3.4(c).
5
<PAGE> 10
"Preferred Return" shall have the meaning ascribed to such term in Section
3.3(a).
"Preferred Unit" means one preferred unit of the Company providing the
holder thereof to the rights provided by this Agreement and shall include a Paid
Preferred Unit.
"Preferred Unit Purchase Agreement" shall mean the Preferred Unit Purchase
Agreement, dated as of June 30 1999, by and among the Company and the purchasers
named therein.
"Put Right" has the meaning ascribed to such term in Section 3.5(b)(ii).
"Quarterly Payment Date" has the meaning ascribed to such term in Section
3.3(a).
"Recapitalization Agreement" shall have the meaning ascribed to such term
in Section 6.1(a).
"Regulatory Requirement" shall have the meaning ascribed to such term in
Section 5.4.
"Related Documents" shall mean each of (i) this Agreement, (ii) the
Preferred Unit Purchase Agreement, and (iii) the Members' Agreement.
"S&N" shall have the meaning ascribed to such term in Section 6.1(a).
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Subsidiary" of any Person means any corporation, association, partnership,
limited liability company or other business entity of which more than 50% of the
total voting power of equity interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, representatives, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by: (1) such Person, (2) such
Person and one or more Subsidiaries of such Person, or (3) one or more
Subsidiaries of such Person.
"Taxable Amount" is defined in the definition of Taxable Income
Distribution Amount.
"Taxable Income Distribution Amount" means an amount determined as follows:
(1)(A) all taxable income and gains of the Company allocated to a Member for any
calendar year pursuant to the first sentence of Section 6.2(d) excluding any
allocations made pursuant to the second sentence of Section 6.2(d) (the "Taxable
Amount") less (B) an amount (not to exceed the Taxable Amount for such calendar
year) equal to all losses of the Company allocated to such Member pursuant to
the first sentence of Section 6.2(d) in any of the three prior calendar years
that have not been previously subtracted pursuant to this clause (B) from the
Taxable Amount for any prior calendar year, multiplied by (2) forty four percent
(44%).
6
<PAGE> 11
"Transfer" shall have the meaning set forth in Section 7.1.
"TCW" shall mean DJC, Inc., a Delaware corporation.
"TCW Members" shall mean TCW; TCW/Crescent Mezzanine Trust II; TCW
Leveraged Income Trust II, L.P.; and Crescent/MACH I Partners, L.P.
"Units" means, collectively, the Common Units and Preferred Units of the
Company.
"Unreturned Original Cost" means, with respect to a Preferred Unit that is
not a Paid Preferred Unit, an amount equal to the sum of (i) the amount of the
original capital contribution with respect to such Preferred Unit ("Preferred
Contribution Amount"), and (ii) the aggregate amount of all accrued Preferred
Return with respect to such Preferred Unit added to the Unreturned Original Cost
thereof pursuant to Section 3.3(a) ("Cumulated Preferred Return"), as such
amounts shall be equitably adjusted for any splits, distributions,
recapitalizations, reorganizations, reclassifications or combinations of
Preferred Units.
"Valuer" is defined in the definition of Fair Market Value.
1.2 INTERPRETATION OF DEFINED TERMS.
(a) The title of and the section and paragraph headings in this Agreement
are for convenience of reference only and shall not govern the interpretation of
any of the terms or provisions of this Agreement.
(b) The use herein of the masculine, feminine or neuter forms shall also
denote the other forms, as in each case the context may require.
ARTICLE II
ORGANIZATION
2.1 COMPANY NAME AND ADDRESS.
(a) The name of the Company shall be "DonJoy, L.L.C." or such other name as
the Board of Managers may from time to time hereafter designate.
(b) The principal office of the Company, and such additional offices as the
Board of Managers may determine to establish, shall be located at such place or
places inside or outside the State of Delaware as the Board of Managers may
designate from time to time.
(c) The registered office of the Company in the State of Delaware is
located at 9 East Loockerman Street, Dover, County of Kent, Delaware 19901. The
registered agent of the Company for service of process at such address is
National Registered Agents, Inc.
7
<PAGE> 12
2.2 PURPOSE.
The purpose of the Company shall be to engage in any lawful business that
may be engaged in by a limited liability company organized under the Delaware
Act, as such business activities may be determined by the Board of Managers from
time to time.
2.3 PREVIOUS ACTIONS.
(a) The Company was formed upon the execution and filing by Sheri Roberts
(such Person being hereby authorized to take such action) with the Secretary of
State of the State of Delaware of a certificate of formation of the Company (the
"Certificate") in the form attached hereto as EXHIBIT B on December 29, 1998.
(b) Upon the execution and delivery of this Agreement by the requisite
parties necessary to amend the Amended Agreement pursuant to Section 10.2
thereof, the Amended Agreement shall be amended and restated as set forth herein
and this Agreement shall be in full force and effect.
(c) The parties hereto hereby ratify and confirm the filing of the
Certificate and adopt and approve the Bylaws in the form of EXHIBIT A hereto;
the Bylaws are expressly incorporated by reference into this Agreement, and made
a part hereof.
ARTICLE III
UNITS
3.1 GENERAL.
(a) The Company shall be authorized to issue from time to time up to
3,000,000 Units, of which 2,900,000 Units shall be designated Common Units and
100,000 Units shall be designated Preferred Units. Such Units may be issued
pursuant to such agreements as the Board of Managers or a committee thereof
shall approve, including pursuant to options or warrants. The Board of Managers
shall have the right and authority to amend this Agreement or the Schedules
hereto to reflect the admission of holders of Units and to reflect the rights of
such holders hereunder.
(b) Except as specifically provided in this Agreement, each Unit, whether
designated as Preferred Unit or Common Unit, shall be identical.
(c) The Company shall issue to each Member who owns Common Units a limited
liability company certificate with respect to such Common Units in the form
attached hereto as EXHIBIT C (a "Common Certificate"), evidencing the Common
Units held by such Member. The Company shall issue to each Member who owns
Preferred Units a limited liability company certificate with respect to such
Preferred Units in the form attached hereto as EXHIBIT D (a "Preferred
Certificate"), evidencing the Preferred Units held by such Member. Each Common
Certificate and Preferred Certificate shall be transferable only on the books of
the Company, to
8
<PAGE> 13
be kept by the Secretary of the Company, on surrender thereof by
the registered holder in person or by attorney, and until so transferred, the
Company may treat the registered holder of a Common Certificate or Preferred
Certificate as the owner of the Interest evidenced thereby for all purposes.
Nothing contained in this Section 3.1 shall authorize or permit any Member to
transfer its Units except as contemplated by Article VII.
(d) For the purposes of Article 8 in any Uniform Commercial Code, each Unit
of the Company as evidenced by a Common Certificate or Preferred Certificate
shall be deemed to be a security, as such term is defined in any Uniform
Commercial Code.
3.2 VOTING OF UNITS.
Except as otherwise required by applicable law or as set forth herein or in
the Members' Agreement, the holders of the Common Units and the holders of the
Preferred Units shall vote together as a single class on all matters to be voted
on by the Members. Except as otherwise set forth herein, each Unit shall entitle
the holder thereof to one vote.
3.3 PREFERRED DISTRIBUTIONS, LIQUIDATION PREFERENCE.
(a) Distributions. Each Preferred Unit (other than a Paid Preferred Unit)
shall accrue a preferred return in an amount equal to 14.0% per annum (subject
to increase as provided below), multiplied by the Unreturned Original Cost for
such Preferred Unit (such product, the "Preferred Return"). The Preferred Return
shall accrue on a daily basis from the date of issuance of each Preferred Unit.
Each March 31, June 30, September 30 and December 31 shall be referred to as a
"Quarterly Payment Date". If the Company shall fail to distribute in cash all of
a quarter's accrued Preferred Return with respect to a Preferred Unit on the
applicable Quarterly Payment Date, then, subject to the last sentence of Section
3.3(a), the Cumulated Preferred Return for such Preferred Unit shall be
increased on such Quarterly Payment Date by any undistributed amount of
Preferred Return. If any Preferred Unit is outstanding for less than an entire
quarter, the accrual of Preferred Return on such Preferred Unit will be
prorated, based on the number of days such Preferred Unit was outstanding.
During an Event of Non-Compliance the rate per annum used to calculate the
Preferred Return shall be 16.0% per annum. Cash distributions to holders of
Preferred Units pursuant to Section 6.3(a) with respect to income allocated
pursuant to clause 2 and 3 of Section 6.2(a)(iii)(A)(first) shall not be deemed
to be distributions of Preferred Return for purposes of determining Cumulated
Preferred Return pursuant to this Section 3.3(a).
(b) Liquidation Preference. Upon the occurrence of any Liquidation Event,
the holders of Preferred Units (other than Paid Preferred Units) then
outstanding shall be entitled to receive out of the assets of the Company
legally available for distribution to its Members before any payment shall be
made to the holders of any Common Units or any other security of the Company
junior to the Preferred Units (with respect to rights upon a Liquidation Event,
(i) the Preferred Units (other than the Paid Preferred Units) shall rank senior
to the Common Units and (ii) the Paid Preferred Units will rank pari passu with
the Common Units), a cash distribution in an amount per Preferred Unit (other
than a Paid Preferred Unit) equal to the sum of (x) the Unreturned Original Cost
of such Preferred Unit plus (y) the aggregate amount of all accrued and unpaid
Preferred Return on such Preferred Unit through the date of distribution that
has not been
9
<PAGE> 14
added to the Cumulated Preferred Return less (z) the aggregate
amount of all distributions made pursuant to Section 6.3(a) with respect to
income allocated pursuant to clause 2 and 3 of Section 6.2(a)(iii)(A)(first)
(the "Preferred Liquidation Preference"). If, upon any Liquidation Event, the
assets of the Company available for distribution to its Members shall be
insufficient to pay the holders of Preferred Units (other than Paid Preferred
Units) the full Preferred Liquidation Preference to which they respectively
shall be entitled, the holders of such Preferred Units shall share ratably in
any distribution of assets according to the respective amounts which would be
payable with respect to such Preferred Units held by them upon such distribution
if all amounts payable on or with respect to said Preferred Units were paid in
full. Upon the payment of the full Preferred Liquidation Preference to which all
Preferred Units shall be entitled, each Preferred Unit shall thereafter share
ratably with the Common Units in any further distribution of assets pursuant to
Section 6.3.
3.4 EVENTS OF NON-COMPLIANCE.
(a) Each of the following shall constitute non-compliance hereunder (each
of clauses (i)-(v) below, "Non-Compliance"):
(i) any failure hereunder by the Company to pay or distribute when
required any amounts with respect to the Preferred Units (other than the
Paid Preferred Units) and such failure continues for ten (10) days after
notice from a holder of Preferred Units (other than Paid Preferred Units);
(ii) a material breach of any of the representations, warranties or
covenants (other than those referred to in clause (i) above) in any Related
Document that continues thirty (30) days after notice of such breach has
been delivered by a holder of Preferred Units (other than Paid Preferred
Units);
(iii) an event of default under the Bank Indebtedness, the Indenture,
any other Indebtedness having an outstanding principal amount of
$15,000,000 or more, or, in each case, any related document governing,
evidencing or securing the same;
(iv) the Company or any of its Subsidiaries shall (A) voluntarily
commence any proceeding or file any petition seeking relief under Title 11
of the United States Code or any other federal, state or foreign
bankruptcy, insolvency or similar law, (B) consent to the institution of,
or fail to controvert in a timely and appropriate manner, any such
proceeding or the filing of any such petition, (C) apply for or consent to
the appointment of a receiver, trustee, custodian, sequestrator or similar
official for any such Person or for any substantial part of its property or
assets, (D) file an answer admitting the material allegations of a petition
filed against it in any such proceeding, (E) make a general assignment for
the benefit of creditors, (F) fail generally to pay its debts as they
become due or (G) take any corporate or stockholder action in furtherance
of any of the foregoing; or
(v) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A)
relief in respect of the Company or any of its Subsidiaries, or of any
substantial part of their respective
10
<PAGE> 15
property or assets, under Title 11 of the United States Code or any
other federal, state or foreign bankruptcy, insolvency or similar law, (B)
the appointment of a receiver, trustee, custodian, sequestrator or similar
official for any such Person or for any substantial part of its property or
(C) the winding-up or liquidation of any such Person, and such proceeding,
petition or order shall continue unstayed and in effect for a period of 60
consecutive days.
(b) After the occurrence of and during the continuation of Non-Compliance
pursuant to clauses (i), (ii) or (iii) of paragraph (a) above, the holders of a
majority of Preferred Units (other than Paid Preferred Units) may declare by
written notice to the Company that an "Event of Non-Compliance" has occurred.
After the occurrence of and during the continuation of Non-Compliance pursuant
to clauses (iv) and (v) of paragraph (a) above, an Event of Non-Compliance shall
occur automatically.
(c) During the existence of an Event of Non-Compliance, holders of a
majority of Preferred Units (other than Paid Preferred Units) shall have the
right to nominate two persons ("Preferred Managers") to the Board of Managers of
the Company (and all Members hereby agree to take all action required to
accomplish the election of such Preferred Managers).
3.5 PAYMENT OF PREFERRED UNITS.
(a) Payments at Option of Company. The Company shall have the right, at its
option, to make payments, in accordance with this Section 3.5(a), with respect
to one or more Preferred Units that are not Paid Preferred Units to cause such
Preferred Units to become Paid Preferred Units. The amount of each such payment
with respect to any such Preferred Unit shall be equal to the sum of (A) the
Applicable Percentage multiplied by such Preferred Unit's Preferred Contribution
Amount, plus (B) the amount of the Cumulated Preferred Return, if any, for such
Preferred Unit plus (C) the aggregate amount of all accrued and unpaid Preferred
Return on such Preferred Unit through the date of payment that has not been
added to Cumulated Preferred Return less (D) the aggregate amount of all
distributions made pursuant to Section 6.3(a) with respect to income allocated
to such Preferred Unit pursuant to clause 2 and 3 of Section
6.2(a)(iii)(A)(first). Except as reduced in accordance with the further
provisions of this Section 3.5(a), the "Applicable Percentage" for any such
payment in any period set forth below shall be the percentage set forth below
opposite such period.
<TABLE>
<S> <C>
Prior to the first anniversary of the original issuance date of the 105%
Preferred Units
On or after the first anniversary and prior to the second 104%
anniversary of the original issuance date of the Preferred Units
On or after the second anniversary and prior to the third 103%
anniversary of the original issuance date of the Preferred Units
On or after the third anniversary and prior to the fourth 102%
</TABLE>
11
<PAGE> 16
<TABLE>
<S> <C>
anniversary of the original issuance date of the Preferred Units
On or after the fourth anniversary and prior to the fifth 101%
anniversary of the original issuance date of the Preferred Units
On or after the fifth anniversary of the original issuance date of 100%
the Preferred Units
</TABLE>
The Applicable Percentage shall be reduced, but not below 100%, to the extent
necessary so that the amount paid pursuant to this Section 3.5(a), together with
all other payments received with respect to such Preferred Unit, does not cause
the IRR on such Preferred Unit to exceed, (i) prior to the second anniversary of
the date of the original issuance of the Preferred Units, 24%, and (ii) after
the second anniversary of the date of the original issuance of the Preferred
Units, 22%. In addition, to the extent the Company makes any payments pursuant
to this Section 3.5(a) from the proceeds of an initial public offering ("IPO")
of its or DJO's equity securities which results in such securities being listed
for trading on a nationally recognized stock exchange (including the Nasdaq
National Market System), then the Applicable Percentage with respect to up to
one-third of the then outstanding Preferred Units (other than Paid Preferred
Units) shall be reduced, if such Applicable Percentage would otherwise exceed
101%, to 101%. If the Company elects to make payments under this Section 3.5(a)
with respect to fewer than all of the outstanding Preferred Units that are not
then Paid Preferred Units, the Company shall make such payments with respect to
Preferred Units selected ratably among all holders of Preferred Units that are
not Paid Preferred Units, and if the Company is entitled to make payments with
respect to certain Preferred Units from the proceeds of an IPO in amounts based
on a reduced Applicable Percentage as provided in the immediately preceding
sentence, such Preferred Units shall also be selected ratably as aforesaid.
(b) Payments at Option of Holder.
(i) Upon a Change of Control, each holder of Preferred Units that are
not Paid Preferred Units shall have the right to require the Company to
make payments, in accordance with this Section 3.5(b)(i), with respect to
one or more of such Preferred Units in order to cause such Preferred Units
to become Paid Preferred Units. The amount of each such payment with
respect to any such Preferred Unit shall be equal to the sum of (A) 101%
multiplied by such Preferred Unit's Preferred Contribution Amount, plus (B)
the amount of the Cumulated Preferred Return, if any, for such Preferred
Unit plus (C) the aggregate amount of all accrued and unpaid Preferred
Return on such Preferred Unit through the date of payment that has not been
added to Cumulated Preferred Return less (D) the aggregate amount of all
distributions made pursuant to Section 6.3(a) with respect to income
allocated to such Preferred Unit pursuant to clause 2 and 3 of Section
6.2(a)(iii)(A)(first). The Company shall give holders of such Preferred
Units notice (the "Change of Control Notice") of the occurrence of a Change
of Control in accordance with and at the time required by Section 4.06 of
the Indenture. To exercise such option such holder must send written notice
of such election to the Company within thirty (30) days
12
<PAGE> 17
after such Change of Control Notice. The Company shall make the
payment required by this Section 3.5(b)(i) within thirty (30) days of
receipt of such written notice (or shall notify such holder of the failure
of one or more of the applicable conditions); provided, however, that such
payment shall be conditioned upon (x) the Company's receipt of any
applicable consents required to make such payment (the Company hereby
agrees to use its commercially reasonable efforts to obtain such consents),
and (y) the Company's compliance with applicable law and documents
respecting its Indebtedness; provided, further, however, that
notwithstanding the failure of any of the foregoing conditions, any such
failure to pay shall constitute Non-Compliance pursuant to Section
3.4(a)(i).
(ii) Each holder of Paid Preferred Units (including any Preferred Unit
that becomes a Paid Preferred Unit in accordance with Section 3.5(b)(i))
shall, upon a Change of Control or after the sixth anniversary of the date
of the original issuance of the Preferred Units, have the right (the "Put
Right") to require the Company to purchase any or all of such holder's Paid
Preferred Units, by paying to such holder the Fair Market Value of such
Paid Preferred Units; provided that, such Put Right shall be conditioned
upon (x) the Company's ability to obtain the financing to make such payment
(the Company hereby agrees to use its commercially reasonable efforts to
obtain such financing), (y) the Company's receipt of any applicable
consents required to make such payment (the Company hereby agrees to use
its commercially reasonable efforts to obtain such consents), and (z) the
Company's compliance with applicable law and documents respecting its
Indebtedness. The Put Right may be exercised by any holder of Paid
Preferred Units by delivery to the Company of a written exercise notice;
provided that if the Put Right is triggered by a Change in Control, the
holder of Paid Preferred Units may indicate in the notice under Section
3.5(b)(i) that such holder also exercises the Put Right. Within 30 days of
receipt thereof, the Company shall either purchase such Paid Preferred
Units in accordance with this Section 3.5(b)(ii) (against receipt of the
Preferred Certificate representing such Preferred Units), or inform the
exercising holder of the failure of one or more of the applicable
conditions. Upon the Company making the payment required by this Section
3.5(b)(ii), such Paid Preferred Unit shall cease to be outstanding for any
purpose hereunder and shall be cancelled.
(iii) Notwithstanding anything herein to the contrary or any provision
of applicable law that but for this paragraph would treat any right to
require the Company to make payments with respect to one or more Preferred
Units in order to cause such Preferred Units to become Paid Preferred Units
and the Put Right (or any right of each holder of Preferred Units to any
payment upon a Change of Control) (any such right, a "Payment Right") as an
unsubordinated obligation of the Company, such Payment Right shall be
subordinated to the indefeasible payment in full of the Obligations (as
defined in the Credit Agreement dated as of June 30, 1999 among the
Company, DJO, the lenders party thereto, First Union National Bank, as
administrative agent and collateral agent, and The Chase Manhattan Bank, as
syndication agent) and all obligations of the Company under the Indenture
and the Senior Subordinated Notes issued thereunder.
13
<PAGE> 18
(c) Mandatory Payment.
The Company shall make a payment with respect to each outstanding
Preferred Unit (other than Paid Preferred Units) to cause such Preferred
Unit to become a Paid Preferred Unit on the Mandatory Redemption Date by
distributing to each holder of an outstanding Preferred Unit (other than
Paid Preferred Units) an amount equal to the sum of (A) 100% of such
Preferred Unit's Preferred Contribution Amount plus (B) the amount of the
Cumulated Preferred Return, if any, for such Preferred Unit plus (C) the
aggregate amount of all accrued and unpaid Preferred Return on such
Preferred Unit through the date of payment that has not been added to
Cumulated Preferred Return less (D) the aggregate amount of all
distributions made pursuant to Section 6.3(a) with respect to income
allocated to such Preferred Unit pursuant to clause 2 and 3 of Section
6.2(a)(iii)(A)(first). Such mandatory payment shall be conditioned upon (i)
the Company's receipt of any applicable consents required to make such
payment (the Company hereby agrees to use its commercially reasonable
efforts to obtain such consents), and (ii) the Company's compliance with
applicable law and documents respecting its Indebtedness; provided that
notwithstanding the failure of any of the foregoing conditions, any such
failure to pay shall constitute Non-Compliance pursuant to Section
3.4(a)(i).
(d) Effect of Payment.
Following the occurrence of a complete payment pursuant to this
Section 3.5 (other than Section 3.5(b)(ii)) to any Preferred Unit, such
Preferred Unit so paid shall remain outstanding (but the Company may
require the holder thereof to surrender the Preferred Certificate
representing such Preferred Unit so that the Company may mark upon such
Preferred Certificate that such Preferred Unit has been paid) and shall be
deemed a "Paid Preferred Unit"; provided, however, that such Paid Preferred
Unit shall not be entitled to any of the provisions of Section 3.3, 3.4 and
3.5(a) through (d) (other than Section 3.5(b)(ii)) (but shall be entitled
to the rights and obligations associated with each Common Unit existing
immediately after the payment pursuant to and subject to the terms of this
Agreement).
3.6 COVENANTS APPLICABLE WHILE THE PREFERRED UNITS HAVE UNRETURNED ORIGINAL
COST.
(a) Until all Preferred Units have become Paid Preferred Units, the Company
shall not issue any additional Preferred Units and shall not issue any other
equity securities that are senior to or pari passu with such Preferred Units
unless the Company first shall have obtained the affirmative consent of holders
of a majority of all Preferred Units that are not Paid Preferred Units.
(b) Neither the Company nor its Subsidiaries shall incur any Indebtedness
that contains restrictions on the payment of Preferred Return or the making of
payments with respect to Preferred Units (including Paid Preferred Units) that
are materially more restrictive than those contained in the Indebtedness of the
Company and the Subsidiary existing or created on June 30, 1999.
14
<PAGE> 19
(c) Unless the Company shall have paid in full in cash the Preferred Return
for the most recent quarter on the applicable Quarterly Payment Date, the
Company shall not make any distributions to holders of Common Units (or Paid
Preferred Units) other than distributions pursuant to Section 6.3(a).
3.7 UNIT SPLITS, UNIT DISTRIBUTIONS, ETC.
(a) The Company shall not in any manner subdivide (by split, distribution
or otherwise) or combine (by reverse split or otherwise) the outstanding
Preferred Units or Common Units unless all such subdivisions and combinations
shall be payable to the holder of each class of units of the Company only in
Units of such class.
(b) If the Company shall in any manner subdivide (by split, distribution or
otherwise) or combine (by reverse split, combination or otherwise) the
outstanding Common Units, then the outstanding Preferred Units shall also be
subdivided or combined, as the case may be, to the same extent, and in the same
proportion as the Common Units. If the Company shall in any manner subdivide (by
split, distribution or otherwise) or combine (by reverse split or otherwise) the
outstanding Preferred Units, then the outstanding Common Units shall also be
subdivided or combined, as the case may be, to the same extent, and in the same
proportion as the Preferred Units.
ARTICLE IV
MANAGEMENT OF THE COMPANY
4.1 BOARD OF MANAGERS; VOTING.
(a) Subject to the delegation of rights and powers provided for herein and
the requirements found in the Bylaws, the Board of Managers shall have the sole
right to manage the business of the Company and shall have all powers and rights
necessary, appropriate or advisable to effectuate and carry out the purposes and
business of the Company. The Board of Managers shall consist of at least nine
(9) members as designated from time to time in accordance with the Members'
Agreement but may be increased to eleven (11) members pursuant to Section 3.4(c)
and shall include the super-voting Manager described in the Bylaws. Any or all
Managers may be removed as Managers with or without cause by the vote of a
Majority in Interest of Members, provided, however, that no Manager may be
removed without the consent of the Member or Members who are entitled to
nominate such person as a Manager pursuant to the Members' Agreement (or Section
3.4(c) as the case may be); provided, further, however, that any Manager may be
removed by the party entitled to nominate such Manager under the Members'
Agreement (or Section 3.4(c) as the case may be), and the vacancy created by any
former Manager of the Board of Managers may be filled by the party entitled to
nominate such former Manager under the Members' Agreement (or Section 3.4(c) as
the case may be).
(b) No Member, by reason of such Member's status as such, shall have any
authority to act for or bind the Company but shall have only the right to vote
on or approve the actions herein specified to be voted on or approved by such
Member.
15
<PAGE> 20
(c) The officers of the Company shall be elected and removed and shall
perform such functions, as are provided in the Bylaws. The Board of Managers may
appoint, employ, or otherwise contract with such other Persons for the
transaction of the business of the Company or the performance of services for or
on behalf of the Company as it shall determine in its sole discretion. The Board
of Managers may delegate to any officer of the Company or to any such other
Person such authority to act on behalf of the Company as the Board of Managers
may from time to time deem appropriate in its sole discretion.
(d) Except as otherwise provided by the Board of Managers or in the Bylaws,
when the taking of such action has been authorized by the Board of Managers, any
Manager or officer of the Company or any other Person specifically authorized by
the Board of Managers may execute any contract or other agreement or document on
behalf of the Company and may execute and file on behalf of the Company with the
Secretary of State of the State of Delaware any certificates of amendment to the
Company's certificate of formation, one or more restated certificates of
formation and certificates of merger or consolidation and, upon the dissolution
and completion of winding up of the Company, at any time when there are fewer
than two Members, or as otherwise provided in the Delaware Act, a certificate of
cancellation canceling the Company's certificate of formation.
(e) If a vacancy on the Board of Managers is not filled by the Member or
Members entitled to nominate such Manager for such vacant position under the
Members' Agreement or Section 3.4(c), as the case may be, within 60 days after
such vacancy occurs, such vacancy may thereafter be filled by a majority of the
Managers then in office. Managers shall serve until they resign, die, become
incapacitated or are removed. Determinations to be made by the Managers in
connection with the conduct of the business of the Company shall be made in the
manner provided in the Bylaws, unless otherwise specifically provided herein.
4.2 OBSERVER BOARD MATERIALS.
(a) First Union shall have the right to send one non-voting observer to
each meeting of the Board of Managers; expenses incurred by such observer to
attend such meetings shall be reimbursed by the Company. In such capacity, such
observer shall be provided with all materials, information and documents the
Company provides the Managers when so provided; provided that such observer
shall agree to hold in confidence and trust all materials, information and
documents so provided. First Union acknowledges and such observer shall
acknowledge that such materials, information and documents may contain material
nonpublic information within the meaning of applicable securities law. The
Company reserves the right to exclude such observer from any distribution of
materials, information and documents, or meeting or portion thereof, when
receipt thereof or attendance by such observer could interfere with (i) the
attorney-client privilege between the Company (or the Board of Managers) and its
counsel, or (ii) contractual confidentiality obligations of the Company, in each
case, as determined by the Board of Managers in its reasonable discretion after
exercising its reasonable efforts to otherwise resolve the conflict requiring
such action to be taken. The Company may also exclude such observer in any
situation in which a conflict of interest exists or potentially exists that
would require a Manager in a similar situation to excuse himself.
16
<PAGE> 21
(b) The Company shall provide to TCW copies of all materials, information
and documents the Company provides the Managers when so provided; provided that
TCW shall hold in confidence and trust all materials, information and documents
provided. TCW acknowledges that such materials, information and documents may
contain material nonpublic information within the meaning of applicable
securities laws.
ARTICLE V
MEMBERS; REPRESENTATIONS
5.1 MEMBERS GENERALLY.
The name and business, mailing or residence address of the Members of the
Company are set forth on SCHEDULE I. Schedule I shall be amended from time to
time to reflect the names and business, mailing or residence address of each of
Persons who shall become Members after the date hereof.
5.2 REPRESENTATIONS WITH RESPECT TO UNITS.
Upon the acquisition of any Units, each Member makes the following
representations and warranties to the Company with respect to such Units:
(a) Such Member is acquiring the Units for its own account, for investment
and not with a view to the distribution thereof or any interest therein in
violation of the Securities Act or applicable state securities laws.
(b) Such Member understands that (i) the Units have not been registered
under the Securities Act or applicable state securities laws by reason of their
issuance by the Company in a transaction exempt from the registration
requirements of the Securities Act and applicable state securities laws and (ii)
the Units must be held by such Member indefinitely unless a subsequent
disposition thereof is registered under the Securities Act and applicable state
securities laws or is exempt from such registration.
(c) Such Member further understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to such Member)
promulgated under the Securities Act depends on the satisfaction of various
conditions, and that, if applicable, Rule 144 may afford the basis for sales of
the Units acquired hereunder in limited amounts.
(d) Such Member is an "accredited investor" (as defined in Rule 501(a) of
Regulation D promulgated under the Securities Act). The Company has made
available to such Member or its representatives all agreements, documents,
records and books that such Member has requested relating to an investment in
the Units which may be acquired by the Member hereunder. Such Member has had an
opportunity to ask questions of, and receive answers from, a person or persons
acting on behalf of the Company, concerning the terms and conditions of this
investment, and answers have been provided to all of such questions to the full
satisfaction of such Member. Such Member has such knowledge and experience in
financial and business matters that it is capable of evaluating the risks and
merits of this investment and to suffer a complete loss of his, her or its
investment.
17
<PAGE> 22
(e) The execution and delivery of this Agreement by such Member has been
duly authorized.
5.3 REGULATORY RESTRICTIONS ON FIRST UNION INVESTORS' VOTING RIGHTS.
Notwithstanding anything herein to the contrary, in no event shall (i) any
vote, consent, approval or authorization (collectively, for purposes of this
Section 5.3, "consent") hereunder of First Union Investors, Inc., or the
successors or assigns of its Interest (other than the TCW Members and their
successors and assigns) (collectively, "First Union") be required unless the
matter subject to such consent would "significantly and adversely affect" the
Interest thereof, as such terms are used in Section 225.2(q)(2)(i) of Regulation
Y of the Board of Governors of the Federal Reserve System or (ii) any consent of
First Union be required if the result of such consent would be to cause the
Interest (or any portion thereof) of First Union to be considered "voting
securities" for purpose of Regulation Y of the Board of Governors of the Federal
Reserve System.
5.4 REGULATORY COMPLIANCE BY FIRST UNION.
Notwithstanding anything herein to the contrary, in the event that First
Union determines that, by reason of any future federal or state rule,
regulation, guideline, order, interpretive release, request or directive (having
the force of law and where the failure to comply therewith would be unlawful)
(collectively, a "Regulatory Requirement"), it is effectively restricted or
prohibited from holding its Interest (or any equity securities distributable to
First Union in any merger, reorganization, readjustment or other
reclassification or exchange with respect to the Company or any successor
thereof) or otherwise realize upon or receive the benefits intended hereunder,
and following First Union's exercise of its reasonable best efforts to overcome
such Regulatory Requirement, the Company, the Board of Managers and the Members
shall make all reasonable efforts to take such action as First Union may deem to
be necessary to permit First Union to comply with such Regulatory Requirement.
Such action to be taken may include the Company's authorization or creation of
one or more new classes of interest and the modification or amendment of this
Agreement or any other documents or instruments executed in connection with the
limited liability company interests held by First Union; and, if compliance with
such Regulatory Requirement can not be satisfied by such efforts, First Union
shall have the right, subject to Section 7.2(b), to freely sell, exchange or
otherwise transfer all or such part of its Interest as it determines to be
necessary without the consent of the Board of Managers or any other Member to
one or more third parties and such assignee(s), upon the written consent of
First Union, shall be admitted as a substituted Member(s); provided that
notwithstanding anything to the contrary contained herein, any such transfer may
not and will not cause the Company to be treated as a "publicly traded
partnership" within the meaning of Section 7704(b) of the Code. First Union
shall give written notice to the Company, the Board of Managers and the other
Members of any such determination and the action or actions necessary to comply
with such Regulatory Requirement, and the Company, the Board of Managers and the
other Members shall take all steps to comply with such determination as
expeditiously as possible.
18
<PAGE> 23
ARTICLE VI
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS;
ALLOCATIONS; DISTRIBUTIONS
6.1 CAPITAL CONTRIBUTIONS.
(a) At the time of the closing of the transactions contemplated by the
Recapitalization Agreement dated as of April 29, 1999 among Chase, Smith &
Nephew, Inc. ("S&N") and the Company (the "Recapitalization Agreement"), the
following occurred:
(i) Chase and certain Members listed on Schedule I as "Management
Members" contributed the New Membership Interest Purchase Price (as defined
in the Recapitalization Agreement) to the Company in exchange for 664,000
Common Units;
(ii) the Company, First Union, and CB Capital Investors, L.P.
consummated the transactions contemplated by the Preferred Unit Purchase
Agreement; and
(iii) the Company distributed to S&N (1) the Existing Membership
Interest Purchase Price (as defined in (and upon the terms and conditions
set forth in) the Recapitalization Agreement) in partial redemption of
S&N's ownership Interest in the Company (and such redeemed Units
representing such ownership Interest shall cease to be outstanding and any
Units representing such ownership Interest shall have the status of
authorized but unissued Units) and (2) 54,000 Common Units in redemption of
the remainder of S&N's prior ownership interests in the Company.
(b) For Federal income tax purposes, the foregoing distribution of cash to
S&N shall be treated as a sale to the Company of an undivided interest of each
of the business assets as set forth more fully in the Recapitalization
Agreement. Moreover, S&N shall be deemed to have contributed to the Company the
remaining interests in the business assets in exchange for Units pursuant to
Section 721 of the Code.
6.2 CAPITAL ACCOUNTS; ALLOCATIONS.
(a) A separate capital account shall be maintained on the books of the
Company for each Member, which shall be adjusted (1) as of December 31 of each
year, (2) immediately prior to the acquisition of any Unit by any Person, (3)
effective as of the date of sale of the Company (whether by way of asset sale,
Unit sale, recapitalization, or merger in which the Members immediately prior to
such transaction shall cease to own a majority of all Units owned by all
Members) and (4) on the date of dissolution of the Company as follows:
(i) the amount of money and the fair market value of property (net of
any liabilities secured by such property that the Company assumes or takes
subject to) contributed by such Member to the Company shall be credited to
such Member's capital account;
19
<PAGE> 24
(ii) the amount of any distributions (including (A) the fair market
value (as determined by the Board of Managers in good faith) of property
other than cash (net of any liabilities that such Member assumes or takes
subject to) and (B) any distribution in respect of a payment with respect
to Preferred Units in accordance with Section 3.5 hereof) distributed to
such Member shall be debited from such Member's capital account; and
(iii) Net Profits (and any items of income or gain specially allocated
pursuant to Sections 6.2(b)(iii) and 6.2(c)(ii)) incurred by the Company
since the last date on which Net Profits or Net Losses shall have been
allocated to the Members shall be credited to such Member's capital account
and Net Losses (and any items of loss or deduction that are specially
allocated pursuant to Section 6.2(c)(ii)) incurred by the Company since the
last date on which Net Losses or Net Profits shall have been allocated to
the Members shall be debited to such Member's capital account, which
allocations shall be made as follows:
(A) Net Profits (or items of gross income or gain) shall be
allocated, first, to the holders of Preferred Units (other than Paid
Preferred Units) pro rata until the capital account of each such
holder equals an amount equal to the sum of (1) the aggregate
Preferred Contribution Amount with respect to all such Preferred Units
held by such holder, plus (2) the aggregate amount of the Cumulated
Preferred Return, if any, for all such Preferred Units held by such
holder plus (3) the aggregate amount of all accrued and unpaid
Preferred Return on all such Preferred Units through the date of
allocation that has not been added to Cumulated Preferred Return less
(4) the aggregate amount of all distributions pursuant to Section
6.3(a) with respect to income allocated pursuant to clause (2) and (3)
through the date of allocation (with any such allocations being deemed
to be applied first to (1), second to (2), third to (3) and fourth to
(4)); and second, to the holders of all Units pro rata according to
their respective holdings of such Units (except as otherwise required
by Sections 6.2(b)(iii) and 6.2(c)(ii)); and
(B) Net Loss shall be allocated, first, to reverse allocations
made pursuant to clause second of Section 6.2(a)(iii)(A), second, to
the holders of Common Units pro rata according to their respective
holdings of such Common Units until the capital accounts of the
holders of Common Units equal zero; third, 100% to the holders of
Preferred Units (other than Paid Preferred Units) according to their
respective holdings of such Preferred Units until their capital
accounts equal zero; and fourth, to the holders of all Units pro rata
according to their respective holdings of Units (except as otherwise
required by Section 6.2(c)(ii)).
(b) (i) Notwithstanding any provision of this Agreement to the contrary,
upon the date of each exercise of each warrant or option issued by the Company,
each Member's (including the exercising option holder's or warrant holder's)
capital account shall be reallocated (a "Capital Shift") such that after such
Capital Shift the ratio of each Member's (including the exercising option
holder's or warrant holder's) capital account (in the case of a Member who holds
Preferred Units (other than Paid Preferred Units), reduced (but not below $0) by
the
20
<PAGE> 25
aggregate of all amounts in such Member's capital account attributable to
Unreturned Original Cost or to accrued and unpaid Preferred Return through the
date of reallocation) to the aggregate of all Members' capital account balances
(less any amounts attributable to Unreturned Original Cost or to accrued and
unpaid Preferred Return through the date of reallocation on all Preferred Units)
shall be the same as the ratio of the number of Units owned by each such Member
(including the exercising option holder or warrant holder) to the aggregate
number of all Units outstanding.
(ii) Solely for purposes of determining the tax treatment to the
Members, the Company will treat (except as otherwise required by applicable
law) the exercise of a compensatory option, as though the option holder
received a cash payment from the Company in an amount equal to the
difference between the option exercise price and the fair market value of
Units received therefor, and the option holder then purchased, from the
Company for cash, the applicable number of Units at such fair market value.
Any deduction attributable to such deemed cash payment shall be allocated
to the holders of Units immediately before such payment.
(iii) Notwithstanding anything herein to the contrary, if the Company
engages in any transaction that will lead to a distribution pursuant to
Section 9.1(e)(iv), then the holders of Preferred Units shall be specially
allocated additional Net Profits (and, if there are insufficient Net
Profits, items of gross income and gain, including any Net Profits, gross
income or gain from a prior taxable year that may properly be so
allocated), pro rata (in accordance with the number of Preferred Units held
by such holders) such that, to the extent possible, after such allocation
the ratio of each Member's capital account (in the case of a Member who
holds Preferred Units (other than Paid Preferred Units), considering only
the portion of such capital account that exceeds the amount thereof
attributable to Unreturned Original Cost or to accrued and unpaid Preferred
Return through the date of reallocation on all Preferred Units) to the
aggregate of all Members' capital account balances (or, in the case of
Preferred Units (other than Paid Preferred Units), the applicable portion
thereof as aforesaid) shall be the same as the ratio of the number of Units
owned by each such Member to the aggregate number of all Units outstanding.
(c) Notwithstanding any provision of this Agreement to the contrary but
after giving effect to Section 6.2(a)(i), each Member's capital account shall be
maintained and adjusted in accordance with the Code, including (i) the
adjustments permitted or required by Code Section 704(b) (provided that such
adjustment is not reasonably likely to have a material effect on amounts
distributable to any Member pursuant to Section 9.1) and the regulations
promulgated thereunder and (ii) adjustments required to maintain capital
accounts in accordance with the "substantial economic effect test" set forth in
the regulations promulgated under Internal Revenue Code Section 704(b)
(including the "minimum gain chargeback" requirements of Sections 1.704-2(f) and
1.704-2(i)(4), the "qualified income offset" requirements of Section
1.704-1(b)(2)(ii)(d) and the "partner nonrecourse debt" allocations of Treasury
Regulation Sections 1.704-2(c), 1.704-2(i)(2) and 1.704-2(j)(1)).
(d) The Company's ordinary income and losses and capital gains and losses
as determined for Federal income tax purposes (and each item of income, gain,
loss or deduction
21
<PAGE> 26
entering into the calculation thereof) shall be allocated to
the Members in the same proportions as the corresponding "book" items are
allocated pursuant to Sections 6.2(a), (b)(iii), and (c). Notwithstanding the
foregoing sentence, Federal income tax items relating to "Section 704(c)
Property" (as defined in Treasury Regulation Section 1.704-3(a)(3) and including
(i) all of the Company's assets deemed to be contributed pursuant to this
Section 6.2 and (ii) any Company property that, at the election of the Board of
Managers, is subject to a revaluation upon the occurrence of an event specified
in Treasury Regulation Section 1.704-1(b)(2)(iv)(f)) shall be allocated among
the Members in accordance with Section 704(c) of the Code taking into account
the difference between the fair market value and the tax basis of such Section
704(c) Property as of the date of its contribution using the so-called
"traditional method with curative allocations" described in Treasury Regulation
Section 1.704-3(c).
(e) Any Member, including any substitute Member, who shall receive any
Units by means of a transfer to him of Units of another Member shall have a
capital account that reflects the capital account associated with the
transferred Units.
(f) No Member shall have an obligation to the Company or any Member to
restore a negative or deficit capital account.
6.3 DISTRIBUTIONS.
Distributions from the Company shall be made in the following order of
priority:
(a) First, (i) within 10 days following the end of each calendar quarter,
the Company will distribute to each Member a cash amount equal to twenty-five
percent (25%) of the Taxable Income Distribution Amount of such Member for such
calendar year as estimated by the Board of Managers; and (ii) with respect to
tax payments to be made with income tax returns filed for a full calendar year
or with respect to adjustments to such returns imposed by the Internal Revenue
Service or other taxing authority, such distribution to Members shall be equal
to the Taxable Income Distribution Amount for each calendar year minus the
aggregate amount distributed for such calendar year as provided in clause (i)
above; provided that in no event shall the Company be obligated to distribute
cash amounts to Members in excess of the aggregate distributions made to the
Company by Subsidiaries of the Company (less any amounts retained by the
Company, which in the Board of Managers sole discretion, are necessary to be
retained by the Company). In the event that the amount determined under clause
(ii) above is a negative amount, the amount of any distributions pursuant to
this Section 6.3(a) in the succeeding calendar year (or if necessary any
subsequent calendar years) shall be reduced by such negative amount.
(b) Second, distributions shall be made, at such times and in such amounts
as the Board of Managers may determine, to the holders of Preferred Units with
respect to the Preferred Return as provided in Section 3.3(a) (but only to the
extent any such distribution has not already been made pursuant to Section
6.3(a)).
(c) Third, subject to Section 3.6(c) such other distributions of the
Company to holders of Units, whether in cash or in kind, shall be made at such
times and in such amounts as
22
<PAGE> 27
the Board of Managers may determine, and shall be made to the Members pro
rata in accordance with their respective holdings of Units at the date of
distribution.
6.4 LIABILITY FOR RETURN OF CAPITAL.
No Member or Manager shall have any liability for the return of any
Member's Capital Contribution, which Capital Contribution shall be payable
solely from the assets of the Company at the absolute discretion of the Board of
Managers, subject to the requirements of the Delaware Act.
6.5 ADMINISTRATIVE MATTERS.
(a) The Company hereby designates Chase as the "tax matters partner" for
purposes of Code Section 6231 and the regulations promulgated thereunder. In
such capacity, Chase may cause the Company to make any tax elections that it
deems necessary or advisable. Chase shall be reimbursed by the Company for any
expenses incurred in its capacity as tax matters partner. (b) It is the
intention of the Members that the Company shall be taxed as a "partnership" for
federal, state, local and foreign income tax purposes. The Members shall take
all reasonable actions, including the amendment of this Agreement and the
execution of other documents, as may reasonably be required in order for the
Company to qualify for and receive "partnership" treatment for federal, state,
local and foreign income tax purposes.
(c) The fiscal year of the Company shall be the calendar year. The books
and records of the Company shall be maintained in accordance with generally
accepted accounting principles and Code Section 704(b) and the regulations
promulgated thereunder.
(d) As to each of the first three fiscal quarters of the Company and each fiscal
year of the Company, the Company shall send to each Member a copy of (a) the
balance sheet of the Company as of the end of the fiscal quarter or year, (b) an
income statement of the Company for such quarter or year, and (c) a statement
showing the amounts distributed by the Company to Members in respect of such
quarter or year. Such financial statements shall be delivered no later than
forty-five (45) days following the end of the fiscal quarter to which the
statements apply, except that the financial statements relating to the end of
the fiscal year shall be delivered no later than ninety (90) days following the
end of such fiscal year.
ARTICLE VII
TRANSFERABILITY OF THE MEMBERS' INTEREST
7.1 LIMITATIONS ON TRANSFERABILITY OF UNITS.
(a) Except as otherwise expressly authorized herein, no Member may sell,
assign, pledge or otherwise transfer or encumber (collectively, "Transfer") all
or any part of its Units or its Interest, and no transferees of all or any part
of the Units or the Interest of a Member shall be admitted as a substituted
Member, without, in either event, having obtained the prior written consent of a
Majority in Interest of the Members (excluding Members that are transferring
23
<PAGE> 28
Units), which consent may be withheld in their sole discretion, and without
complying with the applicable provisions of the Members' Agreement applicable to
such Units or Interest, as the case may be. Notwithstanding the preceding
sentence, the prior written consent of a Majority in Interest of the Members
shall not be required for a Transfer of Units (i) made in compliance with
Sections 2, 3, 4 and 6, as applicable, of the Members' Agreement or (ii) that
constitutes a pledge of Units by a Management Member to secure a loan by the
Company to such Person. Any Transfer or attempted Transfer of any Units or
Interest in the Company in violation of any of the provisions of this Section
7.1 shall be void, and the Company shall not record such Transfer on its books
or treat any purported transferee of such Units (or Interest) as the owner of
such Units (or Interest) for any purpose. The Board of Managers shall amend
SCHEDULE I hereto from time to time to reflect Transfers made in accordance
with, and as permitted under, this Section 7.1 and the Members' Agreement.
(b) Notwithstanding anything herein to the contrary, but subject to Section
7.2(b), a holder of a Preferred Unit may freely transfer such Preferred Unit
without the consent of any Member or the Board of Managers and such assignee(s),
upon the written consent of such holder shall be admitted as a substituted
Member; provided, that, such transfer will not cause the Company to be treated
as a "publicly traded partnership" within the meaning of Section 7704(b) of the
Code.
(c) Prior to the Transfer (other than by means of a public offering) of
Units to any Person who is not a party to this Agreement, such Person shall
execute a counterpart to this Agreement and the Members' Agreement and shall
agree to be bound by the terms hereof and thereof.
7.2 OTHER PROVISIONS WITH RESPECT TO TRANSFERABILITY OF UNITS.
(a) Transfer of any Unit shall constitute the Transfer of a proportionate
share of each attribute constituting the Member's Interest represented by the
Unit.
(b) Each Member shall, after complying, or making provision to comply, with
Section 7.1, but prior to any Transfer of Units, give written notice to the
Company of such proposed Transfer. Each such notice shall describe the manner
and circumstances of the proposed Transfer. Upon request by the Company, the
Member delivering such notice shall deliver a written opinion, addressed to the
Company, of counsel for such Member, stating that in the opinion of such counsel
(which opinion and counsel shall be reasonably satisfactory to the Company) such
proposed Transfer does not involve a transaction requiring registration or
qualification of such Units under the Securities Act or the securities or "blue
sky" laws of any state of the United States. Such Member shall thereupon be
entitled to Transfer Units in accordance with the terms of the notice delivered
to the Company, if the Company does not request such opinion within five days
after delivery of such notice, or, if the Company requests such opinion, and
does not reasonably object (based on the contents of such opinion) to such
Transfer within five days after delivery of such opinion.
24
<PAGE> 29
ARTICLE VIII
ADDITION OF MEMBERS, WITHDRAWAL OF MEMBERS
8.1 ADDITION OF MEMBERS.
Subject to Section 3.6 and Section 10.2 hereof, the Board of Managers, with
the consent of a Majority in Interest of Members, shall have the right to amend
this Agreement and cause the Company to issue additional Units and to admit
additional Members upon the acquisition of such Units upon such terms and
conditions, at such time or times, and for such Capital Contributions as shall
be determined by the Board of Managers. In connection with Transfers permitted
under this Agreement or the admission of an additional Member, the Board of
Managers shall amend SCHEDULE I hereof to reflect the name and address of the
additional Member. Prior to the admission of any Person as a Member, such Person
shall execute a counterpart to this Agreement and the Members' Agreement and
shall agree to be bound by the terms hereof and thereof.
8.2 WITHDRAWAL OF MEMBERS.
No Member shall have the right to withdraw from the Company except with the
consent of the Board of Managers and upon such terms and conditions as may be
specifically agreed upon between the Company and the withdrawing Member. The
provisions hereof with respect to distributions upon withdrawal are exclusive,
and no Member shall be entitled to claim any further or different distribution
upon withdrawal under Section 18-604 of the Delaware Act or otherwise. This
Section 8.2 shall not apply to Transfers permitted under this Agreement.
ARTICLE IX
DISSOLUTION OF THE COMPANY; CONTINUATION
9.1 DISSOLUTION OF THE COMPANY.
(a) Subject to the provisions of Section 9.2, the Company shall be
dissolved and its affairs wound up and terminated upon the first to occur of the
following:
(i) December 31, 2030;
(ii) the determination of the Board of Managers and a Majority in
Interest of Members to dissolve the Company; or
(iii) the occurrence of an Event of Withdrawal of a Member or any
other event causing a dissolution of the Company under Section 18-801 of
the Delaware Act.
(b) Upon dissolution of the Company, the Company's affairs shall be
promptly wound up in accordance with the provisions of this Section 9.1. The
Company shall engage in no further business except as may be necessary, in the
reasonable discretion of the Board of Managers, to preserve the value of the
Company's assets during the period of dissolution and liquidation.
25
<PAGE> 30
(c) Distributions to the Members in liquidation may be made in cash or in
kind, or partly in cash and partly in kind, as determined by the Board of
Managers. With respect to distributions in kind, the capital account of each
Member receiving such distribution shall be adjusted as if such distributed
property had been sold at fair market value and the gain or loss on such sale
had been allocated to such Member.
(d) The Net Profits and Net Losses of the Company during the period of
dissolution and liquidation shall be allocated among the Members in accordance
with the provisions of Section 6.2.
(e) The assets of the Company (including, without limitation, proceeds from
the sale or other disposition of any assets during the period of dissolution and
liquidation) shall be applied as follows:
(i) First, to repay any indebtedness of the Company, whether to third
parties or the Members, in the order of priority required by law;
(ii) Next, to any reserves which the Board of Managers reasonably
deems necessary for contingent or unforeseen liabilities or obligations of
the Company (which reserves when they become unnecessary shall be
distributed in accordance with the provisions of (iii) and (iv), below);
(iii) Next, subject to and in accordance with Section 3.3(b), to the
holders of Preferred Units, to the extent of the Preferred Liquidation
Preference of such Preferred Units held by each such holder, and
(iv) Next, to the Members in proportion to their respective positive
capital account balances (after taking into account all adjustments to the
Members' capital accounts required under Section 6.2).
9.2 CONTINUATION OF THE COMPANY.
Notwithstanding the provisions of Section 9.1, the occurrence of an Event
of Withdrawal of a Member shall not dissolve the Company if within 90 days after
the occurrence of such Event of Withdrawal of a Member the business of the
Company is continued by a Majority in Interest of Members remaining after such
Event of Withdrawal.
ARTICLE X
MISCELLANEOUS
10.1 LIMITATION ON LIABILITY.
The debts, obligations and liabilities of the Company, whether arising in
contract, tort or otherwise, shall be solely the debts, obligations and
liabilities of the Company, and no Member or Manager of the Company shall be
obligated personally for any such debt, obligation or liability of the Company
solely by reason of being a Member or Manager.
26
<PAGE> 31
10.2 AMENDMENTS.
This Agreement may be amended only upon the written consent of (i) the
Board of Managers, (ii) a Majority in Interest of Preferred Members, and (iii) a
Majority in Interest of Members; provided, however, that no modification or
amendment shall be effective to reduce the percentage of the Units the consent
of the holders of which is required under this Section 10.2 nor shall any
modification or amendment discriminate against any Member without the consent of
such Member; provided, further, however, that any amendment that would adversely
affect the rights hereunder of any Member, in its capacity as Member, without
similarly affecting the rights hereunder of all Members of the same class, shall
not be effective without such Member's prior written consent.
10.3 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Delaware without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
* * * * *
27
<PAGE> 32
IN WITNESS WHEREOF, the undersigned have duly executed this Operating
Agreement as of the date first written above.
DONJOY, L.L.C.
By: /s/ Cyril Talbot III
---------------------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
CHASE DJ PARTNERS, LLC,
By: Fairfield Chase Medical Partners, LLC,
its Managing Member
By: /s/ Charles T. Orsatti
---------------------------------
Name: Charles T. Orsatti
Title: Managing Member
SMITH & NEPHEW DISPOSAL, INC.
By: /s/ Cliff Lomax
---------------------------------
Name: Cliff Lomax
Title: President
CB CAPITAL INVESTORS, L.P.
By: CB Capital Investors, Inc.,
its general partner
By: /s/ Damion Wicker
---------------------------------
Name: Damion Wicker
Title: General Partner
1
<PAGE> 33
/s/ Leslie H. Cross
-----------------------------------
Leslie H. Cross
/s/ Michael R. McBrayer
-----------------------------------
Michael R. McBrayer
/s/ Cyril Talbot III
-----------------------------------
Cyril Talbot III
FIRST UNION INVESTORS, INC.
By: /s/ Frederick W. Eubank II
-----------------------------------
Name: Frederick W. Eubank II
Title: Senior Vice President
DJC, INC.
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
2
<PAGE> 34
TCW/CRESCENT MEZZANINE TRUST II
By: TCW/Crescent Mezzanine II, L.P.,
as general partner or managing owner
By: TCW/Crescent Mezzanine, L.L.C.,
its general partner
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
TCW LEVERAGED INCOME TRUST II, L.P.
By: TCW Investment Management Company,
as Investment Advisor
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
By: TCW (LINC II), L.P., as general partner
By: TCW Advisors (Bermuda), Ltd.,
as its general partner
By: /s/ Mark L. Attanasio
-----------------------------------
Name: Mark L. Attanasio
Title: Group Managing Director
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
as Portfolio Manager and as Attorney-in-Fact
the Partnership
By: /s/ John C. Rocchio
-----------------------------------
Name: John C. Rocchio
Title: Managing Director
DonJoy, L.L.C. Amended and Restated Operating Agreement
3
<PAGE> 35
<TABLE>
<CAPTION>
SCHEDULE I -- SCHEDULE OF MEMBERS
Common Units Preferred Units Percentages
<S> <C> <C> <C>
Chase DJ Partners, LLC 645,500 85.14%
c/o Chase Capital Partners
380 Madison Avenue, 12th Floor
New York, New York 10017
Smith & Nephew Disposal, Inc. 54,000 7.12%
c/o Smith & Nephew, Inc.
1450 Brooks Road
Memphis, TN 38116
PREFERRED UNIT HOLDERS
CB Capital Investors, L.P. 20,427 2.69%
c/o Chase Capital Partners
380 Madison Avenue, 12th Floor
New York, New York 10017
First Union Investors, Inc. 6,362 0.84%
One First Union Center
Charlotte, NC 28288
DJC, Inc. 9,631 1.27%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
TCW Crescent Mezzanine Trust II 2,090 0.28%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
TCW Leveraged Income Trust II, L.P. 1,004 0.13%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
</TABLE>
<PAGE> 36
<TABLE>
<S> <C> <C> <C> <C>
Crescent MACH I Partners, L.P. 670 0.09%
c/o TCW/Crescent Mezzanine LLC
11100 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
MANAGEMENT MEMBERS
Les Cross 12,500 1.65%
3330 Caminito Daniella
Del Mar, CA 92014
Michael McBrayer 3,000 0.40%
4308 Horizon Drive
Carlsbad CA 92008
Cy Talbot 3,000 0.40%
----- --------- -----
2511 Lozana Road
Del Mar, CA 92014
Total 718,000 40,184 100%
-----
</TABLE>
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF INCORPORATION
OF
DJ ORTHOPEDIC CAPITAL CORPORATION
DJ Orthopedic Capital Corporation (hereinafter called the "Company"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, does hereby certify:
1. The current name of the Company is DJ Orthopedic Capital Corporation.
2. The Certificate of Incorporation of the Company filed on March 22,
1999 is hereby amended by deleting ARTICLE FIRST in its entirety and replacing
it with the following:
ARTICLE FIRST
The name of the corporation (herein called the "Corporation") is
DJ ORTHOPEDICS CAPITAL CORPORATION.
IN WITNESS WHEREOF, the undersigned has executed this certificate
this 4th day of June, 1999.
/s/ Todd H. Greene
------------------
Name: Todd H. Greene
Title: Sole Incorporator
<PAGE> 2
CERTIFICATE OF INCORPORATION
OF
DJ ORTHOPEDIC CAPITAL CORPORATION
---------------------------
ARTICLE FIRST
The name of the corporation (herein called the "Corporation") is
DJ Orthopedic Capital Corporation.
ARTICLE SECOND
The address of the registered office of the Corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, 19901. The
name of the registered agent of the Corporation at such address is National
Registered Agents, Inc.
ARTICLE THIRD
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE FOURTH
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 1,000 shares, all of which shall be
of one class, shall be designated Common Stock and shall have a par value of
$.01 per share.
<PAGE> 3
ARTICLE FIFTH
The name and mailing address of the incorporator is as follows:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
Todd H. Greene, Esq. c/o O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
</TABLE>
ARTICLE SIXTH
The number of directors of the Corporation shall be such as from
time to time shall be fixed in the manner provided in the By-laws of the
Corporation. The election of directors of the Corporation need not be by ballot
unless the By-laws so require.
ARTICLE SEVENTH
A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after the
date of incorporation of the Corporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
2
<PAGE> 4
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE EIGHTH
For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation and of its directors and stockholders, it is
further provided:
(a) In furtherance and not in limitation of the powers conferred
by the laws of the State of Delaware, the Board of Directors is expressly
authorized and empowered:
(i) to make, alter, amend or repeal the By-laws in any
manner not inconsistent with the laws of the State of Delaware or
this Certificate of Incorporation;
(ii) without the assent or vote of the stockholders, to
authorize and issue securities and obligations of the Corporation,
secured or unsecured, and to include therein such provisions as to
redemption, conversion or other terms thereof as the Board of
Directors in its sole discretion may determine, and to authorize
the mortgaging or pledging, as security therefor, of any property
of the Corporation, real or personal, including after-acquired
property;
(iii) to determine whether any, and if any, what part, of
the net profits of the Corporation or of its surplus shall be
declared in dividends and paid to the stockholders, and to direct
and determine the use and disposition of any such net profits or
such surplus; and
3
<PAGE> 5
(iv) to fix from time to time the amount of net profits of
the Corporation or of its surplus to be reserved as working
capital or for any other lawful purpose.
In addition to the powers and authorities herein or by statute
expressly conferred upon it, the Board of Directors may exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation, subject, nevertheless, to the provisions of the laws of the
State of Delaware, of this Certificate of Incorporation and of the
By-laws of the Corporation.
(b) Any director or any officer elected or appointed by the
stockholders or by the Board of Directors may be removed at any time in
such manner as shall be provided in the By-laws of the Corporation.
(c) From time to time any of the provisions of this Certificate of
Incorporation may be altered, amended or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may
be added or inserted, in the manner and at the time prescribed by said
laws, and all rights at any time conferred upon the stockholders of the
Corporation by this Certificate of Incorporation are granted subject to
the provisions of this paragraph (c).
ARTICLE NINTH
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of the Delaware General Corporation Law or on the
application of trustees in
4
<PAGE> 6
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of the Delaware General Corporation Law order a
meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of the Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree on any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
* * * *
5
<PAGE> 7
IN WITNESS WHEREOF, I, the undersigned, being the sole
incorporator hereinabove named, for the purpose of forming a corporation
pursuant to the General Corporation Law of the State of Delaware, DO HEREBY
CERTIFY, under penalties of perjury, that this is my act and deed and that the
facts hereinabove stated are truly set forth and, accordingly, I have hereunto
set my hand as of the 22nd day of March, 1999.
/s/ Todd H. Greene
-----------------------------------
Todd H. Greene
Sole Incorporator
<PAGE> 1
EXHIBIT 3.4
================================================================================
DJ ORTHOPEDICS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
---------------------------------------
BY-LAWS
---------------------------------------
ADOPTED AS OF JUNE 30, 1999
================================================================================
<PAGE> 2
BY-LAWS
OF
DJ ORTHOPEDICS, LLC
INTRODUCTION
A. Agreement. These By-laws (the "By-laws") are subject to and
made part of the Amended and Restated Operating Agreement dated as of June 30,
1999, as the same may from time to time be amended and in effect (the "Operating
Agreement"), of DJ Orthopedics, LLC, a Delaware limited liability company (the
"Company").
B. Definitions. Capitalized terms used and not defined in these
By-laws have the meanings ascribed to such terms in the Operating Agreement.
ARTICLE I
MEETINGS OF MEMBERS
1.1 PLACE OF MEETINGS AND MEETINGS BY TELEPHONE.
Meetings of Members shall be held at any place designated by the Board of
Managers. In the absence of any such designation, meetings of Members shall be
held at the principal place of business of the Company. Any meeting of the
Members may be held by conference telephone or similar communication equipment
so long as all Members participating in the meeting can hear one another, and
all Members participating by telephone or similar communication equipment shall
be deemed to be present in person at the meeting.
1.2 CALL OF MEETINGS.
Meetings of Members may be called at any time by the Board of Managers or
the Chief Executive Officer and President for the purpose of taking action upon
any matter requiring the vote or authority of the Members as provided herein or
in the Operating Agreement or upon any other matter as to which such vote or
authority is deemed by the Board of Managers or the Chief Executive Officer and
President to be necessary or desirable.
1.3 NOTICE OF MEETINGS OF MEMBERS.
All notices of meetings of Members shall be sent or otherwise given in
accordance with Section 1.4 of this Article I not less then ten nor more than
sixty days before the date of the meeting. The notice shall specify the place,
date and hour of the meeting.
<PAGE> 3
1.4 MANNER OF GIVING NOTICE.
Notice of any meeting of Members shall be given personally or by
telephone to each Member (in the event any Member is a corporation, partnership
or limited liability company, such notice shall be to any vice president,
general partner, managing member, respectively, or other responsible officer of
such entity) or sent by first class mail, postage prepaid, by telegram or
telecopy (or similar electronic means) or by a nationally recognized overnight
courier, charges prepaid, addressed to the Member at the address of that Member
appearing on the books of the Company or given by the Member to the Company for
the purpose of notice. Notice shall be deemed to have been given at the time
when delivered either personally or by telephone, or at the time when deposited
in the mail or with a nationally recognized overnight courier, or when sent by
telegram or telecopy (or similar electronic means).
1.5 ADJOURNED MEETING; NOTICE.
Any meeting of Members, whether or not a quorum is present, may be
adjourned from time to time by the vote of those Members who hold in the
aggregate greater than 50% of the number of Units then outstanding (the
"Majority in Interest of Members") represented at that meeting, either in person
or by proxy. When any meeting of Members is adjourned to another time or place,
notice need not be given of the adjourned meeting, unless a new record date of
the adjourned meeting is fixed or unless the adjournment is for more than thirty
days from the date set for the original meeting, in which case the Board of
Managers shall set a new record date and shall give notice in accordance with
the provisions of Sections 1.3 and 1.4 of this Article I. At any adjourned
meeting, the Company may transact any business that might have been transacted
at the original meeting.
1.6 QUORUM; VOTING.
At any meeting of the Members, the presence of a Majority in Interest of
Members, in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of Members holding such other
percentage of Membership Units is required by the Operating Agreement, these
By-laws or applicable law. Except as otherwise required by the Operating
Agreement, these By-laws or applicable law, all matters shall be determined by
an affirmative vote of a Majority in Interest of Members.
1.7 WAIVER OF NOTICE BY CONSENT OF ABSENT MEMBERS.
The transactions of a meeting of Members, however called and noticed and
wherever held, shall be as valid as though taken at a meeting duly held after
regular call and notice if a quorum is present either in person or by proxy and
if, either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of Members. Attendance by a person at a
-2-
<PAGE> 4
meeting shall also constitute a waiver of notice of that meeting, except when
the person objects at the beginning of the meeting to the transaction of any
business because the meeting was not lawfully called or convened.
1.8 MEMBER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action that may be taken at any meeting of Members may be taken
without a meeting and without prior notice if a consent in writing setting forth
the action so taken is signed by a Majority in Interest of Members (or Members
holding such other percentage of Membership Units as is required to authorize or
take such action under the terms of the Operating Agreement, these By-laws or
applicable law). Any such written consent may be executed and given by telecopy
or similar electronic means. Such consents shall be filed with the Secretary of
the Company and shall be maintained in the Company's records. A copy of any such
consent shall be provided to any Member who does not sign such consent.
1.9 RECORD DATE FOR MEMBER NOTICE, VOTING AND GIVING CONSENTS.
(a) For purposes of determining the Members entitled to vote or act
at any meeting or adjournment thereof, the Board of Managers may fix in advance
a record date which shall not be greater than sixty days nor fewer than ten days
before the date of any such meeting. If the Board of Managers does not so fix a
record date, the record date for determining Members entitled to notice of or to
vote at a meeting of Members shall be at the close of business on the business
day immediately preceding the day on which notice is given, or if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining the Members entitled to give
consent to action in writing without a meeting, (i) when no prior action of the
Board of Managers has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the Board of Managers has been
taken, shall be such date as determined for that purpose by the Board of
Managers, which record date shall not precede the date upon which the resolution
fixing it is adopted by the Board of Managers and shall not be more than twenty
days after the date of such resolution.
(c) Members of record on the record date as herein determined shall
have any right to vote or to act at any meeting or give consent to any action
relating to such record date, provided that no Member who transfers all or part
of such Member's Membership Unit after a record date (and no transferee of such
Membership Unit) shall have the right to vote or act with respect to the
transferred Membership Unit as regards the matter for which the record date was
set.
1.10 PROXIES.
Every Member entitled to vote or act on any matter at a meeting of
Members shall have the right to do so either in person or by proxy, provided
that an instrument authorizing such a proxy to act is executed by the Member in
writing and dated not more than eleven months before the meeting, unless the
instrument specifically provides for a
-3-
<PAGE> 5
longer period. A proxy shall be deemed executed by a Member if the Member's name
is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the Member or the Member's attorney-in-fact. A
valid proxy that does not state that it is irrevocable shall continue in full
force and effect unless (i) revoked by (a) the person executing it before the
vote pursuant to that proxy by a writing delivered to the Company stating that
the proxy is revoked or (b) a subsequent proxy executed by, or by attendance at
the meeting and voting in person by, the person executing that proxy or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the Company before the vote pursuant to that proxy is counted. A proxy
purporting to be executed by or on behalf of a Member shall be deemed valid
unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. Except to the extent inconsistent with
the provisions hereof, the Limited Liability Company Act of the State of
Delaware, and judicial construction thereof by the Courts of the State of
Delaware, shall be applicable to proxies granted by any Member.
ARTICLE II
MANAGERS AND MEETINGS OF MANAGERS
2.1 POWERS.
The powers of the Managers shall be as provided herein and in the
Operating Agreement.
2.2 NUMBER OF MANAGERS.
The Board of Managers shall consist of at least five Managers. The number
of Managers shall be initially nine and may thereafter be changed from time to
time by action of the Managers.
2.3 VACANCIES.
Newly created vacancies on the Board of Managers resulting from an
increase in the number of Managers and vacancies occurring on the Board of
Managers for any other reason, including the removal of Managers without cause,
may be filled as provided in the Operating Agreement.
2.4 PLACE OF MEETINGS AND MEETINGS BY TELEPHONE.
All meetings of the Board of Managers may be held at any place that has
been designated from time to time by resolution of the Board of Managers or in
any notice properly given with respect to any such meeting. In the absence of
such a designation, regular meetings shall be held at the principal place of
business of the Company. Any meeting, regular or special, may be held by
conference telephone or similar communication equipment so long as all Managers
participating in the meeting can hear one another, and all Managers
participating by telephone or similar communication equipment shall be deemed to
be present in person at the meeting.
-4-
<PAGE> 6
2.5 REGULAR MEETINGS.
Regular meetings of the Board of Managers shall be held at such times and
at such places as shall be fixed by approval of the Managers. Such regular
meetings may be held without notice.
2.6 SPECIAL MEETINGS.
Special meetings of the Board of Managers for any purpose or purposes may
be called at any time by any Manager. Notice of the time and place of a special
meeting shall be delivered to each Manager (a) personally, (b) by telephone (and
confirmed by one of the methods set out in the immediately succeeding clause
(c)), or (c) by telegram, telecopy (or similar electronic means), first-class
mail or nationally recognized overnight courier, charges prepaid, addressed to
each Manager at that Manager's address as it is shown on the records of the
Company. If the notice is mailed, it shall be deposited in the United States
mail at least ten calendar days before the time of the holding of the meeting.
If the notice is delivered personally or by telephone or by telegram, telecopy
(or similar electronic means) or by a nationally recognized overnight courier,
it shall be given at least twenty-four hours before the time of the holding of
the meeting. Any oral notice given personally or by telephone may be
communicated either to the Manager or to a person at the office of the Manager
who the person giving the notice has reason to believe will promptly communicate
it to the Manager. The notice need not specify the purpose of the meeting.
2.7 QUORUM; CHAIRMAN.
The Members holding a majority of the votes entitled to be cast shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 2.9 of this Article II. Every act or decision done or made
by the affirmative vote of a majority of Managers entitled to cast votes at a
meeting duly held at which a quorum is present shall be regarded as the act of
the Board of Managers, except to the extent that the vote of a higher number of
Managers is required by the Operating Agreement, these By-laws or applicable
law. The Board of Managers may from time to time appoint any Manager to serve as
Chairman of the Board of Managers, who shall preside at all meetings of the
Board of Managers and of the Members. If at the time of any such meeting, there
shall not be a Chairman of the Board of Managers, or the then incumbent Chairman
does not attend or participate in such meeting, then the Board of Managers shall
appoint a person to preside at such meeting.
2.8 WAIVER OF NOTICE.
Notice of any meeting need not be given to any Manager who either before
or after the meeting signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents, and approvals
shall be filed with the records of the Company or made a part of the minutes of
the meeting. Notice of a meeting shall
-5-
<PAGE> 7
also be deemed given to any Manager who attends the meeting without protesting,
at or prior to its commencement, the lack of notice to that Manager.
2.9 ADJOURNMENT.
Managers present at any meeting entitled to cast a majority of all votes
entitled to be cast by such Managers, whether or not constituting a quorum, may
adjourn any meeting to another time and place. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than forty-eight hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 6 of this Article II.
2.10 ACTION WITHOUT A MEETING.
Any action to be taken by the Board of Managers at a meeting may be taken
without such meeting by the written consent of all the Managers then in office.
Any such written consent may be executed and given by telecopy or similar
electronic means. Such written consents shall be filed with the minutes of the
proceedings of the Board of Managers.
2.11 DELEGATION OF POWER.
Any Manager may, by power of attorney, delegate his power to any
other Manager or Managers; provided, however, that in no case shall fewer than
two Managers personally exercise the powers granted to the Managers, except as
otherwise provided in the Operating Agreement or by resolution of the Board of
Managers. A Manager represented by another Manager pursuant to such power of
attorney shall be deemed to be present for purposes of establishing a quorum and
satisfying any voting requirements. The Board of Managers may, by resolution,
delegate any or all of their powers and duties granted hereunder or under the
Operating Agreement to one or more committees of the Board of Managers, each
consisting of one or more Managers, or to one or more officers, employees or
agents (including, without limitation, Members), and to the extent any such
powers or duties are so delegated, action by the delegate or delegates shall be
deemed for all purposes to be action by the Board of Managers. Except as
otherwise provided in the Operating Agreement, all such delegates shall serve at
the pleasure of the Board of Managers. To the extent applicable, notice shall be
given to, and action may be taken by, any delegate of the Board of Managers as
herein provided with respect to notice to, and action by, the Board of Managers.
2.12 VOTING OF MANAGERS.
Each Manager shall be entitled to one vote on all matters the
Managers are entitled to vote thereon, except for the Chase Managing Member (as
defined in the Members' Agreement of DonJoy, L.L.C., dated as of June 18, 1999,
among DonJoy, L.L.C. and its members signatory thereto), who shall be entitled
to six votes on all matters the Managers are entitled to vote thereon.
-6-
<PAGE> 8
ARTICLE III
OFFICERS
3.1 OFFICERS.
The officers of the Company shall be a Chief Executive Officer and
President, a Secretary and a Chief Financial Officer. The Company may also have,
at the discretion of the Board of Managers, such other officers as may be
appointed in accordance with the provisions of Section 3.3 of this Article III,
including, without limitation, any number of Vice Presidents. Any number of
offices may be held by the same person. Officers may, but need not, be Managers.
3.2 ELECTION OF OFFICERS.
The officers of the Company shall be chosen by the Board of Managers, and
each shall serve at the pleasure of the Board of Managers, subject to the
rights, if any, of an officer under any contract of employment.
3.3 ADDITIONAL OFFICERS.
The Board of Managers may appoint and may empower the Chief Executive
Officer and President to appoint such additional officers as the business of the
Company may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-laws or as the
Board of Managers (or, to the extent the power to prescribe authorities and
duties of additional officers is delegated to him or her, the Chief Executive
Officer and President) may from time to time determine.
3.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, with or without cause, by the Board of
Managers at any regular or special meeting of the Board of Managers or by such
officer, if any, upon whom such power of removal may be conferred by the Board
of Managers. Any officer may resign at any time by giving written notice to the
Company. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice, and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Company under any contract to which the officer is a
party.
3.5 VACANCIES IN OFFICES.
A vacancy in any office because of death, resignation, removal,
disqualification or other cause shall be filled by the Board of Managers,
subject in the case of the appointment of additional officers by the Chief
Executive Officer and President in accordance with Section 3.3 of this Article
III. The Chief Executive Officer and
-7-
<PAGE> 9
President may make temporary appointments to a vacant office reporting to the
Chief Executive Officer and President pending action by the Board of Managers.
3.6 CHIEF EXECUTIVE OFFICER AND PRESIDENT.
The Chief Executive Officer and President shall, subject to the control
of the Board of Managers, be responsible for the general supervision, direction
and control of the business and the officers of the Company. He or she shall
have the general powers and duties of management usually vested in the office of
Chief Executive Officer and President of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Managers or these
By-laws.
3.7 SECRETARY.
The Secretary shall keep or cause to be kept at the principal place of
business of the Company or such other place as the Board of Managers may direct
a book of minutes of all meetings and actions of the Board of Managers,
committees or other delegates of the Board of Managers (appointed in accordance
with the provisions of Section 2.11 of Article II) and the Members. The
Secretary shall keep or cause to be kept at the principal place of business of
the Company a register or a duplicate register showing the names of all Members
and their addresses, the class and percentage interests in the Company held by
each, the number and date of certificates issued for the same, and the number
and date of cancellation of every certificate surrendered for cancellation. The
Secretary shall give or cause to be given notice of all meetings of the Members
and of the Board of Managers (or committees or other delegates thereof) required
to be given by these By-laws or by applicable law and shall have such other
powers and perform such other duties as may be prescribed by the Board of
Managers or the Chief Executive Officer and President or by these By-laws.
3.8 CHIEF FINANCIAL OFFICER.
The Chief Financial Officer shall keep and maintain or cause to be kept
and maintained adequate and correct books and records of accounts of the
properties and business transactions of the Company. The books of account shall
at all reasonable times be open to inspection by any Manager. The Chief
Financial Officer shall deposit all monies and other valuables in the name and
to the credit of the Company with such depositaries as may be designated by the
Board of Managers. He or she shall disburse the funds of the Company as may be
ordered by the Board of Managers, shall render to the Chief Executive Officer
and President and the Board of Managers, whenever they request it, an account of
all of his or her transactions as Chief Financial Officer and of the financial
condition of the Company and shall have other powers and perform such other
duties as may be prescribed by the Board of Managers or the Chief Executive
Officer and President or these By-laws.
-8-
<PAGE> 10
ARTICLE IV
MAINTENANCE AND INSPECTION OF RECORDS
4.1 MEMBER LIST.
The Company shall maintain at its principal place of business a record of
its Members, giving the names and addresses of all Members and the class and
Membership Units in the Company held by each Member. Subject to such reasonable
standards (including standards governing what information and documents are to
be furnished and at whose expense) as may be established by the Board of
Managers from time to time, each Member has the right to obtain from the Company
from time to time upon reasonable demand for any purpose reasonably related to
the Member's interest as a Member of the Company a record of the Company's
Members.
4.2 BY-LAWS.
The Company shall keep at its principal place of business the original or
a copy of these By-laws as amended to date, which shall be open to inspection by
the Members at all reasonable times during office hours.
4.3 OTHER RECORDS.
The accounting books and records, minutes of proceedings of the Members
and the Board of Managers and any committees or delegates of the Board of
Managers and all other information pertaining to the Company that is required to
be made available to the Members under the Delaware Act shall be kept at such
place or places designated by the Board of Managers or in the absence of such
designation, at the principal place of business of the Company. The minutes
shall be kept in written form and the accounting books and records and other
information shall be kept either in written form or in any other form capable of
being converted into written form. The books of account and records of the
Company shall be maintained in accordance with generally accepted accounting
principles consistently applied during the term of the Company, wherein all
transactions, matters and things relating to the business and properties of the
Company shall be currently entered, subject to such reasonable standards
(including standards, governing what information and documents are to be
furnished and at whose expense) as may be established by the Board of Managers
from time to time; and minutes, accounting books and records and other
information shall be open to inspection upon the written demand of any Member at
any reasonable time during usual business hours for purposes reasonably related
to the Member's interests as a Member. Any such inspection may be made in person
or by an agent or attorney and shall include the right to copy and make
extracts. Notwithstanding the foregoing, the Board of Managers shall have the
right to keep confidential from Members for such period of time as the Board of
Managers deems reasonable any information which the Board of Managers reasonably
believes to be in the nature of trade secrets or other information the
disclosure of which the Board of Managers in good faith believes is not in the
best interests of the Company or could
-9-
<PAGE> 11
damage the Company or its business or which the Company is required by law or by
agreement with a third party to keep confidential.
4.4 INSPECTION BY MANAGERS.
Every Manager (and any individuals who are permitted to attend and
observe meetings of the Board of Managers, subject to the limitations set forth
in the Operating Agreement) shall have the right at any reasonable time to
inspect all books, records and documents of every kind and the physical
properties of the Company for a purpose reasonably related to his position as
Manager. This inspection by a Manager may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts of documents.
ARTICLE V
GENERAL MATTERS
5.1 CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS.
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness issued in the name of or payable by the Company shall
be signed or endorsed in such manner and by such person or persons as shall be
designated from time to time in accordance with the resolution of the Board of
Managers.
5.2 REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY THE COMPANY.
The Chief Executive Officer and President or any other person authorized
by the Board of Managers is authorized to vote or represent on behalf of the
Company any and all shares (or similar equity interests) of any corporation,
partnership, limited liability company, trusts or other entities, foreign or
domestic, standing in the name of the Company. Such authority may be exercised
in person or by a proxy duly executed by such designated person.
5.3 SEAL.
The Board of Managers may approve and adopt an official seal of the
Company, which may be altered by them at any time. Unless otherwise required by
the Board of Managers, any seal so adopted shall not be necessary to be placed
on, and its absence shall not impair the validity of, any document, instrument
or other paper executed and delivered by or on behalf of the Company.
-10-
<PAGE> 12
ARTICLE VI
AMENDMENTS AND INCORPORATION BY REFERENCE
6.1 AMENDMENT.
These By-laws may be restated, amended, supplemented or repealed only by
the unanimous vote of the Board of Managers or the affirmative vote of a
Majority in Interest of Members (or such other vote of Members holding such
other number of Membership Units as shall be required by the Operating
Agreement, these By-laws or applicable law).
6.2 INCORPORATION BY REFERENCE OF BY-LAWS INTO OPERATING AGREEMENT.
These By-laws and any amendments hereto shall be deemed incorporated by
reference in the Operating Agreement.
ARTICLE VII
INDEMNIFICATION
7.1 INDEMNIFICATION OF MANAGERS, OFFICERS, EMPLOYEES AND AGENTS.
(a) Each Person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter, a
"proceeding") by reason of the fact that he or she is or was a Manager or an
officer of the Company (or exercised his or her rights with respect to meetings
of the Board of Managers), or is or was serving at the request of the Company as
a manager, director, officer, employee or agent of another limited liability
company or of a corporation, partnership, joint venture, trust or other
enterprise, including a service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such a proceeding is alleged
action in an official capacity as a Manager, officer, employee or agent or in
any other capacity while serving as a Manager, officer, employee or agent, shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the Delaware Act (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), against all expense,
liability and loss (including attorneys' fees, judgments, fines, excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith.
(b) The right to indemnification conferred in paragraph (a) shall
include the right to be paid by the Company the expenses (including attorneys'
fees) incurred in defending any proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"). The rights to indemnification and to
the advancement of expenses conferred in paragraph (a) and this paragraph (b)
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a Manager, officer, employee or
-11-
<PAGE> 13
agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
(c) The rights to indemnification and to the advancement of expenses
conferred in this Section 7.1 shall not be exclusive of any other right that any
Person may have or hereafter acquire under any statute, agreement, vote of the
Managers or otherwise.
(d) The Company may maintain insurance, at its expense, to protect
itself and any Manager, officer, employee or agent of the Company or another
limited liability company, consultant, corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Company would have the power to indemnify such Person against such expense,
liability or loss under the Delaware Act.
(e) The Company may, to the extent authorized from time to time by
the Board of Managers, grant rights to indemnification and to advancement of
expenses to any employee or agent of the Company to the fullest extent of the
provisions of this Section 7.1 with respect to the indemnification and
advancement of expenses of Managers and officers of the Company.
* * * * *
-12-
<PAGE> 1
EXHIBIT 3.5
===============================================================================
DONJOY, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
--------------------------------------------------
BY-LAWS
--------------------------------------------------
ADOPTED AS OF JUNE 30, 1999
===============================================================================
<PAGE> 2
BY-LAWS
OF
DONJOY, L.L.C.
INTRODUCTION
A. Agreement. These By-laws (the "By-laws") are subject to (i)
and made part of the Amended and Restated Operating Agreement dated as of June
30, 1999, as the same may from time to time be amended and in effect (the
"Operating Agreement"), of DonJoy, L.L.C., a Delaware limited liability company
(the "Company") and (ii) the Members' Agreement, dated as of June 30, 1999
among the Company and the members party thereto (the "Members' Agreement"). In
the event of any inconsistency between the terms hereof and the terms of the
Operating Agreement and the Members' Agreement, the terms of the Operating
Agreement shall control.
B. Definitions. Capitalized terms used and not defined in these
By-laws have the meanings ascribed to such terms in the Operating Agreement.
ARTICLE I
MEETINGS OF MEMBERS
1.1 PLACE OF MEETINGS AND MEETINGS BY TELEPHONE.
Meetings of Members shall be held at any place designated by the Board
of Managers. In the absence of any such designation, meetings of Members shall
be held at the principal place of business of the Company. Any meeting of the
Members may be held by conference telephone or similar communication equipment
so long as all Members participating in the meeting can hear one another, and
all Members participating by telephone or similar communication equipment shall
be deemed to be present in person at the meeting.
1.2 CALL OF MEETINGS.
Meetings of Members may be called at any time by the Board of Managers
or the Chief Executive Officer and President for the purpose of taking action
upon any matter requiring the vote or authority of the Members as provided
herein or in the Operating Agreement or upon any other matter as to which such
vote or authority is deemed by the Board of Managers or the Chief Executive
Officer and President to be necessary or desirable.
1.3 NOTICE OF MEETINGS OF MEMBERS.
All notices of meetings of Members shall be sent or otherwise given in
accordance with Section 1.4 of this Article I not less then ten nor more than
sixty days
<PAGE> 3
before the date of the meeting. The notice shall specify the place, date and
hour of the meeting.
1.4 MANNER OF GIVING NOTICE.
Notice of any meeting of Members shall be given personally or by
telephone to each Member (in the event any Member is a corporation, partnership
or limited liability company, such notice shall be to any vice president,
general partner, managing member, respectively, or other responsible officer of
such entity) or sent by first class mail, postage prepaid, by telegram or
telecopy (or similar electronic means) or by a nationally recognized overnight
courier, charges prepaid, addressed to the Member at the address of that Member
appearing on the books of the Company or given by the Member to the Company for
the purpose of notice. Notice shall be deemed to have been given at the time
when delivered either personally or by telephone, or at the time when deposited
in the mail or with a nationally recognized overnight courier, or when sent by
telegram or telecopy (or similar electronic means).
1.5 ADJOURNED MEETING; NOTICE.
Any meeting of Members, whether or not a quorum is present, may be
adjourned from time to time by the vote of a Majority in Interest of Members
represented at that meeting, either in person or by proxy. When any meeting of
Members is adjourned to another time or place, notice need not be given of the
adjourned meeting, unless a new record date of the adjourned meeting is fixed
or unless the adjournment is for more than thirty days from the date set for
the original meeting, in which case the Board of Managers shall set a new
record date and shall give notice in accordance with the provisions of Sections
1.3 and 1.4 of this Article I. At any adjourned meeting, the Company may
transact any business that might have been transacted at the original meeting.
1.6 QUORUM; VOTING.
At any meeting of the Members, the presence of a Majority in Interest
of Members, in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of Members holding such other
percentage of Units is required by the Operating Agreement, these By-laws or
applicable law. Except as otherwise required by the Operating Agreement, these
By-laws or applicable law, all matters shall be determined by an affirmative
vote of a Majority in Interest of Members.
1.7 WAIVER OF NOTICE BY CONSENT OF ABSENT MEMBERS.
The transactions of a meeting of Members, however called and noticed
and wherever held, shall be as valid as though taken at a meeting duly held
after regular call and notice if a quorum is present either in person or by
proxy and if, either before or after the meeting, each person entitled to vote
who was not present in person or by proxy signs a written waiver of notice or a
consent to a holding of the meeting or an approval of the minutes. The waiver
of notice or consent need not specify either the business to be transacted or
the purpose of any meeting of Members. Attendance by a person at a
-2-
<PAGE> 4
meeting shall also constitute a waiver of notice of that meeting, except when
the person objects at the beginning of the meeting to the transaction of any
business because the meeting was not lawfully called or convened.
1.8 MEMBER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action that may be taken at any meeting of Members may be taken
without a meeting and without prior notice if a consent in writing setting
forth the action so taken is signed by a Majority in Interest of Members (or
Members holding such other percentage of Units as is required to authorize or
take such action under the terms of the Operating Agreement, these By-laws or
applicable law). Any such written consent may be executed and given by telecopy
or similar electronic means. Such consents shall be filed with the Secretary of
the Company and shall be maintained in the Company's records. A copy of any
such consent shall be provided to any Member who does not sign such consent.
1.9 RECORD DATE FOR MEMBER NOTICE, VOTING AND GIVING CONSENTS.
(a) For purposes of determining the Members entitled to vote or act
at any meeting or adjournment thereof, the Board of Managers may fix in advance
a record date which shall not be greater than sixty days nor fewer than ten
days before the date of any such meeting. If the Board of Managers does not so
fix a record date, the record date for determining Members entitled to notice
of or to vote at a meeting of Members shall be at the close of business on the
business day immediately preceding the day on which notice is given, or if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining the Members entitled to give
consent to action in writing without a meeting, (i) when no prior action of the
Board of Managers has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the Board of Managers has been
taken, shall be such date as determined for that purpose by the Board of
Managers, which record date shall not precede the date upon which the
resolution fixing it is adopted by the Board of Managers and shall not be more
than twenty days after the date of such resolution.
(c) Members of record on the record date as herein determined shall
have any right to vote or to act at any meeting or give consent to any action
relating to such record date, provided that no Member who transfers all or part
of such Member's Unit after a record date (and no transferee of such Unit)
shall have the right to vote or act with respect to the transferred Unit as
regards the matter for which the record date was set.
1.10 PROXIES.
Every Member entitled to vote or act on any matter at a meeting of
Members shall have the right to do so either in person or by proxy, provided
that an instrument authorizing such a proxy to act is executed by the Member in
writing and dated not more than eleven months before the meeting, unless the
instrument specifically provides for a longer period. A proxy shall be deemed
executed by a Member if the Member's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission
-3-
<PAGE> 5
or otherwise) by the Member or the Member's attorney-in-fact. A valid proxy
that does not state that it is irrevocable shall continue in full force and
effect unless (i) revoked by (a) the person executing it before the vote
pursuant to that proxy by a writing delivered to the Company stating that the
proxy is revoked or (b) a subsequent proxy executed by, or by attendance at the
meeting and voting in person by, the person executing that proxy or (ii)
written notice of the death or incapacity of the maker of that proxy is
received by the Company before the vote pursuant to that proxy is counted. A
proxy purporting to be executed by or on behalf of a Member shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. Except to the extent inconsistent with
the provisions hereof, the General Corporation Law of the State of Delaware,
and judicial construction thereof by the Courts of the State of Delaware, shall
be applicable to proxies granted by any Member.
ARTICLE II
MANAGERS AND MEETINGS OF MANAGERS
2.1 POWERS.
The powers of the Managers shall be as provided herein and in the
Operating Agreement.
2.2 NUMBER OF MANAGERS.
The Board of Managers shall consist of at least five Managers. The
number of Managers shall be initially nine and may thereafter be changed from
time to time by action of the Managers.
2.3 VACANCIES.
Newly created vacancies on the Board of Managers resulting from an
increase in the number of Managers and vacancies occurring on the Board of
Managers for any other reason, including the removal of Managers without cause,
may be filled as provided in the Operating Agreement and the Members'
Agreement.
2.4 PLACE OF MEETINGS AND MEETINGS BY TELEPHONE.
All meetings of the Board of Managers may be held at any place that has
been designated from time to time by resolution of the Board of Managers or in
any notice properly given with respect to any such meeting. In the absence of
such a designation, regular meetings shall be held at the principal place of
business of the Company. Any meeting, regular or special, may be held by
conference telephone or similar communication equipment so long as all Managers
participating in the meeting can hear one another, and all Managers
participating by telephone or similar communication equipment shall be deemed
to be present in person at the meeting.
-4-
<PAGE> 6
2.5 REGULAR MEETINGS.
Regular meetings of the Board of Managers shall be held at such times
and at such places as shall be fixed by approval of the Managers. Such regular
meetings may be held without notice.
2.6 SPECIAL MEETINGS.
Special meetings of the Board of Managers for any purpose or purposes
may be called at any time by any Manager. Notice of the time and place of a
special meeting shall be delivered to each Manager (a) personally, (b) by
telephone (and confirmed by one of the methods set out in the immediately
succeeding clause (c)), or (c) by telegram, telecopy (or similar electronic
means), first-class mail or nationally recognized overnight courier, charges
prepaid, addressed to each Manager at that Manager's address as it is shown on
the records of the Company. If the notice is mailed, it shall be deposited in
the United States mail at least ten calendar days before the time of the
holding of the meeting. If the notice is delivered personally or by telephone
or by telegram, telecopy (or similar electronic means) or by a nationally
recognized overnight courier, it shall be given at least twenty-four hours
before the time of the holding of the meeting. Any oral notice given personally
or by telephone may be communicated either to the Manager or to a person at the
office of the Manager who the person giving the notice has reason to believe
will promptly communicate it to the Manager. The notice need not specify the
purpose of the meeting.
2.7 QUORUM; CHAIRMAN.
The Managers holding a majority of the votes entitled to be cast shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 1.9 of this Article II. Every act or decision done or made
by the affirmative vote of a majority of Managers entitled to cast votes at a
meeting duly held at which a quorum is present shall be regarded as the act of
the Board of Managers, except to the extent that the vote of a higher number of
Managers is required by the Operating Agreement, these By-laws or applicable
law. The Board of Managers may from time to time appoint any Manager to serve
as Chairman of the Board of Managers, who shall preside at all meetings of the
Board of Managers and of the Members. If at the time of any such meeting, there
shall not be a Chairman of the Board of Managers, or the then incumbent
Chairman does not attend or participate in such meeting, then the Board of
Managers shall appoint a person to preside at such meeting.
2.8 WAIVER OF NOTICE.
Notice of any meeting need not be given to any Manager who either
before or after the meeting signs a written waiver of notice, a consent to
holding the meeting or an approval of the minutes. The waiver of notice or
consent need not specify the purpose of the meeting. All such waivers,
consents, and approvals shall be filed with the records of the Company or made
a part of the minutes of the meeting. Notice of a meeting shall
-5-
<PAGE> 7
also be deemed given to any Manager who attends the meeting without protesting,
at or prior to its commencement, the lack of notice to that Manager.
2.9 ADJOURNMENT.
Managers present at any meeting entitled to cast a majority of all
votes entitled to be cast by such Managers, whether or not constituting a
quorum, may adjourn any meeting to another time and place. Notice of the time
and place of holding an adjourned meeting need not be given unless the meeting
is adjourned for more than forty-eight hours, in which case notice of the time
and place shall be given before the time of the adjourned meeting in the manner
specified in Section 2.6 of this Article II.
2.10 ACTION WITHOUT A MEETING.
Any action to be taken by the Board of Managers at a meeting may be
taken without such meeting by the written consent of all the Managers then in
office. Any such written consent may be executed and given by telecopy or
similar electronic means. Such written consents shall be filed with the minutes
of the proceedings of the Board of Managers.
2.11 DELEGATION OF POWER.
Any Manager may, by power of attorney, delegate his power to any other
Manager or Managers; provided, however, that in no case shall fewer than two
Managers personally exercise the powers granted to the Managers, except as
otherwise provided in the Operating Agreement, Members' Agreement or by
resolution of the Board of Managers. A Manager represented by another Manager
pursuant to such power of attorney shall be deemed to be present for purposes
of establishing a quorum and satisfying any voting requirements. The Board of
Managers may, by resolution, delegate any or all of their powers and duties
granted hereunder or under the Operating Agreement or Members' Agreement, to
one or more committees of the Board of Managers, each consisting of one or more
Managers, or to one or more officers, employees or agents (including, without
limitation, Members), and to the extent any such powers or duties are so
delegated, action by the delegate or delegates shall be deemed for all purposes
to be action by the Board of Managers. Except as otherwise provided in the
Operating Agreement or Members' Agreement, all such delegates shall serve at
the pleasure of the Board of Managers. To the extent applicable, notice shall
be given to, and action may be taken by, any delegate of the Board of Managers
as herein provided with respect to notice to, and action by, the Board of
Managers.
2.12 VOTING OF MANAGERS.
Each Manager shall be entitled to one vote on all matters the
Managers are entitled to vote thereon, except for one of the Chase Nominees (as
defined in the Members' Agreement), who shall be entitled to six votes on all
matters the Managers are entitled to vote thereon.
-6-
<PAGE> 8
ARTICLE III
OFFICERS
3.1 OFFICERS.
The officers of the Company shall be a Chief Executive Officer and
President, a Secretary and a Chief Financial Officer. The Company may also
have, at the discretion of the Board of Managers, such other officers as may be
appointed in accordance with the provisions of Section 3.3 of this Article III,
including, without limitation, any number of Vice Presidents. Any number of
offices may be held by the same person. Officers may, but need not, be
Managers.
3.2 ELECTION OF OFFICERS.
The officers of the Company shall be chosen by the Board of Managers,
and each shall serve at the pleasure of the Board of Managers, subject to the
rights, if any, of an officer under any contract of employment.
3.3 ADDITIONAL OFFICERS.
The Board of Managers may appoint and may empower the Chief Executive
Officer and President to appoint such additional officers as the business of
the Company may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in these By-laws or as
the Board of Managers (or, to the extent the power to prescribe authorities and
duties of additional officers is delegated to him or her, the Chief Executive
Officer and President) may from time to time determine.
3.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, with or without cause, by the Board of
Managers at any regular or special meeting of the Board of Managers or by such
officer, if any, upon whom such power of removal may be conferred by the Board
of Managers. Any officer may resign at any time by giving written notice to the
Company. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice, and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Company under any contract to which the officer is a
party.
3.5 VACANCIES IN OFFICES.
A vacancy in any office because of death, resignation, removal,
disqualification or other cause shall be filled by the Board of Managers,
subject in the case of the appointment of additional officers by the Chief
Executive Officer and President in accordance with Section 3.3 of this Article
III. The Chief Executive Officer and
-7-
<PAGE> 9
President may make temporary appointments to a vacant office reporting to the
Chief Executive Officer and President pending action by the Board of Managers.
3.6 CHIEF EXECUTIVE OFFICER AND PRESIDENT.
The Chief Executive Officer and President shall, subject to the control
of the Board of Managers, be responsible for the general supervision, direction
and control of the business and the officers of the Company. He or she shall
have the general powers and duties of management usually vested in the office
of Chief Executive Officer and President of a limited liability company and
shall have such other powers and duties as may be prescribed by the Board of
Managers, the Operating Agreement, the Members' Agreement or these By-laws.
3.7 SECRETARY.
The Secretary shall keep or cause to be kept at the principal place of
business of the Company or such other place as the Board of Managers may direct
a book of minutes of all meetings and actions of the Board of Managers,
committees or other delegates of the Board of Managers (appointed in accordance
with the provisions of Section 2.11 of Article II) and the Members. The
Secretary shall keep or cause to be kept at the principal place of business of
the Company a register or a duplicate register showing the names of all Members
and their addresses, the class and percentage interests in the Company held by
each, the number and date of certificates issued for the same, and the number
and date of cancellation of every certificate surrendered for cancellation. The
Secretary shall give or cause to be given notice of all meetings of the Members
and of the Board of Managers (or committees or other delegates thereof)
required to be given by these By-laws or by applicable law and shall have such
other powers and perform such other duties as may be prescribed by the Board of
Managers or the Chief Executive Officer and President or by these By-laws.
3.8 CHIEF FINANCIAL OFFICER.
The Chief Financial Officer shall keep and maintain or cause to be kept
and maintained adequate and correct books and records of accounts of the
properties and business transactions of the Company. The books of account shall
at all reasonable times be open to inspection by any Manager. The Chief
Financial Officer shall deposit all monies and other valuables in the name and
to the credit of the Company with such depositaries as may be designated by the
Board of Managers. He or she shall disburse the funds of the Company as may be
ordered by the Board of Managers, shall render to the Chief Executive Officer
and President and the Board of Managers, whenever they request it, an account
of all of his or her transactions as Chief Financial Officer and of the
financial condition of the Company and shall have other powers and perform such
other duties as may be prescribed by the Board of Managers or the Chief
Executive Officer and President or these By-laws.
-8-
<PAGE> 10
ARTICLE IV
MAINTENANCE AND INSPECTION OF RECORDS
4.1 MEMBER LIST.
The Company shall maintain at its principal place of business a record
of its Members, giving the names and addresses of all Members and the class and
membership interests in the Company held by each Member. Subject to such
reasonable standards (including standards governing what information and
documents are to be furnished and at whose expense) as may be established by
the Board of Managers from time to time, each Member has the right to obtain
from the Company from time to time upon reasonable demand for any purpose
reasonably related to the Member's interest as a Member of the Company a record
of the Company's Members.
4.2 BY-LAWS.
The Company shall keep at its principal place of business the original
or a copy of these By-laws as amended to date, which shall be open to
inspection by the Members at all reasonable times during office hours.
4.3 OTHER RECORDS.
The accounting books and records, minutes of proceedings of the Members
and the Board of Managers and any committees or delegates of the Board of
Managers and all other information pertaining to the Company that is required
to be made available to the Members under the Delaware Act shall be kept at
such place or places designated by the Board of Managers or in the absence of
such designation, at the principal place of business of the Company. The
minutes shall be kept in written form and the accounting books and records and
other information shall be kept either in written form or in any other form
capable of being converted into written form. The books of account and records
of the Company shall be maintained in accordance with generally accepted
accounting principles consistently applied during the term of the Company,
wherein all transactions, matters and things relating to the business and
properties of the Company shall be currently entered, subject to such
reasonable standards (including standards, governing what information and
documents are to be furnished and at whose expense) as may be established by
the Board of Managers from time to time; and minutes, accounting books and
records and other information shall be open to inspection upon the written
demand of any Member at any reasonable time during usual business hours for
purposes reasonably related to the Member's interests as a Member. Any such
inspection may be made in person or by an agent or attorney and shall include
the right to copy and make extracts. Notwithstanding the foregoing, the Board
of Managers shall have the right to keep confidential from Members for such
period of time as the Board of Managers deems reasonable any information which
the Board of Managers reasonably believes to be in the nature of trade secrets
or other information the disclosure of which the Board of Managers in good
faith believes is not in the best interests of the Company or could
-9-
<PAGE> 11
damage the Company or its business or which the Company is required by law or
by agreement with a third party to keep confidential.
4.4 INSPECTION BY MANAGERS.
Every Manager (and any individuals who are permitted to attend and
observe the meetings of the Board of Managers, subject to the limitations set
forth in the Operating Agreement) shall have the right at any reasonable time
to inspect all books, records and documents of every kind and the physical
properties of the Company for a purpose reasonably related to his position as
Manager. This inspection by a Manager may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts of documents.
ARTICLE V
GENERAL MATTERS
5.1 CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS.
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness issued in the name of or payable by the Company shall
be signed or endorsed in such manner and by such person or persons as shall be
designated from time to time in accordance with the resolution of the Board of
Managers.
5.2 REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY THE COMPANY.
The Chief Executive Officer and President or any other person
authorized by the Board of Managers is authorized to vote or represent on
behalf of the Company any and all shares (or similar equity interests) of any
corporation, partnership, limited liability company, trusts or other entities,
foreign or domestic, standing in the name of the Company. Such authority may be
exercised in person or by a proxy duly executed by such designated person.
5.3 SEAL.
The Board of Managers may approve and adopt an official seal of the
Company, which may be altered by them at any time. Unless otherwise required by
the Board of Managers, any seal so adopted shall not be necessary to be placed
on, and its absence shall not impair the validity of, any document, instrument
or other paper executed and delivered by or on behalf of the Company.
-10-
<PAGE> 12
ARTICLE VI
AMENDMENTS AND INCORPORATION BY REFERENCE
6.1 AMENDMENT.
These By-laws may be restated, amended, supplemented or repealed only
by the unanimous vote of the Board of Managers or the affirmative vote of a
Majority in Interest of Members (or such other vote of Members holding such
other number of Units as shall be required by the Operating Agreement, these
By-laws or applicable law).
ARTICLE VII
INDEMNIFICATION
7.1 INDEMNIFICATION OF MANAGERS, OFFICERS, EMPLOYEES AND AGENTS.
(a) Each Person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter, a
"proceeding") by reason of the fact that he or she is or was a Manager or an
officer of the Company (or exercised his or her observation rights with respect
to meetings of the Board of Managers), or is or was serving at the request of
the Company as a manager, director, officer, employee or agent of another
limited liability company or of a corporation, partnership, joint venture,
trust or other enterprise, including a service with respect to an employee
benefit plan (hereinafter an "indemnitee"), whether the basis of such a
proceeding is alleged action in an official capacity as a Manager, officer,
employee or agent or in any other capacity while serving as a Manager, officer,
employee or agent, shall be indemnified and held harmless by the Company to the
fullest extent authorized by the Delaware Act (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), against all expense, liability and loss (including attorneys' fees,
judgments, fines, excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith.
(b) The right to indemnification conferred in paragraph (a) shall
include the right to be paid by the Company the expenses (including attorneys'
fees) incurred in defending any proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"). The rights to indemnification and
to the advancement of expenses conferred in paragraph (a) and this paragraph
(b) shall be contract rights and such rights shall continue as to an indemnitee
who has ceased to be a Manager, officer, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators.
(c) The rights to indemnification and to the advancement of expenses
conferred in this Section 7.1 shall not be exclusive of any other right that
any Person may
-11-
<PAGE> 13
have or hereafter acquire under any statute, agreement, vote of the Managers or
otherwise.
(d) The Company may maintain insurance, at its expense, to protect
itself and any Manager, officer, employee or agent of the Company or another
limited liability company, consultant, corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or
not the Company would have the power to indemnify such Person against such
expense, liability or loss under the Delaware Act.
(e) The Company may, to the extent authorized from time to time by
the Board of Managers, grant rights to indemnification and to advancement of
expenses to any employee or agent of the Company to the fullest extent of the
provisions of this Section 7.1 with respect to the indemnification and
advancement of expenses of Managers and officers of the Company.
* * * * *
-12-
<PAGE> 1
EXHIBIT 3.6
- --------------------------------------------------------------------------------
DJ ORTHOPEDICS CAPITAL CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
---------------------------
BY-LAWS
---------------------------
AS ADOPTED ON JUNE 30, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
BY-LAWS OF
DJ ORTHOPEDICS CAPITAL CORPORATION
ARTICLE I
OFFICES
1.1 REGISTERED OFFICE.
The registered office of DJ Orthopedics Capital Corporation (the
"Corporation") in the State of Delaware shall be at 9 East Loockerman Street,
City of Dover, County of Kent 19901, and the registered agent in charge thereof
shall be National Registered Agents, Inc.
1.2 OTHER OFFICES.
The Corporation may also have an office or offices at any other place
or places within or outside the State of Delaware.
ARTICLE II
MEETING OF STOCKHOLDERS; STOCKHOLDERS'
CONSENT IN LIEU OF MEETING
2.1 ANNUAL MEETINGS.
The annual meeting of the stockholders for the election of directors,
and for the transaction of such other business as may properly come before the
meeting, shall be held at such place, date and hour as shall be fixed by the
Board of Directors (the "Board") and designated in the notice or waiver of
notice thereof, except that no annual meeting need be held if all actions,
including the election of directors, required by the General Corporation Law of
the State of Delaware (the "Delaware Statute") to be taken at a stockholders'
annual meeting are taken by written consent in lieu of meeting pursuant to
Section 2.10 of this Article II.
2.2 SPECIAL MEETINGS.
A special meeting of the stockholders for any purpose or purposes may
be called by the Board, the Chairman, the Chief Executive Officer, the
President or the record holders of at least a majority of the issued and
outstanding shares of Common Stock of the Corporation, to be held at such
place, date and hour as shall be designated in the notice or waiver of notice
thereof.
<PAGE> 3
2.3 NOTICE OF MEETINGS.
Except as otherwise required by statute, the Certificate of
Incorporation of the Corporation (the "Certificate") or these By-laws, notice
of each annual or special meeting of the stockholders shall be given to each
stockholder of record entitled to vote at such meeting not less than 10 nor
more than 60 days before the day on which the meeting is to be held, by
delivering written notice thereof to him personally, or by mailing a copy of
such notice, postage prepaid, directly to him at his address as it appears in
the records of the Corporation, or by transmitting such notice thereof to him
at such address by telegraph, cable or other telephonic transmission. Every
such notice shall state the place, the date and hour of the meeting, and, in
case of a special meeting, the purpose or purposes for which the meeting is
called. Notice of any meeting of stockholders shall not be required to be
given to any stockholder who shall attend such meeting in person or by proxy,
or who shall, in person or by attorney thereunto authorized, waive such notice
in writing, either before or after such meeting. Except as otherwise provided
in these By-laws, neither the business to be transacted at, nor the purpose of,
any meeting of the stockholders need be specified in any such notice or waiver
of notice. Notice of any adjourned meeting of stockholders shall not be
required to be given, except when expressly required by law.
2.4 QUORUM.
At each meeting of the stockholders, except where otherwise provided
by the Certificate or these By-laws, the holders of a majority of the issued
and outstanding shares of Common Stock of the Corporation entitled to vote at
such meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business. In the absence of a quorum, a majority
in interest of the stockholders present in person or represented by proxy and
entitled to vote, or, in the absence of all the stockholders entitled to vote,
any officer entitled to preside at, or act as secretary of, such meeting, shall
have the power to adjourn the meeting from time to time, until stockholders
holding the requisite amount of stock to constitute a quorum shall be present
or represented. At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally called.
2.5 ORGANIZATION.
(a) Unless otherwise determined by the Board, at each meeting
of the stockholders, one of the following shall act as chairman of the meeting
and preside thereat, in the following order of precedence:
(i) the Chairman;
(ii) the Chief Executive Officer;
(iii) the President;
2
<PAGE> 4
(iv) any director, officer or stockholder of the
Corporation designated by the Board to act as chairman of such meeting
and to preside thereat if the Chairman, the Chief Executive Officer or
the President shall be absent from such meeting; or
(v) a stockholder of record who shall be chosen
chairman of such meeting by a majority in voting interest of the
stockholders present in person or by proxy and entitled to vote
thereat.
(b) The Secretary or, if he shall be presiding over such
meeting in accordance with the provisions of this Section 2.5 or if he shall be
absent from such meeting, the person (who shall be an Assistant Secretary, if
an Assistant Secretary has been appointed and is present) whom the chairman of
such meeting shall appoint, shall act as secretary of such meeting and keep the
minutes thereof.
2.6 ORDER OF BUSINESS.
The order of business at each meeting of the stockholders shall be
determined by the chairman of such meeting, but such order of business may be
changed by a majority in voting interest of those present in person or by proxy
at such meeting and entitled to vote thereat.
2.7 VOTING.
Except as otherwise provided by law, the Certificate or these By-laws,
at each meeting of the stockholders, every stockholder of the Corporation shall
be entitled to one vote in person or by proxy for each share of Common Stock of
the Corporation held by him and registered in his name on the books of the
Corporation on the date fixed pursuant to Section 6.7 of Article VI as the
record date for the determination of stockholders entitled to vote at such
meeting. Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. A person whose stock is pledged shall be entitled to
vote, unless, in the transfer by the pledgor on the books of the Corporation,
he has expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his proxy may represent such stock and vote thereon. If shares or
other securities having voting power stand in the record of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety or otherwise, or if two or more persons have
the same fiduciary relationship respecting the same shares, unless the
Secretary shall be given written notice to the contrary and furnished with a
copy of the instrument or order appointing them or creating the relationship
wherein it is so provided, their acts with respect to voting shall have the
following effect:
(i) if only one votes, his act binds all;
(ii) if more than one votes, the act of the majority so
voting binds all; and
3
<PAGE> 5
(iii) if more than one votes, but the vote is evenly
split on any particular matter, such shares shall be voted in the
manner provided by law.
If the instrument so filed shows that any such tenancy is held in
unequal interests, a majority or even-split for the purposes of this Section
2.7 shall be a majority or even-split in interest. The Corporation shall not
vote directly or indirectly any share of its own capital stock. Any vote of
stock may be given by the stockholder entitled thereto in person or by his
proxy appointed by an instrument in writing, subscribed by such stockholder or
by his attorney thereunto authorized, delivered to the secretary of the
meeting; provided, however, that no proxy shall be voted after three years from
its date, unless said proxy provides for a longer period. At all meetings of
the stockholders, all matters (except where other provision is made by law, the
Certificate or these By-laws) shall be decided by the vote of a majority in
interest of the stockholders present in person or by proxy at such meeting and
entitled to vote thereon, a quorum being present. Unless demanded by a
stockholder present in person or by proxy at any meeting and entitled to vote
thereon, the vote on any question need not be by ballot. Upon a demand by any
such stockholder for a vote by ballot upon any question, such vote by ballot
shall be taken. On a vote by ballot, each ballot shall be signed by the
stockholder voting, or by his proxy, if there be such proxy, and shall state
the number of shares voted.
2.8 INSPECTION.
The chairman of the meeting may at any time appoint one or more
inspectors to serve at any meeting of the stockholders. Any inspector may be
removed, and a new inspector or inspectors appointed, by the Board at any time.
Such inspectors shall decide upon the qualifications of voters, accept and
count votes, declare the results of such vote, and subscribe and deliver to the
secretary of the meeting a certificate stating the number of shares of stock
issued and outstanding and entitled to vote thereon and the number of shares
voted for and against the question, respectively. The inspectors need not be
stockholders of the Corporation, and any director or officer of the Corporation
may be an inspector on any question other than a vote for or against his
election to any position with the Corporation or on any other matter in which
he may be directly interested. Before acting as herein provided, each
inspector shall subscribe an oath faithfully to execute the duties of an
inspector with strict impartiality and according to the best of his ability.
2.9 LIST OF STOCKHOLDERS.
It shall be the duty of the Secretary or other officer of the
Corporation who shall have charge of its stock ledger to prepare and make, at
least 10 days before every meeting of the stockholders, a complete list of the
stockholders entitled to vote thereat, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to any such meeting, during ordinary
business hours, for a period of at least 10 days prior to such meeting, either
at a place within the city where such meeting is to be held, which place shall
be specified in the notice of the meeting or, if not so specified, at the place
where the meeting is to be
4
<PAGE> 6
held. Such list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
2.10 STOCKHOLDERS' CONSENT IN LIEU OF MEETING.
Any action required by the Delaware Statute to be taken at any annual
or special meeting of the stockholders of the Corporation, or any action which
may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, by a consent
in writing, as permitted by the Delaware Statute.
ARTICLE III
BOARD OF DIRECTORS
3.1 GENERAL POWERS.
The business, property and affairs of the Corporation shall be managed
by or under the direction of the Board, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law or by
the Certificate directed or required to be exercised or done by the
stockholders.
3.2 NUMBER AND TERM OF OFFICE.
The number of directors shall be fixed from time to time by the Board.
Directors need not be stockholders. Each director shall hold office until his
successor is elected and qualified, or until his earlier death or resignation
or removal in the manner hereinafter provided. The intial number of directors
of the Corporation shall be set at seven.
3.3 ELECTION OF DIRECTORS.
At each meeting of the stockholders for the election of directors at
which a quorum is present, the persons receiving the greatest number of votes,
up to the number of directors to be elected, of the stockholders present in
person or by proxy and entitled to vote thereon shall be the directors;
provided, however, that for purposes of such vote no stockholder shall be
allowed to cumulate his votes. Unless an election by ballot shall be demanded
as provided in Section 2.7 of Article II, election of directors may be
conducted in any manner approved at such meeting.
3.4 RESIGNATION, REMOVAL AND VACANCIES.
(a) Any director may resign at any time by giving written
notice to the Board, the Chairman, the Chief Executive Officer, the President
or the Secretary. Such resignation shall take effect at the time specified
therein or, if the time be not specified, upon receipt thereof; unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
5
<PAGE> 7
(b) Any director or the entire Board may be removed, with or
without cause, at any time by vote of the holders of a majority of the shares
then entitled to vote at an election of directors or by written consent of the
stockholders pursuant to Section 2.10 of Article II.
(c) Vacancies occurring on the Board for any reason may be
filled by vote of the stockholders or by the stockholders' written consent
pursuant to Section 2.10 of Article II, or by vote of the Board or by the
directors' written consent pursuant to Section 3.6 of this Article III. If the
number of directors then in office is less than a quorum, such vacancies may be
filled by a vote of a majority of the directors then in office.
3.5 MEETINGS.
(a) Annual Meetings. As soon as practicable after each annual
election of directors, the Board shall meet for the purpose of organization and
the transaction of other business, unless it shall have transacted all such
business by written consent pursuant to Section 3.6 of this Article III.
(b) Other Meetings. Other meetings of the Board shall be held
at such times and places as the Board, the Chairman, the Chief Executive
Officer, the President or any director shall from time to time determine.
(c) Notice of Meetings. Notice shall be given to each director
of each meeting, including the time, place and purpose of such meeting. Notice
of each such meeting shall be mailed to each director, addressed to him at his
residence or usual place of business, at least two days before the date on
which such meeting is to be held, or shall be sent to him at such place by
telegraph, cable, wireless or other form of recorded communication, or be
delivered personally or by telephone not later than the day before the day on
which such meeting is to be held, but notice need not be given to any director
who shall attend such meeting. A written waiver of notice, signed by the
person entitled thereto, whether before or after the time of the meeting stated
therein, shall be deemed equivalent to notice.
(d) Place of Meetings. The Board may hold its meetings at such
place or places within or outside the State of Delaware as the Board may from
time to time determine, or as shall be designated in the respective notices or
waivers of notice thereof.
(e) Quorum and Manner of Acting. A majority of the total
number of directors then in office shall be present in person at any meeting of
the Board in order to constitute a quorum for the transaction of business at
such meeting, and the vote of a majority of those directors present at any such
meeting at which a quorum is present shall be necessary for the passage of any
resolution or act of the Board, except as otherwise expressly required by law
or these By-laws. In the absence of a quorum for any such meeting, a majority
of the directors present thereat may adjourn such meeting from time to time
until a quorum shall be present.
6
<PAGE> 8
(f) Organization. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(i) the Chairman;
(ii) the Chief Executive Officer;
(iii) the President (if a director); or
(iv) any director designated by a majority of the
directors present.
The Secretary or, in the case of his absence, an Assistant Secretary,
if an Assistant Secretary has been appointed and is present, or any person whom
the chairman of the meeting shall appoint shall act as secretary of such
meeting and keep the minutes thereof.
3.6 DIRECTORS' CONSENT IN LIEU OF MEETING.
Any action required or permitted to be taken at any meeting of the
Board may be taken without a meeting, without prior notice and without a vote,
if a consent in writing, setting forth the action so taken, shall be signed by
all the directors then in office and such consent is filed with the minutes of
the proceedings of the Board.
3.7 ACTION BY MEANS OF CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS
EQUIPMENT.
Any one or more members of the Board may participate in a meeting of
the Board by means of conference telephone or similar communications equipment
by which all persons participating in the meeting can hear each other, and
participation in a meeting by such means shall constitute presence in person at
such meeting.
3.8 COMMITTEES.
The Board may, by resolution or resolutions passed by a majority of
the whole Board, designate one or more committees, each such committee to
consist of one or more directors of the Corporation, which to the extent
provided in said resolution or resolutions shall have and may exercise the
powers of the Board in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers which may require it, such committee or committees to have such name or
names as may be determined from time to time by resolution adopted by the
Board. A majority of all the members of any such committee may determine its
action and fix the time and place of its meetings, unless the Board shall
otherwise provide. The Board shall have power to change the members of any
such committee at any time, to fill vacancies and to discharge any such
committee, either with or without cause, at any time.
7
<PAGE> 9
ARTICLE IV
OFFICERS
4.1 EXECUTIVE OFFICERS.
The principal officers of the Corporation shall be a Chairman, if one
is appointed (and any references to the Chairman shall not apply if a Chairman
has not been appointed), a Chief Executive Officer, a President, a Chief
Financial Officer and a Secretary, and may include such other officers as the
Board may appoint pursuant to Section 4.3 of this Article IV. Any two or more
offices may be held by the same person.
4.2 AUTHORITY AND DUTIES.
All officers, as between themselves and the Corporation, shall have
such authority and perform such duties in the management of the Corporation as
may be provided in these By-laws or, to the extent so provided, by the Board.
4.3 OTHER OFFICERS.
The Corporation may have such other officers, agents and employees as
the Board may deem necessary, including one or more Assistant Secretaries and
one or more Vice Presidents, each of whom shall hold office for such period,
have such authority and perform such duties as the Board, the Chairman, the
Chief Financial Officer or the President may from time to time determine. The
Board may delegate to any principal officer the power to appoint and define the
authority and duties of, or remove, any such officers, agents or employees.
4.4 TERM OF OFFICE, RESIGNATION AND REMOVAL.
(a) All officers shall be elected or appointed by the Board and
shall hold office for such term as may be prescribed by the Board. Each
officer shall hold office until his successor has been elected or appointed and
qualified or until his earlier death or resignation or removal in the manner
hereinafter provided. The Board may require any officer to give security for
the faithful performance of his duties.
(b) Any officer may resign at any time by giving written notice
to the Board, the Chairman, the Chief Executive Officer, the President or the
Secretary. Such resignation shall take effect at the time specified therein
or, if the time be not specified, at the time it is accepted by action of the
Board. Except as aforesaid, the acceptance of such resignation shall not be
necessary to make it effective.
(c) All officers and agents elected or appointed by the Board
shall be subject to removal at any time by the Board or by the stockholders of
the Corporation with or without cause.
8
<PAGE> 10
4.5 VACANCIES.
If the office of Chairman, Chief Executive Officer, President, Chief
Financial Officer or Secretary becomes vacant for any reason, the Board shall
fill such vacancy, and if any other office becomes vacant, the Board may fill
such vacancy. Any officer so appointed or elected by the Board shall serve
only until such time as the unexpired term of his predecessor shall have
expired, unless reelected or reappointed by the Board.
4.6 THE CHAIRMAN.
The Chairman shall give counsel and advice to the Board and the
officers of the Corporation on all subjects concerning the welfare of the
Corporation and the conduct of its business and shall perform such other duties
as the Board may from time to time determine. Unless otherwise determined by
the Board, he shall preside at meetings of the Board and of the Stockholders at
which he is present.
4.7 THE CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall be responsible for the general
direction of the business and affairs of the Corporation, subject to the
authority of the Board of Directors and the Chairman, and shall perform such
other duties as may from time to time be assigned to him by the Board of
Directors, the Chairman, or as prescribed by law or these By-laws.
4.8 THE PRESIDENT.
The President shall be the chief operating and administrative officer
of the Corporation, subject to the authority of the Board of Directors, the
Chairman and the Chief Executive Officer. After the Chairman and the Chief
Executive Officer, he shall direct the policies and management of the
Corporation. The President shall perform such other duties as from time to
time may be assigned to him by the Board of Directors, the Chairman or the
Chief Executive Officer, or as otherwise prescribed by law of these By-laws.
4.9 THE SECRETARY.
The Secretary shall, to the extent practicable, attend all meetings of
the Board and all meetings of the stockholders and shall record all votes and
the minutes of all proceedings in a book to be kept for that purpose. He may
give, or cause to be given, notice of all meetings of the stockholders and of
the Board, and shall perform such other duties as may be prescribed by the
Board, the Chairman, the Chief Executive Officer or the President, under whose
supervision he shall act. He shall keep in safe custody the seal of the
Corporation and affix the same to any duly authorized instrument requiring it
and, when so affixed, it shall be attested by his signature or by the
signature, if appointed, of an Assistant Secretary. He shall keep in safe
custody the certificate books and stockholder records and such other books and
records as the Board may direct, and shall perform all other duties incident to
the office of Secretary and such other duties as from
9
<PAGE> 11
time to time may be assigned to him by the Board, the Chairman, the Chief
Executive Officer or the President.
4.10 THE CHIEF FINANCIAL OFFICER.
The Chief Financial Officer shall have the care and custody of the
corporate funds and other valuable effects, including securities, shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board. The Chief Financial Officer shall disburse the funds
of the Corporation as may be ordered by the Board, taking proper vouchers for
such disbursements, shall render to the Chairman, Chief Executive Officer,
President and directors, at the regular meetings of the Board, or whenever they
may require it, an account of all his transactions as Chief Financial Officer
and of the financial condition of the Corporation and shall perform all other
duties incident to the office of Chief Financial Officer and such other duties
as from time to time may be assigned to him by the Board, the Chairman, Chief
Executive Officer or the President.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
5.1 EXECUTION OF DOCUMENTS.
The Board shall designate, by either specific or general resolution,
the officers, employees and agents of the Corporation who shall have the power
to execute and deliver deeds, contracts, mortgages, bonds, debentures, checks,
drafts and other orders for the payment of money and other documents for and in
the name of the Corporation, and may authorize such officers, employees and
agents to delegate such power (including authority to redelegate) by written
instrument to other officers, employees or agents of the Corporation; unless so
designated or expressly authorized by these By-laws, no officer, employee or
agent shall have any power or authority to bind the Corporation by any contract
or engagement, to pledge its credit or to render it liable pecuniarily for any
purpose or amount.
5.2 DEPOSITS.
All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation or otherwise as the Board or
Chief Financial Officer, or any other officer of the Corporation to whom power
in this respect shall have been given by the Board, shall select.
5.3 PROXIES WITH RESPECT TO STOCK OR OTHER SECURITIES OF OTHER
CORPORATIONS.
The Board shall designate the officers of the Corporation who shall
have authority from time to time to appoint an agent or agents of the
Corporation to exercise in the name and on behalf of the Corporation the powers
and rights which the Corporation may have
10
<PAGE> 12
as the holder of stock or other securities in any other corporation, and to
vote or consent with respect to such stock or securities. Such designated
officers may instruct the person or persons so appointed as to the manner of
exercising such powers and rights, and such designated officers may execute or
cause to be executed in the name and on behalf of the Corporation and under its
corporate seal or otherwise, such written proxies, powers of attorney or other
instruments as they may deem necessary or proper in order that the Corporation
may exercise its powers and rights.
ARTICLE VI
SHARES AND THEIR TRANSFER; FIXING RECORD DATE
6.1 CERTIFICATES FOR SHARES.
Every owner of stock of the Corporation shall be entitled to have a
certificate certifying the number and class of shares owned by him in the
Corporation, which shall be in such form as shall be prescribed by the Board.
Certificates shall be numbered and issued in consecutive order and shall be
signed by, or in the name of, the Corporation by the Chairman, the Chief
Executive Officer, the President, the Chief Financial Officer or any Vice
President, and by the Secretary (or an Assistant Secretary, if appointed). In
case any officer or officers who shall have signed any such certificate or
certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate had not
ceased to be such officer or officers of the Corporation.
6.2 RECORD.
A record in one or more counterparts shall be kept of the name of the
person, firm or corporation owning the shares represented by each certificate
for stock of the Corporation issued, the number of shares represented by each
such certificate, the date thereof and, in the case of cancellation, the date
of cancellation. Except as otherwise expressly required by law, the person in
whose name shares of stock stand on the stock record of the Corporation shall
be deemed the owner thereof for all purposes regarding the Corporation.
6.3 TRANSFER AND REGISTRATION OF STOCK.
(a) The transfer of stock and certificates which represent the
stock of the Corporation shall be governed by Article 8 of Subtitle 1 of Title
6 of the Delaware Code (the Uniform Commercial Code), as amended from time to
time.
(b) Registration of transfers of shares of the Corporation
shall be made only on the books of the Corporation upon request of the
registered holder thereof, or of his attorney thereunto authorized by power of
attorney duly executed and filed with the
11
<PAGE> 13
Secretary of the Corporation, and upon the surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a stock power
duly executed.
6.4 ADDRESSES OF STOCKHOLDERS.
Each stockholder shall designate to the Secretary an address at which
notices of meetings and all other corporate notices may be served or mailed to
him, and, if any stockholder shall fail to designate such address, corporate
notices may be served upon him by mail directed to him at his post-office
address, if any, as the same appears on the share record books of the
Corporation or at his last known post-office address.
6.5 LOST, DESTROYED AND MUTILATED CERTIFICATES.
The holder of any shares of the Corporation shall immediately notify
the Corporation of any loss, destruction or mutilation of the certificate
therefor, and the Board may, in its discretion, cause to be issued to him a new
certificate or certificates for such shares, upon the surrender of the
mutilated certificates or, in the case of loss or destruction of the
certificate, upon satisfactory proof of such loss or destruction, and the Board
may, in its discretion, require the owner of the lost or destroyed certificate
or his legal representative to give the Corporation a bond in such sum and with
such surety or sureties as it may direct to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate.
6.6 REGULATIONS.
The Board may make such rules and regulations as it may deem
expedient, not inconsistent with these By-laws, concerning the issue, transfer
and registration of certificates for stock of the Corporation.
6.7 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
(a) In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board, and which record date shall be not more than 60 nor less
than 10 days before the date of such meeting. If no record date is fixed by
the Board, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board may fix a new record date for
the adjourned meeting.
(b) In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record
12
<PAGE> 14
date is adopted by the Board, and which date shall be not more than 10 days
after the date upon which the resolution fixing the record date is adopted by
the Board. If no record date has been fixed by the Board, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board is required by the
Delaware Statute, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record date has
been fixed by the Board and prior action by the Board is required by the
Delaware Statute, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board adopts the resolution taking such
prior action.
(c) In order that the Corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the Board may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than 60 days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board adopts the resolution relating thereto.
ARTICLE VII
SEAL
The Board may provide a corporate seal, which shall be in the form of
a circle and shall bear the full name of the Corporation, the year of
incorporation of the Corporation and the words and figures "Corporate Seal -
Delaware."
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year unless
otherwise determined by the Board.
13
<PAGE> 15
ARTICLE IX
INDEMNIFICATION AND INSURANCE
9.1 INDEMNIFICATION.
(a) As provided in the Certificate, to the fullest extent
permitted by the Delaware Statute as the same exists or may hereafter be
amended, a director of the Corporation shall not be liable to the Corporation
or its stockholders for breach of fiduciary duty as a director.
(b) Without limitation of any right conferred by paragraph (a)
of this Section 9.1, each person who was or is made a party or is threatened to
be made a party to or is otherwise involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (hereinafter a "proceeding"), by reason of the fact that he or
she is or was a director, officer or employee of the Corporation or is or was
serving at the request of the Corporation as a director, officer or employee of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity while serving as a director, officer or employee
or in any other capacity while serving as a director, officer or employee,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware Statute, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights
than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, excise taxes or amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a director, officer or employee and shall inure to the benefit of
the indemnitee's heirs, testators, intestates, executors and administrators;
provided, however, that such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and with respect to a criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; provided further,
however, that no indemnification shall be made in the case of an action, suit
or proceeding by or in the right of the Corporation in relation to matters as
to which it shall be adjudged in such action, suit or proceeding that such
director, officer, employee or agent is liable to the Corporation, unless a
court having jurisdiction shall determine that, despite such adjudication, such
person is fairly and reasonably entitled to indemnification; provided further,
however, that, except as provided in Section 9.1(c) of this Article IX with
respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
initiated by such indemnitee was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article IX shall
be a contract right and shall include the right to be paid by the Corporation
the expenses incurred in defending any such proceeding in advance of
14
<PAGE> 16
its final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Delaware Statute requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise.
(c) If a claim under Section 9.1(b) of this Article IX is not
paid in full by the Corporation with 60 days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement
of expenses, in which case the applicable period shall be 20 days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of any undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not
met the applicable standard of conduct set forth in the Delaware Statute.
Neither the failure of the Corporation (including the Board, independent legal
counsel, or the stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware Statute, nor an actual determination by the
Corporation (including the Board, independent legal counsel or the
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee
to enforce a right to indemnification or to an advancement of expenses
hereunder, or by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the burden of proving that the indemnitee is
not entitled to be indemnified, or to such advancement of expenses, under this
Section or otherwise shall be on the Corporation.
(d) The rights to indemnification and to the advancement of
expenses conferred in this Article IX shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the Charter,
agreement, vote of stockholders or disinterested directors or otherwise.
15
<PAGE> 17
9.2 INSURANCE.
The Corporation may purchase and maintain insurance, at its expense,
to protect itself and any person who is or was a director, officer, employee or
agent of the Corporation or any person who is or was serving at the request of
the Corporation as a director, officer, employer or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware Statute.
ARTICLE X
AMENDMENT
Any by-law (including these By-laws) may be adopted, amended or
repealed by the vote of the holders of a majority of the shares then entitled
to vote or by the stockholders' written consent pursuant to Section 2.10 of
Article II, or by the vote of the Board or by the directors' written consent
pursuant to Section 6 of Article III.
* * * * *
* * *
*
16
<PAGE> 1
EXECUTION COPY
EXHIBIT 4.1
===============================================================================
DJ ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
12_% Senior Subordinated Notes due 2009
-----------------
INDENTURE
Dated as of June 30, 1999
-----------------
THE BANK OF NEW YORK,
as Trustee
<PAGE> 2
===============================================================================
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
------------------------------------------
<S> <C> <C>
SECTION 1.01. Definitions............................................... 1
SECTION 1.02. Other Definitions......................................... 20
SECTION 1.03. Incorporation by Reference of Trust Indenture Act......... 20
SECTION 1.04. Rules of Construction..................................... 21
ARTICLE 2
THE SECURITIES
--------------
SECTION 2.01. Form and Dating........................................... 21
SECTION 2.02. Execution and Authentication.............................. 22
SECTION 2.03. Registrar and Paying Agent................................ 22
SECTION 2.04. Paying Agent To Hold Money in Trust....................... 23
SECTION 2.05. Holder Lists.............................................. 23
SECTION 2.06. Transfer and Exchange..................................... 23
SECTION 2.07. Replacement Securities.................................... 24
SECTION 2.08. Outstanding Securities.................................... 24
SECTION 2.09. Temporary Securities...................................... 25
SECTION 2.10. Cancelation............................................... 25
SECTION 2.11. Defaulted Interest........................................ 25
SECTION 2.12. CUSIP and "ISIN" Numbers.................................. 25
</TABLE>
ARTICLE 3
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
REDEMPTION
----------
<S> <C> <C>
SECTION 3.01. Notices to Trustee........................................ 26
SECTION 3.02. Selection of Securities To Be Redeemed.................... 26
SECTION 3.03. Notice of Redemption...................................... 26
SECTION 3.04. Effect of Notice of Redemption............................ 27
SECTION 3.05. Deposit of Redemption Price............................... 27
SECTION 3.06. Securities Redeemed in Part............................... 27
ARTICLE 4
COVENANTS
---------
SECTION 4.01. Payment of Securities..................................... 27
SECTION 4.02. SEC Reports............................................... 28
SECTION 4.03. Limitation on Indebtedness................................ 28
SECTION 4.04. Limitation on Restricted Payments......................... 31
SECTION 4.05. Limitation on Restrictions on Distributions from
Restricted Subsidiaries................................ 35
SECTION 4.06. Limitation on Sales of Assets and Subsidiary Equity
Interests ............................................. 36
SECTION 4.07. Limitation on Transactions with Affiliates................ 39
SECTION 4.08. Change of Control......................................... 40
SECTION 4.09. Compliance Certificate.................................... 42
SECTION 4.10. Further Instruments and Acts.............................. 42
SECTION 4.11. Future Note Guarantors.................................... 42
SECTION 4.12. Limitation on Lines of Business........................... 42
SECTION 4.13. Limitation on the Conduct of Business of DJ Capital....... 42
</TABLE>
ARTICLE 5
SUCCESSOR COMPANY
-----------------
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 5.01. When Company May Merge or Transfer Assets................. 43
ARTICLE 6
DEFAULTS AND REMEDIES
---------------------
SECTION 6.01. Events of Default......................................... 44
SECTION 6.02. Acceleration.............................................. 46
SECTION 6.03. Other Remedies............................................ 46
SECTION 6.04. Waiver of Past Defaults................................... 46
SECTION 6.05. Control by Majority....................................... 47
SECTION 6.06. Limitation on Suits....................................... 47
SECTION 6.07. Rights of Holders To Receive Payment...................... 47
SECTION 6.08. Collection Suit by Trustee................................ 47
SECTION 6.09. Trustee May File Proofs of Claim.......................... 48
SECTION 6.10. Priorities................................................ 48
SECTION 6.11. Undertaking for Costs..................................... 48
SECTION 6.12. Waiver of Stay or Extension Laws.......................... 48
ARTICLE 7
TRUSTEE
-------
SECTION 7.01. Duties of Trustee......................................... 49
SECTION 7.02. Rights of Trustee......................................... 50
SECTION 7.03. Individual Rights of Trustee.............................. 50
SECTION 7.04. Trustee's Disclaimer...................................... 51
SECTION 7.05. Notice of Defaults........................................ 51
SECTION 7.06. Reports by Trustee to Holders............................. 51
SECTION 7.07. Compensation and Indemnity................................ 51
SECTION 7.08. Replacement of Trustee.................................... 52
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 7.09. Successor Trustee by Merger............................... 53
SECTION 7.10. Eligibility; Disqualification............................. 53
SECTION 7.11. Preferential Collection of Claims Against Issuers......... 53
ARTICLE 8
DISCHARGE OF INDENTURE; DEFEASANCE
-----------------------------------
SECTION 8.01. Discharge of Liability on Securities; Defeasance.......... 53
SECTION 8.02. Conditions to Defeasance.................................. 54
SECTION 8.03. Application of Trust Money................................ 56
SECTION 8.04. Repayment to Issuers...................................... 56
SECTION 8.05. Indemnity for Government Obligations...................... 56
SECTION 8.06. Reinstatement............................................. 56
ARTICLE 9
AMENDMENTS
----------
SECTION 9.01. Without Consent of Holders................................ 56
SECTION 9.02. With Consent of Holders................................... 57
SECTION 9.03. Compliance with Trust Indenture Act....................... 58
SECTION 9.04. Revocation and Effect of Consents and Waivers............. 58
SECTION 9.05. Notation on or Exchange of Securities..................... 59
SECTION 9.06. Trustee To Sign Amendments................................ 59
</TABLE>
ARTICLE 10
SUBORDINATION
--------------
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 10.01. Agreement To Subordinate.................................. 59
SECTION 10.02. Liquidation, Dissolution, Bankruptcy...................... 60
SECTION 10.03. Default on Designated Senior Indebtedness of the Issuers.. 60
SECTION 10.04. Acceleration of Payment of Securities; Five Business Day
Delay in Payment of Designated Senior Indebtedness
Outstanding............................................... 61
SECTION 10.05. When Distribution Must Be Paid Over....................... 61
SECTION 10.06. Subrogation............................................... 61
SECTION 10.07. Relative Rights........................................... 62
SECTION 10.08. Subordination May Not Be Impaired by Either Issuer........ 62
SECTION 10.09. Rights of Trustee and Paying Agent........................ 62
SECTION 10.10. Distribution or Notice to Representative.................. 62
SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit
Right To Accelerate.................................... 62
SECTION 10.12. Trust Monies Not Subordinated............................. 63
SECTION 10.13. Trustee Entitled To Rely.................................. 63
SECTION 10.14. Trustee To Effectuate Subordination....................... 63
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior
Indebtedness.......................................... 63
SECTION 10.16. Reliance by Holders of Senior Indebtedness on
Subordination Provisions............................... 63
ARTICLE 11
NOTE GUARANTEES
---------------
SECTION 11.01. Note Guarantees........................................... 64
SECTION 11.02. Limitation on Liability................................... 66
SECTION 11.03. Successors and Assigns.................................... 67
SECTION 11.04. No Waiver................................................. 67
SECTION 11.05. Modification.............................................. 67
SECTION 11.06. Execution of Supplemental Indenture for Future Note
Guarantors................................................ 67
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 11.07. NonImpairment............................................ 67
ARTICLE 12
SUBORDINATION OF THE NOTE GUARANTEES
------------------------------------
SECTION 12.01. Agreement To Subordinate.................................. 68
SECTION 12.02. Liquidation, Dissolution, Bankruptcy...................... 68
SECTION 12.03. Default on Designated Senior Indebtedness of a
Note Guarantor......................................... 68
SECTION 12.04. Demand for Payment; Five Business Day Delay in Payment of
Designated Senior Indebtedness Outstanding................ 69
SECTION 12.05. When Distribution Must Be Paid Over....................... 70
SECTION 12.06. Subrogation............................................... 70
SECTION 12.07. Relative Rights........................................... 70
SECTION 12.08. Subordination May Not Be Impaired by a Note
Guarantor.............................................. 70
SECTION 12.09. Rights of Trustee and Paying Agent........................ 70
SECTION 12.10. Distribution or Notice to Representative.................. 71
SECTION 12.11. Article 12 Not To Prevent Events of Default or Limit
Right To Accelerate.................................... 71
SECTION 12.12. Trustee Entitled to Rely.................................. 71
SECTION 12.13. Trustee To Effectuate Subordination....................... 71
SECTION 12.14. Trustee Not Fiduciary for Holders of Senior Indebtedness
of a Note Guarantor.................................... 71
SECTION 12.15. Reliance by Holders of Senior Indebtedness of a
Note Guarantor on Subordination Provisions............. 72
SECTION 12.16. Defeasance................................................ 72
ARTICLE 13
MISCELLANEOUS
-------------
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 13.01. Trust Indenture Act Controls.............................. 72
SECTION 13.02. Notices................................................... 72
SECTION 13.03. Communication by Holders with Other Holders............... 73
SECTION 13.04. Certificate and Opinion as to Conditions Precedent........ 73
SECTION 13.05. Statements Required in Certificate or Opinion............. 73
SECTION 13.06. When Securities Disregarded............................... 74
SECTION 13.07. Rules by Trustee, Paying Agent and Registrar.............. 74
SECTION 13.08. Legal Holidays............................................ 74
SECTION 13.09. GOVERNING LAW............................................. 74
SECTION 13.10. No Recourse Against Others................................ 74
SECTION 13.11. Successors................................................ 74
SECTION 13.12. Multiple Originals........................................ 74
SECTION 13.13. Table of Contents; Headings............................... 75
</TABLE>
<TABLE>
<S> <C>
Appendix A - Provisions Relating to Initial Securities, Private Exchange
Securities and Exchange Securities
Exhibit A - Form of Initial Security and Private Exchange Security
Exhibit B - Form of Exchange Security
Exhibit C - Form of Supplemental Indenture
Exhibit D - Form of Transferee Letter of Representation
</TABLE>
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA SECTION INDENTURE SECTION
- ----------- -----------------
<S> <C>
310(a)(1) ....................................................................... 7.10
(a)(2) ....................................................................... 7.10
(a)(3) ....................................................................... N.A.
(a)(4) ....................................................................... N.A.
(b) ....................................................................... 7.08; 7.10
(c) ....................................................................... N.A.
311(a) .......................................................................... 7.11
(b) .......................................................................... 7.11
(c) .......................................................................... N.A.
312(a) .......................................................................... 2.05
(b) .......................................................................... 13.03
(c) .......................................................................... 13.03
313(a) .......................................................................... 7.06
(b)(1) ....................................................................... N.A.
(b)(2) ....................................................................... 7.06
(c) .......................................................................... 13.02
(d) .......................................................................... 7.06
314(a) .......................................................................... 4.02;4.11;13.02
(b) .......................................................................... N.A.
(c)(1) ....................................................................... 13.04
(c)(2) ....................................................................... 13.04
(c)(3) ....................................................................... N.A.
(d) .......................................................................... N.A.
(e) .......................................................................... 13.05
(f) .......................................................................... 4.11
315(a) .......................................................................... 7.01
(b) .......................................................................... 7.05;13.02
(c) .......................................................................... 7.01
(d) .......................................................................... 7.01
(e) .......................................................................... 6.11
316(a) (last sentence) .......................................................... 13.06
(a)(1)(A) .................................................................... 6.05
(a)(1)(B) .................................................................... 6.04
(a)(2) ....................................................................... N.A.
(b) .......................................................................... 6.07
317(a)(1) ....................................................................... 6.08
(a)(2) ....................................................................... 6.09
(b) .......................................................................... 2.04
318(a) .......................................................................... 13.01
</TABLE>
N.A. means Not Applicable.
_________________
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be
part of the Indenture.
<PAGE> 10
INDENTURE dated as of June 30, 1999, among DJ
Orthopedics, LLC, a Delaware limited liability company
(the "Company"), DJ Orthopedics Capital Corporation, a
Delaware corporation ("DJ Capital," and together with the
Company, the "Issuers"), DonJoy, L.L.C., a Delaware
limited liability company ("DonJoy"), and The Bank of New
York, a New York banking corporation, as trustee (the
"Trustee").
Each party agrees as follows for the benefit of the other
parties and for the equal and ratable benefit of the Holders of (a) the
Issuers' 12-_% Senior Subordinated Notes due 2009 issued on the date hereof
(the "Initial Securities"), (b) if and when issued as provided in the
Registration Agreement (as defined in Appendix A hereto (the "Appendix")), the
Issuers' 12-_% Senior Subordinated Notes due 2009 issued in the Registered
Exchange Offer (as defined in the Appendix) in exchange for any Initial
Securities (the "Exchange Securities") and (c) if and when issued as provided
in the Registration Agreement, the Private Exchange Securities (as defined in
the Appendix and, together with the Initial Securities and any Exchange
Securities issued hereunder, the "Securities") issued in the Private Exchange.
Except as otherwise provided herein, the Securities will be limited to
$100,000,000 in aggregate principal amount outstanding.
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Additional Assets" means (a) 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; (b) 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 (c) 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 (b) or (c)
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
<PAGE> 11
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of
Sections 4.06 and 4.07 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 (a) 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), (b) all or
substantially all the assets of any division or line of business of the Company
or any Restricted Subsidiary or (c) 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 (a), (b) and (c)
above, (i) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) for
purposes of Section 4.06 only, the making of a Permitted Investment or a
disposition that constitutes a Restricted Payment permitted by Section 4.04,
(iii) a disposition of obsolete or worn out property or equipment or property
or equipment that is no longer useful in the conduct of the business of the
Company and its Restricted Subsidiaries, and (iv) 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 Securities, 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).
"Average Life" means, as of the date of determination, with
respect to any Indebtedness or Preferred Equity Interests, the quotient
obtained by dividing (a) 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 scheduled redemption or similar payment with
respect to such Preferred Equity Interests multiplied by the amount of such
payment by (b) 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,
<PAGE> 12
3
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.
"Change of Control" means the occurrence of any of the following
events:
(a) prior to the earlier to occur of (i) the first public
offering of common Equity Interests of DonJoy or (ii) 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 (a) and clause (b) 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);
(b) (i) 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 (a) above, except that for purposes of this clause (b) 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
<PAGE> 13
4
more than 35% of the total voting power of the Voting Equity Interests
of the Company or DonJoy and (ii) the Permitted Holders "beneficially
own" (as defined in clause (a) 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 (b), 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
(b)), 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 (a) 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);
(c) 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
(i) elected in accordance with the Members' Agreement so long as such
agreement is in effect or (ii) whose election by such Governing Board
of the Company or 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;
(d) the adoption of a plan relating to the liquidation or
dissolution of the Company, DJ Capital or DonJoy;
(e) 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
<PAGE> 14
5
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
(f) the Company ceases to own, of record or beneficially, all
the Equity Interests of DJ Capital.
"Closing Date" means the date of this Indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination
means the ratio of (a) 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 (b)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (i) 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 new Indebtedness as if such discharge had
occurred on the first day of such period, (ii) 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, (iii) 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
<PAGE> 15
6
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), (iv)
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 (v) 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 clause (iii) or (iv) 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 (i) the
amount of such adjustment or adjustments, (ii) 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 (iii)
that any related Incurrence of Indebtedness is permitted
<PAGE> 16
7
pursuant to this 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 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 Officers' Certificate signed by the chief financial officer and
another Officer and meeting the requirements for the Officers' 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).
"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, (a) interest expense attributable to
Capitalized Lease Obligations and the interest expense attributable to leases
constituting part of a Sale/Leaseback Transaction, (b) amortization of debt
discount, (c) capitalized interest, (d) noncash interest expense, (e)
commissions, discounts and other fees and charges attributable to letters of
credit and bankers' acceptance financing, (f) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by the Company or any Restricted Subsidiary; (g) net costs associated with
Hedging Obligations (including amortization of fees), (h) 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, (i) interest Incurred in connection with investments in
discontinued operations, and (j) 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.
<PAGE> 17
8
"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:
(a) any net income (loss) of any Person (other than the Company)
if such Person is not a Restricted Subsidiary, except that (i) subject
to the limitations contained in clauses (d), (e) and (f) 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 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
(c) below) and (ii) 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;
(b) other than for purposes of clauses (iv) and (v) 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;
(c) 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 (i) subject to the
limitations contained in clauses (d), (e) and (f) 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 made to another
Restricted Subsidiary, to the limitation contained in this clause) and
(ii) 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;
(d) 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;
<PAGE> 18
9
(e) any extraordinary gain or loss; and
(f) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of Section 4.04 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 Section 4.04(a)(3)(E).
"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" shall not
include consolidation of the accounts of any Unrestricted Subsidiary, but the
interest of the Company or any Restricted Subsidiary in an Unrestricted
Subsidiary shall 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 (a) the
Bank Indebtedness and (b) 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
<PAGE> 19
10
of this 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 (a) matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise, (b) 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 (c) is redeemable at the
option of the holder thereof, in whole or in part, in the case of clauses (a),
(b) and (c) on or prior to 91 days after the Stated Maturity of the Securities;
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 of Sections 4.06 and 4.08, 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, without duplication, the following to the extent deducted in
calculating such Consolidated Net Income: (a) income tax expense of the Company
and its Consolidated Restricted Subsidiaries, (b) Consolidated Interest
Expense, (c) depreciation expense of the Company and its Consolidated
Restricted Subsidiaries, (d) amortization expense of
<PAGE> 20
11
the Company and its Consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (e) other noncash charges of the Company and its Consolidated
Restricted Subsidiaries (excluding any such noncash charge to the extent that
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 noncash 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 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 (a) the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants, (b) statements
and pronouncements of the Financial Accounting Standards Board, (c) such other
statements by such other entities as are approved by a significant segment of
the accounting profession and (d) the rules and
<PAGE> 21
12
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 this 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.
"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 (a) 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 (b) 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 Security is registered
on the Registrar's books.
"Income Tax Liabilities" means an amount determined by
multiplying (a)(i) all taxable income and gains of the Company for such
calendar year (the "Taxable Amount") minus (ii) 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 (ii) 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
<PAGE> 22
13
the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary 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),
(a) the principal of and premium (if any) in respect of
indebtedness of such Person for borrowed money;
(b) the principal of and premium (if any) in respect of
obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments;
(c) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement
obligations with respect thereto);
(d) 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;
(e) all Capitalized Lease Obligations and all Attributable Debt
of such Person;
(f) 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);
(g) 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 (i) the fair market value of such asset
at such date of determination and (ii) the amount of such Indebtedness
of such other Persons;
(h) to the extent not otherwise included in this definition, the
net obligations under Hedging Obligations of such Person; and
(i) 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
<PAGE> 23
14
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
(j) all obligations of the type referred to in clauses (a)
through (i) 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.
"Indenture" means this Indenture as amended or supplemented from
time to time.
"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 is 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 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 Section 4.04, (a)
"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 (i) the Company's "Investment" in such Subsidiary at the
time of such redesignation less (ii) 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 (b) 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
<PAGE> 24
15
as determined in good faith by (i) the senior management of the Company if the
amount thereof is less than $1.0 million and (ii) the Governing Board if in
excess thereof.
"Issue Date" means the date on which the Initial Securities are
originally issued.
"Issuers" means the parties named as such in this Indenture
until a successor replaces either such party and, thereafter, means any
remaining party named as such in this Indenture and any such successor and, for
purposes of any provision contained herein and required by the TIA, each other
obligor on the indenture securities.
"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).
"liquidated damages" means any liquidated damages payable under
the Registration Agreement.
"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 Securities.
"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 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 (a) 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, (b) 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, (c) all distributions and other payments required to be made
<PAGE> 25
16
to minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition and (d) 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 Guaranteed
Obligations by a Note Guarantor pursuant to the terms of this Indenture.
"Note Guarantor" means DonJoy and any other 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.
"Offering Memorandum" means the Offering Memorandum dated June
17, 1999, relating to the Initial Securities.
"Opinion of Counsel" means a written opinion from legal counsel
who is acceptable to the Trustee.
"Permitted Business" means the design, manufacture and/or
marketing of orthopedic products, devices, accessories or services, other
medical products, devices, accessories or services or any businesses that are
reasonably related, ancillary or complimentary thereto.
"Permitted Holders" means each of (i) Chase Capital Partners and
its Affiliates, (ii) Chase DJ Partners, LLC and its Affiliates, (iii) First
Union Capital Corporation and its Affiliates, (iv) Fairfield Chase Medical
Partners, LLC and its Affiliates, (v) Charles T. Orsatti and his Related
Parties, (vi) the Existing Management Stockholders and their Related Parties
and (vii) any Person acting in the capacity of an
<PAGE> 26
17
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 (a) 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; (b) 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; (c) Temporary Cash Investments; (d) 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; (e) 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; (f) 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; (g) 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; (h) 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 Section 4.06; (i) Hedging
Obligations entered into in the ordinary course of business; (j) endorsements
of negotiable instruments and documents in the ordinary course of business; (k)
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; (l) Investments in existence on the Closing Date; (m) 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 this 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 (n) 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 (n) that are at the time outstanding, not to
exceed the greater of 10% of Total Assets or
<PAGE> 27
18
$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 Security means the principal of the Security
plus the premium, if any, payable on the Security which is due or overdue or is
to become due at the relevant time.
"Recapitalization" shall have the meaning set forth in the
Offering Memorandum.
"Recapitalization Agreement" means the recapitalization
agreement dated as of April 29, 1999 among Chase DJ Partners, LLC, Smith &
Nephew, Inc. and DonJoy as such agreement is in effect on the Closing Date.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in 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 this Indenture (including Indebtedness of the Company or a Restricted
Subsidiary that Refinances Refinancing Indebtedness); provided, however, that
(a) the Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced, (b) 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, (c) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate issue
price) (whether in
<PAGE> 28
19
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 (d) if the Indebtedness being refinanced is subordinated in right of
payment to the Securities or a Note Guarantee of a Note Guarantor, such
Refinancing Indebtedness is subordinated in right of payment to the Securities
or the Note Guarantee at least to the same extent as the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include (i) Indebtedness of a Restricted Subsidiary that is not a Note
Guarantor that Refinances Indebtedness of the Company or (ii) 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.
"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.
<PAGE> 29
20
"Securities" means the Securities issued under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"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 subordinated in right of
payment to the Securities or such Note Guarantor's Note Guarantee; provided,
however, that Senior Indebtedness shall not include (a) 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, (b) any liability for
Federal, state, local or other taxes owed or owing by the Company, DJ Capital
or any Note Guarantor, (c) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (d) 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, including any Senior Subordinated
Indebtedness and any Subordinated Obligations, (e) any obligations with respect
to any Equity Interest or (f) any Indebtedness Incurred in violation of this
Indenture.
"Senior Subordinated Indebtedness" of the Company means the
Securities and any other Indebtedness of the Company that specifically provides
that such Indebtedness is to rank pari passu with the Securities 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
<PAGE> 30
21
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 Securities 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 (a) such
Person, (b) such Person and one or more Subsidiaries of such Person or (c) one
or more Subsidiaries of such Person.
"Tax Distribution" means any distribution by the Company to its
members which (i) 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 (ii) with respect to tax payments to be
made with income tax returns filed for a full calendar year or with respect to
adjustments to such returns imposed by the Internal Revenue Service or other
taxing authority, 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 (i) above. In the event the amount determined under clause
(ii) 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: (a) 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 instrumentality thereof, (b) 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), (c) repurchase obligations with a term of not more than 30
days for underlying
<PAGE> 31
22
securities of the types described in clause (a) above entered into with a bank
meeting the qualifications described in clause (b) above, (d) 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"), (e) 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 (f) investments in money market funds
that invest substantially all of their assets in securities of the types
described in clauses (a) through (e) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
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" shall have the meaning set forth in the Offering
Memorandum.
"Trustee" means the party named as such in this Indenture until
a successor replaces it and, thereafter, means the successor.
"Trust Officer" means, when used with respect to the Trustee,
any officer within the corporate trust department of the Trustee, including any
vice president, assistant vice president, assistant secretary, assistant
treasurer, trust officer or any other officer of the Trustee who customarily
performs functions similar to those performed by the Persons who at the time
shall be such officers, respectively, or to whom any corporate trust matter is
referred because of such person's knowledge of and familiarity with the
particular subject and who shall have direct responsibility for the
administration of this Indenture.
<PAGE> 32
23
"Uniform Commercial Code" means the New York Uniform Commercial
Code as in effect from time to time.
"Unrestricted Subsidiary" means (a) 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 (b) 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 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 (i) the
Subsidiary to be so designated has total Consolidated assets of $1,000 or less
or (ii) if such Subsidiary has Consolidated assets greater than $1,000, then
such designation would be permitted under Section 4.04. The Governing Board may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (a) the
Company could Incur $1.00 of additional Indebtedness under Section 4.03(a), and
(b) 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.
<PAGE> 33
24
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
--------------
<S> <C>
"Affiliate Transaction"......................................... 4.07(a)
"Appendix"...................................................... Preamble
"Bankruptcy Law"................................................ 6.01
"beneficially own".............................................. 1.01
"Blockage Notice"............................................... 10.03
"covenant defeasance option".................................... 8.01(b)
"Custodian"..................................................... 6.01
"Definitive Securities"......................................... Appendix A
"Event of Default".............................................. 6.01
"Exchange Securities"........................................... Preamble
"Global Securities"............................................. Appendix A
"Guarantee Blockage Notice"..................................... 12.03
"Guaranteed Obligation"......................................... 11.01
"Guarantee Payment Blockage Period"............................. 12.03
"Initial Securities"............................................ Preamble
"legal defeasance option"....................................... 8.01(b)
"Legal Holiday"................................................. 13.08
"Offer"......................................................... 4.06(b)
"Offer Amount".................................................. 4.06(c)(ii)
"Offer Period".................................................. 4.06(c)(ii)
"pay the Guarantees"............................................ 12.03
"pay the Securities"........................................... 10.03
"Paying Agent".................................................. 2.03
"Payment Blockage Period"....................................... 10.03
"Private Exchange Securities"................................... Appendix A
"protected purchaser"........................................... 2.07
"Purchase Date"................................................. 4.06(c)(i)
"Registered Exchange Offer"..................................... Appendix A
"Registrar"..................................................... 2.03
"Restricted Payment"............................................ 4.04(a)
"Securities Custodian".......................................... Appendix A
"Successor Company"............................................. 5.01(a)
</TABLE>
<PAGE> 34
25
SECTION 1.03. Incorporation by Reference of Trust Indenture Act.
This Indenture is subject to the mandatory provisions of the TIA, which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities and the Note
Guarantees.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the
Trustee.
"obligor" on the indenture securities means the Company, DJ
Capital, the Note Guarantors and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule
have the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context
otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(c) "or" is not exclusive;
(d) "including" means including without limitation;
(e) words in the singular include the plural and words in the
plural include the singular;
(f) unsecured Indebtedness shall not be deemed to be subordinate
or junior to Secured Indebtedness merely by virtue of its nature as
unsecured Indebtedness;
(g) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on
<PAGE> 35
a balance sheet of the issuer dated such date prepared in accordance
with GAAP; and
(h) the principal amount of any Preferred Equity Interest shall
be (i) the maximum liquidation value of such Preferred Equity Interest
or (ii) the maximum mandatory redemption or mandatory repurchase (not
including, in either case, any redemption or repurchase premium) price
with respect to such Preferred Equity Interests, whichever is greater.
ARTICLE 2
The Securities
SECTION 2.01. Form and Dating. Provisions relating to the
Initial Securities, the Private Exchange Securities and the Exchange Securities
are set forth in the Appendix, which is hereby incorporated in and expressly
made a part of this Indenture. The (a) Initial Securities and the Trustee's
certificate of authentication and (b) Private Exchange Securities and the
Trustee's certificate of authentication shall each be substantially in the form
of Exhibit A hereto, which is hereby incorporated in and expressly made a part
of this Indenture. The Exchange Securities and the Trustee's certificate of
authentication shall each be substantially in the form of Exhibit B hereto,
which is hereby incorporated in and expressly made a part of this Indenture.
The Securities may have notations, legends or endorsements required by law,
stock exchange rule, agreements to which the Issuers or any Note Guarantor is
subject, if any, or usage (provided that any such notation, legend or
endorsement is in a form acceptable to the Issuers). Each Security shall be
dated the date of its authentication. The Securities shall be issuable only in
registered form without interest coupons and only in denominations of $1,000
and integral multiples thereof.
SECTION 2.02. Execution and Authentication. One Officer shall
sign the Securities for the Issuers by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds
that office at the time the Trustee authenticates the Security, the Security
shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Security.
The signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate and make available for delivery
Securities as set forth in the Appendix.
<PAGE> 36
27
The Trustee may appoint an authenticating agent reasonably
acceptable to the Issuers to authenticate the Securities. Any such appointment
shall be evidenced by an instrument signed by a Trust Officer, a copy of which
shall be furnished to the Issuers. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as any Registrar, Paying Agent or agent for service of notices and
demands.
SECTION 2.03. Registrar and Paying Agent. (a) The Issuers shall
maintain an office or agency where Securities may be presented for registration
of transfer or for exchange (the "Registrar") and an office or agency where
Securities may be presented for payment (the "Paying Agent"). The Registrar
shall keep a register of the Securities and of their transfer and exchange. The
Issuers may have one or more co-registrars and one or more additional paying
agents. The term "Paying Agent" includes any additional paying agent, and the
term "Registrar" includes any co-registrars. The Issuers initially appoint the
Trustee as (i) Registrar and Paying Agent in connection with the Securities and
(ii) the Securities Custodian with respect to the Global Securities.
(b) The Issuers shall enter into an appropriate agency agreement
with any Registrar or Paying Agent not a party to this Indenture, which shall
incorporate the terms of the TIA. The agreement shall implement the provisions
of this Indenture that relate to such agent. The Issuers shall notify the
Trustee of the name and address of any such agent. If the Issuers fail to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall
be entitled to appropriate compensation therefor pursuant to Section 7.07.
Either of the Issuers or any of their domestically organized Wholly Owned
Subsidiaries may act as Paying Agent or Registrar.
(c) The Issuers may remove any Registrar or Paying Agent upon
written notice to such Registrar or Paying Agent and to the Trustee; provided,
however, that no such removal shall become effective until (i) acceptance of an
appointment by a successor as evidenced by an appropriate agreement entered
into by the Issuers and such successor Registrar or Paying Agent, as the case
may be, and delivered to the Trustee or (ii) notification to the Trustee that
the Trustee shall serve as Registrar or Paying Agent until the appointment of a
successor in accordance with clause (i) above. The Registrar or Paying Agent
may resign at any time upon written notice to the Issuers and the Trustee.
SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to each
due date of the principal of and interest on any Security, the Issuers shall
deposit with the Paying Agent (or if either of the Issuers or a Subsidiary is
acting as Paying Agent,
<PAGE> 37
28
segregate and hold in trust for the benefit of the Persons entitled thereto) a
sum sufficient to pay such principal and interest when so becoming due. The
Issuers shall require each Paying Agent (other than the Trustee) to agree in
writing that the Paying Agent shall hold in trust for the benefit of Holders or
the Trustee all money held by the Paying Agent for the payment of principal of
or interest on the Securities, shall notify the Trustee of any default by the
Issuers in making any such payment. If either of the Issuers or a Subsidiary of
the Issuers acts as Paying Agent, it shall segregate the money held by it as
Paying Agent and hold it as a separate trust fund. The Issuers at any time may
require a Paying Agent to pay all money held by it to the Trustee and to
account for any funds disbursed by the Paying Agent. Upon complying with this
Section, the Paying Agent shall have no further liability for the money
delivered to the Trustee.
SECTION 2.05. Holder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to
it of the names and addresses of Holders. If the Trustee is not the Registrar,
the Issuers shall furnish, or cause the Registrar to furnish, to the Trustee,
in writing at least five Business Days before each interest payment date and at
such other times as the Trustee may request in writing, a list in such form and
as of such date as the Trustee may reasonably require of the names and
addresses of Holders.
SECTION 2.06. Transfer and Exchange. The Securities shall be
issued in registered form and shall be transferable only upon the surrender of
a Security for registration of transfer and in compliance with the Appendix.
When a Security is presented to the Registrar with a request to register a
transfer, the Registrar shall register the transfer as requested if its
requirements therefor are met. When Securities are presented to the Registrar
with a request to exchange them for an equal principal amount of Securities of
other denominations, the Registrar shall make the exchange as requested if the
same requirements are met. To permit registration of transfers and exchanges,
the Issuers shall execute and the Trustee shall authenticate Securities at the
Registrar's request. The Issuers may require payment of a sum sufficient to pay
all taxes, assessments or other governmental charges in connection with any
transfer or exchange pursuant to this Section. The Issuers shall not be
required to make and the Registrar need not register transfers or exchanges of
Securities selected for redemption (except, in the case of Securities to be
redeemed in part, the portion thereof not to be redeemed) or any Securities for
a period of 15 days before a selection of Securities to be redeemed.
Prior to the due presentation for registration of transfer of
any Security, the Issuers, the Note Guarantors, the Trustee, the Paying Agent,
and the Registrar may deem and treat the Person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of principal of and (subject to paragraph 2 of the Securities)
interest, if any, on such Security and for all other purposes whatsoever,
<PAGE> 38
29
whether or not such Security is overdue, and none of the Issuers, any Note
Guarantor, the Trustee, the Paying Agent, or the Registrar shall be affected by
notice to the contrary.
Any Holder of a Global Security shall, by acceptance of such
Global Security, agree that transfers of beneficial interest in such Global
Security may be effected only through a book-entry system maintained by (a) the
Holder of such Global Security (or its agent) or (b) any Holder of a beneficial
interest in such Global Security, and that ownership of a beneficial interest
in such Global Security shall be required to be reflected in a book entry.
All Securities issued upon any transfer or exchange pursuant to
the terms of this Indenture will evidence the same debt and will be entitled to
the same benefits under this Indenture as the Securities surrendered upon such
transfer or exchange.
SECTION 2.07. Replacement Securities. If a mutilated Security is
surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Issuers shall issue
and the Trustee shall authenticate a replacement Security if the requirements
of Section 8-405 of the Uniform Commercial Code are met, such that the Holder
(a) satisfies the Issuers and the Trustee within a reasonable time after he has
notice of such loss, destruction or wrongful taking and the Registrar does not
register a transfer prior to receiving such notification, (b) makes such
request to the Issuers and the Trustee prior to the Security being acquired by
a protected purchaser as defined in Section 8-303 of the Uniform Commercial
Code (a "protected purchaser") and (c) satisfies any other reasonable
requirements of the Trustee. If required by the Trustee or the Issuers, such
Holder shall furnish an indemnity bond sufficient in the judgment of the
Trustee and the Issuers to protect the Issuers, the Trustee, the Paying Agent
and the Registrar from any loss that any of them may suffer if a Security is
replaced. The Issuers and the Trustee may charge the Holder for their expenses
in replacing a Security. In the event any such mutilated, lost, destroyed or
wrongfully taken Security has become or is about to become due and payable, the
Issuers in their discretion may pay such Security instead of issuing a new
Security in replacement thereof.
Every replacement Security is an additional obligation of the
Issuers.
The provisions of this Section 2.07 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, lost, destroyed or wrongfully taken
Securities.
SECTION 2.08. Outstanding Securities. Securities outstanding at
any time are all Securities authenticated by the Trustee except for those
canceled by it, those delivered to it for cancelation and those described in
this Section as not outstanding.
<PAGE> 39
30
Subject to Section 13.06, a Security does not cease to be outstanding because
the Issuers or an Affiliate of the Issuers holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases to
be outstanding unless the Trustee and the Issuers receive proof satisfactory to
them that the replaced Security is held by a protected purchaser.
If the Paying Agent segregates and holds in trust, in accordance
with this Indenture, on a redemption date or maturity date money sufficient to
pay all principal and interest and liquidated damages payable on that date with
respect to the Securities (or portions thereof) to be redeemed or maturing, as
the case may be, and the Paying Agent is not prohibited from paying such money
to the Holders on that date pursuant to the terms of this Indenture, then on
and after that date such Securities (or portions thereof) cease to be
outstanding and interest on them ceases to accrue.
SECTION 2.09. Temporary Securities. In the event that Definitive
Securities are to be issued under the terms of this Indenture, until such
Definitive Securities are ready for delivery, the Issuers may prepare and the
Trustee shall authenticate temporary Securities. Temporary Securities shall be
substantially in the form of Definitive Securities but may have variations that
the Issuers consider appropriate for temporary Securities. Without unreasonable
delay, the Issuers shall prepare and the Trustee shall authenticate Definitive
Securities and deliver them in exchange for temporary Securities upon surrender
of such temporary Securities at the office or agency of the Issuers, without
charge to the Holder.
SECTION 2.10. Cancelation. The Issuers at any time may deliver
Securities to the Trustee for cancelation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for
registration of transfer, exchange or payment. The Trustee and no one else
shall cancel all Securities surrendered for registration of transfer, exchange,
payment or cancelation and shall dispose of canceled Securities in accordance
with its customary procedures or deliver canceled Securities to the Issuers
pursuant to written direction by an Officer. The Issuers may not issue new
Securities to replace Securities it has redeemed, paid or delivered to the
Trustee for cancelation. The Trustee shall not authenticate Securities in place
of canceled Securities other than pursuant to the terms of this Indenture.
SECTION 2.11. Defaulted Interest. If the Issuers default in a
payment of interest on the Securities, the Issuers shall pay the defaulted
interest (plus interest on such defaulted interest to the extent lawful) in any
lawful manner. The Issuers may pay the defaulted interest to the Persons who
are Holders on a subsequent special record date. The Issuers shall fix or cause
to be fixed any such special record date and payment date to the reasonable
satisfaction of the Trustee and shall promptly mail or cause to be mailed to
<PAGE> 40
31
each Holder a notice that states the special record date, the payment date and
the amount of defaulted interest to be paid.
SECTION 2.12. CUSIP and "ISIN" Numbers. The Issuers in issuing
the Securities may use "CUSIP" and "ISIN" numbers (if then generally in use)
and, if so, the Trustee shall use "CUSIP" and "ISIN" numbers in notices of
redemption as a convenience to Holders; provided, however, that any such notice
may state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be
affected by any defect in or omission of such numbers.
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee. If the Issuers elect to redeem
Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date and the principal amount of
Securities to be redeemed.
The Issuers shall give each notice to the Trustee provided for
in this Section at least 60 days before the redemption date unless the Trustee
consents to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Issuers to the effect that such
redemption will comply with the conditions herein. Any such notice may be
canceled at any time prior to notice of such redemption being mailed to any
Holder and shall thereby be void and of no effect.
SECTION 3.02. Selection of Securities To Be Redeemed. If fewer
than all the Securities are to be redeemed, the Trustee shall select the
Securities to be redeemed pro rata or by lot or by a method that the Trustee in
its sole discretion shall deem to be fair and appropriate. The Trustee shall
make the selection from outstanding Securities not previously called for
redemption. The Trustee may select for redemption portions of the principal of
Securities that have denominations larger than $1,000. Securities and portions
of them the Trustee selects shall be in amounts of $1,000 or a whole multiple
of $1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption. The
Trustee shall notify the Issuers promptly of the Securities or portions of
Securities to be redeemed.
SECTION 3.03. Notice of Redemption. (a) At least 30 days but not
more than 60 days before a date for redemption of Securities, the Issuers shall
mail a notice of
<PAGE> 41
32
redemption by first-class mail to each Holder of Securities to be redeemed at
such Holder's registered address.
The notice shall identify the Securities to be redeemed and
shall state:
(i) the redemption date;
(ii) the redemption price and the amount of accrued interest and
liquidated damages (if any) to the redemption date;
(iii) the name and address of the Paying Agent;
(iv) that Securities called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
(v) if fewer than all the outstanding Securities are to be
redeemed, the certificate numbers and principal amounts of the
particular Securities to be redeemed;
(vi) that, unless the Issuers default in making such redemption
payment or the Paying Agent is prohibited from making such payment
pursuant to the terms of this Indenture, interest on Securities (or
portion thereof) called for redemption ceases to accrue on and after
the redemption date;
(vii) the CUSIP or ISIN number, if any, printed on the
Securities being redeemed; and
(viii) that no representation is made as to the correctness or
accuracy of the CUSIP or ISIN number, if any, listed in such notice or
printed on the Securities.
(b) At the Issuers' request, the Trustee shall give the notice
of redemption in the Issuers' name and at the Issuers' expense. In such event,
the Issuers shall provide the Trustee with the information required by this
Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable
on the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest and liquidated damages, if
any, to the redemption date; provided, however, that if the redemption date is
after a regular record date and on or prior to the interest payment date, the
accrued interest and liquidated damages, if any, shall be payable to the Holder
of the redeemed Securities registered on the relevant record date.
<PAGE> 42
33
Failure to give notice or any defect in the notice to any Holder shall not
affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. Prior to 10:00 a.m.
on the redemption date, the Issuers shall deposit with the Paying Agent (or, if
either of the Issuers or a Subsidiary is the Paying Agent, shall segregate and
hold in trust) money sufficient to pay the redemption price of and accrued
interest and liquidated damages, if any, on all Securities to be redeemed on
that date other than Securities or portions of Securities called for redemption
that have been delivered by the Issuers to the Trustee for cancelation. On and
after the redemption date, interest and liquidated damages (if any) will cease
to accrue on Securities or portions thereof called for redemption so long as
the Issuers 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 Securities to be redeemed, unless the Paying Agent is prohibited from
making such payment pursuant to the terms of this Indenture.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Issuers shall execute and the Trustee
shall authenticate for the Holder (at the Issuers' expense) a new Security
equal in principal amount to the unredeemed portion of the Security
surrendered.
ARTICLE 4
Covenants
SECTION 4.01. Payment of Securities. The Issuers shall promptly
pay the principal of, interest on and liquidated damages (if any) on the
Securities on the dates and in the manner provided in the Securities and in
this Indenture. Principal and interest shall be considered paid on the date due
if on such date the Trustee or the Paying Agent holds in accordance with this
Indenture money sufficient to pay all principal and interest then due and the
Trustee or the Paying Agent, as the case may be, is not prohibited from paying
such money to the Holders on that date pursuant to the terms of this Indenture.
The Issuers shall pay interest on overdue principal at the rate
specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.02. 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 shall 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)
<PAGE> 43
34
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 shall comply with the other provisions of Section 314(a) of the
TIA.
SECTION 4.03. Limitation on Indebtedness. (a) The Company shall
not, and shall 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 2.0 to 1.0 if such Indebtedness is
Incurred on or prior to December 31, 2000 and 2.25 to 1.0 if such Indebtedness
is Incurred thereafter. Notwithstanding the foregoing, the Company will not
permit DJ Capital to Incur any Indebtedness other than the Securities and its
guarantee in respect of the Credit Agreement.
(b) Notwithstanding Section 4.03(a), the Company and its
Restricted Subsidiaries (other than DJ Capital) may Incur the following
Indebtedness:
(i) 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 Section 4.06;
(ii) 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 (1) 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, (2) 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 Securities, (3) if a Restricted
Subsidiary is the obligor on such Indebtedness, such Indebtedness is
made pursuant to an intercompany note and (4) 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;
<PAGE> 44
35
(iii) Indebtedness (1) represented by the Securities and the
Note Guarantees, (2) outstanding on the Closing Date (other than the
Indebtedness described in clauses (i) and (ii) above), (3) consisting
of Refinancing Indebtedness Incurred in respect of any Indebtedness
described in this clause (iii) (including Indebtedness Refinancing
Refinancing Indebtedness) or Section 4.03(a) and (4) consisting of
Guarantees of any Indebtedness permitted under clauses (i) and (ii) of
this paragraph (b);
(iv) (1) 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
(2) Refinancing Indebtedness Incurred by a Restricted Subsidiary in
respect of Indebtedness Incurred by such Restricted Subsidiary pursuant
to this clause (iv);
(v) Indebtedness of the Company or a Restricted Subsidiary (1)
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
(2) 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;
(vi) 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 Indebtedness then outstanding
and Incurred pursuant to this clause (vi) and all Refinancing
Indebtedness Incurred to refund, refinance or replace any Indebtedness
Incurred pursuant to this clause (vi), does not exceed $10.0 million;
(vii) 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
<PAGE> 45
36
overdrafts) drawn against insufficient funds in the ordinary course,
provided that such Indebtedness is extinguished within five Business
Days of Incurrence;
(viii) 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 this 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 (1) such Indebtedness is not
reflected on the consolidated balance sheet of the Company and (2) 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
(ix) Indebtedness of the Company and its Restricted Subsidiaries
(in addition to Indebtedness permitted to be Incurred pursuant to
Section 4.03(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 (ix) and
then outstanding, shall not exceed $15.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur
any Indebtedness pursuant to Section 4.03(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 shall be
subordinated to the Securities to at least the same extent as such Subordinated
Obligations. The Company shall not Incur any Indebtedness pursuant to Section
4.03(a) or 4.03(b) 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 shall not Incur any
Secured Indebtedness which is not Senior Indebtedness unless contemporaneously
therewith effective provision is made to secure the Securities equally and
ratably with (or on a senior basis to, in the case of Indebtedness subordinated
in right of payment to the Securities) such Secured Indebtedness for so long as
such Secured 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,
<PAGE> 46
37
consolidation, purchase of assets or otherwise, provided that such Liens (x)
are not created, incurred or assumed in connection with, or in contemplation of
such entity being acquired by the Company and (y) do not extend to any other
assets of the Company or any of its Subsidiaries. A Note Guarantor shall 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
shall 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 (x) are not created, incurred
or assumed in connection with or in contemplation of such assets being acquired
by such Note Guarantor and (y) do not extend to any other assets of the Company
or any of its Subsidiaries.
(d) Notwithstanding any other provision of this Section 4.03,
the maximum amount of Indebtedness that the Company or any Restricted
Subsidiary may Incur pursuant to this Section 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 Section 4.03, (i)
Indebtedness Incurred pursuant to the Credit Agreement prior to or on the
Closing Date shall be treated as Incurred pursuant to Section 4.03(b)(i), (ii)
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, (iii) 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, (iv) 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, (v) 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, (vi) the accrual of interest, accrual
of dividends, the accretion of accreted value, the payment of
<PAGE> 47
38
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 Section, (vii) Indebtedness
permitted by this Section 4.03 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 Section
permitting such Indebtedness, and (viii) in the event that Indebtedness meets
the criteria of more than one of the types of Indebtedness described in this
Section, 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.
SECTION 4.04. Limitation on Restricted Payments. (a) The Company
shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to (i) 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), (ii)
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, (iii) 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 (B) Indebtedness described in Section 4.03(b)(ii))
or (iv) 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:
(1) a Default shall have occurred and be continuing (or would
result therefrom);
(2) the Company could not Incur at least $1.00 of additional
Indebtedness under Section 4.03(a); or
<PAGE> 48
39
(3) 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 shall be conclusive and evidenced by a resolution of the
Governing Board) declared or made subsequent to the Closing Date would
exceed the sum of, without duplication:
(A) 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 shall be a deficit, minus 100% of such
deficit);
(B) the aggregate Net Cash Proceeds received by the
Company (x) as capital contributions to the Company after the
Closing Date or (y) 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 (x) a Subsidiary of the Company or (y) an
employee equity ownership or participation plan or other trust
established by the Company or any of its Subsidiaries);
(C) 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 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);
(D) 100% of the aggregate amount received by the Company
or any Restricted Subsidiary in cash from the sale or other
disposition (other than to (x) the Company or a Subsidiary of
the Company or (y) 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 (x) the Company or any of its Subsidiaries or (y) an
employee equity ownership
<PAGE> 49
40
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 (D)
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
(E) the amount equal to the net reduction in Investments
in Unrestricted Subsidiaries resulting from (x) 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 (y) 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 Section 4.04(a) shall not prohibit:
(i) 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 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 (1) such Restricted Payment
shall be excluded in the calculation of the amount of Restricted
Payments and (2) the Net Cash Proceeds from such sale or capital
contribution applied in the manner set forth in this clause (i) shall
be excluded from the calculation of amounts under Section
4.04(a)(3)(B);
(ii) 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, (x) Equity Interests
of DonJoy or the Company (other than Disqualified Equity Interests) or
(y) Subordinated Obligations of the Company or a Restricted Subsidiary
that are permitted to be Incurred pursuant to Section 4.03; provided,
however, that such purchase repurchase, redemption, defeasance or
<PAGE> 50
41
other acquisition or retirement for value shall be excluded in the
calculation of the amount of Restricted Payments;
(iii) any purchase or redemption of Subordinated Obligations
from Net Available Cash to the extent permitted by Section 4.06;
provided, however, that such purchase or redemption shall be excluded
in the calculation of the amount of Restricted Payments;
(iv) 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 Section 4.04(a);
provided, however, that such dividend, distribution or redemption shall
be included in the calculation of the amount of Restricted Payments;
(v) payment of dividends, other distributions or other amounts
by the Company for the purposes set forth in clauses (1) and (2) below;
provided, however, that such dividend, distribution or amount set forth
in clause (1) shall be excluded and in clause (2) shall be included in
the calculation of the amount of Restricted Payments for the purposes
of Section 4.04(a):
(1) 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 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
(2) 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
(2) 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 this Indenture;
(vi) for so long as the Company is treated as a pass-through
entity for United States Federal income tax purposes, Tax
Distributions; provided, however,
<PAGE> 51
42
that such Tax Distributions shall be excluded in the calculation of the
amount of Restricted Payments;
(vii) 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;
(viii) 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
(ix) 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, Inc. in connection with the Recapitalization
pursuant to Article III of the Recapitalization Agreement as such
agreement is in effect on the date hereof; provided, however, that such
distributions shall be excluded in the calculation of the amount of
Restricted Payments.
SECTION 4.05. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall 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 (a) pay dividends or make any other distributions
on its Equity Interests or pay any Indebtedness or other obligations owed to
the Company or any of its Restricted Subsidiaries, (b) make any loans or
advances to the Company or any of its Restricted Subsidiaries or (c) transfer
any of its property or assets to the Company or any of its Restricted
Subsidiaries, except:
(i) 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;
<PAGE> 52
43
(ii) 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;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this Section 4.05 or
this clause (iii) or contained in any amendment to an agreement
referred to in clause (i) or (ii) of this Section 4.05 or this clause
(iii); 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;
(iv) in the case of clause (c), any encumbrance or restriction
(1) 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, (2) 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 this Indenture, (3) 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 (4) encumbrances or
restrictions relating to Indebtedness permitted to be Incurred pursuant
to Section 4.03(b)(vi) for property acquired in the ordinary course of
business that only imposes encumbrances or restrictions on the property
so acquired;
(v) 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;
(vi) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business; and
(vii) net worth provisions in leases and other agreements
entered into by the Company or any Restricted Subsidiary in the
ordinary course of business.
<PAGE> 53
44
SECTION 4.06. Limitation on Sales of Assets and Subsidiary
Equity Interests. (a) The Company shall not, and shall not permit any
Restricted Subsidiary to, make any Asset Disposition unless (i) 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, (ii) 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 (iii) 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) (1)
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 this Indenture; (2) 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 (1), to make an Offer (as
defined below) to purchase Securities pursuant to and subject to the conditions
set forth in Section 4.06(b); 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 Securities and other Senior
Subordinated Indebtedness of the Company; and (3) third, to the extent of the
balance of such Net Available Cash after application in accordance with clauses
(1) (other than the proviso thereof) and (2), for any general corporate purpose
not restricted by the terms of this Indenture; provided, however that in
connection with any prepayment, repayment or purchase of Indebtedness pursuant
to clause (1) or (2) above, the Company or such Restricted Subsidiary shall
retire such Indebtedness and shall 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
<PAGE> 54
45
Section 4.06, the Company and the Restricted Subsidiaries shall not be required
to apply any Net Available Cash in accordance with this Section 4.06(a) except
to the extent that the aggregate Net Available Cash from all Asset Dispositions
that is not applied in accordance with this Section 4.06(a) exceeds $5.0
million.
For the purposes of this Section 4.06, the following are deemed
to be cash: (A) 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 (B) 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 Securities (and other Senior Subordinated Indebtedness) pursuant to
Section 4.06(a)(iii)(2), the Issuers shall be required to purchase Securities
(and other Senior Subordinated Indebtedness) tendered pursuant to an offer by
the Issuers for the Securities (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 (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in Section 4.06(c). If the aggregate purchase price
of Securities (and other Senior Subordinated Indebtedness) tendered pursuant to
the Offer is less than the Net Available Cash allotted to the purchase of the
Securities (and other Senior Subordinated Indebtedness), the Company shall
apply the remaining Net Available Cash for any general corporate purpose not
restricted by the terms of this Indenture. The Issuers shall not be required to
make an Offer for Securities (and other Senior Subordinated Indebtedness)
pursuant to this Section 4.06 if the Net Available Cash available therefor
(after application of the proceeds as provided in clause (1) of Section
4.06(a)(iii)) is less than $5.0 million for any particular Asset Disposition
(which lesser amount shall 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) (i) Promptly, and in any event within 10 days after the
Issuers become obligated to make an Offer, the Issuers shall deliver to the
Trustee and send, by first-class mail to each Holder, a written notice stating
that the Holder may elect to have his Securities purchased by the Issuers
either in whole or in part (subject to prorating as hereinafter described in
the event the Offer is oversubscribed) in integral multiples of $1,000 of
principal amount, at the applicable purchase price. The notice shall specify a
purchase date not less than 30 days nor more than 60 days after the date of
such notice
<PAGE> 55
46
(the "Purchase Date") and shall contain such information concerning the
business of the Company which the Issuers in good faith believe will enable
such Holders to make an informed decision (which at a minimum shall include (1)
the most recently filed Annual Report on Form 10-K (including audited
consolidated financial statements) of the Company or DonJoy, the most recent
subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form
8-K of the Company or DonJoy filed subsequent to such Quarterly Report, other
than Current Reports describing Asset Dispositions otherwise described in the
offering materials (or corresponding successor reports), (2) a description of
material developments in the Company's business subsequent to the date of the
latest of such reports, and (3) if material, appropriate pro forma financial
information) and all instructions and materials necessary to tender Securities
pursuant to the Offer, together with the address referred to in clause
(c)(iii).
(ii) Not later than the date upon which written notice of an
Offer is delivered to the Trustee as provided above, the Issuers shall deliver
to the Trustee an Officers' Certificate as to (1) the amount of the Offer (the
"Offer Amount"), (2) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (3) the compliance
of such allocation with the provisions of Section 4.06(a). On the Business Day
immediately preceding the Purchase Date, the Issuers shall irrevocably deposit
with the Trustee or with a paying agent (or, if the Issuers are acting as their
own paying agent, segregate and hold in trust) an amount equal to the Offer
Amount or, if less, the purchase price of Securities (and other Senior
Subordinated Indebtedness) tendered and accepted for payment in the Offer. Upon
the expiration of the period for which the Offer remains open (the "Offer
Period"), the Issuers shall deliver to the Trustee for cancelation the
Securities or portions thereof that have been properly tendered to and are to
be accepted by the Issuers. The Trustee (or the Paying Agent, if not the
Trustee) shall, on the date of purchase, mail or deliver payment to each
tendering Holder in the amount of the purchase price.
(iii) Holders electing to have a Security purchased shall be
required to surrender the Security, with an appropriate form duly completed, to
the Issuers at the address specified in the notice at least three Business Days
prior to the Purchase Date. Holders shall be entitled to withdraw their
election if the Trustee or the Issuers receive not later than one Business Day
prior to the Purchase Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Security
which was delivered by the Holder for purchase and a statement that such Holder
is withdrawing his election to have such Security purchased. If at the
expiration of the Offer Period the aggregate principal amount of Securities and
any other Senior Subordinated Indebtedness included in the Offer surrendered by
holders thereof exceeds the Offer Amount, the Issuers shall select the
Securities and other Senior Subordinated Indebtedness to be purchased on a pro
rata basis (with such adjustments as may be deemed appropriate by the Issuers
so that only Securities and other Senior Subordinated
<PAGE> 56
47
Indebtedness in denominations of $1,000, or integral multiples thereof, shall
be purchased). Holders whose Securities are purchased only in part will be
issued new Securities equal in principal amount to the unpurchased portion of
the Securities surrendered.
(iv) At the time the Issuers deliver Securities to the Trustee
which are to be accepted for purchase, the Issuers shall also deliver an
Officers' Certificate stating that such Securities are to be accepted by the
Issuers pursuant to and in accordance with the terms of this Section. A
Security shall be deemed to have been accepted for purchase at the time the
Trustee, directly or through an agent, mails or delivers payment therefor to
the surrendering Holder.
(v) The Issuers shall 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 Securities pursuant to this
Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Issuers shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.07. Limitation on Transactions with Affiliates. (a)
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, enter into or conduct any transaction or series of
related transactions (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 Affiliate Transaction is on terms (i) 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, (ii) that, in
the event that such Affiliate Transaction involves an aggregate amount in
excess of $1.0 million, (1) are set forth in writing and (2) except as provided
in Section 4.07(a)(iii) 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 (iii) 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 Section 4.07(a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to Section 4.04, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the
<PAGE> 57
48
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, (iii) 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, (iv) 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, (v) 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, (vi) any transaction between the Company and a Restricted
Subsidiary or between Restricted Subsidiaries, (vii) 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, (viii) 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, (ix) (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
Securities 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 the Offering Memorandum 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, (x) 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 excess of the
tax liabilities attributable solely to the Company and its Restricted
Subsidiaries (as a consolidated group), or (ix) any contribution to the capital
of the Company by DonJoy or any purchase of Equity Interests of the Company by
DonJoy.
SECTION 4.08. Change of Control. (a) Upon the occurrence of a
Change of Control, each Holder shall have the right to require that the Issuers
repurchase all or any part of such Holder's Securities at a purchase price in
cash equal to 101% of the
<PAGE> 58
49
principal amount thereof plus accrued and unpaid interest and liquidated
damages, if any, to the date of purchase (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), in accordance with the terms contemplated in Section
4.08(b); provided, however, that notwithstanding the occurrence of a Change of
Control, the Issuers shall not be obligated to purchase the Securities pursuant
to this Section 4.08 in the event that it has exercised its right to redeem all
the Securities under paragraph 5 of the Securities. In the event that at the
time of such Change of Control the terms of any agreement governing
Indebtedness of the Company or its Subsidiaries restrict or prohibit the
repurchase of Securities pursuant to this Section 4.08, then prior to the
mailing of the notice to Holders provided for in Section 4.08(b) below but in
any event within 30 days following any Change of Control, the Company shall (i)
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 (ii) obtain the requisite consent of the lenders under such agreements
to permit the repurchase of the Securities as provided for in Section 4.08(b).
(b) Within 30 days following any Change of Control (except as
provided in the proviso to the first sentence of Section 4.08(a)), the Issuers
shall mail a notice to each Holder with a copy to the Trustee (the "Change of
Control Offer") stating:
(i) that a Change of Control has occurred and that such Holder
has the right to require the Issuers to purchase all or a portion (in
integral multiples of $1,000) of such Holder's Securities at a purchase
price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages, if any, to the date
of purchase (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment
date);
(ii) the circumstances and relevant facts and financial
information regarding such Change of Control;
(iii) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(iv) the instructions determined by the Issuers, consistent with
this Section, that a Holder must follow in order to have its Securities
purchased.
(c) Holders electing to have a Security purchased shall be
required to surrender the Security, with an appropriate form duly completed, to
the Issuers at the address specified in the notice at least three Business Days
prior to the purchase date. Holders shall be entitled to withdraw their
election if the Trustee or the Issuers receive not later than one Business Day
prior to the purchase date a telegram, telex, facsimile
<PAGE> 59
50
transmission or letter setting forth the name of the Holder, the principal
amount of the Security which was delivered for purchase by the Holder and a
statement that such Holder is withdrawing his election to have such Security
purchased. Holders whose Securities are purchased only in part will be issued
new Securities equal in principal amount to the unpurchased portion of the
Securities surrendered.
(d) On the purchase date, all Securities purchased by the
Issuers under this Section shall be delivered to the Trustee for cancelation,
and the Issuers shall pay the purchase price plus accrued and unpaid interest,
if any, to the Holders entitled thereto.
(e) Notwithstanding the foregoing provisions of this Section,
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 Section 4.08(b) applicable to a Change of Control Offer made by the
Issuers and purchases all Securities validly tendered and not withdrawn under
such Change of Control Offer.
(f) At the time the Issuers deliver Securities to the Trustee
which are to be accepted for purchase, the Issuers shall also deliver an
Officers' Certificate stating that such Securities are to be accepted by the
Issuers pursuant to and in accordance with the terms of this Section 4.08. A
Security shall be deemed to have been accepted for purchase at the time the
Trustee, directly or through an agent, mails or delivers payment therefor to
the surrendering Holder.
(g) Prior to any Change of Control Offer, the Issuers shall
deliver to the Trustee an Officers' Certificate stating that all conditions
precedent contained herein to the right of the Issuers to make such offer have
been complied with.
(h) The Issuers shall 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 Securities pursuant to this
Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Issuers shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.09. Compliance Certificate. The Issuers shall deliver
to the Trustee within 120 days after the end of each fiscal year of the Company
an Officers' Certificate (which certificate may be the same certificate
required by Section 314(a)(4) of the TIA) stating that in the course of the
performance by the signers of their duties as Officers of the Issuers they
would normally have knowledge of any Default and whether or not the signers
know of any Default that occurred during such period. If they do, the
<PAGE> 60
51
certificate shall describe the Default, its status and what action the Issuers
are taking or propose to take with respect thereto. The Issuers also shall
comply with Section 314(a)(4) of the TIA.
SECTION 4.10. Further Instruments and Acts. Upon request of the
Trustee, the Issuers shall execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
SECTION 4.11. Future Note Guarantors. The Company shall cause
each Domestic Subsidiary to become a Note Guarantor, and, if applicable,
execute and deliver to the Trustee a supplemental indenture substantially in
the form of Exhibit C pursuant to which such Domestic Subsidiary will Guarantee
payment of the Securities.
SECTION 4.12. Limitation on Lines of Business. The Company shall
not, and shall not permit any Restricted Subsidiary to, engage in any business,
other than a Permitted Business.
SECTION 4.13. Limitation on the Conduct of Business of DJ
Capital. DJ Capital shall 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 Securities and its guarantee in respect of the Credit
Agreement.
ARTICLE 5
Successor Company
SECTION 5.01. (a) When Company May Merge or Transfer Assets.
Neither the Company nor DJ Capital shall 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:
(i) the resulting, surviving or transferee Person (the
"Successor Company") shall 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) shall expressly assume, by a
supplemental indenture hereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company
under the Securities and this Indenture;
<PAGE> 61
52
(ii) 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;
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to Section 4.03(a); and
(iv) 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 this Indenture.
The Successor Company shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under this Indenture,
but the predecessor Company in the case of a conveyance, transfer or lease of
all or substantially all its assets shall not be released from the obligation
to pay the principal of and interest on the Securities.
(b) The Company shall 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: (i) 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) shall 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; (ii)
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 (iii) 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 this Indenture.
(c) Notwithstanding any of the foregoing, (i) 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 (ii) the Company may merge with an Affiliate incorporated
solely for (A) the purpose of
<PAGE> 62
53
incorporating the Company or (B) organizing the Company in another jurisdiction
to realize tax or other benefits.
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default. An "Event of Default" occurs
if:
(a) the Issuers default in any payment of interest on any
Security when the same becomes due and payable or in any payment of
liquidated damages, whether or not such payment shall be prohibited by
Article 10, and such default continues for a period of 30 days;
(b) the Issuers (i) default in the payment of the principal of
any Security when the same becomes due and payable at its Stated
Maturity, upon required redemption or repurchase, upon declaration or
otherwise, whether or not such payment shall be prohibited by Article
10 or (ii) fail to redeem or purchase Securities when required pursuant
to this Indenture or the Securities, whether or not such redemption or
purchase shall be prohibited by Article 10;
(c) either Issuer fails to comply with Section 5.01;
(d) either Issuer fails to comply with Section 4.02, 4.03, 4.04,
4.05, 4.06, 4.07, 4.08, 4.11, 4.12 or 4.13, (other than a failure to
purchase Securities when required under Section 4.06 or 4.08) and such
failure continues for 30 days after the notice specified below;
(e) either Issuer or any Note Guarantor fails to comply with any
of its agreements in the Securities or this Indenture (other than those
referred to in (a), (b), (c) or (d) above) and such failure continues
for 60 days after the notice specified below;
(f) Indebtedness of either Issuer or any Restricted Subsidiary
of the Company is not paid within any applicable grace period after
final maturity or the acceleration by the holders thereof because of a
default and the total amount of such Indebtedness unpaid or accelerated
exceeds $10.0 million or its foreign currency equivalent at the time
and such failure continues for 10 days after the notice specified
below;
<PAGE> 63
54
(g) either Issuer or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief against
it in an involuntary case;
(iii) consents to the appointment of a Custodian of it or
for any substantial part of its property; or
(iv) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(h) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(i) is for relief against either Issuer or any
Significant Subsidiary in an involuntary case;
(ii) appoints a Custodian of either Issuer or any
Significant Subsidiary or for any substantial part of its
property; or
(iii) orders the winding up or liquidation of either
Issuer or any Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order
or decree remains unstayed and in effect for 60 days;
(i) 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 if (i) an enforcement
proceeding thereon is commenced by any creditor or (ii) there is a
period of 60 days following the entry of such judgment or decree during
which such judgment or decree is not discharged, waived or the
execution thereof stayed; or
(j) 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 its obligations under this
<PAGE> 64
55
Indenture or any Note Guarantee and such Default continues for 10 days
after the notice specified below.
The foregoing shall 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.
The term "Bankruptcy Law" means Title 11, United States Code, or
any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
A Default under clause (d), (e), (f) or (j) above is not an
Event of Default until the Trustee notifies the Issuers or the Holders of at
least 25% in principal amount of the outstanding Securities notify the Issuers
and the Trustee of the Default and the Issuers or the Note Guarantor, as
applicable, do not cure such Default within the time specified after receipt of
such notice. Such notice must specify the Default, demand that it be remedied
and state that such notice is a "Notice of Default".
The Issuers shall deliver to the Trustee, within 30 days after
the occurrence thereof, written notice in the form of an Officers' Certificate
of any event which with the giving of notice or the lapse of time would become
an Event of Default, its status and what action the Issuers are taking or
propose to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than
an Event of Default specified in Section 6.01(g) or (h) with respect to the
Company or DJ Capital) occurs and is continuing, the Trustee or the Holders of
at least 25% in principal amount of the outstanding Securities, 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 Securities to be due and
payable. Upon such a declaration, such principal and interest and liquidated
damages (if any) shall be due and payable immediately. If an Event of Default
specified in Section 6.01(g) or (h) with respect to the Company or DJ Capital
occurs, the principal of and interest and liquidated damages (if any) on all
the Securities shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holders.
The Holders of a majority in principal amount of the Securities by notice to
the Trustee may rescind an acceleration and its consequences if the rescission
would not conflict with any judgment or decree and if all existing Events of
Default have been cured or waived except nonpayment of principal or interest
that has become due solely because of acceleration. No such rescission shall
affect any subsequent Default or impair any right consequent thereto.
<PAGE> 65
56
SECTION 6.03. Other Remedies. If an Event of Default occurs and
is continuing, the Trustee may pursue any available remedy to collect the
payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Holder in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a majority
in principal amount of the Securities by notice to the Trustee may waive an
existing Default and its consequences except (a) a Default in the payment of
the principal of or interest on a Security, (b) a Default arising from the
failure to redeem or purchase any Security when required pursuant to the terms
of this Indenture or (c) a Default in respect of a provision that under Section
9.02 cannot be amended without the consent of each Holder affected. When a
Default is waived, it is deemed cured, but no such waiver shall extend to any
subsequent or other Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority in
principal amount of the Securities may 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. However, the Trustee
may refuse to follow any direction that conflicts with law or this Indenture
or, subject to Section 7.01, that the Trustee determines is unduly prejudicial
to the rights of other Holders or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
SECTION 6.06. Limitation on Suits. (a) 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 this Indenture or the
Securities unless:
(i) the Holder gives to the Trustee written notice stating that
an Event of Default is continuing;
<PAGE> 66
57
(ii) the Holders of at least 25% in principal amount of the
Securities make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of security or indemnity;
and
(v) the Holders of a majority in principal amount of the
Securities do not give the Trustee a direction inconsistent with the
request during such 60-day period.
(b) A Holder may not use this Indenture to prejudice the rights
of another Holder or to obtain a preference or priority over another Holder.
SECTION 6.07. Rights of Holders To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of principal of and liquidated damages and interest on the
Securities held by such Holder, on or after the respective due dates expressed
or provided for in the Securities, or to bring suit for the enforcement of any
such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of Default
specified in Section 6.01(a) or (b) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Issuers or any other obligor on the Securities for the whole amount then due
and owing (together with interest on overdue principal and (to the extent
lawful) on any unpaid interest at the rate provided for in the Securities) and
the amounts provided for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may
file such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Holders allowed in
any judicial proceedings relative to the Issuers, any Subsidiary or Note
Guarantor, their creditors or their property and, unless prohibited by law or
applicable regulations, may vote on behalf of the Holders in any election of a
trustee in bankruptcy or other Person performing similar functions, and any
Custodian in any such judicial proceeding is hereby authorized by each Holder
to make payments to the Trustee and, in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and its counsel, and any
other amounts due the Trustee under Section 7.07.
<PAGE> 67
58
SECTION 6.10. Priorities. If the Trustee collects any money or
property pursuant to this Article 6, it shall pay out the money or property in
the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to holders of Senior Indebtedness of either Issuer to
the extent required by Article 10 and to holders of Senior Indebtedness
of the Note Guarantors to the extent required by Article 12;
THIRD: to Holders for amounts due and unpaid on the Securities
for principal and interest, ratably, and any liquidated damages without
preference or priority of any kind, according to the amounts due and
payable on the Securities for principal, any liquidated damages and
interest, respectively; and
FOURTH: to the Issuers.
The Trustee may fix a record date and payment date for any
payment to Holders pursuant to this Section. At least 15 days before such
record date, the Trustee shall mail to each Holder and the Issuers a notice
that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any
party litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section does not apply
to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit
by Holders of more than 10% in principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. Neither the
Issuers nor any Note Guarantor (to the extent they may lawfully do so) shall at
any time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law wherever enacted, now or at
any time hereafter in force, which may affect the covenants or the performance
of this Indenture; and the Issuers and each Note Guarantor (to the extent that
they may lawfully do so) hereby expressly waive all benefit or advantage of any
such law, and shall not hinder, delay or impede the execution of any power
herein granted to the Trustee, but shall suffer and permit the execution of
every such power as though no such law had been enacted.
<PAGE> 68
59
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements
of this Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein).
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(iv) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in
the performance of any of its duties hereunder or in the exercise of
any of its rights or powers, if it shall
<PAGE> 69
60
have reasonable grounds to believe that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably
assured to it.
(d) Every provision of this Indenture that in any way relates to
the Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Issuers.
(f) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(g) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on
any document believed by it to be genuine and to have been signed or presented
by the proper person. The Trustee need not investigate any fact or matter
stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall
not be liable for any action it takes or omits to take in good faith in
reliance on the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Trustee's conduct does not
constitute wilful misconduct or negligence.
(e) The Trustee may consult with counsel of its selection, and
the advice or opinion of counsel with respect to legal matters relating to this
Indenture and the Securities shall be full and complete authorization and
protection from liability in respect to any action taken, omitted or suffered
by it hereunder in good faith and in accordance with the advice or opinion of
such counsel.
(f) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
debenture, note or other paper or document unless requested in writing to do so
by the Holders of not less than a majority
<PAGE> 70
61
in principal amount of the Securities at the time outstanding, but the Trustee,
in its discretion, may make such further inquiry or investigation into such
facts or matters as it may see fit, and, if the Trustee shall determine to make
such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Issuers, personally or by agent or attorney
at the Issuers' expense.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Issuers or their Affiliates with the same
rights it would have if it were not Trustee. Any Paying Agent, Registrar or
co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture, any Note Guarantee or the Securities, it shall not be
accountable for the Issuers' use of the proceeds from the Securities, and it
shall not be responsible for any statement of the Issuers' or any Note
Guarantor in this Indenture or in any document issued in connection with the
sale of the Securities or in the Securities other than the Trustee's
certificate of authentication. The Trustee shall not be charged with knowledge
of any Default or Event of Default under Sections 6.01(c), (d), (e), (f), (i)
or (j) or of the identity of any Significant Subsidiary unless either (a) a
Trust Officer shall have actual knowledge thereof or (b) the Trustee shall have
received notice thereof in accordance with Section 13.02 hereof from the
Issuers, any Note Guarantor or any Holder.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall 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. Except in the case of a Default
in payment of principal of or interest on any Security (including payments
pursuant to the mandatory redemption provisions of such Security, if any), the
Trustee may withhold the notice if and so long as a committee of its Trust
Officers in good faith determines that withholding the notice is in the
interests of Holders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
practicable after each May 15 beginning with the May 15 following the date of
this Indenture, the Trustee shall mail to each Holder a brief report dated as
of such May 15 that complies with Section 313(a) of the TIA if and to the
extent required thereby. The Trustee shall also comply with Sections 313(b) and
313(c) of the TIA.
A copy of each report at the time of its mailing to Holders
shall be filed with the SEC and each stock exchange (if any) on which the
Securities are listed. The
<PAGE> 71
62
Company agrees to notify promptly the Trustee whenever the Securities become
listed on any stock exchange and of any delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Issuers shall pay
to the Trustee from time to time reasonable compensation for its services as
shall be agreed to in writing from time to time by the Issuers and the Trustee.
The Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Issuers shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its
services. Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
experts. The Issuers and each Note Guarantor, jointly and severally, shall
indemnify the Trustee and any predecessor Trustee against any and all loss,
liability or expense (including reasonable attorneys' fees), including taxes
(other than taxes based upon, measured by or determined by the income of the
Trustee) incurred by or in connection with the administration of this trust and
the performance of its duties hereunder. The Trustee shall notify the Issuers
of any claim for which it may seek indemnity promptly upon obtaining actual
knowledge thereof; provided, however, that any failure so to notify the Issuers
shall not relieve the Issuers or any Note Guarantor of their indemnity
obligations hereunder. The Issuers shall defend the claim and the indemnified
party shall provide reasonable cooperation at the Issuers' expense in the
defense. Such indemnified parties may have separate counsel and the Issuers and
the Note Guarantors, as applicable, shall pay the fees and expenses of such
counsel; provided, however, that the Issuers shall not be required to pay such
fees and expenses if they assume such indemnified parties' defense and, in such
indemnified parties' reasonable judgment, there is no conflict of interest
between the Issuers and the Note Guarantors, as applicable, and such parties in
connection with such defense. The Issuers need not reimburse any expense or
indemnify against any loss, liability or expense incurred by an indemnified
party through such party's own wilful misconduct, negligence or bad faith.
To secure the Issuers' payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest and any liquidated damages on particular Securities.
The Issuers' payment obligations pursuant to this Section shall
survive the satisfaction or discharge of this Indenture, any rejection or
termination of this Indenture under any bankruptcy law or the resignation or
removal of the Trustee. Without prejudice to any other rights available to the
Trustee under applicable law, when the Trustee incurs expenses after the
occurrence of a Default specified in Section 6.01(g) or (h) with respect to
either of the Issuers, the expenses are intended to constitute expenses of
administration under the Bankruptcy Law.
<PAGE> 72
63
SECTION 7.08. Replacement of Trustee. (a) The Trustee may
resign at any time by so notifying the Issuers. The Holders of a majority in
principal amount of the Securities may remove the Trustee by so notifying the
Trustee and may appoint a successor Trustee. The Issuers shall remove the
Trustee if:
(i) the Trustee fails to comply with Section 7.10;
(ii) the Trustee is adjudged bankrupt or insolvent;
(iii) a receiver or other public officer takes charge of the
Trustee or its property; or
(iv) the Trustee otherwise becomes incapable of acting.
(b) If the Trustee resigns, is removed by the Issuers or by the
Holders of a majority in principal amount of the Securities and such Holders do
not reasonably promptly appoint a successor Trustee, or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being referred
to herein as the retiring Trustee), the Issuers shall promptly appoint a
successor Trustee.
(c) A successor Trustee shall deliver a written acceptance of
its appointment to the retiring Trustee and to the Issuers. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
(d) If a successor Trustee does not take office within 30 days
after the retiring Trustee resigns or is removed, the retiring Trustee or the
Holders of 10% in principal amount of the Securities may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(e) If the Trustee fails to comply with Section 7.10, unless the
Trustee's duty to resign is stayed as provided in TIA Section 310(b), any Holder
who has been a bona fide holder of a Security for at least six months may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
(f) Notwithstanding the replacement of the Trustee pursuant to
this Section, the Issuers' obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
<PAGE> 73
64
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of
the successor to the Trustee; and in all such cases such certificates shall
have the full force which it is anywhere in the Securities or in this Indenture
provided that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall
at all times satisfy the requirements of TIA Section 310(a). The Trustee shall
have a combined capital and surplus of at least $100,000,000 as set forth in
its most recent published annual report of condition. The Trustee shall comply
with TIA Section 310(b), subject to its right to apply for a stay of its duty
to resign under the penultimate paragraph of TIA Section 310(b); provided,
however, that there shall be excluded from the operation of TIA Section
310(b)(1) any indenture or indentures under which other securities or
certificates of interest or participation in other securities of the Issuers
are outstanding if the requirements for such exclusion set forth in TIA Section
310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Issuers.
The Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
<PAGE> 74
65
SECTION 8.01. Discharge of Liability on Securities; Defeasance.
(a) When (i) all outstanding Securities (other than Securities replaced or paid
pursuant to Section 2.07) have been canceled or delivered to the Trustee for
cancelation or (ii) all outstanding Securities have become due and payable,
whether at maturity or as a result of the mailing of a notice of redemption
pursuant to Article 3 hereof, and the Issuers irrevocably deposit with the
Trustee funds in an amount sufficient or U.S. Government Obligations, the
principal of and interest on which will be sufficient, or a combination thereof
sufficient, in the written opinion of a nationally recognized firm of
independent public accountants delivered to the Trustee (which delivery shall
only be required if U.S. Government Obligations have been so deposited) to pay
the principal of and interest on the outstanding Securities when due at maturity
or upon redemption of, including interest thereon to maturity or such redemption
date (other than Securities replaced or paid pursuant to Section 2.07) and
liquidated damages, if any, and if in either case the Issuers pay all other sums
payable hereunder by the Issuers, then this Indenture shall, subject to Section
8.01(c), cease to be of further effect. The Trustee shall acknowledge
satisfaction and discharge of this Indenture on demand of the Issuers
accompanied by an Officers' Certificate and an Opinion of Counsel and at the
cost and expense of the Issuers.
(b) Subject to Sections 8.01(c) and 8.02, the Issuers at any
time may terminate (i) all of their obligations under the Securities and this
Indenture ("legal defeasance option") or (ii) their obligations under Sections
4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.11, 4.12, 4.13 and the operation of
Section 5.01(a)(iii), 6.01(d), 6.01(f), 6.01(g) (with respect to Significant
Subsidiaries of the Company only), 6.01(h) (with respect to Significant
Subsidiaries of the Company only), 6.01(i) and 6.01(j) ("covenant defeasance
option"). The Issuers may exercise their legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option. In the
event that the Issuers terminate all of their obligations under the Securities
and this Indenture by exercising their legal defeasance option or their
covenant defeasance option, the obligations under the Note Guarantees shall
each be terminated simultaneously with the termination of such obligations.
If the Issuers exercise their legal defeasance option, payment
of the Securities may not be accelerated because of an Event of Default. If the
Issuers exercise their covenant defeasance option, payment of the Securities
may not be accelerated because of an Event of Default specified in Section
6.01(d), 6.01(f), 6.01(g) (with respect to Significant Subsidiaries of the
Company only), 6.01(h) (with respect to Significant Subsidiaries of the Company
only), 6.01(i) or 6.01(j) or because of the failure of the Issuers to comply
with Section 5.01(a)(iii).
Upon satisfaction of the conditions set forth herein and upon
request of the Issuers, the Trustee shall acknowledge in writing the discharge
of those obligations that the Issuers terminate.
<PAGE> 75
66
(c) Notwithstanding clauses (a) and (b) above, the Issuers'
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07, 7.08 and in
this Article 8 shall survive until the Securities have been paid in full.
Thereafter, the Issuers' obligations in Sections 7.07, 8.04, 8.05 and 8.06
shall survive.
SECTION 8.02. (a) Conditions to Defeasance. The Issuers may
exercise their legal defeasance option or their covenant defeasance option only
if:
(i) the Issuers irrevocably deposit in trust with the Trustee
money in an amount sufficient or U.S. Government Obligations, the
principal of and interest on which will be sufficient, or a combination
thereof sufficient, to pay the principal, premium (if any) and interest
on the Securities when due at maturity or redemption, as the case may
be, including interest thereon to maturity or such redemption date and
liquidated damages, if any;
(ii) the Issuers deliver to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus
any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal and interest
when due on all the Securities to maturity or redemption, as the case
may be;
(iii) 123 days pass after the deposit is made and during the
123-day period no Default specified in Section 6.01(g) or (h) with
respect to the Issuers occurs which is continuing at the end of the
period;
(iv) the deposit does not constitute a default under any other
agreement binding on the Issuers and is not prohibited by Article 10;
(v) the Issuers deliver to the Trustee an Opinion of Counsel to
the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
(vi) in the case of the legal defeasance option, the Issuers
shall have delivered to the Trustee an Opinion of Counsel stating that
(1) the Issuers have received from, or there has been published by, the
Internal Revenue Service a ruling, or (2) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to the effect that, and based thereon such Opinion
of Counsel shall confirm that, the Holders will not recognize income,
gain or loss for Federal income tax purposes as a result of such
<PAGE> 76
67
defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred;
(vii) in the case of the covenant defeasance option, the Issuers
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Securityholders will not recognize income, gain or loss for
Federal income tax purposes as a result of such covenant defeasance and
will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
covenant defeasance had not occurred; and
(viii) the Issuers deliver to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the Securities as
contemplated by this Article 8 have been complied with.
(b) Before or after a deposit, the Issuers may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date
in accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall hold
in trust money or U.S. Government Obligations deposited with it pursuant to
this Article 8. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal of and interest on the Securities. Money
and securities so held in trust are not subject to Article 10 or 12.
SECTION 8.04. Repayment to Issuers. The Trustee and the Paying
Agent shall promptly turn over to the Issuers upon request any money or U.S.
Government Obligations held by it as provided in this Article which, in the
written opinion of nationally recognized firm of independent public accountants
delivered to the Trustee (which delivery shall only be required if U.S.
Government Obligations have been so deposited), are in excess of the amount
thereof which would then be required to be deposited to effect an equivalent
discharge or defeasance in accordance with this Article.
Subject to any applicable abandoned property law, the Trustee
and the Paying Agent shall pay to the Issuers upon written request any money
held by them for the payment of principal or interest that remains unclaimed
for two years, and, thereafter, Holders entitled to the money must look to the
Issuers for payment as general creditors and the Trustee, and the Paying Agent
shall have no further liability with respect to such monies.
<PAGE> 77
68
SECTION 8.05. Indemnity for Government Obligations. The
Issuers shall pay and shall indemnify the Trustee against any tax, fee or other
charge imposed on or assessed against deposited U.S. Government Obligations or
the principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with
this Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Issuers' obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, if the
Issuers have made any payment of interest on or principal of any Securities
because of the reinstatement of their obligations, the Issuers shall be
subrogated to the rights of the Holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent.
ARTICLE 9
Amendments
SECTION 9.01. (a) Without Consent of Holders. The Issuers, the
Note Guarantors and the Trustee may amend this Indenture or the Securities
without notice to or consent of any Holder:
(i) to cure any ambiguity, omission, defect or inconsistency;
(ii) to comply with Article 5;
(iii) to provide for uncertificated Securities in addition to or
in place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(iv) to make any change in Article 10 or Article 12 that would
limit or terminate the benefits available to any holder of Senior
Indebtedness (or Representatives therefor) under Article 10 or Article
12;
<PAGE> 78
69
(v) to add additional Note Guarantees with respect to the
Securities or to secure the Securities;
(vi) to add to the covenants of the Issuers for the benefit of
the Holders or to surrender any right or power herein conferred upon
the Issuers;
(vii) to comply with any requirement of the SEC in connection with
qualifying, or maintaining the qualification of, this Indenture under
the TIA;
(viii) to make any change that does not materially and adversely
affect the rights of any Holder; or
(ix) to provide for the issuance of the Exchange Securities or
Private Exchange Securities which shall have terms substantially
identical in all material respects to the Initial Securities (except
that the transfer restrictions contained in the Initial Securities
shall be modified or eliminated, as appropriate), and which shall be
treated, together with any outstanding Initial Securities, as a single
issue of securities.
(b) An amendment under this Section 9.01 may not make any change
that adversely affects the rights under Article 10 or Article 12 of any holder
of Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
After an amendment under this Section becomes effective, the
Issuers shall mail to Holders a notice briefly describing such amendment. The
failure to give such notice to all Holders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
SECTION 9.02. With Consent of Holders. (a) The Issuers, the Note
Guarantors and the Trustee may amend this Indenture or the Securities without
notice to any Holder but with the written consent of the Holders of at least a
majority in principal amount of the Securities then outstanding (including
consents obtained in connection with a tender offer or exchange for the
Securities) and compliance with any provisions of this Indenture may be waived
with the written consent of the Holders of at least a majority in principal
amount of the Securities then outstanding (including consents obtained in
connection with a tender offer or exchange offer for the Securities). However,
without the consent of each Holder affected, an amendment or waiver may not:
(i) reduce the amount of Securities whose Holders must consent
to an amendment;
<PAGE> 79
70
(ii) reduce the rate of or extend the time for payment of
interest or any liquidated damages on any Security;
(iii) reduce the principal of or extend the Stated Maturity of any
Security;
(iv) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with Article 3;
(v) make any Security payable in money other than that stated in
the Security;
(vi) make any change in Article 10 or Article 12 that adversely
affects the rights of any Holder under Article 10 or Article 12;
(vii) make any change in Section 6.04 or 6.07 or the second
sentence of this Section 9.02; or
(viii) modify the Note Guarantees in any manner adverse to the
Holders.
It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent approves the substance thereof.
An amendment under this Section 9.02 may not make any change
that adversely affects the rights under Article 10 or Article 12 of any holder
of Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
After an amendment under this Section 9.02 becomes effective,
the Issuers shall mail to Holders a notice briefly describing such amendment.
The failure to give such notice to all Holders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section 9.02.
SECTION 9.03. Compliance with Trust Indenture Act. Every
amendment to this Indenture or the Securities shall comply with the TIA as then
in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. (a)
A consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. However, any
such Holder or subsequent Holder may revoke
<PAGE> 80
71
the consent or waiver as to such Holder's Security or portion of the Security
if the Trustee receives the notice of revocation before the date on which the
Trustee receives an Officers' Certificate from the Issuers certifying that the
requisite number of consents have been received. After an amendment or waiver
becomes effective, it shall bind every Holder. An amendment or waiver becomes
effective upon the (i) receipt by the Issuers or the Trustee of the requisite
number of consents, (ii) satisfaction of conditions to effectiveness as set
forth in this Indenture and any indenture supplemental hereto containing such
amendment or waiver and (iii) execution of such amendment or waiver (or
supplemental indenture) by the Issuers and the Trustee.
(b) The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to give their consent
or take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Holders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an
amendment changes the terms of a Security, the Trustee may require the Holder
of the Security to deliver it to the Trustee. The Trustee may place an
appropriate notation on the Security regarding the changed terms and return it
to the Holder. Alternatively, if the Issuers or the Trustee so determine, the
Issuers in exchange for the Security shall issue and the Trustee shall
authenticate a new Security that reflects the changed terms. Failure to make
the appropriate notation or to issue a new Security shall not affect the
validity of such amendment.
SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign
any amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it
and to receive, and (subject to Section 7.01) shall be fully protected in
relying upon, an Officers' Certificate and an Opinion of Counsel stating that
such amendment is authorized or permitted by this Indenture and that such
amendment is the legal, valid and binding obligation of the Issuers and the
Note Guarantors enforceable against them in accordance with its terms, subject
to customary exceptions, and complies with the provisions hereof (including
Section 9.03).
<PAGE> 81
72
ARTICLE 10
Subordination
SECTION 10.01. Agreement To Subordinate. The Issuers agree, and
each Holder by accepting a Security agrees, that the Indebtedness evidenced by
the Securities is subordinated in right of payment, to the extent and in the
manner provided in this Article 10, to the prior payment in full of all Senior
Indebtedness of each of the Issuers and that the subordination is for the
benefit of and enforceable by the holders of such Senior Indebtedness. The
Securities shall in all respects rank pari passu with all other Senior
Subordinated Indebtedness of each of the Issuers and shall rank senior to all
existing and future Subordinated Obligations of each of the Issuers; and only
Indebtedness of either of the Issuers that is Senior Indebtedness of the
Issuers shall rank senior to the Securities in accordance with the provisions
set forth herein. For purposes of this Article 10, the Indebtedness evidenced
by the Securities shall be deemed to include the liquidated damages payable
pursuant to the provisions set forth in the Securities and the Registration
Agreement. All provisions of this Article 10 shall be subject to Section 10.12.
SECTION 10.02. Liquidation, Dissolution, Bankruptcy. 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:
(a) holders of Senior Indebtedness of the Company or DJ Capital,
as the case may be, shall be entitled to receive payment in full of
such Senior Indebtedness before Holders shall be entitled to receive
any payment of principal of or interest on the Securities; and
(b) until the Senior Indebtedness of the Company and DJ Capital,
as the case may be, is paid in full, any payment or distribution to
which Holders would be entitled but for this Article 10 shall be made
to holders of such Senior Indebtedness as their interests may appear,
except that Holders may receive Equity Interests and any debt
securities that are subordinated to such Senior Indebtedness to at
least the same extent as the Securities.
SECTION 10.03. Default on Designated Senior Indebtedness of the
Issuers. The Issuers may not pay the principal of, premium (if any) or interest
on the Securities or make any deposit pursuant to Section 8.01 and may not
otherwise repurchase, redeem or otherwise retire any Securities (collectively,
"pay the Securities")
<PAGE> 82
73
if (a) any Designated Senior Indebtedness of either of the Issuers is not paid
when due or (b) 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, (i) the default has been
cured or waived and any such acceleration has been rescinded or (ii) such
Designated Senior Indebtedness has been paid in full; provided, however, that
the Issuers may pay the Securities without regard to the foregoing if the
Issuers and a Trust Officer of the Trustee receive written notice approving
such payment from the Representative of the holders of such Designated Senior
Indebtedness with respect to which either of the events set forth in clause (a)
or (b) of this sentence has occurred and is continuing. During the continuance
of any default (other than a default described in clause (a) or (b) of the
preceding sentence) 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 Securities for a period (a "Payment Blockage
Period") commencing upon the receipt by a Trust Officer of 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
the holders 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 (a) by written notice to the Trustee
and the Issuers from the Person or Persons who gave such Blockage Notice, (b)
by repayment in full of such Designated Senior Indebtedness or (c) 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 first sentence of this Section
10.03), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders shall have accelerated the maturity of such
Designated Senior Indebtedness, the Issuers may resume payments on the
Securities after the end of such Payment Blockage Period, including any missed
payments. 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; provided, however, that 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; provided further, however, that in no event 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 Section 10.03, 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 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
<PAGE> 83
74
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.
SECTION 10.04. Acceleration of Payment of Securities; Five
Business Day Delay in Payment of Designated Senior Indebtedness Outstanding. If
payment of the Securities is accelerated because of an Event of Default, the
Issuers or the Trustee (provided, that a Trust Officer of the Trustee shall
have received written notice from the Issuers or a Representative identifying
such Designated Senior Indebtedness, on which notice the Trustee shall be
entitled to conclusively rely) 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 Securities 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 Securities only if this Article
10 otherwise permits payment at that time.
SECTION 10.05. When Distribution Must Be Paid Over. If a payment
or distribution is made to Holders that because of this Article 10 should not
have been made to them, the Holders who receive the distribution shall hold
such payment or distribution in trust for holders of each Issuer's Senior
Indebtedness and pay it over to them as their interests may appear.
SECTION 10.06. Subrogation. After all Senior Indebtedness of the
Issuers is paid in full and until the Securities are paid in full, Holders
shall be subrogated to the rights of holders of such Senior Indebtedness to
receive distributions applicable to Senior Indebtedness of the Issuers. A
distribution made under this Article 10 to holders of such Senior Indebtedness
which otherwise would have been made to Holders is not, as between the
applicable Issuer and Holders, a payment by such Issuer on such Senior
Indebtedness.
SECTION 10.07. Relative Rights. This Article 10 defines the
relative rights of Holders and holders of each Issuer's Senior Indebtedness.
Nothing in this Indenture shall:
(a) impair, as between either Issuer and Holders, the obligation
of such Issuer, which is absolute and unconditional, to pay principal
of and interest on and liquidated damages in respect of, the Securities
in accordance with their terms; or
(b) prevent the Trustee or any Holder from exercising its
available remedies upon a Default, subject to the rights of holders of
Senior Indebtedness of either Issuer to receive distributions otherwise
payable to Holders.
<PAGE> 84
75
SECTION 10.08. Subordination May Not Be Impaired by Either
Issuer. No right of any holder of Senior Indebtedness of either Issuer to
enforce the subordination of the Indebtedness evidenced by the Securities shall
be impaired by any act or failure to act by such Issuer or by its failure to
comply with this Indenture.
SECTION 10.09. Rights of Trustee and Paying Agent.
Notwithstanding Section 10.03, the Trustee or Paying Agent may continue to make
payments on the Securities and shall not be charged with knowledge of the
existence of facts that would prohibit the making of any such payments unless,
not less than two Business Days prior to the date of such payment, a Trust
Officer of the Trustee receives written notice satisfactory to it that payments
may not be made under this Article 10. The Issuers, the Registrar or
co-registrar, the Paying Agent, a Representative or a holder of either Issuer's
Senior Indebtedness may give the notice; provided, however, that, if an issue
of either of the Issuer's Senior Indebtedness has a Representative, only the
Representative may give the notice.
The Trustee in its individual or any other capacity may hold
Senior Indebtedness of either of the Issuers with the same rights it would have
if it were not Trustee. The Registrar and co-registrar and the Paying Agent may
do the same with like rights. The Trustee shall be entitled to all the rights
set forth in this Article 10 with respect to either Issuer's Senior
Indebtedness which may at any time be held by it, to the same extent as any
other holder of such Senior Indebtedness; and nothing in Article 7 shall
deprive the Trustee of any of its rights as such holder. Nothing in this
Article 10 shall apply to claims of, or payments to, the Trustee under or
pursuant to Section 7.07 or any other Section of this Indenture.
SECTION 10.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of either
Issuer's Senior Indebtedness, the distribution may be made and the notice given
to their Representative (if any).
SECTION 10.11. Article 10 Not To Prevent Events of Default or
Limit Right To Accelerate. The failure to make a payment pursuant to the
Securities by reason of any provision in this Article 10 shall not be construed
as preventing the occurrence of a Default. Nothing in this Article 10 shall
have any effect on the right of the Securityholders or the Trustee to
accelerate the maturity of the Securities.
SECTION 10.12. Trust Monies Not Subordinated. Notwithstanding
anything contained herein to the contrary, payments from money or the proceeds
of U.S. Government Obligations held in trust under Article 8 by the Trustee for
the payment of principal of and interest on the Securities and liquidated
damages, if any, shall not be subordinated to the prior payment of any Senior
Indebtedness of either of the Issuers or
<PAGE> 85
76
subject to the restrictions set forth in this Article 10, and none of the
Holders shall be obligated to pay over any such amount to either of the Issuers
or any holder of Senior Indebtedness or any other creditor of either of the
Issuers.
SECTION 10.13. Trustee Entitled To Rely. Upon any payment or
distribution pursuant to this Article 10, the Trustee and the Holders shall be
entitled to rely (a) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in Section
10.02 are pending, (b) upon a certificate of the liquidating trustee or agent
or other Person making such payment or distribution to the Trustee or to the
Holders or (c) upon the Representatives for the holders of Senior Indebtedness
of either of the Issuers for the purpose of ascertaining the Persons entitled
to participate in such payment or distribution, the holders of such Senior
Indebtedness and other Indebtedness of the Issuers, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article 10. In the event that the
Trustee determines, in good faith, that evidence is required with respect to
the right of any Person as a holder of Senior Indebtedness of either of the
Issuers to participate in any payment or distribution pursuant to this Article
10, the Trustee may request such Person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of such Senior Indebtedness held
by such Person, the extent to which such Person is entitled to participate in
such payment or distribution and other facts pertinent to the rights of such
Person under this Article 10, and, if such evidence is not furnished, the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment. The provisions of Sections
7.01 and 7.02 shall be applicable to all actions or omissions of actions by the
Trustee pursuant to this Article 10.
SECTION 10.14. Trustee To Effectuate Subordination. Each Holder
by accepting a Security authorizes and directs the Trustee on his, her or its
behalf to take such action as may be necessary or appropriate to acknowledge or
effectuate the subordination between the Holders and the holders of Senior
Indebtedness of either of the Issuers as provided in this Article 10 and
appoints the Trustee as attorney-in-fact for any and all such purposes.
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior
Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness of either of the Issuers and shall not be liable
to any such holders if it shall mistakenly pay over or distribute to Holders or
either of the Issuers or any other Person, money or assets to which any holders
of Senior Indebtedness of either of the Issuers shall be entitled by virtue of
this Article 10 or otherwise.
SECTION 10.16. Reliance by Holders of Senior Indebtedness on
Subordination Provisions. Each Holder by accepting a Security acknowledges and
agrees
<PAGE> 86
77
that the foregoing subordination provisions are, and are intended to be, an
inducement and a consideration to each holder of any Senior Indebtedness of
either of the Issuers, whether such Senior Indebtedness was created or acquired
before or after the issuance of the Securities, to acquire and continue to
hold, or to continue to hold, such Senior Indebtedness and such holder of such
Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Indebtedness.
ARTICLE 11
Note Guarantees
SECTION 11.01. (a) Note Guarantees. DonJoy and each other Note
Guarantor hereby jointly and severally irrevocably and unconditionally
guarantees, as a primary obligor and not merely as a surety, to each Holder and
to the Trustee and its successors and assigns (i) the full and punctual payment
when due, whether at Stated Maturity, by acceleration, by redemption or
otherwise, of all obligations of the Issuers under this Indenture (including
obligations to the Trustee) and the Securities, whether for payment of
principal of, interest on or liquidated damages in respect of the Securities
and all other monetary obligations (to the extent permitted by law) of the
Issuers under this Indenture and the Securities and (ii) the full and punctual
performance within applicable grace periods of all other obligations of the
Issuers whether for fees, expenses, indemnification or otherwise under this
Indenture and the Securities (all the foregoing being hereinafter collectively
called the "Guaranteed Obligations"). To the fullest extent permitted by
applicable law, each Note Guarantor further agrees that the Guaranteed
Obligations may be extended or renewed, in whole or in part, without notice or
further assent from each such Note Guarantor, and that each such Note Guarantor
shall remain bound under this Article 11 notwithstanding any extension or
renewal of any Guaranteed Obligation.
(b) Each Note Guarantor waives presentation to, demand of
payment from and protest to the Issuers of any of the Guaranteed Obligations
and also waives notice of protest for nonpayment. Each Note Guarantor waives
notice of any default under the Securities or the Guaranteed Obligations. The
obligations of each Note Guarantor hereunder shall not be affected by (i) the
failure of any Holder or the Trustee to assert any claim or demand or to
enforce any right or remedy against the Issuers or any other Person under this
Indenture, the Securities or any other agreement or otherwise; (ii) any
extension or renewal of any thereof; (iii) any rescission, waiver, amendment or
modification of any of the terms or provisions of this Indenture, the
Securities or any other agreement; (iv) the release of any security held by any
Holder or the Trustee for the Guaranteed Obligations or any of them; (v) the
failure of any Holder or Trustee to exercise any right or remedy against any
other guarantor of the Guaranteed Obligations; or (vi) any change in the
ownership of such Note Guarantor, except as provided in Section 11.02(b).
(c) Each Note Guarantor hereby waives any right to which it may
be entitled to have its obligations hereunder divided among the Note
Guarantors, such that such Note Guarantor's obligations would be less than the
full amount claimed. Each Note Guarantor hereby waives any right to which it
may be entitled to have the assets of the Issuers first be used and depleted as
payment of the Issuers' or such Note Guarantor's obligations hereunder prior to
any amounts being claimed from or paid by such Note Guarantor hereunder. Each
Note Guarantor hereby waives any right to which it may be entitled to require
that the Issuers be sued prior to an action being initiated against such Note
Guarantor.
<PAGE> 87
78
(d) Each Note Guarantor further agrees that its Note Guarantee
herein constitutes a guarantee of payment, performance and compliance when due
(and not a guarantee of collection) and waives any right to require that any
resort be had by any Holder or the Trustee to any security held for payment of
the Guaranteed Obligations.
(e) The Note Guarantee of each Note Guarantor is, to the extent
and in the manner set forth in Article 12, subordinated and subject in right of
payment to the prior payment in full of the principal of and premium, if any,
and interest on all Senior Indebtedness of the relevant Note Guarantor and is
made subject to such provisions of this Indenture.
(f) Except as expressly set forth in Sections 8.01(b), 11.02 and
11.06, the obligations of each Note Guarantor hereunder shall not be subject to
any reduction, limitation, impairment or termination for any reason, including
any claim of waiver, release, surrender, alteration or compromise, and shall
not be subject to any defense of setoff, counterclaim, recoupment or
termination whatsoever or by reason of the invalidity, illegality or
unenforceability of the Guaranteed Obligations or otherwise. Without limiting
the generality of the foregoing, the obligations of each Note Guarantor herein
shall not be discharged or impaired or otherwise affected by the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any remedy
under this Indenture, the Securities or any other agreement, by any waiver or
modification of any thereof, by any default, failure or delay, wilful or
otherwise, in the performance of the obligations, or by any other act or thing
or omission or delay to do any other act or thing which may or might in any
manner or to any extent vary the risk of any Note Guarantor or would otherwise
operate as a discharge of any Note Guarantor as a matter of law or equity.
(g) Each Note Guarantor agrees that its Note Guarantee shall
remain in full force and effect until payment in full of all the Guaranteed
Obligations. Each Note Guarantor further agrees that its Note Guarantee herein
shall, to the fullest extent
<PAGE> 88
79
permitted by applicable law, continue to be effective or be reinstated, as the
case may be, if at any time payment, or any part thereof, of principal of or
interest on any Guaranteed Obligation is rescinded or must otherwise be
restored by any Holder or the Trustee upon the bankruptcy or reorganization of
either of the Issuers or otherwise.
(h) In furtherance of the foregoing and not in limitation of any
other right which any Holder or the Trustee has at law or in equity against any
Note Guarantor by virtue hereof, upon the failure of the Issuers to pay the
principal of or interest on any Guaranteed Obligation when and as the same
shall become due, whether at maturity, by acceleration, by redemption or
otherwise, or to perform or comply with any other Guaranteed Obligation, each
Note Guarantor hereby promises to and shall, upon receipt of written demand by
the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the
Trustee an amount equal to the sum of (i) the unpaid principal amount of such
Guaranteed Obligations, (ii) accrued and unpaid interest on such Guaranteed
Obligations (but only to the extent not prohibited by law) and (iii) all other
monetary obligations of the Issuers to the Holders and the Trustee.
(i) Each Note Guarantor agrees that it shall not be entitled to
any right of subrogation in relation to the Holders in respect of any
Guaranteed Obligations guaranteed hereby until payment in full of all
Guaranteed Obligations and all obligations to which the Guaranteed Obligations
are subordinated as provided in Article 12. Each Note Guarantor further agrees
that, as between it, on the one hand, and the Holders and the Trustee, on the
other hand, to the fullest extent permitted by applicable law, (i) the maturity
of the Guaranteed Obligations guaranteed hereby may be accelerated as provided
in Article 6 for the purposes of any Note Guarantee herein, notwithstanding any
stay, injunction or other prohibition preventing such acceleration in respect
of the Guaranteed Obligations guaranteed hereby, and (ii) in the event of any
declaration of acceleration of such Guaranteed Obligations as provided in
Article 6, such Guaranteed Obligations (whether or not due and payable) shall
forthwith become due and payable by such Note Guarantor for the purposes of
this Section 11.01.
(j) Each Note Guarantor also agrees to pay any and all costs and
expenses (including reasonable attorneys' fees and expenses) incurred by the
Trustee or any Holder in enforcing any rights under this Section 11.01.
(k) Upon request of the Trustee, each Note Guarantor shall
execute and deliver such further instruments and do such further acts as may be
reasonably necessary or proper to carry out more effectively the purpose of
this Indenture.
SECTION 11.02. Limitation on Liability. (a) Any term or
provision of this Indenture to the contrary notwithstanding, the maximum
aggregate amount of the Guaranteed Obligations guaranteed hereunder by any Note
Guarantor shall not exceed the
<PAGE> 89
80
maximum amount that can be hereby guaranteed without rendering this Indenture,
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.
(b) A Note Guarantee as to any Note Guarantor that is a
Subsidiary of the Company shall terminate and be of no further force or effect
and such Note Guarantor shall be deemed to be released from all obligations
under this Article 11 upon (i)(A) the merger or consolidation of such Note
Guarantor with or into any Person other than the Company or a Subsidiary or
Affiliate of the Company where such Note Guarantor is not the surviving entity
of such consolidation or merger or (B) the sale by the Company or any
Subsidiary of the Company (or any pledgee of the Company) of the Equity
Interests of such Note Guarantor (or by any other Person as a result of a
foreclosure of any lien on such Equity Interests securing Senior Indebtedness),
where, after such sale, such Note Guarantor is no longer a Subsidiary of the
Company; provided, however, that each such merger, consolidation or sale (or,
in the case of a sale by such a pledgee, the disposition of the proceeds of
such sale actually received by the Company or any of its Subsidiaries) shall
comply with Section 4.06 and Section 5.01(b) and (ii) such Note Guarantor being
released from its Guarantee of, and all pledges and security interests granted
in connection with, the Credit Agreement and any other Indebtedness of the
Company or any Subsidiary of the Company.
(c) In addition, a Note Guarantee of any Note Guarantor that is
a Subsidiary of the Company shall terminate and be of no further force or
effect and such Note Guarantor shall be deemed to be released from all
obligations under this Article 11 upon the Issuer's designation of such Note
Guarantor as an Unrestricted Subsidiary, provided that such designation
complies with the other applicable provisions of this Indenture.
At the written request of the Issuers, the Trustee shall execute
and deliver an appropriate instrument evidencing such release (in the form
provided by the Issuers).
SECTION 11.03. Successors and Assigns. This Article 11 shall be
binding upon each Note Guarantor and its successors and assigns and shall inure
to the benefit of the successors and assigns of the Trustee and the Holders
and, in the event of any transfer or assignment of rights by any Holder or the
Trustee, the rights and privileges conferred upon that party in this Indenture
and in the Securities shall automatically extend to and be vested in such
transferee or assignee, all subject to the terms and conditions of this
Indenture.
SECTION 11.04. No Waiver. Neither a failure nor a delay on the
part of either the Trustee or the Holders in exercising any right, power or
privilege under this
<PAGE> 90
81
Article 11 shall operate as a waiver thereof, nor shall a single or partial
exercise thereof preclude any other or further exercise of any right, power or
privilege. The rights, remedies and benefits of the Trustee and the Holders
herein expressly specified are cumulative and not exclusive of any other
rights, remedies or benefits which either may have under this Article 11 at
law, in equity, by statute or otherwise.
SECTION 11.05. Modification. No modification, amendment or
waiver of any provision of this Article 11, nor the consent to any departure by
any Note Guarantor therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Trustee, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given. No notice to or demand on any Note Guarantor in any case shall entitle
such Note Guarantor to any other or further notice or demand in the same,
similar or other circumstances.
SECTION 11.06. Execution of Supplemental Indenture for Future
Note Guarantors. Each Subsidiary which is required to become a Note Guarantor
pursuant to Section 4.11 shall promptly execute and deliver to the Trustee a
supplemental indenture in the form of Exhibit C hereto pursuant to which such
Subsidiary shall become a Note Guarantor under this Article 11 and shall
guarantee the Guaranteed Obligations. Concurrently with the execution and
delivery of such supplemental indenture, the Company shall deliver to the
Trustee an Opinion of Counsel and an Officers' Certificate to the effect that
such supplemental indenture has been duly authorized, executed and delivered by
such Subsidiary and that, subject to the application of bankruptcy, insolvency,
moratorium, fraudulent conveyance or transfer and other similar laws relating
to creditors' rights generally and to the principles of equity, whether
considered in a proceeding at law or in equity, the Note Guarantee of such Note
Guarantor is a valid and binding agreement of such Note Guarantor, enforceable
against such Note Guarantor in accordance with its terms.
SECTION 11.07. Non-Impairment. The failure to endorse a Note
Guarantee on any Security shall not affect or impair the validity thereof.
<PAGE> 91
82
ARTICLE 12
Subordination of the Note Guarantees
SECTION 12.01. Agreement To Subordinate. Each Note Guarantor
agrees, and each Holder by accepting a Security agrees, that the obligations of
a Note Guarantor hereunder are subordinated in right of payment, to the extent
and in the manner provided in this Article 12, to the prior payment in full of
all Senior Indebtedness of such Note Guarantor and that the subordination is
for the benefit of and enforceable by the holders of such Senior Indebtedness
of such Note Guarantor. The obligations hereunder with respect to a Note
Guarantor shall in all respects rank pari passu with all other Senior
Subordinated Indebtedness of such Note Guarantor and shall rank senior to all
existing and future Subordinated Obligations of such Note Guarantor; and only
Indebtedness of such Note Guarantor that is Senior Indebtedness of such Note
Guarantor shall rank senior to the obligations of such Note Guarantor in
accordance with the provisions set forth herein.
SECTION 12.02. Liquidation, Dissolution, Bankruptcy. Upon any
payment or distribution of the assets of a Note Guarantor to creditors upon a
total or partial liquidation or a total or partial dissolution of such Note
Guarantor or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to such Note Guarantor or its property:
(a) holders of Senior Indebtedness of such Note Guarantor shall
be entitled to receive payment in full of such Senior Indebtedness
before Holders shall be entitled to receive any payment pursuant to any
Guaranteed Obligations from such Note Guarantor; and
(b) until the Senior Indebtedness of such Note Guarantor is paid
in full, any payment or distribution to which Holders would be entitled
but for this Article 12 shall be made to holders of such Senior
Indebtedness as their respective interests may appear, except that
Holders may receive Equity Interests and any debt securities that are
subordinated to such Senior Indebtedness to at least the same extent as
the Note Guarantees.
SECTION 12.03. Default on Designated Senior Indebtedness of a
Note Guarantor. A Note Guarantor may not make any payment pursuant to any of
the Guaranteed Obligations or repurchase, redeem or otherwise retire any
Securities (collectively, "pay its Guarantee") if (a) any Designated Senior
Indebtedness of such Note Guarantor is not paid when due or (b) any other
default on Designated Senior Indebtedness of such Note Guarantor occurs and the
maturity of such Designated Senior Indebtedness is accelerated in accordance
with its terms unless, in either case, (i) the
<PAGE> 92
83
default has been cured or waived and any such acceleration has been rescinded
or (ii) such Designated Senior Indebtedness has been paid in full; provided,
however, that such Note Guarantor may pay its Guarantee without regard to the
foregoing if such Note Guarantor and a Trust Officer of the Trustee receive
written notice approving such payment from the Representative of the holders of
such Designated Senior Indebtedness with respect to which either of the events
in clause (a) or (b) of this sentence has occurred and is continuing. During
the continuance of any default (other than a default described in clause (a) or
(b) of the preceding sentence) with respect to any Designated Senior
Indebtedness of a Note Guarantor 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, such Note Guarantor may not pay its Guarantee for a period (a
"Guarantee Payment Blockage Period") commencing upon the receipt by a Trust
Officer of the Trustee (with a copy to such Note Guarantor and the Issuers) of
written notice, specified as a "notice of default" and describing with
particularity the default under such Designated Senior Indebtedness (a
"Guarantee Blockage Notice"), of such default from the Representative of the
holders of the Designated Senior Indebtedness of such Note Guarantor specifying
an election to effect a Guarantee Payment Blockage Period and ending 179 days
thereafter (or earlier if such Guarantee Payment Blockage Period is terminated
(a) by written notice to the Trustee (with a copy to such Note Guarantor and
the Issuers) from the Person or Persons who gave such Guarantee Blockage
Notice, (b) because such Designated Senior Indebtedness has been repaid in full
or (c) because the default giving rise to such Guarantee Blockage Notice is no
longer continuing). Notwithstanding the provisions described in the immediately
preceding sentence (but subject to the provisions contained in the first
sentence of this Section 12.03), unless the holders of such Designated Senior
Indebtedness or the Representative of such holders shall have accelerated the
maturity of such Designated Senior Indebtedness, such Note Guarantor may resume
paying its Note Guarantee after the end of such Guarantee Payment Blockage
Period, including any missed payments. Not more than one Guarantee Blockage
Notice may be given with respect to a Note Guarantor in any consecutive 360-day
period, irrespective of the number of defaults with respect to Designated
Senior Indebtedness of such Note Guarantor during such period; provided,
however, that if any Guarantee Blockage Notice within such 360-day period is
given by or on behalf of any holders of Designated Senior Indebtedness of such
Note Guarantor other than the Bank Indebtedness, the Representative of the Bank
Indebtedness may give another Guarantee Blockage Notice within such period;
provided further, however, that in no event may the total number of days during
which any Guarantee Payment Blockage Period or Periods is in effect exceed 179
days in the aggregate during any 360 consecutive day period. For purposes of
this Section 12.03, no default or event of default that existed or was
continuing on the date of the commencement of any Guarantee Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Guarantee Payment Blockage Period shall be, or be made, the basis of the
commencement of a subsequent Guarantee Payment
<PAGE> 93
84
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.
SECTION 12.04. Demand for Payment; Five Business Day Delay in
Payment of Designated Senior Indebtedness Outstanding. If payment of the
Securities is accelerated because of an Event of Default and a demand for
payment is made on a Note Guarantor pursuant to Article 11, the Trustee
(provided that a Trust Officer of the Trustee shall have received written
notice from the Issuers, such Note Guarantor or a Representative identifying
such Designated Senior Indebtedness, on which notice the Trustee shall be
entitled to conclusively rely) shall promptly notify the holders of the
Designated Senior Indebtedness of such Note Guarantor (or the Representative of
such holders) of such demand. If any Designated Senior Indebtedness of such
Note Guarantor is outstanding, such Note Guarantor may not pay its Guarantee
until five Business Days after such holders or the Representative of the
holders of the Designated Senior Indebtedness of such Note Guarantor receive
notice of such demand and, thereafter, may pay its Guarantee only if this
Article 12 otherwise permits payment at that time.
SECTION 12.05. When Distribution Must Be Paid Over. If a payment
or distribution is made to Holders that because of this Article 12 should not
have been made to them, the Holders who receive the payment or distribution
shall hold such payment or distribution in trust for holders of the Senior
Indebtedness of the relevant Note Guarantor and pay it over to them as their
respective interests may appear.
SECTION 12.06. Subrogation. After all Senior Indebtedness of a
Note Guarantor is paid in full and until the Securities are paid in full,
Holders shall be subrogated to the rights of holders of Senior Indebtedness of
such Note Guarantor to receive distributions applicable to Senior Indebtedness
of such Note Guarantor. A distribution made under this Article 12 to holders of
Senior Indebtedness of such Note Guarantor which otherwise would have been made
to Holders is not, as between such Note Guarantor and Holders, a payment by
such Note Guarantor on Senior Indebtedness of such Note Guarantor.
SECTION 12.07. Relative Rights. This Article 12 defines the
relative rights of Holders and holders of Senior Indebtedness of a Note
Guarantor. Nothing in this Indenture shall:
(a) impair, as between a Note Guarantor and Holders, the
obligation of a Note Guarantor which is absolute and unconditional, to
make payments with respect to the Guaranteed Obligations to the extent
set forth in Article 11; or
<PAGE> 94
85
(b) prevent the Trustee or any Holder from exercising its
available remedies upon a default by a Note Guarantor under its
obligations with respect to the Guaranteed Obligations, subject to the
rights of holders of Senior Indebtedness of such Note Guarantor to
receive distributions otherwise payable to Holders.
SECTION 12.08. Subordination May Not Be Impaired by a Note
Guarantor. No right of any holder of Senior Indebtedness of a Note Guarantor to
enforce the subordination of the obligations of such Note Guarantor hereunder
shall be impaired by any act or failure to act by such Note Guarantor or by its
failure to comply with this Indenture.
SECTION 12.09. Rights of Trustee and Paying Agent.
Notwithstanding Section 12.03, the Trustee or the Paying Agent may continue to
make payments on the Guaranteed Obligations and shall not be charged with
knowledge of the existence of facts that would prohibit the making of any such
payments unless, not less than two Business Days prior to the date of such
payment, a Trust Officer of the Trustee receives written notice satisfactory to
it that payments may not be made under this Article 12. A Note Guarantor, the
Registrar or co-registrar, the Paying Agent, a Representative or a holder of
Senior Indebtedness of a Note Guarantor may give the notice; provided, however,
that if an issue of Senior Indebtedness of a Note Guarantor has a
Representative, only the Representative may give the notice.
The Trustee in its individual or any other capacity may hold
Senior Indebtedness of a Note Guarantor with the same rights it would have if
it were not Trustee. The Registrar and co-registrar and the Paying Agent may do
the same with like rights. The Trustee shall be entitled to all the rights set
forth in this Article 12 with respect to any Senior Indebtedness of a Note
Guarantor which may at any time be held by it, to the same extent as any other
holder of Senior Indebtedness of such Note Guarantor; and nothing in Article 7
shall deprive the Trustee of any of its rights as such holder. Nothing in this
Article 12 shall apply to claims of, or payments to, the Trustee under or
pursuant to Section 7.07 or any other Section of this Indenture.
SECTION 12.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of Senior
Indebtedness of a Note Guarantor, the distribution may be made and the notice
given to their Representative (if any).
SECTION 12.11. Article 12 Not To Prevent Events of Default or
Limit Right To Accelerate. The failure of a Note Guarantor to make a payment on
any of its Guaranteed Obligations by reason of any provision in this Article 12
shall not be construed as preventing the occurrence of a default by such Note
Guarantor under such
<PAGE> 95
86
obligations. Nothing in this Article 12 shall have any effect on the right of
the Holders or the Trustee to make a demand for payment on a Note Guarantor
pursuant to Article 11.
SECTION 12.12. Trustee Entitled To Rely. Upon any payment or
distribution pursuant to this Article 12, the Trustee and the Holders shall be
entitled to rely (a) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in Section
12.02 are pending, (b) upon a certificate of the liquidating trustee or agent
or other Person making such payment or distribution to the Trustee or to the
Holders or (c) upon the Representatives for the holders of Senior Indebtedness
of a Note Guarantor for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness of a Note Guarantor and other Indebtedness of a Note Guarantor,
the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article
12. In the event that the Trustee determines, in good faith, that evidence is
required with respect to the right of any Person as a holder of Senior
Indebtedness of a Note Guarantor to participate in any payment or distribution
pursuant to this Article 12, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Indebtedness of such Note Guarantor held by such Person, the extent to
which such Person is entitled to participate in such payment or distribution
and other facts pertinent to the rights of such Person under this Article 12,
and, if such evidence is not furnished, the Trustee may defer any payment to
such Person pending judicial determination as to the right of such Person to
receive such payment. The provisions of Sections 7.01 and 7.02 shall be
applicable to all actions or omissions of actions by the Trustee pursuant to
this Article 12.
SECTION 12.13. Trustee To Effectuate Subordination. Each Holder
by accepting a Security authorizes and directs the Trustee on his, her or its
behalf to take such action as may be necessary or appropriate to acknowledge or
effectuate the subordination between the Holders and the holders of Senior
Indebtedness of each of the Note Guarantors as provided in this Article 12 and
appoints the Trustee as attorney-in-fact for any and all such purposes.
SECTION 12.14. Trustee Not Fiduciary for Holders of Senior
Indebtedness of a Note Guarantor. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Indebtedness of a Note Guarantor and
shall not be liable to any such holders if it shall mistakenly pay over or
distribute to Holders or the relevant Note Guarantor or any other Person, money
or assets to which any holders of Senior Indebtedness of such Note Guarantor
shall be entitled by virtue of this Article 12 or otherwise.
SECTION 12.15. Reliance by Holders of Senior Indebtedness of a
Note Guarantor on Subordination Provisions. Each Holder by accepting a Security
<PAGE> 96
87
acknowledges and agrees that the foregoing subordination provisions are, and
are intended to be, an inducement and a consideration to each holder of any
Senior Indebtedness of a Note Guarantor, whether such Senior Indebtedness was
created or acquired before or after the issuance of the Securities, to acquire
and continue to hold, or to continue to hold, such Senior Indebtedness and such
holder of Senior Indebtedness shall be deemed conclusively to have relied on
such subordination provisions in acquiring and continuing to hold, or in
continuing to hold, such Senior Indebtedness.
SECTION 12.16. Defeasance. The terms of this Article 12 shall
not apply to payments from money or the proceeds of U.S. Government Obligations
held in trust by the Trustee for the payment of principal of and interest on
the Securities pursuant to the provisions described in Section 8.03.
ARTICLE 13
Miscellaneous
SECTION 13.01. Trust Indenture Act Controls. If and to the
extent that any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by, or with another provision (an "incorporated provision")
included in this Indenture by operation of, TIA Sections 310 to 318, inclusive,
such imposed duties or incorporated provision shall control.
SECTION 13.02. Notices. Any notice or communication shall be
in writing and delivered in person or mailed by first-class mail addressed as
follows:
if to either Issuer or DonJoy:
c/o DJ Orthopedics, LLC
2985 Scott Street
Vista, California 92083
Attention of:
Chief Financial Officer
(760) 734-0320
<PAGE> 97
88
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention of:
Corporate Trust Administration
(212) 815-5763
The Issuers, DonJoy or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Holder shall be mailed,
first class mail, to the Holder at the Holder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
SECTION 13.03. Communication by Holders with Other Holders.
Holders may communicate pursuant to TIA Section 312(b) with other Holders with
respect to their rights under this Indenture or the Securities. The Company,
the Trustee, the Registrar and anyone else shall have the protection of TIA
Section 312(c).
SECTION 13.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Issuers to the Trustee to
take or refrain from taking any action under this Indenture, the Issuers shall
furnish to the Trustee:
(a) an Officers' Certificate in form reasonably satisfactory to
the Trustee stating that, in the opinion of the signers, all conditions
precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with; and
(b) an Opinion of Counsel in form reasonably satisfactory to the
Trustee stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
<PAGE> 98
89
SECTION 13.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture (other than pursuant to Section 4.09)
shall include:
(a) a statement that the individual making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 13.06. When Securities Disregarded. In determining
whether the Holders of the required principal amount of Securities have
concurred in any direction, waiver or consent, Securities owned by the Issuers,
any Note Guarantor or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Issuers or
any Note Guarantor shall be disregarded and deemed not to be outstanding,
except that, for the purpose of determining whether the Trustee shall be
protected in relying on any such direction, waiver or consent, only Securities
which the Trustee knows are so owned shall be so disregarded. Subject to the
foregoing, only Securities outstanding at the time shall be considered in any
such determination.
SECTION 13.07. Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Holders. The
Registrar and the Paying Agent may make reasonable rules for their functions.
SECTION 13.08. Legal Holidays. A "Legal Holiday" is a Saturday,
a Sunday or other day on which banking institutions are not required by law or
regulation to be open in the State of New York. If a payment date is a Legal
Holiday, payment shall be made on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period. If a regular
record date is a Legal Holiday, the record date shall not be affected.
SECTION 13.09. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NEW YORK BUT
<PAGE> 99
90
WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE
EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY.
SECTION 13.10. No Recourse Against Others. A director, officer,
employee or stockholder, as such, of the Issuers or any of the Note Guarantors,
shall not have any liability for any obligations of the Issuers or any of the
Note Guarantors under the Securities or this Indenture or for any claim based
on, in respect of or by reason of such obligations or their creation. By
accepting a Security, each Holder shall waive and release all such liability.
The waiver and release shall be part of the consideration for the issue of the
Securities.
SECTION 13.11. Successors. All agreements of the Issuers and
each Note Guarantor in this Indenture and the Securities shall bind its
successors. All agreements of the Trustee in this Indenture shall bind its
successors.
SECTION 13.12. Multiple Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement. One signed copy is enough
to prove this Indenture.
SECTION 13.13. Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have
<PAGE> 100
91
been inserted for convenience of reference only, are not intended to be
considered a part hereof and shall not modify or restrict any of the terms or
provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture to be
duly executed as of the date first written above.
DJ ORTHOPEDICS, LLC,
by /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: President and CEO
DJ ORTHOPEDICS CAPITAL CORPORATION,
by /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: President and CEO
DONJOY, L.L.C.,
by /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: President and CEO
THE BANK OF NEW YORK, as Trustee,
by /s/ Michele L. Russo
------------------------------
Name: Michele L. Russo
Title: Assistant Treasurer
<PAGE> 101
APPENDIX A
PROVISIONS RELATING TO INITIAL SECURITIES,
PRIVATE EXCHANGE SECURITIES AND EXCHANGE SECURITIES
1. Definitions
1.1 Definitions
For the purposes of this Appendix A the following terms shall have the
meanings indicated below:
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Regulation S Global Security or beneficial interest
therein, the rules and procedures of the Depositary for such Global Security,
Euroclear and Cedel, in each case to the extent applicable to such transaction
and as in effect from time to time.
"Cedel" means Cedel Bank, S.A., or any successor securities
clearing agency.
"Definitive Security" means a certificated Initial Security,
Private Exchange Security or Exchange Security (bearing the Restricted
Securities Legend if the transfer of such Security is restricted by applicable
law) that does not include the Global Securities Legend.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors.
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear System or any successor
securities clearing agency.
"Global Securities Legend" means the legend set forth under that
caption in Exhibit A to this Indenture.
"IAI" means an institutional "accredited investor" as described in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"Initial Purchaser" means Chase Securities Inc.
"Private Exchange" means an offer by the Company, pursuant to the
Registration Agreement, to issue and deliver to certain Holders, in exchange
for the
<PAGE> 102
Initial Securities held by such Holders as part of their initial distribution,
a like aggregate principal amount of Private Exchange Securities.
"Private Exchange Securities" means the Securities of the Company
issued in exchange for Initial Securities pursuant to this Indenture in
connection with the Private Exchange pursuant to the Registration Agreement.
"Purchase Agreement" means the Purchase Agreement dated June 17,
1999, among the Company, DJ Capital, DonJoy, and the Initial Purchaser.
"QIB" means a "qualified institutional buyer" as defined in Rule
144A.
"Registered Exchange Offer" means the offer by the Issuers,
pursuant to the Registration Agreement, to certain Holders of Initial
Securities, to issue and deliver to such Holders, in exchange for their Initial
Securities, a like aggregate principal amount of Exchange Securities registered
under the Securities Act.
"Registration Agreement" means the Exchange and Registration
Rights Agreement dated June 30, 1999, among the Company, DJ Capital, DonJoy and
the Initial Purchaser.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Securities" means all Initial Securities offered and
sold outside the United States in reliance on Regulation S.
"Restricted Period", with respect to any Securities, means the
period of 40 consecutive days beginning on and including the later of (a) the
day on which such Securities are first offered to persons other than
distributors (as defined in Regulation S under the Securities Act) in reliance
on Regulation S, notice of which day shall be promptly given by the Company to
the Trustee, and (b) the Issue Date with respect to such Securities.
"Restricted Securities Legend" means the legend set forth in
Section 2.3(e)(i) herein.
"Rule 501" means Rule 501(a)(1), (2), (3) or (7) under the
Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"Rule 144A Securities" means all Initial Securities offered and
sold to QIBs in reliance on Rule 144A.
"Securities Act" means the Securities Act of 1933, as amended.
<PAGE> 103
3
"Securities Custodian" means the custodian with respect to a
Global Security (as appointed by the Depositary) or any successor person
thereto, who shall initially be the Trustee.
"Shelf Registration Statement" means a registration statement
filed by the Issuers and DonJoy in connection with the offer and sale of
Initial Securities or Private Exchange Securities pursuant to the Registration
Agreement.
"Transfer Restricted Securities" means Definitive Securities and
any other Securities that bear or are required to bear the Restricted
Securities Legend.
1.2 Other Definitions
<TABLE>
<CAPTION>
Term: Defined in Section:
----- -------------------
<S> <C>
"Agent Members"..............................................................2.1(c)
"IAI Global Security"........................................................2.1(b)
"Global Security"............................................................2.1(b)
"Regulation S Global Security"...............................................2.1(b)
"Rule 144A Global Security"..................................................2.1(b)
</TABLE>
2. The Securities
2.1 Form and Dating
(a) The Initial Securities issued on the date hereof will be (i)
offered and sold by the Issuers pursuant to the Purchase Agreement and (ii)
resold, initially only to (1) QIBs in reliance on Rule 144A and (2) Persons
other than U.S. Persons (as defined in Regulation S) in reliance on Regulation
S. Such Initial Securities may thereafter be transferred to, among others,
QIBs, purchasers in reliance on Regulation S and, except as set forth below,
IAIs in accordance with Rule 501.
(b) Global Securities. Rule 144A Securities shall be issued
initially in the form of one or more permanent global Securities in definitive,
fully registered form (collectively, the "Rule 144A Global Security") and
Regulation S Securities shall be issued initially in the form of one or more
global Securities (collectively, the "Regulation S Global Security"), in each
case without interest coupons and bearing the Global Securities Legend and
Restricted Securities Legend, which shall be deposited on behalf of the
purchasers of the Securities represented thereby with the Securities Custodian,
and registered in the name of the Depositary or a nominee of the Depositary,
duly executed by the Issuers and authenticated by the Trustee as provided in
this Indenture. One or more global securities in
<PAGE> 104
4
definitive, fully registered form without interest coupons and bearing the
Global Securities Legend and the Restricted Securities Legend (collectively,
the "IAI Global Security") shall also be issued on the Closing Date, deposited
with the Securities Custodian, and registered in the name of the Depositary or
a nominee of the Depositary, duly executed by the Issuers and authenticated by
the Trustee as provided in this Indenture to accommodate transfers of
beneficial interests in the Securities to IAIs subsequent to the initial
distribution. The Rule 144A Global Security, the IAI Global Security and the
Regulation S Global Security are each referred to herein as a "Global Security"
and are collectively referred to herein as "Global Securities", provided, that
the term "Global Security" when used in Sections 2.1(c), 2.3 (c)(iii), 2.3(f),
2.3(g)(i), 2.3(h)(i) and 2.4 shall also include any Security in global form
issued in connection with a Registered Exchange Offer or Private Exchange. The
aggregate principal amount of the Global Securities may from time to time be
increased or decreased by adjustments made on the records of the Trustee and
the Depositary or its nominee and on the schedules thereto as hereinafter
provided.
(c) Book-Entry Provisions. This Section 2.1(c) shall apply only to
a Global Security deposited with or on behalf of the Depositary.
The Issuers shall execute and the Trustee shall, in accordance
with this Section 2.1(c) and Section 2.2 and pursuant to an order of the
Issuers signed by one Officer, authenticate and deliver initially one or more
Global Securities that (i) shall be registered in the name of the Depositary
for such Global Security or Global Securities or the nominee of such Depositary
and (ii) shall be delivered by the Trustee to such Depositary or pursuant to
such Depositary's instructions or held by the Trustee as Securities Custodian.
Members of, or participants in, the Depositary ("Agent Members")
shall have no rights under this Indenture with respect to any Global Security
held on their behalf by the Depositary or by the Trustee as Securities
Custodian or under such Global Security, and the Depositary may be treated by
the Issuers, the Trustee and any agent of the Issuers or the Trustee as the
absolute owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Issuers, the
Trustee or any agent of the Issuers or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Agent Members, the operation of
customary practices of such Depositary governing the exercise of the rights of
a holder of a beneficial interest in any Global Security.
(d) Definitive Securities. Except as provided in Section 2.3 or
2.4, owners of beneficial interests in Global Securities will not be entitled
to receive physical delivery of certificated Securities.
2.2 Authentication. The Trustee shall authenticate and make available
for delivery upon a written order of the Issuers signed by one Officer (a)
Initial Securities for original
<PAGE> 105
5
issue on the date hereof in an aggregate principal amount of $100,000,000 and
(b) the (i) Exchange Securities for issue only in a Registered Exchange Offer
and (ii) Private Exchange Securities for issue only in the Private Exchange, in
the case of each of (i) and (ii) pursuant to the Registration Agreement and for
a like principal amount of Initial Securities exchanged pursuant thereto. Such
order shall specify the amount of the Securities to be authenticated, the date
on which the original issue of Securities is to be authenticated and whether
the Securities are to be Initial Securities, Exchange Securities or Private
Exchange Securities. The aggregate principal amount of Securities outstanding
at any time may not exceed $100,000,000 except as provided in Sections 2.07 and
2.08 of this Indenture.
2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive
Securities. When Definitive Securities are presented to the Registrar with a
request:
(i) to register the transfer of such Definitive Securities; or
(ii) to exchange such Definitive Securities for an equal
principal amount of Definitive Securities of other authorized
denominations,
the Registrar shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the Definitive Securities surrendered for transfer or exchange:
(1) shall be duly endorsed or accompanied by a written instrument
of transfer in form reasonably satisfactory to the Issuers and the
Registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(2) in the case of Definitive Securities which are Transfer
Restricted Securities, are accompanied by the following additional
information and documents, as applicable:
(A) if such Definitive Securities are being delivered to
the Registrar by a Holder for registration in the name of such
Holder, without transfer, a certification from such Holder to
that effect (in the form set forth on the reverse side of the
Initial Security or Private Exchange Security, as applicable); or
(B) if such Definitive Securities are being transferred to
the Issuers, a certification to that effect (in the form set
forth on the reverse side of the Initial Security or Private
Exchange Security, as applicable); or
(C) if such Definitive Securities are being transferred
pursuant to an exemption from registration in accordance with
Rule 144 under the Securities
<PAGE> 106
6
Act or in reliance upon another exemption from the registration
requirements of the Securities Act, (x) a certification to that
effect (in the form set forth on the reverse side of the Initial
Security or Private Exchange Security, as applicable,), (y) an
opinion of counsel or other evidence reasonably satisfactory to
it as to the compliance with the restrictions set forth in the
legend set forth in Section 2.3(e)(i) and (z) in the case of a
transfer to an IAI, a signed letter substantially in the form of
Exhibit D.
(b) Restrictions on Transfer of a Definitive Security for a
Beneficial Interest in a Global Security. A Definitive Security may not be
exchanged for a beneficial interest in a Global Security except upon
satisfaction of the requirements set forth below. Upon receipt by the Trustee
of a Definitive Security, duly endorsed or accompanied by a written instrument
of transfer in form reasonably satisfactory to the Issuers and the Registrar,
together with:
(i) certification (in the form set forth on the reverse side of
the Initial Security or Private Exchange Security, as applicable) that
such Definitive Security is being transferred (1) to a QIB in accordance
with Rule 144A, (2) to an IAI that has furnished to the Trustee a signed
letter substantially in the form of Exhibit D or (3) outside the United
States in an offshore transaction within the meaning of Regulation S and
in compliance with Rule 904 under the Securities Act, and in the case of
clauses (2) and (3) an opinion of counsel or other evidence reasonably
satisfactory to it as to the compliance with the restrictions set forth
in the legend set forth in Section 2.3(e)(i); and
(ii) written instructions directing the Trustee to make, or to
direct the Securities Custodian to make, an adjustment on its books and
records with respect to such Global Security to reflect an increase in
the aggregate principal amount of the Securities represented by the
Global Security, such instructions to contain information regarding the
Depositary account to be credited with such increase, then the Trustee
shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing
instructions and procedures existing between the Depositary and the
Securities Custodian, the aggregate principal amount of Securities
represented by the Global Security to be increased by the aggregate
principal amount of the Definitive Security to be exchanged and shall
credit or cause to be credited to the account of the Person specified in
such instructions a beneficial interest in the Global Security equal to
the principal amount of the Definitive Security so canceled. If no
Global Securities are then outstanding and the Global Security has not
been previously exchanged for certificated securities pursuant to
Section 2.4, the Issuers shall issue and the Trustee shall authenticate,
upon written order of the Issuers in the form of an Officers'
Certificate, a new Global Security in the appropriate principal amount.
<PAGE> 107
7
(c) Transfer and Exchange of Global Securities. (i) The transfer
and exchange of Global Securities or beneficial interests therein shall be
effected through the Depositary, in accordance with this Indenture (including
applicable restrictions on transfer set forth herein, if any) and the
procedures of the Depositary therefor. A transferor of a beneficial interest in
a Global Security shall deliver a written order given in accordance with the
Depositary's procedures containing information regarding the participant
account of the Depositary to be credited with a beneficial interest in such
Global Security or another Global Security and such account shall be credited
in accordance with such order with a beneficial interest in the applicable
Global Security and the account of the Person making the transfer shall be
debited by an amount equal to the beneficial interest in the Global Security
being transferred. Transfers by an owner of a beneficial interest in the Rule
144A Global Security or the IAI Global Security to a transferee who takes
delivery of such interest through the Regulation S Global Security, whether
before or after the expiration of the Restricted Period, shall be made only
upon receipt by the Trustee of a certification (and an opinion of counsel or
other evidence reasonably satisfactory to the Trustee as to the compliance with
the restrictions set forth in the legend set forth in Section 2.3(e)(i)) in the
form provided on the reverse of the Initial Securities or Private Exchange
Securities, as the case may be, from the transferor to the effect that such
transfer is being made in accordance with Regulation S or (if available) Rule
144 under the Securities Act and that, if such transfer is being made prior to
the expiration of the Restricted Period, the interest transferred shall be held
immediately thereafter through Euroclear or Cedel. In the case of a transfer of
a beneficial interest in either the Regulation S Global Security or the Rule
144A Global Security for an interest in the IAI Global Security, the transferee
must furnish a signed letter substantially in the form of Exhibit D to the
Trustee and an opinion of counsel or other evidence reasonably satisfactory to
the Trustee as to the compliance with the restrictions set forth in the legend
set forth in Section 2.3(e)(i).
(ii) If the proposed transfer is a transfer of a
beneficial interest in one Global Security to a beneficial
interest in another Global Security, the Registrar shall reflect
on its books and records the date and an increase in the
principal amount of the Global Security to which such interest is
being transferred in an amount equal to the principal amount of
the interest to be so transferred, and the Registrar shall
reflect on its books and records the date and a corresponding
decrease in the principal amount of Global Security from which
such interest is being transferred.
(iii) Notwithstanding any other provisions of this
Appendix (other than the provisions set forth in Section 2.4), a
Global Security may not be transferred as a whole except by the
Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary
or by the Depositary or any such nominee to a successor
Depositary or a nominee of such successor Depositary.
<PAGE> 108
8
(iv) In the event that a Global Security is exchanged for
Definitive Securities pursuant to Section 2.4 prior to the
consummation of the Registered Exchange Offer or the
effectiveness of the Shelf Registration Statement with respect to
such Securities, such Securities may be exchanged only in
accordance with such procedures as are substantially consistent
with the provisions of this Section 2.3 (including the
certification requirements set forth on the reverse of the
Initial Securities intended to ensure that such transfers comply
with Rule 144A, Regulation S or such other applicable exemption
from registration under the Securities Act, as the case may be)
and such other procedures as may from time to time be adopted by
the Issuers.
(d) Restrictions on Transfer of Regulation S Global Security. (i)
Prior to the expiration of the Restricted Period, interests in the Regulation S
Global Security may only be held through Euroclear or Cedel. During the
Restricted Period, beneficial ownership interests in the Regulation S Global
Security may only be sold, pledged or transferred through Euroclear or Cedel in
accordance with the Applicable Procedures and only (1) to the Issuers, (2) so
long as such security is eligible for resale pursuant to Rule 144A, to a person
whom the selling holder reasonably believes is a QIB that purchases for its own
account or for the account of a QIB to whom notice is given that the resale,
pledge or transfer is being made in reliance on Rule 144A, (3) in an offshore
transaction in accordance with Regulation S, (4) pursuant to an exemption from
registration under the Securities Act provided by Rule 144 (if applicable)
under the Securities Act, (5) to an IAI purchasing for its own account, or for
the account of such an IAI, in a minimum principal amount of Securities of
$250,000 or (6) pursuant to an effective registration statement under the
Securities Act, in each case in accordance with any applicable securities laws
of any state of the United States. Prior to the expiration of the Restricted
Period, transfers by an owner of a beneficial interest in the Regulation S
Global Security to a transferee who takes delivery of such interest through the
Rule 144A Global Security or the IAI Global Security shall be made only in
accordance with Applicable Procedures and upon receipt by the Trustee of a
written certification (and an appropriate opinion, if provided for in the
legend on such Regulations S Global Security and requested by the Trustee) from
the transferor of the beneficial interest in the form provided on the reverse
of the Initial Security to the effect that such transfer is being made to (1) a
QIB within the meaning of Rule 144A in a transaction meeting the requirements
of Rule 144A or (2) an IAI purchasing for its own account, or for the account
of such an IAI, in a minimum principal amount of the Securities of $250,000.
Such written certification shall no longer be required after the expiration of
the Restricted Period. In the case of a transfer of a beneficial interest in
the Regulation S Global Security for an interest in the IAI Global Security,
the transferee must furnish a signed letter substantially in the form of
Exhibit D to the Trustee.
<PAGE> 109
9
(ii) Upon the expiration of the Restricted Period,
beneficial ownership interests in the Regulation S Global
Security shall be transferable in accordance with applicable law
and the other terms of this Indenture.
(e) Legend.
(i) Except as permitted by the following paragraphs (ii),
(iii) or (iv), each Security certificate evidencing the Global
Securities and the Definitive Securities (and all Securities
issued in exchange therefor or in substitution thereof) shall
bear a legend in substantially the following form (each defined
term in the legend being defined as such for purposes of the
legend only):
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION
IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR
TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS
TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND
THE LAST DATE ON WHICH THE ISSUERS OR ANY AFFILIATE OF THE
ISSUERS WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE ISSUERS, (B) PURSUANT TO A
REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION
S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR"
WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT THAT IS AN INSTITUTIONAL ACCREDITED INVESTOR
ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE
<PAGE> 110
10
ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH
CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000,
FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR
SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT
TO THE ISSUERS' AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER,
SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE
THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM."
Each Definitive Security shall bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER
INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO
CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS."
(ii) Upon any sale or transfer of a Transfer Restricted
Security that is a Definitive Security, the Registrar shall
permit the Holder thereof to exchange such Transfer Restricted
Security for a Definitive Security that does not bear the legends
set forth above and rescind any restriction on the transfer of
such Transfer Restricted Security if the Holder certifies in
writing to the Registrar that its request for such exchange was
made in reliance on Rule 144 (such certification to be in the
form set forth on the reverse of the Initial Security, or Private
Exchange Security, as applicable) and delivers an opinion of
counsel or other evidence reasonably satisfactory to the
Registrar as to the compliance with the restrictions set forth in
the legend set forth in Section 2.3(e)(i).
(iii) After a transfer of any Initial Securities or
Private Exchange Securities during the period of the
effectiveness of a Shelf Registration Statement with respect to
such Initial Securities or Private Exchange Securities, as the
case may be, all requirements pertaining to the Restricted
Securities Legend on such Initial Securities or such Private
Exchange Securities shall cease to apply and the requirements
that any such Initial Securities or such Private Exchange
Securities be issued in global form shall continue to apply.
(iv) Upon the consummation of a Registered Exchange Offer
with respect to the Initial Securities pursuant to which Holders
of such Initial Securities are offered Exchange Securities in
exchange for their Initial Securities, all requirements
<PAGE> 111
11
pertaining to Initial Securities that Initial Securities be
issued in global form shall continue to apply, and Exchange
Securities in global form without the Restricted Securities
Legend shall be available to Holders that exchange such Initial
Securities in such Registered Exchange Offer.
(v) Upon the consummation of a Private Exchange with
respect to the Initial Securities pursuant to which Holders of
such Initial Securities are offered Private Exchange Securities
in exchange for their Initial Securities, all requirements
pertaining to such Initial Securities that Initial Securities be
issued in global form shall continue to apply, and Private
Exchange Securities in global form with the Restricted Securities
Legend shall be available to Holders that exchange such Initial
Securities in such Private Exchange.
(vi) Upon a sale or transfer after the expiration of the
Restricted Period of any Initial Security acquired pursuant to
Regulation S, all requirements that such Initial Security bear
the Restricted Securities Legend shall cease to apply and the
requirements requiring any such Initial Security be issued in
global form shall continue to apply.
(f) Cancelation or Adjustment of Global Security. At such
time as all beneficial interests in a Global Security have either been
exchanged for Definitive Securities, transferred, redeemed, repurchased or
canceled, such Global Security shall be returned by the Depositary to the
Trustee for cancelation or retained and canceled by the Trustee. At any time
prior to such cancelation, if any beneficial interest in a Global Security is
exchanged for Definitive Securities, transferred in exchange for an interest in
another Global Security, redeemed, repurchased or canceled, the principal
amount of Securities represented by such Global Security shall be reduced and
an adjustment shall be made on the books and records of the Trustee (if it is
then the Securities Custodian for such Global Security) with respect to such
Global Security, by the Trustee or the Securities Custodian, to reflect such
reduction.
(g) Obligations with Respect to Transfers and Exchanges of
Securities.
(i) To permit registrations of transfers and exchanges,
the Issuers shall execute and the Trustee shall authenticate,
Definitive Securities and Global Securities at the Registrar's
request.
(ii) No service charge shall be made for any registration
of transfer or exchange, but the Issuers may require payment of a
sum sufficient to cover any transfer tax, assessments, or similar
governmental charge payable in connection therewith (other than
any such transfer taxes, assessments or similar governmental
charge payable upon exchanges to be registered in the name of the
registered Holder
<PAGE> 112
12
effecting the exchange pursuant to Sections 2.06, 3.06, 4.06,
4.08 and 9.05 of this Indenture).
(iii) Prior to the due presentation for registration of
transfer of any Security, the Issuers, the Trustee, the Paying
Agent or the Registrar may deem and treat the person in whose
name a Security is registered as the absolute owner of such
Security for the purpose of receiving payment of principal of and
interest on such Security and for all other purposes whatsoever,
whether or not such Security is overdue, and none of the Issuers,
the Trustee, the Paying Agent or the Registrar shall be affected
by notice to the contrary.
(iv) All Securities issued upon any transfer or exchange
pursuant to the terms of this Indenture shall evidence the same
debt and shall be entitled to the same benefits under this
Indenture as the Securities surrendered upon such transfer or
exchange.
(h) No Obligation of the Trustee or Issuers.
(i) Neither the Issuers nor the Trustee shall have no
responsibility or obligation to any beneficial owner of a Global
Security, a member of, or a participant in the Depositary or any
other Person with respect to the accuracy of the records of the
Depositary or its nominee or of any participant or member
thereof, with respect to any ownership interest in the Securities
or with respect to the delivery to any participant, member,
beneficial owner or other Person (other than the Depositary) of
any notice (including any notice of redemption or repurchase) or
the payment of any amount, under or with respect to such
Securities. All notices and communications to be given to the
Holders and all payments to be made to Holders under the
Securities shall be given or made only to the registered Holders
(which shall be the Depositary or its nominee in the case of a
Global Security). The rights of beneficial owners in any Global
Security shall be exercised only through the Depositary subject
to the applicable rules and procedures of the Depositary. The
Trustee may rely and shall be fully protected in relying upon
information furnished by the Depositary with respect to its
members, participants and any beneficial owners.
(ii) The Trustee shall have no obligation or duty to
monitor, determine or inquire as to compliance with any
restrictions on transfer imposed under this Indenture or under
applicable law with respect to any transfer of any interest in
any Security (including any transfers between or among Depositary
participants, members or beneficial owners in any Global
Security) other than to require delivery of such certificates and
other documentation or evidence as are expressly required by, and
to do so if and when expressly required by, the terms of this
Indenture, and to examine
<PAGE> 113
13
the same to determine substantial compliance as to form with the
express requirements hereof.
2.4 Definitive Securities
(a) A Global Security deposited with the Depositary or with
the Trustee as Securities Custodian pursuant to Section 2.1 or issued in
connection with a Registered Exchange Offer or Private Exchange shall be
transferred to the beneficial owners thereof in the form of Definitive
Securities in an aggregate principal amount equal to the principal amount of
such Global Security, in exchange for such Global Security, only if such
transfer complies with Section 2.3 and (i) the Depositary notifies the Issuers
that it is unwilling or unable to continue as a Depositary for such Global
Security or if at any time the Depositary ceases to be a "clearing agency"
registered under the Exchange Act, and a successor depositary is not appointed
by the Issuers within 90 days of such notice or after the Issuers become aware
of such cessation, or (ii) an Event of Default has occurred and is continuing
or (iii) the Issuers, in their sole discretion, notify the Trustee in writing
that they elect to cause the issuance of certificated Securities under this
Indenture.
(b) Any Global Security that is transferable to the
beneficial owners thereof pursuant to this Section 2.4 shall be surrendered by
the Depositary to the Trustee, to be so transferred, in whole or from time to
time in part, without charge, and the Trustee shall authenticate and deliver,
upon such transfer of each portion of such Global Security, an equal aggregate
principal amount of Definitive Securities of authorized denominations. Any
portion of a Global Security transferred pursuant to this Section shall be
executed, authenticated and delivered only in denominations of $1,000 and any
integral multiple thereof and registered in such names as the Depositary shall
direct. Any certificated Initial Security or Private Exchange Security in the
form of a Definitive Security delivered in exchange for an interest in the
Global Security shall, except as otherwise provided by Section 2.3(e), bear the
Restricted Securities Legend.
(c) Subject to the provisions of Section 2.4(b), the
registered Holder of a Global Security may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Securities.
(d) In the event of the occurrence of any of the events
specified in Section 2.4(a)(i), (ii) or (iii), the Issuers will promptly make
available to the Trustee a reasonable supply of Definitive Securities in fully
registered form without interest coupons.
<PAGE> 114
EXHIBIT A
[FORM OF FACE OF INITIAL SECURITY AND PRIVATE EXCHANGE SECURITY]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE ISSUERS OR THEIR AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF
OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUERS OR ANY
AFFILIATE OF THE ISSUERS WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE ISSUERS, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
<PAGE> 115
2
ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES
IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D)
PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE
MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED
INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT THAT IS AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THE
SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL
ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE
SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR
OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUERS' AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM.
Each Definitive Security shall bear the following additional legend:
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS.
<PAGE> 116
No. $__________
12-_% Senior Subordinated Note due 2009
CUSIP No. ______
[ISIN No._]
DJ ORTHOPEDICS, LLC, a Delaware limited liability company, and DJ
ORTHOPEDICS CAPITAL CORPORATION, a Delaware corporation, promise to pay to Cede
& Co., or registered assigns, the principal sum [of Dollars] [listed on the
Schedule of Increases or Decreases in Global Security attached hereto](1) on
June 15, 2009.
Interest Payment Dates: June 15 and December 15.
Record Dates: June 1 and December 1.
- -------------------
(1) Use the Schedule of Increases and Decreases language if the Note is in
Global Form.
<PAGE> 117
Additional provisions of this Security are set forth on the other
side of this Security.
IN WITNESS WHEREOF, the parties have caused this instrument to be
duly executed.
DJ ORTHOPEDICS, LLC,
by
------------------------------
Name:
Title:
DJ ORTHOPEDICS CAPITAL CORPORATION,
by
------------------------------
Name:
Title:
<PAGE> 118
Dated:
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE BANK OF NEW YORK,
as Trustee, certifies that this is one of the
Securities referred to in the Indenture.
By:
---------------------------
Authorized Signatory
- ------------------------
*/ If the Note is to be issued in global form, add the Global Notes Legend and
the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL
SECURITIES-SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY".
[FORM OF REVERSE SIDE OF INITIAL SECURITY
AND PRIVATE EXCHANGE SECURITY]
12-_% Senior Subordinated Note due 2009
1. Interest
(a) DJ ORTHOPEDICS, LLC a Delaware limited liability company (the
"Company") and DJ ORTHOPEDICS CAPITAL CORPORATION, a Delaware corporation ("DJ
Capital") (such entities, and their respective successors and assigns under the
Indenture hereinafter referred to, being herein called the "Issuers"), promise
to pay interest on the principal amount of this Security at the rate per annum
shown above. The Issuers shall pay interest semiannually on June 15 and
December 15 of each year. Interest on the Securities shall accrue from the most
recent date to which interest has been paid or duly provided for or, if no
interest has been paid or duly provided for, from June 30, 1999 until the
principal hereof
<PAGE> 119
4
is due. Interest shall be computed on the basis of a 360-day year of twelve
30-day months. The Issuers shall pay interest on overdue principal at the rate
borne by the Securities, and they shall pay interest on overdue installments of
interest at the same rate to the extent lawful.
(b) Liquidated Damages. The holder of this Security is entitled
to the benefits of an Exchange and Registration Rights Agreement, dated as of
June 30, 1999, among the Company, DJ Capital, DonJoy, L.L.C. ("DonJoy") and
the Initial Purchaser named therein (the "Registration Agreement"). Capitalized
terms used in this paragraph (b) but not defined herein have the meanings
assigned to them in the Registration Agreement. Subject to the terms of the
Registration Agreement, if (i) the Shelf Registration Statement or Exchange
Offer Registration Statement, as applicable under the Registration Agreement,
is not filed with the Commission on or prior to the date specified in the
Registration Agreement, (ii) 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 Registration Agreement, (iii) the
Registered Exchange Offer is not consummated on or prior to 225 days after the
Issue Date (other than in the event the Issuers file a Shelf Registration
Statement), or (iv) the Shelf Registration Statement is filed and declared
effective on or prior to the date specified in the Registration 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 (i) through (iv), a
"Registration Default"), the Issuers and DonJoy, jointly and severally, shall
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 (iii)
of the definition thereof), during the period of such Registration Default, in
an amount equal to $0.192 per week per $1,000 principal amount of the
Securities constituting Transfer Restricted Securities held by such holder
until the applicable Registration Statement is filed or declared effective, the
Registered Exchange Offer is consummated or the Shelf Registration Statement
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
Securities on semi-annual payment dates which correspond to interest payment
dates for the Securities. Following the cure of all Registration Defaults, the
accrual of liquidated damages shall cease. The Trustee shall have no
responsibility with respect to the determination of the amount of any such
liquidated damages. For purposes of the foregoing, "Transfer Restricted
Securities" means (i) each Initial Security until the date on which such
Initial Security has been exchanged for a freely transferable Exchange Security
in the Registered Exchange Offer (but not including Exchange Securities issued
to an Exchanging Dealer in the Registered Exchange Offer), (ii) each Initial
Security or Private Exchange Security until the date on which such Initial
Security or Private Exchange Security has been effectively registered under the
Securities Act and disposed of in accordance with a Shelf Registration
Statement or (iii) each Initial Security or Private Exchange Security until the
date on which such Initial
<PAGE> 120
5
Security or Private Exchange Security is distributed to the public pursuant to
Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under
the Securities Act.
2. Method of Payment
The Issuers shall pay interest on the Securities (except
defaulted interest) to the Persons who are registered holders of Securities at
the close of business on the June 1 or December 1 next preceding the interest
payment date even if Securities are canceled after the record date and on or
before the interest payment date. Holders must surrender Securities to a Paying
Agent to collect principal payments. The Issuers shall pay principal, premium,
liquidated damages and interest in money of the United States of America that
at the time of payment is legal tender for payment of public and private debts.
Payments in respect of the Securities represented by a Global Security
(including principal, premium, liquidated damages and interest) shall be made
by wire transfer of immediately available funds to the accounts specified by
The Depository Trust Company. The Issuers will make all payments in respect of
a certificated Security (including principal, premium and interest), by mailing
a check to the registered address of each Holder thereof; provided, however,
that payments on the Securities may also be made, in the case of a Holder of at
least $1,000,000 aggregate principal amount of Securities, by wire transfer to
a U.S. dollar account maintained by the payee with a bank in the United States
if such Holder elects payment by wire transfer by giving written notice to the
Trustee or the Paying Agent to such effect designating such account no later
than 30 days immediately preceding the relevant due date for payment (or such
other date as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
Initially, The Bank of New York, a New York banking corporation
(the "Trustee"), will act as Paying Agent and Registrar. The Issuers may
appoint and change any Paying Agent, Registrar or co-registrar without notice.
Either of the Issuers or any of their domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
The Issuers issued the Securities under an Indenture dated as of
June 30, 1999 (the "Indenture"), among the Company, DJ Capital, DonJoy and the
Trustee. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the
Indenture (the "TIA"). Terms defined in the Indenture and not defined herein
have the meanings ascribed thereto in the Indenture. The Securities are subject
to all terms and provisions of the Indenture, and Holders (as defined in the
Indenture) are referred to the Indenture and the TIA for a statement of such
terms and provisions.
<PAGE> 121
6
The Securities are senior subordinated unsecured obligations of
the Issuers limited to $100,000,000 aggregate principal amount at any one time
outstanding (subject to Section 2.07 of the Indenture). This Security is one of
the [Initial Securities/Private Exchange Securities] referred to in the
Indenture issued in an aggregate principal amount of $100,000,000. The
Securities include the Initial Securities and any Exchange Securities and
Private Exchange Securities issued in exchange for Initial Securities. The
Initial Securities, the Exchange Securities and the Private Exchange Securities
are treated as a single class of securities under the Indenture. The Indenture
imposes certain limitations on the ability of the Issuers and their Restricted
Subsidiaries to, among other things, make certain Investments and other
Restricted Payments, pay dividends and other distributions, incur Indebtedness,
enter into consensual restrictions upon the payment of certain dividends and
distributions by such Restricted Subsidiaries, enter into or permit certain
transactions with Affiliates and make asset sales. The Indenture also imposes
limitations on the ability of the Issuers to consolidate or merge with or into
any other Person or convey, transfer or lease all or substantially all of the
property of the Issuers.
To guarantee the due and punctual payment of the principal and
interest on the Securities and all other amounts payable by the Issuers under
the Indenture and the Securities when and as the same shall be due and payable,
whether at maturity, by acceleration or otherwise, according to the terms of
the Securities and the Indenture, the Note Guarantors have jointly and
severally unconditionally guaranteed the Guaranteed Obligations on a senior
subordinated basis as and to the extent provided in the Indenture.
5. Optional Redemption
Except as set forth in the following paragraph, the Securities
shall not be redeemable at the option of the Issuers prior to June 15, 2004.
Thereafter, the Securities shall be redeemable at the option of the Issuers, 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 (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
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>
<PAGE> 122
7
In addition, prior to June 15, 2002, the Issuers may on one or
more occasions redeem up to a maximum of 35% of the original aggregate
principal amount of the Securities with the Net Cash Proceeds of one or more
Equity Offerings (i) by the Company or (ii) 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, at
least 65% of the original aggregate principal amount of the Securities remains
outstanding. Any such redemption shall be made within 90 days of such Equity
Offering upon not less than 30 nor more than 60 days notice mailed to each
holder of Securities being redeemed and otherwise in accordance with the
procedures set forth in the Indenture.
6. Sinking Fund
The Securities are not subject to any sinking fund.
7. Notice of Redemption
Notice of redemption will be mailed by first-class mail at least
30 days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his or her registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued and unpaid interest and liquidated damages, if any, on all Securities
(or portions thereof) to be redeemed on the redemption date is deposited with
the Paying Agent on or before the redemption date and certain other conditions
are satisfied, on and after such date interest (and, if applicable, liquidated
damages) ceases to accrue on such Securities (or such portions thereof) called
for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of Control
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions specified in the Indenture, to cause the
Issuers to repurchase all or any part of the Securities of such Holder at a
purchase price equal to 101% of the principal amount of the Securities to be
repurchased plus accrued and unpaid interest and 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 that is on or prior to the date of purchase) as provided in, and subject
to the terms of, the Indenture.
<PAGE> 123
8
In accordance with Section 4.06 of the Indenture, the Issuers
will be required to offer to purchase Securities upon the occurrence of certain
events.
9. Subordination
The Securities are subordinated to Senior Indebtedness, as
defined in the Indenture. To the extent provided in the Indenture, Senior
Indebtedness must be paid before the Securities may be paid. The Issuers and
each Note Guarantor agree, and each Holder by accepting a Security agrees, to
the subordination provisions contained in the Indenture and authorizes the
Trustee to give it effect and appoints the Trustee as attorney-in-fact for such
purpose.
10. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or
exchange Securities in accordance with, and subject to the restrictions on
transfer and exchange set forth in, the Indenture. Upon any transfer or
exchange, the Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements or transfer documents and to pay
any taxes required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption
(except, in the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or to transfer or exchange any Securities for a
period of 15 days prior to a selection of Securities to be redeemed.
11. Persons Deemed Owners
Except as provided in paragraph 2 hereof, the registered Holder
of this Security may be treated as the owner of it for all purposes.
12. Unclaimed Money
If money for the payment of principal or interest or liquidated
damages (if any) remains unclaimed for two years, the Trustee or Paying Agent
shall pay the money back to the Issuers at their written request unless an
abandoned property law designates another Person. After any such payment,
Holders entitled to the money must look only to the Issuers and not to the
Trustee for payment.
<PAGE> 124
9
13. Discharge and Defeasance
Subject to certain conditions, the Issuers at any time may
terminate some of or all their obligations under the Securities and the
Indenture if the Issuers deposit with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Securities to
redemption or maturity, as the case may be.
14. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended without prior notice to any Holder
but with the written consent of the Holders of at least a majority in aggregate
principal amount of the outstanding Securities and (ii) any default or
compliance with any provisions of the Indenture may be waived with the written
consent of the Holders of at least a majority in principal amount of the
outstanding Securities. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of Securities, the Issuers and the
Trustee may amend the Indenture or the Securities (i) to cure any ambiguity,
omission, defect or inconsistency; (ii) to comply with Article 5 of the
Indenture; (iii) to provide for uncertificated Securities in addition to or in
place of certificated Securities; (iv) to add Note Guarantees with respect to
the Securities; (v) to secure the Securities; (vi) to add additional covenants
or to surrender rights and powers conferred on the Issuers; (vii) to comply
with the requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the TIA; (viii) to make any change that
does not materially and adversely affect the rights of any Securityholder; (ix)
to 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 either of the Issuers or a Note Guarantor (or any representative thereof)
under such subordination provisions; or (x) to provide for the issuance of the
Exchange Securities or Private Exchange Securities.
15. Defaults and Remedies
If an Event of Default occurs (other than an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of
either of the Issuers) and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the outstanding Securities may declare the
principal of and accrued but unpaid interest on all the Securities to be due
and payable. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of either of the Issuers occurs, the principal of
and interest on all the Securities shall 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 Securities may rescind any such acceleration with respect to
the Securities and its consequences.
<PAGE> 125
10
If an Event of Default occurs and is continuing, the Trustee
shall 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 and certain other conditions are complied with. 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
Securities unless (i) such Holder has previously given the Trustee notice that
an Event of Default is continuing, (ii) Holders of at least 25% in principal
amount of the outstanding Securities have requested the Trustee in writing to
pursue the remedy, (iii) such Holders have offered the Trustee reasonable
security or indemnity against any loss, liability or expense, (iv) 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 (v) the Holders of a
majority in principal amount of the outstanding Securities 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 Securities are 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 shall be entitled to
indemnification satisfactory to it in its sole discretion against all losses
and expenses caused by taking or not taking such action.
16. Trustee Dealings with the Issuers
Subject to certain limitations imposed by the TIA, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Securities and may otherwise deal with and collect
obligations owed to it by the Issuers, a Note Guarantor or their Affiliates and
may otherwise deal with the Issuers, a Note Guarantor or their Affiliates with
the same rights it would have if it were not Trustee.
17. No Recourse Against Others
A director, officer, employee or stockholder, as such, of either
Issuer or any Note Guarantor shall not have any liability for any obligations
of the Issuers under the Securities or the Indenture or for any claim based on,
in respect of or by reason of such obligations or their creation. By accepting
a Security, each Holder waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Securities.
<PAGE> 126
11
18. Authentication
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
19. Abbreviations
Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
20. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITH OUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
21. CUSIP and ISIN Numbers
The Issuers have caused CUSIP and ISIN numbers to be printed on
the Securities and has directed the Trustee to use CUSIP and ISIN numbers in
notices of redemption as a convenience to Holders. No representation is made as
to the accuracy of such numbers either as printed on the Securities or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
THE ISSUERS WILL FURNISH TO ANY HOLDER OF SECURITIES UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN
IT THE TEXT OF THIS SECURITY.
<PAGE> 127
12
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Security on the
books of the Issuers. The agent may substitute another to act for him.
- -----------------------------------------------------------------
Date: Your Signature:
----------------- ---------------------
- -----------------------------------------------------------------
Sign exactly as your name appears on the other side of this Security.
<PAGE> 128
13
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF
TRANSFER RESTRICTED SECURITIES
This certificate relates to $_________ principal amount of Securities held in
(check applicable space) ____ book-entry or _____ definitive form by the
undersigned.
The undersigned (check one box below):
[ ] has requested the Trustee by written order to deliver in exchange for
its beneficial interest in the Global Security held by the Depositary a
Security or Securities in definitive, registered form of authorized
denominations and in an aggregate principal amount equal to its
beneficial interest in such Global Security (or the portion thereof
indicated above);
[ ] has requested the Trustee by written order to exchange or register the
transfer of a Security or Securities.
In connection with any transfer of any of the Securities evidenced by this
certificate the undersigned confirms that such Securities are being transferred
in accordance with its terms:
CHECK ONE BOX BELOW
<TABLE>
<S> <C> <C>
(1) [ ] to the Issuers; or
(2) [ ] to the Registrar for registration in the name of
the Holder, without transfer; or
(3) [ ] pursuant to an effective registration statement
under the Securities Act of 1933; or
(4) [ ] inside the United States to a "qualified
institutional buyer" (as defined in Rule 144A
under the Securities Act of 1933) that purchases
for its own account or for the account of a
qualified institutional buyer to whom notice is
given that such transfer is being made in
reliance on Rule 144A, in each case pursuant to
and in compliance with Rule 144A under the
Securities Act of 1933; or
(5) [ ] outside the United States in an offshore
transaction within the meaning of Regulation S
under the Securities Act in compliance with Rule
904 under the Securities Act of 1933 and such
Security shall be held
</TABLE>
<PAGE> 129
14
<TABLE>
<S> <C> <C>
immediately after the transfer through Euroclear
and Cedel until the expiration of the Restricted
Period (as defined in the Indenture); or
(6) [ ] to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act of 1933) that has furnished to
the Trustee a signed letter containing certain
representations and agreements; or
(7) [ ] pursuant to another available exemption from
registration provided by Rule 144 under the
Securities Act of 1933.
</TABLE>
Unless one of the boxes is checked, the Trustee will refuse to register
any of the Securities evidenced by this certificate in the name of any
Person other than the registered holder thereof; provided, however, that
if box (5), (6) or (7) is checked, the Trustee shall have received,
prior to registering any such transfer of the Securities, the legal
opinions, certifications and other information required by the Indenture
to confirm that such transfer is being made pursuant to an exemption
from, or in a transaction not subject to, the registration requirements
of the Securities Act of 1933.
------------------------
Your Signature
<TABLE>
<CAPTION>
Signature Guarantee:
<S> <C>
Date:
---------------------- -------------------------
Signature must be guaranteed Signature of Signature
by a participant in a Guarantee
recognized signature guaranty
medallion program or other
signature guarantor acceptable
to the Trustee
</TABLE>
- ------------------------------------------------------------
<PAGE> 130
15
TO BE COMPLETED BY PURCHASER IF (4) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing
this Security for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A under the
Securities Act of 1933, and is aware that the sale to it is being made in
reliance on Rule 144A and acknowledges that it has received such information
regarding the Issuers as the undersigned has requested pursuant to Rule 144A or
has determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
Dated:
---------------- ------------------------------
NOTICE: To be executed by
an executive officer
<PAGE> 131
16
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $[ ]. The
following increases or decreases in this Global Security have been made:
<TABLE>
<S> <C> <C> <C> <C>
Date of Amount of decrease Amount of increase Principal amount of Signature of
Exchange in Principal in Principal Amount this Global Security authorized signatory
Amount of this of this Global following such of Trustee or
Global Security Security decrease or increase Securities Custodian
</TABLE>
<PAGE> 132
17
OPTION OF HOLDER TO ELECT PURCHASE
IF YOU WANT TO ELECT TO HAVE THIS SECURITY PURCHASED BY THE
ISSUERS PURSUANT TO SECTION 4.06 (ASSET DISPOSITION) OR 4.08 (CHANGE OF
CONTROL) OF THE INDENTURE, CHECK THE BOX:
ASSET DISPOSITION [ ] CHANGE OF CONTROL [ ]
IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS SECURITY PURCHASED
BY THE ISSUERS PURSUANT TO SECTION 4.06 OR 4.08 OF THE INDENTURE, STATE THE
AMOUNT ($1,000 OR AN INTEGRAL MULTIPLE THEREOF):
$
DATE: __________________ YOUR SIGNATURE: __________________
(SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THE SECURITY)
SIGNATURE GUARANTEE:_______________________________________
SIGNATURE MUST BE GUARANTEED BY A PARTICIPANT IN A
RECOGNIZED SIGNATURE GUARANTY MEDALLION PROGRAM OR
OTHER SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE
<PAGE> 133
EXHIBIT B
[FORM OF FACE OF EXCHANGE SECURITY]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE ISSUERS OR THEIR AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF
OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
<PAGE> 134
2
No. $__________
12-_% Senior Subordinated Note due 2009
CUSIP No. ______
[ISIN No._]
DJ ORTHOPEDICS, LLC, a Delaware limited liability company, and DJ
ORTHOPEDICS CAPITAL CORPORATION, a Delaware corporation, promise to pay to Cede
& Co., or registered assigns, the principal sum [of Dollars] [listed on the
Schedule of Increases or Decreases in Global Security attached hereto](2) on
June 15, 2009.
Interest Payment Dates: June 15 and December 15.
Record Dates: June 1 and December 1.
- -------------------
(2) Use the Schedule of Increases and Decreases language if Note is in Global
Form.
<PAGE> 135
3
Additional provisions of this Security are set forth on the other
side of this Security.
IN WITNESS WHEREOF, the parties have caused this instrument to be
duly executed.
DJ ORTHOPEDICS, LLC,
by
-------------------------------------
Name:
Title:
DJ ORTHOPEDICS CAPITAL
CORPORATION,
by
-------------------------------------
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE BANK OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred
to in the Indenture.
by
-----------------------------
Authorized Signatory
<PAGE> 136
4
*/ If the Security is to be issued in global form, add the Global Securities
Legend and the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL
SECURITIES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY".
<PAGE> 137
5
[FORM OF REVERSE SIDE OF EXCHANGE SECURITY]
12-_% Senior Subordinated Note due 2009
1. Interest.
DJ ORTHOPEDICS, LLC, a Delaware limited liability company (the
"Company"), and DJ ORTHOPEDICS CAPITAL CORPORATION, a Delaware corporation ("DJ
Capital") (such entities, and their respective successors and assigns under the
Indenture hereinafter referred to, being herein called the "Issuers"), promises
to pay interest on the principal amount of this Security at the rate per annum
shown above. The Issuers shall pay interest semiannually on June 15 and
December 15 of each year. Interest on the Securities shall accrue from the most
recent date to which interest has been paid or duly provided for or, if no
interest has been paid or duly provided for, from June 30, 1999 until the
principal hereof is due. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months. The Issuers shall pay interest on overdue
principal at the rate borne by the Securities, and they shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
2. Method of Payment
The Issuers shall pay interest on the Securities (except
defaulted interest) to the Persons who are registered holders of Securities at
the close of business on the June 1 or December 1 next preceding the interest
payment date even if Securities are canceled after the record date and on or
before the interest payment date. Holders must surrender Securities to a Paying
Agent to collect principal payments. The Issuers shall pay principal, premium
and interest in money of the United States of America that at the time of
payment is legal tender for payment of public and private debts. Payments in
respect of the Securities represented by a Global Security (including
principal, premium and interest) shall be made by wire transfer of immediately
available funds to the accounts specified by The Depository Trust Company. The
Issuers will make all payments in respect of a certificated Security (including
principal, premium and interest), by mailing a check to the registered address
of each Holder thereof; provided, however, that payments on the Securities may
also be made, in the case of a Holder of at least $1,000,000 aggregate
principal amount of Securities, by wire transfer to a U.S. dollar account
maintained by the payee with a bank in the United States if such Holder elects
payment by wire transfer by giving written notice to the Trustee or the Paying
Agent to such effect designating such account no later than 30 days immediately
preceding the relevant due date for payment (or such other date as the Trustee
may accept in its discretion).
<PAGE> 138
6
3. Paying Agent and Registrar
Initially, The Bank of New York, a New York banking corporation
(the "Trustee"), will act as Paying Agent and Registrar. The Issuers may
appoint and change any Paying Agent, Registrar or co-registrar without notice.
Either of the Issuers or any of their domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
The Issuers issued the Securities under an Indenture dated as of
June 30, 1999 (the "Indenture"), among the Company, DJ Capital, DonJoy and the
Trustee. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the
Indenture (the "TIA"). Terms defined in the Indenture and not defined herein
have the meanings ascribed thereto in the Indenture. The Securities are subject
to all terms and provisions of the Indenture, and Holders (as defined in the
Indenture) are referred to the Indenture and the TIA for a statement of such
terms and provisions.
The Securities are senior subordinated unsecured obligations of
the Issuers limited to $100,000,000 aggregate principal amount at any one time
outstanding (subject to Section 2.07 of the Indenture), of which $100,000,000
in aggregate principal amount will be initially issued on the Closing Date.
This Security is one of the Exchange Securities referred to in the Indenture.
The Securities include the Initial Securities and any Exchange Securities and
Private Exchange Securities issued in exchange for the Initial Securities
pursuant to the Indenture. The Initial Securities, the Exchange Securities and
the Private Exchange Securities are treated as a single class of securities
under the Indenture. The Indenture imposes certain limitations on the ability
of the Issuers and their Restricted Subsidiaries to, among other things, make
certain Investments and other Restricted Payments, pay dividends and other
distributions, incur Indebtedness, enter into consensual restrictions upon the
payment of certain dividends and distributions by such Restricted Subsidiaries,
enter into or permit certain transactions with Affiliates and make Asset Sales.
The Indenture also imposes limitations on the ability of the Issuers to
consolidate or merge with or into any other Person or convey, transfer or lease
all or substantially all of the property of the Issuers.
To guarantee the due and punctual payment of the principal and
interest, if any, on the Securities and all other amounts payable by the
Issuers under the Indenture and the Securities when and as the same shall be
due and payable, whether at maturity, by acceleration or otherwise, according
to the terms of the Securities and the Indenture, the Note Guarantors have,
jointly and severally, unconditionally guaranteed the Guaranteed Obligations on
a senior basis subordinated as and to the extent provided in the Indenture.
<PAGE> 139
7
5. Optional Redemption
Except as set forth in the following paragraph, the Securities
shall not be redeemable at the option of the Issuers prior to June 15, 2004.
Thereafter, the Securities shall be redeemable at the option of the Issuers, 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 (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
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>
In addition, prior to June 15, 2002, the Company may, on one or
more occasions, redeem up to a maximum of 35% of the original aggregate
principal amount of the Securities with the Net Cash Proceeds of one or more
Equity Offerings (i) by the Company or (ii) 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, at
least 65% of the original aggregate principal amount of the Securities remains
outstanding. Any such redemption shall be made within 90 days of such Equity
Offering upon not less than 30 nor more than 60 days notice mailed to each
holder of Securities being redeemed and otherwise in accordance with the
procedures set forth in the Indenture.
6. Sinking Fund
The Securities are not subject to any sinking fund.
<PAGE> 140
8
7. Notice of Redemption
Notice of redemption will be mailed by first-class mail at least
30 days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his or her registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued and unpaid interest and liquidated damages, if any, on all Securities
(or portions thereof) to be redeemed on the redemption date is deposited with
the Paying Agent on or before the redemption date and certain other conditions
are satisfied, on and after such date interest ceases to accrue on such
Securities (or such portions thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of Control
Upon a Change of Control, any Holder of Securities will have the
right, subject to certain conditions specified in the Indenture, to cause the
Issuers to repurchase all or any part of the Securities of such Holder at a
purchase price equal to [101%] of the principal amount of the Securities to be
repurchased plus accrued and unpaid interest and 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 that is on or prior to the date of purchase) as provided in, and subject
to the terms of, the Indenture.
In accordance with Section 4.06 of the Indenture, the Issuers
will be required to offer to purchase Securities upon the occurrence of certain
events.
9. Subordination
The Securities are subordinated to Senior Indebtedness, as
defined in the Indenture. To the extent provided in the Indenture, Senior
Indebtedness must be paid before the Securities may be paid. The Issuers and
each Note Guarantor agree, and each Holder by accepting a Security agrees, to
the subordination provisions contained in the Indenture and authorizes the
Trustee to give it effect and appoints the Trustee as attorney-in-fact for such
purpose.
<PAGE> 141
9
10. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or
exchange Securities in accordance with the Indenture. Upon any transfer or
exchange, the Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements or transfer documents and to pay
any taxes required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption
(except, in the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or to transfer or exchange any Securities for a
period of 15 days prior to a selection of Securities to be redeemed or 15 days
before an interest payment date.
11. Persons Deemed Owners
Except as provided in paragraph 2 hereof, the registered Holder
of this Security may be treated as the owner of it for all purposes.
12. Unclaimed Money
If money for the payment of principal or interest remains
unclaimed for two years, the Trustee or Paying Agent shall pay the money back
to the Issuers at their written request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the
money must look only to the Issuers and not to the Trustee for payment.
13. Discharge and Defeasance
Subject to certain conditions, the Issuers at any time may
terminate some of or all their obligations under the Securities and the
Indenture if the Issuers deposit with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Securities to
redemption or maturity, as the case may be.
<PAGE> 142
10
14. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended without prior notice to any Holder
but with the written consent of the Holders of at least a majority in aggregate
principal amount of the outstanding Securities and (ii) any default or
compliance with any of the provisions of the Indenture may be waived with the
written consent of the Holders of at least a majority in principal amount of
the outstanding Securities. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of Securities, the Issuers and the
Trustee may amend the Indenture or the Securities (i) to cure any ambiguity,
omission, defect or inconsistency; (ii) to comply with Article 5 of the
Indenture; (iii) to provide for uncertificated Securities in addition to or in
place of certificated Securities; (iv) to add Note Guarantees with respect to
the Securities; (v) to secure the Securities; (vi) to add additional covenants
or to surrender rights and powers conferred on the Issuers; (vii) to comply
with the requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the TIA; (viii) to make any change that
does not materially and adversely affect the rights of any Holder; (ix) to 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 either
of the Issuers or a Note Guarantor (or any representative thereof) under such
subordination provisions; or (x) to provide for the issuance of the Exchange
Securities or Private Exchange Securities.
15. Defaults and Remedies
If an Event of Default occurs (other than an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of
either of the Issuers) and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the outstanding Securities may declare the
principal of and accrued but unpaid interest on all the Securities to be due
and payable. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of either of the Issuers occurs, the principal of
and interest on all the Securities shall 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 Securities may rescind any such acceleration with respect to
the Securities and its consequences.
If an Event of Default occurs and is continuing, the Trustee
shall 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 and certain other conditions are complied with. 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
Securities unless (i) such Holder has previously given the Trustee notice that
an Event of Default is continuing, (ii) Holders of at least 25% in principal
amount of the outstanding
<PAGE> 143
11
Securities have requested the Trustee in writing to pursue the remedy, (iii)
such Holders have offered the Trustee reasonable security or indemnity against
any loss, liability or expense, (iv) 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 (v) the Holders of a majority in principal amount of
the outstanding Securities 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 Securities are
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 shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
16. Trustee Dealings with the Issuers
Subject to certain limitations imposed by the TIA, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Securities and may otherwise deal with and collect
obligations owed to it by the Issuers, a Note Guarantor or their Affiliates and
may otherwise deal with the Issuers, a Note Guarantor or their Affiliates with
the same rights it would have if it were not Trustee.
17. No Recourse Against Others
A director, officer, employee or stockholder, as such, of either
Issuer or any Note Guarantor shall not have any liability for any obligations
of the Issuer under the Securities or the Indenture or for any claim based on,
in respect of or by reason of such obligations or their creation. By accepting
a Security, each Holder waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Securities.
18. Authentication
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
<PAGE> 144
12
19. Abbreviations
Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
20. Governing Law
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITH OUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
21. CUSIP and ISIN Numbers
The Issuers have caused CUSIP and ISIN numbers to be printed on
the Securities and has directed the Trustee to use CUSIP and ISIN numbers in
notices of redemption as a convenience to Holders. No representation is made as
to the accuracy of such numbers either as printed on the Securities or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
THE ISSUERS WILL FURNISH TO ANY HOLDER OF SECURITIES UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN
IT THE TEXT OF THIS SECURITY.
<PAGE> 145
13
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Security on the books
of the Issuers. The agent may substitute another to act for him.
- -----------------------------------------------------------------
Date: Your Signature:
---------------- ---------------------
- -----------------------------------------------------------------
Sign exactly as your name appears on the other side of this Security. Signature
must be guaranteed by a participant in a recognized signature guaranty
medallion program or other signature guarantor acceptable to the Trustee.
<PAGE> 146
14
OPTION OF HOLDER TO ELECT PURCHASE
IF YOU WANT TO ELECT TO HAVE THIS SECURITY PURCHASED BY THE
ISSUERS PURSUANT TO SECTION 4.06 (ASSET DISPOSITION) OR 4.08 (CHANGE OF
CONTROL) OF THE INDENTURE, CHECK THE BOX:
ASSET DISPOSITION [ ] CHANGE OF CONTROL [ ]
IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS SECURITY PURCHASED
BY THE ISSUERS PURSUANT TO SECTION 4.06 OR 4.08 OF THE INDENTURE, STATE THE
AMOUNT ($1,000 OR AN INTEGRAL MULTIPLE THEREOF):
$
DATE: __________________ YOUR SIGNATURE: __________________
(SIGN EXACTLY AS YOUR NAME APPEARS
ON THE OTHER SIDE OF THE SECURITY)
SIGNATURE GUARANTEE:_______________________________________
SIGNATURE MUST BE GUARANTEED BY A PARTICIPANT IN A
RECOGNIZED SIGNATURE GUARANTY MEDALLION PROGRAM OR
OTHER SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE.
<PAGE> 147
15
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $[ ]. The
following increases or decreases in this Global Security have been made:
<TABLE>
<S> <C> <C> <C> <C>
Date of Amount of decrease Amount of increase Principal amount of Signature of
Exchange in Principal in Principal Amount this Global Security authorized signatory
Amount of this of this Global following such of Trustee or
Global Security Security decrease or increase Securities Custodian
</TABLE>
<PAGE> 148
EXHIBIT C
FORM OF SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "Supplemental
Indenture") dated as of , among [GUARANTOR] (the "New
Guarantor"), a subsidiary of DJ ORTHOPEDICS, LLC (or its
successor), a Delaware limited liability corporation (the
"Company"), DonJoy, L.L.C., a Delaware limited liability
company, [OTHER EXISTING GUARANTORS] and THE BANK OF NEW
YORK, a New York banking corporation, as trustee under the
indenture referred to below (the "Trustee").
W I T N E S S E T H :
WHEREAS the Company, DJ ORTHOPEDICS CAPITAL CORPORATION ("DJ
Capital" and, together with the company, the "Issuers") and [OLD GUARANTORS]
(the "Existing Guarantors") have heretofore executed and delivered to the
Trustee an Indenture (the "Indenture") dated as of June [ ], 1999, providing
for the issuance of an aggregate principal amount of up to $100,000,000 of [ ]%
Senior Subordinated Notes due 2009 (the "Securities");
WHEREAS Section 4.11 of the Indenture provides that under certain
circumstances the Issuers are required to cause the New Guarantor to execute
and deliver to the Trustee a supplemental indenture pursuant to which the New
Guarantor shall unconditionally guarantee all the Issuers' obligations under
the Securities pursuant to a Note Guarantee on the terms and conditions set
forth herein; and
WHEREAS pursuant to Section 9.01 of the Indenture, the Trustee,
the Issuers and the Existing Guarantors are authorized to execute and deliver
this Supplemental Indenture;
NOW THEREFORE, in consideration of the foregoing and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the New Guarantor, the Issuers, the Existing Guarantors and the Trustee
mutually covenant and agree for the equal and ratable benefit of the holders of
the Securities as follows:
1. Agreement to Guarantee. The New Guarantor hereby agrees,
jointly and severally with all the Existing Guarantors, to unconditionally
guarantee the Issuers' obligations under the Securities on the terms and
subject to the conditions set forth in Articles 11 and 12 of the Indenture and
to be bound by all other applicable provisions of the Indenture and the
Securities.
<PAGE> 149
2. Ratification of Indenture; Supplemental Indentures Part of
Indenture. Except as expressly amended hereby, the Indenture is in all respects
ratified and confirmed and all the terms, conditions and provisions thereof
shall remain in full force and effect. This Supplemental Indenture shall form a
part of the Indenture for all purposes, and every holder of Securities
heretofore or hereafter authenticated and delivered shall be bound hereby.
3. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT
WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE
EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY.
4. Trustee Makes No Representation. The Trustee makes no
representation as to the validity or sufficiency of this Supplemental
Indenture.
5. Counterparts. The parties may sign any number of copies of
this Supplemental Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement.
6. Effect of Headings. The Section headings herein are for
convenience only and shall not effect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed as of the date first above written.
[NEW GUARANTOR],
by
----------------------------------
Name:
Title:
DJ ORTHOPEDICS, LLC,
by
----------------------------------
Name:
Title:
<PAGE> 150
DJ ORTHOPEDICS CAPITAL CORPORATION,
by
------------------------------
Name:
Title:
DONJOY, L.L.C.
by
------------------------------
Name:
Title:
[OTHER EXISTING GUARANTORS],
by
------------------------------
Name:
Title:
THE BANK OF NEW YORK, as Trustee,
by
------------------------------
Name:
Title:
<PAGE> 151
EXHIBIT D
Form of
Transferee Letter of Representation
DJ Orthopedics, LLC
DJ Orthopedics Capital Corporation
In care of
DonJoy, L.L.C.
2985 Scott Street
Vista, California 92083
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $[ ] principal
amount of the 12_% Senior Subordinated Notes due 2009 (the "Securities") of DJ
Orthopedics, LLC and DJ Orthopedics Capital Corporation (together, the
"Issuers").
Upon transfer, the Securities would be registered in the name of the new
beneficial owner as follows:
Name:
------------------------
Address:
---------------------
Taxpayer ID Number:
----------
The undersigned represents and warrants to you that:
1. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")), purchasing for our own account or for the account of such
an institutional "accredited investor" at least $250,000 principal amount of
the Securities, and we are acquiring the Securities not with a view to, or for
offer or sale in connection with, any distribution in violation of the
Securities Act. We have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of our investment
in the Securities, and we invest in or purchase securities similar to the
Securities in the normal course of our business. We, and any accounts for which
we are acting, are each able to bear the economic risk of our or its investment
for an indefinite period of time, including a complete loss of the investment.
<PAGE> 152
2
2. We understand that the Securities have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted
in the following sentence. We agree on our own behalf and on behalf of any
investor account for which we are purchasing Securities to offer, sell or
otherwise transfer such Securities prior to the date that is two years after
the later of the date of original issue and the last date on which the Issuers
or any affiliate of the Issuers was the owner of such Securities (or any
predecessor thereto) (the "Resale Restriction Termination Date") only (a) to
the Issuers, (b) pursuant to a registration statement that has been declared
effective under the Securities Act, (c) in a transaction complying with the
requirements of Rule 144A under the Securities Act ("Rule 144A"), to a person
we reasonably believe is a qualified institutional buyer under Rule 144A (a
"QIB") that is purchasing for its own account or for the account of a QIB and
to whom notice is given that the transfer is being made in reliance on Rule
144A, (d) pursuant to offers and sales that occur outside the United States
within the meaning of Regulation S under the Securities Act, (e) to an
institutional "accredited investor" within the meaning of Rule 501(a)(1), (2),
(3) or (7) under the Securities Act that is purchasing for its own account or
for the account of such an institutional "accredited investor," in each case in
a minimum principal amount of Securities of $250,000, or (f) pursuant to any
other available exemption from the registration requirements of the Securities
Act, subject in each of the foregoing cases to any requirement of law that the
disposition of our property or the property of such investor account or
accounts be at all times within our or their control and in compliance with any
applicable state securities laws. The foregoing restrictions on resale will not
apply subsequent to the Resale Restriction Termination Date. If any resale or
other transfer of the Securities is proposed to be made pursuant to clause (e)
above prior to the Resale Restriction Termination Date, the transferor shall
deliver a letter from the transferee substantially in the form of this letter
to the Issuers and the Trustee, which shall provide, among other things, that
the transferee is an institutional "accredited investor" within the meaning of
Rule 501(a)(1), (2), (3) or (7) under the Securities Act and that it is
acquiring such Securities for investment purposes and not for distribution in
violation of the Securities Act. Each purchaser acknowledges that the Issuers
and the Trustee reserve the right prior to the offer, sale or other transfer
prior to the Resale Restriction Termination Date of the Securities pursuant to
clause (d), (e) or (f) above to require the delivery of an opinion of counsel,
certifications or other information satisfactory to the Issuers and the
Trustee.
TRANSFEREE: ,
------------------
by:
-------------------------
<PAGE> 1
Exhibit 4.3
EXECUTION COPY
DJ ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
$100,000,000
12 5/8% SENIOR SUBORDINATED NOTES DUE 2009
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
June 30, 1999
CHASE SECURITIES INC.
270 Park Avenue, 4th floor
New York, New York 10017
Ladies and Gentlemen:
DJ Orthopedics, LLC, a Delaware limited liability company (the
"Company"), and DJ Orthopedics Capital Corporation ("DJ Capital", and together
with the Company, the "Issuers"), propose to issue and sell to Chase Securities
Inc. ("CSI" or the "Initial Purchaser"), upon the terms and subject to the
conditions set forth in a purchase agreement dated June 17, 1999 (the "Purchase
Agreement"), $100,000,000 aggregate principal amount of their 12 5/8% Senior
Subordinated Notes due 2009 (the "Securities") to be guaranteed on a senior
subordinated basis by DonJoy, L.L.C., a Delaware limited liability company and
the direct parent of the Company ("DonJoy"). Capitalized terms used but not
defined herein shall have the meanings given to such terms in the Purchase
Agreement.
As an inducement to the Initial Purchaser to enter into the
Purchase Agreement and in satisfaction of a condition to the obligations of the
Initial Purchaser thereunder, the Issuers and DonJoy agree with the Initial
Purchaser, for the benefit of the holders (including the Initial Purchaser and
the Market-Maker (as defined herein)) of the Securities, the Exchange
Securities (as defined herein) and the Private Exchange Securities (as defined
herein) (collectively, the "Holders"), as follows:
1. Registered Exchange Offer. Unless the Registered Exchange
Offer (as defined herein) is not permitted under applicable law or rules or
regulations of the Commission, the Issuers and DonJoy shall (i) prepare and,
not later than 75 days following the date of original issuance of the
Securities (the "Issue Date"), file with the Commission a registration
statement (the "Exchange Offer Registration Statement") on an appropriate form
under the Securities Act with respect to a proposed offer to the Holders of the
Securities (the "Registered Exchange Offer") to issue and deliver to such
Holders, in exchange for the Securities, a like aggregate principal amount of
debt securities of the Issuers (the "Exchange Securities") that are identical
in all material respects to the Securities, except for the transfer
restrictions relating to the Securities, (ii) use their reasonable best efforts
to cause the Exchange Offer Registration Statement to become effective under
the Securities Act no later than 180 days after the Issue Date and the
Registered Exchange Offer to be consummated no later than 225 days after the
Issue Date and (iii) keep the Registered Exchange Offer open for not less than
30 days (or
<PAGE> 2
longer, if required by applicable law) after the date on which notice of the
Registered Exchange Offer is mailed to the Holders (such period being called
the "Exchange Offer Registration Period"). The Exchange Securities will be
issued under the Indenture or an indenture (the "Exchange Securities
Indenture") among the Issuers, DonJoy and the Trustee or such other bank or
trust company that is reasonably satisfactory to the Initial Purchaser, as
trustee (the "Exchange Securities Trustee"), such indenture to be identical in
all material respects to the Indenture, except for the transfer restrictions
relating to the Securities (as described above). All references in this
Agreement to "prospectus" shall, except where the context otherwise requires,
include any prospectus (or amendment or supplement thereto) filed with the
Commission pursuant to Section 6 of this Agreement.
Upon the effectiveness of the Exchange Offer Registration
Statement, the Issuers shall promptly commence the Registered Exchange Offer,
it being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Securities for Exchange Securities (assuming that such
Holder (a) is not an affiliate of the Issuers or an Exchanging Dealer (as
defined herein) not complying with the requirements of the next sentence, (b)
is not the Initial Purchaser holding Securities that have, or that are
reasonably likely to have, the status of an unsold allotment in an initial
distribution, (c) acquires the Exchange Securities in the ordinary course of
such Holder's business and (d) has no arrangements or understandings with any
person to participate in the distribution of the Exchange Securities) and to
trade such Exchange Securities from and after their receipt without any
limitations or restrictions under the Securities Act and without material
restrictions under the securities laws of the several states of the United
States. The Issuers, DonJoy, the Initial Purchaser and each Exchanging Dealer
acknowledge that, pursuant to current interpretations by the Commission's staff
of Section 5 of the Securities Act, each Holder that is a broker-dealer
electing to exchange Securities, acquired for its own account as a result of
market-making activities or other trading activities, for Exchange Securities
(an "Exchanging Dealer"), is required to deliver a prospectus containing
substantially the information set forth in Annex A hereto on the cover, in
Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of
the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution"
section of such prospectus in connection with a sale of any such Exchange
Securities received by such Exchanging Dealer pursuant to the Registered
Exchange Offer.
If, prior to the consummation of the Registered Exchange Offer,
any Holder shall notify the Company in writing that it holds any Securities
acquired by it that have, or that are reasonably likely to be determined to
have, the status of an unsold allotment in an initial distribution, or any
Holder notifies the Company in writing that it believes that it is not entitled
to participate in the Registered Exchange Offer (other than because it has an
understanding or arrangement with any person to participate in the distribution
of the Exchange Securities) and such Holder has not received a written opinion
from counsel to the Issuers, reasonably acceptable to such Holder to the effect
that such Holder is legally permitted to participate in the Registered Exchange
Offer, the Issuers shall, upon the request of any such Holder, simultaneously
with the delivery of the Exchange Securities in the Registered Exchange Offer,
issue and deliver to any such Holder, in exchange for the Securities held by
such Holder (the "Private Exchange"), a like aggregate principal amount of debt
securities of the Issuers (the "Private Exchange Securities") that are
identical in all material respects to the Exchange Securities, except for the
transfer restrictions relating to such Private Exchange Securities. The Private
Exchange Securities will be issued under the same indenture as the Exchange
Securities, and the Issuers shall use their reasonable best efforts to cause
the Private Exchange Securities to bear the same CUSIP number as the Exchange
Securities.
<PAGE> 3
3
In connection with the Registered Exchange Offer, the Issuers
shall:
(a) mail to each Holder a copy of the prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(b) keep the Registered Exchange Offer open for not less than 30
days (or longer, if required by applicable law) after the date on which
notice of the Registered Exchange Offer is mailed to the Holders;
(c) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City of
New York;
(d) permit Holders to withdraw tendered Securities at any time
prior to the close of business, New York City time, on the last business
day on which the Registered Exchange Offer shall remain open; and
(e) otherwise comply in all respects with all laws that are
applicable to the Registered Exchange Offer.
As soon as practicable after the close of the Registered Exchange
Offer and any Private Exchange, as the case may be, the Issuers shall:
(a) accept for exchange all Securities tendered and not validly
withdrawn pursuant to the Registered Exchange Offer and the Private
Exchange;
(b) deliver to the Trustee for cancelation all Securities so
accepted for exchange; and
(c) cause the Trustee or the Exchange Securities Trustee, as the
case may be, promptly to authenticate and deliver to each Holder,
Exchange Securities or Private Exchange Securities, as the case may be,
equal in principal amount to the Securities of such Holder so accepted
for exchange.
The Issuers and DonJoy shall use their reasonable best efforts to
keep the Exchange Offer Registration Statement effective and to amend and
supplement the prospectus contained therein in order to permit such prospectus
to be used by all persons (including Exchanging Dealers) subject to the
prospectus delivery requirements of the Securities Act for 180 days after the
consummation of the Registered Exchange Offer (such 180 days, the "Applicable
Period").
The Indenture or the Exchange Securities Indenture, as the case
may be, shall provide that the Securities, the Exchange Securities and the
Private Exchange Securities shall vote and consent together on all matters as
one class and that none of the Securities, the Exchange Securities or the
Private Exchange Securities will have the right to vote or consent as a
separate class on any matter.
<PAGE> 4
4
Interest on each Exchange Security and Private Exchange Security
issued pursuant to the Registered Exchange Offer and in the Private Exchange
will accrue from the last interest payment date on which interest was paid on
the Securities surrendered in exchange therefor or, if no interest has been
paid on the Securities, from the Issue Date.
Each Holder participating in the Registered Exchange Offer shall
be required to represent to the Issuers and DonJoy in writing (which may be
contained in the applicable letter of transmittal) that at the time of the
consummation of the Registered Exchange Offer (i) any Exchange Securities
received by such Holder will be acquired in the ordinary course of business,
(ii) such Holder will have no arrangements or understanding with any person to
participate in the distribution of the Securities or the Exchange Securities
within the meaning of the Securities Act, (iii) such Holder is not an affiliate
of the Issuers or, if it is such an affiliate, such Holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable and (iv) if such Holder is a broker-dealer, that it will
deliver a prospectus in connection with any resale of such Exchange Securities.
Notwithstanding any other provisions hereof, the Issuers and
DonJoy will ensure that (i) any Exchange Offer Registration Statement and any
amendment thereto and any prospectus forming part thereof and any supplement
thereto complies in all material respects with the Securities Act and the rules
and regulations of the Commission thereunder, (ii) any Exchange Offer
Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) any prospectus forming part of any Exchange
Offer Registration Statement, and any supplement to such prospectus, does not,
as of the consummation of the Registered Exchange Offer, include an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
2. Shelf Registration. If (i) because of any change in law or
applicable interpretations thereof by the Commission's staff the Issuers and
DonJoy determine in good faith after consultation with counsel that they are
not permitted to effect the Registered Exchange Offer as contemplated by
Section 1 hereof, or (ii) any Securities validly tendered pursuant to the
Registered Exchange Offer are not exchanged for Exchange Securities within 225
days after the Issue Date, or (iii) the Initial Purchaser so requests with
respect to Securities or Private Exchange Securities not eligible to be
exchanged for Exchange Securities in the Registered Exchange Offer and held by
it following the consummation of the Registered Exchange Offer, or (iv) any
applicable law or interpretations do not permit any Holder to participate in
the Registered Exchange Offer, or (v) any Holder that participates in the
Registered Exchange Offer notifies the Company in writing within 30 days
following the consummation of the Registered Exchange Offer that such Holder
may not resell the Exchange Securities acquired by it in the Registered
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 (vi) the Issuers so elect, then the
following provisions shall apply:
(a) The Issuers and DonJoy shall use their reasonable best
efforts to file as promptly as practicable (but in no event more than 60
days after so required or requested
<PAGE> 5
5
pursuant to this Section 2; provided that in the case of any filing in
response to clause (i), (iii) or (iv) of the preceding paragraph, the
Issuers and DonJoy shall not be required to make any such filing earlier
than 75 days following the Issue Date (the date of such filing, the
"Shelf Filing Date")) with the Commission, and thereafter shall use
their reasonable best efforts to cause to be declared effective on or
prior to 105 days after the Shelf Filing Date (but, in the case of any
filing in response to clause (i), (iii), (iv) or (vi) of the preceding
paragraph, in no event earlier than the 180th day after the Issue Date),
a shelf registration statement on an appropriate form under the
Securities Act relating to the offer and sale of the Transfer Restricted
Securities (as defined below) by the Holders thereof from time to time
in accordance with the methods of distribution set forth in such
registration statement (hereafter, a "Shelf Registration Statement" and,
together with any Exchange Offer Registration Statement, a "Registration
Statement").
(b) The Issuers and DonJoy shall use their reasonable best
efforts to keep the Shelf Registration Statement continuously effective
in order to permit the prospectus forming part thereof to be used by
Holders of Transfer Restricted Securities for a period ending on the
earlier of (i) two years from the Issue Date or such shorter period that
will terminate when all the Transfer Restricted Securities covered by
the Shelf Registration Statement have been sold pursuant thereto and
(ii) the date on which the Securities become eligible for resale without
volume restrictions pursuant to Rule 144 under the Securities Act (in
any such case, such period being called the "Shelf Registration
Period"). The Issuers and DonJoy shall be deemed not to have used their
reasonable best efforts to keep the Shelf Registration Statement
effective during the requisite period if any of them voluntarily take
any action that would result in Holders of Transfer Restricted
Securities covered thereby not being able to offer and sell such
Transfer Restricted Securities during that period, unless (A) such
action is required by applicable law or (B) such action was permitted by
Section 2(c).
(c) Notwithstanding the provisions of Section 2(b) (but subject
to the provisions of Section 3(b)), the Issuers and DonJoy may for valid
business reasons, including without limitation, a potential acquisition,
divestiture of assets or other material corporate transaction, issue a
notice that the Shelf Registration Statement is no longer effective or
the prospectus included therein is no longer usable for offers and sales
of Transfer Restricted Securities and may issue any notice suspending
use of the Shelf Registration Statement required under applicable
securities laws to be issued. The provisions of this Section 2(c) shall
also be applicable to the Exchange Offer Registration Statement during
the Applicable Period; provided that the Applicable Period shall be
extended for the number of days (which shall not exceed 60) that the use
of the Exchange Offer Registration Statement is suspended.
(d) Notwithstanding any other provisions hereof, the Issuers and
DonJoy shall ensure that (i) any Shelf Registration Statement and any
amendment thereto and any prospectus forming part thereof and any
supplement thereto complies in all material respects with the Securities
Act and the rules and regulations of the Commission thereunder, (ii) any
Shelf Registration Statement and any amendment thereto (in either case,
other than with respect to information included therein in reliance upon
or in conformity with written information furnished to the Issuers by or
on behalf of any
<PAGE> 6
6
Holder specifically for use therein (the "Holders' Information")) does
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) any prospectus forming part
of any Shelf Registration Statement, and any supplement to such
prospectus (in either case, other than with respect to Holders'
Information), does not include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
3. Liquidated Damages. (a) The parties hereto agree that the
Holders of Transfer Restricted Securities will suffer damages if the Issuers
and DonJoy fail to fulfill their obligations under Section 1 or Section 2, as
applicable, and that it would not be feasible to ascertain the extent of such
damages. Accordingly, if (i) the applicable Registration Statement is not filed
with the Commission on or prior to the date specified in this Agreement, (ii)
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 this Agreement, (iii) the Registered Exchange Offer is not consummated on or
prior to 225 days after the Issue Date (other than in the event the Issuers are
requested or required or elect to file a Shelf Registration Statement), or (iv)
the Shelf Registration Statement is filed and declared effective on or prior to
the date specified in this 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 (i) through (iv), a "Registration Default"), the Issuers and
DonJoy will be jointly and severally 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 (iii) of the definition
thereof), 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 Transfer
Restricted Securities held by such Holder until (i) the applicable Registration
Statement is filed, (ii) the Exchange Offer Registration Statement is declared
effective and the Registered Exchange Offer is consummated, (iii) the Shelf
Registration Statement is declared effective or (iv) the Shelf Registration
Statement again becomes effective, as the case may be. Following the cure of
all Registration Defaults, the accrual of liquidated damages will cease. As
used herein, the term "Transfer Restricted Securities" means (i) each Security
until the date on which such Security has been exchanged for a freely
transferable Exchange Security in the Registered Exchange Offer (but not
including Exchange Securities issued to an Exchanging Dealer in the Registered
Exchange Offer), (ii) each Security or Private Exchange Security until the date
on which it has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iii) each
Security or Private Exchange Security until the date on which it is distributed
to the public pursuant to Rule 144 under the Securities Act or is saleable
pursuant to Rule 144(k) under the Securities Act. Notwithstanding anything to
the contrary in this Section 3(a), the Issuers shall not be required to pay
liquidated damages to a Holder of Transfer Restricted Securities if such Holder
failed to comply with its obligations to make the representations set forth in
the second to last paragraph of Section 1 or failed to provide the information
required to be provided by it, if any, pursuant to Section 4(n).
<PAGE> 7
7
(b) Notwithstanding the foregoing provisions of Section 3(a), the
Issuers and DonJoy may for valid business reasons, including without
limitation, a potential acquisition, divestiture of assets or other material
corporate transaction, issue a notice that the Shelf Registration Statement is
no longer effective or the prospectus included therein is no longer usable for
offers and sales of Transfer Restricted Subsidiaries and may issue any notice
suspending use of the Shelf Registration Statement required under applicable
securities laws to be issued and, in the event that the aggregate number of
days in any consecutive twelve-month period for which all such notices are
issued and effective exceeds 60 days in the aggregate, then the Issuers and
DonJoy will be jointly and severally obligated to pay liquidated damages to
each Holder of Transfer Restricted Securities covered by the Shelf Registration
Statement in an amount equal to $0.192 per week per $1,000 principal amount of
Securities constituting Transfer Restricted Securities covered by the Shelf
Registration Statement held by such Holder. Upon the Issuers and DonJoy
declaring that the Shelf Registration Statement is useable after the period of
time described in the preceding sentence, accrual of liquidated damages shall
cease; provided, however, that if after any such cessation of the accrual of
liquidated damages the Shelf Registration Statement again ceases to be useable
beyond the period permitted above, liquidated damages will again accrue
pursuant to the foregoing provisions.
(c) The Issuers shall notify the Trustee and the Paying Agent
under the Indenture immediately upon the happening of each and every
Registration Default. The Issuers and DonJoy shall pay the liquidated damages
due on the Transfer Restricted Securities by depositing with the Paying Agent
(which may not be the Issuers for these purposes), in trust, for the benefit of
the Holders thereof, prior to 10:00 a.m., New York City time, on the next
interest payment date specified by the Indenture and the Securities, sums
sufficient to pay the liquidated damages then due. The liquidated damages due
shall be payable on each interest payment date specified by the Indenture and
the Securities to the record holder entitled to receive the interest payment to
be made on such date. Each obligation to pay liquidated damages shall be deemed
to accrue from and including the date of the applicable Registration Default.
(d) The parties hereto agree that the liquidated damages provided
for in this Section 3 constitute a reasonable estimate of and are intended to
constitute the sole damages that will be suffered by Holders of Transfer
Restricted Securities by reason of the failure of (i) the Shelf Registration
Statement or the Exchange Offer Registration Statement to be filed, (ii) the
Shelf Registration Statement to remain effective or (iii) the Exchange Offer
Registration Statement to be declared effective and the Registered Exchange
Offer to be consummated, in each case to the extent required by this Agreement.
<PAGE> 8
8
4. Registration Procedures. In connection with any Registration
Statement, the following provisions shall apply:
(a) The Issuers shall (i) furnish to the Initial Purchaser, prior
to the filing thereof with the Commission, a copy of the Exchange Offer
Registration Statement and each amendment thereof and each supplement,
if any, to the prospectus included therein and shall use its reasonable
best efforts to reflect in each such document, when so filed with the
Commission, such comments as the Initial Purchaser may reasonably
propose; (ii) include information substantially as set forth in Annex A
hereto on the cover, in Annex B hereto in the "Exchange Offer
Procedures" section and the "Purpose of the Exchange Offer" section and
in Annex C hereto in the "Plan of Distribution" section of the
prospectus forming a part of the Exchange Offer Registration Statement,
and include information substantially as set forth in Annex D hereto in
the Letter of Transmittal delivered pursuant to the Registered Exchange
Offer; and (iii) if requested by any Initial Purchaser, include the
information required by Items 507 or 508 of Regulation S-K, as
applicable, in the prospectus forming a part of the Exchange Offer
Registration Statement.
(b) The Issuers shall advise the Initial Purchaser, each
Exchanging Dealer and the Holders (if applicable) and, if requested by
any such person, confirm such advice in writing (which advice pursuant
to clauses (ii)-(v) hereof shall be accompanied by an instruction to
suspend the use of the prospectus until the requisite changes have been
made):
(i) when any Registration Statement and any amendment
thereto has been filed with the Commission and when such
Registration Statement or any post-effective amendment thereto
has become effective;
(ii) of any request by the Commission for amendments or
supplements to any Registration Statement or the prospectus
included therein or for additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of any Registration Statement or the
initiation of any proceedings for that purpose;
(iv) of the receipt by the Issuers of any notification
with respect to the suspension of the qualification of the
Securities, the Exchange Securities or the Private Exchange
Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(v) of the happening of any event that requires the making
of any changes in any Registration Statement or the prospectus
included therein in order that the statements therein are not
misleading and do not omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading.
<PAGE> 9
9
(c) The Issuers and DonJoy will make every reasonable effort to
obtain the withdrawal at the earliest possible time of any order
suspending the effectiveness of any Registration Statement.
(d) The Issuers will furnish to each Holder of Transfer
Restricted Securities included within the coverage of any Shelf
Registration Statement, without charge, at least one conformed copy of
such Shelf Registration Statement and any post-effective amendment
thereto, including financial statements and schedules and, if any such
Holder so requests in writing, all exhibits thereto (including those, if
any, incorporated by reference).
(e) The Issuers will, during the Shelf Registration Period,
promptly deliver to each Holder of Transfer Restricted Securities
included within the coverage of any Shelf Registration Statement,
without charge, as many copies of the prospectus (including each
preliminary prospectus) included in such Shelf Registration Statement
and any amendment or supplement thereto as such Holder may reasonably
request; and the Issuers consent to the use of such prospectus or any
amendment or supplement thereto by each of the selling Holders of
Transfer Restricted Securities in connection with the offer and sale of
the Transfer Restricted Securities covered by such prospectus or any
amendment or supplement thereto.
(f) The Issuers will furnish to the Initial Purchaser and each
Exchanging Dealer, and to any other Holder who so requests, without
charge, at least one conformed copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules and, if the Initial Purchaser or Exchanging
Dealer or any such Holder so requests in writing, all exhibits thereto
(including those, if any, incorporated by reference).
(g) The Issuers will, during the Exchange Offer Registration
Period or the Shelf Registration Period, as applicable, promptly deliver
to the Initial Purchaser, each Exchanging Dealer and such other persons
that are required to deliver a prospectus following the Registered
Exchange Offer, without charge, as many copies of the final prospectus
included in the Exchange Offer Registration Statement or the Shelf
Registration Statement and any amendment or supplement thereto as the
Initial Purchaser, such Exchanging Dealer or other persons may
reasonably request; and the Issuers and DonJoy consent to the use of
such prospectus or any amendment or supplement thereto by the Initial
Purchaser, such Exchanging Dealer or other persons, as applicable, as
aforesaid.
(h) Prior to the effective date of any Registration Statement,
the Issuers and DonJoy will use their reasonable best efforts to
register or qualify, or cooperate with the Holders of Securities,
Exchange Securities or Private Exchange Securities included therein and
their respective counsel in connection with the registration or
qualification of, such Securities, Exchange Securities or Private
Exchange Securities for offer and sale under the securities or blue sky
laws of such jurisdictions as any such Holder reasonably requests in
writing and do any and all other acts or things necessary or advisable
to enable the offer and sale in such jurisdictions of the Securities,
Exchange Securities or
<PAGE> 10
10
Private Exchange Securities covered by such Registration Statement;
provided that the Issuers and DonJoy will not be required to qualify
generally to do business in any jurisdiction where they are not then so
qualified or to take any action which would subject them to general
service of process or to taxation in any such jurisdiction where they
are not then so subject.
(i) The Issuers and DonJoy will cooperate with the Holders of
Securities, Exchange Securities or Private Exchange Securities to
facilitate the timely preparation and delivery of certificates
representing Securities, Exchange Securities or Private Exchange
Securities to be sold pursuant to any Registration Statement free of any
restrictive legends and in such denominations and registered in such
names as the Holders thereof may request in writing prior to sales of
Securities, Exchange Securities or Private Exchange Securities pursuant
to such Registration Statement.
(j) If any event contemplated by Sections 2(c), 3(b) or 4(b)(ii)
through (v) occurs during the period for which the Issuers and DonJoy
are required to maintain an effective Registration Statement, the
Issuers and DonJoy will, to the extent required after the end of the
applicable periods referred to in Sections 2(c) and 3(b), promptly
prepare and file with the Commission a post-effective amendment to the
Registration Statement or a supplement to the related prospectus or file
any other required document so that, as thereafter delivered to
purchasers of the Securities, Exchange Securities or Private Exchange
Securities from a Holder, the prospectus will not include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(k) Not later than the effective date of the applicable
Registration Statement, the Issuers will provide a CUSIP number for the
Securities, the Exchange Securities and the Private Exchange Securities,
as the case may be, and provide the applicable trustee with printed
certificates for the Securities, the Exchange Securities or the Private
Exchange Securities, as the case may be, in a form eligible for deposit
with The Depository Trust Company.
(l) The Issuers and DonJoy will comply with all applicable rules
and regulations of the Commission and the Issuers and DonJoy will make
generally available to their security holders as soon as practicable
after the effective date of the applicable Registration Statement an
earning statement of DonJoy satisfying the provisions of Section 11(a)
of the Securities Act; provided that in no event shall such earning
statement be delivered later than 45 days after the end of a 12-month
period (or 90 days, if such period is a fiscal year) beginning with the
first month of the Company's first fiscal quarter commencing after the
effective date of the applicable Registration Statement, which statement
shall cover such 12-month period.
(m) The Issuers and DonJoy will cause the Indenture or the
Exchange Securities Indenture, as the case may be, to be qualified under
the Trust Indenture Act as required by applicable law in a timely
manner.
<PAGE> 11
11
(n) The Issuers may require each Holder of Transfer Restricted
Securities to be registered pursuant to any Shelf Registration Statement
to furnish to the Issuers such information concerning the Holder and the
distribution of such Transfer Restricted Securities as the Issuers may
from time to time reasonably require for inclusion in such Shelf
Registration Statement, and the Issuers may exclude from such
registration the Transfer Restricted Securities of any Holder that fails
to furnish such information within a reasonable time after receiving
such request. Each Holder of Transfer Restricted Securities as to which
a Shelf Registration Statement is being effected, by its participation
in the Shelf Registration Statement, shall be deemed to agree to furnish
the Issuers and DonJoy all information concerning such Holder required
to be described in order to make the information previously furnished by
such Holder to the Issuers and DonJoy not materially misleading.
(o) In the case of (A) a Shelf Registration Statement, each
Holder of Transfer Restricted Securities to be registered pursuant
thereto agrees by acquisition of such Transfer Restricted Securities
that, and (B) the Exchange Offer Registration Statement during the
Applicable Period only, each Holder of Exchange Securities subject to
the prospectus delivery requirements of the Securities Act agrees that,
upon receipt of any notice from the Issuers pursuant to Sections 2(c),
3(b) or 4(b)(ii) through (v), such Holder will discontinue disposition
of such Transfer Restricted Securities or Exchange Securities, as
applicable, until such Holder's receipt of copies of the supplemental or
amended prospectus contemplated by Section 4(j) or until advised in
writing (the "Advice") by the Issuers that the use of the applicable
prospectus may be resumed. If the Issuers shall give any notice under
Sections 2(c), 3(b) or 4(b)(ii) through (v) during the period that the
Issuers are required to maintain an effective Registration Statement
(the "Effectiveness Period"), such Effectiveness Period shall be
extended by the number of days during such period from and including the
date of the giving of such notice to and including the date when each
seller of Transfer Restricted Securities or Exchange Securities, as
applicable, covered by such Registration Statement shall have received
(x) the copies of the supplemental or amended prospectus contemplated by
Section 4(j) (if an amended or supplemental prospectus is required) or
(y) the Advice (if no amended or supplemental prospectus is required).
(p) In the case of a Shelf Registration Statement, the Issuers
and DonJoy shall enter into such customary agreements (including, if
requested, an underwriting agreement in customary form) and take all
such other action, if any, as Holders of a majority in aggregate
principal amount of the Securities, Exchange Securities and Private
Exchange Securities covered by the Shelf Registration Statement or the
managing underwriters (if any) shall reasonably request in order to
facilitate any disposition of Securities, Exchange Securities or Private
Exchange Securities pursuant to such Shelf Registration Statement.
Notwithstanding anything to the contrary contained in this Agreement,
the Issuers and DonJoy shall not be required to engage in more than one
underwritten offering pursuant to this Agreement.
(q) In the case of a Shelf Registration Statement, the Issuers
shall (i) make reasonably available for inspection by a representative
of, and Special Counsel (as defined below) acting for, Holders of a
majority in aggregate principal amount of the
<PAGE> 12
12
Securities, Exchange Securities and Private Exchange Securities covered
by the Shelf Registration Statement and any underwriter participating in
any disposition of Securities, Exchange Securities or Private Exchange
Securities pursuant to such Shelf Registration Statement, all relevant
financial and other records, pertinent corporate documents and
properties of the Issuers and their subsidiaries and (ii) use their
reasonable best efforts to have its officers, directors, employees,
accountants and counsel supply all relevant information reasonably
requested by such representative, Special Counsel or any such
underwriter (an "Inspector") in connection with such Shelf Registration
Statement.
(r) In the case of a Shelf Registration Statement, the Issuers
shall, if requested by Holders of a majority in aggregate principal
amount of the Securities, Exchange Securities and Private Exchange
Securities covered by the Shelf Registration Statement, their Special
Counsel or the managing underwriters (if any) in connection with such
Shelf Registration Statement, use its reasonable best efforts to cause
(i) their counsel to deliver an opinion relating to the Shelf
Registration Statement and the Securities, Exchange Securities or
Private Exchange Securities, as applicable, in customary form, (ii)
their officers to execute and deliver all customary documents and
certificates requested by Holders of a majority in aggregate principal
amount of the Securities, Exchange Securities and Private Exchange
Securities being sold, their Special Counsel or the managing
underwriters (if any) and (iii) their independent public accountants to
provide a comfort letter or letters in customary form, subject to
receipt of appropriate documentation as contemplated, and only if
permitted, by Statement of Auditing Standards No. 72.
5. Registration Expenses. The Issuers and DonJoy will jointly and
severally bear all expenses incurred in connection with the performance of its
obligations under Sections 1, 2, 3 and 4 and the Issuers will reimburse the
Initial Purchaser and the Holders for the reasonable fees and disbursements of
one firm of attorneys (in addition to any local counsel) chosen by the Holders
of a majority in aggregate principal amount of the Securities, the Exchange
Securities and the Private Exchange Securities covered by each Registration
Statement (the "Special Counsel") acting for the Initial Purchaser or Holders
in connection therewith.
6. Market-Making. (a) For so long as any of the Securities,
Exchange Securities or Private Exchange Securities are outstanding and Chase
Securities Inc. (the "Market-Maker") or any of its affiliates (as defined in
the rules and regulations of the Commission) owns any equity securities of the
Issuers, DonJoy or any of their affiliates and proposes to make a market in the
Securities, Exchange Securities or Private Exchange Securities as part of its
business in the ordinary course, the following provisions shall apply for the
sole benefit of the Market Maker:
(i) The Issuers and DonJoy shall (A) on the date that the
Exchange Offer Registration Statement is filed with the Commission, file
a registration statement (the "Market-Making Registration Statement")
(which may be the Exchange Offer Registration Statement or the Shelf
Registration Statement if permitted by the rules and regulations of the
Commission) and use their best efforts to cause such Market-Making
Registration Statement to be declared effective by the Commission on or
prior to the consummation of the Exchange Offer; (B) periodically amend
such Market-Making
<PAGE> 13
13
Registration Statement so that the information contained therein
complies with the requirements of Section 10(a) under the Securities
Act; (C) within 45 days following the end of each of DonJoy's fiscal
quarters, file a supplement to the prospectus contained in the
Market-Making Registration Statement that sets forth the financial
results of DonJoy for such quarter; (D) amend the Market-Making
Registration Statement or supplement the related prospectus when
necessary to reflect any material changes in the information provided
therein; and (E) amend the Market-Making Registration Statement when
required to do so in order to comply with Section 10(a)(3) of the
Securities Act; provided, however, that (1) prior to filing the
Market-Making Registration Statement, any amendment thereto or any
supplement to the related prospectus, the Issuers will furnish to the
Market-Maker copies of all such documents proposed to be filed, which
documents will be subject to the review of the Market-Maker and their
counsel, (2) the Issuers and DonJoy will not file the Market-Making
Registration Statement, any amendment thereto or any supplement to the
related prospectus to which the Market-Maker and its counsel shall
reasonably object unless the Issuers are advised by counsel that such
Market-Making Registration Statement, amendment or supplement is
required to be filed and (3) the Issuers will provide the Market-Maker
and its counsel with copies of the Market-Making Registration Statement
and each amendment and supplement filed.
(ii) The Issuers shall notify the Market-Maker and, if requested
by the Market-Maker, confirm such advice in writing, (A) when any
post-effective amendment to the Market-Making Registration Statement or
any amendment or supplement to the related prospectus has been filed,
and, with respect to any post-effective amendment, when the same has
become effective; (B) of any request by the Commission for any
post-effective amendment to the Market-Making Registration Statement,
any supplement or amendment to the related prospectus or for additional
information; (C) the issuance by the Commission of any stop order
suspending the effectiveness of the Market-Making Registration Statement
or the initiation of any proceedings for that purpose; (D) of the
receipt by the Issuers of any notification with respect to the
suspension of the qualification of the Securities or Exchange Securities
for sale in any jurisdiction or the initiation or threatening of any
proceedings for such purpose; (E) of the happening of any event that
makes any statement made in the Market-Making Registration Statement,
the related prospectus or any amendment or supplement thereto untrue or
that requires the making of any changes in the Market-Making
Registration Statement, such prospectus or any amendment or supplement
thereto, in order to make the statements therein not misleading; and (F)
of any advice from a nationally recognized statistical rating
organization that such organization has placed the Issuers under
surveillance or review with negative implications or has determined to
downgrade the rating of the Securities, Exchange Securities or Private
Exchange Securities or any other debt obligation of the Issuers whether
or not such downgrade shall have been publicly announced.
(iii) If any event contemplated by Section 6(a)(ii)(B) through
(E) occurs during the period for which the Issuers and DonJoy are
required to maintain an effective Market-Making Registration Statement,
the Issuers and DonJoy shall promptly prepare and file with the
Commission a post-effective amendment to the Market-Making Registration
Statement or a supplement to the related prospectus or file any other
<PAGE> 14
14
required document so that the prospectus will not include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(iv) In the event of the issuance of any stop order suspending
the effectiveness of the Market-Making Registration Statement or of any
order suspending the qualification of the Securities, Exchange
Securities or Private Exchange Securities for sale in any jurisdiction,
the Issuers and DonJoy shall use promptly their reasonable best efforts
to obtain its withdrawal.
(v) The Issuers shall furnish to the Market-Maker, without
charge, (i) at least one conformed copy of the Market-Making
Registration Statement and any post-effective amendment thereto; and
(ii) as many copies of the related prospectus and any amendment or
supplement thereto as the Market-Maker may reasonably request.
(vi) The Issuers and DonJoy shall consent to the use of the
prospectus contained in the Market-Making Registration Statement or any
amendment or supplement thereto by the Market-Maker in connection its
market making activities.
(vii) For so long as the Securities, Exchange Securities or
Private Exchange Securities shall be outstanding, the Issuers shall
furnish to the Market-Maker (A) as soon as practicable after the end of
each of DonJoy's fiscal years, the number of copies reasonably requested
by the Market-Maker of DonJoy's annual report for such year, (B) as soon
as available, the number of copies reasonably requested by the
Market-Maker of each report (including, without limitation, reports on
Forms 10-K, 10-Q and 8-K) or definitive proxy statements of DonJoy filed
under the Exchange Act or mailed to stockholders and (C) all public
reports and all reports and financial statements furnished by DonJoy to
the Nasdaq National Market System or any U.S. national securities
exchange or quotation service upon which the Securities or Exchange
Securities may be listed pursuant to requirements of or agreements with
such exchange or quotation service or to the Commission pursuant to the
Exchange Act or any rule or regulation of the Commission thereunder.
(viii) Notwithstanding the foregoing provisions of Section 6, the
Issuers and DonJoy may for valid business reasons, including without
limitation, a potential acquisition, divestiture of assets or other
material corporate transaction, issue a notice that the Market-Making
Registration Statement is no longer effective or the prospectus included
therein is no longer usable for offers and sales of Securities, Exchange
Securities or Private Exchange Securities and may issue any notice
suspending use of the Market-Making Registration Statement required
under applicable securities laws to be issued; provided that the use of
the Market-Making Registration Statement shall not be suspending for
more than 60 days in the aggregate in any consecutive 12 month period.
The Market-Maker agrees that upon receipt of any notice from the Issuers
pursuant to this Section 6(a)(viii), it will discontinue use of the
Market-Making Registration Statement until receipt of copies of the
supplemented or amended prospectus relating thereto or until advised in
writing by the Issuers that the use of the Market-Making Registration
Statement may be resumed.
<PAGE> 15
15
(b) In connection with the Market-Making Registration Statement,
the Issuers shall (i) make reasonably available for inspection by a
representative of, and counsel acting for, the Market-Maker all relevant
financial and other records, pertinent corporate documents and properties of
the Issuers and their subsidiaries and (ii) use its reasonable best efforts to
have its officers, directors, employees, accountants and counsel supply all
relevant information reasonably requested by such representative or counsel or
the Market-Maker.
(c) Prior to the effective date of the Market-Making Registration
Statement, the Issuers and DonJoy will use their reasonable best efforts to
register or qualify, or cooperate with the Market-Maker and its counsel in
connection with the registration or qualification of, such Securities, Exchange
Securities or Private Exchange Securities for offer and sale under the
securities or blue sky laws of such jurisdictions as the Market-Maker
reasonably requests in writing and do any and all other acts or things
necessary or advisable to enable the offer and sale in such jurisdictions of
the Securities, Exchange Securities or Private Exchange Securities covered by
the Market-Making Registration Statement; provided that the Issuers and DonJoy
will not be required to qualify generally to do business in any jurisdiction
where they are not then so qualified or to take any action which would subject
them to general service of process or to taxation in any such jurisdiction
where they are not then so subject.
(d) The Issuers represent that the Market-Making Registration
Statement, any post-effective amendments thereto, any amendments or supplements
to the related prospectus and any documents filed by them under the Exchange
Act will, when they become effective or are filed with the Commission, as the
case may be, conform in all respects to the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the Commission thereunder
and will not, as of the effective date of such Market-Making Registration
Statement or post-effective amendments and as of the filing date of amendments
or supplements to such prospectus or filings under the Exchange Act, contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein in light of
the circumstances under which they were made not misleading; provided that no
representation or warranty is made as to information contained in or omitted
from the Market-Making Registration Statement or the related prospectus in
reliance upon and in conformity with written information furnished to the
Issuers by the Market-Maker specifically for inclusion therein, which
information the parties hereto agree will be limited to the statements
concerning the Market-Making activities of the Market-Maker to be set forth on
the cover page and in the "Plan of Distribution" section of the prospectus (the
"Market-Maker's Information.")
<PAGE> 16
16
(e) At the time of effectiveness of the Market-Making
Registration Statement and concurrently with each time the Market-Making
Registration Statement or the related prospectus shall be amended or such
prospectus shall be supplemented, the Issuers shall (if requested by the
Market-Maker) furnish the Market-Maker and its counsel with a certificate of
its Chairman of the Board of Directors or President and Chief Financial Officer
to the effect that:
(i) the Market-Making Registration Statement has been declared
effective; (ii) in the case of an amendment or supplement, such
amendment has become effective under the Securities Act as of the date
and time specified in such certificate, if applicable; such amendment or
supplement to the prospectus was filed with the Commission pursuant to
the subparagraph of Rule 424(b) under the Securities Act specified in
such certificate on the date specified therein; (iii) to the knowledge
of such officers, no stop order suspending the effectiveness of the
Market-Making Registration Statement has been issued and no proceeding
for that purpose is pending or threatened by the Commission; (iv) such
officers have carefully examined the Market-Making Registration
Statement and the prospectus (and, in the case of an amendment or
supplement, such amendment or supplement) and as of the date of such
Market-Making Registration Statement, amendment or supplement, as
applicable, the Market-Making Registration Statement and the prospectus,
as amended or supplemented, if applicable, did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading.
<PAGE> 17
17
(f) At the time of effectiveness of the Market-Making
Registration Statement and concurrently with each time the Market-Making
Registration Statement or the related prospectus shall be amended or such
prospectus shall be supplemented, the Issuers shall (if requested by the
Market-Maker) furnish the Market-Maker and its counsel with the written opinion
of counsel for the Issuers satisfactory to the Market-Maker to the effect that:
(i) the Market-Making Registration Statement has been declared
effective; (ii) in the case of an amendment or supplement, such
amendment has become effective under the Securities Act as of the date
and time specified in such opinion, if applicable; such amendment or
supplement to the prospectus was filed with the Commission pursuant to
the subparagraph of Rule 424(b) under the Securities Act specified in
such opinion on the date specified therein; (iii) to the knowledge of
such counsel, no stop order suspending the effectiveness of the
Market-Making Registration Statement has been issued and no proceeding
for that purpose is pending or threatened by the Commission; and (iv)
such counsel has reviewed the Market-Making Registration Statement and
the prospectus (and, in the case of an amendment or supplement, such
amendment or supplement) and participated with officers of the Issuers
and independent public accountants for the Issuers in the preparation of
such Market-Making Registration Statement and prospectus (and, in the
case of an amendment or supplement, such amendment or supplement) and
has no reason to believe that (except for the financial statements and
other financial and statistical data contained therein as to which no
belief is required) as of the date of such Market-Making Registration
Statement, amendment or supplement, as applicable, the Market-Making
Registration Statement and the prospectus, as amended or supplemented,
if applicable, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(g) At the time of effectiveness of the Market-Making
Registration Statement and concurrently with each time the Market-Making
Registration Statement or the related prospectus shall be amended or such
prospectus shall be supplemented to include audited annual financial
information, the Issuers shall (if requested by the Market-Maker) furnish the
Market-Maker and its counsel with a letter of Ernst & Young, LLP (or other
independent public accountants for DonJoy or the Company of nationally
recognized standing), in form satisfactory to the Market-Maker, addressed to
the Market-Maker and dated the date of delivery of such letter, (i) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements relating
to the qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission and, (ii) in all other respects, substantially in the form of the
letter delivered to the Initial Purchasers pursuant to Section 5(f) of the
Purchase Agreement, with, in the case of an amendment or supplement to include
audited financial information, such changes as may be necessary to reflect the
amended or supplemented financial information.
(h) The Issuers and DonJoy, on the one hand, and the
Market-Maker, on the other hand, hereby agree to indemnify each other, and, if
applicable, contribute to the other, in accordance with Sections 7 and 8 of
this Agreement.
<PAGE> 18
18
(i) The Issuers will comply with the provisions of this Section 6
at their own expense and will reimburse the Market-Maker for its expenses
associated with this Section 6 (including reasonable fees of counsel).
(j) The agreements contained in this Section 6 and the
representations, warranties and agreements contained in this Agreement shall
survive all offers and sales of the Securities and Exchange Securities and
shall remain in full force and effect, regardless of any termination or
cancelation of this Agreement or any investigation made by or on behalf of any
indemnified party.
(k) For purposes of this Section 6, any reference to the terms
"amend", "amendment" or "supplement" with respect to the Market-Making
Registration Statement or the prospectus contained therein shall be deemed to
refer to and include the filing under the Exchange Act of any document deemed
to be incorporated therein by reference.
7. Indemnification. (a) In the event of a Shelf Registration
Statement or in connection with any prospectus delivery pursuant to an Exchange
Offer Registration Statement by the Initial Purchaser or Exchanging Dealer, as
applicable, or in connection with any prospectus delivery by the Market-Maker,
the Issuers and DonJoy shall jointly and severally indemnify and hold harmless
each Holder (including, without limitation, the Initial Purchaser, the
Market-Maker or such Exchanging Dealer), its affiliates, their respective
officers, directors, employees, representatives and agents, and each person, if
any, who controls such Holder within the meaning of the Securities Act or the
Exchange Act (collectively referred to for purposes of this Section 7 and
Section 8 as a Holder) from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof (including, without
limitation, any loss, claim, damage, liability or action relating to purchases
and sales of Securities, Exchange Securities or Private Exchange Securities),
to which that Holder may become subject, whether commenced or threatened, under
the Securities Act, the Exchange Act, any other federal or state statutory law
or regulation, at common law or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement
or alleged untrue statement of a material fact contained in any such
Registration Statement or Market-Making Registration Statement or any
prospectus forming part thereof or in any amendment or supplement thereto, (ii)
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading or (iii)
in the case of the Market-Maker, any material breach by the Issuers of the
representations, warranties and agreements contained in Section 6, and shall
reimburse each Holder promptly upon demand for any legal or other expenses
reasonably incurred by that Holder in connection with investigating or
defending or preparing to defend against or appearing as a third party witness
in connection with any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Issuers and DonJoy shall not
be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, an untrue statement or
alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with any Holders' Information or
Market-Maker's Information; and provided, further, that with respect to any
such untrue statement in or omission from any related preliminary prospectus,
the indemnity agreement contained in this Section 7(a) shall not inure to the
benefit of any Holder from whom the person asserting any such loss, claim,
damage, liability or action received
<PAGE> 19
19
Securities, Exchange Securities or Private Exchange Securities to the extent
that such loss, claim, damage, liability or action of or with respect to such
Holder results from the fact that both (A) a copy of the final prospectus was
not sent or given to such person at or prior to the written confirmation of the
sale of such Securities, Exchange Securities or Private Exchange Securities to
such person and (B) the untrue statement in or omission from the related
preliminary prospectus was corrected in the final prospectus unless, in either
case, such failure to deliver the final prospectus was a result of
non-compliance by the Issuers with Section 4(d), 4(e), 4(f), 4(g) or 6(a)(vi),
as applicable.
(b) In the event of a Shelf Registration Statement or in
connection with any prospectus delivery by the Market-Maker, each Holder
(including, if applicable, the Market-Maker) shall indemnify and hold harmless
the Issuers, their affiliates, their respective officers, directors, employees,
representatives and agents, and each person, if any, who controls the Issuers
within the meaning of the Securities Act or the Exchange Act (collectively
referred to for purposes of this Section 7(b) and Section 8 as the Company),
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof, to which the Company may become subject, whether
commenced or threatened, under the Securities Act, the Exchange Act, any other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any such Registration Statement or Market-Making Registration
Statement or any prospectus forming part thereof or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with any Holders' Information or
Market-Maker's Information furnished to the Company by such Holder, and shall
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending or preparing to
defend against or appearing as a third party witness in connection with any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that no such Holder shall be liable for any indemnity claims
hereunder in excess of the amount of net proceeds received by such Holder from
the sale of Securities, Exchange Securities or Private Exchange Securities
pursuant to such Shelf Registration Statement or prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party pursuant to Section 7(a) or 7(b), notify the
indemnifying party in writing of the claim or the commencement of that action;
provided, however, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have under this Section 7 except to
the extent that it has been materially prejudiced (through the forfeiture of
substantive rights or defenses) by such failure; and provided, further, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 7. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
<PAGE> 20
20
the defense thereof with counsel reasonably satisfactory to the indemnified
party. After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 7 for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than the reasonable costs of investigation;
provided, however, that an indemnified party shall have the right to employ its
own counsel in any such action, but the fees, expenses and other charges of
such counsel for the indemnified party will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based upon advice of counsel to the indemnified
party) that there may be legal defenses available to it or other indemnified
parties that are different from or in addition to those available to the
indemnifying party, (3) a conflict or potential conflict exists (based upon
advice of counsel to the indemnified party) between the indemnified party and
the indemnifying party (in which case the indemnifying party will not have the
right to direct the defense of such action on behalf of the indemnified party)
or (4) the indemnifying party has not in fact employed counsel reasonably
satisfactory to the indemnified party to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than
one separate firm of attorneys (in addition to any local counsel) at any one
time for all such indemnified party or parties. Each indemnified party, as a
condition of the indemnity agreements contained in Sections 7(a) and 7(b),
shall use all reasonable efforts to cooperate with the indemnifying party in
the defense of any such action or claim. No indemnifying party shall be liable
for any settlement of any such action effected without its written consent
(which consent shall not be unreasonably withheld), but if settled with its
written consent or if there be a final judgment for the plaintiff in any such
action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment. No indemnifying party shall, without the prior written
consent of the indemnified party (which consent shall not be unreasonably
withheld), effect any settlement of any pending or threatened proceeding in
respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party
from all liability on claims that are the subject matter of such proceeding.
8. Contribution. If the indemnification provided for in Section 7
is unavailable or insufficient to hold harmless an indemnified party under
Section 7(a) or 7(b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or payable
by such indemnified party as a result of such loss, claim, damage or liability,
or action in respect thereof, (a) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company from the initial offering
and sale of the Securities, on the one hand, and by a Holder from receiving
Securities, Exchange Securities or Private Exchange Securities, as applicable,
registered under the Securities Act, on the other, or (b) if the allocation
provided by clause (a) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (a) above but also the relative fault of the Company and DonJoy,
on the one hand, and such Holder, on the other, with
<PAGE> 21
21
respect to the statements or omissions that resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to the Company and DonJoy or information supplied by the
Company and DonJoy, on the one hand, or to any Holders* Information or
Market-Maker's Information supplied by such Holder, on the other, the intent of
the parties and their relative knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The parties hereto
agree that it would not be just and equitable if contributions pursuant to this
Section 8 were to be determined by pro rata allocation or by any other method
of allocation that does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 8 shall be deemed to include, for purposes of
this Section 8, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending or preparing to
defend any such action or claim. Notwithstanding the provisions of this Section
8, an indemnifying party that is a Holder of Securities, Exchange Securities or
Private Exchange Securities shall not be required to contribute any amount in
excess of the amount by which the total price at which the Securities, Exchange
Securities or Private Exchange Securities sold by such indemnifying party to
any purchaser exceeds the amount of any damages which such indemnifying party
has otherwise paid or become liable to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
9. Rules 144 and 144A. The Issuers and DonJoy shall use their
reasonable best efforts to file the reports required to be filed by them under
the Securities Act and the Exchange Act in a timely manner and, if at any time
the Issuers and DonJoy are not required to file such reports, they will, upon
the written request of any Holder of Transfer Restricted Securities or the
Market-Maker, make publicly available other information so long as necessary to
permit sales of such Holder's or the Market-Maker's securities pursuant to Rules
144 and 144A. The Issuers and DonJoy covenant that they will take such further
action as any Holder of Transfer Restricted Securities or the Market-Maker may
reasonably request, all to the extent required from time to time to enable such
Holder or the Market-Maker to sell Transfer Restricted Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rules 144 and 144A (including, without limitation, the requirements
of Rule 144A(d)(4)). Upon the written request of any Holder of Transfer
Restricted Securities, the Issuers and DonJoy shall deliver to such Holder or
the Market-Maker a written statement as to whether they have complied with such
requirements. Notwithstanding the foregoing, nothing in this Section 9 shall be
deemed to require the Issuers to register any of their securities pursuant to
the Exchange Act.
10. Underwritten Registrations. If any of the Transfer Restricted
Securities covered by any Shelf Registration Statement are to be sold in an
underwritten offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders
of a majority in aggregate principal amount of such Transfer Restricted
Securities included in such offering, subject to the consent of the Issuers and
<PAGE> 22
22
DonJoy (which shall not be unreasonably withheld or delayed), and such Holders
shall be responsible for all underwriting commissions and discounts in
connection therewith.
No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's Transfer
Restricted Securities on the basis reasonably provided in any underwriting
arrangements approved by the persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
11. Miscellaneous. (a) Amendments and Waivers. The provisions of
this Agreement may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, unless the
Issuers have obtained the written consent of Holders of a majority in aggregate
principal amount of the Securities, the Exchange Securities and the Private
Exchange Securities, taken as a single class (and, with respect to the
provisions of Section 6, the written consent of the Market-Maker).
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders whose Securities, Exchange Securities or Private Exchange
Securities are being sold pursuant to a Registration Statement and that does
not directly or indirectly affect the rights of other Holders may be given by
Holders of a majority in aggregate principal amount of the Securities, the
Exchange Securities and the Private Exchange Securities being sold by such
Holders pursuant to such Registration Statement whose rights are so affected.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class
mail, telecopier or air courier guaranteeing next-day delivery:
(1)if to a Holder, at the most current address given by such
Holder to the Issuers in accordance with the provisions of this Section
11(b), which address initially is, with respect to each Holder, the
address of such Holder maintained by the registrar under the Indenture,
with a copy in like manner to Chase Securities Inc.;
(2)if to the Initial Purchaser or the Market-Maker, initially at
its address set forth in the Purchase Agreement; and
(3)if to the Issuers or DonJoy, initially at the address of the
Company set forth in the Purchase Agreement.
All such notices and communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; one business day
after being delivered to a next-day air courier; five business days after being
deposited in the mail; and when receipt is acknowledged by the recipient's
telecopier machine, if sent by telecopier.
(c) Successors And Assigns. This Agreement shall be binding upon
the Issuers and their successors and assigns.
<PAGE> 23
23
(d) Counterparts. This Agreement may be executed in any number of
counterparts (which may be delivered in original form or by telecopier) and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
(e) Definition of Terms. For purposes of this Agreement, (a) the
term "business day" means any day on which the New York Stock Exchange, Inc. is
open for trading, (b) the term "subsidiary" has the meaning set forth in Rule
405 under the Securities Act and (c) except where otherwise expressly provided,
the term "affiliate" has the meaning set forth in Rule 405 under the Securities
Act.
(f) Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(h) Remedies. In the event of a breach by the Issuers, DonJoy or
by any Holder of any of their obligations under this Agreement, each Holder,
the Issuers or DonJoy, as the case may be, in addition to being entitled to
exercise all rights granted by law, including recovery of damages (other than
the recovery of damages for a breach by the Issuers or DonJoy of their
obligations under Sections 1 or 2 hereof for which liquidated damages have been
paid pursuant to Section 3 hereof), will be entitled to specific performance of
its rights under this Agreement. The Issuers, DonJoy and each Holder agree that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by each such person of any of the provisions of this
Agreement and hereby further agree that, in the event of any action for
specific performance in respect of such breach, each such person shall waive
the defense that a remedy at law would be adequate.
(i) No Inconsistent Agreements. Each of the Issuers and DonJoy
represents, warrants and agrees with the Initial Purchaser that (i) it has not
entered into, and shall not, on or after the date of this Agreement, enter into
any agreement that is inconsistent with the rights granted to the Holders in
this Agreement or otherwise conflicts with the provisions hereof, (ii) it has
not previously entered into any agreement which remains in effect granting any
registration rights with respect to any of its debt securities to any person
and (iii) (with respect to the Issuers) without limiting the generality of the
foregoing, without the written consent of the Holders of a majority in
aggregate principal amount of the then outstanding Transfer Restricted
Securities and the Market-Maker, it shall not grant to any person the right to
request the Issuers to register any debt securities of the Issuers under the
Securities Act unless the rights so granted are not in conflict or inconsistent
with the provisions of this Agreement.
(j) No Piggyback on Registrations. Neither the Issuers nor any of
their security holders (other than the Holders of Transfer Restricted
Securities in such capacity) shall have the right to include any securities of
the Issuers in any Shelf Registration or Registered Exchange Offer other than
Transfer Restricted Securities.
<PAGE> 24
24
(k) Severability. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent jurisdiction
to be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their reasonable best efforts to find and employ
an alternative means to achieve the same or substantially the same result as
that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
Please confirm that the foregoing correctly sets forth the
agreement among the Issuers, DonJoy and the Initial Purchaser.
Very truly yours,
DJ ORTHOPEDICS, LLC,
by /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: President and CEO
DJ ORTHOPEDICS CAPITAL
CORPORATION,
by /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: President and CEO
DONJOY, L.L.C.,
by /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: President and CEO
Accepted:
CHASE SECURITIES INC.
<PAGE> 25
25
by /s/ R. David McDonough
------------------------------
Authorized Signatory
<PAGE> 26
ANNEX A
Each broker-dealer that receives Exchange Securities for its own
account pursuant to the Registered Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Securities.
The Letter of Transmittal states that by so acknowledging 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. 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 Exchange Securities received in exchange for
Securities where such Securities were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Issuers have agreed
that, for a period of 180 days after the Expiration Date (as defined herein),
they will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution".
<PAGE> 27
ANNEX B
Each broker-dealer that receives Exchange Securities for its own
account in exchange for Securities, where such Securities 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 such Exchange Securities. See "Plan of Distribution".
<PAGE> 28
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own
account pursuant to the Registered Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Securities.
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 Exchange Securities
received in exchange for Securities where such Securities were acquired as a
result of market-making activities or other trading activities. The Issuers
have agreed that, for a period of 180 days after the Expiration Date, they will
make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
[ ] 199[ ], all dealers effecting transactions in the Exchange
Securities may be required to deliver a prospectus.
The Issuers will not receive any proceeds from any sale of
Exchange Securities by broker-dealers. Exchange Securities received by
broker-dealers for their own account pursuant to the Registered 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 Exchange Securities or a combination of such methods of resale,
at market prices prevailing at the time 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 such Exchange Securities. Any
broker-dealer that resells Exchange Securities that were received by it for its
own account pursuant to the Registered Exchange Offer and any broker or dealer
that participates in a distribution of such Exchange Securities may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Securities and any commission 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 after the Expiration Date 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 Registered Exchange Offer (including the expenses of one
counsel for the Holders of the Securities) other than commissions or
concessions of any broker-dealers and will indemnify the Holders of the
Securities (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
<PAGE> 29
ANNEX D
[ ] 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.
Name:
Address:
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 Exchange
Securities. If the undersigned is a broker-dealer that will receive Exchange
Securities for its own account in exchange for Securities 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 Exchange Securities; 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.
<PAGE> 1
EXHIBIT 10.1
===============================================================================
RECAPITALIZATION AGREEMENT
Dated as of April 29, 1999
Among
CHASE DJ PARTNERS, LLC,
SMITH & NEPHEW, INC.
And
DONJOY, L.L.C.
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS............................................................................................................1
1.1 Definitions.................................................................................................1
ARTICLE II ISSUANCE AND SALE OF NEW MEMBERSHIP INTEREST AND PURCHASE OF EXISTING MEMBERSHIP INTEREST.............................9
2.1 Amendment and Restatement of Operating Agreement of the Company and Conversion of Existing Membership
Interest to Units......................................................................................9
2.2 Asset Sale to Operating Subsidiary..........................................................................9
2.3 Issuance and Sale of the New Membership Interest............................................................9
2.4 Debt and Preferred Unit Financing...........................................................................9
2.5 Purchase of the Existing Membership Interest................................................................9
ARTICLE III NEW MEMBERSHIP INTEREST PURCHASE PRICE AND EXISTING MEMBERSHIP INTEREST PURCHASE PRICE..............................10
3.1 New Membership Interest Purchase Price.....................................................................10
3.2 Existing Membership Interest Purchase Price................................................................10
3.3 Determination of Closing Date Cash Payment.................................................................10
3.4 Determination of New Membership Interest Purchase Price....................................................10
3.5 Adjustment Upon Determination of Existing Membership Interest Purchase Price...............................12
3.6 Deemed Tax Treatment; Allocation of Purchase Price.........................................................12
ARTICLE IV CLOSING..............................................................................................................13
4.1 Closing Date...............................................................................................13
4.2 Payment of New Membership Interest Purchase Price and Existing Membership Interest Purchase Price..........13
4.3 Investor's Additional Closing Date Deliveries..............................................................14
4.4 Closing Date Deliveries of Smith & Nephew and the Company..................................................14
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SMITH & NEPHEW......................................................................16
5.1 Organization of Smith & Nephew.............................................................................17
5.2 Organization and Capital Structure of the Company..........................................................17
5.3 S&N DonJoy Mexico; Subsidiaries............................................................................17
5.4 Authority of Smith & Nephew and the Company................................................................18
5.5 Financial Statements.......................................................................................19
5.6 Operations Since Balance Sheet Date........................................................................20
5.7 Condition of Assets........................................................................................21
5.8 Governmental Permits.......................................................................................21
5.9 Real Property..............................................................................................21
5.10 Taxes......................................................................................................22
5.11 Personal Property Leases...................................................................................23
5.12 No Undisclosed Liabilities.................................................................................23
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
5.13 Intellectual Property......................................................................................23
5.14 Title to Assets............................................................................................25
5.15 No Violation, Litigation or Regulatory Action..............................................................25
5.16 Insurance..................................................................................................25
5.17 Contracts..................................................................................................26
5.18 Status of Contracts........................................................................................27
5.19 Employee Benefit Plans.....................................................................................27
5.20 No Finder..................................................................................................28
5.21 Labor Relations; Employees.................................................................................28
5.22 Suppliers and Vendors......................................................................................28
5.23 Customers..................................................................................................29
5.24 Year 2000..................................................................................................29
5.25 Accounts and Notes Receivable..............................................................................29
5.26 Related Party Transactions.................................................................................29
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF INVESTOR...........................................................................30
6.1 Organization of Investor...................................................................................30
6.2 Authority of Investor......................................................................................30
6.3 Financial Commitments......................................................................................31
6.4 Investment Intent..........................................................................................31
6.5 No Finder..................................................................................................31
ARTICLE VII ACTION PRIOR TO THE CLOSING DATE....................................................................................31
7.1 Investigation..............................................................................................31
7.2 Preserve Accuracy of Representations and Warranties........................................................32
7.3 Consents of Third Parties; Governmental Approvals; Financing...............................................32
7.4 Operations Prior to the Closing Date.......................................................................33
7.5 Antitrust Law Compliance...................................................................................34
7.6 Acquisition Transactions...................................................................................34
7.7 Certain Assets and Liabilities.............................................................................35
ARTICLE VIII ADDITIONAL AGREEMENTS..............................................................................................35
8.1 Tax Matters................................................................................................35
8.2 Use of Names...............................................................................................39
8.3 Employee Matters...........................................................................................39
8.4 Compensation and Employee Benefit Plan Matters.............................................................40
8.5 Covenant Not to Compete; Proprietary Products..............................................................41
8.6 Non Solicitation of Employees..............................................................................43
8.7 Victoria University of Manchester Technology Matters.......................................................43
8.8 IZEX License...............................................................................................44
8.9 ACL Brace Technology.......................................................................................44
ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF INVESTOR......................................................................45
9.1 No Misrepresentation or Breach of Covenants and Warranties.................................................45
9.2 No Restraint...............................................................................................46
9.3 Necessary Governmental Approvals...........................................................................46
9.4 Necessary Consents.........................................................................................46
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
9.5 Financing..................................................................................................46
ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH & NEPHEW AND THE COMPANY.................................................46
10.1 No Misrepresentation or Breach of Covenants and Warranties.................................................46
10.2 No Restraint...............................................................................................47
10.3 Necessary Governmental Approvals...........................................................................47
10.4 Other Agreements...........................................................................................47
ARTICLE XI INDEMNIFICATION......................................................................................................47
11.1 Indemnification by Smith & Nephew..........................................................................47
11.2 Indemnification by Investor................................................................................49
11.3 Notice of Claims...........................................................................................50
11.4 Third Person Claims........................................................................................50
11.5 Exclusive Remedy...........................................................................................51
11.6 Adjustment to Purchase Price...............................................................................52
ARTICLE XII ENVIRONMENTAL MATTERS...............................................................................................52
12.1 Scope......................................................................................................52
12.2 Representations and Warranties of Smith & Nephew Regarding Environmental Matters...........................52
12.3 Indemnification by Smith & Nephew for Environmental Matters................................................53
12.4 Indemnification by Investor for Environmental Matters......................................................53
12.5 Notice of Claims...........................................................................................54
12.6 Indemnitor's Right to Control..............................................................................54
12.7 Limitations on Liability...................................................................................55
ARTICLE XIII TERMINATION........................................................................................................56
13.1 Termination................................................................................................56
13.2 Notice of Termination......................................................................................56
13.3 Non-Solicitation...........................................................................................56
13.4 Effect of Termination......................................................................................57
ARTICLE XIV GENERAL PROVISIONS..................................................................................................57
14.1 Survival of Obligations....................................................................................57
14.2 Confidential Nature of Information.........................................................................57
14.3 No Public Announcement.....................................................................................58
14.4 Notices....................................................................................................58
14.5 Successors and Assigns.....................................................................................59
14.6 Access to Records after Closing............................................................................60
14.7 Entire Agreement; Amendments...............................................................................60
14.8 Interpretation.............................................................................................60
14.9 Waivers....................................................................................................61
14.10 Expenses...................................................................................................61
14.11 Partial Invalidity.........................................................................................61
14.12 Execution in Counterparts..................................................................................61
14.13 Further Assurances.........................................................................................61
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C>
14.14 Governing Law..............................................................................................62
14.15 Litigation Cooperation.....................................................................................62
14.16 Disclaimer of Warranties...................................................................................63
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
Exhibit A Form of Group Research Centre Technology Agreement
Exhibit B Form of Members' Agreement
Exhibit C Form of Supply Agreement
Exhibit D Form of Transition Services Agreement
Exhibit E Form of Distribution Agreement
Exhibit F Form of CERF Laboratory Agreement
Exhibit G Form of Opinion of Counsel to Investor
Exhibit H Form of Amended and Restated Operating Agreement
of the Company
Exhibit I Form of Assignment of the Existing Membership
Interest
Exhibit J Form of Opinion of Counsel to Smith & Nephew
Exhibit K Form of Vista Subleases
Exhibit L Form of Guarantees of Vista Subleases
Schedules
- ---------
1.1(a) Agreed Accounting Principles
1.1(b) Parties to Retention Agreements
1.1(c) Net Operating Assets Calculation
1.1(d) Excluded Liabilities
2.3 Additional Purchasers of New Membership Interest
5.2 Foreign Qualification; Capitalization
5.3 Capitalization of S&N DonJoy Mexico
5.4 Conflicts; Required Consents
5.5(a)(i) Audited Consolidated Financial Statements
5.5(a)(ii) Interim Financial Statements
5.5(a)(iii) Reconciliation Statement
5.5(a)(iv) Pro Forma Balance Sheets
5.5(b) Corporate Allocations
5.6 Operations Since Balance Sheet Date
5.7 Condition of Assets
5.8 Governmental Permits
5.9(a) Owned Real Property
5.9(b) Leased Real Property
5.9(c) Owned and Leased Real Property
5.10 Taxes
5.11 Personal Property Leases
5.12 Undisclosed Liabilities
5.13(a)(i) Owned Intellectual Property
5.13(a)(ii) Licensed Intellectual Property
5.13(a)(iii) & (iv) Intellectual Property Agreements
5.13(b) Intellectual Property Claims
5.13(c)(i) Intellectual Property Licensed to Third Parties
5.13(c)(ii) Ownership of Material Rights
</TABLE>
-v-
<PAGE> 7
<TABLE>
<S> <C>
5.13(c)(iii) Protection of Intellectual Property
5.13(c)(iv) Infringement
5.13(c)(v) Notice of Infringement Claims
5.13(c)(vi) Intellectual Property Claims Against Third Parties
5.14 Title to Assets
5.15 No Violation, Litigation or Regulatory Action
5.17 Contracts
5.18 Status of Contracts
5.19 Employee Benefit Plans
5.21 Labor Relations; Employees
5.23 Customers
5.24 Year 2000
5.25 Accounts and Notes Receivable
5.26 Related Party Transactions
6.3 Financial Commitments of Investor
6.5 No Finder
7.4 Operations Prior to the Closing Date
8.5(a)(i) Smith & Nephew Permitted Activities
8.5(a)(ii) Seller's Restricted Businesses
8.5(b)(i) Proprietary Information
8.5(b)(ii) Proprietary Products
8.5(b)(iii) Promoters of Proprietary Products
8.7 Victoria Patents
9.4 Necessary Consents
12.2 Environmental Matters
</TABLE>
-vi-
<PAGE> 8
RECAPITALIZATION AGREEMENT
RECAPITALIZATION
AGREEMENT, dated as of April 29, 1999
(this "Agreement") between Chase DJ
Partners, LLC, a Delaware limited
liability company ("Investor"), Smith &
Nephew, Inc., a Delaware corporation
("Smith & Nephew"), and DonJoy, L.L.C.,
a Delaware limited liability company
(the "Company").
WHEREAS, Smith & Nephew is currently the sole member of the Company;
WHEREAS, the Company, together with Smith & Nephew Don Joy de Mexico,
S.A. de C.V., a Mexican corporation and a subsidiary of the Company ("S&N DonJoy
Mexico"), are engaged in the business of developing, manufacturing and marketing
orthopedic bracing and support products and accessories (the "Business");
WHEREAS, Investor desires to purchase from the Company, and the Company
desires to sell to Investor, an ownership interest in the Company that upon
consummation of the transactions contemplated by this Agreement will represent
an approximately 89.90% ownership interest (without calculating the dilutive
effect of any warrants or options to acquire ownership interests) in the
Company; and
WHEREAS, Smith & Nephew desires to sell to the Company, and the Company
desires to purchase from Smith & Nephew, a portion of the ownership interest in
the Company currently owned by Smith & Nephew, such that Smith & Nephew will own
an approximately 7.52% ownership interest (without calculating the dilutive
effect of any warrants or options to acquire ownership interests) in the Company
upon consummation of the transactions contemplated by this Agreement;
WHEREAS, immediately prior to the consummation of the transactions
contemplated hereby, the Company shall transfer all of its assets, subject to
all of its liabilities, to the Operating Subsidiary in consideration for cash;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, it is hereby agreed between Smith & Nephew and Investor
as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS.
In this Agreement, the following terms have the meanings specified or
referred to in this Section 1.1 and shall be equally applicable to both the
singular and plural forms. Any agreement
<PAGE> 9
referred to below shall mean such agreement as amended, supplemented and
modified from time to time to the extent permitted by the applicable provisions
thereof and by this Agreement.
"AFFILIATE" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by or is under common control
with such Person.
"AGREED ACCOUNTING PRINCIPLES" means GAAP, except for the exceptions to
GAAP identified on Schedule 1.1(a).
"AGREED RATE" means the prime rate published by Chase Manhattan Bank, as
that rate may vary from time to time, or if that rate is no longer published, a
comparable rate.
"AGREEMENT" has the meaning specified in the first paragraph of this
Agreement.
"AMENDED AND RESTATED OPERATING AGREEMENT" has the meaning specified in
Section 4.3(e).
"ASSIGNMENT OF THE EXISTING MEMBERSHIP INTEREST" means the Assignment of
the Existing Membership Interest, in the form of Exhibit I.
"ASSUMED LIABILITIES" means all liabilities relating principally to the
Business other than the Excluded Liabilities.
"BALANCE SHEET" means the consolidated balance sheet of the Company and
S&N DonJoy Mexico as of the Balance Sheet Date included in Schedule 5.5.
"BALANCE SHEET DATE" means December 31, 1998.
"BUSINESS" has the meaning specified in the second recital of this
Agreement.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Sections 9601 et seq., any amendments thereto, any
successor statutes, and any regulations promulgated thereunder.
"CERF LABORATORY AGREEMENT" means the CERF Laboratory Agreement between
Smith & Nephew and the Company, in the form of Exhibit F.
"CLAIM NOTICE" has the meaning specified in Section 11.3(a).
"CLOSING" means the closing of the transfer of the Existing Membership
Interest from Smith & Nephew to the Company and the New Membership Interest from
the Company to Investor.
"CLOSING DATE" has the meaning specified in Section 4.1.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning specified in the first paragraph of this
Agreement.
-2-
<PAGE> 10
"COMPANY AGREEMENTS" has the meaning specified in Section 5.18.
"COMPANY ANCILLARY AGREEMENTS" means all agreements, instruments and
documents being or to be executed and delivered by the Company and the Operating
Subsidiary, as applicable, under this Agreement or in connection herewith,
including without limitation, the Amended and Restated Operating Agreement, the
License Agreement, the Supply Agreement, the Distribution Agreement, the
Transition Services Agreement, the CERF Laboratory Agreement, the Vista
Subleases, the Vista Guarantees, the Group Research Centre Technology Agreement
and the Members' Agreement.
"COMPANY PLAN" means any Plan covering or providing benefits to Current
Employees, former employees of the Company or S&N DonJoy Mexico or their
dependents or beneficiaries.
"COMPANY REAL PROPERTY" means any real property, plant, building,
facility, structure or underground storage tank in the United States owned,
leased or operated by the Company.
"CONFIDENTIALITY AGREEMENT" means that certain Confidentiality Agreement
dated January 14, 1999 between Chase Capital Partners and Smith & Nephew.
"CONTAMINANT" means any waste, pollutant, hazardous, noxious or toxic
substance or waste, petroleum, petroleum-based substance or waste, special
waste, or any constituent of any such substance or waste, whether solid, liquid
or gas.
"COURT ORDER" means any judgment, order, compliance agreement,
injunction, award or decree of any foreign, federal, state, local or other court
or tribunal and any award in any arbitration proceeding.
"CURRENT EMPLOYEES" means persons who are employees of the Company or S&N
DonJoy Mexico as of the Closing, including employees on leave of absence for any
reason.
"DISTRIBUTION AGREEMENT" means the Distribution Agreement between Smith &
Nephew and the Company, in the form of Exhibit E.
"ENCUMBRANCE" means any lien, claim, charge, security interest, mortgage,
pledge, easement, conditional sale or other title retention agreement, defect in
title, covenant, restriction on transfer or other restrictions of any kind.
"ENVIRONMENTAL CLAIM NOTICE" has the meaning specified in Section
12.5(a).
"ENVIRONMENTAL ENCUMBRANCE" means an Encumbrance in favor of any
Governmental Body for (i) any liability under any Environmental Law, or (ii)
damages arising from, or costs incurred in response to, a Release or threatened
Release of a Contaminant into the environment or other violation of
Environmental Law.
"ENVIRONMENTAL EXPENSE" means any Expense incurred in connection with
investigating, defending or remediating any Environmental Loss.
-3-
<PAGE> 11
"ENVIRONMENTAL LAW" means all Requirements of Law relating to or
addressing the environment, health or safety, including but not limited to
CERCLA, OSHA and RCRA and any state equivalent thereof.
"ENVIRONMENTAL LOSS" means all Losses resulting from an Environmental
Matter, including fines, penalties, and damages to natural resources.
"ENVIRONMENTAL MATTERS" means any matter relating to (i) the Release or
threatened Release of a Contaminant on, in, at, to, from or beneath a facility
or (ii) liabilities arising under applicable Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" means any corporation, trade or business (whether or
not incorporated) or other organization which, together with the Company, is
treated as a single employer under section 414 of the Code.
"ESTIMATED EXISTING MEMBERSHIP INTEREST PURCHASE PRICE" means the
Existing Membership Interest Purchase Price, but determined on an estimated
basis by Smith & Nephew two business days prior to the Closing Date, in good
faith, in accordance with Section 3.3 and as reflected in the certificate
referred to in Section 3.3.
"EVALUATION AGREEMENT" has the meaning specified in Section 8.7.
"EXCLUDED LIABILITIES" means (i) any fees or expenses payable by Smith &
Nephew pursuant to Section 5.20; (ii) except as otherwise provided in Section
8.4, liabilities arising with respect to any Company Plan, including, without
limitation, relating to dental coverage of employees; (iii) all amounts payable
by Smith & Nephew pursuant to Section 8.4(e), (iv) liabilities, claims,
lawsuits, proceedings or obligations arising from personal injury or product
liability claims relating to products sold by Smith & Nephew, the Company or S&N
DonJoy Mexico prior to the Closing Date, (v) liabilities, demands, claims,
lawsuits or proceedings or obligations arising from workers' or workmen's
compensation claims based on events occurring prior to the Closing Date, (vi)
all liabilities of Smith & Nephew, the Company and S&N DonJoy Mexico incurred in
connection with the evaluation of the Company and the Business by interested
parties and the negotiation and documentation of this Agreement and the
agreements and documents contemplated hereby, including, without limitation,
legal and accounting fees and expenses (except those payable by the Company
pursuant to Section 14.10); (vii) all liabilities or obligations under the Lease
from Premier Business Properties, Ltd. No. 3 to Smith & Nephew DonJoy, Inc.
dated as of March 22, 1991 relating to the premises located at 2777 Loker Avenue
West, Carlsbad, CA, as assigned and amended, (viii) all liabilities or
obligations for severance payments or other amounts of obligations owing to any
employee of the Business as a result of the 1998 restructuring of the operations
of Smith & Nephew and (ix) the liabilities described in Schedule 1.1(d).
"EXCLUDED TAXES" has the meaning specified in Section 8.1(a)(i).
"EXISTING MEMBERSHIP INTEREST" has the meaning specified in Section 2.2.
-4-
<PAGE> 12
"EXISTING MEMBERSHIP INTEREST PURCHASE PRICE" has the meaning specified
in Section 3.2.
"EXPENSES" means any and all reasonable expenses incurred in connection
with investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder (including, without
limitation, court filing fees, court costs, arbitration fees or costs, witness
fees, and reasonable fees and disbursements of legal counsel, investigators,
expert witnesses, accountants and other professionals).
"GAAP" means United States generally accepted accounting principles
applied on a consistent basis, in effect at the date of the applicable financial
statements.
"GOVERNMENTAL BODY" means any foreign, federal, state, local or other
governmental authority or regulatory body.
"GOVERNMENTAL PERMITS" has the meaning specified in Section 5.8.
"GROUP RESEARCH CENTRE TECHNOLOGY AGREEMENT" means the Agreement between
Smith & Nephew and the Company, in the form of Exhibit A.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"INVESTOR" has the meaning specified in the first paragraph of this
Agreement.
"INVESTOR ANCILLARY AGREEMENTS" means all agreements, instruments and
documents being or to be executed and delivered by Investor under this Agreement
or in connection herewith, including without limitation the Members' Agreement
and the Amended and Restated Operating Agreement.
"INVESTOR GROUP MEMBER" means Investor and its Affiliates, (including,
after the Closing, the Company and S&N DonJoy Mexico) and its and their
stockholders, partners, members, directors, officers, employees, agents,
attorneys and consultants and their respective successors and assigns.
"IRS" means the Internal Revenue Service.
"KNOWLEDGE OF SMITH & NEPHEW" means (i) the actual knowledge, without
investigation, of Les Cross, Cy Talbot and Cliff Lomax and (ii) that knowledge
which Les Cross, Cy Talbot and Cliff Lomax should have obtained in the prudent
management and oversight of the Company.
"LEASED REAL PROPERTY" has the meaning specified in Section 5.9(b).
"LOSSES" means any and all losses, costs, obligations, liabilities,
settlement payments, awards, judgments, fines, penalties, damages, expenses,
deficiencies or other charges or losses.
-5-
<PAGE> 13
"MATERIAL ADVERSE EFFECT" means any material adverse effect on the
assets, business, results of operations or financial condition of the Company
and S&N DonJoy Mexico, taken as a whole; provided, however, that any change or
effect resulting from (i) this Agreement or the transactions contemplated
hereby, or announcement thereof, (ii) changes in general economic conditions, or
(iii) events generally affecting the industry in which the Business operates
shall not constitute a "Material Adverse Effect"; and provided, further, that
for purposes of this Agreement any difference of $550,000 or more between the
value of Company's inventory (valued at standard cost) based on the physical
inventory conducted pursuant to Section 3.4 and the Company's book value of
inventory (valued at standard cost) as of the date of such physical inventory
(which book value shall be after deducting the shrinkage reserve of the Company
as of such inventory date), shall constitute a "Material Adverse Effect" for
purposes of this Agreement.
"MEMBERS' AGREEMENT" means the Members' Agreement by and among the
Company, the Investor, Smith & Nephew and the other members from time to time
party thereto, in the form of Exhibit B.
"MULTIEMPLOYER PLAN" means any Plan described in section 4001(a)(3) of
ERISA.
"NEW MEMBERSHIP INTEREST" has the meaning specified in Section 2.1.
"NEW MEMBERSHIP INTEREST PURCHASE PRICE" has the meaning specified in
Section 3.1.
"OPERATING SUBSIDIARY" means DJ Orthopedic, LLC, a Delaware limited
liability company which shall become a wholly owned subsidiary of the Company.
"OSHA" means the Occupational Safety and Health Act, 29 U.S.C. Sections
651 et seq., any amendment thereto, any successor statute, and any regulations
promulgated thereunder.
"OWNED REAL PROPERTY" has the meaning specified in Section 5.9(a).
"PERMITTED ENCUMBRANCES" means (a) liens for Taxes and other governmental
charges and assessments which are not yet due and payable, (b) liens of
landlords and liens of carriers, warehousemen, mechanics and materialmen and
other like liens arising in the ordinary course of business for sums not yet due
and payable and (c) other liens, easements or imperfections on property which
are not material in amount or do not materially detract from the value of or
materially impair the existing use of the property affected by such lien or
imperfection.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or Governmental Body.
"PLAN" means any written material retirement, profit sharing, stock
bonus, stock ownership, stock option, restricted stock, deferred compensation,
severance, holiday pay, vacation pay, bonus, health, hospitalization, accident,
disability, death, insurance, worker's
-6-
<PAGE> 14
compensation or other employee or fringe benefit plan, program or arrangement,
including, without limitation, any "employee benefit plan" within the meaning of
section 3(3) of ERISA sponsored, maintained or contributed to by Smith & Nephew
or any of its ERISA Affiliates as of the Closing Date.
"PROPRIETARY INFORMATION" has the meaning specified in Section 8.5(b).
"PROPRIETARY PRODUCTS" has the meaning specified in Section 8.5(b).
"RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C.
Sections 6901 et seq., and any successor statute, and any regulations
promulgated thereunder.
"RELEASE" means release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant
into the indoor or outdoor environment or into or out of any Company Real
Property, including the movement of Contaminants through or in the air, soil,
surface water, groundwater or Company Real Property.
"REMEDIAL ACTION" means actions required to (i) clean up, remove, treat
or in any other way address Contaminants in the indoor or outdoor environment;
(ii) prevent the Release or threatened Release or minimize the further Release
of Contaminants or (iii) investigate and determine if a remedial response is
needed and to design such a response and post-remedial investigation,
monitoring, operation and maintenance and care.
"REQUIREMENTS OF LAW" means any foreign, federal, state and local laws,
statutes, regulations, rules, codes or ordinances enacted, adopted, issued or
promulgated by any Governmental Body.
"RETENTION AGREEMENTS" means the agreements between Smith & Nephew and
the employees of the Company listed on Schedule 1.1(b).
"S&N DONJOY MEXICO" has the meaning specified in the second recital of
this Agreement.
"SELLER'S RESTRICTED BUSINESS" has the meaning specified in Section
8.5(a).
"SMITH & NEPHEW" has the meaning specified in the first paragraph of this
Agreement.
"SMITH & NEPHEW ANCILLARY AGREEMENTS" means all agreements, instruments
and documents being or to be executed and delivered by Smith & Nephew under this
Agreement or in connection herewith, including without limitation the Amended
and Restated Operating Agreement, the License Agreement, the Supply Agreement,
the Distribution Agreement, the Transition Services Agreement, the CERF
Laboratory Agreement, the Vista Subleases, the Group Research Centre Technology
Agreement and the Members' Agreement.
"SMITH & NEPHEW GROUP MEMBER" means Smith & Nephew and its Affiliates
(which, prior to the Closing, shall include the Company and S&N DonJoy Mexico
but shall not include such entities if on and after the Closing), and its and
their stockholders, partners,
-7-
<PAGE> 15
members, directors, officers, employees, agents, attorneys and consultants and
their respective successors and assigns.
"STRADDLE PERIOD" means any taxable year or period beginning before and
ending after the Closing Date.
"SUPPLY AGREEMENT" means the Supply Agreement between Smith & Nephew and
the Company, in the form of Exhibit C.
"TAX" (and, with correlative meaning, "TAXES") shall (i) mean any
federal, state, local or foreign income, gross receipts, property, sales, use,
license, excise, franchise, employment, payroll, withholding, alternative or
add-on minimum, ad valorem, value added, transfer or excise tax, or any other
tax, custom, duty, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or penalty, imposed by any
governmental authority and (ii) any liability for the payment of (A) any amount
of the type described in clause (i) above as a result of being a "transferee"
(within the meaning of Section 6901 of the Code) of another Person, (B) any
amount incurred as a result of being a member of a combined, consolidated or
affiliated group or (C) a Tax sharing, indemnity or similar contractual
agreement with respect to Tax.
"TAX RETURN" shall mean any return, report or similar statement required
to be filed with respect to any Tax (including any attached schedules),
including, without limitation, any information return, claim for refund, amended
return or declaration of estimated Tax.
"TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement
between Smith & Nephew and the Company, in the form of Exhibit D.
"VALUATION DATE" means the close of business on the last business day
prior to the Closing Date.
"VALUATION DATE BALANCE SHEET" has the meaning specified in Section 3.4.
"VALUATION DATE NET OPERATING ASSETS" means the Net Operating Assets of
the Business on the Valuation Date as reflected in the Valuation Date Balance
Sheet prepared in accordance with Agreed Accounting Principles, as described in
Schedule 1.1(c).
"VICTORIA LICENSE AGREEMENT" has the meaning specified in Section 8.7.
"VICTORIA PATENTS" has the meaning specified in Section 8.7.
"VICTORIA UNIVERSITY" has the meaning specified in Section 8.7.
"VISTA GUARANTEES" has the meaning specified in Section 4.4(b).
"VISTA SUBLEASES" has the meaning specified in Section 4.4(a).
-8-
<PAGE> 16
ARTICLE II
ISSUANCE AND SALE OF NEW MEMBERSHIP INTEREST AND
PURCHASE OF EXISTING MEMBERSHIP INTEREST
2.1 AMENDMENT AND RESTATEMENT OF OPERATING AGREEMENT OF THE COMPANY AND
CONVERSION OF EXISTING MEMBERSHIP INTEREST TO UNITS.
On the Closing Date, Smith & Nephew shall take the necessary actions
required to convert the membership interest in the Company owned by it into
2,054,000 Units in the Company.
2.2 ASSET SALE TO OPERATING SUBSIDIARY.
Smith & Nephew shall cause the Company to transfer to the Operating
Subsidiary all of the Company's assets, subject to all of the Company's
liabilities, including any and all shares of issued and outstanding capital
stock of S&N DonJoy Mexico owned by the Company, in exchange for a portion of
the cash proceeds received by the Operating Subsidiary from the financing
transactions described in Section 2.4.
2.3 ISSUANCE AND SALE OF THE NEW MEMBERSHIP INTEREST.
Upon the terms and subject to the conditions of this Agreement, on the
Closing Date, the Company shall issue, sell, transfer, assign, convey and
deliver to (i) Investor, and Investor shall purchase from the Company, 645,500
Units in the Company and (ii) certain other Persons identified on Schedule 2.3
hereto, and such Persons shall purchase from the Company, 18,500 Units in the
Company (the interests described in clauses (i) and (ii) being referred to
collectively herein as the "New Membership Interest"), free and clear of all
Encumbrances (unless created by Investor or any of its Affiliates), other than
restrictions under applicable securities laws.
2.4 DEBT AND PREFERRED UNIT FINANCING.
In addition to the transactions described in Section 2.3, on the Closing
Date, the Company and the Operating Subsidiary shall consummate the other
transactions contemplated by the commitment letters attached hereto as Schedule
6.3.
2.5 PURCHASE OF THE EXISTING MEMBERSHIP INTEREST.
Upon the terms and subject to the conditions of this Agreement, on the
Closing Date, Smith & Nephew shall sell, transfer, assign, convey and deliver to
the Company, and the Company shall purchase and redeem from Smith & Nephew,
2,000,000 Units of the Company (the "Existing Membership Interest") and Smith &
Nephew shall transfer, assign, convey and deliver to the Company any and all
shares of issued and outstanding capital stock of S&N DonJoy Mexico owned by
Smith & Nephew (for no additional consideration other than the consideration
provided for herein).
-9-
<PAGE> 17
ARTICLE III
NEW MEMBERSHIP INTEREST PURCHASE PRICE
AND EXISTING MEMBERSHIP INTEREST PURCHASE PRICE
3.1 NEW MEMBERSHIP INTEREST PURCHASE PRICE.
The purchase price for the New Membership Interest (the "New Membership
Interest Purchase Price") shall be equal to $65,000,000 in cash and promissory
notes in the aggregate principal amount of $1,400,000.
3.2 EXISTING MEMBERSHIP INTEREST PURCHASE PRICE.
The purchase price for the Existing Membership Interest (the "Existing
Membership Interest Purchase Price") shall be determined in accordance with
Section 3.3 and shall be equal to:
(a) $200,000,000, plus,
(b) the amount, on a dollar for dollar basis, by which the Valuation Date
Net Operating Assets exceeds $33,371,000, or minus,
(c) the amount, on a dollar for dollar basis, by which $33,371,000
exceeds the Valuation Date Net Operating Assets.
3.3 DETERMINATION OF CLOSING DATE CASH PAYMENT.
At least two business days prior to the Closing Date, Smith & Nephew
shall deliver to Investor an officer's certificate, dated the date of its
delivery, setting forth Smith & Nephew's best estimate of the Estimated Existing
Membership Interest Purchase Price, calculated in accordance with Section 3.2
and setting forth in reasonable detail the assets and liabilities of the
Business as of the Valuation Date such officer anticipates, based upon the most
recent available financial statements, will be reflected on the Valuation Date
Balance Sheet prepared in accordance with the Agreed Accounting Principles.
3.4 DETERMINATION OF NEW MEMBERSHIP INTEREST PURCHASE PRICE.
(a) As promptly as practicable following the Closing Date (but not later
than 45 days after the Closing Date), Smith & Nephew shall:
(i) prepare, in accordance with the Agreed Accounting Principles,
a balance sheet as of the Valuation Date of the Company (the "Preliminary
Valuation Date Balance Sheet");
(ii) determine the Existing Membership Interest Purchase Price in
accordance with the provisions of this Agreement (such Existing
Membership Interest Purchase Price as determined by Smith & Nephew being
called the "Preliminary Existing Membership Interest Purchase Price");
and
-10-
<PAGE> 18
(iii) deliver to Investor the Preliminary Valuation Date Balance
Sheet and an officer's certificate setting forth the Preliminary Existing
Membership Interest Purchase Price (the "Preliminary Accounting Report").
The inventory valuation set forth in the Preliminary Valuation Date
Balance Sheet shall be based on a physical inventory to be taken by the Company
on April 30, 1999 and May 1, 1999 (at which representatives of Investor may be
present), as updated by inventory records for the period after the taking of
such physical inventory through the Valuation Date.
(b) Promptly following receipt of the Preliminary Accounting Report,
Investor may review the same and, within 30 days after the date of such receipt,
may deliver to Smith & Nephew an officer's certificate setting forth its
objections to the Preliminary Valuation Date Balance Sheet and the Preliminary
Existing Membership Interest Purchase Price as set forth in the Preliminary
Accounting Report, together with a summary of the reasons therefor and
calculations which, in its view, are necessary to eliminate such objections. If
Investor does not so object within such 30-day period, the Preliminary Valuation
Date Balance Sheet and the Preliminary Existing Membership Interest Purchase
Price set forth in the Preliminary Accounting Report shall be final and binding
as the "Valuation Date Balance Sheet" and the Existing Membership Interest
Purchase Price, respectively, for purposes of this Agreement.
(c) If Investor so objects within such 30-day period, Investor and Smith
& Nephew shall use their reasonable efforts to resolve by written agreement (the
"Agreed Adjustments") any differences as to the Preliminary Valuation Date
Balance Sheet and the Preliminary Existing Membership Interest Purchase Price
and, if Smith & Nephew and Investor so resolve any such differences, the
Preliminary Valuation Date Balance Sheet and the Preliminary Existing Membership
Interest Purchase Price set forth in the Preliminary Accounting Report as
adjusted by the Agreed Adjustments shall be final and binding as the Valuation
Date Balance Sheet and the Existing Membership Interest Purchase Price,
respectively, for purposes of this Agreement.
(d) If any objections raised by Investor are not resolved by Agreed
Adjustments within the 30-day period next following such 30-day period, then
Investor and Smith & Nephew shall submit the objections that are then unresolved
to Pricewaterhouse Coopers, LLP (or to such other national accounting firm
acceptable to both Smith & Nephew and Investor) and such firm (the "Accounting
Firm") shall be directed by Investor and Smith & Nephew to resolve the
unresolved objections (based solely on the presentations by Investor and by
Smith & Nephew (and such other information as the Accounting Firm shall
reasonably request to review in accordance with Section 3.4(e)) as to whether
any disputed matter had been determined in a manner consistent with the Agreed
Accounting Principles) as promptly as reasonably practicable (but no longer than
90 days) and to deliver written notice to each of Investor and Smith & Nephew
setting forth its resolution of the disputed matters. The Preliminary Valuation
Date Balance Sheet and the Preliminary Existing Membership Interest Purchase
Price, after giving effect to any Agreed Adjustments and to the resolution of
disputed matters by the Accounting Firm, shall be final and binding as the
Valuation Date Balance Sheet and the Existing Membership Interest Purchase
Price, respectively, for purposes of this Agreement.
-11-
<PAGE> 19
(e) The parties hereto shall make available to Investor, Smith & Nephew
and, if applicable, the Accounting Firm, such books, records and other
information (including work papers) as any of the foregoing may reasonably
request to prepare or review the Preliminary Accounting Report or any matters
submitted to the Accounting Firm. The fees and expenses of the Accounting Firm
hereunder shall be paid 50% by Investor and 50% by Smith & Nephew.
3.5 ADJUSTMENT UPON DETERMINATION OF EXISTING MEMBERSHIP INTEREST PURCHASE
PRICE.
Promptly (but not later than five days) after the determination of the
Existing Membership Interest Purchase Price pursuant to Section 3.4 that is
final and binding as set forth herein:
(a) if the Estimated Existing Membership Interest Purchase Price exceeds
the Existing Membership Interest Purchase Price, Smith & Nephew shall pay to the
Company, by wire transfer of immediately available funds to such bank account of
the Company as the Company shall designate in writing to Smith & Nephew, an
amount equal to the excess, on a dollar for dollar basis, of the Estimated
Existing Membership Interest Purchase Price over the Existing Membership
Interest Purchase Price, plus interest on such excess from and including the
Closing Date to the date of payment thereof at the Agreed Rate; or
(b) if the Existing Membership Interest Purchase Price exceeds the
Estimated Existing Membership Interest Purchase Price, the Company shall pay to
Smith & Nephew, by wire transfer of immediately available funds to such bank
account of Smith & Nephew as Smith & Nephew shall designate in writing to the
Company, an amount equal to the excess, on a dollar for dollar basis, of the
Existing Membership Interest Purchase Price over the Estimated Existing
Membership Interest Purchase Price, plus interest on such excess from and
including the Closing Date to the date of payment thereof at the Agreed Rate.
3.6 DEEMED TAX TREATMENT; ALLOCATION OF PURCHASE PRICE.
The parties hereto agree that the purchase of the New Membership Interest
by Investor from the Company will be treated as a contribution to the Company
pursuant to Section 721 of the Code. The purchase of the Existing Membership
Interest by the Company from Smith & Nephew will be treated for federal income
tax purposes as (i) a sale to the Company of an undivided interest in each asset
of the Business and the stock of S&N DonJoy Mexico (the "Sale Assets") and (ii)
a contribution to the Company of the remaining undivided interest in each asset
of the Business and the stock of S&N DonJoy Mexico (the "Contributed Assets").
For purposes of the preceding sentence, (i) the total value of the Sale Assets
shall be equal to the Existing Membership Interest Purchase Price plus any
liabilities of the Company immediately prior to the Closing required to be
treated as a transfer of consideration made pursuant to a sale under Treas. Reg.
Section 1.707-5(a) minus Smith & Nephew's allocable share of the liabilities
contemplated by Section 2.4 as determined in accordance with Treas. Reg. Section
1.707-5(b) (the "Deemed Sales Price"), and (ii) the total value of the
Contributed Assets shall be equal to the fair market value of the Company's
assets immediately prior to the Closing Date minus the amount determined under
clause (i) (the "Deemed Tax Treatment"). Within 90 days following the Closing,
Investor shall draft a schedule (the "Allocation Schedule") allocating the
Deemed Sales Price among the Sale Assets and stating the fair market value of
the Contributed Assets. The Allocation Schedule
-12-
<PAGE> 20
shall be reasonable and shall be prepared in accordance with Section 1060 of the
Code and the regulations thereunder. If Smith & Nephew does not object to the
Allocation Schedule prepared by Investor within 30 days following its receipt
thereof, such statement shall be final for purposes of this Agreement. In the
event, however, that Smith & Nephew objects to the Allocation Schedule within 30
days after the receipt thereof, Smith & Nephew and Investor shall meet promptly
and in good faith attempt to resolve any objections of Smith & Nephew and to use
their respective best efforts to agree upon a final allocation among the Sale
Assets and the Contributed Assets. In the event that Smith & Nephew and Investor
are unable to resolve their differences over the Allocation Schedule, such
differences shall be finally resolved in accordance with the procedures set
forth in Section 3.4(d). Investor and Smith & Nephew each agrees that promptly
upon receiving the final Allocation Schedule it shall return an executed copy
thereof to the other party. Investor, Smith & Nephew and the Company each
agrees, as applicable, to file Internal Revenue Service Form 8594, and all
federal, state, local and foreign Tax Returns, in accordance with the Allocation
Schedule and consistent with the Deemed Tax Treatment. Each of Investor, Smith &
Nephew and the Company agrees to provide the other parties promptly with any
other information required to comply with this Section 3.6.
ARTICLE IV
CLOSING
4.1 CLOSING DATE.
The Closing shall be consummated at 10:00 A.M., local time, on the later
of (i) the date that is 75 days following the date hereof (or the next business
day following such date, if such date is not a business day) or (ii) the third
business day after the conditions set forth in Articles IX and X have been
satisfied, or such later date as may be agreed upon by Investor and Smith &
Nephew, at the offices of O'Sullivan Graev & Karabell LLP, 30 Rockefeller Plaza,
New York, New York, or at such other place as shall be agreed upon by Investor
and Smith & Nephew. The time and date on which the Closing is actually held is
referred to herein as the "Closing Date."
4.2 PAYMENT OF NEW MEMBERSHIP INTEREST PURCHASE PRICE AND EXISTING MEMBERSHIP
INTEREST PURCHASE PRICE.
(a) Subject to fulfillment or waiver of the conditions set forth in
Article IX, on the Closing Date, all actions required under Article II to be
taken by Investor shall be taken and Investor and the other Persons identified
on Schedule 2.3 shall pay the Company an amount equal to the New Membership
Interest Purchase Price by wire transfer of immediately available funds to such
account specified by the Company to Investor and the other Persons identified on
Schedule 2.3 at least two business days prior to the Closing Date.
(b) Subject to fulfillment or waiver of the conditions set forth in
Article X, on the Closing Date all actions required to be taken by Smith &
Nephew and the Company shall be taken and the Company shall pay Smith & Nephew
an amount equal to the Estimated Existing Membership Interest Purchase Price by
wire transfer of immediately available funds to such account specified at least
two business days prior to the Closing Date by Smith & Nephew to the Company.
-13-
<PAGE> 21
4.3 INVESTOR'S ADDITIONAL CLOSING DATE DELIVERIES.
Subject to fulfillment or waiver (where permissible) of the conditions
set forth in Article IX, at Closing Investor shall deliver to Smith & Nephew and
the Company all the following:
(a) Certificate of Formation of Investor certified as of a recent date by
the Secretary of State of the State of Delaware;
(b) Certificate of good standing of Investor issued as of a recent date
by the Secretary of State of the State of Delaware;
(c) Certificate of the secretary or an assistant secretary of Investor,
dated the Closing Date, in form and substance reasonably satisfactory to Smith &
Nephew, as to (i) no amendments to the Certificate of Formation of Investor
since a specified date; (ii) the operating agreement of Investor; (iii) the
resolutions of the managers of Investor authorizing the execution, delivery and
performance of this Agreement, the Investor Ancillary Agreements and the
transactions contemplated by this Agreement; and (iv) incumbency and signatures
of the officers of Investor executing this Agreement and any Investor Ancillary
Agreement;
(d) Opinion of counsel to Investor substantially in the form contained in
Exhibit G;
(e) Amended and Restated Operating Agreement of the Company, in the form
of Exhibit H (the "Amended and Restated Operating Agreement"), duly executed by
Investor;
(f) The Members' Agreement, duly executed by Investor; and
(g) The certificate contemplated by Section 10.1, duly executed by the
President or any Vice President of Investor.
4.4 CLOSING DATE DELIVERIES OF SMITH & NEPHEW AND THE COMPANY.
Subject to fulfillment or waiver (where permissible) of the conditions
set forth in Article X, at Closing:
(a) Smith & Nephew shall deliver to the Company the following:
(i) The Assignment of the Existing Membership Interest, duly
executed by Smith & Nephew;
(ii) The Members' Agreement, duly executed by Smith & Nephew;
(iii) The Transition Services Agreement, duly executed by Smith &
Nephew;
(iv) The Supply Agreement, duly executed by Smith & Nephew;
(v) The CERF Laboratory Agreement, duly executed by Smith &
Nephew;
-14-
<PAGE> 22
(vi) The Distribution Agreement, duly executed by Smith & Nephew;
(vii) The Group Research Centre Technology Agreement, duly
executed by Smith & Nephew;
(viii) Amended and Restated Operating Agreement, duly executed by
Smith & Nephew; and
(ix) the Subleases between Smith & Nephew and the Operating
Subsidiary, in the form of Exhibit K (the "Vista Subleases"), duly
executed by Smith & Nephew.
(b) the Company shall deliver to Smith & Nephew the following:
(i) The Members' Agreement, duly executed by the Company;
(ii) The Transition Services Agreement, duly executed by the
Company;
(iii) The Supply Agreement, duly executed by the Company;
(iv) The CERF Laboratory Agreement, duly executed by Smith &
Nephew;
(v) The Distribution Agreement, duly executed by Smith & Nephew;
(vi) The Group Research Centre Technology Agreement, duly executed
by the Company;
(vii) The Amended and Restated Operating Agreement duly executed
by the Company;
(viii) The Vista Subleases, duly executed by Operating Subsidiary;
and
(ix) The Guarantees of the Vista Subleases, in the form of Exhibit
L (the "Vista Guarantees"), duly executed by the Company.
(c) the Company shall deliver to Investor the following:
(i) Certificate of Formation of the Company, certified as of a
recent date by the Secretary of State of the State of Delaware;
(ii) Certificate of good standing of the Company issued as of a
recent date by the Secretary of State of the State of Delaware;
(iii) Certificate of the secretary or an assistant secretary of
the Company, dated the Closing Date, in form and substance reasonably
satisfactory to Investor, as to (A) no amendments to the Certificate of
Formation of the Company since a specified date, (B) the operating
agreement of the Company, (C) the charter and bylaws (or other comparable
documents) of S&N DonJoy Mexico (D) the resolutions of the managers and
sole member of the Company authorizing the execution, delivery and
performance of this Agreement, the Company Ancillary Agreements, and the
transactions contemplated by
-15-
<PAGE> 23
this Agreement and (E) incumbency and signatures of the officers of the
Company executing this Agreement and the Company Ancillary Agreements;
(iv) Amended and Restated Operating Agreement, duly executed by
the Company; and
(v) Certificate of Public Registry of Property and Commerce
relating to S&N DonJoy Mexico.
(d) Smith & Nephew shall deliver to Investor the following:
(i) Certificate of Incorporation of Smith & Nephew certified as of
a recent date by the Secretary of State of the State of Delaware;
(ii) Certificate of good standing of Smith & Nephew issued as of a
recent date by the Secretary of State of the State of Delaware;
(iii) Certificate of the secretary or an assistant secretary of
Smith & Nephew, dated the Closing Date, in form and substance reasonably
satisfactory to Investor, as to (A) no amendments to the Certificate of
Incorporation of Smith & Nephew since a specified date; (B) the by-laws
of Smith & Nephew; (C) the resolutions of the board of directors of Smith
& Nephew and the sole stockholder of Smith & Nephew authorizing the
execution, delivery and performance of this Agreement, the Smith & Nephew
Ancillary Agreements and the transactions contemplated by this Agreement;
and (D) incumbency and signatures of the officers of Smith & Nephew
executing this Agreement and any Smith & Nephew Ancillary Agreement;
(iv) Opinion of counsel to Smith & Nephew and the Company
substantially in the form contained in Exhibit J;
(v) All consents, waivers or approvals obtained by Smith & Nephew,
the Company or S&N DonJoy Mexico with respect to the consummation of the
transactions contemplated by this Agreement, including those listed on
Schedule 9.4;
(vi) Stock certificate representing the shares of capital stock of
S&N DonJoy Mexico held by Smith & Nephew, accompanied by a duly executed
stock power transferring such shares to the Company; and
(vii) The certificate contemplated by Section 9.1, duly executed
by the President or any Vice President of Smith & Nephew.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SMITH & NEPHEW
As an inducement to Investor to enter into this Agreement and to
consummate the transactions contemplated hereby, Smith & Nephew represents and
warrants to Investor as follows:
-16-
<PAGE> 24
5.1 ORGANIZATION OF SMITH & NEPHEW.
Smith & Nephew is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
5.2 ORGANIZATION AND CAPITAL STRUCTURE OF THE COMPANY.
(a) The Company is a limited liability company duly formed, validly
existing and in good standing under the laws of the State of Delaware. The
Company is duly qualified to transact business as a foreign limited liability
company and is in good standing in each of the jurisdictions listed in Schedule
5.2. Except as set forth in Schedule 5.2, the jurisdictions listed in Schedule
5.2 are the only jurisdictions in which the ownership or leasing of the
Company's properties and assets or the conduct of the Business requires such
qualification and where the failure to be so qualified has had or is reasonably
likely to have a Material Adverse Effect. Except as set forth in Schedule 5.2,
the Company has the requisite limited liability company power and authority to
own or lease and to operate and use its assets and to carry on the Business as
now conducted by it.
(b) The initial capital contribution of the sole member of the Company is
set forth on Schedule 5.2. Except for this Agreement and the operating agreement
of the Company, and the Members' Agreement and the Amended and Restated
Operating Agreement contemplated by this Agreement, there are no agreements,
arrangements, options, warrants, calls, rights or commitments of any character
relating to the issuance, sale, purchase or redemption of any membership
interests of the Company. There are no bonds, debentures, notes or other
indebtedness of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
members of the Company have the right to vote. All of the outstanding membership
interests of the Company are duly authorized, validly issued, fully paid and
nonassessable and are owned by Smith & Nephew of record and beneficially free
from all Encumbrances.
(c) The New Membership Interest, when delivered to and purchased by
Investor pursuant to Section 2.3, will be validly issued, fully paid and
nonassessable and free from all Encumbrances (unless created by Investor or any
of its Affiliates), other than restrictions under applicable securities laws.
5.3 S&N DONJOY MEXICO; SUBSIDIARIES.
(a) S&N DonJoy Mexico is a corporation duly organized and validly
existing as a limited liability variable stock company (Sociedad Anonima de
Capital Variable) under the laws of Mexico. S&N DonJoy Mexico has authorized,
issued and outstanding the number of shares of capital stock set forth in
Schedule 5.3. All such outstanding shares are owned by the Company and Smith &
Nephew in the amounts set forth in Schedule 5.3, and have been duly and validly
issued, are fully paid and nonassessable and have not been issued in violation
of the preemptive rights of any Person. There are no outstanding options,
warrants or other rights to acquire securities of S&N DonJoy Mexico and there
are no Encumbrances upon and no restrictions on transfer of the outstanding
capital stock of S&N DonJoy Mexico. Except as set forth in Schedule 5.3, all
corporate actions, licenses, permits, registrations, filings, governmental
authorizations,
-17-
<PAGE> 25
payment of Taxes or withholdings or other actions required under Mexican law in
connection with the acquisition of outstanding capital stock of S&N DonJoy
Mexico by the Company have been taken or made.
(b) Except for its ownership of shares of capital stock of S&N DonJoy
Mexico, the Company does not, directly or indirectly, own, of record or
beneficially, any outstanding voting securities or other equity interests in any
corporation, partnership, joint venture or other entity.
5.4 AUTHORITY OF SMITH & NEPHEW AND THE COMPANY.
(a) Smith & Nephew has the requisite corporate power and authority to
execute, deliver and perform this Agreement and all of the Smith & Nephew
Ancillary Agreements and to consummate the transactions contemplated hereby or
thereby. The execution, delivery and performance of this Agreement and the Smith
& Nephew Ancillary Agreements by Smith & Nephew have been duly authorized and
approved by Smith & Nephew's board of directors and its sole stockholder and do
not require any further authorization or consent of Smith & Nephew or its
stockholder. This Agreement has been duly authorized, executed and delivered by
Smith & Nephew and (assuming the valid authorization, execution and deliver of
this Agreement by Investor) is the legal, valid and binding obligation of Smith
& Nephew enforceable against Smith & Nephew in accordance with its terms, and
each of the Smith & Nephew Ancillary Agreements has been duly authorized by
Smith & Nephew and upon execution and delivery by Smith & Nephew (assuming the
valid authorization, execution and delivery thereof by the other party or
parties thereto) will be a legal, valid and binding obligation of Smith & Nephew
enforceable against Smith & Nephew in accordance with its terms, in each case
subject to bankruptcy, insolvency, reorganization, moratorium and similar laws
of general application relating to or affecting creditors' rights and to general
equity principles.
(b) The Company has the requisite limited liability company power and
authority to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the Company Ancillary Agreements have been duly authorized
and approved by the managers and the sole member of the Company and do not
require any further authorization of the managers or the sole member of the
Company. This Agreement and the Company Ancillary Agreements have been duly
authorized, executed and delivered by the Company. Assuming the valid
authorization, execution and delivery of this Agreement by Investor, this
Agreement is the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws of general application
relating to or affecting creditors' rights and to general equity principles.
(c) Except as set forth in Schedule 5.4, neither the execution and
delivery of this Agreement or any of the Smith & Nephew Ancillary Agreements or
the consummation of any of the transactions contemplated hereby or thereby nor
compliance with or fulfillment of the terms, conditions and provisions hereof or
thereof will:
(i) conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default (with or without notice or lapse
of time, or both), an event of default or an event creating rights of
acceleration, termination or cancellation or a loss of
-18-
<PAGE> 26
rights under, or result in the creation or imposition of any Encumbrance
upon any of the membership interests of the Company, the equity
securities of S&N DonJoy Mexico or any of the assets of the Company,
under (1) the Certificate of Incorporation or by-laws of Smith & Nephew,
(2) any note, instrument, agreement, mortgage, lease, license, franchise,
permit or other authorization, right, restriction or obligation to which
Smith & Nephew is a party or by which Smith & Nephew or any of its
properties is bound, (3) the Certificate of Formation or operating
agreement of the Company or the charter or other formative documents or
the bylaws (Estatutos Sociales) of S&N DonJoy Mexico, (4) any Company
Agreement, (5) any Court Order to which Smith & Nephew, the Company or
S&N DonJoy Mexico is a party or by which any of them or any of their
respective properties is bound, or (6) any Requirements of Laws affecting
Smith & Nephew, the Company or S&N DonJoy Mexico, except, in the case of
clause (6), for such conflicts, breaches, defaults, events or
Encumbrances which is not reasonably expected to have a Material Adverse
Effect; or
(ii) require the approval, consent, authorization or act of, or
the making by Smith & Nephew, the Company or S&N DonJoy Mexico of any
declaration, filing or registration with, any Person, except for the
filings required under the HSR Act, if any.
5.5 FINANCIAL STATEMENTS.
(a) Schedule 5.5(a) contains (i) the audited consolidated balance sheets
of the Business as of December 31, 1998 and 1997 and the related audited
statements of income, members' equity and cash flows of the Business for the
years ended December 31, 1998, 1997 and 1996 (collectively, the "Audited
Financial Statements"), (ii) the unaudited management report of operating profit
and net operating assets of the Business for the period ending April 3, 1999
which have been calculated in accordance with Agreed Accounting Principles,
(iii) a reconciliation statement setting forth the adjustments necessary to the
Audited Financial Statements to arrive at "Net Operating Assets" as of December
31, 1998 set forth on Schedule 1.1(c) attached hereto and (iv) pro forma balance
sheets, of the Business as of December 31, 1998 prepared under (A) GAAP (without
adjustment to Agreed Accounting Principles) and (B) Agreed Accounting Principles
setting forth the adjustments described in Section 7.7 and the adjustments
necessary to eliminate the Excluded Liabilities reflected in the Balance Sheet.
Except as set forth therein, the Audited Financial Statements have been prepared
in conformity with GAAP applied on a consistent basis throughout the periods
covered thereby and present fairly, in all material respects, the financial
position and results of operations of the Business as of their respective dates
and for the respective periods covered thereby.
(b) Schedule 5.5(b) contains the list included as part of Note 3 to the
Audited Financial Statements setting forth the amounts allocated by Smith &
Nephew as liabilities of the Business relating to expenses for certain
management, financial, administrative and legal services supplied to the
Business by Smith & Nephew and its Affiliates during the year ended December 31,
1998 (the "Allocated Services"). Based on the assumptions included in Schedule
5.5(b) and the reasonable judgment of Smith & Nephew, Smith & Nephew believes
that if the Company had operated on a stand alone basis as an entity
unaffiliated with Smith & Nephew for the year ended December 31, 1998, the
expenses for the services which constituted the Allocated Services would have
been reduced by approximately $2,600,000 in the aggregate for the year
-19-
<PAGE> 27
ended December 31, 1998 from the aggregate amount allocated to the Allocated
Services as set forth in Schedule 5.5(b); provided, however, that the foregoing
shall not be deemed to constitute any representation as to the actual financial
results to be achieved by the Company for any period, or the cost savings to be
achieved by the Company for any period after the Closing.
5.6 OPERATIONS SINCE BALANCE SHEET DATE.
Except as set forth in Schedule 5.6, since the Balance Sheet Date, no
event or condition has occurred which has had or is reasonably likely to have a
Material Adverse Effect, and each of Smith & Nephew, the Company and S&N DonJoy
Mexico have conducted the Business only in the ordinary course of business and
the Company and S&N DonJoy Mexico have not and, with respect to the Business,
Smith & Nephew has not:
(i) taken any action which has had or is reasonably likely to have
a Material Adverse Effect;
(ii) declared, set aside or paid any distribution with respect to
any capital stock or membership interests of the Company or S&N DonJoy
Mexico, or caused any direct or indirect purchase or other acquisition of
any of such capital stock or membership interests, except for
distributions of cash to Smith & Nephew in the ordinary course of
business;
(iii) taken any action which has resulted or is reasonably likely
to result in any material change in the manner in which products or
services of the Business are marketed (including, without limitation, any
material change in prices), any material change in the manner in which
the Business extends discounts or credit to customers or any material
change in the manner or terms by which the Business deals with customers;
(iv) canceled any debts owed to or claims held by it (including
the settlement of any claims or litigation) or waived any other rights
held by it, other than in the ordinary course of business;
(v) paid any claims against it (including the settlement of any
claims and litigation against it or the payment or settlement of any of
its obligations or liabilities), other than in the ordinary course of
business;
(vi) created, incurred or assumed, or agreed to create, incur or
assume, any indebtedness for borrowed money (other than money borrowed or
advances from Smith & Nephew or any of its Affiliates) or entered into,
as lessee, any capitalized lease obligations (as defined in Statement of
Financial Accounting Standards No. 13);
(vii) accelerated or delayed collection of notes or accounts
receivable in advance of or beyond their regular due dates or the dates
when the same would have been collected in the ordinary course of
business;
(viii) delayed or accelerated payment of any of its account
payable or other liability beyond or in advance of its due date or the
date when such liability would have been paid in the ordinary course of
business;
-20-
<PAGE> 28
(ix) acquired any real property or undertaken or committed to
undertake capital expenditures exceeding $1,000,000 in the aggregate;
(x) instituted any material increase in any compensation payable
to any of its officer or employee or in any profit-sharing, bonus,
incentive, deferred compensation, insurance, pension, retirement,
medical, hospital, disability, welfare or other benefits made available
to its officers or employees, other than increases pursuant to the
Retention Agreements and increases that are consistent with past practice
of the Business;
(xi) made any change in the Tax or accounting principles and
practices used by the Company and the Business from the Agreed Accounting
Principles; or
(xii) entered into any contractual obligation to any of the things
referred to in clauses (i) through (xi).
5.7 CONDITION OF ASSETS.
Except as set forth in Schedule 5.7, the equipment and other tangible
personal property which is material to the Business and any real property owned,
leased, used or occupied by the Company or S&N DonJoy Mexico are, in all
material respects, in good working order, operating condition and state of
repair, ordinary wear and tear excepted.
5.8 GOVERNMENTAL PERMITS.
Except as set forth in Schedule 5.8 and except for the Environmental
Permits, each of the Company and S&N DonJoy Mexico owns, holds or possesses all
material licenses, franchises, permits, privileges, immunities, approvals and
other authorizations from each Governmental Body which are necessary to entitle
it to own or lease, operate and use its assets and to carry on and conduct the
Business substantially as currently conducted including, without limitation, all
material licenses, permits, registrations and other governmental approvals
required under Mexican law by S&N DonJoy Mexico to operate as a maquiladora
(herein collectively called "Governmental Permits"). The Governmental Permits
owned, held or possessed by the Company or S&N DonJoy Mexico are in full force
and effect, no violations thereof have occurred and no proceeding of any
Governmental Body is pending to revoke or limit any such Governmental Permit.
5.9 REAL PROPERTY.
(a) The Company does not own, and does not hold an option to acquire, any
real property. Schedule 5.9(a) contains a brief description of each parcel of
real property owned by S&N DonJoy Mexico ("Owned Real Property"). S&N DonJoy
Mexico does not hold an option to acquire any real property.
(b) Schedule 5.9(b) sets forth a list and brief description of each lease
or similar agreement under which the Company or S&N DonJoy Mexico is lessee of,
or holds or operates, any real property owned by any third Person (the "Leased
Real Property").
-21-
<PAGE> 29
(c) Except as set forth on Schedule 5.9(c), the Owned Real Property and
the Leased Real Property constitutes all real property used or occupied by Smith
& Nephew, the Company or S&N DonJoy Mexico in connection with the Business. With
respect to the Owned Real Property and the Leased Real Property, except as set
forth on Schedule 5.9(c) and except for Permitted Encumbrances, (i) no portion
thereof is subject to any pending or, to the Knowledge of Smith & Nephew,
threatened condemnation proceeding by any Governmental Body, (ii) the physical
condition of the Leased Real Property and the Owned Real Property is sufficient
to permit the conduct of the Business as presently conducted subject to the
provision of usual and customary maintenance and repair, (iii) the Company (or
S&N DonJoy Mexico, as the case may be) is the owner and holder of all of the
leasehold estates purported to be granted by the leases set forth in Schedule
5.9(b), (iv) there are no written agreements to which the Company (or S&N DonJoy
Mexico, as the case may be) or any Affiliate thereof is a party, granting to any
Person (other than the Company or S&N DonJoy Mexico, as the case may be) the
right of use or occupancy of any portion of the Leased Real Property or the
Owned Real Property, (v) there are no Persons (other than the Company (or S&N
DonJoy Mexico, as the case may be) or its lessees disclosed pursuant to clause
(iv) above) in lawful possession of the Leased Property or the Owned Real
Property, and (vi) no written notice of any increase in the assessed valuation
of the Leased Real Property or the Owned Real Property and no written notice of
any contemplated special assessment has been received by the Company (or S&N
DonJoy Mexico, as the case may be) and, to the Knowledge of Smith & Nephew,
there is no threatened increase in assessed valuation or threatened special
assessment pertaining to any of the Leased Real Property or the Owned Real
Property.
5.10 TAXES.
Except as set forth on Schedule 5.10, (i) Smith & Nephew has filed or
caused to be filed all material Tax Returns required to have been filed on or
before the date hereof with respect to the Business, the Company and S&N DonJoy
Mexico and such Tax Returns are true, correct and complete in all material
respects, (ii) Smith & Nephew, the Company or S&N DonJoy Mexico have thereby
timely paid all Taxes shown to be due on the Tax Returns referred to in clause
(i) and any other Taxes that have become due and payable have been timely paid,
(iii) none of Smith & Nephew, the Company or S&N DonJoy Mexico has waived in
writing any statute of limitations in respect of Taxes with respect to the
Business, the Company or S&N DonJoy Mexico which waiver is currently in effect,
(iv) no issues that have been raised in writing by the relevant taxing authority
in connection with the examination of the Tax Returns referred to in clause (i)
are currently pending, (v) all deficiencies asserted or assessments made as a
result of any examination of the Tax Returns referred to in clause (i) by a
taxing authority have been paid in full, (vi) the Company has not elected to be
taxed as a corporation for federal income tax purposes and is eligible to be
treated as a partnership for tax purposes, (vii) the Company has not incurred
any liability to make any payments that either alone or in conjunction with any
other payments could constitute a "parachute payment" within the meaning of
Section 280G of the Code, (viii) the Company is not presently required to make
any adjustments or changes either on, before or after the Closing Date, to its
accounting methods, and (ix) none of the Business Assets are subject to a lien
for Taxes, other than liens for Taxes not yet due and payable. S&N DonJoy Mexico
is current and in compliance with all Mexican tax obligations (local, state or
federal), social security contributions (without limitation payments to the
Mexican Institute of Social Security (Instituto Mexicano del Seguro Social)
("IMSS"), Employees Housing Fund (Instituto
-22-
<PAGE> 30
Fondo Nacional de la Vivienda para los Trabajadores) ("INFONAVIT") and the
Mandatory Retirement Fund (Sistema de Ahorro para el Retiro) ("SAR")) and
employees profit sharing obligations and is not a party to any action or
proceeding, nor has written notification been received by Smith & Nephew, the
Company or S&N DonJoy Mexico that any such action or proceeding is pending for
the assessment or recollection of Taxes.
5.11 PERSONAL PROPERTY LEASES.
Schedule 5.11 contains as of the date of this Agreement a brief
description of each lease or other agreement or right, whether written or oral,
under which the Company or S&N DonJoy Mexico is lessee of, or holds or operates,
any machinery, equipment or other tangible personal property owned by a third
Person, except those which are terminable by the Company or S&N DonJoy Mexico
without penalty on 60 days' or less notice or which provide for annual rentals
of less than $100,000.
5.12 NO UNDISCLOSED LIABILITIES.
Except as set forth in Schedule 5.12 or as reflected on the Balance
Sheet, to the Knowledge of Smith & Nephew, as of the Balance Sheet Date, neither
the Company nor S&N DonJoy Mexico was subject to, and there was not with respect
to the Business, any material liability, whether absolute, contingent, accrued
or otherwise. Since the Balance Sheet Date, except as set forth in Schedule
5.12, to the Knowledge of Smith & Nephew, neither the Company nor S&N DonJoy
Mexico has incurred any material liability, whether absolute, contingent,
accrued or otherwise, except for liabilities incurred in the ordinary course of
business.
5.13 INTELLECTUAL PROPERTY.
(a) Schedule 5.13(a) contains as of the date of this Agreement a list and
description of:
(i) all United States and foreign patents and patent applications,
all United States, state and foreign trademarks, service marks and trade
names for which registrations have been issued or applied for that are
owned by or to the Knowledge of Smith & Nephew are subject to an
obligation of assignment to Smith & Nephew, the Company S&N DonJoy
Mexico, or a predecessor of any of these, and are used in or are intended
to be used in the Business or relate solely and exclusively to the
Business (the "Owned Intellectual Property");
(ii) all United States and foreign patents and patent
applications, all United States, state and foreign trademarks, service
marks and trade names for which registrations have been issued or applied
for that are licensed to Smith & Nephew, the Company, S&N DonJoy Mexico,
or a predecessor of any of these, and are used in or are intended to be
used in the Business or relate solely and exclusively to the Business
("Licensed Intellectual Property");
(iii) all agreements, commitments, contracts, understandings,
licenses, assignments and indemnities relating or pertaining to any
asset, property or right of the
-23-
<PAGE> 31
character described in the preceding clauses (i) and (ii) to which the
Company or S&N DonJoy Mexico or a predecessor of either of these is a
party, showing in each case the parties thereto, except for employee and
inventor assignments; and
(iv) all licenses or agreements pertaining to know-how, trade
secrets, inventions, disclosures or uses of ideas; copyrights (whether
registered or unregistered); computer software (other than off-the-shelf
computer software); rights of publicity; trademarks, service marks, trade
dress or trade names (whether registered or unregistered); to which the
Company or S&N DonJoy Mexico or a predecessor of either of these is a
party, which are material to the conduct of the Business, showing in each
case the parties thereto.
(b) Except as set forth in Schedule 5.13(b), no unresolved claims have
been asserted or, to the Knowledge of Smith & Nephew, threatened against Smith &
Nephew, the Company or S&N DonJoy Mexico or a predecessor of any of these, which
challenge the validity, enforceability or ownership of any patent, trademark,
trade name, service mark or other right or property described in Schedule 5.13.
(c) Except as set forth in Schedule 5.13(c), to the Knowledge of Smith &
Nephew,
(i) the Company and S&N DonJoy Mexico own, possess all right,
title and interest in, have the exclusive right to sell, license and
dispose of, and have the right to bring actions for the infringement of,
all rights and properties listed in Schedule 5.13(a)(i);
(ii) the Company and S&N DonJoy Mexico own or have an enforceable
right to use pursuant to license, sublicense, or other agreement all
patents, know-how, trade secrets, inventions, designs, trademarks,
service marks, trade dress, trade names, logos, copyrights, data
compilations, computer software, and publicity rights that are material
to and are currently used in the conduct of the Business;
(iii) each of Smith & Nephew, the Company and S&N DonJoy Mexico
has taken reasonable and practicable steps designed to safeguard and
maintain the proprietary rights of the Company and S&N DonJoy Mexico in
all the Owned Intellectual Property and Licensed Intellectual Property;
(iv) the conduct of the Business as presently conducted does not
infringe, misappropriate or otherwise conflict with any valid
intellectual property rights of any third party that are not licensed to
Smith & Nephew;
(v) none of Smith & Nephew, the Company, S&N DonJoy Mexico nor any
predecessor of any of these has received from any Person in the past five
years any unresolved notice, charge, complaint, claim or assertion
thereof relating to infringement or misappropriation of any intellectual
property right of any third-party by the Company, S&N DonJoy Mexico or
any predecessor of any of these, and no such claim is impliedly
threatened by an offer to license from another Person; and
-24-
<PAGE> 32
(vi) none of Smith & Nephew, the Company, S&N DonJoy Mexico nor
any predecessor of any of these has sent to any Person, or otherwise
communicated to any Person, in the past five years any notice, charge,
complaint, claim or other assertion of any infringement by or
misappropriation of, or other conflict with, any Owned Intellectual
Property or Licensed Intellectual Property or any property or right
listed in Section 5.13(c)(ii) by such other Person, nor is any such
infringement, misappropriation, or conflict occurring or threatened.
5.14 TITLE TO ASSETS.
(a) Except as set forth in Schedule 5.14, the Company and S&N DonJoy
Mexico have good and marketable title to, or, in the case of property held under
lease or other contract or agreement, a valid and enforceable right to use, or,
in the case of Owned Real Property, own, all of their properties, rights and
assets, whether tangible or intangible, including without limitation all
properties, rights and assets reflected in the Balance Sheet (except as sold or
otherwise disposed of since the Balance Sheet Date in the ordinary course of
business) (the "Business Assets") free and clear of all Encumbrances except for
Permitted Encumbrances.
(b) Except as set forth in Schedule 5.14, the Business Assets constitute
all of the assets used in the conduct of the Business as currently conducted.
The machinery and equipment which comprises part of the Business Assets is
generally in good operating condition and repair (normal wear and tear excepted)
and is suitable for the uses for which it is currently used in the Business. The
machinery and equipment leased by the Company and S&N DonJoy Mexico are in such
condition as to permit the surrender thereof by the Company or S&N DonJoy
Mexico, as the case may be, to the lessors thereof on the date hereof without
any material cost or expense for repair or restoration as if the related leases
were terminated on and as of the date hereof pursuant to the terms of such
leases. Smith & Nephew has delivered to Investor a true and complete listing of
the fixed assets included in the Business Assets as of the Balance Sheet Date.
5.15 NO VIOLATION, LITIGATION OR REGULATORY ACTION.
Except as set forth in Schedule 5.15:
(a) each of the Company, S&N DonJoy Mexico and Smith & Nephew, with
respect to the Company and the Business, has complied in all material respects
with all applicable Requirements of Laws and all applicable Court Orders; and
(b) as of the date hereof, there are no lawsuits, claims, suits,
arbitrations, proceedings or actions before or by any Governmental Body or
arbitrator pending or, to the Knowledge of Smith & Nephew, threatened against
the Company or S&N DonJoy Mexico and to the Knowledge of Smith & Nephew there
are no investigations by any Governmental Body pending or threatened against the
Company or S&N DonJoy Mexico.
5.16 INSURANCE.
Smith & Nephew or its Affiliates maintain, with respect to the Company
and S&N DonJoy Mexico, policies of fire and extended coverage and casualty,
liability and other forms of
-25-
<PAGE> 33
insurance in such amounts and against such risks and losses as are in its
judgment prudent and commercially reasonable.
5.17 CONTRACTS.
Except as set forth in Schedule 5.17 or any other Schedule hereto which
specifically identifies such contract, as of the date of this Agreement, neither
the Company nor S&N DonJoy Mexico is a party to or bound by:
(a) any contract for the purchase or sale of real property;
(b) any contract for the purchase by the Company or S&N DonJoy Mexico of
supplies, raw materials or equipment which Smith & Nephew reasonably anticipates
will involve the payment of more than $150,000 after the date hereof;
(c) any contract for the sale by the Company or S&N DonJoy Mexico of
products of the Business or Business Assets which Smith & Nephew reasonably
anticipates will involve the payment of more than $150,000 after the date
hereof;
(d) any guarantee of the obligations of customers, suppliers, officers,
directors, employees or Affiliates of the Company or S&N DonJoy Mexico;
(e) any agreement which provides for the incurrence by the Company or S&N
DonJoy Mexico of indebtedness for borrowed money;
(f) any contract for the employment of any officer or individual employee
on a full-time or part-time basis, other than the Retention Agreements and
agreements with employees of S&N DonJoy Mexico;
(g) any factoring agreement or other agreement involving the sale of the
accounts receivable of the Company or S&N DonJoy Mexico to a third party at a
discount;
(h) any contract or group of related contracts with the same party
(excluding purchase orders entered into in the ordinary course of business) for
the purchase or sale of products or services under which the undelivered balance
of such products and services as of the date hereof has a selling price in
excess of $150,000;
(i) any contract which prohibits either the Company or S&N DonJoy Mexico
from freely engaging in the Business in any material respect anywhere in the
world;
(j) any contract relating to the purchase, distribution, marketing or
sales of products of either the Company or S&N DonJoy Mexico or any other Person
(other than purchase and sales orders entered into in the ordinary course of
business consistent with past practices and the performance of which by the
parties thereto is reasonably expected to be substantially completed within 60
days of the execution thereof and contracts with respect to which the amount
which Smith & Nephew reasonably anticipates to be paid by or paid to the Company
and S&N DonJoy Mexico in 1999 will be less than $200,000 in the aggregate); or
-26-
<PAGE> 34
(k) any other contract or agreement that is material to the Company and
S&N DonJoy Mexico, taken as a whole.
5.18 STATUS OF CONTRACTS.
Except as set forth in Schedule 5.18 or in any other Schedule hereto
which specifically identifies such Company Agreement, each of the leases,
contracts and other agreements listed in Schedules 5.9(b), 5.11, 5.13 or 5.17
(collectively, the "Company Agreements") constitutes a valid and binding
obligation of the Company or S&N DonJoy Mexico and, to the Knowledge of Smith &
Nephew, the other parties thereto (subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general application relating to
or affecting creditors' rights and to general equity principles) and is in full
force and effect. Each of the Company and S&N DonJoy Mexico has performed in all
material respects all obligations required to be performed by it and neither the
Company nor S&N DonJoy Mexico is in, or, to the Knowledge of Smith & Nephew,
alleged to be in, breach or default under, any of the Company Agreements. To the
Knowledge of Smith & Nephew, no other party to any of the Company Agreements is
in material breach or material default thereunder and no event has occurred and
no condition or state of facts exists which, with the passage of time or the
giving of notice or both, would constitute such a default or breach by the
Company or S&N DonJoy Mexico or, to the Knowledge of Smith & Nephew, by any such
other party. Complete and correct copies of each of the Company Agreements have
heretofore been made available to Investor by Smith & Nephew.
5.19 EMPLOYEE BENEFIT PLANS.
(a) Schedule 5.19 contains a complete list of each Company Plan. Smith &
Nephew has made available to Investor copies of all such Company Plans.
(b) None of Smith & Nephew, the Company or S&N DonJoy Mexico has been
required, at any time during the six-year period ending on the Closing Date, to
contribute to any Multiemployer Plan with respect to the Business, and no
withdrawal liability has been incurred by or asserted during such period against
Smith & Nephew, the Company or S&N DonJoy Mexico under Title IV of ERISA.
(c) Except as set forth in Schedule 5.19, (i) for each Company Plan that
is a "pension plan" within the meaning of section 3(2) of ERISA that is intended
to satisfy the provisions of section 401(a) of the Code, Smith & Nephew has
obtained a favorable determination letter from the IRS to such effect, (ii) to
the knowledge of Smith & Nephew, none of such determination letters has been
revoked by the IRS nor has the IRS given any written notice to Smith & Nephew
that it intends to revoke any such determination letter, (iii) no Company Plan
that is a funded pension plan and no trust established thereunder has any
accumulated funding deficiency within the meaning of section 302(a) of ERISA and
section 412 of the Code, (iv) no material reportable event within the meaning of
section 4043 of ERISA or material prohibited transaction within the meaning of
section 406 of ERISA has occurred with respect to any Company Plan and no
material tax has been imposed pursuant to section 4975 or section 4976 of the
Code in respect thereof, and (v) none of Smith & Nephew, the Company or S&N
DonJoy Mexico has incurred any material liability to the Pension Benefit
Guaranty
-27-
<PAGE> 35
Corporation with respect to any Company Plan which is a pension plan subject to
Title IV of ERISA other than liability for premiums.
(d) Except as set forth in Schedule 5.19, there are no material claims
pending by or on behalf of any Company Plan, by any employee or beneficiary
covered under any Company Plan, or otherwise involving any Company Plan (other
than routine claims for benefits).
(e) Each Company Plan has been operated and administered in accordance
with its terms and compliance with ERISA and the Code in all material respects.
5.20 NO FINDER.
Neither Smith & Nephew nor any Person acting on its behalf has incurred
any liability for any fee or commission to any broker, finder or intermediary
for or on account of the transactions contemplated by this Agreement, other than
to Chase Securities Inc., whose fees and expenses shall be paid by Smith &
Nephew.
5.21 LABOR RELATIONS; EMPLOYEES.
(a) Schedule 5.21 sets forth a list of all employees of the Business as
of the date hereof whose base compensation exceeds $100,000, together with their
respective names, titles, salaries, bonuses, retention payments or other
compensation (if any) in the year ended December 31, 1998, and the respective
dates on which each of them commenced employment. To the extent any such
employee is on a leave of absence, Schedule 5.21 indicates the nature of such
leave of absence and such employee's anticipated date of return to active
employment. Except as set forth in Schedule 5.21, no employee who would have
been listed in Schedule 5.21 if employed in the Business on the date hereof left
the service of the Business within the six-month period immediately preceding
the date hereof.
(b) Except as set forth on Schedule 5.21,(i) the Company and S&N DonJoy
Mexico generally enjoy good relations with their employees, and there is no
labor strike, dispute, slowdown or stoppage actually pending or, to the
Knowledge of Smith & Nephew, threatened against or involving the Business, and
(ii) neither the Company nor S&N DonJoy Mexico is a party to or bound by any
collective bargaining agreement, union contract or similar agreement, no such
agreement is currently being negotiated by either the Company or S&N DonJoy
Mexico, and to the Knowledge of Smith & Nephew, no labor union has taken any
action with respect to organizing employees of either the Company nor S&N DonJoy
Mexico and no representation question exists with respect to any such employees.
5.22 SUPPLIERS AND VENDORS.
Except in the ordinary course of business, no material supplier or vendor
who supplied more than $100,000 of goods or services to the Business in 1998 has
notified Smith & Nephew, the Company or S&N DonJoy Mexico in writing that it has
canceled or otherwise terminated, or, to the Knowledge of Smith & Nephew,
threatened to cancel or otherwise terminate, its relationship with such company
with respect to the Business or has materially decreased, materially limited or
otherwise materially modified, or, to the Knowledge of Smith & Nephew,
-28-
<PAGE> 36
threatened to materially decrease, materially limit or otherwise materially
modify, the services, supplies or materials it provides to such company with
respect to the Business.
5.23 CUSTOMERS.
Except as set forth on Schedule 5.23, no customer of the Business to
which more than $50,000 of sales in 1998 were attributable has notified Smith &
Nephew, the Company or S&N DonJoy Mexico in writing that it intends to, or, to
the Knowledge of Smith & Nephew, has threatened to, terminate or materially
curtail its relationship and dealings with such company with respect to the
Business.
5.24 YEAR 2000.
To the Knowledge of Smith & Nephew, except as set forth in Schedule 5.24,
the software and hardware used by Smith & Nephew, the Company or S&N DonJoy
Mexico in the conduct of the Business as presently conducted that contains or
relies upon a calendar function, provides specific dates or calculates spans of
dates, is able to record, store, process and provide true and accurate dates and
calculations for dates and spans of dates including and following January 1,
2000.
5.25 ACCOUNTS AND NOTES RECEIVABLE.
Except as set forth on Schedule 5.25, all of the accounts receivable and
notes receivable owing to the Business as of the date hereof constitute valid
and enforceable claims arising from bona fide transactions in the ordinary
course of business, and there are no known or asserted claims, refusals to pay
or other rights to set-off against any thereof. Except as set forth on Schedule
5.25, as of the Balance Sheet Date, there is to the Knowledge of Smith & Nephew
with respect to the Business (i) no account debtor or note debtor that is in
excess of credit terms for payments in excess of $100,000 in the aggregate (ii)
no account debtor or note debtor that has refused to pay its obligations to the
Business for any reason, or has otherwise made a claim of set-off or similar
claim (other than in amounts not in excess of $50,000 per account debtor or
$100,000 in the aggregate), and (iii) no account debtor or note debtor that owes
the Business amounts in excess of $50,000 in the aggregate that is insolvent or
bankrupt.
5.26 RELATED PARTY TRANSACTIONS.
Except (i) as set forth on Schedule 5.26, (ii) for the Smith & Nephew
Ancillary Agreements, (iii) for compensation to bona-fide employees of the
Business for services rendered in the ordinary course of business and (iv) for
contracts, agreements and arrangements involving payment of less than $75,000 in
any fiscal year, no current or former Affiliate of Smith & Nephew, the Company
or S&N DonJoy Mexico is now or has been during the last three fiscal years party
to any transaction or contract with respect to the Business with the Company or
S&N DonJoy Mexico or Smith & Nephew, including, but not limited to any contract,
agreement or arrangement for the furnishing of services by, or rental of real or
personal property from, or otherwise requiring payments to any such Affiliate.
-29-
<PAGE> 37
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INVESTOR
As an inducement to Smith & Nephew to enter into this Agreement and to
consummate the transactions contemplated hereby, Investor hereby represents and
warrants to Smith & Nephew as follows:
6.1 ORGANIZATION OF INVESTOR.
Investor is a limited liability company duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the
requisite limited liability company power and authority to own or lease and to
operate and use its properties and assets and to carry on its business as now
conducted.
6.2 AUTHORITY OF INVESTOR.
(a) Investor has the requisite limited liability company power and
authority to execute, deliver and perform this Agreement and all of the Investor
Ancillary Agreements and to consummate the transactions contemplated hereby or
thereby. The execution, delivery and performance of this Agreement and the
Investor Ancillary Agreements by Investor have been duly authorized and approved
by Investor's managers and do not require any further authorization or consent
of Investor or its members. This Agreement has been duly authorized, executed
and delivered by Investor and (assuming the valid authorization, execution and
delivery of this Agreement by Smith & Nephew and the Company) is the legal,
valid and binding agreement of Investor enforceable against Investor in
accordance with its terms, and each of the other Investor Ancillary Agreements
has been duly authorized by Investor and upon execution and delivery by Investor
(assuming the valid authorization, execution and delivery thereof by the other
party or parties thereto) will be a legal, valid and binding obligation of
Investor enforceable against Investor in accordance with its terms, in each case
subject to bankruptcy, insolvency, reorganization, moratorium and similar laws
of general application relating to or affecting creditors' rights and to general
equity principles.
(b) Neither the execution and delivery of this Agreement or any of the
Investor Ancillary Agreements or the consummation of any of the transactions
contemplated hereby or thereby nor compliance with or fulfillment of the terms,
conditions and provisions hereof or thereof will:
(i) conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default (with or without notice or lapse
of time, or both), an event of default or an event creating rights of
acceleration, termination or cancellation or a loss of rights under (1)
the Certificate of Formation or operating agreement of Investor, (2) any
note, instrument, agreement, mortgage, lease, license, franchise, permit
or other authorization, right, restriction or obligation to which
Investor is a party or by which Investor or any of its properties is
bound, (3) any Court Order to which Investor is a party or by which
Investor or any of its properties is bound or (4) any Requirements of
Laws affecting Investor, except, in the case of clause (3), for such
conflicts, breaches, defaults,
-30-
<PAGE> 38
events or Encumbrances which would not have a material adverse effect on
the assets, business, results of operations or financial condition of
Investor and its subsidiaries, taken as a whole, and would not impair in
any material respect the ability of Investor to perform its obligations
under this Agreement or consummate the transactions contemplated hereby,
or
(ii) require the approval, consent, authorization or act of, or
the making by Investor of any declaration, filing or registration with,
any Person, except for the filings required under the HSR Act, if any.
6.3 FINANCIAL COMMITMENTS.
Complete and correct copies of the funding commitments for equity and
debt financing are included in Schedule 6.3, which are in amounts sufficient to
enable Investor to consummate the transactions contemplated by this Agreement to
be performed by Investor and in amounts sufficient to enable the Company (and
the Operating Subsidiary) to consummate the transactions contemplated by this
Agreement to be performed by the Company (and the Operating Subsidiary).
6.4 INVESTMENT INTENT.
Investor is acquiring the New Membership Interest as an investment for
its own account and not with a view to the distribution or sale thereof and is
an "accredited investor" within the meaning of Regulation D promulgated under
the Securities Act of 1933, as amended.
6.5 NO FINDER.
Neither Investor nor any Person acting on its behalf has paid or become
obligated to pay any fee or commission to any broker, finder or intermediary for
or on account of the transactions contemplated by this Agreement, except for the
Persons listed on Schedule 6.5, the fees and expenses of which shall be paid by
Investor.
ARTICLE VII
ACTION PRIOR TO THE CLOSING DATE
The respective parties hereto covenant and agree to take the following
actions between the date hereof and the Closing Date:
7.1 INVESTIGATION.
Smith & Nephew shall (and shall cause the Company and S&N DonJoy Mexico
to) afford to the officers, employees and authorized representatives of Investor
(and its potential financing sources who agree to be bound by the provisions of
Section 14.2),including, without limitation, independent public accountants and
attorneys, reasonable access during normal business hours upon reasonable
advance notice to the offices, properties, employees and business and financial
records (including computer files, retrieval programs and similar documentation)
of the Company and S&N DonJoy Mexico as and to the extent Investor and such
other Persons
-31-
<PAGE> 39
shall reasonably deem necessary or desirable in the course of their
investigation of the Company and S&N DonJoy Mexico and shall furnish to Investor
and its potential financing sources or its or their authorized representatives
such additional information concerning the Company and S&N DonJoy Mexico as
shall be reasonably requested; provided, however, that Smith & Nephew shall not
be required to violate any obligation of confidentiality to which it, or the
Company or S&N DonJoy Mexico is subject in discharging its obligations pursuant
to this Section 7.1. Investor agrees that such investigation shall be conducted
in such a manner as not to interfere unreasonably with the operations of Smith &
Nephew, the Company or S&N DonJoy Mexico.
7.2 PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES.
Each of the parties hereto shall refrain from taking any action which
would render any representation or warranty contained in this Agreement
inaccurate as of the Closing Date. Each party shall promptly notify the other of
any action, suit or proceeding that shall be instituted or threatened against
such party to restrain, prohibit or otherwise challenge the legality of any
transaction contemplated by this Agreement. Prior to the Closing, each party
will give the other prompt written notice upon becoming aware of any material
breach of or material inaccuracy in any representation or warranty of such
notifying party; provided, however, that no such disclosure shall be deemed to
amend any Schedule hereto, or prevent or cure any breach of or inaccuracy in, or
disclose any exception to, any of the representations and warranties set forth
herein or relieve such other party of any liability pursuant to this Agreement.
7.3 CONSENTS OF THIRD PARTIES; GOVERNMENTAL APPROVALS; FINANCING.
(a) Smith & Nephew (and Smith & Nephew shall cause the Company and S&N
DonJoy Mexico to) and Investor will act diligently and reasonably to secure,
before the Closing Date, the consent, approval or waiver, in form and substance
reasonably satisfactory to Investor, from any party to any Company Agreement
required to be obtained to satisfy the conditions set forth in Section 9.4;
provided that neither Smith & Nephew nor Investor shall have any obligation to
offer or pay any consideration in order to obtain any such consents or
approvals.
(b) During the period prior to the Closing Date, Smith & Nephew (and
Smith & Nephew shall cause the Company and S&N DonJoy Mexico to) and Investor
shall act diligently and reasonably, and shall cooperate with each other, to
secure as soon as practicable any consents and approvals of any Governmental
Body required to be obtained by them in order to permit the consummation of the
transactions contemplated by this Agreement.
(c) Investor shall act diligently and reasonably to cause the Company and
the Operating Subsidiary to obtain the financing described in the funding
commitments set forth in Schedule 6.3. In the event that the Senior Subordinated
Notes (as defined in such funding commitments) cannot be issued, Investor shall
use diligent and reasonable efforts to cause the Operating Subsidiary to borrow
not less than $100,000,000 under the Senior Subordinated Facility (as defined in
such funding commitments) for purposes of consummating the transactions
contemplated by this Agreement.
-32-
<PAGE> 40
7.4 OPERATIONS PRIOR TO THE CLOSING DATE.
(a) Smith & Nephew shall cause the Company and S&N DonJoy Mexico to
operate and carry on the Business only in the ordinary course of business
substantially as presently operated and consistent with past practice.
Consistent with the foregoing, Smith & Nephew shall cause each of the Company
and S&N DonJoy Mexico to use its reasonable efforts consistent with good
business practice to preserve the goodwill of the suppliers, employees,
customers and others having business relations with it.
(b) Without limiting Section 7.4(a), except as set forth on Schedule 7.4,
except as expressly contemplated by this Agreement or except with the express
written approval of Investor (which Investor agrees shall not be unreasonably
withheld or delayed), Smith & Nephew shall cause the Company and S&N DonJoy
Mexico to not:
(i) make any material change in the Business or the operations of
the Company or S&N DonJoy Mexico;
(ii) enter into any contract for the purchase of real property or
exercise any option to extend a lease listed in Schedule 5.9(b);
(iii) create, incur, assume or guarantee, or agree to create,
incur, assume or guarantee, any indebtedness for borrowed money (other
than money borrowed from or advances from Smith & Nephew or any of its
Affiliates in the ordinary course of business);
(iv) institute any material increase in any profit-sharing, bonus,
incentive, deferred compensation, insurance, pension, retirement,
medical, hospital, disability, welfare or other employee benefit plan
with respect to its employees, except as provided in the Retention
Agreements;
(v) make any material change in the compensation of its employees,
other than changes made in accordance with normal compensation practices
and consistent with past compensation practices, except as provided in
the Retention Agreements;
(vi) make any material change in accounting policies from the
Agreed Accounting Principles;
(vii) sell, lease to others or otherwise dispose of any of its
assets (except for sales in the ordinary course of business);
(viii) change or amend the Company's Certificate of Formation or
operating agreement, except for the Amended and Restated Operating
Agreement, or S&N DonJoy Mexico's charter or other formative documents or
by-laws;
(ix) issue or sell any of its capital stock or other securities,
acquire directly or indirectly, by redemption or otherwise, any such
capital stock, reclassify or split-up any such capital stock or grant or
enter into any options, warrants, calls or commitments of any kind with
respect thereto;
-33-
<PAGE> 41
(x) fail to use reasonable efforts to keep the policies of fire
and extended coverage and casualty, liability and other forms of
insurance coverage maintained by Smith & Nephew or its Affiliates with
respect to the Company and S&N DonJoy Mexico as of the date hereof or
comparable insurance in effect through the Closing Date;
(xi) acquire any capital stock or other equity securities of any
corporation or acquire any equity or ownership interest in any business;
(xii) fail to use commercially reasonable efforts to maintain the
condition of all material Business Assets;
(xiii) make any Tax election, change any Tax accounting method or
file any Tax Returns in a manner that is inconsistent with past practice;
and
(xiv) agree, whether in writing or otherwise, to do any of the
foregoing.
7.5 ANTITRUST LAW COMPLIANCE.
To the extent required, as promptly as practicable after the date hereof,
Investor and Smith & Nephew shall file with the Federal Trade Commission and the
Antitrust Division of the Department of Justice (and, if applicable, state
antitrust authorities or competition authorities of any other jurisdiction) the
notifications and other information required to be filed under the HSR Act, or
any rules and regulations promulgated thereunder or under any other Requirements
of Law, with respect to the transactions contemplated hereby. Each party
warrants that all such filings by it will be, as of the date filed, true and
accurate and in accordance with the requirements of the HSR Act and any such
rules and regulations. Each of Investor and Smith & Nephew agrees to make
available to the other such information as each of them may reasonably request
relative to its business, assets and property (including, in the case of Smith &
Nephew, the Company and S&N DonJoy Mexico) as may be required of each of them to
file any additional information requested by such agencies under the HSR Act and
any such rules and regulations. Any filing fees payable in connection with the
notifications or filings described in this Section 7.5 shall be paid by
Investor.
7.6 ACQUISITION TRANSACTIONS.
(a) From and after the date hereof until the earlier of the Closing Date
or the termination of the Agreement, without the written consent of the
Investor, neither Smith & Nephew, the Company nor S&N DonJoy Mexico shall,
directly or indirectly:
(i) solicit, initiate discussions or engage in negotiations with
any Person (whether such negotiations are initiated by Smith & Nephew or
otherwise), other than Investor, its Affiliates and their respective
designees and agents, relating to the possible acquisition, whether by
way of merger, reorganization, purchase of capital stock, purchase of
assets or otherwise (any such acquisition being referred to in this
Section 7.6 as an "Acquisition Transaction"), of any interest in the
Business or any equity interest of the Company or S&N DonJoy Mexico;
provided, however, that the acquisition by any Person of the capital
stock or assets of Smith & Nephew or any of its Affiliates, other than
the capital stock or assets of the Company or S&N DonJoy Mexico, shall
not
-34-
<PAGE> 42
constitute an "Acquisition Transaction" for purposes of this Agreement;
and provided, further, that sales of product or inventory or other
property in the ordinary course of the Business shall not be a violation
of this Section 7.6;
(ii) provide information with respect to the Business or the
capital stock of the Company or S&N DonJoy Mexico to any Person in
connection with a possible Acquisition Transaction involving such Person,
other than Investor, its Affiliates and their respective designees and
agents; or
(iii) enter into any agreement with any Person, other than
Investor, its Affiliates and their respective designees and agents, with
respect to an Acquisition Transaction.
If Smith & Nephew, the Company or S&N DonJoy Mexico receives an
unsolicited written offer or proposal relating to a possible Acquisition
Transaction, Smith & Nephew shall promptly notify Investor and provide
information to Investor as to the identity of the Person making any such offer
or proposal and the material terms of such offer or proposal.
(b) The parties recognize and acknowledge that a breach by the Seller of
Section 7.6(a) may cause irreparable and material loss and damage for Investor,
the amount of which cannot be readily determinable and as to which it will not
have any adequate remedy at law or in damages. Accordingly, in addition to any
remedy Investor may have in damages by an action at law, it shall be entitled to
the issuance of an injunction restraining any such breach or any other remedy at
law or in equity for any such breach.
7.7 CERTAIN ASSETS AND LIABILITIES.
Prior to the Closing Date, Smith & Nephew shall cause the assets listed
under "Cash" and the liabilities listed under "Current and deferred income taxes
due to Parent" and "Restructuring reserve" on the Balance Sheet to be canceled
and shall cause the amounts listed under "Intercompany obligations, less current
portion" on the Balance Sheet to be capitalized and transferred to "Members
Equity."
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 TAX MATTERS.
(a) Liability for Taxes.
(i) Smith & Nephew shall be liable for and pay, and pursuant to
Article XI (and subject to the limitations thereof) shall indemnify
Investor, the Company and S&N DonJoy Mexico against, all Taxes applicable
to the Business or for which the Company or S&N DonJoy Mexico may
otherwise be liable (including any liability pursuant to Treas. Req.
Section 1.1502-6 or similar provisions of state or local law), in each
case, for any taxable year or period that ends on or before the Closing
Date and, with respect to any Straddle Period, the portion of such
Straddle Period ending on and including the Closing
-35-
<PAGE> 43
Date, provided, however, that Smith & Nephew shall not be liable for or
pay, and shall not indemnify Investor, the Company and S&N DonJoy Mexico
against, (I) any Taxes shown as a liability or reserve on the Valuation
Date Balance Sheet, (II) any Taxes that result from any actual or deemed
election under Section 338 of the Code or any similar provisions of
state, local or foreign law as a result of the purchase of shares of S&N
DonJoy Mexico, and (III) any Taxes applicable to the Business or for
which the Company or S&N DonJoy Mexico may otherwise be liable as a
result of transactions occurring on the Closing Date that are properly
allocable (based on the factors set forth in Treas. Reg. Section
1.1502-76(b)(1)(ii)(B)) to the portion of the Closing Date after the
Closing (Taxes described in this proviso, hereinafter "Excluded Taxes").
Investor and Smith & Nephew agree that, with respect to any transaction
described in clause (III) of the preceding sentence, the Company and all
persons related to the Company under Section 267(b) of the Code
immediately after the Closing shall treat such transaction for all
federal income Tax purposes (in accordance with Treas. Reg. Section
1.1502-76(b)(1)(ii)(B)), and (to the extent permitted) for other income
Tax purposes, as occurring at the beginning of the day following the
Closing Date. Smith & Nephew shall be entitled to any refund of (or
credit for) Taxes, other than Excluded Taxes paid or credited to
Investor, the Company or S&N DonJoy Mexico, allocable to any taxable year
or period that ends on or before the Closing Date and, with respect to
any Straddle Period, the portion of such Straddle Period ending on and
including the Closing Date.
(ii) The Company shall be liable for and pay, and pursuant to
Article XI (and subject to the limitations thereof) shall indemnify Smith
& Nephew against, (A) all Taxes applicable to the Business, or for which
the Company or S&N DonJoy Mexico may otherwise be liable, for any taxable
year or period that begins after the Closing Date and, with respect to
any Straddle Period, the portion of such Straddle Period beginning after
the Closing Date and (B) Excluded Taxes. Except as otherwise provided
herein, the Company shall be entitled to any refund of (or credit for)
Taxes allocable to any taxable year or period that begins after the
Closing Date and, with respect to any Straddle Period, the portion of
such Straddle Period beginning after the Closing Date and with respect to
Excluded Taxes.
(iii) For purposes of paragraphs (a)(i) and (a)(ii), whenever it
is necessary to determine the liability for Taxes for a Straddle Period,
the determination of the Taxes applicable to the portion of the Straddle
Period ending on and including, and the portion of the Straddle Period
beginning after, the Closing Date shall be determined by assuming that
the Straddle Period consisted of two taxable years or periods, one which
ended at the close of the Closing Date and the other which began at the
beginning of the day following the Closing Date, and items of income,
gain, deduction, loss or credit for the Straddle Period shall be
allocated between such two taxable years or periods on a "closing of the
books basis" by assuming that the books of the Company or S&N DonJoy
Mexico were closed at the close of the Closing Date, provided, however,
that (I) transactions occurring on the Closing Date that are properly
allocable (based on the factors set forth in Treas. Reg. Section
1.1502-76(b)(1)(ii)(B)) to the portion of the Closing Date after the
Closing shall be allocated to the taxable year or period that is deemed
to begin at the beginning of the day following the Closing Date, and (II)
exemptions, allowances, deductions and Taxes (such as real or personal
property Taxes) that are calculated on an annual basis, such as
-36-
<PAGE> 44
the deduction for depreciation, shall be apportioned between such two
taxable years or periods on a daily basis.
(iv) Notwithstanding anything herein to the contrary, Investor
shall pay, and shall indemnify each Smith & Nephew Group Member against,
any real property transfer or gains Tax, sales Tax, use Tax, value-added
Tax, stamp Tax, stock transfer Tax, or other similar Tax imposed on the
transactions contemplated by this Agreement.
(b) Tax Returns.
(i) Smith & Nephew shall file or cause to be filed when due
(taking into account all extensions properly obtained) in a manner
consistent with past practices and in accordance with applicable
Requirements of Law all Tax Returns that are required to be filed by or
with respect to the Business, the Company and S&N DonJoy Mexico for
taxable years or periods ending on or before the Closing Date and Smith &
Nephew shall remit or cause to be remitted any Taxes due in respect of
such Tax Returns, and the Company shall file or cause to be filed when
due (taking into account all extensions properly obtained) all Tax
Returns that are required to be filed by or with respect to the Business,
the Company and S&N DonJoy Mexico for taxable years or periods ending
after the Closing Date and the Company shall remit or cause to be
remitted any Taxes due in respect of such Tax Returns. Smith & Nephew or
the Company shall pay the other party for the Taxes for which Smith &
Nephew or the Company, respectively, is liable pursuant to paragraph (a)
of this Section 8.1 but which are payable with any Tax Return
to be filed by the other party pursuant to this paragraph (b) upon the
written request of the party entitled to payment, setting forth in detail
the computation of the amount owed by Smith & Nephew or the Company, as
the case may be, but in no event earlier than 10 days prior to the due
date for paying such Taxes.
(ii) None of Investor or the Company or any Affiliate of Investor
or the Company shall (or shall cause or permit the Company or S&N DonJoy
Mexico to) amend, refile or otherwise modify (or grant an extension of
any statute of limitation with respect to) any Tax Return relating in
whole or in part to the Business, the Company or S&N DonJoy Mexico with
respect to any taxable year or period ending on or before the Closing
Date (or with respect to any Straddle Period) without the prior written
consent of Smith & Nephew, which consent may be withheld in the
reasonable discretion of Smith & Nephew or unless required by applicable
Requirements of Law (it being understood that withholding of such consent
shall be deemed reasonable if any such action will materially increase
Smith & Nephew's liability for Taxes).
(c) Contest Provisions. The Company shall promptly notify Smith & Nephew
in writing upon receipt by it, any of its Affiliates or S&N DonJoy Mexico of
notice of any pending or threatened federal, state, local or foreign Tax audits,
examinations or assessments which might affect the Tax liabilities for which
Smith & Nephew may be liable pursuant to paragraph (a) of this Section 8.1.
Smith & Nephew shall have the sole right to represent the Company's and
S&N DonJoy Mexico's interests in any Tax audit or administrative or court
proceeding relating to
-37-
<PAGE> 45
taxable periods ending on or before the Closing Date or otherwise relating to
Taxes for which Smith & Nephew may be liable pursuant to paragraph (a) of this
Section 8.1, and to employ counsel of its choice at its expense; provided,
however, that Smith & Nephew shall provide timely notice to the Company of any
significant developments with respect to any such audit or proceeding; and
provided, further that the Company and its representatives shall be permitted,
at the Company's expense, to be present at, and participate in, any such audit
or proceeding (not including any such audit or proceeding relating to income
Taxes of Smith & Nephew). In the case of a Straddle Period, Smith & Nephew shall
be entitled to participate at its expense in any Tax audit or administrative or
court proceeding relating (in whole or in part) to Taxes attributable to the
portion of such Straddle Period ending on and including the Closing Date and,
with the written consent of the Company, and at Smith & Nephew's sole expense,
may assume the entire control of such audit or proceeding. Notwithstanding the
foregoing, Smith & Nephew shall not be entitled to settle, either
administratively or after the commencement of litigation, any claim for Taxes
which could adversely affect the liability for Taxes of the Company, S&N DonJoy
Mexico or Investor for any period after the Closing Date to any extent without
the prior written consent of the Company, which consent the Company may not
unreasonably withhold. Notwithstanding the foregoing, none of Investor, any of
its Affiliates, the Company or S&N DonJoy Mexico may settle any Tax claim for
any Taxes for which Smith & Nephew may be liable pursuant to paragraph (a) of
this Section 8.1, without the prior written consent of Smith & Nephew, which
consent may not be unreasonably withheld.
(d) Assistance and Cooperation. After the Closing Date, each of Smith &
Nephew, the Company and Investor shall (and shall cause their respective
Affiliates to):
(i) assist the other party in preparing any Tax Returns which such
other party is responsible for preparing and filing in accordance with
paragraph (b) of this Section 8.1;
(ii) cooperate fully in preparing for any audits of, or disputes
with taxing authorities regarding, any Tax Returns of the Company and S&N
DonJoy Mexico or otherwise relating to the Business;
(iii) make available to the other and to any taxing authority as
reasonably requested all information, records, and documents relating to
Taxes of the Business, the Company and S&N DonJoy Mexico;
(iv) provide timely notice to the other in writing of any pending
or threatened Tax audits or assessments of the Company and S&N DonJoy
Mexico for taxable periods for which the other may have a liability under
this Section 8.1;
(v) furnish the other with copies of all correspondence received
from any taxing authority in connection with any Tax audit or information
request with respect to any such taxable period;
(vi) timely sign and deliver such certificates or forms as may be
necessary or appropriate to establish an exemption from (or otherwise
reduce), or file Tax Returns
-38-
<PAGE> 46
or other reports with respect to, Taxes described in paragraph (a)(iv) of
this Section 8.1 (relating to sales, transfer and similar Taxes); and
(vii) timely provide to the other powers of attorney or similar
authorizations necessary to carry out the purposes of this Section 8.1.
(e) Election under Section 338 for S&N DonJoy Mexico. Smith & Nephew and
Investor agree that Investor shall not make any election under Section 338 of
the Code or under any applicable similar provision of state or foreign law with
respect to S&N DonJoy Mexico.
8.2 USE OF NAMES.
Smith & Nephew is not granting Investor or the Company or S&N DonJoy
Mexico a license to use any of Smith & Nephew's tradenames or trademarks
(including, without limitation, "Smith & Nephew"), and Investor shall not permit
the Company or S&N DonJoy Mexico to use in any manner after the Closing any
names or marks of Smith & Nephew or any of Smith & Nephew's Affiliates or any
word that is similar in sound or appearance to such names or marks. Investor
acknowledges that Smith & Nephew and its Affiliates would be irreparably harmed
by any breach of this Section 8.2 and that any relief under Article XI will be
inadequate to compensate Smith & Nephew or such Affiliates for any such breach.
Accordingly, Investor agrees that, in addition to any relief available under
Article XI, Smith & Nephew and its Affiliates shall be entitled, without the
necessity of proving actual damages or posting any bond, to injunctive relief
against Investor and any involved Affiliates of Investor in the event of any
breach or threatened breach by Investor (or its Affiliates) of its covenants and
agreements in this Section 8.2 and Investor (on behalf of itself and its
Affiliates) consents to the entry thereof. Notwithstanding any provision of this
Agreement, the Company and S&N DonJoy Mexico shall have the right to distribute
materials marked with tradenames or trademarks of Smith & Nephew printed on such
materials prior to the Closing Date, provided that commencing with the 90th day
after the Closing Date and until the first anniversary of the Closing Date,
Investor shall cause the Company and S&N DonJoy Mexico where feasible to remove
such names and marks or to indicate thereon prior to any use thereof the change
in the ownership of the Company and S&N DonJoy Mexico and, in any event, on and
after the first anniversary of the Closing Date, Investor shall cause the
Company and S&N DonJoy Mexico to remove such names and marks. Investor agrees
that promptly after the Closing Date it shall cause S&N DonJoy Mexico to change
its corporate name to a name that does not include the words "Smith & Nephew" or
"S&N" or any variations thereof.
8.3 EMPLOYEE MATTERS.
On or before the Closing Date, all individuals who are employed by Smith
& Nephew with respect to the Business, including all such employees who are on a
leave of absence for any reason other than employees who have applied for or are
receiving long-term disability benefits, shall become employees of the Company.
Nothing in this Agreement shall be interpreted as giving any employee any right
to be employed by the Company or S&N DonJoy Mexico after the Closing Date for
any period of time or to enforce any provision of this Agreement, whether as a
third-party beneficiary or otherwise. Investor shall not cause or allow the
Company to take any action after the Closing Date which results in the
imposition on the Company of any
-39-
<PAGE> 47
liabilities under the Workers' Adjustment and Retraining Notification Act. From
and after the Closing Date, persons who are employed by the Company or S&N
DonJoy Mexico shall not participate in or have any rights with respect to
employee benefit programs of Smith & Nephew, except to the extent otherwise
provided pursuant to the terms of such programs.
8.4 COMPENSATION AND EMPLOYEE BENEFIT PLAN MATTERS.
(a) Except as otherwise provided in this Section 8.4, neither Investor
nor the Company shall assume any Company Plan maintained by Smith & Nephew prior
to the Closing Date. On and after the Closing Date, S&N DonJoy Mexico shall
continue to maintain and be responsible for all liabilities under each Company
Plan maintained by S&N DonJoy Mexico prior to the Closing Date and Smith &
Nephew shall have no obligations or liability with respect to such Company
Plans.
(b) During the period from the Closing Date through the date that is six
months after the Closing Date, Investor shall cause the Company or S&N DonJoy
Mexico, as the case may be, to pay wages and salaries to, and provide employee
benefit programs on behalf of, Current Employees that are no less favorable in
the aggregate than the compensation and benefits which such Current Employees
were entitled to receive immediately before the Closing Date; provided, that a
discretionary profit sharing plan shall be considered no less favorable than the
Smith & Nephew U.S. Pension Plan for purposes of this Agreement. Investor shall
have no obligation to cause the Company to maintain any defined benefit plan
after the Closing Date. The Company and S&N DonJoy Mexico shall pay, perform and
discharge when due any and all liabilities, obligations or commitments relating
to or arising under all compensation and employee benefit programs maintained by
the Company or S&N DonJoy Mexico on or after the Closing Date. Investor's (or
the Company's) benefit programs shall for purposes of determining eligibility to
participate and vesting and for purposes of computing benefits (but subject to
an offset, if necessary, to avoid duplication of benefits), take into account
all employment of Current Employees by Smith & Nephew or any ERISA Affiliate.
Investor shall (or shall cause the Company to) credit Current Employees with all
health plan deductibles and co-payments paid with respect to the 1999 plan year
to the extent such amounts would have been taken into account under a Company
Plan prior to the Closing.
(c) Investor shall take any and all actions as it shall deem necessary or
appropriate to cause the Current Employees who are eligible to participate in
the Smith & Nephew U.S. Savings Plan prior to the Closing Date to be eligible to
participate, as of the Closing Date, in a defined contribution plan which is
tax-qualified under section 401(a) of the Code ("Investor's Savings Plan").
Smith & Nephew and Investor shall, as soon as is practicable after the Closing
Date, take any and all action as shall be necessary to cause the Smith & Nephew
U.S. Savings Plan to transfer to Investor's Savings Plan the account balances
(including outstanding loans) and assets relating thereto held under the Smith &
Nephew U.S. Savings Plan in respect of the Current Employees who have not by the
date of transfer received a distribution of their accounts thereunder. Upon the
acceptance of such assets by Investor's Savings Plan, Investor's Savings Plan
shall assume the liabilities of the Smith & Nephew U.S. Savings Plan to the
Current Employees for whom such assets were transferred.
-40-
<PAGE> 48
(d) Investor shall cause the Company, a successor employer for federal,
state and local withholding and employment Taxes, to assume Smith & Nephew's
responsibilities as predecessor employer for filing all federal, state and local
withholding income tax and employment tax returns and to furnish for the 1999
calendar year Forms W-2 and similar forms relating to all Current Employees
formerly employed by Smith & Nephew for such year that are due after the Closing
Date. Investor shall assume such responsibility in accordance with the
alternative procedure described in Section 5 of Revenue Procedure 96-60. Smith &
Nephew shall comply with all of the requirements set forth in such alternative
procedure that are imposed on a predecessor employer and Investor shall cause
the Company to comply with all of the requirements set forth in such procedure
that are imposed on a successor employer. Smith & Nephew shall provide
information and data to the Company upon request with respect to the wages of
Current Employees and related payroll Taxes for the 1999 calendar year through
the last regular wage payment prior to the Closing Date in order for the Company
to file timely and proper tax returns and forms for such year. Nothing in this
Section 8.4(d) shall limit Smith & Nephew's (i) liability for Taxes pursuant to
Section 8.1 or (ii) obligations to indemnify Investor, the Company or S&N DonJoy
Mexico pursuant to Section 11.1.
(e) After the Closing, the Company shall be liable for and shall perform
all obligations of Smith & Nephew under the Retention Agreement, except that
Smith & Nephew shall remain liable for and shall pay any amounts due and owing
under the Retention Agreements with respect to any "Retention Bonuses" or
"Special Sale Bonuses" (each as described in the section entitled "Compensation
and Benefits" of the Retention Agreements).
(f) Smith & Nephew shall be responsible for providing health care
continuation coverage pursuant to the requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), to the extent required
by COBRA, for all former employees of the Business and/or their dependents who
were receiving health care continuation coverage or who had a "qualifying event"
under COBRA prior to the Closing Date.
(g) Smith & Nephew shall take all actions that are necessary to provide
that all Current Employees who remain employees of the Company after the Closing
(i) are fully vested in their account balances in the Smith & Nephew U.S.
Savings Plan and (ii) will receive credit for their service with the Company
following the Closing Date for purposes of determining their vesting, but not
their benefit accrual, under the Smith & Nephew U.S. Pension Plan.
(h) Prior to the date Smith & Nephew transfers any assets to the
Investor's Savings Plan, Smith & Nephew shall provide Investor with a copy of
the favorable determination letter issued by the Internal Revenue Service with
respect to the Smith & Nephew U.S. Savings Plan.
8.5 COVENANT NOT TO COMPETE; PROPRIETARY PRODUCTS.
(a) In furtherance of the transactions contemplated hereby, Smith &
Nephew covenants and agrees that, for a period ending on the fifth anniversary
of the Closing Date, neither Smith & Nephew nor any of its Affiliates will
engage, directly or indirectly, anywhere in the world in the "Seller's
Restricted Business" (as defined below) in competition with the Business as it
exists on the Closing Date (it being understood by the parties hereto that the
Business is not limited to any particular region of the world and that such
business may be
-41-
<PAGE> 49
engaged in effectively from any location anywhere in the world); provided,
however, that nothing set forth in this Section shall prohibit Smith & Nephew or
its Affiliates from:
(i) owning not in excess of 5% in the aggregate of any class of
capital stock or other equity interest of any Person;
(ii) owning an interest acquired as a creditor in bankruptcy or
otherwise than by a voluntary investment decision;
(iii) acquiring the assets or capital stock or other equity
interests of any other Person engaged in the Seller's Restricted Business
if less than 20% of the assets or sales of such Person as reflected in
its most recent financial statements relate to the Seller's Restricted
Business; provided, however, that if Smith & Nephew or any of its
Affiliates acquires substantially all of the assets or all of the capital
stock or other equity interests of any other Person, greater than 20% but
not greater than 40% of the assets or sales of which, as reflected in
such Person's most recent financial statements, relate to the Seller's
Restricted Business, then Smith & Nephew shall, within nine months of the
acquisition of the assets or capital stock or other equity interest of
such Person, divest assets to the extent necessary so that less than 20%
of the assets or sales of the entity or business so acquired relate to
the Seller's Restricted Business ; or
(iv) engaging in any of the activities described in Schedule
8.5(a)(i).
In addition, Smith & Nephew covenants and agrees that neither it nor any
of its Affiliates will divulge or make use of any trade secrets or other
confidential information of the Business other than to disclose such secrets and
information to Investor or its Affiliates. Without limiting the right of
Investor to pursue all other legal and equitable rights available to it for
violation of this Section by Smith & Nephew or its Affiliates, it is agreed that
other remedies cannot fully compensate Investor for such a violation and that
Investor shall be entitled to injunctive relief to prevent violation or
continuing violation thereof without the necessity of posting a bond or proving
actual damages. It is the intent and understanding of each party hereto that if,
in any action before any court or agency legally empowered to enforce this
Section any term, restriction, covenant or promise in this Section is found to
be unreasonable and for that reason unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to make it
enforceable by such court or agency. Smith & Nephew agrees to notify its
Affiliates of the restrictions contained in this Section 8.5(a).
For purposes of this Section 8.5(a),(i) the term "Seller's Restricted
Business" shall mean those businesses listed on Schedule 8.5(a)(ii).
(b) Investor acknowledges that the Company and the Business have obtained
access to certain proprietary information described on Schedule 8.5(b)(i) (the
"Proprietary Information") relating to the RCI Screw System, including, without
limitation, the products listed on Schedule 8.5(b)(ii) (collectively, the
"Proprietary Products") as a result of being affiliated with Smith & Nephew. In
furtherance of the transactions contemplated hereby, Investor agrees that it,
the Company and its subsidiaries shall treat in confidence and not use or
disclose any Proprietary Information. The obligation to treat Proprietary
Information in confidence shall not
-42-
<PAGE> 50
apply to the extent such Proprietary Information (i) is or becomes available to
the public other than as a result of disclosure by Investor, the Company or any
subsidiary of the Company or (ii) is required to be disclosed under applicable
law or judicial process, but only to the extent it must be disclosed. In
addition, Investor agrees that neither it nor the Company or any of its
subsidiaries, will, directly or indirectly, develop or market any product which
competes with the Proprietary Products in cooperation with or with any
promotional or marketing support from any of the Persons listed in Schedule
8.5(b)(iii); provided, however, that the restrictions contained in this sentence
shall not apply to any Person whose capital stock or other equity interest is
acquired by, or any business substantially all of the assets of which are
acquired by, Investor, the Company and any subsidiaries of the Company. Without
limiting the right of Smith & Nephew to pursue all other legal and equitable
rights available to it for violation of this Section by Investor or its
Affiliates, it is agreed that other remedies cannot fully compensate Smith &
Nephew for such a violation and that Smith & Nephew shall be entitled to
injunctive relief to prevent violation or continuing violation thereof without
the necessity of posting a bond or proving actual damages. It is the intent and
understanding of each party hereto that if, in any action before any court or
agency legally empowered to enforce this Section, any term, restriction,
covenant or promise in this Section is found to be unreasonable and for that
reason unenforceable, then such term, restriction, covenant or promise shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency.
8.6 NON SOLICITATION OF EMPLOYEES.
(a) For a period of three years from the date hereof, Smith & Nephew
shall not, directly or indirectly through any other Person, induce or attempt to
persuade any employee of the Company, S&N DonJoy Mexico or any of their
respective subsidiaries (including, without limitation the Operating Subsidiary)
to leave the employ of such Person; provided, however, that this Section 8.6(a)
shall not prohibit Smith & Nephew from conducting generalized solicitations for
employees through the use of media advertisements, professional search firms or
otherwise and hiring employees through the use of such solicitations.
(b) For a period of three years from the date hereof, neither Investor
nor the Company shall, directly or indirectly through any other Person, induce
or attempt to persuade any employee of Smith & Nephew or any of its
subsidiaries, or any employee of any Affiliate of Smith & Nephew involved in the
international distribution of the products of the Business, to leave the employ
of such Person; provided, however, that this Section 8.6(b) shall not prohibit
Investor or the Company from conducting generalized solicitations for employees
through the use of media advertisements, professional search firms or otherwise
and hiring employees through the use of such solicitations.
8.7 VICTORIA UNIVERSITY OF MANCHESTER TECHNOLOGY MATTERS.
Pursuant to an Exclusive Evaluation Agreement dated January 5, 1998
between the Victoria University of Manchester ("Victoria University") and Smith
& Nephew plc (the "Evaluation Agreement"), Smith & Nephew is negotiating with
Victoria University to obtain exclusive rights to the Victoria Patents (as
defined below). Smith & Nephew will use commercially reasonable efforts to
assist the Operating Subsidiary in the negotiation of a separate license
agreement (with Smith & Nephew leading such negotiations and affording to the
-43-
<PAGE> 51
Company the opportunity to attend any meetings or negotiations with Victoria
University) relating to products within the Seller's Restricted Business with
Victoria University with respect to the Victoria Patents. In determining if a
product that incorporates technology covered by the Victoria Patents is a
"Hi-Tech Hinged Knee Brace" for purposes of Schedule 8.5(a)(ii), the List Price
(as defined in Schedule 8.5(a)(ii)) of the base product, excluding such
technology, shall apply. Any costs associated with the negotiation, execution or
operation under any separate license agreement between the Operating Subsidiary
and Victoria University will be the sole responsibility and obligation of the
Operating Subsidiary. The Company will not, without the consent of Smith &
Nephew, obtain or negotiate a license with Victoria University with respect to
the Victoria Patents relating to products that are not within the Seller's
Restricted Business. For purposes of this Agreement, "Victoria Patents" shall
mean patents or patent applications currently owned by Victoria University
relating to the use of electrostimulation therapy products for skeletal muscle
rehabilitation, including the patents and patent applications set forth in
Schedule 8.7. If Smith & Nephew and the Operating Subsidiary are unable to
negotiate a separate license agreement, Smith & Nephew will use commercially
reasonable efforts to enter into an exclusive license agreement with Victoria
University relating the Victoria Patents ("Victoria License Agreement"), and to
enter into an exclusive worldwide sublicense to the Victoria License Agreement
with the Operating Subsidiary which sublicense shall grant the Operating
Subsidiary the exclusive right to make, use or sell products within the Seller's
Restricted Business which are covered by the Victoria Patents, subject to
approval of Victoria University ("Sublicense Agreement"). The Sublicense
Agreement shall provide for the payment of royalties due under the Victoria
License Agreement directly to Victoria University by the Operating Subsidiary.
Any payments due to Victoria University upon the satisfaction of any condition
or achievement of milestones pursuant to the Victoria License Agreement shall be
paid by the party which first satisfies the condition or achieves the milestone;
provided, however, that when and if the other party independently satisfies such
condition or achieves such milestone (if such condition had not previously been
satisfied or milestone been achieved), then such second party shall pay to the
first party one-half of such payment to Victoria University.
8.8 IZEX LICENSE.
It is the understanding of the parties that after the Closing Smith &
Nephew may enter into a license agreement with IZEX Technologies, Incorporated
("IZEX"), pursuant to which Smith & Nephew would have the right to use certain
intellectual property rights relating to products for use with the human wrist
(the "IZEX Wrist License"). Investor and the Company agree that the Company and
the Operating Subsidiary will not bring any claim, action or proceeding to
prevent, block or seek modification of the IZEX Wrist License in any manner on
the grounds of interference with the license agreement between Smith & Nephew
and IZEX dated August 7, 1998, which agreement has been assigned to the Company,
or otherwise.
8.9 ACL BRACE TECHNOLOGY.
Smith & Nephew hereby assigns to the Company its entire right, title and
interest in and to the ACL Brace Technology (as defined below), together with
the right to seek patent protection for such technology in the United States and
all foreign countries, including, without limitation, all claims for any past,
present or future infringement, misappropriation, or other unauthorized use of
such technology. Smith & Nephew shall, at the Company's request and
-44-
<PAGE> 52
expense, provide cooperation and assistance to the Company in the preparation
and prosecution of any patent applications relating to the ACL Brace Technology
and the prosecution or defense of any legal proceeding relating to such patent
applications or any patents issuing thereon or the ACL Brace Technology,
including without limitation, the execution and delivery of any and all
affidavits, declarations, oaths, exhibits, assignments, powers of attorney or
other documentation as may be reasonably required. Smith & Nephew shall fully
disclose and cause its Affiliates to fully disclose, the ACL Brace Technology to
the Company, and Smith & Nephew shall deliver and cause its Affiliates to
deliver to the Company all tangible embodiments of the ACL Brace Technology,
including, without limitation, all documents, devices and computer software that
disclose or embody such technology. Smith & Nephew has not executed and will not
execute any agreement in conflicts with this assignment. As used herein, "ACL
Brace Technology" shall mean all technology, research and development,
information, inventions, ideas, improvements, know-how, trade secrets, technical
data, devices, computer software, and copyrights developed by or for Smith &
Nephew or any of its Affiliates (including, without limitation, the Group
Research Centre) as of the Closing Date relating exclusively to (improvements
in) anterior and posterior cruciate ligament bracing.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF INVESTOR
The obligations of Investor under this Agreement shall, at the option of
Investor (to the extent permissible under applicable law), be subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:
9.1 NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES.
There shall have been no material breach by Smith & Nephew in the
performance of any of its covenants and agreements herein which shall not have
been remedied or cured; each of the representations and warranties of Smith &
Nephew contained in this Agreement shall be true and correct on the Closing Date
as though made on the Closing Date (except to the extent that they expressly
relate to an earlier date, in which case, such representations and warranties
shall be true and correct on such date), except where the failure to be so true
and correct has not had and is not reasonably likely to have a Material Adverse
Effect (for such purposes (i) all breaches of representations and warranties
shall be taken as a whole and (ii) any representation or warranty which contains
a qualification or exception that contains the term "Material Adverse Effect"
shall be read without such qualification or exception; provided, however, that
the foregoing shall not effect the applicability of terms other than "Material
Adverse Effect" that qualify such representations and warranties by materiality)
and except for changes therein specifically permitted by this Agreement or
resulting from any transaction expressly consented to in writing by Investor or
any transaction permitted by Section 7.4; and there shall have been delivered to
Investor a certificate to such effect, dated the Closing Date, signed on behalf
of Smith & Nephew by the President or any Vice President of Smith & Nephew.
-45-
<PAGE> 53
9.2 NO RESTRAINT.
The waiting period under the HSR Act shall have expired or been
terminated, and no injunction or restraining order shall have been issued by any
United States, Mexico or United Kingdom court of competent jurisdiction and be
in effect which restrains or prohibits any material transaction contemplated
hereby.
9.3 NECESSARY GOVERNMENTAL APPROVALS.
All approvals and actions of or by all United States Governmental Bodies
which are necessary to consummate the transactions contemplated hereby shall
have been obtained or taken place, other than those as to which the failure to
have been obtained or taken place is not reasonably expected to have a Material
Adverse Effect. No federal or California state Requirement of Law shall have
been enacted which prohibits, restricts or delays consummation of any material
transaction contemplated hereby.
9.4 NECESSARY CONSENTS.
Smith & Nephew shall have received the consents, in form and substance
reasonably satisfactory to Investor, which are specified in Schedule 9.4.
9.5 FINANCING.
The Investor, the Company and the Operating Subsidiary, as applicable,
shall have received the proceeds of the financing contemplated by the commitment
letter(s) disclosed to Smith & Nephew in Schedule 6.3 on the terms described
therein (or such other terms not contemplated in such commitment letters as are
agreed between the parties thereto) in an amount necessary to consummate the
transactions contemplated hereby.
Notwithstanding the failure of any one or more of the foregoing
conditions, Investor may proceed with the Closing without satisfaction, in whole
or in part, of any one or more of such conditions and without written waiver.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF
SMITH & NEPHEW AND THE COMPANY
The obligations of Smith & Nephew and the Company under this Agreement
shall, at the option of Smith & Nephew (to the extent permissible under
applicable law), be subject to the satisfaction, on or prior to the Closing
Date, of the following conditions:
10.1 NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES.
There shall have been no material breach by Investor in the performance
of any of its covenants and agreements herein which shall not have been remedied
or cured; each of the representations and warranties of Investor contained in
this Agreement shall be true and correct in all material respects on the Closing
Date as though made on the Closing Date (except to the
-46-
<PAGE> 54
extent they expressly relate to an earlier date, in which case such
representations and warranties shall be true and correct on such date), except
for changes therein specifically permitted by this Agreement or resulting from
any transaction expressly consented to in writing by Smith & Nephew or any
transaction contemplated by this Agreement; and there shall have been delivered
to Smith & Nephew a certificate to such effect, dated the Closing Date and
signed on behalf of Investor by the President or any Vice President of Investor.
10.2 NO RESTRAINT.
The waiting period under the HSR Act shall have expired or been
terminated, and no injunction or restraining order shall have been issued by any
United States, Mexico or United Kingdom court of competent jurisdiction and be
in effect which restrains or prohibits any material transaction contemplated
hereby.
10.3 NECESSARY GOVERNMENTAL APPROVALS.
All approvals and actions of or by all Governmental Bodies which are
necessary to consummate the transactions contemplated hereby shall have been
obtained or taken place, other than those as to which the failure to have been
obtained or taken place is not reasonably expected to have a material adverse
effect on the ability of Smith & Nephew or the Company to consummate the
transactions contemplated by this Agreement. No federal or California state
Requirement of Law shall have been enacted which prohibits, restricts or delays
the consummation of any material transaction contemplated hereby.
10.4 OTHER AGREEMENTS.
The Company and Investor, as applicable, shall have executed and
delivered to Smith & Nephew the Members' Agreement, the Group Research Centre
Technology Agreement, the Supply Agreement, the CERF Laboratory Agreement and
the Vista Guarantees.
Notwithstanding the failure of any one or more of the foregoing
conditions, Smith & Nephew may proceed with the Closing without satisfaction, in
whole or in part, of any one or more of such conditions and without written
waiver.
ARTICLE XI
INDEMNIFICATION
11.1 INDEMNIFICATION BY SMITH & NEPHEW.
(a) Smith & Nephew agrees to indemnify and hold harmless each Investor
Group Member from and against any and all Loss and Expense incurred by such
Investor Group Member in connection with or arising from:
(i) any breach by Smith & Nephew of any of its covenants or
agreements in this Agreement or any Smith & Nephew Ancillary Agreement
(other than the Group Research Centre Technology Agreement, the Supply
Agreement, the Transition Services Agreement, the Distribution Agreement
and the CERF Laboratory Agreement);
-47-
<PAGE> 55
(ii) any breach of any warranty or the inaccuracy of any
representation of Smith & Nephew contained in this Agreement (other than
those contained in Section 12.2) or any Smith & Nephew Ancillary
Agreement (other than the Group Research Centre Technology Agreement, the
Supply Agreement, the Transition Services Agreement, the Distribution
Agreement and the CERF Laboratory Agreement);
(iii) the Tax liabilities for which Smith & Nephew is liable
pursuant to Section 8.1; or
(iv) the Excluded Liabilities;
provided, however, that Smith & Nephew shall be required to indemnify and hold
harmless under clause (ii) of this Section 11.1(a) with respect to Losses and
Expenses incurred by Investor Group Members only to the extent that the
aggregate amount of such Losses and Expenses exceeds $3,000,000; and provided,
further, that the aggregate amount required to be paid by Smith & Nephew
pursuant to clause (ii) of this Section 11.1(a) shall not exceed $75,000,000.
(b) The indemnification provided for in Section 11.1(a)(i) and (a)(ii)
shall terminate 15 months after the Closing Date (and no claims shall be made by
any Investor Group Member under this Section 11.1 thereafter), except that the
indemnification by Smith & Nephew shall continue as to:
(i) the covenants and agreements of Smith & Nephew set forth in
Sections 7.6, 7.7, 8.1, 8.2, 8.3, 8.4, 8.7, 8.8, 8.9 and Article XIV
(other than Section 14.6), as to all of which no time limitation shall
apply;
(ii) the covenants and agreements of Smith & Nephew set forth in
Section 8.5(a),8.6 and 14.6, as to which the indemnification provided for
in this Section 11.1 shall terminate upon expiration of the period
provided for in such Section;
(iii) the representations and warranties of Smith & Nephew set
forth in Sections 5.2, 5.3 and 5.4(a), as to all of which no time
limitation shall apply;
(iv) the representations and warranties of Smith & Nephew set
forth in Section 5.10, as to which the indemnification provided in this
Section 11.1 shall terminate upon the expiration of the applicable
statute of limitations; and
(v) any Loss or Expense of which any Investor Group Member has
notified Smith & Nephew in accordance with the requirements of Section
11.3 on or prior to the date such indemnification would otherwise
terminate in accordance with this Section 11.1, as to which the
obligation of Smith & Nephew shall continue until the liability of Smith
& Nephew shall have been determined pursuant to this Article XI, and
Smith & Nephew shall have reimbursed all Investor Group Members for the
full amount of such Loss and Expense in accordance with this Article XI.
-48-
<PAGE> 56
11.2 INDEMNIFICATION BY INVESTOR.
(a) Investor agrees to indemnify and hold harmless each Smith & Nephew
Group Member from and against any and all Loss and Expense incurred by such
Smith & Nephew Group Member in connection with or arising from:
(i) any breach by Investor of any of its covenants or agreements
in this Agreement or any Investor Ancillary Agreement or any breach by
the Company of any of its covenants or agreements in this Agreement or in
any Investor Ancillary Agreement to be performed after the Closing;
(ii) any breach of any warranty or the inaccuracy of any
representation of Investor contained in this Agreement or in any Investor
Ancillary Agreement;
(iii) the Tax liabilities for which the Company is liable pursuant
to Section 8.1;
(iv) the employment, or termination of employment, of any Current
Employees on or after the Closing Date, including without limitation the
payment of compensation earned or benefits accrued by Current Employees
on or after the Closing Date; or
(v) the Assumed Liabilities;
provided, however, that Investor shall be required to indemnify and hold
harmless under clause (ii) of this Section 11.2(a) with respect to Losses and
Expenses incurred by Smith & Nephew Group Members only to the extent that the
aggregate amount of such Losses and Expenses exceeds $3,000,000; and provided,
further, that the aggregate amount required to be paid by Investor pursuant to
clause (ii) of this Section 11.2(a) shall not exceed $75,000,000.
(b) The indemnification provided for in Section 11.2(b)(i) and (b)(ii)
shall terminate 15 months after the Closing Date (and no claims shall be made by
any Smith & Nephew Group Member under this Section 11.2 thereafter), except that
the indemnification by Investor shall continue as to:
(i) the covenants of Investor set forth in Sections 8.1, 8.2, 8.3,
8.4, 8.5(b), 8.7, 8.8 and Article XIV (other than Section 14.6), as to
all of which no time limitation shall apply;
(ii) the covenants of Investor set forth in Sections 8.6, 13.3 and
14.6 as to which the indemnification provided for in this Section 11.2
shall terminate upon the expiration of the period provided for in such
Section;
(iii) the representations and warranties of Investor set forth in
Sections 6.1, 6.2(a) and 6.4, as to all of which no time limitation shall
apply; and
(iv) any Loss or Expense of which any Smith & Nephew Group Member
has notified Investor in accordance with the requirements of Section 11.3
on or prior to
-49-
<PAGE> 57
the date such indemnification would otherwise terminate in accordance
with this Section 11.2, as to which the obligation of Investor shall
continue until the liability of Investor shall have been determined
pursuant to this Article XI, and Investor shall have reimbursed all Smith
& Nephew Group Members for the full amount of such Loss and Expense in
accordance with this Article XI.
11.3 NOTICE OF CLAIMS.
(a) Any Investor Group Member or Smith & Nephew Group Member (the
"Indemnified Party") seeking indemnification hereunder shall give to the party
obligated to provide indemnification to such Indemnified Party (the
"Indemnitor") a notice (a "Claim Notice") describing in reasonable detail the
facts giving rise to any claim for indemnification hereunder and shall include
in such Claim Notice (if then known) the amount or the method of computation of
the amount of such claim, and a reference to the provision of this Agreement or
any other agreement, document or instrument executed hereunder or in connection
herewith upon which such claim is based; provided, that a Claim Notice in
respect of any action at law or suit in equity by or against a third Person as
to which indemnification will be sought shall be given promptly after the action
or suit is commenced; provided, that failure to give such notice shall not
relieve the Indemnitor of its obligations hereunder except to the extent the
Indemnitor shall have been prejudiced by such failure (it being understood that
this proviso does not modify or otherwise affect the time periods specified in
Sections 11.1 and 11.2).
(b) In calculating any Loss or Expense there shall be deducted (i) any
insurance recovery actually received by the Indemnified Party (less any
deductibles and any resulting premium increases) in respect thereof (and no
right of subrogation shall accrue hereunder to any insurer) and (ii) the amount
of any Tax benefit actually received by the Indemnified Party (or any of its
Affiliates) with respect to such Loss or Expense (after giving effect to the Tax
effect of receipt of the indemnification payments). In no event shall Investor
be entitled to indemnification under this Agreement for any Loss or Expense that
is reflected in the adjustment to the Existing Membership Interest Purchase
Price pursuant to Article III to the extent (and only to the extent) such Loss
or Expense is so reflected in such adjustment.
(c) After the giving of any Claim Notice pursuant hereto, the amount of
indemnification to which an Indemnified Party shall be entitled under this
Article XI shall be determined: (i) by the written agreement between the
Indemnified Party and the Indemnitor; (ii) by a final judgment or decree of any
court of competent jurisdiction; or (iii) by any other means to which the
Indemnified Party and the Indemnitor shall agree. The judgment or decree of a
court shall be deemed final when the time for appeal, if any, shall have expired
and no appeal shall have been taken or when all appeals taken shall have been
finally determined. The Indemnified Party shall have the burden of proof in
establishing the amount of Loss and Expense suffered by it.
11.4 THIRD PERSON CLAIMS.
(a) Subject to Section 11.4(b), the Indemnified Party shall have the
right to conduct and control, through counsel of its choosing, the defense,
compromise or settlement of any third Person claim, action or suit against such
Indemnified Party as to which indemnification
-50-
<PAGE> 58
will be sought by any Indemnified Party from any Indemnitor hereunder, and in
any such case the Indemnitor shall cooperate in connection therewith and shall
furnish such records, information and testimony and attend such conferences,
discovery proceedings, hearings, trials and appeals as may be reasonably
requested by the Indemnified Party in connection therewith; provided, that the
Indemnitor may participate, through counsel chosen by it and at its own expense,
in the defense of any such claim, action or suit as to which the Indemnified
Party has so elected to conduct and control the defense thereof; and provided,
further, that the Indemnified Party shall not, without the written consent of
the Indemnitor (which written consent shall not be unreasonably withheld), pay,
compromise or settle any such claim, action or suit. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay, settle or
compromise any such claim, action or suit, provided that in such event the
Indemnified Party shall waive any right to indemnity therefor hereunder.
(b) If any third Person claim, action or suit against any Indemnified
Party is solely for money damages or, where Smith & Nephew is the Indemnitor,
will have no continuing effect in any material respects on the Company or S&N
DonJoy Mexico, then the Indemnitor shall have the right to conduct and control,
through counsel of its choosing, the defense, compromise or settlement of any
such third Person claim, action or suit against such Indemnified Party as to
which indemnification will be sought by any Indemnified Party from any
Indemnitor hereunder if the Indemnitor has acknowledged and agreed in writing
that, if the same is adversely determined, the Indemnitor has an obligation to
provide indemnification to the Indemnified Party in respect thereof, and in any
such case the Indemnified Party shall cooperate in connection therewith and
shall furnish such records, information and testimony and attend such
conferences, discovery proceedings, hearings, trials and appeals as may be
reasonably requested by the Indemnitor in connection therewith; provided, that
the Indemnified Party may participate, through counsel chosen by it and at its
own expense, in the defense of any such claim, action or suit as to which the
Indemnitor has so elected to conduct and control the defense thereof. The
Indemnitor shall not pay, settle or compromise any such claim without obtaining
an unconditional general release of the Indemnified Party. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay, settle or
compromise any such claim, action or suit, provided that in such event the
Indemnified Party shall waive any right to indemnity therefor hereunder.
(c) If there shall be any conflicts between the provisions of this
Section 11.4 and Section 8.1(c) (relating to Tax contests), the provision of
Section 8.1(c) shall control with respect to Tax contests.
11.5 EXCLUSIVE REMEDY.
Except for remedies that cannot be waived as a matter of law, if the
Closing occurs, this Article XI shall be the exclusive remedy for breach of the
representations and warranties contained in Article V or VI or the corresponding
certificates delivered pursuant to Section 4.3 and Section 4.4.
-51-
<PAGE> 59
11.6 ADJUSTMENT TO PURCHASE PRICE.
Investor and Smith & Nephew agree that, for purposes of computing the
amount of any indemnification payment under this Article XI, any such
indemnification payment shall be treated as an adjustment to the New Membership
Interest Purchase Price for all Tax purposes.
ARTICLE XII
ENVIRONMENTAL MATTERS
12.1 SCOPE.
This Article XII contains (i) the complete and entire agreement between
Investor and Smith & Nephew regarding, and sets forth the responsibilities,
liabilities, rights and remedies of Investor and Smith & Nephew, vis-a-vis each
other, in respect of any Environmental Loss or Environmental Expense resulting
from, or any Environmental Matters relating to or otherwise affecting, the
Company or its assets and (ii) the sole representations, warranties and
indemnities made by Investor and Smith & Nephew with respect to any
Environmental Matters.
12.2 REPRESENTATIONS AND WARRANTIES OF SMITH & NEPHEW REGARDING ENVIRONMENTAL
MATTERS.
As an inducement to Investor to enter into this Agreement and to
consummate the transactions contemplated hereby, Smith & Nephew represents and
warrants to Investor that, except as set forth in Schedule 12.2:
(a) The operations of the Company have complied and are currently in
compliance in all material respects with all applicable Environmental Laws.
(b) The Company owns, holds or possesses all material Governmental
Permits which are necessary under Environmental Laws to entitle it to own or
lease, operate and use its assets and to carry on and conduct the Business
substantially as currently conducted.
(c) To the Knowledge of Smith & Nephew, the Company is not subject to any
investigation by, order from or written agreement with any Person (including
without limitation any prior owner or operator of the Company Real Property)
respecting (i) any Environmental Law or common law, (ii) any Remedial Action or
(iii) any claim of Environmental Losses and Environmental Expenses arising from
the Release or threatened Release of a Contaminant into the environment.
(d) The Company is not subject to any judicial or administrative
proceeding, order, judgment, decree or settlement alleging or addressing a
violation of or liability under any Environmental Law or common law, which
proceeding, order, judgment, decree or settlement is reasonably expected to have
a Material Adverse Effect.
(e) To the Knowledge of Smith & Nephew, neither Smith & Nephew nor the
Company has received any written notice or claim to the effect that it is or may
be liable to any Person as a result of the Release of a Contaminant into the
environment from or on the Company
-52-
<PAGE> 60
Real Property or any third party disposal site, which notice or claim is
reasonably expected to have a Material Adverse Effect.
(f) To the Knowledge of Smith & Nephew, no Environmental Encumbrance has
attached to the Company Real Property.
12.3 INDEMNIFICATION BY SMITH & NEPHEW FOR ENVIRONMENTAL MATTERS.
(a) Smith & Nephew agrees to indemnify and hold harmless each Investor
Group Member from and against any and all Environmental Losses and Environmental
Expenses incurred by such Investor Group Member in connection with or arising
from any breach of any warranty or the inaccuracy of any representation of Smith
& Nephew contained in Section 12.2; provided, however, that Smith & Nephew shall
be required to indemnify and hold harmless under this Section 12.3 with respect
to Environmental Loss and Environmental Expense incurred by Investor Group
Members only to the extent that the aggregate amount of such Environmental Loss
and Environmental Expense exceeds $750,000 and provided, further, that the
aggregate amount required to be paid by Smith & Nephew pursuant to this Section
12.3 shall not exceed $7,500,000.
(b) The indemnification provided for in this Section 12.3 shall terminate
three years and six months after the Closing Date (and no claims shall be made
by any Investor Group Member under this Section 12.3 thereafter), except that
the indemnification by Smith & Nephew shall continue as to any Environmental
Loss or Environmental Expense of which any Investor Group Member has notified
Smith & Nephew in accordance with the requirements of Section 12.5 on or prior
to the date such indemnification would otherwise terminate in accordance with
this Section 12.3, as to which the obligation of Smith & Nephew shall continue
until the liability of Smith & Nephew shall have been determined pursuant to
this Agreement, and Smith & Nephew shall have reimbursed all Investor Group
Members for the full amount of such Environmental Loss and Environmental Expense
in accordance with this Article XII.
12.4 INDEMNIFICATION BY INVESTOR FOR ENVIRONMENTAL MATTERS.
Investor agrees to indemnify and hold harmless each Smith & Nephew Group
Member from and against any and all Environmental Losses and Environmental
Expenses incurred by such Smith & Nephew Group Member in connection with or
arising from:
(a) any breach by Investor of any of its covenants, obligations or
agreements in this Agreement or in any Investor Ancillary Agreement or any
failure by Investor to pay or discharge any Environmental Loss or Environmental
Expense from and against which Smith & Nephew is not required to indemnify and
hold harmless the Investor Group Members under Section 12.3; or
(b) any third Person claim, action or suit or any proceeding,
investigation or order by any Governmental Body, under any Environmental Law or
common law relating to any violation of Environmental Law or any Release of a
Contaminant first occurring on or after the Closing Date in connection with the
operation of the Business on or after the Closing Date or to conditions first
created or arising in respect of the assets of the Company or S&N DonJoy Mexico
on or after the Closing Date.
-53-
<PAGE> 61
The indemnification provided for in this Section 12.4 shall survive the
Closing indefinitely.
12.5 NOTICE OF CLAIMS.
(a) Any Investor Group Member or Smith & Nephew Group Member (the
"Indemnified Party") seeking indemnification under this Article XII shall give
to the party obligated to provide indemnification to such Indemnified Party (the
"Indemnitor") a notice (an "Environmental Claim Notice") describing in
reasonable detail the facts giving rise to any claim for indemnification
hereunder and shall include in such Environmental Claim Notice (if then known)
the amount or the method of computation of the amount of such claim, and a
reference to the provision of this Agreement or any other agreement, document or
instrument executed hereunder or in connection herewith upon which such claim is
based; provided, that an Environmental Claim Notice in respect of any action at
law or suit in equity by or against a third Person as to which indemnification
will be sought shall be given promptly after the action or suit is commenced;
provided, that failure to give such notice shall not relieve the Indemnitor of
its obligations hereunder except to the extent of the Indemnitor shall have been
prejudiced by such failure (it being understood that this proviso does not
modify or otherwise affect the time periods specified in Section 12.3).
(b) In calculating any Environmental Loss or Environmental Expense there
shall be deducted (i) any insurance recovery in respect thereof (and no right of
subrogation shall accrue hereunder to any insurer) and (ii) the amount of any
tax benefit to the Indemnified Party (or any of its Affiliates) with respect to
such Environmental Loss or Environmental Expense (after giving effect to the tax
effect of receipt of the indemnification payments).
(c) After the giving of any Environmental Claim Notice pursuant hereto,
the amount of indemnification to which an Indemnified Party shall be entitled
under this Article XII shall be determined: (i) by the written agreement between
the Indemnified Party and the Indemnitor; (ii) by a final judgment or decree of
any court of competent jurisdiction; or (iii) by any other means to which the
Indemnified Party and the Indemnitor shall agree. The judgment or decree of a
court shall be deemed final when the time for appeal, if any, shall have expired
and no appeal shall have been taken or when all appeals taken shall have been
finally determined. The Indemnified Party shall have the burden of proof in
establishing the amount of Environmental Loss and Environmental Expense suffered
by it.
12.6 INDEMNITOR'S RIGHT TO CONTROL.
The Indemnitor shall have the right and responsibility of defending,
remedying, compromising and settling, through counsel, consultant or contractor
of its choosing (which shall be reasonably satisfactory to the Indemnified
Party), any action or suit as to which indemnification is sought by any
Indemnified Party from any Indemnitor under this Article XII (an "Environmental
Claim"). With respect to any Environmental Claim involving a third Person claim,
action or suit solely for money damages, the provisions of Section 11.4(b) shall
apply. With respect to all Environmental Claims, the parties shall reasonably
cooperate in connection therewith including, without limitation, providing
copies of material documents, affording a reasonable right to review and comment
upon material submissions, and providing reasonable
-54-
<PAGE> 62
advance notice of and soliciting reasonable input in preparation for material
interactions with governmental authorities or third Persons, and shall furnish
such records, information and testimony and attend such conferences, discovery
proceedings, hearings, trials and appeals as may be reasonably requested by the
Indemnitor in connection therewith. The Indemnitor shall have the right, upon
acknowledging its indemnification obligation, to direct any Remedial Action,
negotiation or other litigation in connection with any Environmental Claim;
provided that: (i) if a remedial or other action proposed to be taken by the
Indemnitor in settlement of the Environmental Claim would, in the Indemnified
Party's reasonable judgment, adversely affect the Indemnified Party's operations
at a facility of the Company or S&N DonJoy Mexico, or its business or financial
condition, such action shall not be taken without the prior written consent of
the Indemnified Party (which consent shall not be unreasonably withheld); (ii)
the Indemnitor shall not compromise or settle any Environmental Claim without
the consent of the Indemnified Party (which consent shall not be unreasonably
withheld); and (iii) in the event the Indemnified Party shall refuse to consent
to the taking of any remedial or other action in respect of, or the compromise
or settlement of, any Environmental Claim, the Indemnified Party may elect to
take over the defense of such Environmental Claim, and in any such case the
liability of the Indemnitor for indemnification in respect of such Environmental
Claim shall not exceed the amount for which the Environmental Claim could have
been settled plus the amount of Environmental Expense incurred by the
Indemnified Party prior to the time of the proposed settlement to which it is
entitled to indemnification.
12.7 LIMITATIONS ON LIABILITY.
The obligations of an Indemnitor in respect of a claim for
indemnification under this Article XII with respect to Remedial Action shall be
limited to the taking of such reasonable actions as are necessary under the
circumstances giving rise to such claim, and an Indemnitor (i) shall in no event
be required to take more extensive actions than would be required under
Environmental Laws in effect at the time of the Remedial Action and (ii) shall
not be liable for special or exemplary damages. Smith & Nephew and Investor
agree that their respective rights and obligations in respect of Environmental
Matters as provided in this Agreement shall supersede any such rights and
obligations either may have under any existing or future law. Except for any
Environmental Losses or Environmental Expenses for which any party hereto is
required to indemnify and hold harmless any other party hereto, the parties
hereto release one another from any and all Environmental Losses and
Environmental Expenses arising in connection with the Business or the assets of
the Company, including, without limitation (i) any Environmental Losses or
Environmental Expenses arising under the common law or Environmental Law,
including without limitation any cost recovery claim under CERCLA or under
equivalent state law; (ii) any Release or threatened Release of any Contaminant
on, in, at, to, from or beneath the Company Real Property (including without
limitation all facilities, improvements, structures and equipment thereon,
surface water thereon or adjacent thereto and soil or groundwater thereunder);
and (iii) any environmental, health or safety condition whatsoever on, in,
under, at or in the vicinity of the Company Real Property.
-55-
<PAGE> 63
ARTICLE XIII
TERMINATION
13.1 TERMINATION.
Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated at any time prior to the Closing Date:
(a) by the mutual consent of Investor and Smith & Nephew;
(b) by Investor or Smith & Nephew if the Closing shall not have occurred
on or before July 31, 1999 (or such later date as may be mutually agreed to by
Investor and Smith & Nephew);
(c) by Investor in the event of (i) any material breach by Smith & Nephew
of any of Smith & Nephew's covenants or agreements contained herein and the
failure of Smith & Nephew to cure such breach within 30 days after receipt of
notice from Investor requesting such breach to be cured or (ii) any breach by
Smith & Nephew of any of Smith & Nephew's representations or warranties
contained herein, except any such breach that would not have a Material Adverse
Effect, and the failure of Smith & Nephew to cure such breach within 30 days
after receipt of notice from Investor requesting such breach to be cured;
(d) by Smith & Nephew in the event of any material breach by Investor of
any of Investor's covenants, agreements, representations or warranties contained
herein and the failure of Investor to cure such breach within 30 days after
receipt of notice from Smith & Nephew requesting such breach to be cured; or
(e) by Investor or Smith & Nephew if any court of competent jurisdiction
in the United States, Mexico or the United Kingdom shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the consummation of any material transaction contemplated
hereby.
13.2 NOTICE OF TERMINATION.
Any party desiring to terminate this Agreement pursuant to Section 13.1
shall give notice of such termination to the other party to this Agreement.
13.3 NON-SOLICITATION.
If this Agreement is terminated, neither Investor nor any of its
Affiliates will, for a period of two years thereafter, without the prior written
approval of Smith & Nephew, directly or indirectly solicit, induce or attempt to
persuade any person who is an employee of the Company or S&N DonJoy Mexico on
the date hereof or at any time hereafter that precedes such termination, to
terminate his or her employment with the Company or S&N DonJoy Mexico; provided,
however, that this Section 13.3 shall not prohibit Investor or any of its
Affiliates from conducting generalized solicitations for employees through the
use of media advertisements, professional search firms or otherwise and hiring
employees through the use of such
-56-
<PAGE> 64
solicitations. Without limiting the rights of Smith & Nephew to pursue all other
legal and equitable rights available for a violation of this Section 13.3 by
Investor or its Affiliates, it is agreed that other remedies cannot fully
compensate Smith & Nephew for such a violation and that Smith & Nephew shall be
entitled to injunctive relief to prevent a violation or continuing violation
hereof without the necessity of posting a bond or proving actual damages. It is
the intent and understanding of each party hereto that if, in any action before
any court or agency legally empowered to enforce this Section 13.3, any term,
restriction, covenant or promise in this Section 13.3 is found to be
unreasonable and for that reason unenforceable, then such term, restriction,
covenant or promise shall be deemed modified to the extent necessary to make it
enforceable by such court or agency.
13.4 EFFECT OF TERMINATION.
In the event that this Agreement shall be terminated pursuant to this
Article XIII, all further obligations of the parties under this Agreement (other
than Sections 13.3, 14.2 and 14.10) shall be terminated without further
liability of any party to the other, provided that nothing herein shall relieve
any party from liability for its willful breach of this Agreement.
ARTICLE XIV
GENERAL PROVISIONS
14.1 SURVIVAL OF OBLIGATIONS.
The representations and warranties, covenants and agreements of Smith &
Nephew or Investor contained in this Agreement shall survive the Closing for a
period of 15 months, provided, however, that (i) the representations and
warranties contained in Section 12.2 shall survive the Closing for a period of
three years and six months, (ii) the representations and warranties contained in
Sections 5.2, 5.3, 5.4(a), 6.1, 6.2(a) and 6.4 shall survive the Closing
indefinitely, (iii) the representations and warranties contained in Section 5.10
shall survive the Closing, until the expiration of the applicable statute of
limitations, (iv) the covenants and agreements contained in Sections 7.6, 7.7,
8.1, 8.2, 8.3, 8.4, 8.5(b), 8.7, 8.8, 8.9 and Article XIV (other than Section
14.6) shall survive the Closing indefinitely, and (v) the covenants and
agreements contained in Sections 8.5(a), 8.6, 13.3, and 14.6 and Articles XI and
XII shall survive the Closing until the expiration of the period provided for
therein. Except as otherwise provided herein, no claim shall be made for the
breach of any representation or warranty contained in Article V or VI or Section
12.2 or under any certificate delivered with respect thereto under this
Agreement after the date on which such representations and warranties terminate
as set forth in this Section. Nothing in this Section shall limit any covenant
or agreement of the parties which by its terms contemplates performance after
the Closing.
14.2 CONFIDENTIAL NATURE OF INFORMATION.
Each party agrees that it will treat in confidence all documents,
materials and other information which it shall have obtained regarding the other
party or its Affiliates during the course of the negotiations leading to the
consummation of the transactions contemplated hereby (whether obtained before or
after the date of this Agreement), the investigation provided for
-57-
<PAGE> 65
herein and the preparation of this Agreement and other related documents, and,
in the event the transactions contemplated hereby shall not be consummated, each
party shall return to the other party all copies of nonpublic documents and
materials which have been furnished in connection therewith and shall return or
destroy all analyses, compilations, studies or other documents of or prepared by
such party from such information (and confirm to the other party in writing that
it has done so). Such documents, materials and information shall not be
communicated to any third Person (other than to a party's counsel, accountants,
financial advisors or lenders). No party shall use any such confidential
information in any manner whatsoever except solely for the purpose of evaluating
the transactions contemplated by this Agreement; provided, however, that after
the Closing Investor may use or disclose any confidential information of the
Company or S&N DonJoy Mexico. The obligation of each party to treat such
documents, materials and other information in confidence shall not apply to any
information which (i) is or becomes available to such party from a source other
than such other party, (ii) is or becomes available to the public other than as
a result of disclosure by such party or its agents, (iii) is required to be
disclosed under applicable law or judicial process, but only to the extent it
must be disclosed, or (iv) such party reasonably deems necessary to disclose to
obtain any of the consents or approvals contemplated hereby.
14.3 NO PUBLIC ANNOUNCEMENT.
Neither Investor nor Smith & Nephew shall, without the approval of the
other, make any press release or other public announcement concerning the
transactions contemplated by this Agreement, except as and to the extent that
any such party shall be so obligated by law, in which case the other party shall
be advised and the parties shall use their best efforts to cause a mutually
agreeable release or announcement to be issued; provided that the foregoing
shall not preclude communications or disclosures necessary to implement the
provisions of this Agreement or to comply with the accounting and Securities and
Exchange Commission disclosure obligations or the rules of any stock exchange.
14.4 NOTICES.
All notices or other communications required or permitted hereunder shall
be in writing and shall be deemed given or delivered when delivered personally
or when sent by registered or certified mail or by private courier addressed as
follows:
If to Investor, to:
c/o Chase DJ Partners, LLC
Chase Capital Partners
380 Madison Avenue
New York, New York 10017
Attention: Damion Wicker, M.D.
Jonas Steinman
John Daileader
-58-
<PAGE> 66
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: John J. Suydam, Esq.
If to Smith & Nephew or, prior to the Closing,
to the Company, to:
Smith & Nephew, Inc.
1450 Brooks Road
Memphis, Tennessee 38116
Attention: Chief Financial Officer
with a copy to:
Smith & Nephew, Inc.
1450 Brooks Road
Memphis, Tennessee 38116
Attention: General Counsel
or to such other address as such party may indicate by a
notice delivered to the other party hereto.
14.5 SUCCESSORS AND ASSIGNS.
(a) The rights of either party under this Agreement shall not be
assignable by such party hereto prior to the Closing without the written consent
of the other, except that each of the Investor, the Company and the Operating
Subsidiary may assign its rights hereunder to its lenders for the purposes of
securing indebtedness. Following the Closing, either party may assign any of its
rights hereunder, but no such assignment shall relieve it of its obligations
hereunder.
(b) Prior to the Closing, Smith & Nephew may assign its entire ownership
interest in the Company to a wholly-owned subsidiary of Smith & Nephew;
provided, however that Smith & Nephew shall remain liable for all obligations
under this Agreement and all Smith & Nephew Ancillary Agreements (other than the
Members' Agreement and the Amended and Restated Operating Agreement).
Simultaneously, with such assignment, such assignee shall deliver a certificate
to Investor in which such assignee agrees to be bound by the provisions of this
Agreement relating to the transfer and sale of the Existing Membership Interest.
If Smith & Nephew assigns its interest in the Company to a wholly-owned
subsidiary of Smith & Nephew, such subsidiary shall be substituted for Smith &
Nephew in the Members' Agreement and the Amended and Restated Operating
Agreement.
(c) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and permitted assigns. Nothing in this
Agreement, expressed or
-59-
<PAGE> 67
implied, is intended or shall be construed to confer upon any Person other than
the parties and successors and assigns permitted by this Section 14.5 any right,
remedy or claim under or by reason of this Agreement.
14.6 ACCESS TO RECORDS AFTER CLOSING.
For a period of six years after the Closing Date, (i) Smith & Nephew and
its representatives shall have reasonable access to all of the books and records
of the Company or S&N DonJoy Mexico and (ii) Investor, the Company and S&N
DonJoy Mexico shall have reasonable access to the books and records of Smith &
Nephew, to the extent that such access is reasonably necessary to comply with
various tax, accounting and third party requests for information relating to the
operations of the Company or S&N DonJoy Mexico prior to the Closing Date. Such
access shall be afforded upon receipt of reasonable advance notice and during
normal business hours. Each party shall be solely responsible for any costs or
expenses incurred by it pursuant to this Section 14.6. If Smith & Nephew or
Investor, the Company or S&N DonJoy Mexico shall desire to dispose of any of
such books and records prior to the expiration of such six-year period, such
party shall, prior to such disposition, give the other party notice and a
reasonable opportunity, at such other party's expense, to segregate and remove
such books and records as such party may select.
14.7 ENTIRE AGREEMENT; AMENDMENTS.
This Agreement and the Exhibits and Schedules referred to herein and the
documents delivered pursuant hereto contain the entire understanding of the
parties hereto with regard to the subject matter contained herein or therein,
and supersede all prior agreements, understandings or letters of intent between
or among any of the parties hereto, including without limitation the
Confidentiality Agreement. This Agreement shall not be amended, modified or
supplemented except by a written instrument signed by an authorized
representative of each of the parties hereto.
14.8 INTERPRETATION.
Article titles and headings to sections herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement. The Schedules and Exhibits
referred to herein shall be construed with and as an integral part of this
Agreement to the same extent as if they were set forth verbatim herein.
Disclosure of any fact or item in any Schedule hereto referenced by a particular
section in this Agreement shall be deemed to have been disclosed with respect to
every other section in this Agreement. Neither the specification of any dollar
amount in any representation or warranty contained in this Agreement nor the
inclusion of any specific item in any Schedule hereto is intended to imply that
such amount, or higher or lower amounts, or the item so included or other items,
are or are not material, and no party shall use the fact of the setting forth of
any such amount or the inclusion of any such item in any dispute or controversy
between the parties as to whether any obligation, item or matter not described
herein or included in any Schedule is or is not material for purposes of this
agreement. Unless this Agreement specifically provides otherwise, neither the
specification of any item or matter in any representation or warranty contained
in this Agreement nor the inclusion of any specific item in any Schedule hereto
is
-60-
<PAGE> 68
intended to imply that such item or matter, or other items or matters, are or
are not in the ordinary course of business, and no party shall use the fact of
the setting forth or the inclusion of any such item or matter in any dispute or
controversy between the parties as to whether any obligation, item or matter not
described herein or included in any Schedule is or is not in the ordinary course
of business for purposes of this Agreement.
14.9 WAIVERS.
Any term or provision of this Agreement may be waived, or the time for
its performance may be extended, by the party or parties entitled to the benefit
thereof. Any such waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if, as to any party, it is authorized in writing by
an authorized representative of such party. The failure of any party hereto to
enforce at any time any provision of this Agreement shall not be construed to be
a waiver of such provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of any party thereafter to enforce
each and every such provision. No waiver of any breach of this Agreement shall
be held to constitute a waiver of any other or subsequent breach.
14.10 EXPENSES.
Each party hereto will pay its own costs and expenses incident to its
negotiation and preparation of this Agreement and to its performance and
compliance with all agreements and conditions contained herein on its part to be
performed or complied with, including the fees, expenses and disbursements of
its counsel and accountants; provided, however, that if the Closing occurs, on
the Closing Date, the Company (or its Operating Subsidiary) shall pay all such
fees and expenses of the Investor.
14.11 PARTIAL INVALIDITY.
Wherever possible, each provision hereof shall be interpreted in such
manner as to be effective and valid under applicable law, but in case any one or
more of the provisions contained herein shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such provision shall be
ineffective to the extent, but only to the extent, of such invalidity,
illegality or unenforceability without invalidating the remainder of such
invalid, illegal or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.
14.12 EXECUTION IN COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be considered an original instrument, but all of which shall be considered
one and the same agreement, and shall become binding when one or more
counterparts have been signed by each of the parties hereto and delivered to
each of Smith & Nephew and Investor.
14.13 FURTHER ASSURANCES.
On and after the Closing Date each party hereto shall take, and Investor
shall cause the Company to take, such other actions and execute such other
documents and instruments of
-61-
<PAGE> 69
conveyance and transfer as may be reasonably requested by the other party hereto
from time to time to effectuate the transactions contemplated by this Agreement.
From time to time following the Closing, Smith & Nephew shall execute and
deliver and file, or cause to be executed, delivered and filed, such other
instruments of conveyance and transfer as Investor may reasonably request or as
may be otherwise necessary to more effectively convey and transfer to, and vest
in, the Company and/or S&N DonJoy Mexico and put the Company and/or S&N DonJoy
Mexico in possession of, any part of the assets that are used principally in the
Business as of the Closing Date, and, in the case of licenses, certificates,
approvals, authorizations, agreements, contracts, leases, easements and other
commitments included in such assets which cannot be transferred or assigned
effectively without the consent of third parties which consent has not been
obtained, to cooperate with Investor and the Company and/or S&N DonJoy Mexico at
their request in endeavoring to obtain such consent promptly, and if any such
consent is unobtainable, to use its best efforts to secure to the Company the
benefits thereof in some other manner. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an agreement to
assign any license, certificate, approval, authorization, agreement, contract,
lease, easement or other commitment included in the assets used principally in
the Business if an attempted assignment thereof without the consent of a third
party thereto would constitute a breach thereof. With respect to contracts,
permits and other arrangements that are not used principally in the Business or
where the Company and/or S&N DonJoy Mexico are co-beneficiaries (with Smith &
Nephew) of such contract or arrangement, from time to time following the
Closing, Smith & Nephew shall use its best efforts to create, execute and
deliver such instruments and arrangements as Investor may reasonably request to
substantially replicate the benefits that the Company and S&N DonJoy Mexico
previously enjoyed with respect to such contracts and arrangements. After the
Closing, Investor shall cause the Company to remit to Smith & Nephew any
proceeds received by the Company or its subsidiaries from third parties in
payment of accounts receivable which do not relate to the Business and Smith &
Nephew shall remit to the Company any proceeds received by Smith & Nephew from
third parties in payment of accounts receivable which relate to the Business.
14.14 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
internal laws (as opposed to the conflicts of law provisions) of the State of
Delaware.
14.15 LITIGATION COOPERATION.
In connection with any litigation in which Smith & Nephew is or becomes
named or joined as a defendant that involves the operations of the Business
prior to Closing, Investor shall cause the Company to afford Smith & Nephew
reasonable access to information, documents and Current Employees that Smith &
Nephew reasonably believes are necessary to the preparation of Smith & Nephew's
defense. Such access shall occur at the Company's facilities during the
Company's usual business hours; provided, however, that Buyer acknowledges and
agrees that a Current Employee may at times be required to give testimony at
locations other than the Company's facilities. Smith & Nephew shall bear all of
its costs and expenses associated with such reviews and shall bear any costs of
the Company or Current Employees associated with Smith & Nephew's review of
information or contact with the Current Employees contemplated hereby, which
costs shall not include wages but shall include reasonable out-of-pocket
business
-62-
<PAGE> 70
expenses (i.e., travel, meals, lodging) incurred in connection with any off-site
visits by Current Employees.
14.16 DISCLAIMER OF WARRANTIES.
Smith & Nephew makes no representations or warranties with respect to any
projections, forecasts or forward-looking information provided to Investor.
There is no assurance that any projected or forecasted results will be achieved.
EXCEPT AS TO THOSE MATTERS EXPRESSLY COVERED BY THE REPRESENTATIONS AND
WARRANTIES IN THIS AGREEMENT AND THE CERTIFICATE DELIVERED BY SMITH & NEPHEW
PURSUANT TO SECTION 4.4, THE NEW MEMBERSHIP INTEREST (AND THE BUSINESS AND
ASSETS OF THE COMPANY REPRESENTED THEREBY) ARE BEING SOLD TO INVESTOR ON AN "AS
IS, WHERE IS" BASIS AND SMITH & NEPHEW DISCLAIMS ALL OTHER WARRANTIES,
REPRESENTATIONS AND GUARANTEES WHETHER EXPRESS OR IMPLIED. SMITH & NEPHEW MAKES
NO REPRESENTATION OR WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE AND NO IMPLIED WARRANTIES WHATSOEVER. Investor acknowledges
that neither Smith & Nephew nor any of its representatives nor any other Person
has made any representation nor warranty, express or implied, as to the accuracy
or completeness of any memoranda, charts, summaries or schedules heretofore made
available by Smith & Nephew or its representatives to Investor or any other
information which is not included in this Agreement or the Schedules hereto, and
neither Smith & Nephew nor any of its representatives nor any other Person will
have or be subject to any liability to Investor, any Affiliate of Investor or
any other Person resulting from the distribution of any such information to, or
use of any such information by, Investor, any Affiliate of Investor or any of
their agents, consultants, accountants, counsel or other representatives.
-63-
<PAGE> 71
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the day and year first above written.
CHASE DJ PARTNERS, LLC
By: CB Capital Investors, L.P., its
managing member
By: CB Capital Investors, Inc., its
general partner
By: /s/ George E. Kelts
-------------------
Name: George E. Kelts
Title: Vice President
SMITH & NEPHEW, INC.
By: /s/ Clifford K. Lomax
---------------------
Its: Treasurer
--------------------
DONJOY, L.L.C.
By: /s/ Clifford K. Lomax
---------------------
Its: Chairman
---------------------
<PAGE> 1
EXHIBIT 10.2
GROUP RESEARCH CENTRE TECHNOLOGY AGREEMENT
THIS GROUP RESEARCH CENTRE TECHNOLOGY AGREEMENT ("Agreement") dated as of
June 30, 1999 ("Effective Date") between DonJoy, L.L.C., a Delaware limited
liability company ("DonJoy, L.L.C.") and Smith & Nephew, Inc., a Delaware
corporation ("S&N").
WHEREAS, pursuant to a Recapitalization Agreement dated April 29, 1999
(the "Recapitalization Agreement") among DonJoy, L.L.C., S&N and Chase DJ
Partners, LLC ("Investor"), DonJoy, L.L.C. is selling Investor 645,500 Common
Units of DonJoy, L.L.C. and DonJoy, L.L.C. is redeeming 2,000,000 Common Units
from S&N, such that upon consummation of the transactions contemplated by the
Recapitalization Agreement, Investor will own approximately a ninety percent
(90%) membership interest in DonJoy, L.L.C.;
WHEREAS, it is a condition to Investor's obligations under the
Recapitalization Agreement that S&N and DonJoy, L.L.C. enter into this
Agreement;
WHEREAS, S&N owns, and hereby represents and warrants that it owns, the
rights to intellectual property developed under the Active Rehabilitation
Research Program (as defined hereinbelow) and the Zalzala Research Program (as
defined hereinbelow), both of which have been conducted at the Group Research
Centre ("GRC"), an Affiliate of S&N, and S&N has agreed to grant to DonJoy,
L.L.C. certain rights in such intellectual property, subject to the terms and
conditions set forth herein.
WHEREAS, any term not otherwise defined herein shall have the meaning
ascribed to such term in the Recapitalization Agreement; and
NOW THEREFORE, in consideration of the mutual covenants contained herein
and for other good and valuable consideration, the receipt and sufficiency which
is acknowledged, S&N and DonJoy, L.L.C. do hereby agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the terms defined in this Section
shall have the meaning specified and shall be applicable both to the singular
and plural forms.
1.1 "AFFILIATE" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by or is under common control
with such Person.
1.2 "PARTY" shall mean DonJoy, L.L.C. or S&N, as applicable.
1.3 "ACTIVE REHABILITATION RESEARCH PROGRAM" shall mean the current
research program that has been conducted under such name by GRC, and which
focuses on technology useful in muscle tonification, neuro-muscular training and
proprioception training.
<PAGE> 2
1.4 "ACTIVE REHABILITATION TECHNOLOGY" shall include all technology
developed as of the Effective Date under the Active Rehabilitation Research
Program, including unpublished research and development information, inventions
(patented and unpatented), know-how, trade secrets and technical data.
1.5 "PRIMARY PATENT" shall mean any patent application, and any patent
issuing therefrom, which claims at least in part Active Rehabilitation
Technology, but does not claim technology developed subsequent to the Effective
Date that represents an improvement to the Active Rehabilitation Technology.
1.6 "IMPROVEMENT CONTINUATION PATENT" shall mean any patent application,
and any patent issuing therefrom, which claims priority to a Primary Patent.
1.7 "IMPROVEMENT NON-CONTINUATION PATENT" shall mean any patent
application, and any patent issuing therefrom, which claims technology developed
subsequent to the Effective Date and represents an improvement to the Active
Rehabilitation Technology, but which does not claim priority to a Primary
Patent.
1.8 "ZALZALA RESEARCH PROGRAM" shall mean the current research programs
that have been conducted under the names "Zalzala I" and "Zalzala II" by GRC,
and which focus on a system capable of real-time analysis of EMG signals in
order to define associated limb function.
1.9 "ZALZALA TECHNOLOGY" shall include all technology developed as the
Effective Date under the Zalzala Research Program, including unpublished
research and development information, inventions (patented and unpatented),
know-how, trade secrets and technical data.
1.10 "ZALZALA PATENTS" shall mean any patent application and any patent
issuing therefrom, which claims at least in part Zalzala Technology.
1.11 "S&N APPLICATIONS" shall mean all applications not included with the
DonJoy Applications.
1.12 "DONJOY APPLICATIONS" shall mean all applications included within
Schedule 8.5 of the Recapitalization Agreement. In determining if a product that
incorporates Zalzala Technology or Active Rehabilitation Technology is a Hi-Tech
Hinged Knee Brace as defined within the aforementioned Schedule 8.5 (a) (ii),
the List Price of the base product excluding such technology shall apply.
2. ASSIGNMENT OF TECHNOLOGY AND PATENTS
2.1 ASSIGNMENT OF TECHNOLOGY. S&N hereby conveys and assigns to DonJoy,
L.L.C. an undivided fifty percent (50%) interest in and to the Active
Rehabilitation Technology.
<PAGE> 3
2.2 ASSIGNMENT OF PATENTS. Any Party which files a Primary Patent or an
Improvement Continuation Patent shall assign to the other Party an undivided
fifty percent (50%) interest in and to such patent.
3. LICENSING OF TECHNOLOGY AND PATENTS
3.1 EXCLUSIVE LICENSE TO S&N. Notwithstanding the joint ownership as set
forth in Paragraphs 2.1 and 2.2, S&N shall have the exclusive, worldwide,
royalty-free right, including the right to grant licenses, under the Active
Rehabilitation Technology, the Primary Patents and the Improvement Continuation
Patents to make, have made, use, import, sell, and offer to sell any product
falling within the S&N Applications during the term of this Agreement.
3.2 EXCLUSIVE LICENSE TO DONJOY, L.L.C. Notwithstanding the joint
ownership as set forth in Paragraphs 2.1 and 2.2, DonJoy, L.L.C. shall have the
exclusive, worldwide, royalty-free right, including the right to grant licenses,
under the Active Rehabilitation Technology, the Primary Patents and the
Improvement Continuation Patents to make, have made, use, import, sell, and
offer to sell any product falling within the DonJoy Applications during the term
of this Agreement.
3.3 NONEXCLUSIVE LICENSE TO DONJOY, L.L.C. S&N hereby grants to DonJoy,
L.L.C., a nonexclusive, worldwide, perpetual, royalty-free right and license,
with the right to sublicense, under the Zalzala Technology and Zalzala Patents
to make, have made, use, import, sell, and offer to sell products included
within the DonJoy Applications.
4. DISCLOSURE OF TECHNOLOGY AND INVENTIONS
4.1 CURRENT TECHNOLOGY. Upon execution of this Agreement, S&N shall make
available to DonJoy, L.L.C. all Active Rehabilitation Technology and Zalzala
Technology that it possesses, or in which it has rights.
4.2 FUTURE TECHNOLOGY. During the term of this Agreement, each Party shall
disclose to the other Party all technology claimed in any Improvement
Continuation Patent in which such other Party develops or an Affiliate of such
other Party develops.
5. PATENT PROTECTION
5.1 INITIAL PATENTS. S&N shall file, prosecute and maintain the initial
Primary Patents ("Initial Primary Patents"). The three draft patent applications
attached hereto as Exhibit A shall, at least in part, form the basis for the
Initial Primary Patents. The Initial
3
<PAGE> 4
Primary Patents shall first be filed in the United Kingdom, and later filed as
PCT patent applications designating at least Europe, Canada, Australia, Japan,
and the United States. S&N shall be responsible for all costs associated
therewith, and shall control the prosecution of the Initial Primary Patents. S&N
shall, however, promptly provide DonJoy, L.L.C. with copies of the Initial
Primary Patents as filed, together with copies of all correspondence or official
communications previously made or received or made or received in the future
with any patent office relating thereto.
5.2 ADDITIONAL PATENTS. Either Party shall have the right to file other
Primary Patents, Improvement Continuation Patents and/or Improvement
Non-Continuation Patents. Each Party shall control the prosecution of any
applications which it files. Such Party shall, however, promptly provide the
other Party with copies of any Primary Patent or Improvement Continuation Patent
which it files together with copies of all correspondence or official
communications previously made or received or made or received in the future
with any patent office relating thereto. With regard to any later filed patent
application, it is within the sole discretion of the filing Party to determine
if such later filed patent application will claim priority to a Primary Patent.
4
<PAGE> 5
5.3 PATENT EXPENSES. The parties shall share equally all expenses,
including but not limited to attorney fees, translation costs, and patent office
fees associated with any Primary Patent (other than the Initial Primary Patents
referred to above in Paragraph 5.1) or Improvement Continuation Patent
(collectively "Joint Patents"). Either Party may elect to not share in the
expenses or to discontinue sharing in the expenses associated with any Joint
Patent. With regard to any new application for a Joint Patent, such election
must be made within thirty (30) days of receipt of the final draft of such
patent application. With regard to ongoing Joint Patents, a Party must give
thirty (30) days notice of its intent to exercise such election. For any Joint
Patent that a Party elects not to financially support, any license granted in
Section 3 of this Agreement shall terminate with respect to such Joint Patent,
and such Joint Patent and all patents claiming priority thereto shall no longer
be deemed to be a Primary Patent or an Improvement Continuation Patent.
Furthermore, at the other Party's request and expense, the non-financially
supporting Party shall assign to the other Party its interest in such Joint
Patent and all patents claiming priority thereto. Alternatively, the financially
supporting Party may require (at such Party's request and expense) the
non-financially supporting Party to grant to it an exclusive worldwide
royalty-free license under such Joint Patent and all patents claiming priority
thereto in all fields.
5.4 COOPERATION. Each Party agrees to promptly execute or cause its
employees, agents or consultants to execute and return any and all documents
reasonably deemed necessary to carry out the purposes of this Section 5,
including all declarations, oaths, assignments, affidavits, pleadings, and
powers of attorney.
5.5 PATENT MARKING. Each Party is required to mark all applicable products
with the applicable patent numbers of the Primary Patents or Improvement
Continuation Patents in accordance with the patent marking laws of the United
States.
6. INFRINGEMENT
6.1 THIRD PARTY INFRINGERS. If either Party believes that any Primary
Patent or Improvement Continuation Patent, which has issued or is otherwise
enforceable, is being infringed by any unlicensed third party, it shall promptly
notify the other Party in writing. Either Party shall have the right, but not
the obligation, to take the appropriate steps to end any alleged unauthorized
third party use of the Active Rehabilitation Technology or any technology
claimed in a Primary Patent or an Improvement Continuation Patent. The parties
shall endeavor to determine whether either or both will pursue such infringer.
Either Party may submit a formal written request to the other Party seeking a
written decision as to whether such other Party will pursue or participate in
legal action against a third party infringer, either solely or together with the
requesting Party. Such written decision shall be provided to the requesting
Party within ninety (90) days of receipt of such request, or receipt of a sample
of the allegedly infringing product, whichever is later. Neither Party shall
initiate or commence a legal action against a third party infringer without
first submitting such a formal written request stating such Party's intent to
pursue such action and awaiting receipt of a written decision from the other
Party. Further, a
5
<PAGE> 6
decision by either Party not to pursue an infringer shall be revocable until
the other Party commences an action against an infringer.
6.2 LITIGATION EXPENSES AND RECOVERY. If both Parties elect to pursue a
suit against an infringer or other enforcement action, the Parties shall agree
on how the costs and expenses for such a suit will be shared, and agree on a
division of any net recovery from such an infringer after deduction of all costs
and expenses (including attorneys' fees) incurred in regard to the litigation.
The division of any net recovery shall be based on: 1) the relative
contributions of each Party to the costs of the suit or enforcement action; and
2) a consideration of the extent to which the allegedly infringing products are
within a DonJoy Application or within a S&N Application. If the infringing
product falls completely with a DonJoy Application, then S&N shall only be
entitled to recover its share of the costs and expenses (including attorneys'
fees) incurred in regard to the litigation. If the infringing product falls
completely with a S&N Application, then DonJoy, L.L.C. shall only be entitled to
recover its share of the costs and expenses (including attorneys' fees) incurred
in regard to the litigation. If either Party shall bring and maintain the suit
alone, such Party may join the other Party if it deems in its sole discretion
such joinder is necessary and/or desirable. In such case, the Party bringing
suit shall reimburse the joined Party for its out of pocket expenses (excluding
attorneys' fees) resulting from any assistance such other Party is required to
provide hereunder. If either Party elects to bring suit alone and it is awarded
a monetary judgment against an infringer, the other Party shall not be entitled
to any portion of such recovery, even if such Party is involuntarily joined in
the litigation.
6.3 SETTLEMENTS. In any and all litigation or other contested hearing
relating to Active Rehabilitation Technology, a Primary Patent, or a Improvement
Continuation Patent that is jointly owned hereunder, neither Party shall
terminate or reach final settlement of any claim, without first obtaining the
other Party's written consent to do so, which consent shall not be unreasonably
withheld. If such termination or settlement does not involve the granting of a
license to, or an admission or stipulation which affects the validity or scope
of a Primary Patent or an Improvement Continuation Patent, a Party need not
obtain the other Party's consent thereto.
6.4 COOPERATION. Each Party shall keep the other advised of all material
developments in any suit for infringement or negotiations with respect thereto,
and shall cooperate and execute documentation as may be required in order for
the other Party to maintain any action. Any non-acting Party shall cooperate
with the Party taking such action and shall make available to the acting Party
all reasonable information that could assist such Party. The non-acting Party
shall, at its own expense, be entitled (but not be obligated) to non-controlling
participation through counsel of its own selection.
7. DISCLAIMER OF REPRESENTATIONS AND WARRANTIES; COVENANTS; INDEMNIFICATION
7.1 COVENANTS. Until the expiration of the term set forth in Paragraph 8.1
of this Agreement, DonJoy, L.L.C. agrees not to use the Active Rehabilitation
Technology to make, have made, use, import, sell or offer to sell a product
falling within S&N Applications and agrees not to grant any license to any third
party for such purpose.
6
<PAGE> 7
S&N agrees that during such time period it will not use the Active
Rehabilitation Technology to make, have made, use, import, sell or offer to sell
a product falling within DonJoy Applications and agrees not to grant any license
to any third party for such purpose. DonJoy, L.L.C. agrees not to use the
technology claimed in any Primary Patent or any Improvement Continuation Patent
to make, have made, use, import, sell or offer to sell a product falling within
S&N Applications and agrees not to grant any license to any third party for such
purpose until the date upon which such patent expires. S&N agrees not to use the
technology claimed in any Primary Patent or any Improvement Continuation Patent
to make, have made, use, import, sell or offer to sell a product falling within
DonJoy Applications and agrees not to grant any license to any third party for
such purpose until the date upon which such patent expires.
7.2 SCOPE OF PATENTS. Each Party shall have an obligation, and hereby
covenants and agrees, that it will use commercially reasonable efforts to seek
the broadest possible patent protection in each Primary Patent or Improvement
Continuation Patent. Furthermore, each Party covenants and agrees that it will
allow the other Party to review all Primary Patents and Improvement Continuation
Patents prior to filing, and if requested to do so, such Party shall augment the
patent application to include additional disclosure provided by the other Party
to support claims that cover the other Party's technical applications as defined
in this Agreement.
7.3 DISCLAIMER. THERE ARE NO REPRESENTATIONS OR WARRANTIES OF ANY KIND,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OR
OTHERWISE WITH RESPECT TO THE TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS
COVERED BY THIS AGREEMENT. THE TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS
ASSIGNED OR LICENSED HEREUNDER IS DONE SO ON AN "AS-IS" BASIS.
7.4 INDEMNIFICATION.
a. Each Party shall indemnify (the "Indemnifying Party"), defend and hold
harmless the other Party (together with its officers, directors, members,
partners, employees, agents, Affiliates, successors and assigns (the
"Indemnified Group")) from and against any and all demands, claims, actions,
losses, damages (including consequential and punitive damages), deficiencies,
liabilities, judgments, interest, penalties, costs and expenses (including court
costs and, solely to the extent specified in Section b. below, attorneys' fees)
asserted against, or incurred by the Indemnified Group, directly or indirectly,
in connection with, arising out of, or resulting from (i) a breach or
nonfulfillment of any one or more covenants or agreements of the Indemnifying
Party contained in this Agreement; or (ii) any claim against the Indemnified
Group by a third party: (a) for infringement in connection with any product of
the Indemnifying Party that incorporates Active Rehabilitation Technology,
Zalzala Technology, or technology described in a Primary Patent or an
Improvement Continuation Patent; or (b) asserting that such a product is
defective and caused injury or damage to such third party.
7
<PAGE> 8
b. Except as otherwise provided in this Agreement, the Indemnifying Party
shall have the obligation and right to take over and assume, at its own expense,
the sole control of defense and any settlement of any suit or threatened suit by
a third party for any indemnifiable claim set forth herein for which the
Indemnifying Party has agreed to indemnify the Indemnified Group under this
Agreement. The Indemnifying Party shall be liable for the fees of attorneys it
retains for purposes of asserting such defense or negotiating such settlement,
but shall not be liable for fees of other attorneys, if any, retained by the
Indemnified Group in connection with a suit or threatened suit. The Indemnified
Group will promptly advise the Indemnifying Party, by telefax or courier, within
72 hours after receipt of any summons or other notice of the institution of any
suit against it relating to an indemnifiable claim, and shall include with such
notice a copy of any complaint pertaining to such suit. The Indemnified Group
agrees to cooperate in the defense of such suit by furnishing such assistance as
is reasonably requested by the Indemnifying Party.
8. TERM AND TERMINATION
8.1 TERM. Unless terminated sooner under Paragraph 5.3 of this Agreement,
the licenses granted in Section 3 and the assignments granted in Section 2 of
this Agreement shall continue in full force and effect with respect to any
particular patent until the expiration of such patent's term or cancellation of
such patent or a final declaration of invalidity or unenforceability by a court
of competent jurisdiction. Any restriction contained herein with respect to non
patented Active Rehabilitation Technology shall expire upon the tenth (10th)
anniversary of this Agreement.
8.2 TERMINATION. In the event of bankruptcy, insolvency, or material
breach of this Agreement by one of the parties hereto, the other Party to this
Agreement may terminate this Agreement provided that the Party terminating the
Agreement first gives the other Party written notice of such termination,
specifying the grounds therefore, and the other Party has had ten (10) days
after such notice is given to cure any breach. If not so cured, this Agreement
shall terminate at the expiration of such ten (10) days.
8.3 CONSEQUENCES OF TERMINATION. Upon termination of this Agreement due to
a material breach by a Party or the insolvency or bankruptcy of a Party all
rights to the Active Rehabilitation Technology, the Primary Patents and the
Improvement Continuation Patents shall automatically revert to the other Party.
Waiver of a breach shall not deprive the aggrieved Party of the right to
terminate this Agreement due to any subsequent breach of the other Party.
9. CONFIDENTIALITY
9.1 NON-DISCLOSURE. Subject to Section 9.2, all information, including
oral disclosures, that is disclosed by one Party to another Party under this
Agreement relating to intellectual property rights or technology which is
subject to the assignment provisions herein, shall be treated as jointly owned
confidential and proprietary information. All
8
<PAGE> 9
other information that is disclosed by one Party to another Party with respect
to the intellectual property rights or technology covered by this Agreement, or
other disclosures required under this Agreement, including oral disclosures,
shall be treated as confidential and proprietary information of the disclosing
Party. Each Party agrees that all such confidential information, jointly owned
or otherwise, shall be disclosed only to such third persons to whom disclosure
is necessary to effect the purposes of this Agreement. Each Party further agrees
to implement procedures and safeguards reasonably calculated to prevent any
unauthorized disclosure by any persons to whom proper disclosure has been made.
Upon expiration or termination of this Agreement, each Party shall return to the
other Party all materials embodying confidential information owned by such other
Party.
9.2 EXCLUSIONS. The limitations of confidentiality set forth in Section
9.1 shall not apply to: (i) information which, at the time of disclosure was in
the public domain; (ii) information which, after disclosure becomes part of the
public domain through no fault of the recipient, (iii information subsequently
received by the recipient from a third party not owing a duty of confidence to
the discloser, or (iv) information other than the Active Rehabilitation
Technology or the Zalzala Technology which is known or within the possession of
the recipient at the time of disclosure thereof.
10. DISPUTES
10.1 ARBITRATION. The Parties agree that any disputes arising under this
Agreement that cannot be resolved by the Parties shall be submitted to binding
arbitration pursuant to the then current Commercial Rules of the American
Arbitration Association. Absent manifest error, both Parties agree to be bound,
and to abide by the decision reached in such arbitration including the entry of
judgment upon the award of the arbitrator(s) in such arbitration.
10.2 ARBITRATION COSTS. The cost of the arbitration shall be borne as
follows: fifty percent (50%) by S&N and fifty percent (50%) by DonJoy, L.L.C.
Each Party agrees to bear its own individual costs.
10.3 NOTICE. Written notice given by one Party to the other requiring a
dispute to be submitted to an arbitration shall be deemed to constitute a joint
submission to arbitration by both Parties.
11. MISCELLANEOUS
11.1 PUBLIC ANNOUNCEMENTS. Except as required by law, neither S&N or any
of its officers, employees, representatives, advisors, agents or Affiliates, nor
DonJoy, L.L.C. or any of its representatives, advisors, agents, partners,
officers, employees or Affiliates, shall make, or cause to be made, any public
disclosure or other announcement with respect to the transactions contemplated
hereby or any term hereof without the prior written consent of the other.
9
<PAGE> 10
11.2 NOTICES. All notices or other communications required or permitted
hereunder shall be in writing and shall be delivered personally or sent by
registered or certified mail, by overnight delivery or courier or by facsimile
transmission, addressed as follows:
If to S&N, to:
Smith & Nephew, Inc.
1450 East Brooks Road
Memphis, TN 38116
Attention: Vice President - Finance
Facsimile: (901) 348-6207
With a copy to:
Smith & Nephew, Inc.
1450 East Brooks Road
Memphis, TN 38116
Attention: General Counsel
Facsimile: (901) 396-7824
Smith & Nephew Group Research Centre
York Science Park
Heslingtion
York Science Park
Heslingtion
York
Y01 5DF
Facsimile: 011-44-1-904-824003
If to DonJoy, L.L.C., to:
DonJoy, L.L.C
2985 Scott Street
Vista, CA 92083
Attention: General Counsel
Facsimile: (760) 734-3536
or to such other address as such Party may indicate by a notice delivered to the
other Party hereto; provided that notice of change of address shall be effective
only upon receipt thereof. All such notices and other communications shall be
deemed effective (a) if by personal delivery, upon receipt, (b) if by registered
or certified mail, on the fifth business day after the date of mailing thereof,
(c) if by overnight delivery or courier, on the first business day after the
date of mailing or (d) if by facsimile transmission, immediately upon receipt of
a transmission confirmation, provided notice is sent on a business day between
the hours of 9:00 a.m. and 5:00 p.m., recipient's time, but if not then upon the
following business day.
10
<PAGE> 11
11.3 ASSIGNMENT. Either Party may assign this Agreement as part of the
transfer of the business to which it relates. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Any permitted assignee shall assume all
obligations of its assignor under this Agreement. No assignment shall relieve
any Party of responsibility for the performance of any accrued obligation which
such Party then has hereunder. No Party which is in default of any provision in
this Agreement shall have any assignment rights as provided in this paragraph.
11.4 EXPORT CONTROLS. Any Party that receives technical data or products
agrees to comply with all United States Department of Commerce and other United
States export controls. Each Party agrees that, unless prior authorization is
obtained from the Office of Export Administration, it will not knowingly ship or
transfer technical data covered by this Agreement or any direct product of such
technical data, directly or indirectly, to any country in contravention of any
Office of Export Administration requirement.
11.5 NO AGENCY, PARTNERSHIP OR JOINT VENTURE. It is understood that all
parties hereto are independent contractors and engaged in the operation of their
own respective businesses and no Party hereto is to be considered to be the
agent or partner of the other Party for any purpose whatsoever, and no Party has
authority to enter into contracts or assume any obligations for any other Party
or make any warranties or representations on behalf of the other Party; and
nothing in this Agreement shall be considered to establish a relationship of
co-partner or joint venturers among the parties.
11.6 LIMITATION OF RIGHTS. Except as expressly provided in this Agreement,
nothing contained herein shall be construed as conferring any license or other
rights by implication, estoppel or otherwise, under any patent or patent
applications or any copyrights, trademarks, trade names or trade dress or other
intellectual property of the other Party.
11.7 ENTIRE AGREEMENT. This Agreement and its Exhibits set forth the
entire agreement between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties with respect to the
subject matter of this Agreement.
11.8 AMENDMENT. This Agreement may not be modified, amended or discharged
except as expressly stated in this Agreement or by a written agreement signed by
an authorized representative of each Party.
11.9 SEVERABILITY. The provisions of this Agreement shall be deemed
separable. If any provision in this Agreement shall be found or be held to be
invalid or unenforceable in any jurisdiction in which this Agreement is
performed, then the meaning of that provision shall be construed, to the extent
feasible, to render the provision enforceable, and if no feasible interpretation
would save such provision, it shall be severed from the remainder of this
Agreement which shall remain in full force and effect
11
<PAGE> 12
unless the provisions that are invalid or unenforceable substantially impair the
value of the entire Agreement to either Party.
11.10 HEADINGS. The article and section headings in this Agreement are
inserted for convenience only and shall not constitute a part thereof.
11.11 FURTHER ASSURANCE. The parties shall take any and all steps and
execute, acknowledge and deliver any and all further documents necessary to
effectuate the intent of this Agreement.
11.12 GUARANTEE OF PERFORMANCE. Each Party hereby guarantees the
performance and all obligations of its Affiliates under this Agreement.
11.13 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to constitute an original, but all
of which together shall constitute one and the same instrument.
11.14 WAIVERS. Any term or provision of this Agreement may be waived, or
the time for its performance may be extended, by the Party or parties entitled
to the benefit thereof. Any such waiver shall be validly and sufficiently
authorized for the purposes of this Agreement if, as to any Party, it is
authorized in writing by an authorized representative of such Party. The failure
of any Party hereto to enforce at any time any provision of this Agreement shall
not be construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of any Party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
11.15 SURVIVAL. The following provisions shall survive the termination or
expiration of this Agreement for any reason: Sections 3.3, 9, and 7.4.
11.16 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws (as opposed to the conflicts of law
provisions) of the State of Delaware.
11.17 CONSTRUCTION. This Agreement, the validity, construction,
performance and interpretation thereof, and all issues and controversies arising
therefrom shall be construed and enforced exclusively in accordance with the
laws of the State of Delaware applicable to contracts made and to be performed
entirely within the State of Delaware without reference to its conflict of law
provisions.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
SMITH & NEPHEW, INC. DONJOY, L.L.C.
By: /s/ Clifford K. Lomax By: /s/ Leslie H. Cross
---------------------- ---------------------
Name: Clifford K. Lomax Name: Leslie H. Cross
------------------ ------------------
Title: Treasurer Title: President and CEO
------------------ ------------------
Date: 6/30/99 Date: 6/30/99
------------------ ------------------
13
<PAGE> 14
EXHIBIT A
DRAFT PATENT APPLICATIONS
14
<PAGE> 1
EXHIBIT 10.3
SUPPLY AGREEMENT
Dated as of June 30, 1999
Between
DonJoy, L.L.C.
And
Smith & Nephew, Inc.
<PAGE> 2
SUPPLY AGREEMENT (this "Agreement"), dated as of June 30, 1999
between DonJoy, L.L.C., a Delaware limited liability company ("DonJoy, L.L.C.")
and Smith & Nephew, Inc., a Delaware corporation ("S&N").
WHEREAS, pursuant to a Recapitalization Agreement dated April
29, 1999 (the "Recapitalization Agreement") among DonJoy, L.L.C., S&N and Chase
DJ Partners, LLC ("Investor"), DonJoy, L.L.C. is selling Investor 645,500
Common Units of DonJoy, L.L.C. and DonJoy, L.L.C. is redeeming 2,000,000 Common
Units from S&N, such that upon consummation of the transactions contemplated by
the Recapitalization Agreement, Investor will own approximately a ninety
percent (90%) membership interest in DonJoy, L.L.C.;
WHEREAS, it is a condition to Investor's obligations under the
Recapitalization Agreement that S&N and DonJoy, L.L.C. enter into this
Agreement;
WHEREAS, any term not otherwise defined herein shall have the
meaning ascribed to such term in the Recapitalization Agreement; and
WHEREAS, the parties wish to provide for the continued supply to
S&N by DonJoy, L.L.C. of certain products of the Business to be hereafter
manufactured or sourced from third-party vendors and sold by DonJoy, L.L.C.;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
DonJoy, L.L.C. and S&N hereby agree as follows:
1. PURCHASE AND SALE OF PRODUCTS. From time to time during the
term of this Agreement, DonJoy, L.L.C. will sell to S&N and S&N will purchase
from DonJoy, L.L.C. the health care products listed on Schedule 1 attached
hereto, or such other products as may be mutually agreed by the parties, under
brand names to be mutually agreed upon by the parties (the "Products").
2. PRICES AND TERM OF SALE.
(a) The prices for the Products to be sold by DonJoy, L.L.C. to
S&N pursuant to Section 1 shall be the prices currently being charged by
DonJoy, L.L.C. as of the date first set forth above (the "Effective Date").
Such prices shall remain firm until December 31, 1999. No later than 90 days
prior to the end of the current calendar year, DonJoy, L.L.C. shall inform S&N
of its best distributor prices (including discounts and rebates offered to
distributors by DonJoy, L.L.C.) for the next calendar year, which prices shall
go into effect on January 1 of such calendar year if and to the extent agreed
to in writing by S&N. All invoices from DonJoy, L.L.C. to S&N will be due and
payable net within sixty (60) days. All shipments shall be FOB factory, all
shipping charges shall be paid by S&N, and the title and risk of loss shall
pass to S&N on delivery of the products to the common carrier designated by
S&N. S&N shall be responsible for the payment of
<PAGE> 3
taxes assessed in respect of the sale and insurance relating to Products
purchased from DonJoy, L.L.C.
(b) To place an order for the Products hereunder, S&N shall
deliver to DonJoy, L.L.C. purchase orders specifying the type and quantities of
the Products to be purchased together with an example of the brand name and
associated artwork, which purchase orders shall provide for the delivery date
for the shipment. DonJoy, L.L.C. shall use commercially reasonable efforts to
fill such purchase order within the time period set forth therein or, if such
purchase order is for a quantity of Products that is substantially in excess of
the quantity forecast by S&N pursuant to Section 3(b) for the applicable
period, such other reasonable period of time as customarily required by DonJoy,
L.L.C. to fill an order of such Products. For a period of forty-five (45) days
following receipt of a shipment by S&N at the address specified in the
applicable purchase order, S&N shall have the right of inspection and may
reject any Product which (i) fails to meet specifications, (ii) was not
Processed (as hereafter defined), Packaged (as hereafter defined) or shipped in
compliance with applicable governmental or regulatory requirements or the
provisions of this Agreement, (iii) which is defective in material or
workmanship, (iv) otherwise fails to comply with the requirements of this
Agreement or (v) which was damaged in transit. Any notice of rejection must be
given on or before the forty-fifth (45th) day following receipt of the
particular shipment of the Products by S&N, and any failure to give such notice
shall be deemed to constitute acceptance of delivery; provided, however, that
notices of rejection based on latent or otherwise unapparent defects in the
Products may be given at any time following receipt of the particular shipment
of the Products by S&N. If any defective or damaged Products are timely
rejected by S&N, DonJoy, L.L.C. shall credit the account of S&N for the portion
of the invoiced amount that relates to such defective or damaged Products, such
credit to be applied against the invoice relating to such defective or damaged
Products if not previously paid by S&N or, if such invoice has been paid by
S&N, against future purchases of S&N under this Agreement. If, in lieu of such
credit, S&N requests in its rejection notice that it desires to receive
replacement Products, DonJoy, L.L.C. shall ship such replacement Products at
DonJoy, L.L.C.'s expense within ten (10) days after receipt of, or as otherwise
provided in, the notice of rejection hereunder. If requested by DonJoy, L.L.C.,
S&N shall return such defective or damaged Products to DonJoy, L.L.C. at
DonJoy, L.L.C.'s expense. For purposes of this Agreement, the term "Packaged"
shall mean the procedure whereby the Products, or any part thereof, were
inspected, labeled, packaged and packed in accordance with the requisite
specifications. The term "Processed" shall mean the procedures involved in the
manufacture and preparation of the Products or any part thereof in accordance
with the requisite specifications.
3. QUANTITIES. (a) S&N shall have no obligation to purchase any
specific or minimum quantities of Products; provided, however, that S&N shall
not purchase any of the Products listed on Schedule 2 (the "Competing
Products") from any Person other than DonJoy, L.L.C. without the prior written
consent of DonJoy, L.L.C. Notwithstanding the preceding sentence, in the event
that DonJoy, L.L.C. does not, or informs S&N that it will not, deliver such
Competing Products to S&N on the terms set forth in the applicable purchase
order and in accordance with this Agreement, then S&N may purchase such
Competing Products from suppliers other than DonJoy, L.L.C.
<PAGE> 4
("Third Party Suppliers") upon 10 days' prior notice to DonJoy, L.L.C.;
provided that S&N shall not be entitled to purchase Competing Products from
Third Party Suppliers if the sole reason for DonJoy, L.L.C.'s failure to
deliver is S&N's refusal to pay the best distributor price for such Competing
Products as set forth in Section 2(a). If S&N is entitled to purchase Competing
Products from a Third Party Supplier it may do so for the period and on the
terms reasonably required by such Third Party Supplier. No purchase by S&N of
Competing Products from a Third Party Supplier in accordance with this Section
3(a) shall violate the noncompetition provisions of Section 8.5(a) of the
Recapitalization Agreement. In addition, and by way of clarification, S&N may
purchase Products other than the Competing Products (the "Noncompeting
Products") from suppliers other than DonJoy, L.L.C. and may manufacture
Noncompeting Products.
(b) S&N shall give DonJoy, L.L.C. a 30 day forecast at the beginning of
each month of its requirements for such month.
4. SPECIFICATIONS AND QUALITY CONTROL.
(a) DonJoy, L.L.C. warrants that the Products sold pursuant to
this Agreement (i) shall be Processed and Packaged in strict accordance with
the specifications and quality control standards in effect immediately prior to
the Effective Date (the "Specifications"); (ii) will be Processed and Packaged
in accordance with all applicable laws, rules, orders and regulations,
including good manufacturing practice, ISO and CE Marking requirements; (iii)
will be free from defects in materials and workmanship; (iv) are merchantable
and fit for the purposes for which the products were manufactured; (v) will be
free of all liens and encumbrances; and (vi) will not be adulterated or
misbranded within the meaning of the United States Food, Drug and Cosmetic Act
or of any other applicable law, rule, order or regulation.
(b) DonJoy, L.L.C. warrants that it shall maintain all material
permits, registrations, licenses and any other approvals necessary to Package,
Process and supply the Products under this Agreement.
5. TERM.
(a) This Agreement shall remain in full force and effect until
June 18, 2004 (the "Term") and shall be renewed or extended only on the formal
written agreement of the parties.
(b) Without waiving any other rights or remedies which may be
available for breach or default of this Agreement, a party hereto may terminate
this Agreement on thirty (30) days' written notice to the other party if:
(i) The other party makes an assignment for the
benefit of creditors.
<PAGE> 5
(ii) A receiver shall be appointed to take over
all or a substantial part of the other party's business or
property and such receivership shall not have been vacated or
stayed within thirty (30) days.
(iii) The other party commences any proceeding
relating to itself under any bankruptcy, insolvency, and
readjustment of debt, arrangement with creditors, dissolution,
liquidation or similar laws of any jurisdiction now or hereafter
in effect.
(iv) The other party is adjudicated insolvent or
an order for relief is entered against such party under
applicable bankruptcy law.
(v) The other party materially fails to perform
any part of this Agreement or the Recapitalization Agreement or
any other agreement contemplated thereby and, upon written
notice of such failure by the other party, fails to remedy the
same within thirty (30) days of such notice.
6. CONFIDENTIALITY. During the term hereof and for a period of
five (5) years thereafter, the parties agree that they will maintain in
confidence all Confidential Information of the other party, and will not
disclose such Confidential Information to any third party. As used herein, the
term "Confidential Information" means technical, business, customer, marketing,
financial, corporate or any other information of a party, or of its
subsidiaries, affiliates or parent companies, which, whether or not pursuant to
this Agreement, is disclosed orally or in writing or which another party
obtains by any other means, excluding information which (i) is or becomes
available to such party from a source other than such party, (ii) is or becomes
available to the public other than as a result of disclosure by such party or
its agents, or (iii) is required to be disclosed under applicable law or
judicial process, but only to the extent it must be disclosed.
7. INDEMNIFICATION AND INSURANCE.
(a) DonJoy, L.L.C. will indemnify and hold S&N and its officers
and affiliates harmless from and against any liability, damage, claims, cost or
expense (including reasonable attorney's fees) ("Losses") arising out of (i)
any injury, death or property damage arising out of the negligence or willful
misconduct of DonJoy, L.L.C. or its employees or agents (except to the extent
that such injury, death or damage was caused by the negligent act or willful
misconduct of S&N) in any action or proceeding brought by any third party
respecting such claim; (ii) DonJoy, L.L.C.'s negligent act or omission; (iii)
DonJoy, L.L.C.'s misstatements or false claims with respect to the Products;
(iv) any product liability claims relating to the Products (other than those
resulting from S&N's or any third party's fault which do not give rise to an
indemnifiable claim against DonJoy, L.L.C. by S&N under the Recapitalization
Agreement); (v) any governmentally-required recall of Products (other than
those resulting from S&N's or a third party's fault which do not give rise to
an indemnifiable claim against DonJoy, L.L.C. by S&N under the Recapitalization
Agreement); (vi) DonJoy, L.L.C.'s failure to
<PAGE> 6
comply with DonJoy, L.L.C.'s obligations, covenants, and representations and
warranties under this Agreement; and (vii) 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 Products pursuant hereto; provided, however, that in no event
will S&N have any right to claim indemnity under this Section 7 if the events,
facts or circumstances giving rise to such claim constitute a breach of any of
the obligations, covenants, and representations and warranties of S&N contained
in the Recapitalization Agreement, or otherwise give rise to an indemnifiable
claim against S&N by DonJoy, L.L.C. thereunder. In order to ensure DonJoy,
L.L.C.'s performance, DonJoy, L.L.C. shall obtain and maintain during the term
of this Agreement at least Three Million Dollars ($3 million) of product
liability and general public liability insurance with a deductible or
self-insurance of no more than One Hundred Thousand Dollars ($100,000). DonJoy,
L.L.C. shall name S&N as an additional insured party on such insurance and
shall provide S&N with a certificate evidencing such coverage.
(b) S&N will indemnify and hold DonJoy, L.L.C. and DonJoy,
L.L.C.'s officers, managers, equity holders and affiliates harmless from and
against any and all Losses arising out of (i) any injury, death or property
damage arising out of the negligence or willful misconduct of S&N or its
employees or agents (except to the extent that such injury, death or damage was
caused by the negligent act or willful misconduct of DonJoy, L.L.C.) in any
action or proceeding brought by any third party respecting such claim; (ii)
S&N's negligent act or omission; (iii) S&N's misstatements or false claims with
respect to the Products; (iv) S&N's misuse of the Product literature; and (v)
S&N's failure to comply with its obligations, covenants, and representations
and warranties hereunder.
(c) Indemnification Procedures
Each party shall be entitled to the indemnify described in
paragraphs (a) and (b) of this Section provided the following conditions are
met; the party obliged to provide indemnification is referred to as the
"Indemnifying Party", and the party entitled to be indemnified is referred to
as the "Indemnified Party":
(i) Promptly upon learning of any claim for which
indemnification is sought from the Indemnifying Party, the
Indemnified Party shall notify the Indemnifying Party of such
claim and shall furnish to the Indemnifying Party all
information known and available to the Indemnified Party related
to such claim.
(ii) In the event of the commencement of
litigation on the basis of such claim, the Indemnified Party
shall tender the defense of such litigation to the Indemnifying
Party.
(iii) The Indemnified Party shall comply with any
such reasonable instructions received from the Indemnifying
Party relating to
<PAGE> 7
settlement of such claim (unless settlement of the claim would
establish an adverse precedent for other similar claims in the
future), if any, to the extent that it lies within the power of
the Indemnified Party to comply with any such instructions,
excluding any instruction that requires the Indemnified Party to
license or otherwise make available technology or other
confidential information to a third party.
(iv) If the Indemnifying Party undertakes defense
of such litigation, the Indemnifying Party shall be entitled to
appoint its attorneys to defend the case in the name of the
Indemnified Party, and the Indemnified Party shall cooperate
fully with the Indemnifying Party and its chosen attorneys in
the defense of such litigation. The Indemnified Party shall be
free to appoint its own attorneys in the same litigation, at its
sole expense, although all decisions with respect to the conduct
or settlement of such litigation shall remain solely with the
Indemnifying Party.
8. INDEPENDENT CONTRACTORS. Each party shall be treated for all
purposes as an independent contractor and not as an agent or representative of
the other party. Each party shall be responsible for complying with laws and
regulations applicable to its business, for obtaining required licenses and
permits, for the payment of applicable taxes, and for the conduct and
compensation of its own employees.
9. NOTICES. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given or delivered
when delivered personally or when sent by registered or certified mail or by
private courier addressed as follows:
If to DonJoy, L.L.C., to:
DonJoy, L.L.C.
2985 Scott Street
Vista, California 92083-8339
Attention: President
If to S&N, to:
Smith & Nephew, Inc.
1450 Brooks Road
Memphis, Tennessee 38116
Attention: General Counsel
or to such other address as such party may indicate by a notice delivered to
the other party hereto.
<PAGE> 8
10. SUCCESSORS AND ASSIGNS. This Agreement shall not be
assignable by either party without the written consent of the other party;
provided, however, that DonJoy, L.L.C. may assign its rights and obligations
under this Agreement to any of its affiliates or subsidiaries (including DJ
Orthopedics, LLC) without the consent of S&N; provided further, that neither
party hereto shall be released from any of its obligations hereunder by reason
of any such assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and permitted assigns.
11. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the
entire understanding of the parties hereto with regard to the subject matter
contained herein and supersedes all prior agreements, understandings or letters
of intent between or among any of the parties hereto. Contrary provisions in
any purchase order, invoice or other commercial documentation shall be of no
force and effect. This Agreement shall not be amended, modified or supplemented
except by a written instrument signed by an authorized representative of each
of the parties hereto.
12. INTERPRETATION. Headings to sections herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
13. WAIVERS. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by the party or
parties entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently authorized for the purposes of this Agreement if it is authorized
in writing by the other party. The failure of any party hereto to enforce at
any time any provision of this Agreement shall not be construed to be a waiver
of such provision, nor in any way to affect the validity of this Agreement or
any part hereof or the right of any party thereafter to enforce each and every
such provision. No waiver of any breach of this Agreement shall be held to
constitute a waiver of any other or subsequent breach.
14. FORCE MAJEURE. The obligations and performance of a party
hereto shall be excused if made impossible by strikes, riots, fire, inability
to obtain or shortages of labor, materials, equipment or transportation, war,
acts of God, natural disasters or other causes beyond the reasonable control of
the party and acts in compliance with applicable law, regulation or order
(whether valid or invalid of any governmental body).
15. PARTIAL INVALIDITY. Wherever possible, each provision hereof
shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such invalid, illegal or unenforceable provision or provisions
or any other provisions hereof, unless such a construction would be
unreasonable.
<PAGE> 9
16. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be considered an original
instrument, but all of which shall be considered one and the same agreement,
and shall become binding when one or more counterparts have been signed by each
of the parties hereto and delivered to each of DonJoy, L.L.C. and S&N. An
executed copy hereof delivered by facsimile shall be deemed an original
instrument.
17. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (as opposed to the conflicts of
law provisions) of the State of Delaware.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed the day and year first above written.
DONJOY, L.L.C.
By: /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: President and CEO
SMITH & NEPHEW, INC.
By: /s/ Clifford K. Lomax
----------------------------
Name: Clifford K. Lomax
Title: Treasurer
[SIGNATURE PAGE TO SUPPLY AGREEMENT]
<PAGE> 11
SCHEDULE 1
PRODUCT LISTING
1. All ProCare line products (including ProCare OEM products).
2. All DonJoy products listed in the Rehabilitation Division, Smith &
Nephew, Inc. 1999 Catalog for the United States (including DonJoy OEM
products) and any replacement and substitutions therefor and
improvement thereto; provided that S&N shall not export any such
products from the United States after March 31, 2000.
<PAGE> 12
SCHEDULE 2
Schedule 8.5(a)(ii) to the Recapitalization Agreement and the
provisions of Section 8.7 of the Recapitalization Agreement relating to high
tech hinged knee braces incorporating technology covered by the Victoria
Patents (as defined in the Recapitalization Agreement) are incorporated by
reference herein.
<PAGE> 1
EXHIBIT 10.4
TRANSITION SERVICES AGREEMENT
This Transition Services Agreement (this "Agreement") is made and
entered into as of this 30th day of June, 1999, by and between Smith & Nephew
Inc., a Delaware corporation (hereinafter "S&N"), and DonJoy, L.L.C., a
Delaware limited liability company (hereinafter "DonJoy, L.L.C.").
WHEREAS, pursuant to the Recapitalization Agreement, dated as of April
29, 1999 (the "Recapitalization Agreement") by and among S&N, DonJoy, L.L.C.
and Chase DJ Partners, LLC ("Investor"), DonJoy, L.L.C. is selling to Investor
645,000 Common Units of DonJoy, L.L.C. and DonJoy, L.L.C. is redeeming
2,000,000 Common Units from S&N, such that upon consummation of the
transactions contemplated by the Recapitalization Agreement Investor will own
approximately a ninety percent (90%) membership interest in DonJoy, L.L.C.
(capitalized terms not otherwise defined herein shall have the meanings
assigned to such terms in the Recapitalization Agreement);
WHEREAS, it is a condition to Investor's obligations under the
Recapitalization Agreement that S&N and DonJoy, L.L.C. enter into this
Agreement; and
WHEREAS, in accordance with the Recapitalization Agreement, S&N wishes
to assist DonJoy, L.L.C. with the transfer and transition of the Business and
DonJoy, L.L.C. wishes to obtain such assistance, all on the terms and
conditions herein described.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, S&N and DonJoy, L.L.C. do hereby
agree as follows:
I. SERVICES
In this Agreement, "Services" shall mean those services provided by S&N
to DonJoy, L.L.C. as listed and described on Exhibit A hereto and such other
services as the parties may mutually agree.
I. DELIVERY OF SERVICES
a) The Services shall be performed by employees, representatives or
agents of S&N as may be selected by S&N and which are reasonably acceptable to
DonJoy, L.L.C. The Services shall be provided at times that are mutually
agreeable to the parties.
b) The parties hereto shall be treated for all purposes as independent
contractors and not as an agent or representative of the other party and
neither has any power, right or authority to bind the other party or to assume
or to create any obligation or responsibility, express or implied, on behalf of
the other party. Nothing stated in this Agreement shall be construed as
constituting DonJoy, L.L.C. and S&N as partners or as members of a joint
venture, or as creating the relationship of employer and employee, master and
servant, or principal and agent between them.
<PAGE> 2
I. TERM AND TERMINATION
a) This Agreement shall commence on the date hereof and, except as
provided in Exhibit A, shall expire on December 31, 1999 DonJoy, L.L.C. shall
have the right to terminate any Service to be provided under this Agreement by
providing S&N with at least thirty (30) days prior written notice.
b) Either party may terminate this Agreement by written notice having
immediate effect in the event that any of the following events occur: (1) a
receiver is appointed over any of the assets of the other party and such
receivership shall not have been vacated or stayed within thirty (30) days; (2)
the other party is unable to pay its debts as they mature or ceases to pay its
debts as they mature in the ordinary course of business or makes an assignment
for the benefit of its creditors; (3) any voluntary proceedings are commenced
by or for the other party under any bankruptcy, insolvency, or debtors' relief
law; or for any proceedings commenced against the other party under any
bankruptcy, insolvency or debtors' relief law and such proceeding is not
vacated or set aside within thirty (30) days from the date of commencement
thereof.; or (4) material default by the other party under its respective
Ancillary Agreements.
c) Any material breach of any term of this Agreement shall entitle the
other party to terminate this Agreement provided the non-breaching party first
gives notice to the breaching party and permits the breaching party twenty (20)
days to cure such breach, provided that in the event of delay of payment by
DonJoy, L.L.C. the cure period shall be five (5) days. The right to terminate
shall be in addition to all other rights and remedies available at law or in
equity.
4. INDEMNIFICATION
a) Indemnification by S&N
S&N agrees to defend, indemnify and hold harmless DonJoy, L.L.C. and
DonJoy, L.L.C.'s officers, managers, equity holders and Affiliates from and
against any and all claims, actions, damages, losses, costs, liabilities and
expenses (including without limitation reasonable attorneys' fees) (hereinafter
"Losses") sustained or incurred by DonJoy, L.L.C. as a consequence of (i) any
injury, death or property damage arising out of the negligence or willful
misconduct of S&N or its employees or agents (except to the extent that such
injury, death or damage was caused by the negligent act or willful misconduct
of DonJoy, L.L.C.) in any action or proceeding brought by any third party
respecting such claim, (ii) S&N's negligent act or omission, or (iii) S&N's
failure to comply with its obligations hereunder.
b) Indemnification by DonJoy, L.L.C.
DonJoy, L.L.C. shall indemnify, defend and hold harmless S&N and
S&N's officers, directors, equity holders and Affiliates from and against any
Losses as a consequence of (i) any injury, death or property damage arising out
of the negligence or
<PAGE> 3
willful misconduct of DonJoy, L.L.C. or its employees or agents (except to the
extent that such injury, death or damage was caused by the negligent act or
willful misconduct of S&N) in any action or proceeding brought by any third
party respecting such claim, (ii) DonJoy, L.L.C.'s negligent act or omission,
(iii) DonJoy, L.L.C.'s failure to comply with its obligations hereunder, (iv)
any claim made in respect of an International Employee (as hereinafter defined)
for actions or omissions after the Closing Date or (v) claim made in respect of
any product of the Business sold by DonJoy, L.L.C. under any Group Purchasing
Contract (as hereinafter defined).
c) Indemnification Procedures
Each party shall be entitled to the indemnity described in
paragraphs (a) and (b) of this Section provided the following conditions are
met; the party obliged to provide indemnification is referred to as the
"Indemnifying Party", and the party entitled to be indemnified is referred to
as the "Indemnified Party":
(i) Promptly upon learning of any claim for which indemnification
is sought from the Indemnifying Party, the Indemnified Party shall notify the
Indemnifying Party of such claim and shall furnish to the Indemnifying Party
all information known and available to the Indemnified Party related to such
claim.
(ii) In the event of the commencement of litigation on the basis of
such claim, the Indemnified Party shall tender the defense of such litigation
to the Indemnifying Party.
(iii) The Indemnified Party shall comply with any such reasonable
instructions received from the Indemnifying Party relating to settlement of
such claim (unless settlement of the claim would establish an adverse precedent
for other similar claims in the future), if any, to the extent that it lies
within the power of the Indemnified Party to comply with any such instructions,
excluding any instruction that requires the Indemnified Party to license or
otherwise make available technology or other confidential information to a
third party.
(iv) If the Indemnifying Party undertakes defense of such
litigation, the Indemnifying Party shall be entitled to appoint its attorneys
to defend the case in the name of the Indemnified Party, and the Indemnified
Party shall cooperate fully with the Indemnifying Party and its chosen
attorneys in the defense of such litigation. The Indemnified Party shall be
free to appoint its own attorneys in the same litigation, at its sole expense,
although all decisions with respect to the conduct or settlement of such
litigation shall remain solely with the Indemnifying Party.
d) Insurance
Each party shall maintain at its own expense general public
liability coverage of not less than Three Million Dollars ($3,000,000) per
occurrence with respect to bodily injury and death and Three Million Dollars
($3,000,000) per occurrence with
<PAGE> 4
respect to property damage for each claim with a deductible of no more than Two
Hundred Fifty Thousand Dollars ($250,000). Each party shall provide the other
with a certificate of insurance showing coverage and showing that the other has
been named as an additional insured. Further, each party's insurer shall give
the other party at least thirty (30) days prior written notice of any proposed
cancellation or modification of the product liability insurance policy.
5. GOVERNMENTAL PERMITS AND COMPLIANCE WITH LAWS
a) The parties shall maintain all governmental permits required in order
to perform their respective obligations under this Agreement. The parties shall
comply with all laws, rules and regulations in all material respects; provided
that DonJoy, L.L.C. shall have the sole responsibility for compliance with all
laws, rules and regulations relating to the Business.
6. MISCELLANEOUS
a) This Agreement shall be amended or modified only by a written
instrument executed by the duly authorized representatives of both parties.
b) The waiver by either party of a breach or default in any of the
provisions of this Agreement by the other party shall not be construed as a
waiver of any succeeding breach of the same or any other provision.
c) All notices under this Agreement shall be in writing and shall be
sufficient if delivered in accordance with the requirements of the
Recapitalization Agreement.
d) The construction, performance and enforcement of this Agreement
shall be governed by and construed in accordance with the laws of the State of
Delaware (other than conflicts of law provisions).
e) If any provision of this Agreement shall be held to be invalid,
illegal, or unenforceable, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
f) Any controversy or claim arising out of or relating to this
Agreement, or any breach thereof, including, without limitation, any claim that
any of said Agreement, or any part thereof, is invalid, illegal or otherwise
voidable or void, shall be submitted to arbitration in accordance with the
Commercial Rules of the American Arbitration Association; provided, however,
that this clause shall not be construed to limit or to preclude either party
from bringing any action in any court of competent jurisdiction for injunctive
or other provisional relief as necessary or appropriate. The arbitration shall
be conducted in Chicago.
g) This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof. The parties represent that, in
entering into this
<PAGE> 5
Agreement, they are not relying upon any previous representation, inducement or
agreement of any kind.
h) In the event of arbitration and/or litigation over any controversy
or claim arising out of or relating to this Agreement, or any breach thereof,
the prevailing party shall be entitled to recover its reasonable attorneys fees
and expenses in connection with such arbitration and/or litigation.
i) All Exhibits attached hereto are incorporated into this Agreement by
reference.
j) Neither party may assign this Agreement without the written consent
of the other party, which consent shall not be unreasonably withheld; provided,
however, that DonJoy, L.L.C. may assign its rights and obligations under this
Agreement to any Affiliate or subsidiary (including DJ Orthopedics, LLC)
without the prior written consent of S&N; provided further, that neither party
hereto shall be released from any of its obligations hereunder by reason of any
such assignment.
k) S&N shall be not liable for its failure to perform its obligations
under this Agreement due to events beyond its reasonable control including, but
not limited to, strikes, riots, wars, fire, acts of God, inability to obtain or
shortages of labor, materials, equipment or transportation and acts in
compliance with applicable law, regulation, or order (whether valid or invalid)
of any governmental body.
[Remainder of Page Intentionally Left Blank]
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DonJoy, L.L.C. Smith & Nephew, Inc.,
By: /s/ Leslie H. Cross By: /s/ Clifford K. Lomax
-------------------------- ----------------------------
Title: President and CEO Title: Treasurer
--------------------------- -----------------------------
[Signature Page to Transition Services Agreement]
<PAGE> 7
EXHIBIT A
SERVICES
The following Services are to be provided at no additional consideration beyond
that set forth herein, provided, however, DonJoy, L.L.C. shall reimburse S&N
for all payments made by S&N to third parties in conjunction with the services:
1. Continue Steven Murphy and Lieve Vandem Berghe (collectively "International
Employees") as employees of S&N's affiliates in the United Kingdom and
Belgium, respectively, until the earlier of: (a) fifteen (15) days
following receipt of written notice from DonJoy, L.L.C.; or (b) December
31, 1999. DonJoy, L.L.C. shall reimburse S&N's affiliates in the United
Kingdom and Belgium, as applicable, for all compensation, expenses and
benefits paid or provided to or on behalf of the International Employees.
The appropriate S&N affiliate will invoice DonJoy, L.L.C. for all such
amounts, which amounts shall be paid by DonJoy, L.L.C. to such affiliate
within thirty (30) days in the currency designated in by such affiliate.
DonJoy L.L.C.'s obligation to reimburse S&N for expenses shall include the
actual expense for providing such benefits in addition to a reasonable
charge for administering the benefits and benefit plans. The level of
compensation to be paid to the International Employees shall be the same is
currently as paid to the International Employees as of the date hereof,
unless the compensation is adjusted by written notice from DonJoy, L.L.C.
to S&N. The benefits to be provided to the International Employees shall
be similar to those provide to the International Employees prior to the
date of this Agreement.
2. Support the orderly transition of services for human resource support
relating to the Business.
3. Assist in the transition of the employee payroll tax function relating to
the Business from S&N to DonJoy, L.L.C.
4. Assist in the transition of the sales tax reporting function relating to
the Business from S&N to DonJoy, L.L.C.
5. Assist in the transition of the master group buying company contracts
listed on Schedule 1 that include products of the Business from the master
contract with S&N (collectively the "Group Purchasing Contracts") to a
separate agreement or arrangement for the benefit of DonJoy, L.L.C. At the
written request of DonJoy, L.L.C. and conditioned upon approval of the
other party to the respective Group Purchasing Contract if such approval is
required under such Group Purchasing Contract, S&N shall permit DonJoy,
L.L.C. to sell the products of the Business under and pursuant to the Group
Purchasing Contracts in accordance with the terms of a subcontract between
the Parties ("Subcontract Arrangement"). The Subcontract Arrangement
relating to any Group Purchasing Contract will commence within a reasonable
period of time following the receipt of the request and end on the earlier
of
<PAGE> 8
(a) such time as DonJoy, L.L.C. enters into a contract to replace such
Group Purchasing Contract; (b) such Group Purchasing Contract terminates;
and (c) thirty (30) days after DonJoy, L.L.C. notifies S&N that it no
longer wishes to purchase products pursuant to such Group Purchasing
Contract. The Parties shall negotiate in good faith with respect to the
processes and procedures and other terms of each Subcontract Arrangement,
which shall be substantially similar to the processes and procedures
followed as of the date of this Agreement; provided that, unless otherwise
agreed by the Parties, prior to January 1, 2000 DonJoy, L.L.C. shall not be
required to pay S&N any fee for products subject to a Subcontract
Arrangement and, on and after January 1, 2000, DonJoy, L.L.C. shall pay S&N
a fee equal to 1.5% of DonJoy, L.L.C.'s gross sales for products subject to
a Subcontract Arrangement.
6. Store the assets of DonJoy, L.L.C., including shelving, racks and obsolete
inventory, located at 2777 Loker Avenue, Carlsbad, CA (the "Premises") on
the date hereof (the "Stored Assets") until the earlier of (a) 10 business
days after S&N gives notice to DonJoy, L.L.C. that (i) S&N or its subtenant
desires to use the Premises or (ii) the removal of the Stored Assets is
required by the owner of the Premises, and (b) December 31, 1999. DonJoy,
L.L.C., at its own expense, shall remove the Stored Assets from the
Premises within 5 business days after the termination of DonJoy, L.L.C.'s
storage rights pursuant to the preceding sentence.
7. Assist in the transition of documents relating to the Business in the
possession or under the control of S&N's Legal Department. Assist in the
transition of the legal function relating to the Business from S&N to
DonJoy, L.L.C.
8. Assist in the transfer of the treasury and cash management functions
relating to the Business from S&N to DonJoy, L.L.C.
9. S&N will act as authorized European representative for CE regulation
through December 31, 1999.
<PAGE> 9
Schedule 1
Novation
Premier
AmeriNet
<PAGE> 1
EXHIBIT 10.5
DISTRIBUTION AGREEMENT
Dated as of June 30, 1999
Among
DonJoy, L.L.C.
And
Smith & Nephew, Inc.
Smith & Nephew GMBH, Austria
Smith & Nephew GMBH, Germany
Smith & Nephew OY, Finland
Smith & Nephew Nederland BV, Holland
Smith & Nephew K.K., Japan
Smith & Nephew LDA., Portugal
Smith & Nephew (Belgium) S.A. - N.V., Belgium
Smith & Nephew FZE, Dubai
Smith & Nephew Medical Limited, India
Smith & Nephew Limited, Korea
Smith & Nehpew (Malaysia) Ltd., Malaysia
Smith & Nephew (Overseas) Limited Philippine Branch
Smith & Nephew Inc., Puerto Rico
Smith & Nephew Limited, Thailand
Smith & Nephew AB, Sweden
Smith & Nephew Limited, Ireland
Smith & Nephew Laboratoires Fisch SA, France
Smith & Nephew AG, Switzerland
Smith & Nephew S.r.I., Italy
Smith & Nephew A/S, Norway
Smith & Nephew Iberica S.A., Spain
Smith & Nephew A/S, Denmark
Smith & Nephew Medical Limited, UK
Smith & Nephew Pty. Limited, Australia
Smith & Nephew Pte. Limited, Singapore
Smith & Nephew Limited, Hong Kong
Smith & Nephew SA de CV, Mexico
Smith & Nephew Inc., Canada
Smith & Nephew Limited, South Africa
Smith & Nephew Limited (New Zealand)
And
Smith & Nephew (Far East) - Taiwan Branch
<PAGE> 2
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, (this "Agreement") dated as of June 30, 1999
among DonJoy, L.L.C., a Delaware limited liability company ("DonJoy, L.L.C."),
Smith & Nephew, Inc., a Delaware corporation ("S&N"), and the affiliates of S&N
listed on Schedule 1 hereto (the "S&N Group Companies").
WHEREAS, pursuant to a Recapitalization Agreement dated April 29,
1999 (the "Recapitalization Agreement") among DonJoy, L.L.C., S&N and Chase DJ
Partners, LLC ("Investor"), DonJoy, L.L.C. is selling Investor 645,500 Common
Units of DonJoy, L.L.C. and DonJoy, L.L.C. is redeeming 2,000,000 Common Units
from S&N, such that upon consummation of the transactions contemplated by the
Recapitalization Agreement, Investor will own approximately a ninety percent
(90%) membership interest in DonJoy, L.L.C.;
WHEREAS, it is a condition to Investor's obligations under the
Recapitalization Agreement that S&N and DonJoy, L.L.C. enter into this
Agreement;
WHEREAS, any term not otherwise defined herein shall have the meaning
ascribed to such term in the Recapitalization Agreement; and
WHEREAS, the parties wish to provide for the continued distribution by
S&N Group Companies of certain products of the Business to be hereafter
manufactured or sourced from third-party vendors and sold by DonJoy, L.L.C.;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
DonJoy, L.L.C., S&N and the S&N Group Companies hereby agree as follows:
1. PURCHASE AND SALE OF PRODUCTS. From time to time during the
term of this Agreement, DonJoy, L.L.C. will sell to S&N and S&N will purchase
from DonJoy, L.L.C. certain health care products as set forth in Schedule 1
attached hereto under the "DonJoy", "ProCare" and other brand names of the
specific type manufactured or purchased from third parties, and sold on and
prior to the date hereof by the Business and such other products as may be
generally offered for sale by DonJoy, L.L.C. during the Term (as hereinafter
defined) of this Agreement (the "Products").
2. PRICES AND TERM OF SALE. (a) Except as otherwise noted in
Schedule 2, S&N will pay the same transfer prices charged by S&N for equivalent
Products on its sales to S&N Group Companies immediately prior to the date
first set forth above (the "Effective Date"). Such prices shall remain firm
until December 31, 1999. Thereafter, DonJoy, L.L.C. and S&N agree to
renegotiate the price of any Product in good faith. Such renegotiations shall
be finalized on or before September 1, 1999. All invoices from DonJoy, L.L.C.
to S&N will be due and payable net within sixty (60) days. All shipments shall
be sent FOB factory and all shipping charges shall be paid by S&N, and
<PAGE> 3
the title and risk of loss shall pass to S&N on delivery of the products to the
common carrier designated by S&N. S&N shall be responsible for the payment of
taxes assessed in respect of the sale, import duties and insurance relating to
Products purchased from DonJoy, L.L.C. All amounts to be paid or credited and
the prices set forth hereunder shall be denominated in United States dollars.
Shipments shall be made either to the Territory (as hereinafter defined) or a
consolidation center designated by S&N in accordance with practices in effect
as of the Effective Date; provided that S&N shall provide information with
respect to in-market sales to DonJoy, L.L.C.
To place an order for the Products hereunder, S&N Group
Companies shall deliver to DonJoy, L.L.C. purchase orders specifying the type
and quantities of the Products to be purchased, which purchase orders shall
provide for the delivery date for the shipment. DonJoy, L.L.C. shall use
commercially reasonable efforts to fill any such purchase order within the time
period set forth therein or such other reasonable period of time as is
customarily required for DonJoy, L.L.C. to fill an order of such Products
within the specified time requested on such order. For a period of forty-five
(45) days following receipt of a shipment by an S&N Group Company at the
address specified in the applicable purchase order, such S&N Group Company
shall have the right of inspection and may reject any Product which (a) fails
to meet specifications, (b) which was not Processed (as hereafter defined),
Packaged (as hereafter defined) or shipped in compliance with applicable
governmental or regulatory requirements or the provisions of this Agreement,
(c) which is defective in material or workmanship, (d) otherwise fails to
comply with the requirements of this Agreement or (e) which was damaged in
transit prior to delivery to the common carrier designated by S&N. Any notice
of rejection must be given on or before the forty-fifth (45th) day following
receipt of the particular shipment of the Products by such S&N Group Company,
and any failure to give such notice shall be deemed to constitute acceptance of
delivery; provided, however, that notices of rejection based on latent or
otherwise unapparent defects in the Products may be given at any time following
receipt of the particular shipment of the Products by S&N Group Companies. If
any defective or damaged Products are timely rejected by an S&N Group Company,
DonJoy, L.L.C. shall credit the account of the S&N Group Companies for the
portion of the invoiced amount that relates to such defective or damaged
Products, such credit to be applied against the invoice relating to such
defective or damaged Products if not previously paid by S&N Group Companies or,
if such invoice has been paid by S&N Group Companies, against future purchases
of S&N Group Companies under this Agreement. If, in lieu of such credit, a S&N
Group Company requests in its rejection notice that it desires to receive
replacement Products, DonJoy, L.L.C. shall ship such replacement Products at
DonJoy, L.L.C.'s expense within ten (10) days after receipt of, or as otherwise
provided in, the notice of rejection hereunder. If requested by DonJoy,
L.L.C., S&N Group Companies shall return such defective or damaged Products to
DonJoy, L.L.C. at DonJoy, L.L.C.'s expense. For purposes of this Agreement,
the term "Packaged" shall mean the procedure whereby the Products, or any part
thereof, were inspected, labeled, packaged and packed in accordance with the
requisite specifications. The term "Processed" shall mean the procedures
involved in the manufacture and preparation of the Products or any part thereof
in accordance with the requisite specifications.
<PAGE> 4
3. QUANTITIES. During the term of this Agreement, S&N will use
its commercially reasonable efforts to have S&N Group Companies purchase,
subject to changing market conditions, from DonJoy, L. L.C. the same quantities
of Products included in DonJoy, L.L.C. budgets set forth on Schedule 3, ("1999
Purchase Level"); provided, however, that the S&N Group Companies shall not be
subject to any minimum purchase requirements. S&N shall give DonJoy, L.L.C. a
30 day forecast at the beginning of each month of its requirements for such
month. DonJoy, L.L.C. will use its commercially reasonable efforts to supply
and sell to the S&N Group Companies the quantities of the Products that S&N
Group Companies desire to purchase under this Agreement. DonJoy, L.L.C. agrees
that it will sell to S&N Group Companies, pursuant to purchase orders properly
delivered pursuant to Section 2 hereof, quantities of Products at least equal
to the 1999 Purchase Level. DonJoy, L.L.C. shall, if DonJoy, L.L.C. reasonably
determines that its available manufacturing capacity permits, and may, in its
sole discretion if otherwise, agree to sell quantities of Products in excess of
the 1999 Purchase Level.
4. DISTRIBUTION AND RESALE. S&N will use its commercially
reasonable efforts to have each S&N Group Company distribute and resell,
subject to changing market conditions, the Products in the same geographical
markets within the Territories. DonJoy, L.L.C. shall make available to S&N at
the same costs in effect as of the Effective Date, adequate and reasonable
sales literature, promotional support, training and samples of Products of the
same quality and quantity as S&N made available to the S&N Group Companies
prior to the Effective Date. The S&N Group Companies shall not sell or supply
the Products or other products similar to the Products (other than products
(not Products) that the S&N Group Companies are selling or supplying as of the
Effective Date) to any other person, firm or corporation operating outside the
Territories without the prior written consent of DonJoy, L.L.C.
5. SPECIFICATIONS AND QUALITY CONTROL. (a) DonJoy, L.L.C.
warrants that the Products sold pursuant to this Agreement (i) shall be
Processed and Packaged in strict accordance with the specifications and quality
control standards in effect immediately prior to the Effective Date (the
"Specifications"); (ii) will be Processed and Packaged in accordance with all
applicable laws, rules, orders and regulations, including good manufacturing
practice, ISO and CE Marking requirements; (iii) will be free from defects in
materials and workmanship; (iv) are merchantable and fit for the purposes for
which the products were manufactured; (v) will be free of all liens and
encumbrances; and (vi) will not be adulterated or misbranded within the meaning
of the United States Food, Drug and Cosmetic Act or of any other applicable
law, rule, order or regulation.
(b) DonJoy, L.L.C. warrants that it shall maintain all
material permits, registrations, licenses and any other approvals necessary to
Package, Process and supply the Products under this Agreement.
6. DUTIES OF THE S&N GROUP COMPANIES. S&N and each S&N Group
Company agrees that during the term hereof each S&N Group Company will employ
<PAGE> 5
efforts and methods to sell and promote the sale of the Products in its
respective Territory that are substantially the same as to the efforts and
methods employed by such S&N Group Company prior to the date hereof.
7. EXCLUSIVITY. (a) In connection with each S&N Group Company
acting as a distributor of the Products in the territory indicated next to such
S&N Group Company on Schedule 1 hereto (each, a "Territory" and collectively,
the "Territories"), each S&N Group Company shall not, while the Territory is
subject to this Agreement, directly or indirectly, personally or, knowingly,
through an intermediary:
(i) import, sell or promote or be engaged in the sale of
any of the products listed on Schedule 8.5(c) to the Recapitalization
Agreement other than products purchased from DonJoy, L.L.C.;
(ii) seek customers, establish a branch or maintain a
distribution depot outside its Territory;
(iii) incur any liability or assume any obligation of any
kind on behalf of DonJoy, L.L.C. or in any way pledge or purport to
pledge DonJoy, L.L.C.'s credit or accept any order to make any
contract binding upon DonJoy, L.L.C. without DonJoy, L.L.C. first
approving in writing the terms thereof; or
(iv) misrepresent DonJoy, L.L.C.'s descriptions or
indications for use of the Products.
(b) DonJoy, L.L.C. shall not sell or supply the Products or any
products similar to the Products to any other person, firm or corporation
operating in the Territories without the prior written consent of S&N.
8. TERM. (a) This Agreement shall remain in full force and
effect until the termination of the last Territory under this Agreement. (the
"Term").
(b) Notwithstanding anything contained herein to the contrary, S&N
shall have the right to terminate this Agreement with respect to any individual
Territory or Territories, without terminating the entire Agreement: (i) on
sixty (60) days prior written notice to DonJoy, L.L.C. with respect to
Territories listed in Column "A" on Schedule 1; and (ii) on sixty (60) days
prior written notice to DonJoy L.L.C. with respect to Territories listed in
Columns "B" and "C" on Schedule 1, but in no event shall notice be given prior
to November 1, 1999.
(c) Notwithstanding anything contained herein to the contrary,
DonJoy, L.L.C. shall have the right to terminate this Agreement with respect to
any individual Territory or Territories, without terminating the entire
Agreement: (i) on thirty (30) days prior written notice to S&N with respect to
Territories listed in Column "A" on Schedule 1; (ii) on sixty (60) days prior
written notice to S&N with respect to Territories listed in
<PAGE> 6
Column "B" on Schedule 1, but in no event shall notice be given prior to August
1, 1999 ; and (iii) on sixty (60) days prior written to S&N with respect to
Territories listed in Column "C" on Schedule 1, but in no event shall notice be
given prior to November 1, 1999.
(d) Without waiving any other rights or remedies which may be
available for breach or default of this Agreement, a party hereto may terminate
this Agreement on thirty (30) days' written notice to the other party if:
(i) The other party makes an assignment for the benefit
of creditors.
(ii) A receiver shall be appointed to take over all or a
substantial part of the other party's business or property and such
receivership shall not have been vacated or stayed within thirty (30)
days.
(iii) The other party commences any proceeding relating to
itself under any bankruptcy, insolvency, and readjustment of debt,
arrangement with creditors, dissolution, liquidation or similar laws
of any jurisdiction now or hereafter in effect.
(iv) The other party is adjudicated insolvent or an order
for relief is entered against such party under applicable bankruptcy
law.
(v) The other party materially fails to perform any part
of this Agreement or the Recapitalization Agreement or any other
agreement contemplated thereby and, upon written notice of such
failure by the other party, fails to remedy the same within thirty
(30) days of such notice.
9. TRADEMARKS. (a) The S&N Group Companies shall have the
royalty-free right to use the trademarks of DonJoy, L.L.C. related to the
Products solely in connection with the S&N Group Companies' distribution of the
Products as contemplated hereby, subject to DonJoy, L.L.C.'s right to approve
or disapprove of the S&N Group Companies' manner of usage of such trademarks.
Except as provided herein, neither S&N nor any of the S&N Group Companies shall
have any right to any mark, trade mark, name or symbol of DonJoy, L.L.C. or any
translation thereof now or hereafter applied or used by either party in
relation to any of the Products. DonJoy, L.L.C. shall be responsible, at
DonJoy, L.L.C.'s expense, for the registration of any such marks or trademarks
in the Territories. Except with respect to Repurchased Inventory not actually
purchased by DonJoy, L.L.C., the S&N Group Companies will, on termination of
this Agreement for a Territory, discontinue any use (and shall ship to DonJoy,
L.L.C. or destroy any such material at DonJoy, L.L.C.'s option and expense) in
that Territory of the DonJoy, L.L.C. trademarks on any signs, stationery,
invoices, promotional materials or otherwise and thereafter will not use,
either directly or indirectly, such trademarks or any other names, titles or
expressions so nearly resembling the same as would be likely to lead to
confusion or uncertainty, or to deceive the public.
<PAGE> 7
(b) The S&N Group Companies shall not alter or add to any of the
trademarks or trade names used by DonJoy, L.L.C. on the Products and shall at
all times use such trademarks or trade names in the advertising and promotion
of the Products; provided, however, that DonJoy, L.L.C. and the S&N Group
Companies may agree that the Products shall be sold under other trademarks or
trade names.
(c) Neither S&N nor any S&N Group Company shall have any right to
use any DonJoy, L.L.C. trademark, including "DonJoy" or "ProCare", in
connection with sales by any S&N Group Company of any similar products not
sourced by DonJoy, L.L.C. as may be permitted by Section 7(a) hereof.
10. CONFIDENTIALITY. Except as set forth herein below, during the
term hereof and for a period of five (5) years thereafter, DonJoy, L.L.C., on
the one hand, and S&N and each of the S&N Group Companies, on the other hand,
agree that they will maintain in confidence all Confidential Information of the
other party, and will not disclose such Confidential Information to any third
party. As used herein, the term "Confidential Information" means technical,
business, customer, marketing, financial, corporate or any other information of
a party, or of its subsidiaries, affiliates or parent companies, which, whether
or not pursuant to this Agreement, is disclosed orally or in writing or which
another party obtains by any other means, excluding information which (i) is or
becomes available to such party from a source other than such party, (ii) is or
becomes available to the public other than as a result of disclosure by such
party or its agents, or (iii) is required to be disclosed under applicable law
or judicial process, but only to the extent it must be disclosed.
11. INDEMNIFICATION AND INSURANCE. (a) DonJoy, L.L.C. will
indemnify and hold S&N and the S&N Group Companies and their respective
officers, managers, equity holders and affiliates harmless from and against any
liability, damage, claims, cost or expense (including reasonable attorney's
fees) ("Losses") arising out of (i) any injury, death or property damage
arising out of the negligence or willful misconduct of DonJoy, L.L.C. or its
employees or agents (except to the extent that such injury, death or damage was
caused by the negligent act or willful misconduct of S&N or the S&N Group
Companies) in any action or proceeding brought by any third party respecting
such claim, (ii) DonJoy, L.L.C.'s negligent act or omission, (iii) DonJoy,
L.L.C.'s misstatements or false claims with respect to the Products, (iv) any
product liability claims relating to the Products (other than those resulting
from S&N's, any S&N Group Companies' or any third party's fault which do not
give rise to an indemnifiable claim against DonJoy, L.L.C. by S&N under the
Recapitalization Agreement); (v) any governmentally-required recall of Products
(other than those resulting from S&N's, any S&N Group Companies' or a third
party's fault which do not give rise to an indemnifiable claim against DonJoy,
L.L.C. by S&N under the Recapitalization Agreement); (vi) DonJoy, L.L.C.'s
failure to comply with DonJoy, L.L.C.'s obligations, covenants, and
representations and warranties under this Agreement; and (vii) any claimed
infringement of the rights of any third party arising from the S&N Group
Company's use of the DonJoy, L.L.C. trademarks arising in connection with the
distribution of Products pursuant hereto, or any claim of infringement by any
third party of any patents or any
<PAGE> 8
claimed violation of any other intellectual property right of any third party
arising in connection with the distribution of Products pursuant hereto;
provided, however, that in no event will S&N or any S&N Group Company have any
right to claim indemnity under this Section 11 if the events, facts or
circumstances claim giving rise to such claim constitute a breach of any of the
obligations, covenants and representations and warranties of S&N contained in
the Recapitalization Agreement, or otherwise give rise to an indemnifiable
claim against S&N by DonJoy, L.L.C. thereunder. In order to ensure DonJoy,
L.L.C.'s performance, DonJoy, L.L.C. shall obtain and maintain during the term
of this Agreement at least Three Million Dollars ($3 million) of product
liability and general public liability insurance with a deductible or
self-insurance of no more than One Hundred Thousand Dollars ($100,000).
DonJoy, L.L.C. shall name S&N and the S&N Group Companies as additional insured
parties on such insurance and shall provide S&N with a certificate evidencing
such coverage.
(b) S&N will indemnify and hold DonJoy, L.L.C. and DonJoy,
L.L.C.'s officers, managers, equity holders and affiliates harmless from and
against any and all Losses arising out of (i) any injury, death or property
damage arising out of the negligence or willful misconduct of S&N or the S&N
Group Companies or its employees or agents (except to the extent that such
injury, death or damage was caused by the negligent act or willful misconduct
of DonJoy, L.L.C.) in any action or proceeding brought by any third party
respecting such claim; (ii) S&N's or the S&N Group Companies' negligent act or
omission; (iii) S&N's or the S&N Group Companies' misstatements or false claims
with respect to the Products; (iv) S&N's or the S&N Group Companies' misuse of
the Product literature; or (v) S&N's or the S&N Group Companies' failure to
comply with its obligations, covenants and representations and warranties
hereunder.
(c) Indemnification Procedures
Each party shall be entitled to the indemnity described in paragraphs
(a) and (b) of this Section provided the following conditions are met; the
party obliged to provide indemnification is referred to as the "Indemnifying
Party", and the party entitled to be indemnified is referred to as the
"Indemnified Party";
(i) Promptly upon learning of any claim for which
indemnification is sought from the Indemnifying Party, the Indemnified
Party shall notify the Indemnifying Party of such claim and shall
furnish to the Indemnifying Party all information known and available
to the Indemnified Party related to such claim.
(ii) In the event of the commencement of litigation on the
basis of such claim, the Indemnified Party shall tender the defense of
such litigation to the Indemnifying Party.
(iii) The Indemnified Party shall comply with any such
reasonable instructions received from the Indemnifying Party relating
to settlement of such claim (unless settlement of the claim would
establish an adverse precedent for
<PAGE> 9
other similar claims in the future), if any, to the extent that it
lies within the power of the Indemnified Party to comply with any such
instructions, excluding any instruction that requires the Indemnified
Party to license or otherwise make available technology or other
confidential information to a third party.
(iv) If the Indemnifying Party undertakes defense of such
litigation, the Indemnifying Party shall be entitled to appoint its
attorneys to defend the case in the name of the Indemnified Party, and
the Indemnified Party shall cooperate fully with the Indemnifying
Party and its chosen attorneys in the defense of such litigation. The
Indemnified Party shall be free to appoint its own attorneys in the
same litigation, at its sole expense, although all decisions with
respect to the conduct or settlement of such litigation shall remain
solely with the Indemnifying Party.
12. TRANSITION.
(a) Upon the termination of this Agreement with respect
to a Territory, the parties hereto agree to take all actions reasonably
necessary to effect the transition of the distribution arrangements for the
Products contemplated herein among the parties hereto and the distribution
arrangements entered into for the Products by the S&N Group Companies and third
parties with respect to such Territory, including the transfer of customer
lists and marketing materials relating principally to the customers of the
Products in that Territory. The S&N Group Companies shall assist DonJoy, L.L.C.
in transferring or applying for product registrations or certificates for
products that relate principally to the Products in the terminated Territory.
Transfers of product registrations or certificates for products in the
terminated Territory shall be made solely at DonJoy, L.L.C.'s expense.
(b) Upon the termination of this Agreement with respect to each
respective Territory or Territories, S&N or the appropriate S&N Group Company
shall deliver Products (whether acquired prior to or during the term of this
Agreement) ("Repurchased Inventory") to destinations specified by DonJoy,
L.L.C. in writing and at DonJoy, L.L.C.'s cost. DonJoy, L.L.C. shall pay S&N
or its designee in currency designated by S&N an amount equal to (i) the S&N
Group Company book value of the Repurchased Inventory (i.e., the original
transfer price paid by the S&N Group Company to purchase the Repurchased
Inventory, plus duty and tax paid by the S&N Group Company and the S&N Group
Company's original cost of shipping the Repurchased Inventory to the S&N Group
Company, to the extent such cost was paid by the S&N Group Company with an
appropriate deduction for unsaleable Repurchased Inventory) plus (ii) any sales
tax, VAT, duty or fee incurred by the S&N Group Company related to the delivery
of the Products to DonJoy, L.L.C. or such other destination specified by
DonJoy, L.L.C., within sixty (60) days following receipt of S&N's or S&N Group
Companies' invoice. In the event that DonJoy, L.L.C. designates another
distributor to receive Repurchased Inventory pursuant hereto, DonJoy, L.L.C.
may specify that such distributor shall pay all amounts to be paid to S&N or
its designee pursuant to this Section 12(b); provided, however, that, DonJoy,
L.L.C. shall remain primarily liable to S&N for all such amounts. In the event
of a dispute concerning the price to be paid by DonJoy, L.L.C. or its
disributor, as applicable, for the Repurchased Inventory or the condition of
the
<PAGE> 10
Repurchased Inventory then senior representatives of the parties shall meet and
attempt to resolve the dispute in good faith. If the parties are unable to
resolve the dispute within ten (10) business days then the S&N Group Companies
shall have the right to sell or distribute the Products that are the subject of
the dispute to third parties either within or outside the Territories following
the termination of this Agreement with respect the relevant Territory. Upon the
expiration of this Agreement with respect to all Territories, DonJoy, L.L.C. or
its designated distributor shall purchase all remaining Repurchase Inventory
from S&N in accordance with this Section.
13. INDEPENDENT CONTRACTORS. DonJoy, L.L.C., on the one hand, and
S&N and each of the S&N Group Companies, on the other hand, shall each be
treated for all purposes as an independent contractor and not as an agent or
representative of the other party. Each party shall be responsible for
complying with laws and regulations applicable to its business, for obtaining
required licenses and permits, for the payment of applicable taxes, and for the
conduct and compensation of its own employees.
14. NOTICES. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given or delivered
when delivered personally or when sent by registered or certified mail or by
private courier addressed as follows:
If to DonJoy, L.L.C., to:
DonJoy, L.L.C.
2985 Scott Street
Vista, California 92083-8339
Attention: President
If to S&N or any S&N Group Company, to:
Smith & Nephew, Inc.
1450 Brooks Road
Memphis, Tennessee 38116
Attention: General Counsel
or to such other address as such party may indicate by a notice delivered to
the other party hereto.
15. SUCCESSORS AND ASSIGNS. The rights of DonJoy, L.L.C., on the
one hand, and S&N and each of the S&N Group Companies, on the other hand, under
this Agreement shall not be assignable without the written consent of DonJoy,
L.L.C., in the case of assignment by S&N or any of the S&N Group Companies, and
S&N, in the case of assignment by DonJoy, L.L.C.; provided, however, that
DonJoy, L.L.C. may assign its rights and obligations under this Agreement to
any affiliate or subsidiary (including DJ Orthopedics, LLC) without the prior
written consent of S&N or any S&N Group Company; provided further, that neither
party hereto shall be released from any of its
<PAGE> 11
obligations hereunder by reason of any such assignment. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
successors and permitted assigns.
16. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the
entire understanding of the parties hereto with regard to the subject matter
contained herein and supersedes all prior agreements, understandings or letters
of intent between or among any of the parties hereto. Contrary provisions in
any purchase order, invoice or other commercial documentation shall be of no
force and effect. This Agreement shall not be amended, modified or
supplemented except by a written instrument signed by an authorized
representative of each of the parties hereto.
17. INTERPRETATION. Headings to sections herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
18. WAIVERS. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by the party or
parties entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently authorized for the purposes of this Agreement if it is authorized
in writing by S&N, in the case of any waiver by S&N or any of the S&N Group
Companies, or by DonJoy, L.L.C., in the case of any waiver by DonJoy, L.L.C..
The failure of any party hereto to enforce at any time any provision of this
Agreement shall not be construed to be a waiver of such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right of
any party thereafter to enforce each and every such provision. No waiver of
any breach of this Agreement shall be held to constitute a waiver of any other
or subsequent breach.
19. FORCE MAJEURE. The obligations and performance of a party
hereto shall be excused if made impossible by strikes, riots, fire, inability
to obtain or shortages of labor, materials, equipment or transportation, war,
acts of God, natural disasters or other causes beyond the reasonable control of
the party and acts in compliance with applicable law, regulation or order
(whether valid or invalid) of any governmental body.
20. PARTIAL INVALIDITY. Wherever possible, each provision hereof
shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such invalid, illegal or unenforceable provision or provisions
or any other provisions hereof, unless such a construction would be
unreasonable.
21. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be considered an original
instrument, but all of which shall be considered one and the same agreement,
and shall become binding when one or more counterparts have been signed by each
of the parties hereto and delivered to
<PAGE> 12
each of DonJoy, L.L.C. and S&N. An executed copy hereof delivered by facsimile
shall be deemed an original instrument.
22. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with laws of the State of Delaware (without regard to
conflicts of laws principles thereof).
[Remainder of Page Left Intentionally Blank]
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed the day and year first above written.
DONJOY, L.L.C.
By: /s/ Leslie H. Cross
-------------------------------
Name: Leslie H. Cross
Title: President and CEO
SMITH & NEPHEW, INC.
By: Clifford K. Lomax
-----------------------------
Name: Clifford K. Lomax
Title: Treasurer
FOR EACH OF THE S&N GROUP
COMPANIES LISTED BELOW:
By: Clifford K. Lomax
-----------------------------
Name: Clifford K. Lomax
Title: Treasurer
S&N GROUP COMPANIES:
Smith & Nephew GMBH, Austria
Smith & Nephew GMBH, Germany
Smith & Nephew OY, Finland
Smith & Nephew Nederland BV, Holland
Smith & Nephew K.K., Japan
Smith & Nephew LDA., Portugal
Smith & Nephew (Belgium) S.A. - N.V. ,
Belgium
Smith & Nephew FZE, Dubai
Smith & Nephew Medical Limited, India
Smith & Nephew Limited, Korea
Smith & Nehpew (Malaysia) Ltd., Malaysia
Smith & Nephew (Overseas) Limited
Philippine Branch
Smith & Nephew Inc., Puerto Rico
Smith & Nephew Limited, Thailand
Smith & Nephew AB, Sweden
Smith & Nephew Limited, Ireland
Smith & Nephew Laboratoires Fisch SA,
France
<PAGE> 14
Smith & Nephew AG, Switzerland
Smith & Nephew S.r.I., Italy
Smith & Nephew A/S, Norway
Smith & Nephew Iberica S.A., Spain
Smith & Nephew A/S, Denmark
Smith & Nephew Medical Limited, UK
Smith & Nephew Pty. Limited, Australia
Smith & Nephew Pte. Limited, Singapore
Smith & Nephew Limited, Hong Kong
Smith & Nephew SA de CV, Mexico
Smith & Nephew Inc., Canada
Smith & Nephew Limited, South Africa
Smith & Nephew Limited (New Zealand)
Smith & Nephew (Far East) - Taiwan
Branch
[Signature Page to Distribution Agreement]
<PAGE> 15
SCHEDULE 1
S&N GROUP COMPANIES AND TERRITORIES
<TABLE>
<CAPTION>
A B C
Company Territory Company Territory Company Territory
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Smith & Nephew GMBH, Germany and Smith & Nephew (Belgium) Smith & Nephew Pty.
Germany Eastern Europe S.A. Belgium Limited Australia
Smith & Nephew GMBH, Smith & Nephew, Inc. Canada
Austria Austria Smith & Nephew FZE Dubai
Smith & Nephew A/S Denmark Smith & Nephew Limited Hong Kong
Smith & Nephew OY Finland Smith & Nephew Medical
Limited India
Smith & Nephew Smith & Nephew Limited Ireland
Laboratoires Fisch SA France
Smith & Nephew S.r.I. Italy
Smith & Nephew Nederland Smith & Nephew Limited Korea
BV Holland
Smith & Nephew K.K. Japan Smith & Nephew Ltd. Malaysia
Smith & Nephew A/S Norway Smith & Nephew SA de CV Mexico
Smith & Nephew Limited New Zealand Smith & Nephew [ ] Philippines
Smith & Nephew LDA Portugal Smith & Nephew Inc. Puerto Rico
Smith & Nephew AB Sweden Smith & Nephew Pte.
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C> <C>
Limited Singapore
Smith & Nephew AG Switzerland Smith & Nephew Limited South Africa
Smith & Nephew Limited U.K. Smith & Nephew Iberica S.A. Spain
Smith & Nephew (Far East) Taiwan
Smith & Nephew Limited Thailand
</TABLE>
See Schedule 2 for a list of products.
<PAGE> 17
SCHEDULE 2
PRICING
SCHEDULE ATTACHED
<PAGE> 18
SCHEDULE 3
1999 PURCHASE LEVELS
<PAGE> 1
EXHIBIT 10.6
CERF LABORATORIES AGREEMENT
This CERF Laboratories Agreement (this "Agreement") is made and
entered into as of this 30th day of June, 1999, by and between Smith & Nephew
Inc., a Delaware corporation (hereinafter "S&N"), and DonJoy, L.L.C., a Delaware
limited liability company (hereinafter "DonJoy, L.L.C.").
WHEREAS, pursuant to the Recapitalization Agreement, dated as of April
29, 1999 (the "Recapitalization Agreement") by and among S&N, DonJoy, L.L.C. and
Chase DJ Partners, LLC ("Investor"), DonJoy, L.L.C. is selling to Investor
645,500 Common Units of DonJoy, L.L.C. and DonJoy, L.L.C. is redeeming 2,000,000
Common Units from S&N, such that upon consummation of the transactions
contemplated by the Recapitalization Agreement Investor will own approximately a
ninety percent (90%) membership interest in DonJoy, L.L.C. (capitalized terms
not otherwise defined herein shall have the meanings assigned to such terms in
the Recapitalization Agreement);
WHEREAS, it is a condition to S&N's obligations under the
Recapitalization Agreement that S&N and DonJoy, L.L.C. enter into this
Agreement; and
WHEREAS, in accordance with the Recapitalization Agreement, S&N
desires for its employees, agents, representatives and invitees (collectively
"Users") to use the Facilities (as defined below) and DonJoy, L.L.C. desires to
make the Facilities available to S&N, all on the terms and conditions herein
described.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, S&N and DonJoy, L.L.C. do hereby
agree as follows:
In this Agreement,
I. USE OF THE FACILITIES
a) DonJoy, L.L.C. shall allow S&N and the Users to use the Clinical
Education Research Facility (CERF) laboratory located at DonJoy, L.L.C.'s
premises located on Scott Street, Vista, California, the equipment and supplies
located therein and the services offered thereby (collectively the "Facilities")
for the term of this Agreement on substantially the same terms as those upon
which S&N and the Users currently use such Facilities S&N shall pay to DonJoy,
L.L.C. on the first day of each calendar quarter a quarterly fee for the use of
the Facilities, which such fee shall be calculated in the same manner as it was
calculated prior to the date of this Agreement.
b) The parties hereto shall be treated for all purposes as independent
contractors and not as an agent or representative of the other party and neither
has any power, right or authority to bind the other party or to assume or to
create any obligation or responsibility, express or implied, on behalf of the
other party. Nothing stated in this Agreement shall be construed as constituting
S&N and DonJoy, L.L.C. as partners or as
<PAGE> 2
members of a joint venture, or as creating the relationship of employer and
employee, master and servant, or principal and agent between them.
I. TERM AND TERMINATION
a) This Agreement shall commence on the date hereof and shall expire on
June 30, 2001 unless renewed mutual agreement of the parties. S&N shall have the
right to terminate this Agreement by providing DonJoy, L.L.C. with at least
thirty (30) days prior written notice.
b) Either party may terminate this Agreement by written notice having
immediate effect in the event that any of the following events occur: (1) a
receiver is appointed over any of the assets of the other party and such
receivership shall not have been vacated or stayed within thirty (30) days; (2)
the other party is unable to pay its debts as they mature or ceases to pay its
debts as they mature in the ordinary course of business or makes an assignment
for the benefit of its creditors; (3) any voluntary proceedings are commenced by
or for the other party under any bankruptcy, insolvency, or debtors' relief law;
or for any proceedings commenced against the other party under any bankruptcy,
insolvency or debtors' relief law and such proceeding is not vacated or set
aside within thirty (30) days from the date of commencement thereof.; or (4)
material default by the other party under its respective Ancillary Agreements.
c) Any material breach of any term of this Agreement shall entitle the
other party to terminate this Agreement provided the non-breaching party first
gives notice to the breaching party and permits the breaching party twenty (20)
days to cure such breach, provided that in the event of delay of payment by S&N
the cure period shall be five (5) days. The right to terminate shall be in
addition to all other rights and remedies available at law or in equity.
3. INDEMNIFICATION
a) Indemnification by DonJoy, L.L.C.
DonJoy, L.L.C. agrees to defend, indemnify and hold harmless S&N and
S&N's officers, managers, equity holders and Affiliates from and against any and
all claims, actions, damages, losses, costs, liabilities and expenses (including
without limitation reasonable attorneys' fees) (hereinafter "Losses") sustained
or incurred by S&N as a consequence of (i) any injury, death or property damage
arising out of the negligence or willful misconduct of DonJoy, L.L.C. or its
employees or agents (except to the extent that such injury, death or damage was
caused by the negligent act or willful misconduct of S&N) in any action or
proceeding brought by any third party respecting such claim, (ii) DonJoy,
L.L.C.'s negligent act or omission, or (iii) DonJoy, L.L.C.'s failure to comply
with its obligations hereunder.
b) Indemnification by S&N
S&N shall indemnify, defend and hold harmless DonJoy, L.L.C. and
DonJoy, L.L.C.'s officers, directors, equity holders and Affiliates from and
against any
<PAGE> 3
Losses as a consequence of (i) any injury, death or property damage arising out
of the negligence or willful misconduct of S&N or its employees or agents
(except to the extent that such injury, death or damage was caused by the
negligent act or willful misconduct of DonJoy, L.L.C.) in any action or
proceeding brought by any third party respecting such claim, (ii) S&N's
negligent act or omission, or (iii) S&N's failure to comply with its obligations
hereunder.
c) Indemnification Procedures
Each party shall be entitled to the indemnity described in paragraphs
(a) and (b) of this Section provided the following conditions are met; the party
obliged to provide indemnification is referred to as the "Indemnifying Party",
and the party entitled to be indemnified is referred to as the "Indemnified
Party":
(i) Promptly upon learning of any claim for which indemnification is
sought from the Indemnifying Party, the Indemnified Party shall notify the
Indemnifying Party of such claim and shall furnish to the Indemnifying Party all
information known and available to the Indemnified Party related to such claim.
(ii) In the event of the commencement of litigation on the basis of
such claim, the Indemnified Party shall tender the defense of such litigation to
the Indemnifying Party.
(iii) The Indemnified Party shall comply with any such reasonable
instructions received from the Indemnifying Party relating to settlement of such
claim (unless settlement of the claim would establish an adverse precedent for
other similar claims in the future), if any, to the extent that it lies within
the power of the Indemnified Party to comply with any such instructions,
excluding any instruction that requires the Indemnified Party to license or
otherwise make available technology or other confidential information to a third
party.
(iv) If the Indemnifying Party undertakes defense of such litigation,
the Indemnifying Party shall be entitled to appoint its attorneys to defend the
case in the name of the Indemnified Party, and the Indemnified Party shall
cooperate fully with the Indemnifying Party and its chosen attorneys in the
defense of such litigation. The Indemnified Party shall be free to appoint its
own attorneys in the same litigation, at its sole expense, although all
decisions with respect to the conduct or settlement of such litigation shall
remain solely with the Indemnifying Party.
d) Insurance
Each party shall maintain at its own expense general public liability
coverage of not less than Three Million Dollars ($3,000,000) per occurrence with
respect to bodily injury and death and Three Million Dollars ($3,000,000) per
occurrence with respect to property damage for each claim with a deductible of
no more than Two Hundred Fifty Thousand Dollars ($250,000). Each party shall
provide the other with a
<PAGE> 4
certificate of insurance showing coverage and showing that the other has been
named as an additional insured. Further, each party's insurer shall give the
other party at least thirty (30) days prior written notice of any proposed
cancellation or modification of the product liability insurance policy.
4. GOVERNMENTAL PERMITS AND COMPLIANCE WITH LAWS
a) The parties shall maintain all governmental permits required in
order to perform their respective obligations under this Agreement. The parties
shall comply with all laws, rules and regulations in all material respects;
provided that DonJoy, L.L.C. shall have the sole responsibility for compliance
with all laws, rules and regulations relating to the Facilities.
5. MISCELLANEOUS
a) This Agreement shall be amended or modified only by a written
instrument executed by the duly authorized representatives of both parties.
b) The waiver by either party of a breach or default in any of the
provisions of this Agreement by the other party shall not be construed as a
waiver of any succeeding breach of the same or any other provision.
c) All notices under this Agreement shall be in writing and shall be
sufficient if delivered in accordance with the requirements of the
Recapitalization Agreement.
d) The construction, performance and enforcement of this Agreement
shall be governed by and construed in accordance with the laws of the State of
Delaware (other than conflicts of law provisions).
e) If any provision of this Agreement shall be held to be invalid,
illegal, or unenforceable, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
f) Any controversy or claim arising out of or relating to this
Agreement, or any breach thereof, including, without limitation, any claim that
any of said Agreement, or any part thereof, is invalid, illegal or otherwise
voidable or void, shall be submitted to arbitration in accordance with the
Commercial Rules of the American Arbitration Association; provided, however,
that this clause shall not be construed to limit or to preclude either party
from bringing any action in any court of competent jurisdiction for injunctive
or other provisional relief as necessary or appropriate. The arbitration shall
be conducted in Chicago.
g) This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof. The parties represent that, in
entering into this Agreement, they are not relying upon any previous
representation, inducement or agreement of any kind.
<PAGE> 5
h) In the event of arbitration and/or litigation over any controversy
or claim arising out of or relating to this Agreement, or any breach thereof,
the prevailing party shall be entitled to recover its reasonable attorneys fees
and expenses in connection with such arbitration and/or litigation.
i) Neither party may assign this Agreement without the written consent
of the other party, which consent shall not be unreasonably withheld; provided,
however, that DonJoy, L.L.C. may assign its rights and obligations under this
Agreement to any Affiliate or subsidiary (including DJ Orthopedics, LLC) without
the prior written consent of S&N; provided further, that neither party hereto
shall be released from any of its obligations hereunder by reason of any such
assignment.
j) DonJoy, L.L.C. shall be not liable for its failure to perform its
obligations under this Agreement due to events beyond its reasonable control
including, but not limited to, strikes, riots, wars, fire, acts of God,
inability to obtain or shortages of labor, materials, equipment or
transportation and acts in compliance with applicable law, regulation, or order
(whether valid or invalid) of any governmental body.
[Remainder of Page Intentionally Left Blank]
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DonJoy, L.L.C. Smith & Nephew, Inc.,
By: /s/ Leslie H. Cross By: /s/ Clifford K. Lomax
--------------------------- --------------------------------
Title: President and CEO Title: Treasurer
------------------------ -----------------------------
[Signature Page to CERF Laboratories Agreement]
<PAGE> 1
EXHIBIT 10.7
SUBLEASE
This Sublease is made as of the 30th day of June, 1999, by and between
SMITH & NEPHEW, INC., a Delaware corporation (the "Sublandlord") and DJ
ORTHOPEDIC, LLC, a Delaware limited liability company (the "Subtenant").
RECITALS
A. Pursuant to a recapitalization agreement dated as of April 30,
1999 (the "Recapitalization Agreement") among DonJoy, L.L.C., Sublandlord and
Chase DJ Partners, LLC ("Investor"), DonJoy L.L.C. is selling to Investor
657,000 Units of DonJoy, L.L.C. and DonJoy, L.L.C. is redeeming 2,000,000 Units
from Sublandlord, such that upon consummation of the transactions contemplated
by the Recapitalization Agreement, Investor will own approximately a ninety
percent (90%) interest in DonJoy, L.L.C.;
B. Sublandlord is the tenant under that certain Lease Agreement dated
as of June 9, 1997 as amended by First Amendment to Lease Agreement dated as of
November 17, 1997 and as further amended by Second Amendment to Lease Agreement
and Agreement Regarding Lease Terms dated as of February 21, 1998 (collectively
the "Master Lease") as evidenced by a Memorandum of Lease recorded on April 8,
1998 as Doc. No. 1998-0198211 in the San Diego County Recorders Office with
Stetman & Morris Properties, a California General Partnership (the "Landlord")
(a copy of which Master Lease is attached hereto as Exhibit A and by this
reference made a part hereof) concerning the real estate and the building and
improvements located thereon and identified as Parcels H, I, and J of Parcel Map
16028 in the City of Vista, San Diego County California as more fully set forth
therein (the "Premises").
C. It is a condition to Investor's obligations under the
Recapitalization Agreement that Sublandlord and Subtenant enter into this
Sublease and Subtenant desires to sublease from Sublandlord the Premises, and
Sublandlord has agreed to sublease the Premises to Subtenant upon the terms,
covenants and conditions herein set forth.
AGREEMENT
In consideration of the mutual covenants contained herein, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows.
1. SUBLEASE. Sublandlord hereby subleases and demises to Subtenant
and Subtenant hereby hires and takes from Sublandlord the Premises.
2. TERM. The term of this Sublease shall commence on date on which
the closing occurs pursuant to the Recapitalization Agreement (the "Effective
Date") and shall end on February 19, 2008 unless sooner terminated as provided
herein or in the Master Lease or unless the term is extended in accordance with
the provisions of Section 7.2 of this Sublease.
3. RENT. Subtenant shall pay minimum monthly rent during the term of
this Sublease in the same monthly amount required to be paid by Sublandlord as
tenant under the
<PAGE> 2
Master Lease including adjustments as required by Paragraph 4.2 of the Master
Lease over the Beginning Index applicable to the Master Lease. Subtenant shall
also be required to pay all taxes and other amounts which are the responsibility
of Sublandlord as lessee under Paragraph 4.4 or other provisions of the Master
Lease. In the event that the term of this Sublease shall begin or end on a date
which is not the first day of a month, minimum monthly rent in the initial
amount of $66,924.00 together with taxes and other amounts payable by
Sublandlord to Landlord under the Master Lease shall be prorated as of such date
in accordance with the provisions of the Recapitalization Agreement.
4. DEFINITIONS. All terms not otherwise defined herein shall have the
meaning provided in the Master Lease.
5. MASTER LEASE. As applied to this Sublease, the words "Landlord"
and "Tenant" as used in the Master Lease shall be deemed to refer to Sublandlord
and Subtenant, respectively. Subtenant and this Sublease shall be subject in all
respects to the terms of, and the rights of the Landlord under, the Master
Lease. Except as otherwise expressly provided in Paragraph 6 or Paragraph 7
hereof, the covenants, agreements, terms, provisions and conditions of the
Master Lease insofar as they relate to the Premises and insofar as they are not
inconsistent with the terms of this Sublease are made a part of and incorporated
into this Sublease as if recited herein in full, and the rights of the Landlord
and the rights and obligations of Tenant under the Master Lease shall be deemed
the rights of Sublandlord and rights and obligations of Subtenant, respectively,
hereunder and shall be binding upon and inure to the benefit of Sublandlord and
Subtenant, respectively. As between the parties hereto only, in the event of a
conflict between the terms of the Master Lease and the terms of this Sublease,
the terms of this Sublease shall control. Subtenant covenants and warrants that
it fully understands and agrees to be subject to and bound by all of the
covenants, agreements, terms, provisions and conditions of the Master Lease
applicable to Tenant, except as modified herein.
6. LANDLORD'S PERFORMANCE UNDER MASTER LEASE.
6.1 Subtenant recognizes that Sublandlord is not in a position
to render any of the services or to perform any of the obligations required of
Sublandlord by the terms of this Sublease. Therefore, notwithstanding anything
to the contrary contained in this Sublease, Subtenant agrees that performance by
Sublandlord of its obligations hereunder are conditional upon due performance by
the Landlord of its corresponding obligations under the Master Lease and
Sublandlord shall not be liable to Subtenant for any default of the Landlord
under the Master Lease. Subtenant shall not have any claim against Sublandlord
by reason of the Landlord's failure or refusal to comply with any of the
provisions of the Master Lease unless such failure or refusal is a result of
Sublandlord's act or failure to act. In each instance where action by Landlord
under the Master Lease is necessary to the realization of a right of Subtenant
under the Sublease, it is agreed that Sublandlord shall have no liability for a
failure to timely give a notice or respond to a request if: (i) Subtenant has
not given sufficient notice to permit Sublandlord to take action or give notice
under the Master Lease regardless of the notice period contained in the
Sublease, or (ii) notwithstanding timely notice or action by Sublandlord,
Landlord fails or refuses to timely act or respond, unless such failure is
excused because of a default by Sublandlord as tenant under the Master Lease, or
(iii) Subtenant is in default beyond all applicable notice and cure periods
under this Sublease. This Sublease shall remain in full force and effect
notwithstanding the
2
<PAGE> 3
Landlord's failure or refusal to comply with any provisions of the Master Lease
and Subtenant shall pay the minimum monthly rent and additional rent and all
other charges provided for herein without any abatement, deduction or set off
whatsoever (except as otherwise provided in Paragraph 6.2 as modified by Section
7.5) unless and until the Master Lease is terminated without liability to
Sublandlord. Furthermore, Subtenant and Sublandlord further covenant not to take
any action or do or perform any act or fail to perform any act which would
result in the failure or breach of any of the covenants, agreements, terms,
provisions or conditions of the Master Lease on the part of the Tenant
thereunder.
6.2 Whenever the consent of Landlord shall be required by, or
Landlord shall fail to perform its obligations under, the Master Lease,
Sublandlord agrees to use commercially reasonable efforts to obtain, at
Subtenant's sole cost and expense, such consent and/or performance on behalf of
Subtenant. To the extent permitted by (or not precluded under) the Master Lease,
Subtenant shall have the right, in its own name, to request performance of
obligations required of the Landlord and to conduct such proceedings as may be
required to obtain performance of such obligations, including, without
limitation, the commencement of one or more actions against the Landlord. In
addition, Subtenant shall have the right to make its own arrangements with
Landlord to receive any additional services which Landlord is obligated to
provide upon request of Landlord under the terms of the Master Lease; provided,
however, if Landlord refuses to deal directly with Subtenant pursuant to its
rights under the Lease, Subtenant shall have the right to request that
Sublandlord make such arrangements with Landlord on Subtenant's behalf;
provided, further, however, that Sublandlord shall not be required to incur any
expense in connection with the foregoing. As between Sublandlord and Subtenant,
Subtenant shall have the sole obligation to pay for such additional services
6.3 Sublandlord represents and warrants to Subtenant that the
Master Lease is in full force and effect, as of the date hereof all obligations
of both Landlord and Sublandlord thereunder have been satisfied and Sublandlord
has neither given nor received a notice of default pursuant to the Master Lease.
6.4 Sublandlord covenants as follows: (i) not to voluntarily
terminate the Master Lease (except upon a basis which in Subtenant's reasonable
judgment would preserve for Subtenant the right to continue occupancy upon all
of the terms and conditions hereof), (ii) not to modify the Master Lease without
Subtenant's prior written consent, which consent shall not be unreasonably
withheld so long as any proposed modification will not adversely affect
Subtenant's rights hereunder, and (iii) at Subtenant's sole cost and expense to
take all actions reasonably necessary to preserve the Master Lease.
7. ADDITIONAL VARIATIONS FROM MASTER LEASE. The following covenants,
agreements, terms, provisions and conditions of the Master Lease are hereby
modified or not incorporated herein:
7.1 The provisions designated Paragraphs 2.1 through 2.13 of
the Master Lease are inapplicable to the Sublease insofar as the improvements
have been completed without a rental adjustment or reimbursement obligation and
are hereby deemed satisfactory by Subtenant.
3
<PAGE> 4
7.2 Notwithstanding anything to the contrary set forth in
Paragraph 3.1 of the Master Lease, the term of this Sublease shall be as set
forth in Section 2 above. The options to renew contained in Paragraph 3.2 of the
Master Lease may only be exercised upon 120 days prior written notice from
Subtenant and it shall be a condition of such exercise that Subtenant not be in
default under the terms and provisions of this Sublease beyond all applicable
notice and cure periods.
7.3 Any notice which may or shall be given by either party
hereunder shall be either delivered personally, sent by overnight private
courier service, sent by certified mail, return receipt requested, or sent by
fax with a copy sent by first class U.S. mail, addressed to the party for whom
it is intended at the Premises (if to the Subtenant) with a copy to DJ
Orthopedics , LLC, c/o Chase Capital Partners, 380 Madison Avenue, New York, NY
10017, Attn: Damion Wicker, M.D., Joans Steinman and John Daileader; or (if to
the Sublandlord) to Smith & Nephew, Inc., 1450 Brooks Road, Memphis, TN 38116,
Attn.. General Counsel, (Fax) 901 396-7824 with a copy to Smith & Nephew, Inc.,
1450 Brooks Road, Memphis, TN 38116, Attn Chief Financial Officer, (Fax) 901
399-6151 or to such other address as may have been designated in a notice given
in accordance with the provisions of this Section 7.3.
7.4 All amounts payable by Subtenant hereunder or pursuant to
the Master Lease shall be payable directly to Landlord, provided: (i) Landlord
agrees to accept such payments directly from Subtenant, and (ii) Subtenant
timely makes all required payments under the Sublease and hereby indemnifies
Sublandlord from all loss, cost, expense and liability by reason of Subtenant's
failure to timely make such payment. If Subtenant fails to timely make such
payments and such failure occurs more than twice in any twelve (12) month
period, then Subtenant shall thereafter upon written notice from Sublandlord
make all payments required under this Sublease to Sublandlord and Sublandlord
shall immediately remit all such payments to Landlord. Sublandlord shall
indemnify Subtenant from all loss, cost, expense and liability by reason of
Sublandlord's failure to timely remit to Landlord the funds timely received from
Subtenant.
7.5 The provisions of the following Paragraphs of the Master
Lease shall not apply to this Sublease or shall apply only to the extent
indicated: Paragraph 2.1 is modified to refer to the term of this Sublease as
set forth in Section 2 hereof, Paragraph 4.1 is modified to provide that the
current minimum monthly rent is $66,924.00 (which Sublandlord represents in the
minimum monthly rent currently payable by Sublandlord under the Master Lease)
rather than the $60,489.00 amount specified in the Second Amendment to the
Master Lease; Paragraph 5.2.c to the extent it grants Subtenant the right to
terminate the Sublease; Paragraph 6.2 is modified to condition the right of
Subtenant to withhold sums from future rents upon: (i) the ability of
Sublandlord to withhold such sums under the Master Lease and (ii) Subtenant
hereby indemnifying Sublandlord from all loss, cost, expense and liability to
Landlord as a result of such withholding; Paragraph 6.4 is hereby modified to
provide that any assignment of warranties by Sublandlord to Subtenant is
conditioned upon Subtenant hereby indemnifying Sublandlord from all loss, cost,
expense and liability as a result of such assignment or any action taken with
respect to such warranties; Paragraph 7.1 is hereby amended to extend each of
the time periods for giving notice by ten (10) days and to reduce the thirty
(30) day restoration period to twenty (20) days; Paragraph 7.2 and Paragraph
11.4.b.(3) are hereby modified to increase the 2 day period to
4
<PAGE> 5
7 days; Paragraph 10.1 and Paragraph 10.2 are hereby modified to provided that
all references to Landlord shall be deemed to refer to both Landlord and
Sublandlord; Paragraph 10.6.b is hereby modified to provide that the policies
shall name both Landlord and Sublandlord; Paragraph 11.2.b is hereby modified to
reduce the fifteen (15) day period for notice by Subtenant to seven (7) days and
to increase the period for response by Sublandlord from fifteen (15) to twenty
(20); Paragraph 11.3.c is hereby modified to provide that Sublandlord shall have
no obligation to contribute its funds to restoration and any provision of the
Sublease to the contrary notwithstanding, Sublandlord's duty shall be
exclusively to make available funds, if any, which it receives from Landlord for
such purposes; Paragraph 11.6 is hereby modified to provide that this Sublease
shall terminate if Landlord exercises its right to terminate under Paragraph
11.6 of the Master Lease and to reduce the period for notice of termination by
the Subtenant to fifty (50) days; Paragraph 12.4.a is hereby modified to reduce
the thirty (30) day references to twenty (20) days and to reduce the ninety (90)
day reference to eighty (80) days; Paragraph 12.5.a is modified to change the
thirty (30) day reference to forty (40) days; Paragraph 13.1 is hereby modified
to require consent of both Landlord and Sublandlord; Paragraph 13.2 is hereby
deleted; Paragraph 13.3 is hereby modified to require Subtenant to pay the
attorney's fees of both Landlord and Sublandlord; Paragraph 14.1.a is hereby
modified to reduce the five (5) day notice to three (3) days and to reduce the
thirty (30) day notice period to twenty-five (25) days and Paragraph 14.1.c is
deleted in its entirety; Paragraph 14.5.a is hereby modified to increase the
period to forty-five (45) days to allow Sublandlord adequate time to put
Landlord on notice; Article 15 including Paragraphs 15.1 through 15.8 are hereby
deleted in their entirety; The indemnities contained in Article 16 shall protect
both Landlord and Sublandlord, and Sublandlord shall have no obligation to pay
or reimburse Subtenant for any environmental investigation or remediation of
contamination; Paragraph 16.5 is modified to reduce the response period for
Subtenant to five (5) days; Article 18 is hereby modified to provide that the
references to Landlord shall also be deemed to refer to Sublandlord; Paragraph
19.1 is hereby modified to provide that the Sublease shall be and remain subject
and subordinate to the terms of the Master Lease; Paragraph 19.2 is hereby
modified to provide that Subtenant shall respond in five (5) days rather than
ten (10) days and that Sublandlord shall respond in fifteen (15) days rather
than ten (10) days; Paragraph 19.3 is hereby modified to provide that it shall
refer only to the interest of Sublandlord in its leasehold estate in the
Premises and it shall have no liability to Subtenant for damages as a result of
a breach by Landlord of its obligations under Paragraph 19.3 of the Master Lease
except to the extent it shall receive compensation or damages from Landlord as a
result of such breach (nor shall Sublandlord have any obligation to pursue any
claims or remedies against Landlord for a breach of Paragraph 19.3 except that
Sublandlord shall cooperate with Subtenant in pursuing such claims for
Subtenant's benefit and at the sole cost and expense of Subtenant); Paragraph
25.1. is hereby modified to reduce the ten (10) day notice requirement and
period to five (5) days; Article 26 is hereby modified to require that the
Subtenant must notify Sublandlord of its election to exercise the option and
deposit with Sublandlord the full purchase price in cash, all within
seventy-five (75) days so that Sublandlord will have no liability or risk in
connection with the exercise of the option under the Master Lease; and Article
27 is hereby modified to provide that it may only be exercised to the extent
that Sublandlord is able to timely exercise the expansion option under the
Master Lease and Subtenant shall indemnify and hold harmless Sublandlord from
all loss, cost, expense and liability to Landlord as a result of the exercise of
the expansion option under the Master Lease.
5
<PAGE> 6
7.6 Sublandlord shall deliver the Premises to Subtenant in its
current "as is" condition, ordinary wear and tear and loss by fire or other
casualty excepted.
8. INDEMNITY. Subtenant hereby agrees to indemnify and hold
Sublandlord harmless from and against any and all claims, losses and damages,
including, without limitation, reasonable attorneys' fees and disbursements,
which may at any time be asserted against Sublandlord by (a) the Landlord for
failure of Subtenant to perform any of the covenants, agreements, terms,
provisions or conditions contained in the Master Lease which by reason of the
provisions of this Sublease Subtenant is obligated to perform, or (b) any person
by reason of Subtenant's use and/or occupancy of the Premises, except to the
extent any of the foregoing is caused by the gross negligence or willful
misconduct of Sublandlord. The provisions of this Section 8 shall survive the
expiration or earlier termination of the Master Lease and/or this Sublease.
9. CANCELLATION OF MASTER LEASE. In the event of the cancellation or
termination of the Master Lease for any reason whatsoever or of the involuntary
surrender of the Master Lease by operation of law prior to the expiration date
of this Sublease, Subtenant agrees to make full and complete attornment to the
Landlord under the Master Lease for the balance of the term of this Sublease and
upon the then executory terms hereof at the option of the Landlord at any time
during Subtenant's occupancy of the Premises, which attornment shall be
evidenced by an agreement in form and substance reasonably satisfactory to the
Landlord. Subtenant agrees to execute and deliver such an agreement at any time
within ten (10) business days after request of the Landlord, and Subtenant
waives the provisions of any law now or hereafter in effect which may give
Subtenant any right of election to terminate this Sublease or to surrender
possession of the Premises in the event any proceeding is brought by the
Landlord under the Master Lease to terminate the Master Lease so long as
Subtenant is not named in said action and so long as Landlord agrees to
recognize Subtenant.
10. BROKERS. Each party hereto represents and warrants to the other
that such party did not deal with any broker or finder in connection with the
consummation of this Sublease and each party agrees to indemnify, hold and save
the other party harmless from and against any and all claims for brokerage
commissions or finder's fees arising out of the indemnifying party's acts in
connection with this Sublease. The provisions of this Section 10 shall survive
the expiration or earlier termination of this Sublease.
11. ASSIGNMENT, SUBLETTING, AND SUBLEASEHOLD MORTGAGES. Subject
further to all of the rights of the Landlord under the Master Lease and the
restrictions contained in the Master Lease, Subtenant shall not be entitled to
assign this Sublease or to sublet all or any portion of the Premises without the
prior written consent of Sublandlord, which consent shall not be unreasonably
withheld. Provided any required consent is obtained from Landlord in writing
under the Master Lease and Subtenant is not released from its obligations
hereunder, Sublandlord agrees not to withhold its consent to any assignment or
sub-sublease to a party owned or controlled by Subtenant or under common
ownership or control with Subtenant or which acquires all or substantially all
of the business of Subtenant.
11.1 Subject to any required written consent of Landlord under
the Master Lease, Subtenant may, from time to time, mortgage or otherwise
encumber its interest in this Sublease
6
<PAGE> 7
(hereinafter a "Subleasehold Mortgage"), including but not limited to
Subtenant's interest in any improvements, fixtures and personal property located
on the Premises (the "Subleasehold Estate"), and, in connection therewith,
assign the rents, issues and profits from the Subleasehold Estate.
Notwithstanding any other provisions of this Sublease, any transfer of the
Subleasehold Estate pursuant to, or in lieu of, foreclosure of a Subleasehold
Mortgage shall be permitted without Sublandlord's consent (any such transfer
being hereinafter referred to as a "foreclosure"). Any person who becomes the
holder of the Subleasehold Estate pursuant to the foreclosure of a Subleasehold
Mortgage shall have no personal liability, direct or indirect, to Sublandlord
for payment of any rents or other charges (except if such person elects to
timely cure prior defaults to preserve this Sublease or except as provided in
clause (i) of Section 11.5 below) or for satisfaction of any other claims based
on events occurring prior to the date of such party's acquisition of the
Subleasehold Estate, nor for conditions existing prior to the date of such
party's accession to title, and any such person may thereafter assign this
Sublease without Sublandlord's consent and shall be released from any and all
obligations under this Sublease which arise after, or relate to any period
following, the effective date of such assignment.
11.2. If Subtenant shall grant a Subleasehold Mortgage and shall
provide Sublandlord with notice thereof specifying the name and address of the
Subleasehold Mortgagee, then Sublandlord, upon giving Subtenant a notice of (i)
default, (ii) termination or proposed termination, (iii) a matter on which
Sublandlord may claim or base a default, (iv) consent to an assignment or
subletting or (v) any other matter which could materially and adversely affect
the rights or obligations of Sublandlord or Subtenant, shall at the same time
also give such notice to the Subleasehold Mortgagee in the manner provided in
this Sublease. In the case of a default notice, such notice shall set forth with
particularity all the claimed defaults. Notices delivered under this Sublease
shall not be deemed effective unless and until such notice has been given to
said Subleasehold Mortgagee.
11.3. Each Subleasehold Mortgagee shall have a right, but not any
obligation, to perform any term, covenant, condition or agreement of this
Sublease and to remedy any default by Subtenant thereunder within the time
limits set forth in this Sublease, and Sublandlord shall accept such
performance.
11.4. Notwithstanding anything contained in this Sublease to the
contrary, if a default shall occur which would otherwise entitle Sublandlord to
terminate this Sublease, Sublandlord shall have no right to terminate this
Sublease in the absence of a termination of the Master Lease unless, following
the expiration of the period of time given Subtenant to cure such default,
Sublandlord shall give each Subleasehold Mortgagee written notice of
Sublandlord's intent to terminate this Sublease at least thirty (30) days in
advance of the proposed effective date of such termination. The Subleasehold
Mortgagee, in addition to its right as described above to cure defaults by the
Subtenant, shall have a right, in the absence of a termination of the Master
Lease as a result of such default, to postpone the date on which this Sublease
would terminate as a result of the Subtenant's default(s) in accordance with
said notice by (a) giving Sublandlord written notice within such 30 day period
of the Subleasehold Mortgagee's election to postpone the date on which this
Sublease would terminate, and (b) proceeding with due diligence (i) to cure all
defaults, if any, then existing which may be cured by the payment of a sum of
money, (ii) to initiate and pursue steps to acquire the Subleasehold Estate by
foreclosure of its Subleasehold Mortgage or otherwise, and (iii) after obtaining
possession of the Premises, to cure
7
<PAGE> 8
any other then existing default(s) of Subtenant susceptible of being cured by
the Subleasehold Mortgagee. In the case of any default(s) not reasonably
susceptible of being cured by the Subleasehold Mortgagee, Sublandlord's right to
terminate this Sublease on account thereof, in the absence of a termination of
the Master Lease as a result of such default, shall be deemed to be waived so
long as all other defaults are cured by the Subleasehold Mortgagee as provided
above.
11.5. If this Sublease shall be terminated for any reason
whatsoever while the Subleasehold Mortgage remains in effect, then in the
absence of a termination of the Master Lease, Sublandlord hereby grants the
Subleasehold Mortgagee or its designee the right, exercisable by notice given to
Sublandlord not later than thirty (30) days after receipt by Subleasehold
Mortgagee of notice of such termination from Sublandlord, to obtain a new
sublease of the Premises from the date of termination for the remaining term of
this Sublease upon the same terms and conditions of this Sublease (as modified
hereby) including the rent and options to renew and purchase, but excluding any
provisions which have been performed or are no longer applicable, provided, that
Subleasehold Mortgagee (i) cures all monetary defaults under this Sublease at
the time such new sublease is entered into and (ii) cures or agrees in such new
sublease to cure all non-monetary defaults which are not personal to Subtenant,
those which are personal to Subtenant (such as the bankruptcy or insolvency of
Subtenant), being waived. The new sublease shall (a) as to the Sublandlord have
the same priority as this Sublease and (b) provide that the subtenant under such
new sublease shall be liable to perform the obligations imposed on the Subtenant
under the new sublease only during the time period that such party is the
Subtenant of the Subleasehold Estate.
11.6. Sublandlord will not accept any surrender, agree to the
cancellation or failure to renew, or enter into any modification, of this
Sublease without the prior written consent thereto of each Subleasehold
Mortgagee of which Sublandlord has been given notice by the Subtenant. Without
limiting the generality of the foregoing, in the absence of a termination of the
Master Lease, no termination under Section 365(h) of the United States
Bankruptcy Code, as amended, shall be effective against any Subleasehold
Mortgagee without the prior written consent of such Subleasehold Mortgagee. No
material amendment or modification of this Sublease shall be effective as to the
Subleasehold Mortgage without the written consent of such Subleasehold
Mortgagee.
11.7. If Subtenant is entitled to exercise but does not for any
reason exercise at least thirty (30) days prior to the expiration of the time
permitted in this Sublease for the exercise of any right or option to purchase
the Premises or to extend or to renew this Sublease for any extension or renewal
term provided in this Sublease, any Subleasehold Mortgagee shall have the right,
for a period of thirty (30) days prior to the expiration of the time for
exercising such a right or option, to elect, by notice given in the manner
specified in this Sublease for the exercise of such right or option, to exercise
such right or option upon the same terms and conditions and with the same effect
as though such right or option had been validly exercised by Subtenant, provided
such exercise shall only be effective to the extent it is timely made under the
Master Lease
8
<PAGE> 9
11.8. In the case of any default under any Subleasehold Mortgage,
the Subleasehold Mortgagee shall be entitled at its expense to have a receiver
appointed, irrespective of whether such Subleasehold Mortgagee accelerates the
maturity of all indebtedness secured by its Subleasehold Mortgage, and to enter
or have its receiver enter and take possession of the Premises, and manage and
operate the same in accordance with the terms of this Sublease.
11.9. Sublandlord hereby waives any landlord's lien, all rights
of levy or distraint, security interest or any other right or interest that
Sublandlord may now or hereafter have, whether by statute, agreement or by
common law, in any portion of the Subleasehold Estate or Subtenant's inventory,
equipment and other personal property now or at any time hereafter located on
the Premises, but excluding fixtures and equipment customarily used for
operation of the building or building systems (collectively the "Personal
Property"). Subject to the rights of Landlord under the Master Lease and the
Estoppel and Consent of Landlord, the Personal Property may be installed in or
located on the Premises and is not and shall not be deemed to be a fixture or
part of the underlying real estate but shall at all times be considered personal
property unless permanently affixed and customarily used for operation of the
building or building systems. Sublandlord agrees that Subleasehold Mortgagee or
its representatives may enter upon the Premises at any time during the term of
this Sublease to inspect, remove or repossess the Personal Property or otherwise
exercise its remedies with respect thereto.
11.10. Each party hereto shall, at any time and from time to time,
as requested by this Subleasehold Mortgagee, upon not less than ten (10) days'
prior notice, execute and deliver a statement certifying that this Sublease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), certifying the dates to which the rent has been paid, and
stating whether or not, to the best knowledge of the signer, the other party is
in default in the performance of any of its obligations under this Sublease,
and, if so, specifying each such default of which the signer may have knowledge,
it being intended that any such statement may be relied upon by others with whom
the requesting party may be dealing.
12. SEVERABILITY. If any term or provision of this Sublease or the
application thereof to any person or circumstances shall, to any extent, be
invalid and unenforceable, the remainder of this Sublease or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each term
or provision of this Sublease shall be valid and be enforced to the fullest
extent permitted by law.
13. ENTIRE AGREEMENT; WAIVER. This Sublease contains the entire
agreement between the parties hereto with respect to the use and occupancy of
the Premises and shall be binding upon and inure to the benefit of their
respective heirs, representatives, successors and permitted assigns. Any
agreement hereinafter made shall be ineffective to change, modify,
9
<PAGE> 10
waive, release, discharge, terminate or effect an abandonment hereof, in whole
or in part, unless such agreement is in writing and signed by the parties
hereto.
14. CAPTIONS. Captions to the Sections in this Sublease are included
for convenience only and are not intended and shall not be deemed to modify or
explain any of the terms of this Sublease.
10
<PAGE> 11
15. FURTHER ASSURANCES. The parties hereto agree that each of them,
upon the request of the other party, shall execute and deliver, in recordable
form if necessary, such further documents, instruments or agreements and shall
take such further action that may be necessary or appropriate to effectuate the
purposes of this Sublease.
16. GOVERNING LAW. This Sublease shall be governed by and in all
respects construed in accordance with the internal laws of the State of
California.
17. CONSENT OF LANDLORD. To the extent required by the Master Lease,
the validity of this Sublease shall be subject to the Landlord's prior written
consent hereto pursuant to the terms of the Master Lease. The parties shall
cooperate to obtain such consent upon mutually acceptable terms.
18. SUBLANDLORD ALTERATIONS. Sublandlord shall not make any
alterations or improvements to the Premises, except Sublandlord may at its
election make such alterations or improvements to the Premises as may be
required by law or the Master Lease.
19. SUBLANDLORD TRANSFERS. Sublandlord shall not assign, mortgage or
otherwise encumber the Lease or any interest therein unless the transferee shall
agree to recognize this Sublease and the rights of Subtenant hereunder.
20. SUBTENANT'S CANCELLATION RIGHT. In the event that Landlord agrees
to enter into a direct lease with Subtenant for the Premises and to terminate
the Master Lease without cost or liability to Sublandlord as Tenant, Subtenant
shall have the right to cancel this Sublease upon five (5) days' written notice
to Sublandlord. In the event that Subtenant so notifies Sublandlord, the
Sublease shall be deemed terminated effective upon the termination of the Master
Lease without cost or liability to Sublandlord. Subtenant and Sublandlord shall
execute such documents as may be reasonably necessary to evidence the
termination.
21. RECORDING. Subject to any required consent of Landlord under the
Master Lease, Subtenant shall have the right to record a memorandum of this
Sublease in the public records and Sublandlord agrees to execute and deliver to
Subtenant such memorandum within fifteen (15) days after Subtenant's request
therefor.
11
<PAGE> 12
22. RECAPITALIZATION AGREEMENT. The agreements contained herein shall
be without prejudice to any of the rights, benefits and indemnities in favor of
Subtenant or Sublandlord under the Recapitalization Agreement between
Sublandlord and Subtenant or its affiliates.
IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
executed as of the day and year first above written.
"SUBLANDLORD":
SMITH & NEPHEW, INC., a Delaware corporation
By: /s/ Clifford K. Lomax
--------------------------------
Its: Treasurer
-----------------------------
By: /s/ James A. Ralston
--------------------------------
Its: Sr. Vice President
-----------------------------
"SUBTENANT":
DJ ORTHOPEDIC, LLC, a Delaware limited liability
company
By: /s/ Cyril Talbot III
--------------------------------
Its: V.P., CFO and Secretary
----------------------------
By: /s/ Leslie H. Cross
--------------------------------
Its: President and CEO
----------------------------
12
<PAGE> 13
EXHIBIT A
THE MASTER LEASE
13
<PAGE> 14
SUBLEASE
This Sublease is made as of the 30th day of June, 1999, by and between
SMITH & NEPHEW, INC., a Delaware corporation (the "Sublandlord") and DJ
ORTHOPEDIC, LLC, a Delaware limited liability company (the "Subtenant").
RECITALS
A. Pursuant to a recapitalization agreement dated as of April 30,
1999 (the "Recapitalization Agreement") among DonJoy, L.L.C., Sublandlord and
Chase DJ Partners, LLC ("Investor"), DonJoy L.L.C. is selling to Investor
657,000 Units of DonJoy, L.L.C. and DonJoy, L.L.C. is redeeming 2,000,000 Units
from Sublandlord, such that upon consummation of the transactions contemplated
by the Recapitalization Agreement, Investor will own approximately a ninety
percent (90%) interest in DonJoy, L.L.C.;
B. Sublandlord as successor by merger to Smith & Nephew DonJoy, Inc.,
the assignee of Professional Care Products, Incorporated is the tenant under
that certain Amended and Restated Lease Agreement, dated as of September 21,
1995, as amended by Amendment #1 to Amended and Restated Lease Agreement dated
as of June 9, 1997 (collectively the "Master Lease") as evidenced by a
Memorandum of Lease recorded on October 6 1995 as Doc. No. 1995-0451246 in the
San Diego County Recorders Office with Stetman & Morris Properties, a California
general partnership (the "Landlord") (a copy of which Master Lease is attached
hereto as Exhibit A and by this reference made a part hereof) concerning the
real estate and the building and improvements located thereon and identifies as
Parcels A, B, C, D, & E of Parcel Map 16,028 in the City of Vista, San Diego
County California as more fully set forth therein (the "Premises").
C. It is a condition to Investor's obligations under the
Recapitalization Agreement that Sublandlord and Subtenant enter into this
Sublease and Subtenant desires to sublease from Sublandlord the Premises, and
Sublandlord has agreed to sublease the Premises to Subtenant upon the terms,
covenants and conditions herein set forth.
AGREEMENT
In consideration of the mutual covenants contained herein, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows.
1. SUBLEASE. Sublandlord hereby subleases and demises to Subtenant
and Subtenant hereby hires and takes from Sublandlord the Premises.
2. TERM. The term of this Sublease shall commence on the date on
which the closing occurs pursuant to the Recapitalization Agreement (the
"Effective Date") and shall end on February 19, 2008 unless sooner terminated as
provided herein or in the Master Lease or unless the term is extended in
accordance with the provisions of Section 7.2 of this Sublease.
<PAGE> 15
3. RENT. Subtenant shall pay minimum monthly rent during the term of
this Sublease in the same monthly amount required to be paid by Sublandlord as
tenant under the Master Lease including adjustments as required by Paragraph 4.2
of the Master Lease over the Beginning Index applicable to the Master Lease.
Subtenant shall also be required to pay all taxes and other amounts which are
the responsibility of Sublandlord as lessee under Paragraph 4.5 or other
provisions of the Master Lease. In the event that the term of this Sublease
shall begin or end on a date which is not the first day of a month, minimum
monthly rent in the initial amount of $78,770.00 together with taxes and other
amounts payable by Sublandlord to Landlord under the Master Lease shall be
prorated as of such date in accordance with the provisions of the
Recapitalization Agreement.
4. DEFINITIONS. All terms not otherwise defined herein shall have the
meaning provided in the Master Lease.
5. MASTER LEASE. As applied to this Sublease, the words "Landlord"
and "Tenant" as used in the Master Lease shall be deemed to refer to Sublandlord
and Subtenant, respectively. Subtenant and this Sublease shall be subject in all
respects to the terms of, and the rights of the Landlord under, the Master
Lease. Except as otherwise expressly provided in Paragraph 6 or Paragraph 7
hereof, the covenants, agreements, terms, provisions and conditions of the
Master Lease insofar as they relate to the Premises and insofar as they are not
inconsistent with the terms of this Sublease are made a part of and incorporated
into this Sublease as if recited herein in full, and the rights of the Landlord
and the rights and obligations of Tenant under the Master Lease shall be deemed
the rights of Sublandlord and rights and obligations of Subtenant, respectively,
hereunder and shall be binding upon and inure to the benefit of Sublandlord and
Subtenant, respectively. As between the parties hereto only, in the event of a
conflict between the terms of the Master Lease and the terms of this Sublease,
the terms of this Sublease shall control. Subtenant covenants and warrants that
it fully understands and agrees to be subject to and bound by all of the
covenants, agreements, terms, provisions and conditions of the Master Lease
applicable to Tenant, except as modified herein.
6. LANDLORD'S PERFORMANCE UNDER MASTER LEASE.
6.1 Subtenant recognizes that Sublandlord is not in a position
to render any of the services or to perform any of the obligations required of
Sublandlord by the terms of this Sublease. Therefore, notwithstanding anything
to the contrary contained in this Sublease, Subtenant agrees that performance by
Sublandlord of its obligations hereunder are conditional upon due performance by
the Landlord of its corresponding obligations under the Master Lease and
Sublandlord shall not be liable to Subtenant for any default of the Landlord
under the Master Lease. Subtenant shall not have any claim against Sublandlord
by reason of the Landlord's failure or refusal to comply with any of the
provisions of the Master Lease unless such failure or refusal is a result of
Sublandlord's act or failure to act. In each instance where action by Landlord
under the Master Lease is necessary to the realization of a right of Subtenant
under the Sublease, it is agreed that Sublandlord shall have no liability for a
failure to timely give a notice or respond to a request if: (i) Subtenant has
not given sufficient notice to permit Sublandlord to take action or give notice
under the Master Lease regardless of the notice period contained in the
Sublease, or (ii) notwithstanding timely notice or action by Sublandlord,
Landlord fails or refuses to timely act or respond, unless such failure is
excused because of a default by Sublandlord as tenant under
2
<PAGE> 16
the Master Lease, or (iii) Subtenant is in default beyond all applicable notice
and cure periods under this Sublease. This Sublease shall remain in full force
and effect notwithstanding the Landlord's failure or refusal to comply with any
provisions of the Master Lease and Subtenant shall pay the minimum monthly rent
and additional rent and all other charges provided for herein without any
abatement, deduction or set off whatsoever (except as otherwise provided in
Paragraph 6.2 as modified by Section 7.5) unless and until the Master Lease is
terminated without liability to Sublandlord. Furthermore, Subtenant and
Sublandlord further covenant not to take any action or do or perform any act or
fail to perform any act which would result in the failure or breach of any of
the covenants, agreements, terms, provisions or conditions of the Master Lease
on the part of the Tenant thereunder.
6.2 Whenever the consent of Landlord shall be required by, or
Landlord shall fail to perform its obligations under, the Master Lease,
Sublandlord agrees to use commercially reasonable efforts to obtain, at
Subtenant's sole cost and expense, such consent and/or performance on behalf of
Subtenant. To the extent permitted by (or not precluded under) the Master Lease,
Subtenant shall have the right, in its own name, to request performance of
obligations required of the Landlord and to conduct such proceedings as may be
required to obtain performance of such obligations, including, without
limitation, the commencement of one or more actions against the Landlord. In
addition, Subtenant shall have the right to make its own arrangements with
Landlord to receive any additional services which Landlord is obligated to
provide upon request of Landlord under the terms of the Master Lease; provided,
however, if Landlord refuses to deal directly with Subtenant pursuant to its
rights under the Lease, Subtenant shall have the right to request that
Sublandlord make such arrangements with Landlord on Subtenant's behalf;
provided, further, however, that Sublandlord shall not be required to incur any
expense in connection with the foregoing. As between Sublandlord and Subtenant,
Subtenant shall have the sole obligation to pay for such additional services
6.3 Sublandlord represents and warrants to Subtenant that the
Master Lease is in full force and effect, as of the date hereof all obligations
of both Landlord and Sublandlord thereunder have been satisfied and Sublandlord
has neither given nor received a notice of default pursuant to the Master Lease.
6.4 Sublandlord covenants as follows: (i) not to voluntarily
terminate the Master Lease (except upon a basis which in Subtenant's reasonable
judgment would preserve for Subtenant the right to continue occupancy upon all
of the terms and conditions hereof), (ii) not to modify the Master Lease without
Subtenant's prior written consent, which consent shall not be unreasonably
withheld so long as any proposed modification will not adversely affect
Subtenant's rights hereunder, and (iii) at Subtenant's sole cost and expense to
take all actions reasonably necessary to preserve the Master Lease.
7. ADDITIONAL VARIATIONS FROM MASTER LEASE. The following covenants,
agreements, terms, provisions and conditions of the Master Lease are hereby
modified or not incorporated herein:
7.1 Notwithstanding anything to the contrary set forth in
Paragraph 2.1 of the Master Lease, the term of this Sublease shall be as set
forth in Section 2 above.
3
<PAGE> 17
7.2 The options to renew contained in Paragraph 2.2 of the
Master Lease may only be exercised upon 120 days prior written notice from
Subtenant and it shall be a condition of such exercise that Subtenant not be in
default under the terms and provisions of this Sublease beyond all applicable
notice and cure periods.
7.3 Any notice which may or shall be given by either party
hereunder shall be either delivered personally, sent by overnight private
courier service, sent by certified mail, return receipt requested, or sent by
fax with a copy sent by first class U.S. mail, addressed to the party for whom
it is intended at the Premises (if to the Subtenant) with a copy to DJ
Orthopedics , LLC, c/o Chase Capital Partners, 380 Madison Avenue, New York, NY
10017, Attn: Damion Wicker, M.D., Joans Steinman and John Daileader; or (if to
the Sublandlord) to Smith & Nephew, Inc., 1450 Brooks Road, Memphis, TN 38116,
Attn: General Counsel, (Fax) 901 396-7824 with a copy to Smith & Nephew, Inc.,
1450 Brooks Road, Memphis, TN 38116, Attn: Chief Financial Officer, (Fax)
901-399-6151 or to such other address as may have been designated in a notice
given in accordance with the provisions of this Section 7.3.
7.4 All amounts payable by Subtenant hereunder or pursuant to
the Master Lease shall be payable directly to Landlord, provided: (i) Landlord
agrees to accept such payments directly from Subtenant, and (ii) Subtenant
timely makes all required payments under the Sublease and hereby indemnifies
Sublandlord from all loss, cost, expense and liability by reason of Subtenant's
failure to timely make such payment. If Subtenant fails to timely make such
payments and such failure occurs more than twice in any twelve (12) month
period, then Subtenant shall thereafter upon written notice from Sublandlord
make all payments required under this Sublease to Sublandlord and Sublandlord
shall immediately remit all such payments to Landlord. Sublandlord shall
indemnify Subtenant from all loss, cost, expense and liability by reason of
Sublandlord's failure to timely remit to Landlord the funds timely received from
Subtenant.
7.5 The provisions of the following Paragraphs of the Master
Lease shall not apply to this Sublease or shall apply only to the extent
indicated: Paragraph 2.1 is modified to refer to the term of this Sublease as
set forth in Section 2 hereof, Paragraph 4.1 is modified to provide that the
current minimum monthly rent is $78,770.00 (which Sublandlord represents in the
minimum monthly rent currently payable by Sublandlord under the Master Lease)
rather than the $73,500.00 amount specified; Paragraph 5.2.c to the extent it
grants Subtenant the right to terminate the Sublease or the "New Lease" as
provided in Amendment #1 to the Master Lease; Paragraph 6.2 is modified to
condition the right of Subtenant to withhold sums from future rents upon: (i)
the ability of Sublandlord to withholding such sums under the Master Lease and
(ii) Subtenant hereby indemnifying Sublandlord from all loss, cost, expense and
liability to Landlord as a result of such withholding; Paragraph 6.4 is hereby
modified to provide that any assignment of warranties by Sublandlord to
Subtenant is conditioned upon Subtenant hereby indemnifying Sublandlord from all
loss, cost, expense and liability as a result of such assignment or any action
taken with respect to such warranties; Paragraph 7.1 is hereby amended to extend
each of the time periods for giving notice by ten (10) days and to reduce the
thirty (30) day restoration period to twenty (20) days; Paragraph 7.2 and
Paragraph 11.4.b.(3) are hereby modified to increase the 2 day period to 7 days;
Paragraph 10.1 and Paragraph 10.2 are hereby modified to provided that all
references to Landlord shall be deemed to refer to both Landlord and
4
<PAGE> 18
Sublandlord; Paragraph 10.6.b is hereby modified to provide that the policies
shall name both Landlord and Sublandlord; Paragraph 11.2.b is hereby modified to
reduce the fifteen (15) day period for notice by Subtenant to seven (7) days and
to increase the period for response by Sublandlord from fifteen (15) to twenty
(20); Paragraph 11.3.c is hereby modified to provide that Sublandlord shall have
no obligation to contribute its funds to restoration and any provision of the
Sublease to the contrary notwithstanding, Sublandlord's duty shall be
exclusively to make available funds, if any, which it receives from Landlord for
such purposes; Paragraph 11.6 is hereby modified to provide that this Sublease
shall terminate if Landlord exercises its right to terminate under Paragraph
11.6 of the Master Lease and to reduce the period for notice of termination by
the Subtenant to fifty (50) days; Paragraph 12.4.a is hereby modified to reduce
the thirty (30) day references to twenty (20) days and to reduce the ninety (90)
day reference to eighty (80) days; Paragraph 12.5.a is modified to change the
thirty (30) day reference to forty (40) days; Paragraph 13.1 is hereby modified
to require consent of both Landlord and Sublandlord; Paragraph 13.2 is hereby
deleted; Paragraph 13.3 is hereby modified to require Subtenant to pay the
attorney's fees of both Landlord and Sublandlord; Paragraph 14.1.a is hereby
modified to reduce the five (5) day notice to three (3) days and to reduce the
thirty (30) day notice period to twenty-five (25) days and Paragraph 14.1.c is
deleted in its entirety; Paragraph 14.5.a is hereby modified to increase the
period to forty-five (45) days to allow Sublandlord adequate time to put
Landlord on notice; Article 15 including Paragraphs 15.1 through 15.10 are
hereby deleted in their entirety; The indemnities contained in Article 16 shall
protect both Landlord and Sublandlord, and Sublandlord shall have no obligation
to pay or reimburse Subtenant for any environmental investigation or remediation
of contamination; Paragraph 16.5 is modified to reduce the response period for
Subtenant to five (5) days; Article 18 is hereby modified to provide that the
references to Landlord shall also be deemed to refer to Sublandlord; Paragraph
19.1 is hereby modified to provide that the Sublease shall be and remain subject
and subordinate to the terms of the Master Lease; Paragraph 19.2 is hereby
modified to provide that Subtenant shall respond in five (5) days rather than
ten (10) days and that Sublandlord shall respond in fifteen (15) days rather
than ten (10) days; Paragraph 19.3 is hereby modified to provide that it shall
refer only to the interest of Sublandlord in its leasehold estate in the
Premises and it shall have no liability to Subtenant for damages as a result of
a breach by Landlord of its obligations under Paragraph 19.3 of the Master Lease
except to the extent it shall receive compensation or damages from Landlord as a
result of such breach (nor shall Sublandlord have any obligation to pursue any
claims or remedies against Landlord for a breach of Paragraph 19.3 except that
Sublandlord shall cooperate with Subtenant in pursuing such claims for
Subtenant's benefit and at the sole cost and expense of Subtenant); Paragraph
25.1. is hereby modified to reduce the ten (10) day notice requirement and
period to five (5) days; Article 26 (Paragraphs 26.1 through 26.3) are each
hereby deleted in their entirety from the Sublease and Article 27 is hereby
modified to require that the Subtenant must notify Sublandlord of its election
to exercise the option and deposit with Sublandlord the full purchase price in
cash, all within seventy-five (75) days so that Sublandlord will have no
liability or risk in connection with the exercise of the option under the Master
Lease.
7.6 Sublandlord shall deliver the Premises to Subtenant in its
current "as is" condition, ordinary wear and tear and loss by fire or other
casualty excepted.
8. INDEMNITY. Subtenant hereby agrees to indemnify and hold
Sublandlord harmless from and against any and all claims, losses and damages,
including, without limitation,
5
<PAGE> 19
reasonable attorneys' fees and disbursements, which may at any time be asserted
against Sublandlord by (a) the Landlord for failure of Subtenant to perform any
of the covenants, agreements, terms, provisions or conditions contained in the
Master Lease which by reason of the provisions of this Sublease Subtenant is
obligated to perform, or (b) any person by reason of Subtenant's use and/or
occupancy of the Premises, except to the extent any of the foregoing is caused
by the gross negligence or willful misconduct of Sublandlord. The provisions of
this Section 8 shall survive the expiration or earlier termination of the Master
Lease and/or this Sublease.
9. CANCELLATION OF MASTER LEASE. In the event of the cancellation or
termination of the Master Lease for any reason whatsoever or of the involuntary
surrender of the Master Lease by operation of law prior to the expiration date
of this Sublease, Subtenant agrees to make full and complete attornment to the
Landlord under the Master Lease for the balance of the term of this Sublease and
upon the then executory terms hereof at the option of the Landlord at any time
during Subtenant's occupancy of the Premises, which attornment shall be
evidenced by an agreement in form and substance reasonably satisfactory to the
Landlord. Subtenant agrees to execute and deliver such an agreement at any time
within ten (10) business days after request of the Landlord, and Subtenant
waives the provisions of any law now or hereafter in effect which may give
Subtenant any right of election to terminate this Sublease or to surrender
possession of the Premises in the event any proceeding is brought by the
Landlord under the Master Lease to terminate the Master Lease so long as
Subtenant is not named in said action and so long as Landlord agrees to
recognize Subtenant.
10. BROKERS. Each party hereto represents and warrants to the other
that such party did not deal with any broker or finder in connection with the
consummation of this Sublease and each party agrees to indemnify, hold and save
the other party harmless from and against any and all claims for brokerage
commissions or finder's fees arising out of the indemnifying party's acts in
connection with this Sublease. The provisions of this Section 10 shall survive
the expiration or earlier termination of this Sublease.
11. ASSIGNMENT, SUBLETTING, AND SUBLEASEHOLD MORTGAGES. Subject
further to all of the rights of the Landlord under the Master Lease and the
restrictions contained in the Master Lease, Subtenant shall not be entitled to
assign this Sublease or to sublet all or any portion of the Premises without the
prior written consent of Sublandlord, which consent shall not be unreasonably
withheld. Provided any required consent is obtained from Landlord in writing
under the Master Lease and Subtenant is not released from its obligations
hereunder, Sublandlord agrees not to withhold its consent to any assignment or
sub-sublease to a party owned or controlled by Subtenant or under common
ownership or control with Subtenant or which acquires all or substantially all
of the business of Subtenant.
11.1 Subject to any required written consent of Landlord under
the Master Lease, Subtenant may, from time to time, mortgage or otherwise
encumber its interest in this Sublease (hereinafter a "Subleasehold Mortgage"),
including but not limited to Subtenant's interest in any improvements, fixtures
and personal property located on the Premises (the "Subleasehold Estate"), and,
in connection therewith, assign the rents, issues and profits from the
Subleasehold Estate. Notwithstanding any other provisions of this Sublease, any
transfer of the Subleasehold Estate pursuant to, or in lieu of, foreclosure of a
Subleasehold Mortgage shall be permitted
6
<PAGE> 20
without Sublandlord's consent (any such transfer being hereinafter referred to
as a "foreclosure"). Any person who becomes the holder of the Subleasehold
Estate pursuant to the foreclosure of a Subleasehold Mortgage shall have no
personal liability, direct or indirect, to Sublandlord for payment of any rents
or other charges (except if such person elects to timely cure prior defaults to
preserve this Sublease or except as provided in clause (i) of Section 11.5
below) or for satisfaction of any other claims based on events occurring prior
to the date of such party's acquisition of the Subleasehold Estate, nor for
conditions existing prior to the date of such party's accession to title, and
any such person may thereafter assign this Sublease without Sublandlord's
consent and shall be released from any and all obligations under this Sublease
which arise after, or relate to any period following, the effective date of such
assignment.
11.2. If Subtenant shall grant a Subleasehold Mortgage and shall
provide Sublandlord with notice thereof specifying the name and address of the
Subleasehold Mortgagee, then Sublandlord, upon giving Subtenant a notice of (i)
default, (ii) termination or proposed termination, (iii) a matter on which
Sublandlord may claim or base a default, (iv) consent to an assignment or
subletting or (v) any other matter which could materially and adversely affect
the rights or obligations of Sublandlord or Subtenant, shall at the same time
also give such notice to the Subleasehold Mortgagee in the manner provided in
this Sublease. In the case of a default notice, such notice shall set forth with
particularity all the claimed defaults. Notices delivered under this Sublease
shall not be deemed effective unless and until such notice has been given to
said Subleasehold Mortgagee.
11.3. Each Subleasehold Mortgagee shall have a right, but not any
obligation, to perform any term, covenant, condition or agreement of this
Sublease and to remedy any default by Subtenant thereunder within the time
limits set forth in this Sublease, and Sublandlord shall accept such
performance.
11.4. Notwithstanding anything contained in this Sublease to the
contrary, if a default shall occur which would otherwise entitle Sublandlord to
terminate this Sublease, Sublandlord shall have no right to terminate this
Sublease in the absence of a termination of the Master Lease unless, following
the expiration of the period of time given Subtenant to cure such default,
Sublandlord shall give each Subleasehold Mortgagee written notice of
Sublandlord's intent to terminate this Sublease at least thirty (30) days in
advance of the proposed effective date of such termination. The Subleasehold
Mortgagee, in addition to its right as described above to cure defaults by the
Subtenant, shall have a right, in the absence of a termination of the Master
Lease as a result of such default, to postpone the date on which this Sublease
would terminate as a result of the Subtenant's default(s) in accordance with
said notice by (a) giving Sublandlord written notice within such 30 day period
of the Subleasehold Mortgagee's election to postpone the date on which this
Sublease would terminate, and (b) proceeding with due diligence (i) to cure all
defaults, if any, then existing which may be cured by the payment of a sum of
money, (ii) to initiate and pursue steps to acquire the Subleasehold Estate by
foreclosure of its Subleasehold Mortgage or otherwise, and (iii) after obtaining
possession of the Premises, to cure any other then existing default(s) of
Subtenant susceptible of being cured by the Subleasehold Mortgagee. In the case
of any default(s) not reasonably susceptible of being cured by the Subleasehold
Mortgagee, Sublandlord's right to terminate this Sublease on account thereof, in
the absence of a termination of the Master Lease as a result of such default,
shall be deemed to be waived so long as all other defaults are cured by the
Subleasehold Mortgagee as provided above.
7
<PAGE> 21
11.5. If this Sublease shall be terminated for any reason
whatsoever while the Subleasehold Mortgage remains in effect, then in the
absence of a termination of the Master Lease, Sublandlord hereby grants the
Subleasehold Mortgagee or its designee the right, exercisable by notice given to
Sublandlord not later than thirty (30) days after receipt by Subleasehold
Mortgagee of notice of such termination from Sublandlord, to obtain a new
sublease of the Premises from the date of termination for the remaining term of
this Sublease upon the same terms and conditions of this Sublease (as modified
hereby) including the rent and options to renew and purchase, but excluding any
provisions which have been performed or are no longer applicable, provided, that
Subleasehold Mortgagee (i) cures all monetary defaults under this Sublease at
the time such new sublease is entered into and (ii) cures or agrees in such new
sublease to cure all non-monetary defaults which are not personal to Subtenant,
those which are personal to Subtenant (such as the bankruptcy or insolvency of
Subtenant), being waived. The new sublease shall (a) as to the Sublandlord have
the same priority as this Sublease and (b) provide that the subtenant under such
new sublease shall be liable to perform the obligations imposed on the Subtenant
under the new sublease only during the time period that such party is the
Subtenant of the Subleasehold Estate.
11.6. Sublandlord will not accept any surrender, agree to the
cancellation or failure to renew, or enter into any modification, of this
Sublease without the prior written consent thereto of each Subleasehold
Mortgagee of which Sublandlord has been given notice by the Subtenant. Without
limiting the generality of the foregoing, in the absence of a termination of the
Master Lease, no termination under Section 365(h) of the United States
Bankruptcy Code, as amended, shall be effective against any Subleasehold
Mortgagee without the prior written consent of such Subleasehold Mortgagee. No
material amendment or modification of this Sublease shall be effective as to the
Subleasehold Mortgage without the written consent of such Subleasehold
Mortgagee.
11.7. If Subtenant is entitled to exercise but does not for any
reason exercise at least thirty (30) days prior to the expiration of the time
permitted in this Sublease for the exercise of any right or option to purchase
the Premises or to extend or to renew this Sublease for any extension or renewal
term provided in this Sublease, any Subleasehold Mortgagee shall have the right,
for a period of thirty (30) days prior to the expiration of the time for
exercising such a right or option, to elect, by notice given in the manner
specified in this Sublease for the exercise of such right or option, to exercise
such right or option upon the same terms and conditions and with the same effect
as though such right or option had been validly exercised by Subtenant, provided
such exercise shall only be effective to the extent it is timely made under the
Master Lease.
11.8. In the case of any default under any Subleasehold Mortgage,
the Subleasehold Mortgagee shall be entitled at its expense to have a receiver
appointed, irrespective of whether such Subleasehold Mortgagee accelerates the
maturity of all indebtedness secured by
8
<PAGE> 22
its Subleasehold Mortgage, and to enter or have its receiver enter and take
possession of the Premises, and manage and operate the same in accordance with
the terms of this Sublease.
11.9. Sublandlord hereby waives any landlord's lien, all rights
of levy or distraint, security interest or any other right or interest that
Sublandlord may now or hereafter have, whether by statute, agreement or by
common law, in any portion of the Subleasehold Estate or Subtenant's inventory,
equipment and other personal property now or at any time hereafter located on
the Premises, but excluding fixtures and equipment customarily used for
operation of the building or building systems (collectively the "Personal
Property"). Subject to the rights of Landlord under the Master Lease and the
Estoppel and Consent of Landlord, the Personal Property may be installed in or
located on the Premises and is not and shall not be deemed to be a fixture or
part of the underlying real estate but shall at all times be considered personal
property unless permanently affixed and customarily used for operation of the
building or building systems. Sublandlord agrees that Subleasehold Mortgagee or
its representatives may enter upon the Premises at any time during the term of
this Sublease to inspect, remove or repossess the Personal Property or otherwise
exercise its remedies with respect thereto.
11.10. Each party hereto shall, at any time and from time to time,
as requested by this Subleasehold Mortgagee, upon not less than ten (10) days'
prior notice, execute and deliver a statement certifying that this Sublease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), certifying the dates to which the rent has been paid, and
stating whether or not, to the best knowledge of the signer, the other party is
in default in the performance of any of its obligations under this Sublease,
and, if so, specifying each such default of which the signer may have knowledge,
it being intended that any such statement may be relied upon by others with whom
the requesting party may be dealing.
12. SEVERABILITY. If any term or provision of this Sublease or the
application thereof to any person or circumstances shall, to any extent, be
invalid and unenforceable, the remainder of this Sublease or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each term
or provision of this Sublease shall be valid and be enforced to the fullest
extent permitted by law.
13. ENTIRE AGREEMENT; WAIVER. This Sublease contains the entire
agreement between the parties hereto with respect to the use and occupancy of
the Premises and shall be binding upon and inure to the benefit of their
respective heirs, representatives, successors and permitted assigns. Any
agreement hereinafter made shall be ineffective to change, modify, waive,
release, discharge, terminate or effect an abandonment hereof, in whole or in
part, unless such agreement is in writing and signed by the parties hereto.
9
<PAGE> 23
14. CAPTIONS. Captions to the Sections in this Sublease are included
for convenience only and are not intended and shall not be deemed to modify or
explain any of the terms of this Sublease.
10
<PAGE> 24
15. FURTHER ASSURANCES. The parties hereto agree that each of them,
upon the request of the other party, shall execute and deliver, in recordable
form if necessary, such further documents, instruments or agreements and shall
take such further action that may be necessary or appropriate to effectuate the
purposes of this Sublease.
16. GOVERNING LAW. This Sublease shall be governed by and in all
respects construed in accordance with the internal laws of the State of
California.
17. CONSENT OF LANDLORD. To the extent required by the Master Lease,
the validity of this Sublease shall be subject to the Landlord's prior written
consent hereto pursuant to the terms of the Master Lease. The parties shall
cooperate to obtain such consent upon mutually acceptable terms.
18. SUBLANDLORD ALTERATIONS. Sublandlord shall not make any
alterations or improvements to the Premises, except Sublandlord may at its
election make such alterations or improvements to the Premises as may be
required by law or the Master Lease.
19. SUBLANDLORD TRANSFERS. Sublandlord shall not assign, mortgage or
otherwise encumber the Lease or any interest therein unless the transferee shall
agree to recognize this Sublease and the rights of Subtenant hereunder.
20. SUBTENANT'S CANCELLATION RIGHT. In the event that Landlord agrees
to enter into a direct lease with Subtenant for the Premises and to terminate
the Master Lease without cost or liability to Sublandlord as Tenant, Subtenant
shall have the right to cancel this Sublease upon five (5) days' written notice
to Sublandlord. In the event that Subtenant so notifies Sublandlord, the
Sublease shall be deemed terminated effective upon the termination of the Master
Lease without cost or liability to Sublandlord. Subtenant and Sublandlord shall
execute such documents as may be reasonably necessary to evidence the
termination.
21. RECORDING. Subject to any required consent of Landlord under the
Master Lease, Subtenant shall have the right to record a memorandum of this
Sublease in the public records and Sublandlord agrees to execute and deliver to
Subtenant such memorandum within fifteen (15) days after Subtenant's request
therefor.
11
<PAGE> 25
22. RECAPITALIZATION AGREEMENT. The agreements contained herein shall
be without prejudice to any of the rights, benefits and indemnities in favor of
Subtenant or Sublandlord under the Recapitalization Agreement between
Sublandlord and Subtenant or its affiliates.
IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
executed as of the day and year first above written.
"SUBLANDLORD":
SMITH & NEPHEW, INC., a Delaware corporation
By: /s/ Clifford K. Lomax
-------------------------------
Its: Treasurer
---------------------------
By: /s/ James A. Ralston
-------------------------------
Its: Sr. Vice President
----------------------------
"SUBTENANT":
DJ ORTHOPEDIC, LLC, a Delaware limited liability
company
By: /s/ Cyril Talbot III
-------------------------------
Its: V.P., CFO and Secretary
---------------------------
By: /s/ Leslie H. Cross
-------------------------------
Its: President and CEO
---------------------------
12
<PAGE> 26
EXHIBIT A
THE MASTER LEASE
13
<PAGE> 1
EXHIBIT 10.8
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
GUARANTY OF LEASE
WHEREAS, Smith & Nephew, Inc., a Delaware corporation as Sublandlord,
hereinafter "Sublandlord", and DJ Orthopedic, LLC, a Delaware limited liability
company as Subtenant, hereinafter "Subtenant", are about to execute a document
entitled "Sublease" dated as of June 30, 1999 concerning the premises commonly
known as Parcels H, I, & J of Parcel Map 16, 028 in the City of Vista, San Diego
County, CA wherein Sublandlord will lease the premises to Subtenant, and
WHEREAS, DonJoy, LLC, a Delaware limited liability company, hereinafter
"Guarantors" have a financial interest in Subtenant, and
WHEREAS, Sublandlord would not execute the Sublease if Guarantors did not
execute and deliver to Sublandlord this Guarantee of Lease.
NOW THEREFORE, in consideration of the execution of the foregoing
Sublease by Sublandlord and as a material inducement to Sublandlord to execute
said Sublease, Guarantors hereby jointly, severally, unconditionally and
irrevocably guarantee the prompt payment by Subtenant of all rents and all other
sums payable by Subtenant under said Sublease and the faithful and prompt
performance by Subtenant of each and every one of the terms, conditions and
covenants of said Sublease to be kept and performed by Subtenant.
It is specifically agreed that the terms of the foregoing Sublease may be
modified by agreement between Sublandlord and Subtenant, or by a course of
conduct, and said Sublease may be assigned by Sublandlord or any assignee of
Sublandlord without consent or notice to Guarantors and that this Guaranty shall
guarantee the performance of said Sublease as so modified.
This Guaranty shall not be released, modified or affected by the failure
or delay on the part of Sublandlord to enforce any of the rights or remedies of
the Sublandlord under said Sublease, whether pursuant to the terms thereof or at
law or in equity.
No notice of default need be given to Guarantors, it being specifically
agreed that the guarantee of the undersigned is a continuing guarantee under
which Sublandlord may proceed immediately against Subtenant and/or against
Guarantors following any breach or default by Subtenant or for the enforcement
of any rights which Sublandlord may have as against Subtenant under the terms of
the Sublease or at law or in equity.
Sublandlord shall have the right to proceed against Guarantors hereunder
following any breach or default by Subtenant without first proceeding against
Subtenant and without previous notice to or demand upon either Subtenant or
Guarantors.
Guarantors hereby waive (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) all right to assert or plead
any statute of limitations relating to this Guaranty or the Sublease, (d) any
right to require the Sublandlord to proceed against the Subtenant or any other
Guarantor or any other person or entity liable to Sublandlord, (e) any right to
require Sublandlord to apply to any default any security deposit or other
security it may hold
<PAGE> 2
under the Sublease, (f) any right to require Sublandlord to
proceed under any other remedy Sublandlord may have before proceeding against
Guarantors, (g) any right of subrogation.
Guarantors do hereby subrogate all existing or future indebtedness of
Subtenant to Guarantors to the obligations owed to Sublandlord under the
Sublease and this Guaranty.
If a Guarantor is married, such Guarantor expressly agrees that recourse
may be had against his or her separate property for all of the obligations
hereunder.
The obligations of Subtenant under the Sublease to execute and deliver
estoppel statements and financial statements, as therein provided, shall be
deemed to also require the Guarantors hereunder to do and provide the same.
The term "Sublandlord" refers to and means the Sublandlord named in the
Sublease and also Sublandlord's successors and assigns. So long as Sublandlord's
interest in the Sublease, the leased premises or the rents, issues and profits
therefrom, are subject to any mortgage or deed of trust or assignment for
security, no acquisition by Guarantors of the Sublandlord's interest shall
affect the continuing obligation of Guarantors under this Guaranty which shall
nevertheless continue in full force and effect for the benefit of the mortgagee,
beneficiary, trustee or assignee under such mortgage, deed of trust or
assignment and their successors and assigns.
The term "Subtenant" refers to and means the Subtenant named in the
Sublease and also Subtenant's successors and assigns.
In the event any action be brought by said Sublandlord against Guarantors
hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be fixed by the court.
<TABLE>
<S> <C>
Executed by "GUARANTORS" as of June 22, DONJOY, LLC, a Delaware limited liability
1999 company
By: /s/ Cyril Talbot III
-------------------------------
Its: V.P., CFO and Secretary
-------------------------------
By: /s/ Leslie H. Cross
-------------------------------
Its: President and CEO
-------------------------------
</TABLE>
<PAGE> 3
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
GUARANTY OF LEASE
WHEREAS, Smith & Nephew, Inc., a Delaware corporation as Sublandlord,
hereinafter "Sublandlord", and DJ Orthopedic, LLC, a Delaware limited liability
company as Subtenant, hereinafter "Subtenant", are about to execute a document
entitled "Sublease" dated as of June 30, 1999 concerning the premises commonly
known as Parcels A, B, C, D, E of Parcel Map 16, 028 in the City of Vista, San
Diego County, CA wherein Sublandlord will lease the premises to Subtenant, and
WHEREAS, DonJoy, LLC, a Delaware limited liability company hereinafter
"Guarantors" have a financial interest in Subtenant, and
WHEREAS, Sublandlord would not execute the Sublease if Guarantors did not
execute and deliver to Sublandlord this Guarantee of Lease.
NOW THEREFORE, in consideration of the execution of the foregoing
Sublease by Sublandlord and as a material inducement to Sublandlord to execute
said Sublease, Guarantors hereby jointly, severally, unconditionally and
irrevocably guarantee the prompt payment by Subtenant of all rents and all other
sums payable by Subtenant under said Sublease and the faithful and prompt
performance by Subtenant of each and every one of the terms, conditions and
covenants of said Sublease to be kept and performed by Subtenant.
It is specifically agreed that the terms of the foregoing Sublease may be
modified by agreement between Sublandlord and Subtenant, or by a course of
conduct, and said Sublease may be assigned by Sublandlord or any assignee of
Sublandlord without consent or notice to Guarantors a nd that this Guaranty
shall guarantee the performance of said Sublease as so modified.
This Guaranty shall not be released, modified or affected by the failure
or delay on the part of Sublandlord to enforce any of the rights or remedies of
the Sublandlord under said Sublease, whether pursuant to the terms thereof or at
law or in equity.
No notice of default need be given to Guarantors, it being specifically
agreed that the guarantee of the undersigned is a continuing guarantee under
which Sublandlord may proceed immediately against Subtenant and/or against
Guarantors following any breach or default by Subtenant or for the enforcement
of any rights which Sublandlord may have as against Subtenant under the terms of
the Sublease or at law or in equity.
Sublandlord shall have the right to proceed against Guarantors hereunder
following any breach or default by Subtenant without first proceeding against
Subtenant and without previous notice to or demand upon either Subtenant or
Guarantors.
Guarantors hereby waive (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) all right to assert or plead
any statute of limitations relating to this Guaranty or the Sublease, (d) any
right to require the Sublandlord to proceed against the Subtenant or any other
Guarantor or any other person or entity liable to Sublandlord, (e) any right to
require Sublandlord to apply to any default any security deposit or other
security it may hold
<PAGE> 4
under the Sublease, (f) any right to require Sublandlord to
proceed under any other remedy Sublandlord may have before proceeding against
Guarantors, (g) any right of subrogation.
<PAGE> 5
Guarantors do hereby subrogate all existing or future indebtedness of Subtenant
to Guarantors to the obligations owed to Sublandlord under the Sublease and this
Guaranty.
If a Guarantor is married, such Guarantor expressly agrees that recourse
may be had against his or her separate property for all of the obligations
hereunder.
The obligations of Subtenant under the Sublease to execute and deliver
estoppel statements and financial statements, as therein provided, shall be
deemed to also require the Guarantors hereunder to do and provide the same.
The term "Sublandlord" refers to and means the Sublandlord named in the
Sublease and also Sublandlord's successors and assigns. So long as Sublandlord's
interest in the Sublease, the leased premises or the rents, issues and profits
therefrom, are subject to any mortgage or deed of trust or assignment for
security, no acquisition by Guarantors of the Sublandlord's interest shall
affect the continuing obligation of Guarantors under this Guaranty which shall
nevertheless continue in full force and effect for the benefit of the mortgagee,
beneficiary, trustee or assignee under such mortgage, deed of trust or
assignment and their successors and assigns.
The term "Subtenant" refers to and means the Subtenant named in the
Sublease and also Subtenant's successors and assigns.
In the event any action be brought by said Sublandlord against Guarantors
hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be fixed by the court.
<TABLE>
<S> <C>
Executed by "GUARANTORS" as of June 22, DONJOY, LLC, a Delaware limited liability
1999 company
By: /s/ Cyril Talbot III
------------------------------
Its: V.P., CFO and Secretary
------------------------------
By: /s/ Leslie H. Cross
------------------------------
Its: President and CEO
------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.9
EXECUTION COPY
PREFERRED UNIT PURCHASE AGREEMENT
DATED AS OF JUNE 30, 1999
AMONG
DONJOY, L.L.C.
AND
THE PURCHASERS NAMED HEREIN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINED TERMS; RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
--- -------------
1.2 Rules of Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
--- ---------------------
ARTICLE II PURCHASE AND SALE OF PREFERRED UNITS; CLOSING . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Amended and Restated Operating Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
--- ----------------------------------------
2.2 Authorization of Issuance of Preferred Units. . . . . . . . . . . . . . . . . . . . . . . . . . 5
--- ---------------------------------------------
2.3 Sale of Preferred Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
--- -----------------------
2.4 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
--- -------
2.5 Closing Deliveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
--- ------------------
2.6 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
--- ---------------
ARTICLE III REPRESENTATIONS AND WARRANTIES ABOUT THE COMPANY . . . . . . . . . . . . . . . . . . . . . . 6
3.1 Private Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
--- ------------
3.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
--- --------------
3.3 Authority, Execution and Enforceability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
--- ---------------------------------------
3.4 No Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
--- -----------
3.5 Investment Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
--- ----------------------
3.6 Recapitalization Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
--- --------------------------
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS . . . . . . . . . . . . . . . . . . . . . . . 8
4.1 Authorization of the Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
--- ------------------------------
4.2 Investment Representations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
--- --------------------------
ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
5.1 Information Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
--- ------------------
5.2 Compliance with Indenture Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
--- -----------------------------------
5.3 Compliance with Credit Agreement Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . .11
--- ------------------------------------------
ARTICLE VI CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
6.1 Conditions to Purchasers' Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
--- -------------------------------------
6.2 Conditions to the Company's Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
--- ---------------------------------------
ARTICLE VII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.1 Survival of Representations, Warranties, Agreements and Covenants, Etc. . . . . . . . . . . . .12
--- ----------------------------------------------------------------------
7.2 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
--- ---------------
ARTICLE VIII TRANSFER OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
8.1 Restriction on Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
--- -----------------------
8.2 Restrictive Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
--- -------------------
ARTICLE IX ADDITIONAL AGREEMENTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
9.1 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
--- ----
9.2 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
--- ------------------
9.3 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
--- --------
9.4 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
--- ------------------------
9.5 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
--- -----------------
9.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
--- -------
9.7 Amendments, Modifications and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
--- -------------------------------------
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
9.8 Governing Law; Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
--- ------------------------------------
9.9 No Third Party Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
--- -----------------------
9.10 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
---- ------------
9.11 Independence of Agreements, Covenants, Representations and Warranties. . . . . . . . . . . .19
---- ---------------------------------------------------------------------
9.12 Counterparts; Facsimile Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
---- ----------------------------------
</TABLE>
ii
<PAGE> 4
SCHEDULES AND EXHIBITS
<TABLE>
<S> <C> <C>
SCHEDULES
- ---------
Schedule I - Purchasers, Purchase Price and Fees
EXHIBITS
- --------
Exhibit A - Amended and Restated Operating Agreement
Exhibit B - Members' Agreement
Exhibit C - SBA Sideletter
</TABLE>
iii
<PAGE> 5
PREFERRED UNIT PURCHASE
AGREEMENT dated as of June 30, 1999 by and
among DONJOY, L.L.C., a Delaware limited
liability company (the "Company"), and the
Purchasers listed on Schedule I
(collectively, the "Purchasers").
The Company is in the business of developing, manufacturing
and marketing orthopedic recovery products (the "Business"). The Company
desires to raise $31,415,000 in preferred equity financing, and the Purchasers
are willing to purchase certain of the Company's redeemable preferred units
(the "Preferred Units") in connection therewith, all on the terms and subject
to the conditions set forth herein.
ACCORDINGLY, in consideration of the foregoing and the
covenants, agreements, representations and warranties contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINED TERMS; RULES OF CONSTRUCTION
1.1 DEFINED TERMS.
Capitalized terms used and not otherwise defined in this Agreement
have the meanings given to them below or in the other locations of this
Agreement specified below (or, if not defined herein, have the meanings
ascribed to them in the Amended and Restated Operating Agreement):
"Agreement" shall have the meaning given to such term in
Section 1.2.
"Amended and Restated Operating Agreement" means the Company's
Amended and Restated Operating Agreement, dated as of the date hereof, among
the Company and the holders of Units of the Company, in substantially the form
set forth in Exhibit A, as amended from time to time.
"Applicable Law" means , as to any Person, all provisions of
laws, statutes, ordinances, rules, regulations, permits, certificates or orders
of any governmental authority applicable to such Person or any of its assets or
property and all judgments applicable to such Person.
"Application Fee" has the meaning given to it in Section 9.1.
"Board" means the Board of Managers of the Company.
"Business" has the meaning given to it in the Preamble to this
Agreement.
"Business Day" means any day other than a Saturday, Sunday or
a day on which commercial banks in New York, New York are authorized or
required to be closed.
<PAGE> 6
"CB Capital" means CB Capital Investors, L.P, and any
successors or assigns of its Interest (as defined in the Amended and Restated
Operating Agreement).
"Claim" means any claim, demand, assessment, judgment, order,
decree, action, cause of action, litigation, suit, investigation or other
Proceeding.
"Closing" has the meaning given to it in Section 2.4.
"Closing Certificate" has the meaning given to it in Section
7.1.
"Closing Date" has the meaning given to it in Section 2.4.
"Closing Fee" has the meaning given to it in Section 9.1.
"Code" means the Internal Revenue Code of 1986, as amended, or
any similar Federal law then in force, and the rules and regulations
promulgated thereunder, all as the same may from time to time be in effect.
"Commission" means the Securities and Exchange Commission or
any successor or replacement thereto.
"Common Units" means the common units of the Company providing
the holder thereof to the rights provided by the Amended and Restated Operating
Agreement.
"Company" has the meaning given to it in the caption to this
Agreement.
"Company Indemnified Persons" has the meaning given to it in
Section 6.2(b).
"Credit Agreement" shall mean the Credit Agreement dated as of
the date hereof, among the Company, as Parent, DJ Orthopedics, as Borrower, the
lenders party thereto, First Union National Bank, as Administrative Agent,
Documentation Agent and Collateral Agent, The Chase Manhattan Bank, as
Syndication Agent, Issuing Bank and Swingline Lender and Chase Securities Inc.,
as Arranger and Book Manager, as amended from time to time.
"DJ Capital" means DJ Orthopedics Capital Corporation, a
Delaware corporation and a wholly-owned subsidiary of DJ Orthopedics.
"DJ Orthopedics" means DJ Orthopedics, LLC, a Delaware limited
liability company and wholly-owned subsidiary of the Company.
"Documents" means this Agreement, the Amended and Restated
Operating Agreement, the Members' Agreement and the SBA Sideletter.
"First Union" means First Union Investors, Inc., and any
successors or assigns of its Interest (as defined in the Amended and Restated
Operating Agreement).
"Fundamental Documents" means the documents by which any
Person (other than an individual) establishes its legal existence or which
govern its internal affairs. The
2
<PAGE> 7
Fundamental Documents of the Company are the Amended and Restated Operating
Agreement, the Members' Agreement and the By-Laws of the Company.
"Indemnified Persons" means any of the Company Indemnified
Persons or any of the Purchaser Indemnified Persons, as the context may
require.
"Indemnifying Persons" means any of the Purchasers or the
Company, as the context may require.
"Indenture" has the meaning given to it in the Amended and
Restated Operating Agreement.
"Initial Purchaser" has the meaning given to it in the Senior
Subordinated Notes Purchase Agreement.
"Investment Company Act" shall have the meaning given to such
term in Section 3.5.
"Liability" means any liability or obligation, whether known
or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated and whether due or to become due,
regardless of when asserted.
"LLC Act" shall have the meaning given to such term in Section
3.2.
"Loss" means any loss, Liability, Claim, cost, damage,
deficiency, Tax (including any Taxes imposed with respect to any indemnity
payments for any such Loss), penalty, fine or expense, whether or not arising
out of any Claims by or on behalf of any party to this Agreement or any third
party, including interest, penalties, reasonable attorneys' fees and expenses
and all amounts paid in investigation, defense or settlement of any of the
foregoing which any such party may suffer, sustain or become subject to, as a
result of, in connection with, relating or incidental to or by virtue of any
indemnifiable event or condition.
"Members' Agreement" means the Members' Agreement among the
Company and the holders of Units, in substantially the form set forth in
Exhibit B, as amended from time to time.
"Offering Memorandum" means the offering memorandum dated June
17, 1999, as the same may be amended or supplemented from time to time prior to
Closing, to be used in connection with the sale of the Senior Subordinated
Notes.
"Person" has the meaning given to it in the Amended and
Restated Operating Agreement.
"Preferred Units" has the meaning given to it in the Preamble
to the Agreement providing the holder thereof to the rights provided by the
Amended and Restated Operating Agreement.
"Proceeding" means any legal, administrative or arbitration
action, suit, complaint, charge, hearing, inquiry, investigation or proceeding.
3
<PAGE> 8
"Purchaser" has the meaning given to it in the caption to this
Agreement and any Person succeeding to the rights of a Purchaser pursuant to
the terms hereof.
"Purchaser Indemnified Person" has the meaning given to it in
Section 7.2(a).
"Recapitalization Agreement" means the Recapitalization
Agreement, dated as of April 29, 1999, by and among Chase DJ Partners, LLC,
Smith & Nephew, Inc. and the Company.
"SBA Sideletter" means the letter from the Company to CB
Capital, in substantially the form attached as Exhibit C.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Subordinated Notes" means the Company's 12 5/8% Senior
Subordinated Notes due 2009 issued on the date hereof.
"Senior Subordinated Notes Purchase Agreement" means the
Purchase Agreement dated as of June 17, 1999, among the Company, DJ
Orthopedics, DJ Capital and the Initial Purchaser signatory thereto.
"Tax" means any Taxes and the term "Taxes" means, with respect
to any Person, (A) all income taxes (including any tax on or based upon net
income, or gross income, or income as specially defined, or earnings, or
profits, or selected items of income, earnings or profits) and all gross
receipts, sales, use, ad valorem, transfer, franchise, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property or
windfall profits taxes, alternative or add-on minimum taxes, customs duties or
other taxes, fees, assessments or charges of any kind whatsoever, together with
any interest and any penalties, additions to tax or additional amounts imposed
by any taxing authority (domestic or foreign) on such Person and (B) any
Liability for the payment of any amount of the type described in the
immediately preceding clause (A) as a result of (i) being a "transferee"
(within the meaning of Section 6901 of the Code or any other Applicable Law) of
another Person, (ii) being a member of an affiliated, combined or consolidated
group or (iii) a contractual arrangement or otherwise.
"Transaction Documents" has the meaning given to it in Section
3.3.
"Units" means, collectively, the Common Units and the
Preferred Units.
1.2 RULES OF CONSTRUCTION.
The term this "Agreement" means this agreement together with all
schedules and exhibits hereto, as the same may from time to time be amended,
modified, supplemented or restated in accordance with the terms hereof. The
use in this Agreement of the term "including" means "including, without
limitation." The words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole, including the schedules and
exhibits, as the same may from time to time be amended, modified, supplemented
or restated, and not to any particular section, subsection, paragraph,
subparagraph or clause contained in this Agreement. All references to
sections, schedules and exhibits mean the sections of this Agreement and the
4
<PAGE> 9
schedules and exhibits attached to this Agreement, except where otherwise
stated. The title of and the section and paragraph headings in this Agreement
are for convenience of reference only and shall not govern or affect the
interpretation of any of the terms or provisions of this Agreement. The use
herein of the masculine, feminine or neuter forms shall also denote the other
forms, as in each case the context may require or permit. Where specific
language is used to clarify by example a general statement contained herein,
such specific language shall not be deemed to modify, limit or restrict in any
manner the construction of the general statement to which it relates. The
language used in this Agreement has been chosen by the parties to express their
mutual intent, and no rule of strict construction shall be applied against any
party. Unless expressly provided otherwise, the measure of a period of one
month or year for purposes of this Agreement shall be that date of the
following month or year corresponding to the starting date, provided that if no
corresponding date exists, the measure shall be that date of the following
month or year corresponding to the next day following the starting date. For
example, one month following February 18 is March 18, and one month following
March 31 is May 1.
ARTICLE II
PURCHASE AND SALE OF PREFERRED UNITS; CLOSING
2.1 AMENDED AND RESTATED OPERATING AGREEMENT.
Simultaneously with or prior to the Closing, the Company shall execute
and deliver the Amended and Restated Operating Agreement. The Amended and
Restated Operating Agreement designates 100,000 Preferred Units and sets forth
the powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof.
2.2 AUTHORIZATION OF ISSUANCE OF PREFERRED UNITS.
The Company has authorized the issuance, sale, transfer, assignment,
conveyance and deliverance at the Closing of an aggregate of 40,184 Preferred
Units.
2.3 SALE OF PREFERRED UNITS.
At the Closing, subject to the satisfaction or waiver of the
conditions set forth in Article VI, the Company shall issue, sell, transfer,
assign, convey and deliver to each Purchaser, and each Purchaser shall
severally purchase from the Company, that number of Preferred Units set forth
opposite its name on Schedule I for the aggregate purchase price set forth
opposite its name.
2.4 CLOSING.
The closing (the "Closing") hereunder with respect to the issuance,
sale, transfer, assignment, conveyance and delivery of the Preferred Units
being purchased by each Purchaser at the Closing and the consummation of the
related transactions contemplated hereby shall, subject to the satisfaction or
waiver of the applicable conditions set forth in Article VI, take place at the
offices of O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York,
New York 10112 at 10:00 a.m., local time, on the date of the closing of the
transactions contemplated
5
<PAGE> 10
by the Recapitalization Agreement, or at such other time, date or place as
agreed to by the parties (such date, the "Closing Date").
2.5 CLOSING DELIVERIES.
At the Closing, the Company shall deliver to each Purchaser purchasing
Preferred Units a certificate, registered in such Purchaser's name,
representing the Preferred Units purchased by such Purchaser at the Closing,
against receipt by the Company of a wire transfer, of immediately available
funds to an account or accounts designated by the Company, of an aggregate
amount equal to the purchase price for the Preferred Units being purchased by
such Purchaser at the Closing.
2.6 USE OF PROCEEDS.
The proceeds received by the Company from the sale of Preferred Units
shall be used by the Company (i) as set forth under "Sources and Uses of Funds"
in the Offering Memorandum and (ii) to pay the Application Fee and the Closing
Fee as set forth in
Section 9.1.
ARTICLE III
REPRESENTATIONS AND WARRANTIES ABOUT THE COMPANY
The Company represents and warrants to each Purchaser as
follows:
3.1 PRIVATE SALE.
Assuming the accuracy of the representations of the Purchasers in
Section 4.2, the offering, sale, and issuance of the Preferred Units will be
exempt from registration under the Securities Act and applicable state
securities laws and the rules and regulations promulgated thereunder.
3.2 CAPITALIZATION.
(a) As of the Closing Date, the Company will have an authorized
capitalization as set forth in the Offering Memorandum under the heading
"Security Ownership of Certain Beneficial Owners and Management--Description of
Operating Agreement"; all of the outstanding Units of the Company have been
duly and validly authorized and issued and are not subject to assessment by the
Company for additional capital contributions; provided, however, that each
member of the Company would be liable for the amount of any distribution to
such member (or its predecessor in interest) made in violation of Section
18-607 or Section 18-804 of the Limited Liability Company Act of the State of
Delaware (the "LLC Act") to the extent the same is required to be returned to
or for the account of the Company as provided in Section 18-607 or Section
18-804, as applicable, of the LLC Act, potentially with interest. All of the
outstanding units or shares of capital stock of each subsidiary of the Company
have been duly and validly authorized and issued, and, in the case of capital
stock, fully paid and non-assessable or, in the case of the units of DJ
Orthopedics, are not subject to assessment by the Company for additional
capital contributions; provided, however, that each member of DJ Orthopedics
will be liable for the amount of any distribution to such member (or its
predecessor in interest) made in violation of Section 18-607 or Section 18-804
of the LLC Act to the extent the same is required
6
<PAGE> 11
to be returned to or for the account of the Company as provided in Section
18-607 or Section 18-804, as applicable, of the LLC Act, potentially with
interest; and are owned directly by the Company, free and clear of any lien,
charge, encumbrance, security interest, restriction upon voting or transfer or
any other claim of any third party, (except for those created pursuant to the
Credit Agreement, the Amended and Restated Operating Agreement or the Members'
Agreement and except for those described in the Offering Memorandum). DJ
Orthopedics has no subsidiaries other than DJ Capital and Smith & Nephew DonJoy
de Mexico, S.A. de C.V., a Mexican corporation.
(b) Except as described in the Offering Memorandum, there are
no outstanding subscriptions, rights, warrants, calls or options to acquire, or
instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of, units or other equity
or other ownership interests in the Company or any of its subsidiaries.
3.3 AUTHORITY, EXECUTION AND ENFORCEABILITY.
(a) The Company (i) has full right, power and authority to
execute and deliver this Agreement, and (ii) had or has full right, power and
authority to execute and deliver the Recapitalization Agreement, the Amended
and Restated Operating Agreement, the Members' Agreement, the Credit Agreement,
the Indenture and the Senior Subordinated Notes Purchase Agreement
(collectively, the "Transaction Documents") and to perform its respective
obligations hereunder and thereunder; and all requisite action required to be
taken for the due and proper authorization, execution and delivery of each of
the Transaction Documents to which it is a party and the consummation of the
transactions contemplated thereby have been duly and validly taken.
(b) Each Transaction Document has been duly authorized,
executed and delivered by the Company and constitutes a valid and legally
binding agreement of the Company, enforceable against it in accordance with its
terms, except to the extent that (i) such enforceability may be subject to (A)
bankruptcy, insolvency, fraudulent, conveyance, reorganization, moratorium and
other similar laws affecting creditors' rights generally and (B) general
equitable principles (whether considered in a proceeding in equity or at law)
and (ii) the validity or enforceability of rights to indemnification and
contribution thereunder may be limited by Federal or state securities laws or
regulations or the public policy underlying such laws or regulations.
3.4 NO CONFLICT.
The execution, delivery and performance by the Company of each of the
Transaction Documents to which it is a party, the compliance by the Company
with the terms thereof and the consummation of the transactions contemplated
thereby will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or, except for those
existing on the Closing Date and permitted under the Credit Agreement and those
created pursuant to the Credit Agreement, result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company
or any of its subsidiaries pursuant to, any material indenture, mortgage, deed
of trust, loan agreement or other material agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets of the
7
<PAGE> 12
Company or any of its subsidiaries is subject, nor will any such actions result
in any violation of the provisions of the limited liability company agreement,
operating agreement, charter or by-laws, as applicable, of the Company or any
of its subsidiaries or any statute or any judgment, order, decree, rule or
regulation of any court or arbitrator or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties or assets (assuming compliance by each Purchaser with its
representations, warranties and agreements set forth in Section 4 hereof and
assuming compliance by the Initial Purchaser of its representations, warranties
and agreements set forth in Section 2 of the Senior Subordinated Notes Purchase
Agreement); and (assuming compliance by each Purchaser with its
representations, warranties and agreements set forth in Section 4 hereof and
assuming compliance by the Initial Purchaser of its representations, warranties
and agreements set forth in Section 2 of the Senior Subordinated Notes Purchase
Agreement) no consent, approval, authorization or order of, or filing or
registration with, any such court or arbitrator or governmental agency or body
under any such statute, judgment, order, decree, rule or regulation is required
for the execution, delivery and performance by the Company of each of the
Transaction Documents to which it is a party, the issuance, sale and delivery
of the Preferred Units and compliance by the Company with the terms thereof and
the consummation of the transactions contemplated by the Transaction Documents,
except for such consents, approvals, authorizations, filings, registrations or
qualifications which shall have been obtained or made prior to the Closing
Date.
3.5 INVESTMENT COMPANY ACT.
Neither the Company nor any of its subsidiaries is (i) an "investment
company" or a company "controlled by" an investment company within the meaning
of the Investment Company Act of 1940, as amended (the "Investment Company
Act"), and the rules and regulations of the Commission thereunder or (ii) a
"holding company" or a "subsidiary company" of a holding company or an
"affiliate" thereof within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
3.6 RECAPITALIZATION AGREEMENT.
Except as set forth on Schedule 3.6 hereto, or as described in the
Offering Memorandum, the representations and warranties contained in Article V
of the Recapitalization Agreement are true and correct in all material respects
(except to the extent such representations and warranties which expressly
relate to an earlier date, in which case, such representations and warranties
shall be true and correct in all material respects on such date).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the Company as to
itself and not as to any other Purchaser, as of the date hereof, as follows:
4.1 AUTHORIZATION OF THE DOCUMENTS.
Such Purchaser has all requisite power and authority to execute,
deliver and perform the Documents to which it is a party and the transactions
contemplated thereby, and the execution,
8
<PAGE> 13
delivery and performance by such Purchaser of the Documents to which it is a
party have been duly authorized by all requisite action by such Purchaser.
This Agreement has been duly executed and delivered by such Purchaser and this
Agreement constitutes and, when executed and delivered by such Purchaser
(assuming the due authorization, execution and delivery by the other parties
thereto), each other Document to which such Purchaser is a party will
constitute a valid and binding obligation of such Purchaser, enforceable
against such Purchaser in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws and subject to general principles of equity.
4.2 INVESTMENT REPRESENTATIONS.
Solely for establishing that the issuance, sale, transfer, assignment,
conveyance and deliverance of the Preferred Units to such Purchaser is exempt
from the registration requirements of the Securities Act and comparable
provisions of state blue-sky laws and not in any way to mitigate the
responsibility or Liability of the Company for any breach of the
representations and warranties made by it in this Agreement, on which such
Purchaser is relying in full in connection with its decision to invest in the
Company:
(a) Such Purchaser is acquiring the Preferred Units for its own
account, for investment and not with a view to the distribution thereof or any
interest therein in violation of the Securities Act or applicable state
securities laws.
(b) Such Purchaser understands that (i) the Preferred Units
have not been registered under the Securities Act or applicable state
securities laws by reason of their issuance by the Company in a transaction
exempt from the registration requirements of the Securities Act and applicable
state securities laws and (ii) the Preferred Units must be held by such
Purchaser indefinitely unless a subsequent disposition thereof is registered
under the Securities Act and applicable state securities laws or is exempt from
such registration.
(c) Such Purchaser further understands that the exemption from
registration afforded by Rule 144 (the provisions of which are known to such
Purchaser) promulgated under the Securities Act depends on the satisfaction of
various conditions, and that, if applicable, Rule 144 may afford the basis for
sales of the Preferred Units acquired hereunder in limited amounts.
(d) Such Purchaser has not employed any broker or finder in
connection with the transactions contemplated by this Agreement.
(e) Such Purchaser is an "accredited investor" (as defined in
Rule 501(a) of Regulation D promulgated under the Securities Act). The Company
has made available to such Purchaser or its representatives all agreements,
documents, records and books that such Purchaser has requested relating to an
investment in the Preferred Units which may be acquired by the Purchaser
hereunder. Such Purchaser has had an opportunity to ask questions of, and
receive answers from, a person or persons acting on behalf of the Company,
concerning the terms and conditions of this investment, and answers have been
provided to all of such questions to the full satisfaction of such Purchaser.
Such Purchaser has such knowledge and experience in financial and business
matters that it is capable of evaluating the risks and merits of this
investment. Such Purchaser's representations in this subsection shall in no
way limit the
9
<PAGE> 14
enforceability of any representations made by the Company in any of the
Documents to which it is a party.
(f) Such Purchaser was not formed for the purpose of
consummating the transactions contemplated hereby.
ARTICLE V
COVENANTS
5.1 INFORMATION RIGHTS.
The Company shall furnish each Purchaser with the following:
(a) Monthly Reports. As soon as available, but not later than
30 days after the end of each fiscal month, a consolidated balance sheet of the
Company as of the end of such period and consolidated statements of income of
the Company for such period and for the period commencing at the end of the
previous fiscal year and ending with the end of such period, setting forth in
each case in comparative form the corresponding figures for the corresponding
period of the preceding fiscal year, and including comparisons to the budget or
business plan and an analysis of the variances from the budget or plan, all
prepared in accordance with generally accepted accounting principles
consistently applied with past practices (except for the absence of footnotes
and year-end adjustments).
(b) Quarterly Reports. As soon as available, but not later
than 45 days after the end of each quarterly accounting period, (i) a
consolidated balance sheet of the Company as of the end of such period and
consolidated statements of income, cash flows and changes in members' equity
for such quarterly accounting period and for the period commencing at the end
of the previous fiscal year and ending with the end of such period, setting
forth in each case in comparative form the corresponding figures for the
corresponding period of the preceding fiscal year, and including comparisons to
the budget or business plan and an analysis of the variances from the budget or
plan, all prepared in accordance with generally accepted accounting principles
consistently applied with past practices (except for the absence of footnotes
and year-end adjustments) and (ii) a report by management of the Company of the
operating and financial highlights of the Company and its subsidiaries for such
period.
(c) Annual Audit. As soon as available, but not later than 120
days after the end of each fiscal year of the Company, audited consolidated
financial statements of the Company, which shall include statements of income,
cash flows and changes in members' equity for such fiscal year and a balance
sheet as of the last day thereof, each prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by the
report of a "Big 5" firm of independent certified public accountants selected
by the Board (the "Accountants"). The Company and its subsidiaries shall
maintain a system of accounting sufficient to enable its Accountants to render
the report referred to in this Section 4.
(d) Budgets. As soon as available, but not more than 90 days
after the commencement of each new fiscal year, a business plan and projected
financial statements for such new fiscal year.
10
<PAGE> 15
(e) Miscellaneous. Promptly upon becoming available, the
Company shall provide to each Purchaser copies of all financial statements,
reports, press releases, notices, proxy statements and other documents sent by
the Company or its subsidiaries to its members generally or released to the
public and copies of all regular and periodic reports, if any, filed by the
Company or its subsidiaries with the Commission, any securities exchange or the
NASD.
5.2 COMPLIANCE WITH INDENTURE COVENANTS.
So long as any Preferred Units (other than Paid Preferred Units) are
outstanding, the Company shall cause DJ Orthopedics to perform its obligations
under Section 4.03, Section 4.05, Section 4.06, Section 4.07, Section 4.09 and
Section 4.12 of the Indenture.
5.3 COMPLIANCE WITH CREDIT AGREEMENT COVENANTS.
So long as any Preferred Units (other than Paid Preferred Units) are
outstanding, the Company will perform its obligations under Section 6.01(b),
Section 6.03(b) and Section 6.09 of the Credit Agreement, as in effect on the
date hereof.
ARTICLE VI
CONDITIONS TO CLOSING
6.1 CONDITIONS TO PURCHASERS' OBLIGATIONS.
The obligation of each Purchaser to purchase and pay for the Preferred
Units to be purchased hereunder at the Closing is subject to the satisfaction
of the following conditions, whether precedent or subsequent (unless waived by
such Purchaser):
(a) The Company and each member of the Company (other than the
Purchasers) shall have executed and delivered to each Purchaser a counterpart
to the Amended and Restated Operating Agreement.
(b) The Company shall have duly issued and delivered to each
Purchaser a certificate for the number of Preferred Units purchased by such
Purchaser.
(c) The Company and each member of the Company (other than the
Purchasers) shall have duly executed and delivered to each Purchaser a
counterpart to the Members' Agreement.
(d) The Company shall have executed and delivered to each
Purchaser an SBA Sideletter.
(e) The Company shall have performed its obligations under, and
shall have complied with, all the covenants and agreements set forth in this
Agreement.
(f) Each Purchaser shall have received a certificate from the
Secretary or an Assistant Secretary of the Company, dated as of the Closing
Date, certifying (i) that true and complete copies of the Fundamental Documents
of the Company as in effect on the Closing Date
11
<PAGE> 16
are attached thereto, (ii) as to the incumbency and genuineness of the
signatures of each Person executing this Agreement and the other Documents on
behalf of the Company and (iii) the genuineness of the resolutions (attached
thereto) of the Board or similar governing body of the Company authorizing the
execution, delivery and performance of this Agreement and the other Documents
to which the Company is a party and the consummation of the transactions
contemplated hereby and thereby.
(g) All representations and warranties of the Company contained
in Article III shall be true and correct in all material respects on and as of
the Closing Date.
(h) The transactions contemplated by the Recapitalization
Agreement, the Credit Agreement and the Senior Subordinated Notes Purchase
Agreement shall be consummated concurrently with the closing under this
Agreement.
6.2 CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The obligation of the Company to issue the Preferred Units to each
Purchaser at the Closing is subject to the satisfaction of the following
conditions whether precedent or subsequent (unless waived by the Company):
(a) Each Purchaser shall have delivered to the Company by wire
transfer, of immediately available funds to an account or accounts designated
by the Company, an aggregate amount equal to the purchase price for the
Preferred Units being purchased by such Purchaser.
(b) Each Purchaser and each other member of the Company shall
have duly executed and delivered to the Company a counterpart to the Amended
and Restated Operating Agreement.
(c) Each Purchaser and each other member of the Company shall
have duly executed and delivered to the Company a counterpart to the Members'
Agreement.
(d) All representations and warranties of each Purchaser
contained in Article III shall be true and correct in all material respects on
and as of the Closing Date.
(e) The transactions contemplated by the Recapitalization
Agreement, the Credit Agreement and the Senior Subordinated Notes Purchase
Agreement shall be consummated concurrently with the closing under this
Agreement.
ARTICLE VII
INDEMNIFICATION
7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AGREEMENTS AND COVENANTS,
ETC.
All statements contained in this Agreement or any other Document or
any closing certificate delivered by the Company or the Purchasers, pursuant to
this Agreement or in connection with the transactions contemplated by this
Agreement (each, a "Closing Certificate"), shall constitute representations and
warranties by the Company, or the Purchasers, as applicable, under this
Agreement. Notwithstanding any investigation made at any time by or on behalf
of any party hereto, all representations and warranties contained in this
Agreement or made in
12
<PAGE> 17
writing by or on behalf of the Company, or any Purchaser, in connection with
the transactions contemplated by this Agreement shall survive the Closing until
fifteen (15) months following the Closing Date, provided however, that the
representations and warranties contained in Sections 3.2, 3.3, 3.4 and Article
IV shall survive the Closing indefinitely and the representations and
warranties contained in Section 3.6 shall survive the Closing until such time
as such representations and warranties cease to survive under the
Recapitalization Agreement.
7.2 INDEMNIFICATION.
(a) In addition to all other rights and remedies available to
the Purchasers, the Company shall indemnify, defend and hold harmless each
Purchaser and its affiliates and their respective partners, officers,
directors, employees, agents and representatives (collectively, the "Purchaser
Representatives"; and together with such Purchaser, the "Purchaser Indemnified
Persons") against all Losses, and none of the Purchaser Indemnified Persons
shall be liable to the Company or any other stockholder of the Company for or
with respect to any and all Losses, together with all costs and expenses
(including legal and accounting fees and expenses) related thereto or incurred
in enforcing this Article VII, (i) arising from the untruth, inaccuracy or
breach of any of the representations or warranties of the Company (without
giving effect to any qualification as to materiality) contained in any Document
or Closing Certificate or any facts or circumstances constituting any such
untruth, inaccuracy or breach or (ii) arising from the breach of any covenant
or agreement of the Company contained in any Document or any facts or
circumstances constituting such breach.
(b) In addition to all other rights and remedies available to
the Company, each Purchaser severally as to itself only and not as to any other
Purchaser, shall indemnify, defend and hold harmless the Company and its
officers, directors, employees, agents and representatives (collectively, the
"Company Indemnified Persons,") against all Losses, together with all
reasonable out-of-pocket costs and expenses (including legal and accounting
fees and expenses) related thereto or incurred in enforcing this Article VII,
(i) arising from the untruth, inaccuracy or breach of any of the
representations or warranties of such Purchaser contained in any Document or
Closing Certificate or any facts or circumstances constituting such untruth,
inaccuracy or breach or (ii) arising from the breach of any covenant or
agreement of such Purchaser contained in any Document or any facts or
circumstances constituting such breach.
(c) If for any reason the indemnity provided for in this
Section 7.2 is unavailable to any Indemnified Person or is insufficient to hold
each such Indemnified Person harmless from all such Losses arising with respect
to the transactions contemplated by this Agreement, then the Indemnifying
Persons shall contribute to the amount paid or payable for such Losses in such
proportion as is appropriate to reflect not only the relative benefits received
by the Indemnifying Persons on the one hand and such Indemnified Person on the
other but also the relative fault of the Indemnifying Persons and the
Indemnified Person as well as any other relevant equitable considerations. In
addition, the Indemnifying Persons shall reimburse any Indemnified Person upon
demand for all reasonable expenses (including reasonable fees of legal counsel)
incurred by such Indemnified Person in connection with investigating, preparing
for or defending any such action or claim. The indemnity, contribution and
expenses reimbursement obligations that the Indemnifying Persons have under
this Article VII shall be in addition to any Liability that the Indemnifying
Persons may otherwise have. The Indemnifying Persons further agree that the
13
<PAGE> 18
indemnification and reimbursement commitments set forth in this Agreement shall
apply whether or not the Indemnified Person is a formal party to any such
Claim.
(d) Any indemnification of an Indemnified Person by
Indemnifying Persons pursuant to this Section shall be effected by wire
transfer of immediately available funds from the Indemnifying Persons to an
account designated by the Indemnified Person within 15 days after the
determination thereof.
(e) All indemnification rights hereunder shall survive the
execution and delivery of the Documents and the consummation of the
transactions contemplated herein and therein indefinitely, regardless of any
investigation, inquiry or examination made for or on behalf of, or any
knowledge of the Purchaser and/or any of the other Indemnified Parties or the
acceptance by the Purchaser of any certificate or opinion.
ARTICLE VIII
TRANSFER OF SECURITIES
8.1 RESTRICTION ON TRANSFER.
The Preferred Units shall be restricted from transfer as set forth in
the Amended and Restated Operating Agreement and the Members' Agreement.
8.2 RESTRICTIVE LEGENDS.
Each certificate evidencing the Preferred Units shall be stamped or
otherwise imprinted with a legend as set forth in the Members' Agreement.
ARTICLE IX
ADDITIONAL AGREEMENTS OF THE COMPANY
9.1 FEES.
(a) The Company will pay, and save the Purchasers harmless
against all Liability, whether or not the Closing hereunder occurs, for the
payment of, (i) all costs and other expenses incurred from time to time by the
Company in connection with the Company's performance of and compliance with all
agreements and conditions contained herein on its part to be performed or
complied with (including the reasonable costs and expenses of counsel incurred
in connection with the review and preparation of the Documents), (ii) the
actual and reasonable out-of-pocket costs and expenses incurred by CB Capital
in connection with the transactions contemplated hereby, including reasonable
fees, expenses and charges of O'Sullivan Graev & Karabell, LLP (counsel to CB
Capital), (iii) the reasonable costs and expenses (including fees, expenses and
charges of counsel) incurred by the Purchasers in connection with any amendment
or waiver of, or enforcement of, any Document relating to the transactions
contemplated hereby and (iv) the reasonable costs and expenses incurred by each
Purchaser in any filing with any governmental authority with respect to its
investment in the Company or in any other filing with any governmental
authority with respect to the Company that mentions such Purchaser.
14
<PAGE> 19
(b) The Company further agrees that it will pay, and will save
the Purchasers harmless from, any and all Liability with respect to any stamp
or similar taxes which may be determined to be payable in connection with the
execution and delivery and performance of the Documents or any modification,
amendment or alteration of the terms or provisions of the Documents.
(c) The Company further agrees that it will pay (a) a closing
fee (the "Closing Fee") in the aggregate amount of $1,100,850 and (b) an
application fee (the "Application Fee") in the aggregate amount of $314,150 to
the Purchasers, to be shared by the Purchasers pro rata in accordance with the
number of Preferred Units purchased hereunder. The Company hereby authorizes
each Purchaser to withhold from its aggregate purchase price set forth opposite
its name on Schedule I hereto, its pro rata portion of the applicable fees
payable to it by the Company pursuant to this Section 9.1(c).
9.2 FURTHER ASSURANCES.
The Company shall duly execute and deliver, or cause to be duly
executed and delivered, at its own cost and expense, such further instruments
and documents and to take all such action, in each case as may be necessary or
proper in the reasonable judgment of the Purchasers holding a majority of the
Preferred Units to carry out the provisions and purposes of the Agreement and
the other Documents.
9.3 REMEDIES.
In case any one or more of the representations, warranties, covenants
and/or agreements set forth in this Agreement shall have been breached by the
Company, the Purchasers (or any Purchaser) may proceed to protect and enforce
its or their rights either by suit in equity and/or by action at law, including
an action for damages as a result of any such breach and/or an action for
specific performance of any such covenant or agreement contained in this
Agreement.
9.4 SUCCESSORS AND ASSIGNS.
This Agreement shall bind and inure to the benefit of the Company and
the Purchasers and their respective successors and assigns. Upon any transfer
of any Preferred Units, as a condition to transfer the transferee shall agree
to be bound by, and entitled to the benefits of, this Agreement with respect to
such transferred Preferred Units in the same manner as the transferring
Purchaser.
9.5 ENTIRE AGREEMENT.
This Agreement and the other writings referred to herein or delivered
pursuant hereto which form a part hereof contain the entire agreement among the
parties with respect to the subject matter hereof and thereof and supersede all
prior and contemporaneous arrangements or understandings with respect thereto.
15
<PAGE> 20
9.6 NOTICES.
All notices and other communications delivered hereunder (whether or
not required to be delivered hereunder) shall be deemed to be sufficient and
duly given if contained in a written instrument (a) personally delivered, (b)
sent by telecopier, (c) sent by nationally-recognized overnight courier
guaranteeing next Business Day delivery or (d) sent by first class registered
or certified mail, postage prepaid, return receipt requested, in each case
addressed as follows:
if to the Company, to:
DonJoy, L.L.C.
2985 Scott St.
Vista, CA 92083
Telephone: (760) 727-1280
Telecopier: (760) 734-3536
Attention: Mr. Leslie H. Cross
Chief Executive Officer
16
<PAGE> 21
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
Telephone: (212) 408-2400
Telecopier: (212) 728-5950
Attention: John J. Suydam, Esq.
if to CB Capital, to its address set forth on Schedule I attached hereto;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
Telephone: (212) 408-2400
Telecopier: (212) 728-5950
Attention: John J. Suydam, Esq.
if to First Union, to its address set forth on Schedule I attached hereto;.
or to such other address as the party to whom such notice or other
communication is to be given may have furnished to each other party in writing
in accordance herewith. Any such notice or communication shall be deemed to
have been received (i) when delivered, if personally delivered, (ii) when sent,
if sent by telecopy on a Business Day (or, if not sent on a Business Day, on
the next Business Day after the date sent by telecopy), (iii) on the next
Business Day after dispatch, if sent by nationally recognized, overnight
courier guaranteeing next Business Day delivery, and (iv) on the fifth Business
Day following the date on which the piece of mail containing such communication
is posted, if sent by mail.
9.7 AMENDMENTS, MODIFICATIONS AND WAIVERS.
The terms and provisions of this Agreement may not be modified or
amended, nor may any of the provisions hereof be waived, temporarily or
permanently, except pursuant to a written instrument executed by the Company
and the holders of a majority of the Preferred Units; provided however that any
such amendment, modification or waiver that would adversely affect the rights
hereunder of any Purchaser, in its capacity as a Purchaser, without similarly
affecting the rights hereunder of all Purchasers, in their capacities as
Purchasers, shall not be effective as to such Purchaser without its prior
written consent. No waiver by any party shall operate or be construed as a
waiver of any subsequent breach by any other party.
9.8 GOVERNING LAW; WAIVER OF JURY TRIAL.
(a) All questions concerning the construction, interpretation
and validity of the Documents shall be governed by and construed and enforced
in accordance with the domestic laws of the State of Delaware, without giving
effect to any choice or conflict of law provision or rule (whether in the State
of Delaware or any other jurisdiction) that would cause the application
17
<PAGE> 22
of the laws of any jurisdiction other than the State of Delaware. In
furtherance of the foregoing, the internal law of the State of Delaware will
control the interpretation and construction of the Documents, even if under
such jurisdiction's choice of law or conflict of law analysis, the substantive
law of some other jurisdiction would ordinarily or necessarily apply.
(b) BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX
FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY
(RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE
PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR
PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS
AGREEMENT OR ANY DOCUMENTS RELATED HERETO.
(c) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the exclusive
jurisdiction of any court of the State of New York or Federal court of the
United States of America sitting in the State of New York, and any appellate
court from any thereof, in any action or proceeding arising out of or relating
to this Agreement or for recognition or enforcement of any judgment, and each
of the parties hereto hereby irrevocably and unconditionally agrees that all
claims in respect of any such action or proceeding may be heard and determined
in any such court of the State of New York or, to the extent permitted by law,
in such Federal court. Each of the parties hereto agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided by
law.
(d) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any court
of the State of New York or Federal court. Each of the parties hereto
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
9.9 NO THIRD PARTY RELIANCE.
Anything contained herein to the contrary notwithstanding, the
representations and warranties of the Company contained in this Agreement (a)
are being given by the Company as an inducement to the Purchasers to enter into
this Agreement and the other Documents (and the Company acknowledges that the
Purchasers have expressly relied thereon) and (b) are solely for the benefit of
the Purchasers and their permitted assigns. Accordingly, no third party
(including, without limitation, any other holder of any equity interest of the
Company) or anyone acting on behalf of any thereof other than the Purchasers
and their permitted assigns, and each of them, shall be a third party or other
beneficiary of such representations and warranties and no such third party
shall have any rights of contribution against the Purchasers or the Company
with respect to such representations or warranties or any matter subject to or
resulting in indemnification under this Agreement or otherwise.
18
<PAGE> 23
9.10 SEVERABILITY.
It is the desire and intent of the parties that the provisions of this
Agreement be enforced to the fullest extent permissible under the law and
public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, in the event that any provision of this Agreement would be held in
any jurisdiction to be invalid, prohibited or unenforceable for any reason,
such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn
so as not be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
9.11 INDEPENDENCE OF AGREEMENTS, COVENANTS, REPRESENTATIONS AND WARRANTIES.
All agreements and covenants hereunder shall be given independent
effect so that if a certain action or condition constitutes a default under a
certain agreement or covenant, the fact that such action or condition is
permitted by another agreement or covenant shall not affect the occurrence of
such default, unless expressly permitted under an exception to such initial
covenant. In addition, all representations and warranties hereunder shall be
given independent effect so that if a particular representation or warranty
proves to be incorrect or is breached, the fact that another representation or
warranty concerning the same or similar subject matter is correct or is not
breached will not affect the incorrectness of or a breach of a representation
and warranty hereunder.
9.12 COUNTERPARTS; FACSIMILE SIGNATURES.
This Agreement may be executed in any number of counterparts, and each
such counterpart hereof shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement. Facsimile
counterpart signatures to this Agreement shall be acceptable and binding.
* * * *
19
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have executed this
Preferred Unit Purchase Agreement as of the date first above written.
COMPANY:
DONJOY, L.L.C.
By: /s/ Cyril Talbot III
--------------------
Name: Cyril Talbot III
Title: Vice President- Finance, Chief
Financial Officer and Secretary
PURCHASERS:
CB CAPITAL INVESTORS, L.P.
By: CB Capital Investors, Inc.,
its General Partner
By: /s/ Mitchell Blutt
---------------------
Name: Mitchell Blutt, M.D.
Title: Vice President
<PAGE> 25
FIRST UNION INVESTORS, INC.
By: /s/ Neal Morrison
----------------------
Name: Neal Morrison
Title: Sr. Vice President
[Signature Page to Preferred Unit Purchase Agreement]
<PAGE> 26
SCHEDULE I
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF UNITS TOTAL PRICE
- -------------------------------------------------------------------------
<S> <C> <C>
CB CAPITAL INVESTORS, L.P. 27,124 $21,204,968.64
c/o Chase Capital Partners
380 Madison Avenue,
12th Floor
New York, NY 10017
Attention: Eric Green
Tel: (212) 622-3100
Fax: (212) 622-3101
- -------------------------------------------------------------------------
FIRST UNION INVESTORS, INC. 13,060 $10,210,031.36
One First Union Center
Charlotte, NC 28288
Attention: Eric Eubank
Tel: (704)
Fax: (704)
- -------------------------------------------------------------------------
TOTAL 40,184 $31,415,000
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.10
EXECUTION COPY
MEMBERS' AGREEMENT dated as
of June 30, 1999, among DONJOY, L.L.C., a
Delaware limited liability company (the
"Company"), and the Members that are parties
hereto.
WHEREAS, each Member deems it to be in the best interest of the
Company and the Members that provision be made for the continuity and stability
of the business and policies of the Company, and, to that end, the Company and
the Members hereby set forth herein their agreement with respect to the Member
Units owned by them.
NOW, THEREFORE, in consideration of the premises and of the mutual
consents and obligations hereinafter set forth, the parties hereto hereby agree
as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following
respective meanings:
"AFFILIATE" shall mean with respect to any Person, any other
Person, directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with such Person. The term "control" means
and includes the possession, directly or indirectly, of the power to direct the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"BOARD" shall mean the Board of Managers of the Company.
"CHASE" shall mean Chase DJ Partners, LLC.
"COMMISSION" shall mean the Securities and Exchange Commission or
any other Federal agency at the time administering the Securities Act.
"COMMON UNIT" shall mean one Common Unit as defined in the
Operating Agreement.
"FAIR VALUE PER UNIT" shall mean, as of any date of determination,
the fair value of each Unit (or, with respect to a warrant or option, the fair
value of each Unit obtainable upon exercise thereof net of the exercise price),
determined as follows: At any time that the Fair Value Per Unit shall be
required to be determined hereunder, the Board shall make a good faith
determination (the "Board's Determination") of the fair value of each Unit
within 30 days of the delivery by the Company of a Repurchase Notice (without
taking into account that the Units may be "restricted securities" but with a
reasonable discount (not to exceed 20%) for the minority position represented by
the Units and shall provide to the Member with respect to whose Unit such
determination is being made a written notice thereof which notice shall set
forth supporting data in respect of such calculation (the "Determination
Notice"). The Member shall have 10 days following receipt of the Determination
Notice within which to deliver to the Company a written notice (the "Objection
Notice") of an objection, if any, to the Board's Determination, which Objection
Notice shall set forth the Member's good faith determination (the "Member's
<PAGE> 2
Determination") of the fair value of each Unit. The failure by the Member to
deliver the Objection Notice within such 10-day period shall constitute the
Member's acceptance of the Board's Determination as conclusive. In the event of
the timely delivery of an Objection Notice, the Company and the Member shall
attempt in good faith to arrive at an agreement with respect to the Fair Value
Per Unit, which agreement shall be set forth in writing within 15 days following
delivery of the Objection Notice. If the Company and the Member are unable to
reach an agreement within such 15-day period, the matter shall be promptly
referred for determination to a regionally or nationally recognized investment
banking or valuation firm (the "Valuer") reasonably acceptable to the Company
and the Member. The Company and the Member will cooperate with each other in
good faith to select such Valuer. The Valuer may select the Board's
Determination or the Member's Determination as the Fair Value Per Unit or may
select any other number or value (determined without taking into account that
the Units may be "restricted securities" but with a reasonable discount, not to
exceed 20% for the minority position represented by the Units). The Valuer's
selection will be furnished to the Company and the Member in writing and
conclusive and binding upon the Company and the Member. The fees and expenses of
the Valuer shall be borne equally by the Company and the Member with respect to
whose Units such determination relates; provided, however, that if the Fair
Value Per Unit, as determined by the Valuer, shall be more than 15% greater than
the Board's Determination of such Fair Value Per Unit, then such fees and
expenses of the Valuer shall be borne entirely by the Company.
"GROUP" shall mean:
(a) in the case of any Member who is an individual, (i) such
Member, (ii) the siblings, spouse, lineal descendants, adopted children, parents
and grandparents of such Member, (iii) any trust for the benefit of any of the
foregoing and (iv) any entity whose ownership and management is controlled by
such Member;
(b) in the case of any Member which is a partnership, (i) such
partnership and any of its limited or general partners, (ii) any corporation or
other business organization to which such partnership shall sell all or
substantially all of its assets or with which it shall be merged and (iii) any
Affiliate of such partnership;
(c) in the case of any Member which is a corporation, (i) such
corporation and (ii) any controlling stockholder of such corporation; and
(d) in the case of any Member which is a limited liability
company, (i) such limited liability company and any of its members, (ii) any
corporation or other business organization to which such limited liability
company shall sell all or substantially all of its assets or with which it shall
be merged and (iii) any Affiliate of such limited liability company.
"MAJORITY IN INTEREST OF NON-CHASE MEMBERS" shall mean, at any
point in time, Non-Chase Members owning, in the aggregate, more than 50% of the
Member Units owned by all Non-Chase Members at such time.
"MANAGEMENT MEMBERS" shall mean the Persons listed under the
caption "Management Members" on Annex I attached hereto and any successor to, or
assignee or transferee of, any such Management Member who shall agree in writing
to be treated as a Management Member and to be bound by the terms and to comply
with the provisions of this
-2-
<PAGE> 3
Agreement, including any member of the Group of such Management Members who
shall agree in writing to be treated as a Management Members and to be bound by
the terms of and to comply with the provisions of this Agreement.
"MEMBER UNITS" means any Units held, from time to time, by any
Member and any Units issued upon exercise of options or warrants for Units.
"MEMBERS" shall mean Chase, the Management Members and the
Non-Chase Members.
"NON-CHASE MEMBERS" shall mean all Members listed on Annex I
hereto (as amended from time to time) as Non-Chase Members.
"OPERATING AGREEMENT" means the Amended and Restated Operating
Agreement of the Company, dated the date hereof, as amended from time to time.
"OTHER UNITS" shall mean at any time those Units that do not
constitute Primary Units or Registrable Units.
"PAID PREFERRED UNITS" shall have the meaning ascribed to such
term in the Operating Agreement.
"PERSON" shall be construed broadly and shall include an
individual, a partnership, a corporation, an association, a joint stock company,
a limited liability company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.
"PRIMARY UNITS" shall mean at any time the authorized but unissued
Units.
"PREFERRED UNIT" shall mean one Preferred Unit as defined in the
Operating Agreement.
"PROPORTIONATE PERCENTAGE" shall mean (1) for the purposes of
Section 2, the pro rata percentage of the number of Member Units to which a
Section 2 Offer relates that each Non-Chase Member shall be entitled to Transfer
to the Section 2 Offeror, which pro rata percentage, as to each Non-Chase
Member, shall be the percentage figure which expresses the ratio between the
number of Member Units owned by such Non-Chase Member (assuming the conversion
of all convertible securities and the exercise of all exercisable securities to
the extent then convertible or exercisable) and the aggregate number of Units
then outstanding and held by all Members (assuming the conversion of all
convertible securities and the exercise of all exercisable securities to the
extent then convertible or exercisable) and (2) for the purposes of Section 5,
the percentage figure which expresses the ratio between the number of Member
Units owned by the Member exercising its rights under Section 5 (assuming the
conversion of all convertible securities and the exercise of all exercisable
securities to the extent then convertible or exercisable) and the aggregate
number of Units then outstanding and held by all Members (assuming the
conversion of all convertible securities and the exercise of all exercisable
securities to the extent then convertible or exercisable).
-3-
<PAGE> 4
"PUBLIC OFFERING" shall mean an offering of equity securities of
the Company or any Subsidiary (or any successor-in-interest of the foregoing)
which is made pursuant to an effective registration statement under the
Securities Act.
"QUALIFIED PUBLIC OFFERING" shall mean a Public Offering which
results in at least $20,000,000 of net proceeds (after the effect of
underwriting discounts and commissions) to the Company (or in the case of a
Qualified Public Offering of a Subsidiary, to such Subsidiary).
"REGISTRABLE UNITS" shall mean the Units held by the Members that
constitute Restricted Units.
"RELATIVELY EQUIVALENT TERMS", as of any date of determination,
with respect to any Common Unit proposed to be sold, the Relatively Equivalent
Terms for a Preferred Unit shall be the amount proposed to be paid for such
Common Unit plus an amount, if any, equal to the Preferred Liquidation
Preference (as such term is defined in the Operating Agreement) of such
Preferred Unit.
"RESTRICTED UNITS" shall mean all Units and any other securities
which by their terms are exercisable or exchangeable for or convertible into
Units and any securities received in respect thereof, which are held by a Member
and which have not theretofore been sold to the public pursuant to an effective
registration statement under the Securities Act or pursuant to Rule 144
promulgated under the Securities Act or any successor rule thereto or any
complementary rule thereto (such as Rule 144A).
"SALE OF THE COMPANY" shall mean a sale of the Company (or any
Subsidiary) or substantially all of its (or their) assets, whether by way of
merger, consolidation, sale of Units or assets, or otherwise.
"SECURITIES ACT" shall mean the Securities Act of 1933 or any
successor Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect from time to time.
"SUBSIDIARY" means any Person of which the securities or other
ownership interests having at least 50% of the ordinary voting power in electing
the board of directors (or other governing body), at the time as of which any
determination is being made, are owned by the Company either directly or through
one or more of its Subsidiaries.
"TERMINATION OF EMPLOYMENT" shall mean, as to any Management
Member, the termination of the employment by the Company or any of its
Subsidiaries of such Management Member for any reason whatsoever including, but
not limited to, termination by resignation, discharge (with or without cause),
retirement, disability or non-renewal of an employment agreement.
"TERMINATION DATE" shall mean, as to such Management Member, the
effective date of the Termination of Employment of such Management Member.
"TERMINATION FOR CAUSE" shall have the meaning, in the case of any
Management Member, set forth in the employment agreement, if any, of such
Management
-4-
<PAGE> 5
Member, or in the absence of such an employment agreement, shall mean a
Termination of Employment for Cause (as defined herein).
"TERMINATION OF EMPLOYMENT FOR CAUSE" shall mean the Management
Member's (A) failure to perform such duties as are reasonably requested by the
Board as documented in writing to the Management Member, (B) willful disregard
of his duties or failure to act, where such action would be in the ordinary
course of the Management Member's duties, (C) failure to observe all material
Company policies and material policies of all Affiliates of the Company
generally applicable to executives of the Company and/or its Affiliates, (D)
gross negligence or willful misconduct in the performance of his duties, (E)
commission of an act constituting a felony or involving fraud, theft or
dishonesty which is not a felony and which materially adversely affects the
Company and/or its Affiliates or could reasonably be expected to materially
adversely affect the Company or its Affiliates, as applicable, (F) repeated
failure to be reasonably available to perform his duties, which, if curable,
shall not have been cured within 10 business days of written notice thereof from
the Company or its Affiliates, as applicable, (G) repeated failure to follow the
lawful directions of the Board, which, if curable, shall not have been cured
within 10 business days of written notice thereof from the Company or its
Affiliates, as applicable, (H) material breach of any agreement with the Company
or its Affiliates (including the non-compete provisions thereof) which, if
curable, shall not have been cured within 10 business days of written notice
thereof from the Company or its Affiliates, as applicable, (I) resignation or
(J) alcohol or other substance abuse.
"TRANSFER" shall mean, as to any Member Units, to sell, or in any
other way transfer, assign, pledge, distribute, encumber or otherwise dispose of
(including, without limitation, the foreclosure or other acquisition by any
lender with respect to any Member Units pledged to such lender by a Member),
such Member Units, either voluntarily or involuntarily and with or without
consideration.
"UNDERWRITERS' MAXIMUM NUMBER" means, for any registration of
Units under the Securities Act which is an underwritten offering of Units
pursuant to an effective registration statement, that number of Units to which
such registration should, in the opinion of the managing underwriters of such
registration in the light of marketing and other relevant factors (including
pricing), be limited.
"UNITS" has the meaning set forth in the Operating Agreement and
shall also include any equity security of the Company or any successor thereto,
issued in respect of or in exchange for Units, whether by way of dividend or
other distribution, split, recapitalization, merger, rollup transaction,
consolidation or reorganization.
SECTION 2. RIGHT OF CO-SALE.
(a) In the event that, prior to a Qualified Public Offering, Chase
(hereinafter, the "Section 2 Offeree") receives a bona fide offer (the "Section
2 Offer") from a third party which is not an Affiliate of Chase (the "Section 2
Offeror") to purchase Common Units from the Section 2 Offeree, for a specified
price payable in cash or otherwise and on specified terms and conditions that
the Section 2 Offeree intends to accept, the Section 2 Offeree shall promptly
forward a notice (the "Section 2 Notice") complying with Section 2(b) to the
Company and each Non-Chase Member. The Section 2 Offeree shall not Transfer any
Common Units to the Section 2
-5-
<PAGE> 6
Offeror prior to the expiration of the 15-day period referred to below and
unless the terms of the Section 2 Offer are extended to the Non-Chase Members
with respect to their Proportionate Percentages of the aggregate number of Units
to which the Section 2 Offer relates, whereupon each Non-Chase Member shall be
entitled to Transfer to the Section 2 Offeror pursuant to the Section 2 Offer
such Non-Chase Member's Proportionate Percentage of the aggregate number of
Units to which the Section 2 Offer relates. Each Non-Chase Member shall have a
period of 15 days after receipt of the Section 2 Notice to deliver a written
notice (the "Section 2 Acceptance") to the Section 2 Offeree evidencing such
Non-Chase Member's acceptance of the Section 2 Offer and setting forth the
number and type (e.g., Preferred Unit, Paid Preferred Unit or Common Unit) of
Member Units such Non-Chase Member desires to include. If an Acceptance Notice
is not received from a Non-Chase Member within such 15 day period, then such
Non-Chase Member shall be deemed to have declined such Section 2 Offer.
(b) The Section 2 Notice shall set forth (i) the number of Common
Units to which the Section 2 Offer relates and the name of the Section 2
Offeree, (ii) the name and address of the Section 2 Offeror, (iii) the proposed
amount and type of consideration (including, if the consideration consists in
whole or in part of non-cash consideration, such information available to the
Section 2 Offeree as may be reasonably necessary for the Non-Chase Members to
properly analyze the economic value and investment risk of such non-cash
consideration) and the terms and conditions of payment offered by the Section 2
Offeror and (iv) that the Section 2 Offeror has been informed of the co-sale
rights provided for in this Section 2 and has agreed to purchase Member Units in
accordance with the terms of this Section 2 (which agreement may contain the
Section 2 Offeror's obligation to purchase all of the Common Units subject to
the Section 2 Offer from the Section 2 Offeree so long as such Section 2 Offeree
agrees to purchase simultaneously with such sale from any Non-Chase Member
delivering a Section 2 Acceptance the Member Units subject to such Section 2
Acceptance).
(c) Any Member Units included in any Section 2 Acceptance that are
Common Units shall be transferred upon the terms and conditions set forth in the
Section 2 Notice. Any Member Units included in any Section 2 Acceptance that are
Preferred Units shall be transferred upon the same conditions and upon
Relatively Equivalent Terms as those set forth in the Section 2 Notice. If none
of the Non-Chase Members gives the Section 2 Offeree a timely Section 2
Acceptance with respect to the Transfer proposed in the Section 2 Notice, the
Section 2 Offeree may Transfer the Common Units specified in the Section 2
Notice for a period of 90 days after expiration of the time period during which
the Non-Chase Members may exercise their rights under this Section 2, on the
terms and conditions set forth in the Section 2 Notice. If one or more Non-Chase
Members give the Section 2 Offeree a timely Section 2 Acceptance, then the
Section 2 Offeree shall use all reasonable efforts to cause the prospective
transferees to agree to acquire all of the Member Units that are identified in
the Section 2 Acceptances that have been timely given to the Section 2 Offeree,
upon the same purchase price and other terms and conditions (or, if applicable,
upon the same conditions and upon Relatively Equivalent Terms) as set forth in
the Section 2 Notice.
(d) If the prospective transferees specified in the Section 2
Notice are unwilling or unable to acquire all of the Member Units that are
identified in the Section 2 Acceptances that have been timely given, the Section
2 Offeree may then elect either to (A) cancel the proposed Transfer or (B)
allocate to itself and to each Non-Chase Member which or who has given a timely
Section 2 Acceptance such Member's Proportionate Percentage of the aggregate
number
-6-
<PAGE> 7
of Member Units that the prospective transferees are willing to purchase
taking into account the types of Member Units held by each Member.
(e) Notwithstanding the provisions of this Section 2, during the
term of this Agreement Chase may Transfer up to an aggregate of 20% of the total
number of Common Units owned by Chase on the date hereof appropriately adjusted
for any Unit split or dividend or other recapitalization without complying with
the provisions of this Section 2.
(f) Sales under this Section 2 shall be subject to any applicable
transfer restrictions under the Operating Agreement.
SECTION 3. REQUIRED SALE; ROLLUP.
(a) In the event that, prior to a Qualified Public Offering, Chase
approves a Sale of the Company to a Person which is not an Affiliate of Chase
(an "Approved Sale"), all Non-Chase Members and Management Members shall consent
to and raise no objections against the Approved Sale, and if the Approved Sale
is structured as (i) a merger or consolidation of the Company, or a sale of all
or substantially all of the Company's assets, each Non-Chase Member and
Management Member shall, and hereby agree to, waive any dissenters rights,
appraisal rights or similar rights in connection with such merger, consolidation
or asset sale, or (ii) a sale of Units, the Non-Chase Members and Management
Members shall, and hereby agree to, agree to sell their Member Units on the
terms and conditions approved by Chase and in each such instance shall, and
hereby agree to, waive any claims any Non-Chase Member or Management Member may
have against the Board in connection with the Approved Sale. The Non-Chase
Members and Management Members shall take all necessary and desirable actions
approved by Chase, in connection with the consummation of the Approved Sale,
including the execution of such agreements and such instruments and other
actions reasonably necessary to (1) provide the representations, warranties,
indemnities, covenants, conditions, escrow agreements and other provisions and
agreements relating to such Approved Sale and (2) effectuate the allocation and
distribution of the aggregate consideration upon the Approved Sale as set forth
below.
(b) The obligations of the Non-Chase Members pursuant to this
Section 3 are subject to the satisfaction of the following conditions:
(i) subject to Section 3(b)(iii), upon the consummation of
the Approved Sale (or as promptly thereafter as practical in the case of
certain options to purchase Units pursuant to outstanding Tier II IRR
Vesting Option Agreements and Tier III IRR Vesting Option Agreements, in
each case between the Company and the optionees named therein), all of
the Members shall receive the same proportion of the aggregate
consideration from such Approved Sale that such holder would have
received if such aggregate consideration had been distributed by the
Company in complete liquidation pursuant to the rights and preferences
set forth in the Operating Agreement as in effect immediately prior to
such Approved Sale (giving effect to applicable orders of priority and
the exercise price of all warrants and options);
(ii) if any Members are given an option as to the form and
amount of consideration to be received, all Members will be given the
same option; provided, however, that holders of the Preferred Units
(other than Paid Preferred Units) shall not be
-7-
<PAGE> 8
required to accept any consideration that does not consist solely of cash
or marketable securities;
(iii) all holders of then-currently exercisable Unit
equivalents (including, without limitation, options and warrants
exercisable for Units) will be given an opportunity to either (A)
exercise such rights prior to the consummation of the Approved Sale (but
only to the extent such Unit equivalents are then vested or will become
vested as a result of the Approved Sale) and participate in such sale as
Members or (B) upon the consummation of the Approved Sale, receive in
exchange for such Unit equivalents (to the extent such Unit equivalents
are then vested) consideration equal to the amount determined by
multiplying (x) the same amount of consideration per Unit (of the same
class as that for which the Unit equivalent is exercisable) received by
the holders of such class of Unit in connection with the Approved Sale
less the exercise price per Unit equivalent by (y) the number of Unit
equivalents (but only to the extent such Unit equivalents are then
vested);
(iv) no Member shall be obligated to make any out-of-pocket
expenditure prior to the consummation of the Approved Sale and no Member
shall be obligated to pay more than his pro rata share (based upon the
number of Units held by each such Member) of reasonable expenses incurred
in connection with a consummated Approved Sale to the extent such costs
are incurred for the benefit of all Members and are not otherwise paid by
the Company or the acquiring party (costs incurred by or on behalf of a
Member for its or his sole benefit will not be considered costs of the
transaction hereunder), provided that a Member's liability for such
expenses shall be capped at the total purchase price received by such
Member for his Member Units (including the exercise price thereof, in the
case of options and warrants); provided that in calculating total
purchase price under this Section 3(b)(iv) the amount of any Preferred
Liquidation Preference (as defined in the Operating Agreement) for such
Member's Preferred Units shall be deducted from the total purchase price
received by such Member (but such deduction shall not cause such total
purchase price to be less than $0);
(v) in the event that the Members are required to provide
any representations or indemnities in connection with the Approved Sale
(other than representations and indemnities, on a several basis,
concerning each Member's valid ownership of his Member Units, free of all
liens and encumbrances (other than those arising under applicable
securities laws), and each Member's authority, power, and right to enter
into and consummate such purchase or merger agreement without violating
any other agreement and without needing any third party consent), then
each Member shall not be liable for more than his pro rata share (based
upon the amount of consideration received) of any liability for
misrepresentation or indemnity and such liability shall not exceed the
total purchase price received by such Member for his Member Units
(including the exercise price thereof, in the case of options and
warrants); provided that in calculating total purchase price under this
Section 3(b)(v) the amount of any Preferred Liquidation Preference (as
defined in the Operating Agreement) for such Member's Preferred Units
shall be deducted from the total purchase price received by such Member
(but such deduction shall not cause such total purchase price to be less
than $0); and
(vi) prior notice of an Approved Sale shall be provided to
the Members.
-8-
<PAGE> 9
(c) In the event that the Board shall determine that (i) it shall
facilitate a public offering of securities of the Company, (ii) it shall
facilitate compliance with this Agreement, or (iii) it is desirable or helpful
for the business of the Company, or in the best interests of the Company, for
the business of the Company to be conducted in a corporate rather than in a
limited liability company form, the Board shall have the power, without any vote
or consent of the holders of Units, to incorporate the Company or take such
other action as it may deem advisable in light of such changed conditions,
including, without limitation, (A) dissolving the Company, creating one or more
Subsidiaries of the newly formed corporation and transferring to such
Subsidiaries any or all of the assets of the Company or (B) causing the Members
to exchange their Units for shares of the newly formed corporation (which the
Company shall endeavor to effect in a manner that will not cause a taxable event
to the Members). In connection with any such incorporation of the Company, the
Members shall receive, in exchange for their respective Units, shares of capital
stock of such corporation or its subsidiaries having the same relative economic
interest and other rights and obligations in such corporation or its
subsidiaries as is set forth in this Agreement and the Operating Agreement,
subject to any modifications (as determined by the Board in its sole discretion)
required solely as a result of the conversion to corporation form. At the time
of such conversion, the Members shall, and hereby agree to, enter into a
shareholders agreement providing for (i) the restrictions on transfer set forth
in this Agreement; provided that such restrictions shall not apply to sales in
broadly disseminated public offerings or sales in accordance with Rule 144 under
the Securities Act and (ii) an agreement to vote all shares of capital stock
held by them to elect to the Board of Directors of the new corporation in
accordance with Section 8. Prior to taking any action to incorporate the
Company, the Board shall approve the proposed forms of a certificate of
incorporation, by-laws, stockholders' agreement and any other governing
documents proposed to be established for such corporation and its Subsidiaries,
if any.
SECTION 4. REPURCHASE OF UNITS.
(a) In the event of a Termination of Employment of any Management
Member (a "Terminated Member"), the Company or its designee shall have the right
(but not the obligation) to repurchase from such Management Member (and each
member of the Group of such Management Member) all or any part of any Units
owned by such Management Member and member of such Group, including warrants and
options not then expired.
(b) The repurchase right of the Company or its designee under this
Section 4 may be exercised by written notice on one occasion (a "Repurchase
Notice"), specifying the number of Units to be repurchased, and given to the
Terminated Member within 90 days of the Termination Date (or, if the Company
shall not have assigned its rights under this Section 4 and shall be legally
prevented (whether by contract or statutorily) from making such repurchase
during the foregoing 90-day period, then such Repurchase Notice may be delivered
by the Company within 45 days after the date on which it shall be legally
permitted to make such repurchase), but in no event shall the Company be
permitted to make such election after the second anniversary of the Termination
Date. Upon the delivery of a Repurchase Notice to the Terminated Member, the
Terminated Member and each member of such Terminated Member's Group shall be
obligated to sell or cause to be sold to the Company or its designee the Units
specified in such Repurchase Notice.
(c) The price per Unit to be paid under this Section 4 and the
form of payment therefor shall be determined as follows:
-9-
<PAGE> 10
(i) in the case of a repurchase of Units following a
Termination for Cause, the repurchase price to be paid for such Units or
warrants or options to acquire Units shall be the cost paid for such
Units, and such repurchase consideration shall be payable in cash; and
(ii) in the case of any other repurchase of Units or
warrants or options to acquire Units, such repurchase price shall be the
Fair Value Per Unit (net of any exercise price, in the case of options
and warrants) as of the Termination Date (or in the event that the
Company shall elect to repurchase any Units on or after the first
anniversary of the Termination Date because it shall have been legally
prevented (whether by contract or statutorily) from making such
repurchase at an earlier date, then the determination of Fair Value Per
Unit shall be made as of such date on which the Company makes its
repurchase election under this Section 4, which purchase price shall be
paid in cash or, at the election of the Company, 50% in cash and 50% in
the form of a subordinated promissory note that (1) matures ratably on a
quarterly basis over a three-year period, (2) is subordinated in right of
payment and exercise of remedies to all other funded indebtedness of the
Company and (3) bears interest at the rate of 10% per annum.
(iii) Repurchases of Units under the terms of this Section 4
shall be made at the offices of the Company or its designee on a mutually
satisfactory business day within 30 days after the final determination of
the repurchase price as described above. Delivery of certificates or
other instruments evidencing such Units duly endorsed for transfer and
free and clear of all liens, claims and other encumbrances shall be made
on such date against payment of the purchase price therefor.
SECTION 5. PREEMPTIVE RIGHT TO PURCHASE EQUITY SECURITIES; PURCHASE
PRICE.
(a) Prior to issuing to Chase any Units or any options or
convertible securities exercisable for or convertible into Units of the Company
(collectively, "Equity Securities"), the Company will first give to the
Non-Chase Members the right to purchase, on the same terms, conditions and
timing as Chase, their Proportionate Percentage of the securities proposed to be
sold by the Company. Any such right to purchase shall be exercisable for a
period of 10 days after the Non-Chase Members receive written notice of a
proposed issuance of Equity Securities. The obligations of the Company under
this Section 5 shall terminate upon the consummation of a Qualified Public
Offering.
(b) The price per Equity Security to be paid by Chase for any
Equity Security issued to Chase by the Company shall be the fair value of such
Equity Security as of the date of such issuance as determined in good faith by
the Board.
SECTION 6. RIGHT OF FIRST REFUSAL.
A Non-Chase Member or Management Member shall not Transfer any
Common Units other than in accordance with Section 2, 3 or 4 of this Agreement,
except in accordance with the applicable procedures in this Section 6 and
Article VII of the Operating Agreement and any other applicable provisions
thereof.
(a) In the event a Non-Chase Member or Management Member receives
an offer from a third Person to acquire any Common Units held by such Non-Chase
Member or
-10-
<PAGE> 11
Management Member and such Member intends to accept such offer and effect such
proposed Transfer to such third Person (and obtain any prior written consent
which may be required pursuant to Section 7 hereof in order to effect such
proposed Transfer), the Non-Chase Member or Management Member shall first
deliver to the Company and Chase a written notice (the "Section 6 Offer
Notice"), which shall be irrevocable for a period of 30 days after delivery
thereof, offering (the "Section 6 Offer") all of the Common Units proposed to be
Transferred by the Non-Chase Member or Management Member at the same purchase
price and on the same terms specified in such offer from the third Person (such
Section 6 Offer Notice shall include the foregoing information and all other
relevant terms of the proposed Transfer). The Company shall have the right and
option, for a period of 15 days after receipt of a Section 6 Offer Notice to
purchase all or any portion of the Units so offered, and if the Company declines
to accept any or all of such Common Units, Chase shall have the right and
option, for a period of 15 days, to accept all or any remaining portion of the
Common Units so offered at the purchase price and on the terms stated in the
Section 6 Offer Notice. Such acceptance shall be made by delivering a written
notice to the Company and all Members within said 15 or 30 day period (as
applicable).
(b) A notice of acceptance delivered by the Company or Chase
pursuant to Section 6 shall be a binding commitment to purchase the Common Units
referred to therein.
(c) Transfers of Common Units under the terms of Section 6 shall
be made at the offices of the Company on a mutually satisfactory business day
within 30 days after the expiration of the last applicable period described in
Section 6. Delivery of certificates or other instruments evidencing such Common
Units duly endorsed for Transfer shall be made on such date against payment of
the purchase price therefor.
(d) If effective acceptance shall not be received pursuant to
Section 6 with respect to all Common Units offered for sale pursuant to the
Section 6 Offer Notice, then the Non-Chase Members or Management Members may
Transfer all or any part of the Common Units so offered and not so accepted at a
price not less than the price, and on terms not more favorable to the purchaser
thereof than upon the terms, stated in the Section 6 Offer Notice at any time
within 30 days after the expiration of the offers required by Section 6. In the
event that the Common Units are not Transferred by the Non-Chase Members or
Management Members during such 30-day period, the right of the Non-Chase Members
or Management Members to Transfer such Common Units shall expire and the
obligations of this Section 6 shall be reinstated.
(e) Anything contained herein to the contrary notwithstanding, any
purchaser of Common Units pursuant to Section 6 who is not a Member shall, as a
condition to the effectiveness of such purchase, agree to become a party to, and
be bound by and obligated to comply with the terms and provisions of, this
Agreement. Such purchaser shall also agree, if requested by the Company, to be a
party to a confidentiality agreement which is reasonable and customary for an
investment of the type being made by such purchaser in the Company.
(f) The obligations of the Non-Chase Members or Management Members
under this Section 6 shall terminate upon the consummation of a Qualified Public
Offering.
SECTION 7. TRANSFER RESTRICTIONS.
All provisions with respect to transferability of the Units
are set forth in the Operating Agreement.
-11-
<PAGE> 12
SECTION 8. VOTING; BOARD OF MANAGERS.
(a) Any time at which holders of Units shall have the right to, or
shall, vote for managers of the Company, then, and in each event, the Members
shall vote all Units owned by them for the election of a Board consisting of
nine (9) managers (subject, however, to Section 3.4(c) of the Operating
Agreement), as designated from time to time in the following manner:
(i) one Management Member nominated by the Management
Members holding greater than 50% of all Member Units then held by all
Management Members shall be elected to the Board; provided that (i)
Leslie H. Cross shall be appointed to the Board as the initial nominee of
the Management Members, and (ii) such nominee Management Member shall be
a member of the Board for only so long as he is both an employee and a
holder of Member Units;
(ii) six individuals nominated by Chase shall be elected to
the Board (the "Chase Nominees"); such Chase Nominees shall initially be
Charles T. Orsatti, Mitchell J. Blutt, M.D., Shahan D. Soghikian, Jonas
L. Steinman, Damion E. Wicker, M.D., and John J. Daileader; and
(iii) two individuals with industry expertise shall be
nominated by agreement among the other members of the Board and shall be
elected to the Board.
(b) While any Preferred Unit has Unreturned Original Cost and
during the continuance of an Event of Non-Compliance, the holders of Preferred
Units (other than Paid Preferred Units), shall have the right to appoint two (2)
additional managers to the Board in accordance with the provisions of the Bylaws
of the Company. All terms used in this Section 8(b) not otherwise defined herein
shall have the meanings ascribed to them in the Operating Agreement.
(c) Voting of the Board shall be conducted in accordance with the
Bylaws of the Company, including, without limitation, the super-voting rights
granted to one of the Chase Nominees in Section 2.12 of the Bylaws of the
Company, which super-voting right allows such Chase Nominee to cast six votes on
each matter on which the managers are entitled to vote; such super-voting
manager shall initially be Charles T. Orsatti.
(d) The voting rights of this Section 8 shall not supersede, and
shall be subject to, the restrictions and other limitations of First Union
Investors, Inc.'s (including the successors and assigns of its Units) voting
rights as set forth in Section 5.3 and 5.4 of the Operating Agreement.
SECTION 9. DEMAND REGISTRATION.
(a) Request for Demand Registration.
(i) Subject to the limitations contained in the following
paragraphs of this Section 9, Chase may, at any time and from time to
time, give to the Company, pursuant to this subparagraph (i), a written
request for the registration by the Company under the Securities Act of
all or any part of the Registrable Units owned by it (such registration
being herein called a "Demand Registration"). Within ten (10) days after
the receipt by
-12-
<PAGE> 13
the Company of any such written request, the Company will give written
notice of such registration request to all holders of Registrable Units.
(ii) Subject to the limitations contained in the following
paragraphs of this Section 9, after the receipt of such written request
for a Demand Registration, (A) the Company will be required to include in
such Demand Registration all Registrable Units with respect to which the
Company shall receive from holders of Registrable Units, within thirty
(30) days after the date on which the Company shall have given to all
holders a written notice of registration request pursuant to Section
9(a)(i) hereof, the written requests of such holders for inclusion in
such Demand Registration, and (B) the Company will use its best efforts
in good faith to effect promptly the registration of all such Registrable
Units. All written requests made by Holders of Registrable Units pursuant
to this subparagraph (ii) will specify the number of Registrable Units to
be registered and will specify the intended method of disposition
thereof.
(b) Limitations on Demand Registration.
(i) Chase will not be entitled to require the Company to
effect more than three (3) Demand Registrations on Form S-1 (or other
comparable form adopted by the Commission). Chase will not be entitled to
require the Company to effect (A) any Demand Registration on Form S-1 (or
other comparable form adopted by the Commission) unless Form S-3 (or any
comparable form adopted by the Commission) is not available for such
Demand Registration, or (B) any Demand Registration if the aggregate
number of Registrable Units requested to be registered pursuant to such
Demand Registration is less than five percent (5%) of the number of Units
then outstanding (on a fully-diluted basis).
(ii) Any registration initiated by Chase pursuant to
Section 9(a) hereof shall not count as a Demand Registration for purposes
of Section 9(b)(i) hereof (A) unless and until such registration shall
have become effective and all of such Units requested by Chase or all of
such lesser number of Units as consented to by Chase to be included in
such registration shall have been actually sold.
(c) Priority on Demand Registration. If the managing underwriters
in any underwritten offering pursuant to a Demand Registration shall give
written advice to the Company and Chase of an Underwriters' Maximum Number,
then: (i) the Company will be obligated and required to include in such
registration that number of such Registrable Units requested by Chase to be
included in such registration which does not exceed the Underwriters' Maximum
Number; (ii) if the Underwriters' Maximum Number exceeds the number of
Registrable Units requested by Chase to be included in such registration, then
the Company will be obligated and required to include in such registration that
number of other holders' Registrable Units requested by the holders thereof
pursuant to Section 9(a)(ii) to be included in such registration and which does
not exceed such excess and such Registrable Units shall be allocated pro rata
among the holders thereof on the basis of the number of Registrable Units
requested to be included therein by each such holder, and (iii) if the
Underwriters' Maximum Number exceeds the number of Registrable Units requested
by Chase and such other holders of Registrable Units to be included in such
registration, then the Company may include Primary Units and, if (or to the
extent that) it does not do so, the Company will be required to include in such
registration that number of Other Units requested by the holders thereof to be
included in such registration
-13-
<PAGE> 14
and which does not exceed such excess and such Other Units shall be allocated
pro rata among the holders thereof on the basis of the number of Other Units
requested to be included therein by each such holder. Neither the Company nor
any of its Members (other than Chase) shall be entitled to include any
securities in any underwritten Demand Registration unless the Company or such
Members (as the case may be) shall have agreed in writing to sell such
securities on the same terms and conditions as shall apply to the Registrable
Units held by Chase to be included in such Demand Registration.
(d) Selection of Underwriters. Chase shall determine whether or
not the offering pursuant to such Demand Registration shall be underwritten.
Chase shall select the investment banker(s) and managing underwriter(s) to
administer such offering in a Demand Registration; provided that the selected
underwriters must be reasonably acceptable to the Company.
SECTION 10. REGISTRATIONS ON FORM S-3.
(a) Subject to paragraph (c) below, at and after such time as the
Company shall have qualified for the use of Form S-3 promulgated under the
Securities Act or any successor form thereto, any holder or holders of Preferred
Units shall have the right to request in writing registration on Form S-3, or
such successor form, and to effect a registration under the Securities Act of
Registrable Units in accordance with this Section 10.
(b) If the Company shall be requested by such Members to effect a
registration under the Securities Act of Registrable Units in accordance with
this Section 10, then the Company shall promptly give written notice of such
proposed registration to all other holders of Registrable Units and shall offer
to include in such proposed registration any Registrable Units requested to be
included in such proposed registration by such other holders who respond in
writing to the Company's notice within 30 days after delivery of such notice
(which response shall specify the number of Registrable Units proposed to be
included in such registration). The Company shall promptly use its commercially
reasonable efforts to effect such registration on Form S-3 of the Registrable
Units which the Company has been so requested to register.
(c) The Company shall not be obligated to effect any registration
under the Securities Act requested by the Members under this Section 10 except
in accordance with the following provisions:
(i) the Company shall not be obligated to effect any such
registration initiated pursuant to Section 10(a) if (A) the Company shall
reasonably conclude that the anticipated gross offering price of all
Registrable Units to be included therein would be less than $500,000, (B)
such registration is requested within six (6) months after a registered
offering of the Company in which any of the holders of Preferred Units
were given the opportunity to participate or (C) the Company shall have
effected two or more Registration Statements on Form S-3 pursuant to this
Section 10 during the preceding 12-month period; and
(ii) the Company may delay the filing or effectiveness of
any Registration Statement pursuant to this Section for a period not to
exceed 90 days after the date of a request for registration if the
Company's Board has determined that such registration would have a
material adverse effect upon the Company or its then current business
-14-
<PAGE> 15
plans; provided, however, that the Company may cause such delay only once
during any 360-day period.
SECTION 11. PIGGYBACK REGISTRATION.
Other than with respect to a registration pursuant to Section 9
hereof, if the Company at any time proposes for any reason to register Primary
Units, Registrable Units or Other Units under the Securities Act (other than on
Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms
thereto), it shall promptly give written notice to all holders of outstanding
Registrable Units of its intention so to register the Primary Units, Registrable
Units or Other Units and, upon the written request, given within 30 days after
delivery of any such notice by the Company, of the holders of Registrable Units
(other than the holders of Registrable Units to be included in such offering) to
include in such registration Registrable Units held by such holders (which
request shall specify the number of Registrable Units proposed to be included in
such registration), the Company shall use its best efforts to cause all such
Registrable Units to be included in such registration on the same terms and
conditions as the securities otherwise being sold in such registration;
provided, however, that if the managing underwriter advises the Company that the
inclusion of all such Registrable Units or Other Units proposed to be included
in such registration would interfere with the successful marketing (including
pricing) of Primary Units or Registrable Units initially included such proposed
registration by the Company, then the number of Primary Units, Registrable Units
and Other Units proposed to be included in such registration shall be included
in the following order:
(A) first, the Primary Units;
(B) second, any Registrable Units requested to be included
in such proposed registration at the request of the holders under
Section 10 hereof;
(C) third, any other Registrable Units requested to be
included in such registration by the holders of such Registrable
Units, pro rata based upon the number of such Registrable Units
requested to be included therein by each such holder; and
(D) fourth, any Other Units requested to be included in
such registration by the holders of Other Units, pro rata based
upon the number of Other Units requested to be included therein by
each such holder.
SECTION 12. EXPENSES.
All expenses incurred by the Company in complying with Section 9,
10 or 11, including, without limitation, all registration and filing fees, fees
and expenses of complying with securities and blue sky laws, printing expenses,
fees and expenses of the Company's counsel and accountants and fees and expenses
of the one counsel to the Members, shall be paid by the Company; provided,
however, that all underwriting discounts and selling commissions applicable to
the Registrable Units or Other Units shall not be borne by the Company but shall
be borne by the holders of Registrable Units or Other Units sold by each of
them.
-15-
<PAGE> 16
SECTION 13. INDEMNIFICATION.
In connection with any registration of any Registrable Units under
the Securities Act pursuant to Section 9, 10 or 11, the Company shall indemnify
and hold harmless the holders of Registrable Units, each underwriter, broker or
any other person acting on behalf of the holders of Registrable Units and each
other person, if any, who controls any of the foregoing persons within the
meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several (or actions in respect thereof), to which any of
the foregoing persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the registration statement under which
such Registrable Units were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein or otherwise filed with the
Commission, any amendment or supplement thereto or any document incident to
registration or qualification of any Registrable Units, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading or, with respect to any prospectus, necessary to make the statements
therein in light of the circumstances under which they were made not misleading,
or any violation by the Company of the Securities Act or state securities or
blue sky laws applicable to the Company and relating to action or inaction
required of the Company in connection with such registration or qualification
under such state securities or blue sky laws; and shall reimburse the holders of
Registrable Units, such underwriter, such broker or such other person acting on
behalf of the holders of Registrable Units and each such controlling person for
any legal or other expenses reasonably incurred by any of them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable in any such case
to the extent that any such loss, claim, damage, liability or action arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in said registration statement, preliminary prospectus,
final prospectus, amendment, supplement or document incident to registration or
qualification of any Registrable Units in reliance upon and in conformity with
written information furnished to the Company through an instrument duly executed
by the holders of Registrable Units or underwriter specifically for use in the
preparation thereof.
In connection with any registration of Registrable Units under the
Securities Act pursuant to this Agreement, each holder of Registrable Units
shall indemnify and hold harmless (in the same manner and to the same extent as
set forth in the preceding paragraph of this Section 10) the Company, each
director (within the meaning of the Securities Act) of the Company, each officer
of the Company who shall sign such registration statement, each underwriter,
broker or other person acting on behalf of the holders of Registrable Units and
each person who controls any of the foregoing persons within the meaning of the
Securities Act with respect to any statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained therein or
otherwise filed with the Commission, any amendment or supplement thereto or any
document incident to registration or qualification of any Registrable Units, if
such statement or omission was made in reliance upon and in conformity with
written information furnished to the Company or such underwriter through an
instrument duly executed by such holder of Registrable Units specifically for
use in connection with the preparation of such registration statement,
preliminary prospectus, final prospectus, amendment, supplement or document
pursuant to which such holder of Registrable Units shall sell Registrable Units;
-16-
<PAGE> 17
provided, however, that the maximum amount of liability in respect of such
indemnification shall be limited, in the case of each seller of Registrable
Units, to an amount equal to the net proceeds actually received by such seller
from the sale of Registrable Units effected pursuant to such registration.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs of this Section 13, such indemnified party will, if a claim in
respect thereof is made against an indemnifying party, give written notice to
the latter of the commencement of such action. In case any such action is
brought against an indemnified party, the indemnifying party will be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be responsible for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof; provided, however, that if any indemnified
party shall have reasonably concluded that there may be one or more legal or
equitable defenses available to such indemnified party which are additional to
or conflict with those available to the indemnifying party, or that such claim
or litigation involves or could have an effect upon matters beyond the scope of
the indemnity agreement provided in this Section 12 the indemnifying party shall
not have the right to assume the defense of such action on behalf of such
indemnified party and such indemnifying party shall reimburse such indemnified
party and any person controlling such indemnified party for that portion of the
fees and expenses of any counsel retained by the indemnified party which is
reasonably related to the matters covered by the indemnity agreement provided in
this Section 13.
If the indemnification provided for in this Section 13 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, claim, damage, liability or action referred to herein, then
the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amounts paid or payable by such indemnified
party as a result of such loss, claim, damage, liability or action in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions which resulted in such loss, claim, damage,
liability or action as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
SECTION 14. UNDERWRITING AGREEMENT.
Notwithstanding the provisions of Sections 9, 10, 11, 12 and 13 to
the extent that the holders of Registrable Units shall enter into an
underwriting or similar agreement, which agreement contains provisions covering
one or more issues addressed in such Sections, the provisions contained in such
Sections addressing such issue or issues shall be of no force or effect with
respect to such registration.
-17-
<PAGE> 18
SECTION 15. INFORMATION BY HOLDER.
Each holder of Registrable Units proposing to sell the same
pursuant to a registration to which this Agreement relates shall furnish to the
Company such written information regarding itself and the distribution of
Registrable Units proposed by such holder, as the Company may reasonably request
in writing, and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Agreement.
SECTION 16. LEGEND ON UNIT CERTIFICATES.
Each certificate representing Units shall bear the following
legends:
"THE VOTING OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IN
RESPECT OF MANAGERS AND TRANSFER OF THE SECURITIES REPRESENTED BY
THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A
MEMBERS' AGREEMENT AND AN OPERATING AGREEMENT, EACH DATED AS OF
JUNE 30, 1999, AS AMENDED FROM TIME TO TIME, AMONG THE ISSUER OF
SUCH SECURITIES AND CERTAIN HOLDERS OF THE OUTSTANDING SECURITIES
OF SUCH ISSUER. COPIES OF SUCH AGREEMENTS MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF SUCH ISSUER."
"THIS CERTIFICATE AND THE UNITS REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED, OR ANY
STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT IN
COMPLIANCE THEREWITH."
SECTION 17. ADDITIONAL UNITS; ETC.
In the event additional Units are issued by the Company to a
Member at any time during the term of this Agreement, either directly or upon
the exercise or exchange of securities of the Company exercisable for or
exchangeable into Units, such additional Units shall, as a condition to such
issuance, become subject to the terms and provisions of this Agreement.
SECTION 18. EFFECTIVENESS.
The rights and obligations of each Member under this Agreement
shall terminate as to such Member upon the earlier to occur of (i) the Transfer
of all Member Units owned by such Member, (ii) a sale of all or substantially
all of the equity interests of the Company in a single transaction or (iii) the
consummation of an Approved Sale.
-18-
<PAGE> 19
SECTION 19. SEVERABILITY.
If any provision of this Agreement shall be determined to be
illegal and unenforceable by any court of law, the remaining provisions shall be
severable and enforceable in accordance with their terms.
SECTION 20. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware (without regard to principles
of conflicts of laws).
SECTION 21. SUCCESSORS AND ASSIGNS.
This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, transferees, legal representatives
and heirs; provided, however, that the rights under this Agreement shall not be
assignable by any Member, (i) except in connection with a Transfer pursuant to
Section 2, 3 or 6, (ii) without the consent of Chase, or (iii) except for
transfers permitted by the Operating Agreement.
SECTION 22. NOTICES.
All notices, requests, consents and other communications hereunder
to any party shall be deemed to be sufficient if contained in a written
instrument delivered in person or by telecopy or sent by nationally-recognized
overnight courier or first class registered or certified mail, return receipt
requested, postage prepaid, addressed to such party at the address set forth
below or at such other address as may hereafter be designated in writing by such
party to the other parties:
(a) if to the Company, to:
DonJoy, L.L.C.
2985 Scott Street
Vista, CA 92083
Telecopier: (760) 734-3536
with copies to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 24th Floor
New York, NY 10112
Attention: John J. Suydam, Esq.
Telecopier: (212) 728-5950;
(b) if to the Members, to their respective addresses set forth
on Annex I hereto.
All such notices, requests, consents and other communications shall be deemed to
have been delivered and received (i) in the case of personal delivery or
delivery by telecopy, on the date of such delivery (assuming such date of
delivery is a business day), (ii) in the case of dispatch by
nationally-recognized overnight courier, on the next business day following such
dispatch and (iii) in the case of mailing, on the third business day after the
posting thereof.
-19-
<PAGE> 20
SECTION 23. MODIFICATION.
Except as otherwise provided herein, neither this Agreement nor
any provisions hereof can be modified, changed, discharged or terminated except
by an instrument in writing signed by (i) the Company, (ii) Chase and (iii) a
Majority in Interest of Non-Chase Members; provided, however, that no
modification or amendment shall be effective to reduce the percentage of the
Member Units the consent of the holders of which is required under this Section
22 nor shall any modification or amendment discriminate against any Member
without the consent of such Member; provided further, that, any amendment or
modification that would adversely affect the rights of any Member hereunder, in
its capacity as a Member, without similarly affecting the rights hereunder of
all Members of the same class, shall not be effective as to such Member without
its prior written consent.
SECTION 24. HEADINGS.
The headings of the sections of this Agreement have been inserted
for convenience of reference only and shall not be deemed to be a part of this
Agreement.
SECTION 25. ENTIRE AGREEMENT.
This Agreement and the other writings referred to herein or
therein contain the entire agreement among the parties hereto with respect to
the subject matter hereof and supersede all prior agreements and understandings
with respect thereto. In case of any conflict among this Agreement or any such
writings, the terms of the Operating Agreement shall be dispositive.
SECTION 26. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, and
each such counterpart hereof shall be deemed to be an original instrument, but
all such counterparts together shall constitute but one agreement.
-20-
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have executed this Members'
Agreement on the date first above written.
DONJOY, L.L.C.
By: /s/ Leslie H. Cross
-----------------------------
Name: Leslie H.Cross
Title: President and CEO
CHASE DJ PARTNERS, LLC
By: Fairfield Chase Medical Partners, LLC,
its Managing Member
By: /s/ Charles T. Orsatti
-----------------------------
Name: Charles T. Orsatti
Title:Managing Member
SMITH & NEPHEW DISPOSAL, INC.
By: /s/ Clifford K. Lomax
-----------------------------
Name: Clifford K. Lomax
Title:President
CB CAPITAL INVESTORS, L.P.
By: CB Capital Investors, Inc,
its General Partner
By: /s/ Damion Wicker
-----------------------------
Name: Damion Wicker
Title:General Partner
<PAGE> 22
/s/ Leslie H. Cross
-----------------------------
Leslie H. Cross
/s/ Cyril Talbot III
-----------------------------
Cyril Talbot III
/s/ Michael R. McBrayer
-----------------------------
Michael R. McBrayer
[DonJoy, L.L.C. Members' Agreement]
<PAGE> 23
FIRST UNION INVESTORS, INC.
By: /s/ Neal Morrison
-----------------------------
Name: Neal Morrison
Title: Sr. Vice President
[DonJoy, L.L.C. Members' Agreement]
<PAGE> 24
ANNEX I
Chase
- -----
Chase DJ Partners, LLC
Non-Chase Members
- -----------------
Smith & Nephew, Inc.
CB Capital Investors, L.P. (as holder of Preferred Units)
First Union Investors, Inc. (as holder of Preferred Units)
Management Members
- ------------------
Leslie H. Cross
Cyril Talbot III
Michael R. McBrayer
<PAGE> 1
EXHIBIT 10.11
CONFORMED COPY
================================================================================
CREDIT AGREEMENT
dated as of
June 30, 1999
among
DJ ORTHOPEDICS, LLC
as Borrower
DONJOY, L.L.C.,
as Parent
The Lenders Party Hereto,
FIRST UNION NATIONAL BANK,
as Administrative Agent and Collateral Agent
and
THE CHASE MANHATTAN BANK,
as Syndication Agent, Issuing Bank and Swingline Lender
----------------------
CHASE SECURITIES INC.,
as Arranger and Book Manager
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I Definitions
-----------
SECTION 1.01. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.02. Classification of Loans and Borrowings . . . . . . . . . . . . 28
SECTION 1.03. Terms Generally . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 1.04. Accounting Terms; GAAP . . . . . . . . . . . . . . . . . . . . 28
ARTICLE II The Credits
-----------
SECTION 2.01. Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 2.02. Loans and Borrowings . . . . . . . . . . . . . . . . . . . . . 29
SECTION 2.03. Requests for Borrowings . . . . . . . . . . . . . . . . . . . 29
SECTION 2.04. Swingline Loans . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 2.05. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 2.06. Funding of Borrowings . . . . . . . . . . . . . . . . . . . . 35
SECTION 2.07. Interest Elections . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.08. Termination and Reduction of Commitments . . . . . . . . . . . 37
SECTION 2.09. Repayment of Loans, Evidence of Debt . . . . . . . . . . . . . 38
SECTION 2.10. Amortization of Term Loans . . . . . . . . . . . . . . . . . . 39
SECTION 2.11. Prepayment of Loans . . . . . . . . . . . . . . . . . . . . . 40
SECTION 2.12. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 2.13. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 2.14. Alternate Rate of Interest . . . . . . . . . . . . . . . . . . 43
SECTION 2.15. Increased Costs . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 2.16. Break Funding Payments . . . . . . . . . . . . . . . . . . . . 44
SECTION 2.17. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs . 46
SECTION 2.19. Mitigation Obligations; Replacement of Lenders . . . . . . . . 48
ARTICLE III Representations and Warranties
------------------------------
SECTION 3.01. Organization; Powers . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 3.02. Authorization; Enforceability . . . . . . . . . . . . . . . . 49
SECTION 3.03. Governmental Approvals; No Conflicts . . . . . . . . . . . . . 49
SECTION 3.04. Financial Condition; No Material Adverse Change . . . . . . . 50
SECTION 3.05. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 3.06. Litigation and Environmental Matters . . . . . . . . . . . . . 51
SECTION 3.07. Compliance with Laws and Agreements . . . . . . . . . . . . . 51
SECTION 3.08. Investment and Holding Company Status . . . . . . . . . . . . 51
SECTION 3.09. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 3.10. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 3.11. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 3.12. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 3.13. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 3.14. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 3.15. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 3.16. Security Documents . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 3.17. Federal Reserve Regulations . . . . . . . . . . . . . . . . . 54
SECTION 3.18. Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE IV Conditions
----------
SECTION 4.01. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 4.02. Each Credit Event . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE V Affirmative Covenants
---------------------
SECTION 5.01. Financial Statements and Other Information . . . . . . . . . . 58
SECTION 5.02. Notices of Material Events . . . . . . . . . . . . . . . . . . 60
SECTION 5.03. Information Regarding Collateral . . . . . . . . . . . . . . . 60
SECTION 5.04. Existence; Conduct of Business . . . . . . . . . . . . . . . . 61
SECTION 5.05. Payment of Obligations . . . . . . . . . . . . . . . . . . . . 61
SECTION 5.06. Maintenance of Properties . . . . . . . . . . . . . . . . . . 61
SECTION 5.07. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 5.08. Casualty and Condemnation . . . . . . . . . . . . . . . . . . 62
SECTION 5.09. Books and Records; Inspection and Audit Rights . . . . . . . . 62
SECTION 5.10. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 62
SECTION 5.11. Use of Proceeds and Letters of Credit . . . . . . . . . . . . 62
SECTION 5.12. Additional Subsidiaries . . . . . . . . . . . . . . . . . . . 63
SECTION 5.13. Further Assurances . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE VI Negative Covenants
------------------
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 6.01. Indebtedness; Certain Equity Securities . . . . . . . . . . . 64
SECTION 6.02. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 6.03. Fundamental Changes . . . . . . . . . . . . . . . . . . . . . 68
SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions . . 68
SECTION 6.05. Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 6.06. Sale and Lease-Back Transactions . . . . . . . . . . . . . . . 71
SECTION 6.07. Hedging Agreements . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 6.08. Restricted Payments; Certain Payments of Indebtedness . . . . 71
SECTION 6.09. Transactions with Affiliates . . . . . . . . . . . . . . . . . 73
SECTION 6.10. Restrictive Agreements . . . . . . . . . . . . . . . . . . . . 74
SECTION 6.11. Amendment of Material Documents . . . . . . . . . . . . . . . 75
SECTION 6.12. Capital Expenditures . . . . . . . . . . . . . . . . . . . . . 75
SECTION 6.13. Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 6.14. Consolidated Interest Coverage Ratio . . . . . . . . . . . . . 77
SECTION 6.15. Changes in Fiscal Periods . . . . . . . . . . . . . . . . . . 77
ARTICLE VII Events of Default
-----------------
ARTICLE VIII The Administrative Agent
------------------------
ARTICLE IX Miscellaneous
-------------
SECTION 9.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 9.02. Waivers; Amendments . . . . . . . . . . . . . . . . . . . . . 82
SECTION 9.03. Expenses; Indemnity; Damage Waiver . . . . . . . . . . . . . . 83
SECTION 9.04. Successors and Assigns . . . . . . . . . . . . . . . . . . . . 85
SECTION 9.05. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
SECTION 9.06. Counterparts; Integration; Effectiveness . . . . . . . . . . . 88
SECTION 9.07. Severability . . . . . . . . . . . . . . . . . . . . . . . . . 88
SECTION 9.08. Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . 88
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process . . 88
SECTION 9.10. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . 89
SECTION 9.11. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
SECTION 9.12. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 89
SECTION 9.13. Interest Rate Limitation . . . . . . . . . . . . . . . . . . . 90
</TABLE>
<PAGE> 5
4
<PAGE> 6
5
SCHEDULES:
Schedule 1.01(a) -- Mortgaged Properties
Schedule 2.01 -- Commitments
Schedule 3.05 -- Properties
Schedule 3.06 -- Disclosed Matters
Schedule 3.07 -- Compliance with Laws and Agreements
Schedule 3.12 -- Subsidiaries
Schedule 3.13 -- Insurance
Schedule 6.01 -- Existing Indebtedness
Schedule 6.02 -- Existing Liens
Schedule 6.09 -- Transactions with Affiliates
Schedule 6.10 -- Existing Restrictions
EXHIBITS:
Exhibit A -- Form of Assignment and Acceptance
Exhibit B -- Form of Opinion of Borrower's Counsel
Exhibit C -- Form of Opinion of Local Counsel
Exhibit D -- Form of Parent Guarantee Agreement
Exhibit E -- Form of Subsidiary Guarantee Agreement
Exhibit F -- Form of Indemnity, Subrogation and Contribution Agreement
Exhibit G -- Form of Pledge Agreement
Exhibit H -- Form of Security Agreement
<PAGE> 7
CREDIT AGREEMENT dated as of June 30, 1999, among DJ
ORTHOPEDICS, LLC (the "Borrower"), a Delaware limited
liability company, DONJOY, L.L.C. ("Holdings"), a Delaware
limited liability company, the Lenders party hereto, FIRST
UNION NATIONAL BANK ("First Union"), as Administrative
Agent (such term and each other capitalized term used but
not defined herein having the meaning provided in Article
I) and Collateral Agent, and THE CHASE MANHATTAN BANK, as
Syndication Agent, Issuing Bank and Swingline Lender.
Pursuant to a Recapitalization Agreement (the "Recapitalization
Agreement") dated as of April 29, 1999, among Chase DJ Partners, LLC
("Investor"), a Delaware limited liability company of which a majority indirect
equity interest is owned by Chase Capital Partners ("Sponsor"), Holdings and
Smith & Nephew, Inc., a Delaware corporation (the "Existing Shareholder"), (a)
Investor will contribute, directly or indirectly, an aggregate amount of
$64,550,000 in cash (the "Equity Contribution") to Holdings in exchange for the
issuance to Investor of membership interests representing 645,500 common units
in Holdings ("Common Units"), (b) certain members of the management of Holdings
will contribute an aggregate amount of $1,850,000 in cash (the "Management
Equity Contribution") to Holdings (of which $1,400,000 will be financed by
loans from Holdings) in exchange for the issuance to such members of management
of an aggregate of 18,500 Common Units, (c) the Existing Shareholder will
continue to hold 54,000 Common Units (the "Roll-Over Equity"), (d) Affiliates
of Sponsor and First Union will purchase in a private placement not less than
$31,415,000 in aggregate principal amount of senior redeemable participating
preferred units of Holdings (the "Preferred Units"), (e) the Borrower will
obtain Loans hereunder, (f) the Borrower will issue not less than $100,000,000
in aggregate principal amount of its senior subordinated notes (the "Senior
Subordinated Notes") in a public offering or in a Rule 144A or other private
placement, (g) Holdings, the Existing Shareholder and its Affiliates will sell
or otherwise transfer to the Borrower (the "Asset Transfer") substantially all
the assets and liabilities of the bracing and support system business of the
Existing Shareholder and its Affiliates (the "Business") for an aggregate cash
amount equal to the sum of (i) the initial aggregate amount of the Lenders'
Term Commitments of $15,500,000 and (ii) the net cash proceeds from the
issuance of the Senior Subordinated Notes (with any excess in the fair market
value of the Business over such purchase price being treated as a capital
contribution by Holdings to the Borrower), (h) Holdings will pay to the
Existing Shareholder $200,000,000 (the "Cash Payment") in connection with the
redemption of the Common Units owned by the Existing Shareholder and (i) fees
and expenses incurred in connection with the Transactions (as defined below) in
an aggregate amount not to exceed $9,915,000 will be paid (the "Transactions
Costs"). The transactions described in clauses (a) through (h) in this
paragraph, including the recapitalization of Holdings on the
<PAGE> 8
terms set forth in the Recapitalization Agreement (the "Recapitalization") and
the Asset Transfer, are collectively referred to herein as the "Transactions".
The Borrower has requested (a) the Lenders to extend credit in the
form of Term Loans to the Borrower on the Effective Date in an aggregate
principal amount of $15,500,000, (b) the Lenders to extend credit in the form
of Revolving Loans to the Borrower at any time and from time to time prior to
the Revolving Maturity Date, in an aggregate principal amount at any time
outstanding not in excess of the difference between $25,000,000 and the
Revolving Exposure at such time, (c) the Issuing Bank to issue Letters of
Credit at any time and from time to time prior to the Revolving Maturity Date,
in an aggregate stated amount at any time outstanding not in excess of the
lesser of (i) $5,000,000 and (ii) the difference between $25,000,000 and the
Revolving Exposure at such time and (d) the Swingline Lender to make Swingline
Loans to the Borrower at any time and from time to time prior to the Revolving
Maturity Date, in an aggregate principal amount at any time outstanding not in
excess of the lesser of (i) $2,500,000 and (ii) the difference between
$25,000,000 and the Revolving Exposure at such time.
The proceeds of the Term Facility will be used, together with the net
proceeds of the issuance of the Senior Subordinated Notes, solely (a) to
purchase the Business in the Asset Transfer and (b) to pay a portion of the
Transaction Costs, and the proceeds paid to Holdings in connection with the
Asset Transfer will be used, together with the proceeds from the Equity
Contribution, the Management Equity Contribution and the issuance of the
Preferred Units, solely (i) to make the Cash Payment and (ii) to pay the
remaining portion of the Transaction Costs. The proceeds of loans under the
Revolving Facility will be used by the Borrower for general corporate purposes,
including financing in connection with Permitted Acquisitions. Letters of
Credit and Swingline Loans will be used by the Borrower for general corporate
purposes.
The Lenders and the Swingline Lender are willing to extend such
credit to the Borrower and the Issuing Bank is willing to issue Letters of
Credit for the account of the Borrower, in each case on the terms and subject
to the conditions set forth herein. Accordingly, the parties hereto agree as
follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this Agreement, the
following terms have the meanings specified below:
"ABR", when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are bearing interest
at a rate determined by reference to the Alternate Base Rate.
<PAGE> 9
3
"Act" means the Limited Liability Company Act of the State of
Delaware, 6 Del. C. Section 18-01 et seq., as in effect and amended from time
to time, or any successor statute.
"Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest
Period multiplied by (b) the Statutory Reserve Rate.
"Administrative Agent" means First Union National Bank in its
capacity as Administrative Agent with respect to this Agreement and any
successor appointed pursuant hereto.
"Administrative Questionnaire" means an Administrative Questionnaire
in a form supplied by the Administrative Agent.
"Affiliate" means, with respect to a specified Person, another Person
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.
"Agents" means the collective reference to the Administrative Agent,
the Collateral Agent and the Syndication Agent.
"Alternate Base Rate" means, for any day, a rate per annum equal to
the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate
in effect on such day plus 1% and (c) the Federal Funds Effective Rate in
effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due
to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective
Rate shall be effective from and including the effective date of such change in
the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate,
respectively, without notice to the Borrower.
"Applicable Percentage" means, with respect to any Revolving Lender,
the percentage of the total Revolving Commitments represented by such Lender's
Revolving Commitment. If the Revolving Commitments have terminated or expired,
the Applicable Percentages shall be determined based upon the Revolving
Commitments most recently in effect, giving effect to any assignments.
"Applicable Rate" means, for any day with respect to any ABR
Revolving Loan, Eurodollar Revolving Loan, ABR Term Loan, Eurodollar Term Loan,
or with respect to the commitment fees payable hereunder, as the case may be,
the applicable rate per annum set forth below under the caption "ABR Revolving
Spread", "Eurodollar Revolving Spread", "ABR Term Spread", "Eurodollar Term
Spread" or "Commitment
<PAGE> 10
4
Fee Rate", as applicable, based upon the Leverage Ratio as of the relevant
determination date, provided that until the delivery to the Administrative
Agent pursuant to Section 5.01(a) of Holdings's consolidated financial
statements for the fiscal year ending December 31, 1999, the "Applicable Rate"
shall be the applicable rate per annum set forth below in Category 1:
<TABLE>
<CAPTION>
====================================================================================================
Leverage ABR Revolving Eurodollar Revolving ABR Term Eurodollar Commitment
-------- --------------- --------------------- -------- ---------- ----------
Ratio: Spread Spread Spread Term Spread Fee Rate
------ ------ ------ ------ ----------- --------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Category 1
----------
Greater than or equal to
5.00 to 1.00 1.75% 2.75% 2.25% 3.25% 0.50%
- ----------------------------------------------------------------------------------------------------
Category 2
----------
Greater than or equal to
4.50 to 1.00 and less
than 5.00 to 1.00 1.50% 2.50% 2.00% 3.00% 0.50%
- ----------------------------------------------------------------------------------------------------
Category 3
----------
Greater than or equal to
4.00 to 1.00 and less
than 4.50 to 1.00 1.25% 2.25% 1.75% 2.75% 0.50%
- ----------------------------------------------------------------------------------------------------
Category 4
----------
Greater than or equal to
3.50 to 1.00 and less
than 4.00 to 1.00 1.00% 2.00% 1.50% 2.50% 0.425%
Category 5
----------
Less than 3.50 to 1.00 0.75% 1.75% 1.25% 2.25% 0.425%
- ----------------------------------------------------------------------------------------------------
</TABLE>
For purposes of the foregoing, (a) the Leverage Ratio shall be
determined as of the end of each fiscal quarter of Holdings's fiscal year based
upon Holdings's consolidated financial statements delivered pursuant to Section
5.01(a) or (b) and (b) each change in the Applicable Rate resulting from a
change in the Leverage Ratio shall be effective during the period commencing on
and including the date of delivery to the Administrative Agent of such
consolidated financial statements indicating such change and ending on the date
immediately preceding the effective date of the next such change, provided that
the Leverage Ratio shall be deemed to be in Category 1 (i) at any time that an
Event of Default has occurred and is continuing or (ii) if the Borrower fails
to deliver the consolidated financial statements required to be delivered by it
pursuant to Section 5.01(a) or (b), during the period from the expiration of
the time for delivery thereof until such consolidated financial statements are
delivered.
<PAGE> 11
5
"Assessment Rate" means, for any day, the annual assessment rate
in effect on such day that is payable by a member of the Bank Insurance Fund
classified as "well-capitalized" and within supervisory subgroup "B" (or a
comparable successor risk classification) within the meaning of 12 C.F.R. Part
327 (or any successor provision) to the Federal Deposit Insurance Corporation
for insurance by such Corporation of time deposits made in dollars at the
offices of such member in the United States of America, provided that if, as a
result of any change in any law, rule or regulation, it is no longer possible
to determine the Assessment Rate as aforesaid, then the Assessment Rate shall
be such annual rate as shall be reasonably determined by the Administrative
Agent to be representative of the cost of such insurance to the Lenders.
"Asset Transfer" has the meaning assigned to such term in the
preamble of this Agreement.
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an assignee (with the consent of any party whose
consent is required by Section 9.04), and accepted by the Administrative Agent,
in the form of Exhibit A or any other form approved by the Administrative
Agent.
"Base Capex Amount" has the meaning set forth in Section
6.12(a).
"Base CD Rate" means the sum of (a) the Three-Month Secondary CD
Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate.
"Board" means the Board of Governors of the Federal Reserve
System of the United States of America.
"Board of Managers" means the Board of Managers of Holdings
contemplated by, and as appointed in accordance, with the Members' Agreement
and any other governing board or body of Holdings exercising rights or powers
that under the Act may ordinarily be exercised by a limited liability company's
"managers" or "members" (within the meaning of the Act).
"Borrower" has the meaning assigned to such term in the
introductory paragraph of this Agreement.
"Borrower Operating Agreement" means collectively, the Operating
Agreement of the Borrower dated as of June 30, 1999, and the By-laws of the
Borrower, which are collectively the sole "limited liability company
agreements" of the Borrower within the meaning of the Act.
<PAGE> 12
6
"Borrowing" means (a) Loans of the same Class and Type, made,
converted or continued on the same date and, in the case of Eurodollar Loans,
as to which a single Interest Period is in effect, or (b) a Swingline Loan.
"Borrowing Request" means a request by the Borrower for a
Borrowing in accordance with Section 2.03.
"Business" has the meaning assigned to such term in the preamble
of this Agreement.
"Business Day" means any day that is not a Saturday, Sunday or
other day on which commercial banks in New York City or Charlotte, North
Carolina, are authorized or required by law to remain closed, provided that,
when used in connection with a Eurodollar Loan, the term "Business Day" shall
also exclude any day on which banks are not open for dealings in dollar
deposits in the London interbank market.
"Capital Expenditures" means, for any period, without
duplication, (a) the additions to property, plant and equipment and other
capital expenditures of the Borrower and its consolidated Subsidiaries that are
(or would be) set forth in a consolidated statement of cash flows of the
Borrower for such period prepared in accordance with GAAP and (b) Capital Lease
Obligations incurred by the Borrower and its consolidated Subsidiaries during
such period, provided that the term "Capital Expenditures" shall not include,
for purposes of Section 6.12, expenditures set forth in clauses (i) through
(iii) below, and for purposes of the definition of the term "Excess Cash Flow",
expenditures set forth in clauses (i) and (ii) below and non-cash expenditures
set forth in clause (iii) below: (i) expenditures made in connection with the
repair, replacement or restoration of assets (A) to the extent financed from
insurance proceeds paid on account of the loss of or damage to the assets being
repaired, replaced or restored or (B) with awards of compensation arising from
the taking by eminent domain or condemnation of the assets being replaced, (ii)
expenditures in connection with the reinvestment of Net Proceeds of any asset
sale within 300 days after receipt thereof as contemplated by the definition of
the term "Net Proceeds" and (iii) expenditures that constitute a Permitted
Acquisition.
"Capital Lease Obligations" of any Person means the obligations
of such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"Cash Payment" has the meaning ascribed to such term in the
preamble of this Agreement.
<PAGE> 13
7
"CB Capital" means CB Capital Investors, L.P., a Delaware
limited partnership and an Affiliate of Sponsor.
"CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq.
"Change of Control" means an event or series of events by which
(a) prior to any initial public offering of Equity Interests in Holdings:
(i) Investor or an entity controlled by Sponsor or Investor
ceases to be the "beneficial owner" (as defined in Rule 13d-3 and 13d-5
under the Securities Exchange Act), directly or indirectly, of at least
40% (or 33% if the reduction below 40% is attributable solely to dilution
as a result of the issuance of stock in connection with a Permitted
Acquisition) of the Equity Interests of Holdings ordinarily having the
right to vote on any matters relating to the management of Holdings,
including the election of its "managers" within the meaning of the Act;
(ii) Holdings ceases to be the "beneficial owner" (as defined in
Rule 13d-3 and 13d-5 under the Securities Exchange Act), directly or
indirectly, of 100% of the combined voting power of the Equity Interests
of the Borrower ordinarily having the right to vote on any matters
relating to the management of Holdings, including the election of its
"managers" within the meaning of the Act;
(iii) Investor or an entity controlled by Sponsor or Investor,
together with members of management of Holdings and its subsidiaries,
cease to be the "beneficial owner" (as defined in Rule 13d-3 and 13d-5
under the Securities Exchange Act), directly or indirectly, of at least
51% on a fully diluted basis of the Equity Interests of Holdings
ordinarily having the right to vote on any matters relating to the
management of Holdings, including the election of its "managers" within
the meaning of the Act;
(iv) (A) any "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act but excluding Investor)
becomes the "beneficial owner" (as defined in Rule 13d-3 and 13d-5 under
the Securities Exchange Act, except that for purposes of this clause (iv),
such Person or group shall be deemed to have "beneficial ownership" of all
Equity Interests that it has the right to acquire whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of an equal percentage or greater percentage of the Equity
Interests of Holdings than that percentage beneficially owned by Sponsor
or an entity Controlled by Sponsor or (B) any "person" or
<PAGE> 14
8
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act but in each case excluding Sponsor and its
Affiliates) acquires the right, directly or indirectly, (I) to elect,
appoint or nominate members of the Board of Managers with aggregate voting
power greater than that held by the members of the Board of Managers
nominated by CB Capital and the managing member of Investor, (II) to
elect, appoint or nominate any managing member or "manager" within the
meaning of the Act of, or otherwise to Control, Investor (provided that
Chase Fairfield may serve as the initial managing member of Investor in
accordance with the terms of its limited liability company agreement) or
(III) to elect, appoint or nominate any general or managing partner of, or
otherwise to Control, CB Capital;
(v) Continuing Managers shall not constitute the members of the
Board of Managers with a majority of the voting power of the Board of
Managers; or
(vi) there shall occur a Change of Control (as defined in the
Senior Subordinated Notes Indenture) or a Change of Control (as defined in
the Holdings Operating Agreement); and
(b) after any initial public offering of Equity Interests in Holdings:
(i) Investor or an entity controlled by Sponsor or Investor
ceases to be the "beneficial owner" (as defined in Rule 13d-3 and 13d-5
under the Securities Exchange Act), directly or indirectly, of at least
30% (or 25% if the reduction below 30% is attributable solely to dilution
as a result of the issuance of stock in connection with a Permitted
Acquisition) of (A) the Equity Interests of Holdings ordinarily having the
right to vote on any matters relating to the management of Holdings,
including the election of its "managers" within the meaning of the Act, or
(B) if Holdings is then a corporation, the capital stock or other Equity
Interests of Holdings ordinarily having the right to vote at an election
of directors;
(ii) Holdings ceases to be the "beneficial owner" (as defined in
Rule 13d-3 and 13d-5 under the Securities Exchange Act), directly or
indirectly, of 100% of the combined voting power of the Equity Interests
of the Borrower ordinarily having the right to vote on any matters
relating to the management of Holdings, including the election of its
"managers" within the meaning of the Act;
(iii) Investor or an entity controlled by Sponsor or Investor,
together with members of management of Holdings and its Subsidiaries,
cease to be the "beneficial owner" (as defined in Rule 13d-3 and 13d-5
under the Securities Exchange Act), directly or indirectly, of at least
35% on a fully diluted basis of (A) the Equity Interests of Holdings
ordinarily having the right to vote on any
<PAGE> 15
9
matters relating to the management of Holdings, including the election of
its "managers" within the meaning of the Act or (B) if Holdings is then a
corporation, the capital stock or other Equity Interests of Holdings
ordinarily having the right to vote at an election of directors;
(iv) (A) any "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act but excluding Investor)
becomes the "beneficial owner" (as defined in Rule 13d-3 and 13d-5 under
the Securities Exchange Act, except that for purposes of this clause (iv),
such Person or group shall be deemed to have "beneficial ownership" of all
Equity Interests that it has the right to acquire whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of an equal or greater percentage of (I) the Equity Interests
of Holdings, or (II) if Holdings is then a corporation, the capital stock
or other Equity Interests of Holdings ordinarily having the right to vote
at an election of directors than that percentage beneficially owned by
Sponsor or an entity Controlled by Sponsor or (B) any "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Securities
Exchange Act but in each case excluding Sponsor and its Affiliates)
acquires the right, directly or indirectly, (I) to elect, appoint or
nominate members of the Board of Managers with aggregate voting power
greater than that held by the members of the Board of Managers nominated
by CB Capital and the managing member of Investor, (II) to elect, appoint
or nominate any managing member or "manager" within the meaning of the Act
of, or otherwise to Control, Investor (provided that Chase Fairfield may
serve as the initial managing member of Investor in accordance with the
terms of its limited liability company agreement) or (III) to elect,
appoint or nominate any general or managing partner of, or otherwise to
Control, CB Capital;
(v) (A) Continuing Managers shall not constitute the members of
the Board of Managers with a majority of the voting power of the Board of
Managers or (B) if Holdings is then a corporation, Continuing Directors
shall not constitute the members of the Board of Directors of Holdings
with a majority of the voting power of the Board of Directors of Holdings;
or
(vi) there shall occur a Change of Control (as defined in the
Senior Subordinated Notes Indenture) or a Change of Control (as defined in
the Holdings Operating Agreement).
"Change in Law" means (a) the adoption of any law, rule or
regulation after the date of this Agreement, (b) any change in any law, rule or
regulation or in the interpretation or application thereof by any Governmental
Authority after the date of this Agreement or (c) compliance by any Lender or
the Issuing Bank (or, for purposes of
<PAGE> 16
10
Section 2.15(b), by any lending office of such Lender or by such Lender's or
the Issuing Bank's holding company, if any) with any request, guideline or
directive (whether or not having the force of law) of any Governmental
Authority made or issued after the date of this Agreement.
"Charges" has the meaning assigned to such term in Section 9.13.
"Class", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are Revolving
Loans, Term Loans or Swingline Loans and, when used in reference to any
Commitment, refers to whether such Commitment is a Revolving Commitment or Term
Commitment.
"Code" means the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral" means any and all "Collateral" as defined in any
applicable Security Document.
"Collateral Agent" means the "Collateral Agent" as defined in
the Security Agreement.
"Commitment" means a Revolving Commitment or Term Commitment, or
any combination thereof (as the context requires).
"Common Units" has the meaning assigned to such term in the
preamble of this Agreement.
"Consolidated EBITDA" means, for any period, Consolidated Net
Income for such period, plus, without duplication and to the extent deducted
from revenues in determining Consolidated Net Income for such period, the sum
of (a) the aggregate amount of Consolidated Interest Expense for such period,
(b) the aggregate amount of letter of credit fees paid during such period, (c)
the aggregate amount of income Tax expense for such period, (d) all amounts
attributable to depreciation, amortization and other non-cash charges or losses
for such period, (e) non-cash expenses resulting from the grant of stock
options to any director, officer or employee or Holdings, the Borrower or any
Subsidiary pursuant to a written plan or agreement, (f) all amounts
attributable to compensation expense related to transaction bonuses incurred in
connection with the Transactions, (g) all extraordinary charges during such
period and (h) all non-recurring transaction and financing expenses resulting
from the Transactions and Permitted Acquisitions, and minus, without
duplication and to the extent added to revenues in determining Consolidated Net
Income for such period, all extraordinary gains during such period, all as
determined on a consolidated basis with respect to Holdings, the Borrower and
the Subsidiaries in accordance with GAAP. If the Borrower or any consolidated
<PAGE> 17
11
Subsidiary has made any Permitted Acquisition or any sale, transfer, lease or
other disposition of assets outside of the ordinary course of business
permitted by Section 6.05 during the relevant period for determining
Consolidated EBITDA, Consolidated EBITDA for the relevant period shall be
calculated after giving pro forma effect thereto, as if such Permitted
Acquisition or sale, transfer, lease or other disposition of assets (and any
related incurrence, repayment or assumption of Indebtedness, with any new
Indebtedness being deemed to be amortized over the relevant period in
accordance with its terms, and assuming that any Revolving Loans borrowed in
connection with such acquisition are repaid with excess cash balances when
available) had occurred on the first day of the relevant period for determining
Consolidated EBITDA. Any such pro forma calculations may include operating
expense reductions for such period resulting from any Permitted Acquisition
that is being given pro forma effect to the extent that such operating expense
reductions (a) would be permitted pursuant to Article XI of Regulation S-X
under the Securities Act of 1933, as amended or (b) have been approved by the
Required Lenders.
"Consolidated Interest Coverage Ratio" means, with respect to
any period, the ratio of (a) Consolidated EBITDA for such period to (b)
Consolidated Interest Expense for such period.
"Consolidated Interest Expense" means, for any period, (a) the
interest expense, both expensed and capitalized (including the interest
component in respect of Capital Lease Obligations), accrued by Holdings, the
Borrower and the Subsidiaries during such period and payable in cash (b) net of
interest income, in each case determined on a consolidated basis in accordance
with GAAP.
"Consolidated Net Income" means, for any period, net income or
loss of Holdings, the Borrower and the Subsidiaries for such period determined
on a consolidated basis in accordance with GAAP, provided that there shall be
excluded from such net income or loss the income of any Person in which any
other Person (other than the Borrower or any of the Subsidiaries or any
director holding qualifying shares in compliance with applicable law) has a
majority interest, except to the extent of the amount of dividends or other
distributions actually paid to Holdings, the Borrower or any of the
Subsidiaries by such Person during such period.
"Continuing Director" means, at any date, an individual (a) who,
as at such date, has been a member of such Board of Directors for at least the
12 preceding months (or was a member of the board of managers of a predecessor
limited liability company during any portion of such period before such entity
was converted in some manner into a corporation), (b) who has been nominated to
be a member of such Board of Directors, directly or indirectly, by Sponsor or
Persons nominated by Sponsor, (c) who has been nominated to be a member of such
Board of Directors by a majority of the other Continuing Directors then in
office or (d) in the case of Holdings, who has been
<PAGE> 18
12
nominated to be a member of the Board of Directors of Holdings pursuant to the
terms of the Members' Agreement or any similar successor agreement.
"Continuing Manager" means, at any date, an individual (a) who,
as at such date, has been a member of the Board of Managers for at least the 12
preceding months, (b) who has been nominated to be a member of the Board of
Managers, directly or indirectly, by Sponsor or Persons nominated by Sponsor,
(c) who has been nominated to be a member of the Board of Managers by a
majority of the other Continuing Managers then in office or (d) who has been
nominated to be a member of the Board of Managers pursuant to the terms of the
Members' Agreement.
"Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise. The terms "Controlling" and "Controlled" have meanings correlative
thereto.
"Default" means any event or condition that constitutes an Event
of Default or that upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"Disclosed Matters" means the actions, suits and proceedings and
the environmental matters disclosed in Schedule 3.06.
"dollars" or "$" refers to lawful money of the United States of
America.
"Effective Date" means the date on which the conditions
specified in Section 4.01 are satisfied (or waived in accordance with Section
9.02).
"Environmental Laws" means all laws, rules, regulations, codes,
ordinances, orders, decrees, judgments, injunctions or binding agreements
issued, promulgated or entered into by or with any Governmental Authority,
relating in any way to the environment, preservation or reclamation of natural
resources, handling, treatment, storage, disposal, Release or threatened
Release of any Hazardous Material or to health and safety matters.
"Environmental Liability" means any liability, contingent or
otherwise (including any liability for damages, natural resource damage, costs
of environmental investigation or remediation, administrative oversight costs,
fines, penalties or indemnities), of Holdings, the Borrower or any Subsidiary
directly or indirectly resulting from or based upon (a) violation of any
Environmental Law, (b) the generation, use, handling, transportation, storage,
treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous
Materials, (d) the release or threatened release of any
<PAGE> 19
13
Hazardous Materials into the environment or (e) any contract, agreement or
other consensual arrangement pursuant to which liability is assumed or imposed
with respect to any of the foregoing.
"Equity Contribution" has the meaning assigned to such term in
the preamble of this Agreement.
"Equity Interests" means shares of capital stock, partnership
interests, membership interests in a limited liability company, beneficial
interests in a trust or other equity ownership interests in a Person.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower, is treated as a single employer
under Section 414(b) or (c) of the Code or, solely for purposes of Section 302
of ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code.
"ERISA Event" means (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder with respect to a
Plan (other than an event for which the 30-day notice period is waived); (b)
the existence with respect to any Plan of an "accumulated funding deficiency"
(as defined in Section 412 of the Code or Section 302 of ERISA), whether or not
waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d)
of ERISA of an application for a waiver of the minimum funding standard with
respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate
from the PBGC or a plan administrator of any notice relating to an intention to
terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f)
the incurrence by the Borrower or any of its ERISA Affiliates of any liability
with respect to the withdrawal or partial withdrawal from any Plan or
Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate
of any notice, or the receipt by any Multiemployer Plan from the Borrower or
any ERISA Affiliate of any notice, concerning the imposition of Withdrawal
Liability or a determination that a Multiemployer Plan is, or is expected to
be, insolvent or in reorganization, within the meaning of Title IV of ERISA.
"Eurodollar", when used in reference to any Loan or Borrowing,
refers to whether such Loan, or the Loans comprising such Borrowing, are
bearing interest at a rate determined by reference to the Adjusted LIBO Rate.
<PAGE> 20
14
"Event of Default" has the meaning assigned to such term in
Article VII.
"Excess Cash Flow" means, for any period, the sum (without
duplication) of:
(a) the Consolidated Net Income for such period, adjusted to
exclude any gains or losses attributable to Prepayment Events or
dispositions that would constitute Prepayment Events but for clauses
(a)(i) through (a)(iii) and clause (b) of the definition of the term
"Prepayment Event"; plus
(b) depreciation, amortization and other non-cash charges or
losses deducted in determining such Consolidated Net Income for such
period; plus
(c) the sum of (i) the amount, if any, by which Net Working
Capital decreased during such period plus (ii) the amount, if any, by
which the consolidated deferred revenues of Holdings and its consolidated
subsidiaries (not recorded as a current liability) increased during such
period plus (iii) the aggregate principal amount of Capital Lease
Obligations and other Indebtedness incurred during such period to finance
Capital Expenditures and Permitted Acquisitions, to the extent that
mandatory principal payments in respect of such Indebtedness would not be
excluded from clause (f) below when made; minus
(d) the sum of (i) any non-cash income or gains included in
determining such consolidated net income (or loss) for such period plus
(ii) the amount, if any, by which Net Working Capital increased during
such period plus (iii) the amount, if any, by which the consolidated
deferred revenues of Holdings and its consolidated subsidiaries (not
recorded as a current liability) decreased during such period; minus
(e) Capital Expenditures for such period (other than Capital
Expenditures made pursuant to Section 6.12(c) or (d)); minus
(f) the aggregate principal amount of Indebtedness repaid or
prepaid by Holdings and its consolidated subsidiaries during such period,
excluding (i) Indebtedness in respect of Revolving Loans and Letters of
Credit, (ii) Term Loans prepaid pursuant to Section 2.11(a), (b) or (c),
(iii) repayments or prepayments of Indebtedness financed by incurring
other Indebtedness, to the extent that mandatory principal payments in
respect of such other Indebtedness would, pursuant to this clause (f), be
deducted in determining Excess Cash Flow when made and (iv) Indebtedness
referred to in clauses (iv) and (v) of Section 6.01(a) and Indebtedness
(other than term Indebtedness) referred to in clause (viii) of Section
6.01(a).
<PAGE> 21
15
"Excluded Taxes" means, with respect to the Administrative
Agent, the Swingline Lender, any Lender, the Issuing Bank or any other
recipient of any payment to be made by or on account of any obligation of the
Borrower hereunder, (a) income or franchise Taxes imposed on (or measured by)
its net income by the United States of America, or by the jurisdiction under
the laws of which such recipient is organized or in which its principal office
is located or, in the case of any Foreign Lender, in which its applicable
lending office is located (provided, however, that no Foreign Lender shall be
deemed to be located in any jurisdiction solely as a result of taking any
action related to this loan), (b) any branch profits Taxes imposed by the
United States of America or any similar Tax imposed by any other jurisdiction
described in clause (a) above and (c) in the case of a Foreign Lender (other
than an assignee pursuant to a request by the Borrower under Section 2.19(b)),
any withholding Tax (i) that is in effect and would apply to amounts payable to
such Foreign Lender at the time such Foreign Lender becomes a party to this
Agreement (or designates a new lending office), except to the extent that such
Foreign Lender (or its assignor, if any) would have been entitled, at the time
of designation of a new lending office (or assignment), to receive additional
amounts from the Borrower with respect to any withholding Tax pursuant to
Section 2.17(a) or (ii) that is attributable to such Foreign Lender's failure
to comply with Section 2.17(e).
"Existing Shareholder" has the meaning assigned to such term in
the preamble of this Agreement.
"Fairfield Chase" means Fairfield Chase Medical Partners, LLC, a
Delaware limited liability company.
"Federal Funds Effective Rate" means, for any day, the weighted
average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates
on overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers, as published on the next succeeding
Business Day by the Federal Reserve Bank of New York, or, if such rate is not
so published for any day that is a Business Day, the average (rounded upwards,
if necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.
"Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or controller of the Borrower.
"First Union" has the meaning assigned to such term in the
preamble of this Agreement.
"Foreign Lender" means any Lender that is organized under the
laws of a jurisdiction other than that in which the Borrower is located. For
purposes of this
<PAGE> 22
16
definition, the United States of America, each State thereof and the District
of Columbia shall be deemed to constitute a single jurisdiction.
"Foreign Subsidiary" means any Subsidiary that is organized
under the laws of a jurisdiction other than 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.
"Governmental Authority" means the government of the United
States of America, any other nation or any political subdivision thereof,
whether state or local, and any agency, authority, instrumentality, regulatory
body, court, central bank or other entity exercising executive, legislative,
judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.
"Guarantee" of or by any Person (the "guarantor") means any
obligation, contingent or otherwise, of the guarantor guaranteeing or having
the economic effect of guaranteeing any Indebtedness or other obligation of any
other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor, direct or indirect,
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation or to purchase (or to advance or
supply funds for the purchase of) any security for the payment thereof, (b) to
purchase or lease property, securities or services for the purpose of assuring
the owner of such Indebtedness or other obligation of the payment thereof, (c)
to maintain working capital, equity capital or any other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation or (d) as an account party
in respect of any letter of credit or letter of guaranty issued to support such
Indebtedness or obligation, provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business.
"Guarantee Agreements" means, collectively, the Parent Guarantee
Agreement and the Subsidiary Guarantee Agreement.
"Hazardous Materials" means all explosive or radioactive
substances or wastes and all hazardous or toxic substances, wastes or other
pollutants, including petroleum or petroleum distillates, asbestos or asbestos
containing materials, polychlorinated biphenyls, radon gas, infectious or
medical wastes and all other substances or wastes of any nature regulated
pursuant to any Environmental Law, including any material listed as a hazardous
substance under Section 101(14) of CERCLA.
<PAGE> 23
17
"Hedging Agreement" means any interest rate protection
agreement, foreign currency exchange agreement, commodity price protection
agreement or other interest or currency exchange rate or commodity price
hedging arrangement.
"Holdings" has the meaning assigned to such term in the
introductory paragraph of this Agreement.
"Holdings Operating Agreement" means collectively, the Operating
Agreement of Holdings and the By-laws of Holdings, each dated as of June 30,
1999, which collectively are the sole "limited liability company agreements" of
Holdings within the meaning of the Act.
"Income Tax Liabilities" means an amount determined by
multiplying (a) (i) all taxable income and gains of Holdings (in the case of
Holdings) and the Borrower (in the case of the Borrower) for such calendar year
(the "Taxable Amount") minus (ii) an amount (not to exceed the Taxable Amount
for such calendar year) equal to all losses of Holdings (in the case of
Holdings) or the Borrower (in the case of the Borrower) in any of the three
prior calendar years that have not been previously subtracted pursuant to this
clause (ii) from the Taxable Amount of Holdings or the Borrower, respectively,
for any prior year by (b) 44%.
"Indebtedness" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such Person under conditional sale or other title retention
agreements relating to property acquired by such Person, (d) all obligations of
such Person in respect of the deferred purchase price of property or services
(excluding current accounts payable incurred in the ordinary course of
business) (it being understood that "deferred purchase price" in connection
with any purchase of property or assets shall include only that portion of the
purchase price which shall be deferred beyond the date on which the purchase is
actually consummated), (e) all Indebtedness of others secured by (or for which
the holder of such Indebtedness has an existing right, contingent or otherwise,
to be secured by) any Lien on property owned or acquired by such Person,
whether or not the Indebtedness secured thereby has been assumed, (f) all
Guarantees by such Person of Indebtedness of others, (g) all Capital Lease
Obligations of such Person, (h) all obligations, contingent or otherwise, of
such Person as an account party in respect of letters of credit and letters of
guaranty and (i) all obligations, contingent or otherwise, of such Person in
respect of bankers' acceptances. The Indebtedness of any Person shall include
the Indebtedness of any other entity (including any partnership in which such
Person is a general partner) to the extent such Person is liable therefor as a
result of such Person's ownership interest in
<PAGE> 24
18
or other relationship with such entity, except to the extent the terms of such
Indebtedness provide that such Person is not liable therefor.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
"Indemnity, Subrogation and Contribution Agreement" means the
Indemnity, Subrogation and Contribution Agreement, substantially in the form of
Exhibit F, among Holdings, the Borrower, the Subsidiary Loan Parties and the
Administrative Agent.
"Information Memorandum" means the Confidential Information
Memorandum dated May 1999 relating to the Borrower and the Transactions.
"Interest Election Request" means a request by the Borrower to
convert or continue a Revolving Borrowing or Term Borrowing in accordance with
Section 2.07.
"Interest Payment Date" means (a) with respect to any ABR Loan
(other than a Swingline Loan), the last day of each June, September, December
and March, (b) with respect to any Eurodollar Loan, the last day of the
Interest Period applicable to the Borrowing of which such Loan is a part and,
in the case of a Eurodollar Borrowing with an Interest Period of more than
three months' duration, each day prior to the last day of such Interest Period
that occurs at intervals of three months' duration after the first day of such
Interest Period and (c) with respect to any Swingline Loan, the day that such
Loan is required to be repaid.
"Interest Period" means, with respect to any Eurodollar
Borrowing, the period commencing on the date of such Borrowing and ending on
the numerically corresponding day in the calendar month that is one, two, three
or six months thereafter, as the Borrower may elect, provided that (a) if any
Interest Period would end on a day other than a Business Day, such Interest
Period shall be extended to the next succeeding Business Day unless such next
succeeding Business Day would fall in the next calendar month, in which case
such Interest Period shall end on the next preceding Business Day and (b) any
Interest Period that commences on the last Business Day of a calendar month (or
on a day for which there is no numerically corresponding day in the last
calendar month of such Interest Period) shall end on the last Business Day of
the last calendar month of such Interest Period. For purposes hereof, the date
of a Borrowing initially shall be the date on which such Borrowing is made and
thereafter shall be the effective date of the most recent conversion or
continuation of such Borrowing.
"Investor" has the meaning assigned to such term in the preamble
of this Agreement.
<PAGE> 25
19
"Issuing Bank" means The Chase Manhattan Bank, in its capacity
as the issuer of Letters of Credit hereunder, and its successors in such
capacity as provided in Section 2.05(i). The Issuing Bank may, in its
discretion, arrange for one or more Letters of Credit to be issued by
Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall
include any such Affiliate with respect to Letters of Credit issued by such
Affiliate.
"Joint Venture" means, as to a Person, any corporation,
partnership or other legal entity or arrangement in which such Person has any
direct or indirect Equity Interest and that is not a subsidiary of such Person.
"LC Availability Period" means the period from and including the
Effective Date to but excluding the earlier of (a) the date that is five
Business Days prior to the Revolving Maturity Date and (b) the date of
termination of the Revolving Commitments.
"LC Disbursement" means a payment made by the Issuing Bank
pursuant to a Letter of Credit.
"LC Exposure" means, at any time, the sum of (a) the aggregate
undrawn amount of all outstanding Letters of Credit at such time plus (b) the
aggregate amount of all LC Disbursements that have not yet been reimbursed by
or on behalf of the Borrower at such time. The LC Exposure of any Revolving
Lender at any time shall be its Applicable Percentage of the total LC Exposure
at such time.
"Lenders" means the Persons listed on Schedule 2.01 and any
other Person that shall have become a party hereto pursuant to an Assignment
and Acceptance, other than any such Person that ceases to be a party hereto
pursuant to an Assignment and Acceptance. Unless the context otherwise
requires, the term "Lenders" includes the Swingline Lender.
"Letter of Credit" means any letter of credit issued pursuant to
this Agreement.
"Leverage Ratio" means, on any date, the ratio of (a) Total Debt
as of such date to (b) Consolidated EBITDA for the four-fiscal-quarter period
of the Borrower ended on such date (or, if such date is not the last day of a
fiscal quarter, ended on the last day of the fiscal quarter of the Borrower
most recently ended prior to such date), all determined on a consolidated basis
in accordance with GAAP.
"LIBO Rate" means, with respect to any Eurodollar Borrowing for
any Interest Period, the rate appearing on Page 3750 of the Telerate Service
(or on any
<PAGE> 26
20
successor or substitute page of such Service, or any successor to or substitute
for such Service, providing rate quotations comparable to those currently
provided on such page of such Service, as determined by the Administrative
Agent from time to time for purposes of providing quotations of interest rates
applicable to dollar deposits in the London interbank market) at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such
Interest Period, as the rate for dollar deposits with a maturity comparable to
such Interest Period. In the event that such rate is not available at such
time for any reason, then the "LIBO Rate" with respect to such Eurodollar
Borrowing for such Interest Period shall be the rate at which dollar deposits
of $5,000,000 and for a maturity comparable to such Interest Period are offered
by the principal London office of the Administrative Agent in immediately
available funds in the London interbank market at approximately 11:00 a.m.,
London time, two Business Days prior to the commencement of such Interest
Period (and if the Administrative Agent shall not have a London office, then
the principal London office of the Syndication Agent).
"Lien" means, with respect to any asset, (a) any mortgage, deed
of trust, lien, pledge, hypothecation, encumbrance, charge or security interest
in, on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any
financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.
"Loan Documents" means this Agreement, the Letters of Credit,
the Guarantee Agreements, the Indemnity, Subrogation and Contribution Agreement
and the Security Documents.
"Loan Parties" means Holdings, the Borrower and the Subsidiary
Loan Parties.
"Loans" means the loans made by the Lenders to the Borrower
pursuant to this Agreement.
"Location" means any facility of the Business, now or
hereinafter owned, leased or operated by the Borrower or any of its
Subsidiaries, in each case including the land on which such facility is located
and all buildings and other improvements thereon, including leasehold
improvements and all assets related thereto, the construction, acquisition or
installation of which would constitute Capital Expenditures.
"Management Agreement" means a financial advisory agreement or
other similar agreement between the Borrower or Holdings and the Investor or
Fairfield Chase
<PAGE> 27
21
(or any Affiliate of either of them) providing for customary expense
reimbursement and such other terms as are reasonably acceptable to the Agents.
"Management Equity Contribution" has the meaning assigned to
such term in the preamble of this Agreement.
"Margin Stock" has the meaning assigned to such term in
Regulation U.
"Material Adverse Effect" means a material adverse effect on (a)
the business, operations, properties, assets, liabilities or financial
condition of Holdings, the Borrower and the Subsidiaries taken as a whole, (b)
the ability of the Loan Parties to perform any material obligations under any
Loan Document or (c) the rights of or benefits available to the Lenders under
any Loan Document.
"Material Indebtedness" means Indebtedness (other than the Loans
and Letters of Credit), or obligations in respect of one or more Hedging
Agreements, of any one or more of Holdings, the Borrower and the Subsidiaries
in an aggregate principal amount exceeding $2,500,000. For purposes of
determining Material Indebtedness, the "principal amount" of the obligations of
Holdings, the Borrower or any Subsidiary in respect of any Hedging Agreement at
any time shall be the maximum aggregate amount (giving effect to any netting
agreements) that Holdings, the Borrower or such Subsidiary would be required to
pay if such Hedging Agreement were terminated at such time.
"Maximum Rate" has the meaning assigned to such term in Section
9.13.
"Members' Agreement" means the Members' Agreement dated as of
June 30, 1999, among Holdings, the Investor and the other members of Holdings
named therein.
"Merger Subsidiary" has the meaning assigned to such term in
Section 6.03(b).
"Moody's" means Moody's Investors Service, Inc.
"Mortgage" means a mortgage, deed of trust, assignment of leases
and rents, leasehold mortgage or other security document granting a Lien on any
Mortgaged Property to secure the Obligations. Each Mortgage shall be
reasonably satisfactory in form and substance to the Collateral Agent.
"Mortgaged Property" means, initially, each parcel of real
property and the improvements thereto owned or leased by a Loan Party and
identified on Schedule
<PAGE> 28
22
1.01(a), and includes each other parcel of real property and improvements
thereto with respect to which a Mortgage is granted pursuant to Section 5.12 or
5.13.
"Multiemployer Plan" means a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
"Net Proceeds" means, with respect to any event, (a) the cash
proceeds received in respect of such event, including (i) any cash (other than
amounts representing interest) received in respect of any non-cash proceeds,
but only as and when received, (ii) in the case of a casualty, insurance
proceeds, and (iii) in the case of a condemnation or similar event,
condemnation awards and similar payments, net of (b) the sum of (i) all
reasonable fees and out-of-pocket expenses paid by Holdings, the Borrower and
the Subsidiaries to third parties in connection with such event, (ii) in the
case of a sale, transfer or other disposition of an asset (including pursuant
to a sale and lease-back transaction or a casualty or other insured damage or
condemnation or similar proceeding), the amount of all payments required to be
made by Holdings, the Borrower and the Subsidiaries as a result of such event
to repay Indebtedness (other than Loans) secured by such asset or otherwise
subject to mandatory prepayment as a result of such event (including in order
to obtain consent required therefor), (iii) the amount of all Taxes paid (or
reasonably estimated to be payable) by Holdings, the Borrower and the
Subsidiaries, and the amount of any reserves established by Holdings, the
Borrower and the Subsidiaries to fund contingent liabilities reasonably
estimated to be payable, and that are directly attributable to such event (as
determined reasonably and in good faith by the chief financial officer of the
Borrower) and (iv) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or Joint Ventures as a result of such
event (provided that such distribution or payment is proportionate to such
minority interest holders' share of net income (or dividends and distribution
made in respect of the Equity Interests) of such Subsidiary or Joint Venture as
provided in the certificate of incorporation or other governing documents of
such Subsidiary or Joint Venture); provided, however, that with respect to any
sale, transfer or other disposition of an asset (including, pursuant to a sale
and lease-back transaction or, subject to Section 5.08, a casualty or other
insured damage or condemnation or similar proceeding), if the Borrower shall
deliver a certificate (a "Reinvestment Certificate") of a Financial Officer to
the Administrative Agent at the time of such sale, transfer or other
disposition setting forth the Borrower's intent to use the proceeds of such
sale, transfer or other disposition to fund expenditures for (A) other assets
to be used in a Permitted Business or (B) the acquisition in a Permitted
Acquisition of voting Equity Interests of one or more Persons engaged in a
Permitted Business that is or thereby becomes a Subsidiary, in each case prior
to the date that is 300 days after receipt of such proceeds and no Default or
Event of Default shall have occurred and shall be continuing at the time of
such certificate or at the proposed time of the application of such proceeds,
such proceeds shall not constitute Net
<PAGE> 29
23
Proceeds except to the extent not so used at the end of such 300-day period, at
which time such proceeds shall be deemed to be Net Proceeds.
"Net Working Capital" means, at any date, (a) the consolidated
current assets and non-current deferred income tax assets of Holdings and its
consolidated subsidiaries as of such date (excluding cash and Permitted
Investments) minus (b) the consolidated current liabilities and non-current
deferred income tax liabilities of Holdings and its consolidated subsidiaries
as of such date (excluding current liabilities in respect of checks issued but
not yet paid and Indebtedness). Net Working Capital at any date may be a
positive or negative number. Net Working Capital increases when it becomes
more positive or less negative and decreases when it becomes less positive or
more negative.
"Obligations" has the meaning assigned to such term in the
Security Agreement.
"Other Taxes" means any and all current or future recording,
stamp, documentary, excise, transfer, sales or property or similar Taxes,
charges or levies arising from any payment made under any Loan Document or from
the execution, delivery or enforcement of, or otherwise with respect to, any
Loan Document.
"Parent Guarantee Agreement" means the Parent Guarantee
Agreement, substantially in the form of Exhibit D, made by Holdings in favor of
the Collateral Agent for the benefit of the Secured Parties.
"PBGC" means the Pension Benefit Guaranty Corporation referred
to and defined in ERISA and any successor entity performing similar functions.
"Perfection Certificate" means a certificate in the form of
Annex 1 to the Security Agreement or any other form approved by the Collateral
Agent.
"Permitted Acquisition" means the acquisition, by merger or
otherwise, by the Borrower or any Subsidiary of assets or Equity Interests so
long as (a) immediately after giving effect thereto, no Default or Event of
Default shall have occurred and be continuing or would result therefrom, (b)
all transactions related thereto shall be consummated in accordance in all
material respects with applicable laws, (c) in the case of any acquisition of
Equity Interests in any Person, such acquisition is an acquisition of 100% of
the Equity Interests of such Person, (d) in case of an acquisition of assets,
such assets (other than assets to be retired or disposed of) are to be used,
and in the case of an acquisition of Equity Interests, the Person so acquired
is engaged, in the same line of business or a Related Business, (e) (i) the
Borrower shall be in compliance, on a pro forma basis after giving effect to
such acquisition (including any operating expense reductions that would be
permitted pursuant to Article XI of Regulation S-X under the
<PAGE> 30
24
Securities Act of 1933, as amended, or that have been approved by the Required
Lenders and Indebtedness assumed or permitted to exist in connection with such
acquisition), with the covenants set forth in Sections 6.13 and 6.14 (provided
that (A) if the maximum Leverage Ratio then permitted under Section 6.13 is
equal to or greater then 5.00 to 1.00, then for purposes of determining such
compliance the maximum Leverage Ratio shall be equal to the remainder of (I)
the then applicable maximum Leverage Ratio minus (II) 0.25 to 1.00 and (B) if
the date of consummation of such acquisition is not the last day of a fiscal
quarter, the Consolidated Interest Coverage Ratio shall be calculated, on the
pro forma basis set forth above, with respect to the four fiscal quarters of
the Borrower most recently ended prior to such date), and shall deliver to the
Administrative Agent a certificate of a Financial Officer to such effect and
(ii) if any acquisition is consummated prior to December 31, 1999, (A) the
Leverage Ratio as of the date of the consummation of such acquisition shall be
equal, on a pro forma basis after giving effect to such acquisition (including
any operating expense reductions that would be permitted pursuant to Article XI
of Regulation S-X under the Securities Act of 1933, as amended, or that have
been approved by the Required Lenders and Indebtedness assumed or permitted to
exist in connection with such acquisition), to 5.75 to 1.00 and (B) the
Consolidated Interest Coverage Ratio for the period of the four fiscal quarters
of the Borrower ended on the date of consummation of such acquisition (or, if
such date is not the last day of a fiscal quarter, ended on the last day of the
fiscal quarter of the Borrower most recently ended prior to such date) shall be
equal, on a pro forma basis after giving effect to such acquisition (including
any cost savings to the extent approved by the Required Lenders and
Indebtedness assumed or permitted to exist in connection with such
acquisition), to 1.50 to 1.00 and the Borrower shall deliver a certificate of a
Financial Officer to the effect of each of the foregoing clauses (A) and (B),
(f) on a pro forma basis after giving effect to such acquisition, the sum of
(i) the unused Revolving Commitments and (ii) the dollar cash and cash
equivalents of the Borrower and the Subsidiaries not subject to any Lien or
other restriction (other than Permitted Liens and Liens and restrictions
arising under the Loan Documents) shall be equal to at least $5,000,000 and (g)
simultaneously with any such acquisition, the Administrative Agent for the
benefit of the Secured Parties shall be granted a first-priority security
interest in all real and personal property (including capital stock and other
securities or interests but excluding leasehold interests), subject to
customary and reasonable exceptions and permitted encumbrances, acquired by the
Borrower as part as such acquisition, and the Borrower shall, and shall cause
any applicable Subsidiary to, execute any documents (including supplements to
the Subsidiary Guarantee Agreement, the Security Agreement, the Pledge
Agreement and the Indemnity, Subrogation and Contribution Agreement, if
applicable), financing statements, agreements and instruments, and take all
action (including filing financing statements and obtaining and providing
consents, title insurance, surveys and legal opinions) that may be required
under applicable law or as the Administrative Agent may request, in order to
grant, preserve, protect and perfect such security interest; provided, however,
that the aggregate amount paid (including any Indebtedness assumed in
<PAGE> 31
25
connection therewith) in connection with (i) any such Permitted Acquisition
shall not exceed $30,000,000 (provided, that if the aggregate amount paid with
respect to any Permitted Acquisition, including any Indebtedness assumed in
connection therewith, is in excess of $25,000,000, at least $5,000,000 of the
consideration paid shall consist of Equity Interests of Holdings), (ii) all
such Permitted Acquisitions shall not exceed $50,000,000 during the term of
this Agreement and (iii) all Permitted Acquisitions involving assets located
outside the United States of America or the Equity Interests of entities
organized outside the United States of America shall not exceed $10,000,000 in
each case during the term of this Agreement.
"Permitted Business" means the Business and any business
providing for the design, manufacture or marketing of orthopedic products,
devices, accessories or services, other medical products, devices, accessories
or services or any businesses that are reasonably related, ancillary or
complementary thereto.
"Permitted Encumbrances" means:
(a) Liens imposed by law for Taxes or other governmental charges
that are not yet due or are being contested in compliance with Section
5.05;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's and other like Liens imposed by law,arising in the ordinary
course of business and securing obligations that are not overdue by more
than 60 days or are being contested in compliance with Section 5.05;
(c) pledges and deposits made in the ordinary course of business
in compliance with workers' compensation, unemployment insurance and other
social security laws or regulations;
(d) deposits to secure the performance of bids, trade contracts,
leases, statutory obligations, surety and appeal bonds, performance bonds
and other obligations of a like nature, in each case in the ordinary
course of business;
(e) judgment liens in respect of judgments that do not
constitute an Event of Default under clause (k) of Article VII;
(f) easements, zoning restrictions, rights-of-way and similar
encumbrances on real property imposed by law or arising in the ordinary
course of business that do not secure any monetary obligations and do not
materially detract from the value of the affected property or interfere
with the ordinary conduct of business of the Borrower or any Subsidiary;
<PAGE> 32
26
(g) any interest of a landlord in or to property of the tenant
imposed by law, arising in the ordinary course of business and securing
lease obligations that are not overdue by more than 60 days or are being
contested in compliance with Section 5.05, or any possessory rights of a
lessee to the leased property under the provisions of any lease permitted
by the terms of this Agreement; and
(h) Liens of a collection bank arising in the ordinary course of
business under Section 4-208 of the Uniform Commercial Code in effect in
the relevant jurisdiction,
provided that the term "Permitted Encumbrances" shall not include any Lien
securing Indebtedness.
"Permitted Investments" means:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are
backed by the full faith and credit of the United States of America), in
each case maturing within one year from the date of acquisition thereof;
(b) investments in commercial paper maturing within 270 days
from the date of acquisition thereof and having, at such date of
acquisition, the highest credit rating obtainable from S&P or from
Moody's;
(c) investments in certificates of deposit, banker's acceptances
and time deposits maturing within 180 days from the date of acquisition
thereof issued or guaranteed by or placed with, and money market deposit
accounts issued or offered by, any domestic office of any commercial bank
organized under the laws of the United States of America or any State
thereof that has a combined capital and surplus and undivided profits of
not less than $500,000,000;
(d) fully collateralized repurchase agreements with a term of
not more than 30 days for securities described in clause (a) above and
entered into with a financial institution satisfying the criteria
described in clause (c) above; and
(e) shares of funds registered under the Investment Company Act
of 1940, as amended, that have assets of at least $500,000,000 and invest
substantially all their assets in obligations described in clauses (a)
through (d) above to the extent that such shares are rated by Moody's or
S&P in one of the two highest rating categories assigned by such agency
for shares of such nature.
<PAGE> 33
27
"Person" means any natural person, corporation, limited
liability company, trust, joint venture, association, company, partnership,
Governmental Authority or other entity.
"Plan" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which the Borrower
or any ERISA Affiliate is (or, if such plan were terminated, would under
Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5)
of ERISA.
"Pledge Agreement" means the Pledge Agreement, substantially in
the form of Exhibit G, among Holdings, the Borrower, the Subsidiary Loan
Parties and the Collateral Agent for the benefit of the Secured Parties.
"Preferred Units" has the meaning assigned to such term in the
preamble of this Agreement.
"Prepayment Event" means:
(a) any sale, transfer or other disposition (including pursuant
to a sale and lease-back transaction) of any property or asset of
Holdings, the Borrower or any Subsidiary, other than (i) dispositions
described in clauses (a), (b) and (c) of Section 6.05, (ii) dispositions
to which clause (b) of this definition applies and (iii) other
dispositions resulting in aggregate Net Proceeds not exceeding $250,000
during any fiscal year of the Borrower;
(b) subject to Section 5.08, any casualty or other insured
damage to, or any taking under power of eminent domain or by condemnation
or similar proceeding of, any property or asset of Holdings, the Borrower
or any Subsidiary, other than casualties, insured damage or takings
resulting in aggregate Net Proceeds not exceeding $250,000 during any
fiscal year of the Borrower;
(c) (i) the issuance by Holdings, the Borrower or any Subsidiary
of any Equity Interests, or (ii) without duplication of clause (i) of this
paragraph (c), the receipt by Holdings, the Borrower or any Subsidiary of
any capital contribution, other than in each case (A) any such issuance of
Equity Interests by or to, or receipt of any such capital contribution
from, Holdings, the Borrower or a Subsidiary for the sole purpose of
financing a Permitted Acquisition (including any issuance to one or more
sellers in a Permitted Acquisition) or Capital Expenditures, (B) the
issuance of Equity Interests of Holdings to employees of the Borrower or
any of the Subsidiaries in their capacity as such pursuant to employee
benefit plans, employment agreements or other written employment-related
<PAGE> 34
28
arrangements or (C) the purchase of Equity Interests of a Subsidiary, or
the contribution of capital to a Subsidiary, by the Borrower from funds
obtained in a manner not otherwise constituting a Prepayment Event; and
(d) the incurrence by Holdings, the Borrower or any Subsidiary
of any Indebtedness, other than Indebtedness permitted by clauses (a) and
(b) of Section 6.01.
"Prime Rate" means the rate of interest per annum publicly
announced from time to time by the Administrative Agent as its prime rate in
effect at its principal office in Charlotte, North Carolina; each change in the
Prime Rate shall be effective from and including the date such change is
publicly announced as being effective.
"Pro Forma Capex Amount" has the meaning set forth in Section
6.12(a).
"Recapitalization" has the meaning assigned to such term in the
preamble of this agreement
"Recapitalization Agreement" has the meaning assigned to such
term in the preamble of this Agreement.
"Register" has the meaning set forth in Section 9.04.
"Regulation T" means Regulation T of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"Regulation U" means Regulation U of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"Regulation X" means Regulation X of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"Reinvestment Certificate" has the meaning set forth in the
definition of the term "Net Proceeds".
"Reinvestment Temporary Repayment" has the meaning set forth in
Section 2.11(f).
"Related Parties" means, with respect to any specified Person,
such Person's Affiliates (other than Sponsor and Persons Controlled by Sponsor
in the case of The Chase Manhattan Bank) and the respective directors,
officers, employees, agents and
<PAGE> 35
29
advisors of such Person and such Person's Affiliates (other than Sponsor and
Persons Controlled by Sponsor in the case of The Chase Manhattan Bank).
"Release" has the meaning set forth in Section 101(22) of
CERCLA.
"Required Lenders" means, at any time, Lenders having Revolving
Exposures, Term Loans and unused Commitments representing more than 50% of the
sum of the total Revolving Exposures, outstanding Term Loans and unused
Commitments at such time.
"Restricted Payment" means any dividend or other distribution
(whether in cash, securities or other property) with respect to any class of
Equity Interests of Holdings, the Borrower or any Subsidiary, or any payment
(whether in cash, securities or other property), including any sinking fund or
similar deposit, on account of the purchase, redemption, retirement,
acquisition, cancelation or termination of any Equity Interests of Holdings,
the Borrower or any Subsidiary or any option, warrant or other right to acquire
any Equity Interests of Holdings, the Borrower or any Subsidiary.
"Revolving Availability Period" means the period from and
including the Effective Date to but excluding the earlier of the Revolving
Maturity Date and the date of termination of the Revolving Commitments.
"Revolving Commitment" means, with respect to each Lender, the
commitment, if any, of such Lender to make Revolving Loans and to acquire
participations in Letters of Credit and Swingline Loans hereunder, expressed
as an amount representing the maximum aggregate amount of such Lender's
Revolving Exposure hereunder, as such commitment may be (a) reduced from time
to time pursuant to Section 2.08 and (b) reduced or increased from time to time
pursuant to assignments by or to such Lender pursuant to Section 9.04. The
initial amount of each Lender's Revolving Commitment is set forth on Schedule
2.01, or in the Assignment and Acceptance pursuant to which such Lender shall
have assumed its Revolving Commitment, as applicable. The initial aggregate
amount of the Lenders' Revolving Commitments is $25,000,000.
"Revolving Exposure" means, with respect to any Lender at any
time, the sum of the outstanding principal amount of such Lender's Revolving
Loans and its LC Exposure and Swingline Exposure at such time.
"Revolving Lender" means a Lender with a Revolving Commitment
or, if the Revolving Commitments have terminated or expired, a Lender with
Revolving Exposure.
<PAGE> 36
30
"Revolving Loan" means a Loan made pursuant to clause (b) of
Section 2.01.
"Revolving Maturity Date" means June 30, 2004, or if such day is
not a Business Day, the next preceding Business Day.
"Roll-Over Equity" has the meaning assigned to such term in the
preamble of this Agreement.
"S&P" means Standard & Poor's Rating Service.
"Secured Parties" has the meaning assigned to such term in the
Security Agreement.
"Security Agreement" means the Security Agreement, substantially
in the form of Exhibit H, among Holdings, the Borrower, the Subsidiary Loan
Parties and the Collateral Agent for the benefit of the Secured Parties.
"Security Documents" means the Security Agreement, the Pledge
Agreement, the Mortgages and each other security agreement, mortgage or other
instrument or document executed and delivered pursuant to Section 5.12 or 5.13
to secure any of the Obligations.
"Senior Subordinated Notes" has the meaning assigned to such
term in the preamble of this Agreement.
"Senior Subordinated Notes Indenture" means the indenture to be
entered into by Holdings, the Borrower and DJ Orthopedics Capital Corporation,
a Delaware corporation and a wholly owned Subsidiary, in connection with the
issuance of the Senior Subordinated Notes, together with all instruments and
other agreements entered into by Holdings, the Borrower and such Subsidiary in
connection therewith, as the same may be amended, supplemented or otherwise
modified from time to time in accordance with Section 6.11.
"Sponsor" has the meaning assigned to such term in the preamble
of this Agreement.
"Statutory Reserve Rate" means a fraction (expressed as a
decimal), the numerator of which is the number one and the denominator of which
is the number one minus the aggregate of the maximum reserve percentages
(including any marginal, special, emergency or supplemental reserves) expressed
as a decimal established by the Board to which the Administrative Agent is
subject (a) with respect to the Base CD Rate,
<PAGE> 37
31
for new negotiable nonpersonal time deposits in dollars of over $100,000 with
maturities approximately equal to three months and (b) with respect to the
Adjusted LIBO Rate, for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Board). Such reserve
percentages shall include those imposed pursuant to such Regulation D.
Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be
subject to such reserve requirements without benefit of or credit for
proration, exemptions or offsets that may be available from time to time to any
Lender under such Regulation D or any comparable regulation. The Statutory
Reserve Rate shall be adjusted automatically on and as of the effective date of
any change in any reserve percentage.
"subsidiary" means, with respect to any Person (the "parent") at
any date, any corporation, limited liability company, partnership, association
or other entity the accounts of which would be consolidated with those of the
parent in the parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, as well as
any other corporation, limited liability company, partnership, association or
other entity (a) of which Equity Interests representing more than 50% of the
equity or more than 50% of the ordinary voting power or, in the case of a
partnership, more than 50% of the general partnership interests are, as of such
date, owned, controlled or held, or (b) that is, as of such date, otherwise
Controlled, by the parent or one or more subsidiaries of the parent or by the
parent and one or more subsidiaries of the parent.
"Subsidiary" means any subsidiary of the Borrower.
"Subsidiary Guarantee Agreement" means the Subsidiary Guarantee
Agreement, substantially in the form of Exhibit E, made by the Subsidiary Loan
Parties in favor of the Collateral Agent for the benefit of the Secured
Parties.
"Subsidiary Loan Party" means any Subsidiary other than a
Foreign Subsidiary that, if it were to Guarantee the Obligations, would result
in adverse Tax consequences to Holdings or the Borrower.
"Swingline Exposure" means, at any time, the aggregate principal
amount of all Swingline Loans outstanding at such time. The Swingline Exposure
of any Lender at any time shall be its Applicable Percentage of the total
Swingline Exposure at such time.
"Swingline Lender" means The Chase Manhattan Bank or any of its
Affiliates, in its capacity as lender of Swingline Loans hereunder.
"Swingline Loan" means a Loan made pursuant to Section 2.04.
<PAGE> 38
32
"Syndication Agent" means The Chase Manhattan Bank in its
capacity as Syndication Agent with respect to this Agreement.
"Tax Distribution" means as of the time of determination
thereof, any distribution by the Borrower or Holdings, to (a) in the case of
the Borrower, Holdings or (b) in the case of Holdings, its members pursuant to
the provisions of Section 6.08(a)(i), which distribution shall be equal to (i)
with respect to quarterly estimated Tax payments due in each calendar year, 25%
of the Income Tax Liabilities for such calendar year as estimated in writing by
the chief financial officer of the Borrower in good faith and (ii) with respect
to Tax payments to be made with income Tax returns filed for a full calendar
year or with respect to adjustments to such returns imposed by the Internal
Revenue Service or other taxing authority, the Income Tax Liabilities for such
calendar year minus the aggregate amount distributed for such year as provided
in the preceding clause (i). In the event the amount determined under clause
(ii) of the immediately preceding sentence is a negative amount, the amount of
any Tax Distributions in the succeeding calendar year (or if necessary, any
next succeeding calendar years) shall be reduced by an aggregate amount equal
to such amount.
"Taxable Amount" has the meaning assigned to such term in the
definition of the term "Income Tax Liabilities".
"Taxes" means any and all current or future taxes, levies,
imposts, duties, deductions, charges or withholdings imposed by any
Governmental Authority.
"Term Commitment" means, with respect to each Lender, the
commitment, if any, of such Lender to make a Term Loan hereunder on the
Effective Date, expressed as an amount representing the maximum principal
amount of the Term Loan to be made by such Lender hereunder, as such commitment
may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced
or increased from time to time pursuant to assignments by or to such Lender
pursuant to Section 9.04. The initial amount of each Lender's Term Commitment
is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to
which such Lender shall have assumed its Term Commitment, as applicable. The
initial aggregate amount of the Lenders' Term Commitments is $15,500,000.
"Term Loans" means Loans made pursuant to clause (a) of Section
2.01.
"Term Maturity Date" means June 30, 2005, or if such day is not
a Business Day, the next preceding Business Day.
"Three-Month Secondary CD Rate" means, for any day, the
secondary market rate for three-month certificates of deposit reported as being
in effect on such day
<PAGE> 39
33
(or, if such day is not a Business Day, the next preceding Business Day) by the
Board through the public information telephone line of the Federal Reserve Bank
of New York (which rate will, under the current practices of the Board, be
published in Federal Reserve Statistical Release H.15(519) during the week
following such day) or, if such rate is not so reported on such day or such
next preceding Business Day, the average of the secondary market quotations for
three-month certificates of deposit of major money center banks in New York
City received at approximately 10:00 a.m., New York City time, on such day (or,
if such day is not a Business Day, on the next preceding Business Day) by the
Administrative Agent from three negotiable certificate of deposit dealers of
recognized standing selected by it.
"Total Debt" means, as of any date of determination, without
duplication, (a) the aggregate principal amount of Indebtedness of Holdings,
the Borrower and the Subsidiaries as of such date, determined on a consolidated
basis in accordance with GAAP (other than (i) Indebtedness of the type referred
to in clause (h) of the definition of the term "Indebtedness", except to the
extent of any unreimbursed drawings thereunder and Indebtedness of the type
referred to in Section 6.01(a)(x), and (ii) the aggregate principal amount of
Revolving Loans and Swingline Loans outstanding as of such date), plus (b) the
average daily principal amount of Revolving Loans and Swingline Loans
outstanding during the four-fiscal-quarter period immediately preceding such
date.
"Term Lender" means a Lender with a Term Commitment or an
outstanding Term Loan.
"Transaction Costs" has the meaning assigned to such term in the
preamble of this Agreement.
"Transactions" has the meaning assigned to such term in the
preamble of this Agreement.
"Type", when used in reference to any Loan or Borrowing, refers
to whether the rate of interest on such Loan, or on the Loans comprising such
Borrowing, is determined by reference to the Adjusted LIBO Rate or the
Alternate Base Rate.
"Withdrawal Liability" means liability to a Multiemployer Plan
as a result of a complete or partial withdrawal from such Multiemployer Plan,
as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Classification of Loans and Borrowings. For
purposes of this Agreement, Loans may be classified and referred to by Class
(e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class
and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be
classified and referred to by Class (e.g., a
<PAGE> 40
34
"Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class
and Type (e.g., a "Eurodollar Revolving Borrowing").
SECTION 1.03. Terms Generally. The definitions of terms herein
shall apply equally to the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The word "will" shall be construed to have the same meaning and effect as the
word "shall". Unless the context requires otherwise (a) any definition of or
reference to any agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth
herein), (b) any reference herein to any Person shall be construed to include
such Person's successors and assigns, (c) the words "herein", "hereof" and
"hereunder", and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all
references herein to Articles, Sections, Exhibits and Schedules shall be
construed to refer to Articles and Sections of, and Exhibits and Schedules to,
this Agreement and (e) the words "asset" and "property" shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.
SECTION 1.04. Accounting Terms; GAAP. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time, provided
that, if the Borrower notifies the Administrative Agent that the Borrower
requests an amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the application thereof on
the operation of such provision (or if the Administrative Agent notifies the
Borrower that the Required Lenders request an amendment to any provision hereof
for such purpose), regardless of whether any such notice is given before or
after such change in GAAP or in the application thereof, then such provision
shall be interpreted on the basis of GAAP as in effect and applied immediately
before such change shall have become effective until such notice shall have
been withdrawn or such provision amended in accordance herewith.
ARTICLE II
The Credits
<PAGE> 41
35
SECTION 2.01. Commitments. Subject to the terms and conditions
set forth herein, each Lender agrees (a) to make a Term Loan to the Borrower on
the Effective Date in a principal amount not exceeding its Term Commitment, and
(b) to make Revolving Loans to the Borrower from time to time during the
Revolving Availability Period in an aggregate principal amount that will not
result in such Lender's Revolving Exposure exceeding such Lender's Revolving
Commitment. Within the foregoing limits and subject to the terms and
conditions set forth herein, the Borrower may borrow, prepay and reborrow
Revolving Loans. Amounts repaid in respect of Term Loans may not be
reborrowed.
SECTION 2.02. Loans and Borrowings. (a) Each Loan (other
than a Swingline Loan) shall be made as part of a Borrowing consisting of Loans
of the same Class and Type made by the Lenders ratably in accordance with their
respective Commitments of the applicable Class. The failure of any Lender to
make any Loan required to be made by it shall not relieve any other Lender of
its obligations hereunder, provided that the Commitments of the Lenders are
several and no Lender shall be responsible for any other Lender's failure to
make Loans as required.
(b) Subject to Section 2.14, each Revolving Borrowing and Term
Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the
Borrower may request in accordance herewith. Notwithstanding anything to the
contrary contained herein, all Borrowings made on the Effective Date shall be
ABR Borrowings. Each Swingline Loan shall be an ABR Loan. Each Lender at its
option may make any Eurodollar Loan by causing any domestic or foreign branch
or Affiliate of such Lender to make such Loan, provided that any exercise of
such option shall not affect the obligation of the Borrower to repay such Loan
in accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any
Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an
integral multiple of $100,000 and not less than $2,000,000. At the time that
each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate
amount that is an integral multiple of $100,000 and not less than $2,000,000,
provided that an ABR Revolving Borrowing may be in an aggregate amount that is
equal to the entire unused balance of the total Revolving Commitments or that
is required to finance the reimbursement of an LC Disbursement as contemplated
by Section 2.05(e). Each Swingline Loan shall be in an amount that is an
integral multiple of $50,000 and not less than $250,000. Borrowings of more
than one Type and Class may be outstanding at the same time, provided that
there shall not at any time be more than a total of eight Eurodollar Borrowings
outstanding.
(d) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request, or to elect to convert or continue
(i) any Revolving Borrowing or Swingline Loan if the Interest Period requested
with respect thereto would
<PAGE> 42
36
end after the Revolving Maturity Date or (ii) any Term Borrowing if the
Interest Period requested with respect thereto would end after the Term
Maturity Date.
SECTION 2.03. Requests for Borrowings. To request a Revolving
Borrowing or Term Borrowing, the Borrower shall notify the Administrative Agent
of such request by telephone (a) in the case of a Eurodollar Borrowing, not
later than 11:00 a.m., New York City time, three Business Days before the date
of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later
than 11:00 a.m., New York City time, one Business Day before the date of the
proposed Borrowing, provided that any such notice of an ABR Revolving Borrowing
to finance the reimbursement of an LC Disbursement as contemplated by Section
2.05(e) may be given not later than 10:00 a.m., New York City time, on the date
of the proposed Borrowing. Each such telephonic Borrowing Request shall be
irrevocable and shall be confirmed promptly by hand delivery or telecopy to the
Administrative Agent of a written Borrowing Request in a form approved by the
Administrative Agent and signed by the Borrower. Each such telephonic and
written Borrowing Request shall specify the following information in compliance
with Section 2.02:
(i) whether the requested Borrowing is to be a Revolving
Borrowing or Term Borrowing;
(ii) the aggregate amount of such Borrowing;
(iii) the date of such Borrowing, which shall be a Business Day;
(iv) subject to the second sentence of Section 2.02(b), whether
such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;
(v) in the case of a Eurodollar Borrowing, the initial Interest
Period to be applicable thereto, which shall be a period contemplated by
the definition of the term "Interest Period"; and
(vi) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of
Section 2.06.
If no election as to the Type of Borrowing is specified, then the requested
Borrowing shall be an ABR Borrowing. If no Interest Period is specified with
respect to any requested Eurodollar Borrowing, then the Borrower shall be
deemed to have selected an Interest Period of one month's duration. Promptly
following receipt of a Borrowing Request in accordance with this Section, the
Administrative Agent shall advise each Lender of the details thereof and of the
amount of such Lender's Loan to be made as part of the requested Borrowing.
<PAGE> 43
37
SECTION 2.04. Swingline Loans. (a) Subject to the terms and
conditions set forth herein, the Swingline Lender agrees to make Swingline
Loans to the Borrower from time to time during the Revolving Availability
Period, in an aggregate principal amount at any time outstanding that will not
result in (i) the aggregate principal amount of outstanding Swingline Loans
exceeding $2,500,000 or (ii) the sum of the total Revolving Exposures exceeding
the total Revolving Commitments, provided that the Swingline Lender shall not
be required to make a Swingline Loan to refinance an outstanding Swingline
Loan. Within the foregoing limits and subject to the terms and conditions set
forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans.
(b) To request a Swingline Loan, the Borrower shall notify the
Administrative Agent and the Swingline Lender of such request by telephone
(confirmed by telecopy), not later than 1:00 p.m., New York City time, on the
day of a proposed Swingline Loan. Each such notice shall be irrevocable and
shall specify the requested date (which shall be a Business Day) and amount of
the requested Swingline Loan. The Swingline Lender shall make each Swingline
Loan available to the Borrower by means of a credit to the general deposit
account of the Borrower with the Swingline Lender (or, in the case of a
Swingline Loan made to finance the reimbursement of an LC Disbursement as
provided in Section 2.06(e), by remittance to the Issuing Bank) by 3:00 p.m.,
New York City time, on the requested date of such Swingline Loan.
(c) The Swingline Lender may by written notice given to the
Administrative Agent require the Revolving Lenders to acquire participations on
any Business Day in all or a portion of the Swingline Loans outstanding. Such
notice shall be given to the Administrative Agent not later than 11:00 a.m.,
New York City time, on the Business Day immediately preceeding the Business Day
on which the Revolving Lenders are required to acquire such participations and
shall specify the aggregate amount of Swingline Loans in which Revolving
Lenders will participate. Promptly upon receipt of such notice, the
Administrative Agent will give notice thereof to each Revolving Lender,
specifying in such notice such Lender's Applicable Percentage of such Swingline
Loan or Loans. Each Revolving Lender hereby absolutely and unconditionally
agrees, upon receipt of notice as provided above, to pay to the Administrative
Agent, for the account of the Swingline Lender, such Lender's Applicable
Percentage of such Swingline Loan or Loans. Each Revolving Lender acknowledges
and agrees that its obligation to acquire participations in Swingline Loans
pursuant to this paragraph is absolute and unconditional and shall not be
affected by any circumstance whatsoever, including the occurrence and
continuance of a Default or reduction or termination of the Commitments, and
that each such payment shall be made without any offset, abatement, withholding
or reduction whatsoever. Each Revolving Lender shall comply with its
obligation under this paragraph by wire transfer of immediately available
funds, in the same manner as
<PAGE> 44
38
provided in Section 2.06 with respect to Loans made by such Lender (and Section
2.06 shall apply, mutatis mutandis, to the payment obligations of the Revolving
Lenders), and the Administrative Agent shall promptly pay to the Swingline
Lender the amounts so received by it from the Revolving Lenders. The
Administrative Agent shall notify the Borrower of any participations in any
Swingline Loan acquired pursuant to this paragraph, and thereafter payments in
respect of such Swingline Loan shall be made to the Administrative Agent and
not to the Swingline Lender. Any amounts received by the Swingline Lender from
the Borrower (or other party on behalf of the Borrower) in respect of a
Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale
of participations therein shall be promptly remitted to the Administrative
Agent; any such amounts received by the Administrative Agent shall be promptly
remitted by the Administrative Agent to the Revolving Lenders that shall have
made their payments pursuant to this paragraph and to the Swingline Lender, as
their interests may appear. The purchase of participations in a Swingline Loan
pursuant to this paragraph shall not relieve the Borrower of any default in the
payment thereof.
SECTION 2.05. Letters of Credit. (a) General. Subject to the
terms and conditions set forth herein, the Borrower may request the issuance of
Letters of Credit for its own account or for the account of any Subsidiary
(subject, in the case of any Subsidiary which is not a Subsidiary Loan Party,
to the limitations set forth in Section 6.04), in a form reasonably acceptable
to the Administrative Agent and the Issuing Bank, at any time and from time to
time during the LC Availability Period. In the event of any inconsistency
between the terms and conditions of this Agreement and the terms and conditions
of any form of letter of credit application or other agreement submitted by the
Borrower to, or entered into by the Borrower with, the Issuing Bank relating to
any Letter of Credit, the terms and conditions of this Agreement shall control.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. To request the issuance of a Letter of Credit (or the amendment,
renewal or extension of an outstanding Letter of Credit), the Borrower shall
hand deliver or telecopy (or transmit by electronic communication, if
arrangements for doing so have been approved by the Issuing Bank) to the
Issuing Bank and the Administrative Agent (reasonably in advance of the
requested date of issuance, amendment, renewal or extension) a notice
requesting the issuance of a Letter of Credit, or identifying the Letter of
Credit to be amended, renewed or extended, and specifying the date of issuance,
amendment, renewal or extension (which shall be a Business Day), the date on
which such Letter of Credit is to expire (which shall comply with paragraph (c)
of this Section), the amount of such Letter of Credit, the name and address of
the beneficiary thereof and such other information as shall be necessary to
prepare, amend, renew or extend such Letter of Credit. If requested by the
Issuing Bank, the Borrower also shall submit a letter of credit application on
the Issuing Bank's standard form in connection with any request for a Letter of
Credit. A Letter of Credit shall be issued, amended, renewed or extended
<PAGE> 45
39
only if (and upon issuance, amendment, renewal or extension of each Letter of
Credit the Borrower shall be deemed to represent and warrant that), after
giving effect to such issuance, amendment, renewal or extension (i) the LC
Exposure shall not exceed $5,000,000 and (ii) the total Revolving Exposures
shall not exceed the total Revolving Commitments.
(c) Expiration Date. Each Letter of Credit shall expire at or
prior to the close of business on the earlier of (i) the date one year after
the date of the issuance of such Letter of Credit (or, in the case of any
renewal or extension thereof, one year after such renewal or extension) and
(ii) the date that is five Business Days prior to the Revolving Maturity Date.
(d) Participations. By the issuance of a Letter of Credit (or
an amendment to a Letter of Credit increasing the amount thereof) and without
any further action on the part of the Issuing Bank or the Lenders, the Issuing
Bank hereby grants to each Revolving Lender, and each Revolving Lender hereby
acquires from the Issuing Bank, a participation in such Letter of Credit equal
to such Lender's Applicable Percentage of the aggregate amount available to be
drawn under such Letter of Credit. In consideration and in furtherance of the
foregoing, each Revolving Lender hereby absolutely and unconditionally agrees
to pay to the Administrative Agent, for the account of the Issuing Bank, such
Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank
and not reimbursed by the Borrower on the date due as provided in paragraph (e)
of this Section, or of any reimbursement payment required to be refunded to the
Borrower for any reason. Each Lender acknowledges and agrees that its
obligation to acquire participations pursuant to this paragraph in respect of
Letters of Credit is absolute and unconditional and shall not be affected by
any circumstance whatsoever, including any amendment, renewal or extension of
any Letter of Credit or the occurrence and continuance of a Default or
reduction or termination of the Commitments, and that each such payment shall
be made without any offset, abatement, withholding or reduction whatsoever.
(e) Reimbursement. If the Issuing Bank shall make any LC
Disbursement in respect of a Letter of Credit, the Borrower shall reimburse
such LC Disbursement by paying to the Administrative Agent an amount equal to
such LC Disbursement not later than 1:00 p.m., New York City time, on the date
that such LC Disbursement is made, if the Borrower shall have received notice
of such LC Disbursement prior to 10:00 a.m., New York City time, on such date,
or, if such notice has not been received by the Borrower prior to such time on
such date, then not later than 12:00 noon, New York City time, on (i) the
Business Day that the Borrower receives such notice, if such notice is received
prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the
Business Day immediately following the day that the Borrower receives such
notice, if such notice is not received prior to such time on the day of
receipt, provided that the
<PAGE> 46
40
Borrower may, subject to the conditions to borrowing set forth herein, request
in accordance with Section 2.03 or 2.04 that such payment be financed with an
ABR Revolving Borrowing or Swingline Loan in an equivalent amount and, to the
extent so financed, the Borrower's obligation to make such payment shall be
discharged and replaced by the resulting ABR Revolving Borrowing or Swingline
Loan. If the Borrower fails to make such payment when due, the Administrative
Agent shall notify each Revolving Lender of the applicable LC Disbursement, the
payment then due from the Borrower in respect thereof and such Lender's
Applicable Percentage thereof. Promptly following receipt of such notice, each
Revolving Lender shall pay to the Administrative Agent its Applicable
Percentage of the payment then due from the Borrower, in the same manner as
provided in Section 2.06 with respect to Loans made by such Lender (and Section
2.06 shall apply, mutatis mutandis, to the payment obligations of the Revolving
Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank
the amounts so received by it from the Revolving Lenders. Promptly following
receipt by the Administrative Agent of any payment from the Borrower pursuant
to this paragraph, the Administrative Agent shall distribute such payment to
the Issuing Bank or, to the extent that Revolving Lenders have made payments
pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders
and the Issuing Bank as their interests may appear. Any payment made by a
Revolving Lender pursuant to this paragraph to reimburse the Issuing Bank for
any LC Disbursement (other than the funding of ABR Revolving Loans or a
Swingline Loan as contemplated above) shall not constitute a Loan and shall not
relieve the Borrower of its obligation to reimburse such LC Disbursement.
<PAGE> 47
41
(f) Obligations Absolute. The Borrower's obligation to
reimburse LC Disbursements as provided in paragraph (e) of this Section shall
be absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement under any and all circumstances
whatsoever and irrespective of (i) any lack of validity or enforceability of
any Letter of Credit or this Agreement, or any term or provision therein, (ii)
any draft or other document presented under a Letter of Credit proving to be
forged, fraudulent or invalid in any respect or any statement therein being
untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a
Letter of Credit against presentation of a draft or other document that does
not comply with the terms of such Letter of Credit, or (iv) any other event or
circumstance whatsoever, whether or not similar to any of the foregoing, that
might, but for the provisions of this Section, constitute a legal or equitable
discharge of, or provide a right of set-off against, the Borrower's obligations
hereunder. None of the Administrative Agent, the Lenders, the Issuing Bank or
any of their Related Parties shall have any liability or responsibility by
reason of or in connection with the issuance or transfer of any Letter of
Credit or any payment or failure to make any payment thereunder (irrespective
of any of the circumstances referred to in the preceding sentence), or any
error, omission, interruption, loss or delay in transmission or delivery of any
draft, notice or other communication under or relating to any Letter of Credit
(including any document required to make a drawing thereunder), any error in
interpretation of technical terms or any consequence arising from causes beyond
the control of the Issuing Bank, provided that the foregoing shall not be
construed to excuse the Issuing Bank from liability to the Borrower to the
extent of any direct damages (as opposed to consequential damages, claims in
respect of which are hereby waived by the Borrower to the extent permitted by
applicable law) suffered by the Borrower that are caused by the Issuing Bank's
failure to exercise care when determining whether drafts and other documents
presented under a Letter of Credit comply with the terms thereof. The parties
hereto expressly agree that, in the absence of gross negligence or wilful
misconduct on the part of the Issuing Bank (as finally determined by a court of
competent jurisdiction), the Issuing Bank shall be deemed to have exercised
care in each such determination. In furtherance of the foregoing and without
limiting the generality thereof, the parties agree that, with respect to
documents presented that appear on their face to be in substantial compliance
with the terms of a Letter of Credit, the Issuing Bank may, in its sole
discretion, either accept and make payment upon such documents without
responsibility for further investigation, regardless of any notice or
information to the contrary, or refuse to accept and make payment upon such
documents if such documents are not in strict compliance with the terms of such
Letter of Credit.
(g) Disbursement Procedures. The Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. The Issuing Bank shall promptly
notify the Administrative Agent and the Borrower by telephone (confirmed by
telecopy) of such
<PAGE> 48
42
demand for payment and whether the Issuing Bank has made or will make an LC
Disbursement thereunder, provided that any failure to give or delay in giving
such notice shall not relieve the Borrower of its obligation to reimburse the
Issuing Bank and the Revolving Lenders with respect to any such LC
Disbursement.
(h) Interim Interest. If the Issuing Bank shall make any LC
Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in
full on the date such LC Disbursement is made, the unpaid amount thereof shall
bear interest, for each day from and including the date such LC Disbursement is
made to but excluding the date that the Borrower reimburses such LC
Disbursement, at the rate per annum then applicable to ABR Revolving Loans,
provided that, if the Borrower fails to reimburse such LC Disbursement when due
pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply.
Interest accrued pursuant to this paragraph shall be for the account of the
Issuing Bank, except that interest accrued on and after the date of payment by
any Revolving Lender pursuant to paragraph (e) of this Section to reimburse the
Issuing Bank shall be for the account of such Lender to the extent of such
payment.
(i) Replacement of the Issuing Bank. The Issuing Bank may be
replaced at any time by written agreement among the Borrower, the
Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank.
The Administrative Agent shall notify the Lenders of any such replacement of
the Issuing Bank. At the time any such replacement shall become effective, the
Borrower shall pay all unpaid fees accrued for the account of the replaced
Issuing Bank pursuant to Section 2.12(b). From and after the effective date of
any such replacement, (i) the successor Issuing Bank shall have all the rights
and obligations of the Issuing Bank under this Agreement with respect to
Letters of Credit to be issued thereafter and (ii) references herein to the
term "Issuing Bank" shall be deemed to refer to such successor or to any
previous Issuing Bank, or to such successor and all previous Issuing Banks, as
the context shall require. After the replacement of an Issuing Bank hereunder,
the replaced Issuing Bank shall remain a party hereto and shall continue to
have all the rights and obligations of an Issuing Bank under this Agreement
with respect to Letters of Credit issued by it prior to such replacement, but
shall not be required to issue additional Letters of Credit.
(j) Cash Collateralization. If any Event of Default shall
occur and be continuing, on the Business Day that the Borrower receives notice
from the Administrative Agent or the Required Lenders (or, if the maturity of
the Loans has been accelerated, Revolving Lenders with LC Exposure representing
greater than 50% of the total LC Exposure) demanding the deposit of cash
collateral pursuant to this paragraph, the Borrower shall deposit in an account
with the Administrative Agent, in the name of the Administrative Agent and for
the benefit of the Lenders, an amount in cash equal to 105% of the LC Exposure
as of such date plus any accrued and unpaid interest thereon, provided that the
obligation to deposit such cash collateral shall become effective
<PAGE> 49
43
immediately, and such deposit shall become immediately due and payable, without
demand or other notice of any kind, upon the occurrence of any Event of Default
with respect to the Borrower described in clause (h) or (i) of Article VII.
Each such deposit shall be held by the Administrative Agent as collateral for
the payment and performance of the obligations of the Borrower under this
Agreement. The Administrative Agent shall have exclusive dominion and control,
including the exclusive right of withdrawal, over such account. Other than any
interest earned on the investment of such deposits, which investments (if
requested by the Borrower) shall be made at the option and sole discretion of
the Administrative Agent and at the Borrower's risk and expense, such deposits
shall not bear interest. Interest or profits, if any, on such investments
shall accumulate in such account. Moneys in such account shall be applied by
the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for
which it has not been reimbursed and, to the extent not so applied, shall be
held for the satisfaction of the reimbursement obligations of the Borrower for
the LC Exposure at such time or, if the maturity of the Loans has been
accelerated (but subject to the consent of Revolving Lenders with LC Exposure
representing greater than 50% of the total LC Exposure), be applied to satisfy
other obligations of the Borrower under this Agreement. If the Borrower is
required to provide an amount of cash collateral hereunder as a result of the
occurrence of an Event of Default, such amount (to the extent not applied as
aforesaid) shall be returned to the Borrower within three Business Days after
all Events of Default have been cured or waived.
SECTION 2.06. Funding of Borrowings. (a) Each Lender shall
make each Loan to be made by it hereunder on the proposed date thereof by wire
transfer of immediately available funds by 12:00 noon, New York City time, to
the account of the Administrative Agent most recently designated by it for such
purpose by notice to the Lenders, provided that Swingline Loans shall be made
as provided in Section 2.04. The Administrative Agent will make such Loans
available to the Borrower by promptly crediting the amounts so received, in
like funds, to an account designated by the Borrower in the applicable
Borrowing Request, provided that ABR Revolving Loans made to finance the
reimbursement of an LC Disbursement as provided in Section 2.05(e) shall be
remitted by the Administrative Agent to the Issuing Bank.
(b) Unless the Administrative Agent shall have received notice
from a Lender prior to the proposed date of any Borrowing that such Lender will
not make available to the Administrative Agent such Lender's share of such
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with paragraph (a) of this Section
and may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. In such event, if a Lender has not in fact made its
share of the applicable Borrowing available to the Administrative Agent, then
the applicable Lender and the Borrower severally agree to pay to the
Administrative Agent forthwith on demand such corresponding amount with
<PAGE> 50
44
interest thereon, for each day from and including the date such amount is made
available to the Borrower to but excluding the date of payment to the
Administrative Agent, at (i) in the case of such Lender, the greater of the
Federal Funds Effective Rate and a rate determined by the Administrative Agent
in accordance with banking industry rules on interbank compensation or (ii) in
the case of the Borrower, the interest rate applicable to ABR Loans. If such
Lender pays such amount to the Administrative Agent, then such amount shall
constitute such Lender's Loan included in such Borrowing.
SECTION 2.07. Interest Elections. (a) Each Revolving
Borrowing and Term Borrowing initially shall be of the Type specified in the
applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall
have an initial Interest Period as specified in such Borrowing Request.
Thereafter, the Borrower may elect to convert such Borrowing to a different
Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing,
may elect Interest Periods therefor, all as provided in this Section. The
Borrower may elect different options with respect to different portions of the
affected Borrowing, in which case each such portion shall be allocated ratably
among the Lenders holding the Loans comprising such Borrowing, and the Loans
comprising each such portion shall be considered a separate Borrowing. This
Section shall not apply to Swingline Borrowings, which may not be converted or
continued.
(b) To make an election pursuant to this Section, the Borrower
shall notify the Administrative Agent of such election by telephone by the time
that a Borrowing Request would be required under Section 2.03 if the Borrower
were requesting a Revolving Borrowing of the Type resulting from such election
to be made on the effective date of such election. Each such telephonic
Interest Election Request shall be irrevocable and shall be confirmed promptly
by hand delivery or telecopy to the Administrative Agent of a written Interest
Election Request in a form approved by the Administrative Agent and signed by
the Borrower.
(c) Each telephonic and written Interest Election Request shall
specify the following information in compliance with Section 2.02 and paragraph
(f) of this Section:
(i) the Borrowing to which such Interest Election Request
applies and, if different options are being elected with respect to
different portions thereof, the portions thereof to be allocated to each
resulting Borrowing (in which case the information to be specified
pursuant to clauses (iii) and (iv) below shall be specified for each
resulting Borrowing);
(ii) the effective date of the election made pursuant to such
Interest Election Request, which shall be a Business Day;
<PAGE> 51
45
(iii) whether the resulting Borrowing is to be an ABR Borrowing
or a Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the
Interest Period to be applicable thereto after giving effect to such
election, which shall be a period contemplated by the definition of the
term "Interest Period".
If any such Interest Election Request requests a Eurodollar Borrowing but does
not specify an Interest Period, then the Borrower shall be deemed to have
selected an Interest Period of one month's duration.
(d) Promptly following receipt of an Interest Election Request,
the Administrative Agent shall advise each Lender of the details thereof and of
such Lender's portion of each resulting Borrowing.
(e) If the Borrower fails to deliver a timely Interest Election
Request with respect to a Eurodollar Borrowing prior to the end of the Interest
Period applicable thereto, then, unless such Borrowing is repaid as provided
herein, at the end of such Interest Period such Borrowing shall be converted to
an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event
of Default has occurred and is continuing and the Administrative Agent, at the
request of the Required Lenders, so notifies the Borrower, then, so long as an
Event of Default is continuing (i) no outstanding Borrowing may be converted to
or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar
Borrowing shall be converted to an ABR Borrowing at the end of the Interest
Period applicable thereto.
(f) A Borrowing of any Class may not be converted to or
continued as a Eurodollar Borrowing if after giving effect thereto (i) the
Interest Period therefor would commence before and end after a date on which
any principal of the Loans of such Class is scheduled to be repaid and (ii) the
sum of the aggregate principal amount of outstanding Eurodollar Borrowings of
such Class with Interest Periods ending on or prior to such scheduled repayment
date plus the aggregate principal amount of outstanding ABR Borrowings of such
Class would be less than the aggregate principal amount of Loans of such Class
required to be repaid on such scheduled repayment date.
SECTION 2.08. Termination and Reduction of Commitments. (a)
Unless previously terminated, (i) the Term Commitments shall terminate at 5:00
p.m., New York City time, on the Effective Date and (ii) the Revolving
Commitments shall terminate on the Revolving Maturity Date.
(b) The Borrower may at any time terminate, or from time to
time reduce, the Commitments of any Class, provided that (i) each reduction of
the Commitments of any Class shall be in an amount that is an integral multiple
of $1,000,000 and not less
<PAGE> 52
46
than $2,000,000 and (ii) the Borrower shall not terminate or reduce the
Revolving Commitments if, after giving effect to any concurrent prepayment of
the Revolving Loans in accordance with Section 2.11, the sum of the Revolving
Exposures would exceed the total Revolving Commitments.
(c) The Borrower shall notify the Administrative Agent of any
election to terminate or reduce the Commitments under paragraph (b) of this
Section at least three Business Days prior to the effective date of such
termination or reduction, specifying such election and the effective date
thereof. Promptly following receipt of any notice, the Administrative Agent
shall advise the Lenders of the contents thereof. Each notice delivered by the
Borrower pursuant to this Section shall be irrevocable, provided that a notice
of termination of the Revolving Commitments delivered by the Borrower may state
that such notice is conditioned upon the effectiveness of other credit
facilities, an initial public offering of Equity Interests in Holdings or the
Borrower or a sale of all or substantially all the assets or Equity Interests
of the Borrower or Holdings (whether by merger or otherwise), in which case
such notice may be revoked by the Borrower (by notice to the Administrative
Agent on or prior to the specified effective date) if such condition is not
satisfied. Any termination or reduction of the Commitments of any Class shall
be permanent. Each reduction of the Commitments of any Class shall be made
ratably among the Lenders in accordance with their respective Commitments of
such Class.
SECTION 2.09. Repayment of Loans, Evidence of Debt. (a) The
Borrower hereby unconditionally promises to pay (i) to the Administrative Agent
for the account of each Lender the then unpaid principal amount of each
Revolving Loan of such Lender on the Revolving Maturity Date, (ii) to the
Administrative Agent for the account of each Lender the then unpaid principal
amount of each Term Loan of such Lender as provided in Section 2.10 and (iii)
to the Swingline Lender the then unpaid principal amount of each Swingline Loan
on the earlier of the Revolving Maturity Date and the first date after such
Swingline Loan is made that is the 15th or last day of a calendar month and is
at least two Business Days after such Swingline Loan is made, provided that on
each date that a Revolving Borrowing is made, the Borrower shall repay all
Swingline Loans then outstanding.
(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing the indebtedness of the Borrower to
such Lender resulting from each Loan made by such Lender, including the amounts
of principal and interest payable and paid to such Lender from time to time
hereunder.
(c) The Administrative Agent shall maintain accounts in which
it shall record (i) the amount of each Loan made hereunder, the Class and Type
thereof and the Interest Period applicable thereto, (ii) the amount of any
principal or interest due and
<PAGE> 53
47
payable or to become due and payable from the Borrower to each Lender hereunder
and (iii) the amount of any sum received by the Administrative Agent hereunder
for the account of the Lenders and each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
paragraph (b) or (c) of this Section shall be prima facie evidence of the
existence and amounts of the obligations recorded therein, provided that the
failure of any Lender or the Administrative Agent to maintain such accounts or
any error therein shall not in any manner affect the obligation of the Borrower
to repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans of any Class made by it
be evidenced by a promissory note. In such event, the Borrower shall prepare,
execute and deliver to such Lender a promissory note payable to the order of
such Lender (or, if requested by such Lender, to such Lender and its registered
assigns) and in a customary form reasonably satisfactory to the Administrative
Agent and the Borrower. Thereafter, the Loans evidenced by such promissory
note and interest thereon shall at all times (including after assignment
pursuant to Section 9.04) be represented by one or more promissory notes in
such form payable to the order of the payee named therein (or, if such
promissory note is a registered note, to such payee and its registered
assigns).
SECTION 2.10. Amortization of Term Loans. (a) Subject to
adjustment pursuant to paragraph (c) of this Section, the Borrower shall repay
Term Borrowings on the last Business Day of each month set forth below (or, in
the case of the last repayment, on the Term Maturity Date) in the aggregate
principal amount set forth opposite such month:
<TABLE>
<CAPTION>
Date Amount
- ---- ------
<S> <C>
September, 1999 $125,000
December, 1999 $125,000
March, 2000 $125,000
June, 2000 $125,000
September, 2000 $125,000
December, 2000 $125,000
March, 2001 $125,000
June, 2001 $125,000
September, 2001 $125,000
December, 2001 $125,000
</TABLE>
<PAGE> 54
48
<TABLE>
<CAPTION>
Date Amount
- ---- ------
<S> <C>
March, 2002 $125,000
June, 2002 $125,000
September, 2002 $125,000
December, 2002 $125,000
March, 2003 $125,000
June, 2003 $125,000
September, 2003 $125,000
December, 2003 $125,000
March, 2004 $125,000
June, 2004 $125,000
September, 2004 $3,250,000
December, 2004 $3,250,000
March, 2005 $3,250,000
Term Maturity Date $3,250,000
----------
$15,500,000
==========
</TABLE>
(b) To the extent not previously paid, all Term Loans shall be
due and payable on the Term Maturity Date.
(c) If the initial aggregate amount of the Lenders' Term
Commitments exceeds the aggregate principal amount of Term Loans that are made
on the Effective Date, then the scheduled repayments of Term Borrowings to be
made pursuant to this Section shall be reduced ratably by an aggregate amount
equal to such excess. Any prepayment of a Term Borrowing shall be applied to
reduce the subsequent scheduled repayments of the Term Borrowings to be made
pursuant to this Section ratably.
(d) Prior to any repayment of any Term Borrowings hereunder,
the Borrower shall select the Borrowing or Borrowings to be repaid and shall
notify the Administrative Agent by telephone (confirmed by telecopy) of such
selection not later than 11:00 a.m., New York City time, three Business Days
before the scheduled date of such repayment, provided that each repayment of
Term Borrowings shall be applied to repay any outstanding ABR Borrowings before
any Eurodollar Borrowings. Each repayment of a Borrowing shall be applied
ratably to the Loans included in the repaid Borrowing. Repayments of Term
Borrowings shall be accompanied by accrued interest on the amount repaid.
<PAGE> 55
49
SECTION 2.11. Prepayment of Loans. (a) The Borrower shall
have the right at any time and from time to time to prepay any Borrowing in
whole or in part, subject to the requirements of this Section.
(b) Subject to the provisions of Section 5.08(b), in the event
and on each occasion that any Net Proceeds are received by or on behalf of
Holdings, the Borrower or any Subsidiary in respect of any Prepayment Event,
the Borrower shall, promptly after such Net Proceeds are received, prepay Term
Borrowings in an aggregate amount equal to 100% of such Net Proceeds.
(c) Following the end of each fiscal year of the Borrower,
commencing with the fiscal year ending December 1999, the Borrower shall prepay
Term Borrowings in an aggregate amount equal to the amount by which (i) 50% of
Excess Cash Flow for such fiscal year (provided that such percentage shall be
increased from 50% to 75% in respect of any fiscal year if the Leverage Ratio
as of the last day of such fiscal year is equal to or exceeds 4.00 to 1.00)
exceeds (ii) the aggregate amount of all prepayments actually made pursuant to
Section 2.11(a) since the date a prepayment was made pursuant to this paragraph
in respect of the immediately preceding fiscal year of the Borrower (or would
have been required to be made pursuant to this paragraph if so required with
respect to such immediately preceding fiscal year). Each prepayment pursuant
to this paragraph shall be made on or before the date that is three days after
the date on which financial statements are delivered pursuant to Section 5.01
with respect to the fiscal year for which Excess Cash Flow is being calculated
(and in any event within 100 days after the end of such fiscal year).
(d) Prior to any optional or mandatory prepayment of Borrowings
hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid
and shall specify such selection in the notice of such prepayment pursuant to
paragraph (e) of this Section, provided that each prepayment shall be applied
to prepay ABR Borrowings before any Eurodollar Borrowings.
(e) The Borrower shall notify the Administrative Agent (and, in
the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone
(confirmed by telecopy) of any prepayment hereunder (i) in the case of
prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City
time, three Business Days before the date of prepayment, (ii) in the case of
prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time,
one Business Day before the date of prepayment or (iii) in the case of
prepayment of a Swingline Loan, not later than 12:00 noon, New York City time,
on the date of prepayment. Each such notice shall be irrevocable and shall
specify the prepayment date, the principal amount of each Borrowing or portion
thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably
detailed calculation of the amount of such prepayment, provided that, if a
notice of optional
<PAGE> 56
50
prepayment is given in connection with a conditional notice of termination of
the Revolving Commitments as contemplated by Section 2.08, then such notice of
prepayment may be revoked if such notice of termination is revoked in
accordance with Section 2.08. Promptly following receipt of any such notice
(other than a notice relating solely to Swingline Loans), the Administrative
Agent shall advise the Lenders of the contents thereof. Each partial
prepayment of any Borrowing shall be in an amount that would be permitted in
the case of an advance of a Borrowing of the same Type as provided in Section
2.02, except as necessary to apply fully the required amount of a mandatory
prepayment. Each prepayment of a Borrowing shall be applied ratably to the
Loans included in the prepaid Borrowing. Prepayments shall be accompanied by
accrued interest to the extent required by Section 2.13.
(f) In the event the Borrower specifies in the applicable
Reinvestment Certificate that the Borrower will apply the Net Proceeds of any
asset sale or other disposition to the temporary repayment of Revolving Loans
pursuant to this Section 2.11(f), the Borrower shall apply such Net Proceeds to
the repayment of Revolving Loans as provided in this Section, without giving
effect to any minimum repayment amounts set forth herein. Any such repayment
is referred to herein as a "Reinvestment Temporary Repayment". The Borrower
may from time to time reborrow all or a portion of the amount repaid pursuant
to any Reinvestment Temporary Repayment if (i) such borrowing complies with all
the procedures for a Revolving Borrowing set forth in Section 2.03 and (ii)
promptly upon the receipt of the proceeds of such Revolving Borrowing, the
Borrower (A) reinvests such proceeds in accordance with the terms of the
proviso in the definition of the term "Net Proceeds" or (B) applies such
proceeds to the prepayment of Term Loans as provided in Section 2.11(b). So
long as any portion of any Reinvestment Temporary Repayment has not been
reborrowed, the Borrower shall not be entitled to borrow, and no Lender shall
be entitled to make, Revolving Loans or Swingline Loans if after giving effect
thereto the aggregate Revolving Exposure at such time would exceed an amount
equal to (i) the aggregate amount of the Revolving Commitments at such time
minus (ii) the aggregate amount of all Reinvestment Temporary Repayments that
have not been reborrowed at such time.
SECTION 2.12. Fees. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Revolving Lender a commitment fee,
which shall accrue at the Applicable Rate on the average daily unused amount of
the Revolving Commitment of such Lender during the period from and including
the Effective Date to but excluding the date on which such Revolving Commitment
terminates. Accrued commitment fees shall be payable in arrears on the last
day of June, September, December and March of each year and on the date on
which the Revolving Commitments terminate, commencing on the first such date to
occur after the date hereof. All commitment fees shall be computed on the
basis of a year of 360 days and shall be payable for the actual number of days
elapsed (including the first day but excluding the
<PAGE> 57
51
last day). For purposes of computing commitment fees with respect to Revolving
Commitments, a Revolving Commitment of a Lender shall be deemed to be used to
the extent of the outstanding Revolving Loans and LC Exposure of such Lender
(and the Swingline Exposure of such Lender shall be disregarded for such
purpose).
(b) The Borrower agrees to pay (i) to the Administrative Agent
for the account of each Revolving Lender a participation fee with respect to
its participations in Letters of Credit, which shall accrue at the same
Applicable Rate as interest on Eurodollar Revolving Loans on the average daily
amount of such Lender's LC Exposure (excluding any portion thereof attributable
to unreimbursed LC Disbursements) during the period from and including the
Effective Date to but excluding the later of the date on which such Lender's
Revolving Commitment terminates and the date on which such Lender ceases to
have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall
accrue at the rate of 3 of 1% per annum on the average daily amount of the LC
Exposure (excluding any portion thereof attributable to unreimbursed LC
Disbursements) during the period from and including the Effective Date to but
excluding the later of the date of termination of the Revolving Commitments and
the date on which there ceases to be any LC Exposure, as well as the Issuing
Bank's standard fees with respect to the issuance, amendment, renewal or
extension of any Letter of Credit or processing of drawings thereunder.
Accrued participation fees and fronting fees shall be payable on the last day
of June, September, December and March of each year, commencing on the first
such date to occur after the Effective Date, provided that all such fees shall
be payable on the date on which the Revolving Commitments terminate and any
such fees accruing after the date on which the Revolving Commitments terminate
shall be payable on demand. Any other fees payable to the Issuing Bank
pursuant to this paragraph shall be payable within 10 days after demand. All
participation fees and fronting fees shall be computed on the basis of a year
of 360 days and shall be payable for the actual number of days elapsed
(including the first day but excluding the last day).
(c) The Borrower agrees to pay to the Administrative Agent, for
its own account, fees payable in the amounts and at the times separately agreed
upon between the Borrower and the Administrative Agent.
(d) All fees payable hereunder shall be paid on the dates due,
in immediately available funds, to the Administrative Agent (or to the Issuing
Bank, in the case of fees payable to it) for distribution, in the case of
commitment fees and participation fees, to the Lenders entitled thereto. Fees
paid shall not be refundable under any circumstances.
SECTION 2.13. Interest. (a) The Loans comprising each ABR
Borrowing (including each Swingline Loan) shall bear interest at the Alternate
Base Rate plus the Applicable Rate.
<PAGE> 58
52
(b) The Loans comprising each Eurodollar Borrowing shall bear
interest at the Adjusted LIBO Rate for the Interest Period in effect for such
Borrowing plus the Applicable Rate.
(c) Notwithstanding the foregoing, if any principal of or
interest on any Loan or any fee or other amount payable by the Borrower
hereunder is not paid when due, whether at stated maturity, upon acceleration
or otherwise, such overdue amount shall bear interest, after as well as before
judgment, at a rate per annum equal to (i) in the case of overdue principal of
any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the
preceding paragraphs of this Section or (ii) in the case of any other amount,
2% plus the rate applicable to ABR Revolving Loans as provided in paragraph (a)
of this Section.
(d) Accrued interest on each Loan shall be payable in arrears
on each Interest Payment Date for such Loan and, in the case of Revolving
Loans, upon termination of the Revolving Commitments, provided that (A)
interest accrued pursuant to paragraph (c) of this Section shall be payable on
demand, (B) in the event of any repayment or prepayment of any Loan (other than
a prepayment of an ABR Revolving Loan prior to the end of the Revolving
Availability Period), accrued interest on the principal amount repaid or
prepaid shall be payable on the date of such repayment or prepayment and (C) in
the event of any conversion of any Eurodollar Loan prior to the end of the
current Interest Period therefor, accrued interest on such Loan shall be
payable on the effective date of such conversion.
(e) All interest hereunder shall be computed on the basis of a
year of 360 days, except that interest computed by reference to the Alternate
Base Rate at times when the Alternate Base Rate is based on the Prime Rate
shall be computed on the basis of a year of 365 days (or 366 days in a leap
year), and in each case shall be payable for the actual number of days elapsed
(including the first day but excluding the last day). The applicable Alternate
Base Rate or Adjusted LIBO Rate shall be determined by the Administrative
Agent, and such determination shall be conclusive absent manifest error.
SECTION 2.14. Alternate Rate of Interest. If prior to the
commencement of any Interest Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination
shall be conclusive absent manifest error) that adequate and reasonable
means do not exist for ascertaining the Adjusted LIBO Rate for such
Interest Period; or
(b) the Administrative Agent is advised by the Required Lenders
that the Adjusted LIBO Rate for such Interest Period will not adequately
and fairly reflect
<PAGE> 59
53
the cost to such Lenders (or Lender) of making or maintaining their Loans
(or its Loan) included in such Borrowing for such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Borrowing to, or
continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective
and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such
Borrowing shall be made as an ABR Borrowing.
SECTION 2.15. Increased Costs. (a) If any Change in Law
shall:
(i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender (except any such reserve
requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank; or
(ii) impose on any Lender or the Issuing Bank or the London
interbank market any other condition affecting this Agreement or
Eurodollar Loans made by such Lender or any Letter of Credit or
participation therein;
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan (or of maintaining its
obligation to make any such Loan) or to increase the cost to such Lender or the
Issuing Bank of participating in, issuing or maintaining any Letter of Credit
or to reduce the amount of any sum received or receivable by such Lender or the
Issuing Bank in respect thereof (whether of principal, interest or otherwise),
then the Borrower will pay to such Lender or the Issuing Bank, as the case may
be, such additional amount or amounts as will compensate such Lender or the
Issuing Bank, as the case may be, for such additional costs incurred or
reduction suffered.
(b) If any Lender or the Issuing Bank determines that any
Change in Law regarding capital requirements has or would have the effect of
reducing the rate of return on such Lender's or the Issuing Bank's capital or
on the capital of such Lender's or the Issuing Bank's holding company, if any,
as a consequence of this Agreement or the Loans made by, or participations in
Letters of Credit held by, such Lender, or the Letters of Credit issued by the
Issuing Bank, to a level below that which such Lender or the Issuing Bank or
such Lender's or the Issuing Bank's holding company could have achieved but for
such Change in Law (taking into consideration such Lender's or the Issuing
Bank's policies and the policies of such Lender's or the Issuing Bank's holding
company with respect to capital adequacy), then from time to time the Borrower
will pay
<PAGE> 60
54
to such Lender or the Issuing Bank, as the case may be, such additional amount
or amounts as will compensate such Lender or the Issuing Bank or such Lender's
or the Issuing Bank's holding company for any such reduction suffered.
(c) A certificate of a Lender or the Issuing Bank setting forth
the amount or amounts necessary to compensate such Lender or the Issuing Bank
or its holding company, as the case may be, as specified in paragraph (a) or
(b) of this Section (and setting forth the underlying calculations) shall be
delivered to the Borrower and shall be conclusive absent manifest error. The
Borrower shall pay such Lender or the Issuing Bank, as the case may be, the
amount shown as due on any such certificate within 10 days after receipt
thereof.
(d) Failure or delay on the part of any Lender or the Issuing
Bank to demand compensation pursuant to this Section shall not constitute a
waiver of such Lender's or the Issuing Bank's right to demand such
compensation, provided that the Borrower shall not be required to compensate a
Lender or the Issuing Bank pursuant to this Section for any increased costs or
reductions incurred more than 180 days prior to the date that such Lender or
the Issuing Bank, as the case may be, notifies the Borrower of the Change in
Law giving rise to such increased costs or reductions and of such Lender's or
the Issuing Bank's intention to claim compensation therefor; and, provided
further that, if the Change in Law giving rise to such increased costs or
reductions is retroactive, then the 180-day period referred to above shall be
extended to include the period of retroactive effect thereof.
SECTION 2.16. Break Funding Payments. In the event of (a) the
payment of any principal of any Eurodollar Loan other than on the last day of
an Interest Period applicable thereto (including as a result of an Event of
Default), (b) the conversion of any Eurodollar Loan other than on the last day
of the Interest Period applicable thereto, (c) the failure to borrow, convert,
continue or prepay any Revolving Loan or Term Loan on the date specified in any
notice delivered pursuant hereto (regardless of whether such notice may be
revoked under Section 2.11(e) and is revoked in accordance therewith), or (d)
the assignment of any Eurodollar Loan other than on the last day of the
Interest Period applicable thereto as a result of a request by the Borrower
pursuant to Section 2.19, then, in any such event, the Borrower shall
compensate each Lender for the loss, cost and expense incurred by such Lender
attributable to such event. In the case of a Eurodollar Loan, such loss, cost
or expense to any Lender shall be deemed to include an amount determined by
such Lender to be the excess, if any, of (i) the amount of interest that would
have accrued on the principal amount of such Loan had such event not occurred,
at the Adjusted LIBO Rate that would have been applicable to such Loan, for the
period from the date of such event to the last day of the then current Interest
Period therefor (or, in the case of a failure to borrow, convert or continue,
for the period that would have been the Interest Period for such Loan), over
(ii) the amount of interest that would accrue on
<PAGE> 61
55
such principal amount for such period at the interest rate that such Lender
would bid were it to bid, at the commencement of such period, for dollar
deposits of a comparable amount and period from other banks in the Eurodollar
market. A certificate of any Lender setting forth any amount or amounts that
such Lender is entitled to receive pursuant to this Section (and setting forth
the underlying calculations) shall be delivered to the Borrower and shall be
conclusive absent manifest error. The Borrower shall pay such Lender the
amount shown as due on any such certificate within 10 days after receipt
thereof.
SECTION 2.17. Taxes. (a) Any and all payments by or on
account of any obligation of the Borrower hereunder or under any other Loan
Document shall be made free and clear of and without deduction for any
Indemnified Taxes or Other Taxes, provided that if the Borrower shall be
required to deduct any Indemnified Taxes or Other Taxes from such payments,
then (i) the sum payable shall be increased as necessary so that after making
all required deductions (including deductions applicable to additional sums
payable under this Section) the Administrative Agent, Lender or Issuing Bank
(as the case may be) receives an amount equal to the sum it would have received
had no such deductions been made, (ii) the Borrower shall make such deductions
and (iii) the Borrower shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.
(c) The Borrower shall indemnify the Administrative Agent, each
Lender and the Issuing Bank, within 10 days after written demand therefor, for
the full amount of any Indemnified Taxes or Other Taxes paid by the
Administrative Agent, such Lender or the Issuing Bank, as the case may be, on
or with respect to any payment by or on account of any obligation of the
Borrower hereunder or under any other Loan Document (including Indemnified
Taxes or Other Taxes imposed or asserted on or attributable to amounts payable
under this Section) and any penalties, interest and reasonable expenses arising
therefrom or with respect thereto, whether or not such Indemnified Taxes or
Other Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. A certificate as to the amount of such payment or
liability (and setting forth the underlying calculations) delivered to the
Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its
own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive
absent manifest error.
(d) As soon as practicable after any payment of Indemnified
Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower
shall deliver to the Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such payment, a copy
of the return reporting such
<PAGE> 62
56
payment or other evidence of such payment reasonably satisfactory to the
Administrative Agent.
(e) Any Foreign Lender and any Issuing Bank that is not a
"United States person" within the meaning of Section 7701(a)(30) of the Code
(together with the Foreign Lenders, the "Non-U.S. Lenders") shall, if such
Non-U.S. Lender is entitled to an exemption from or reduction of withholding
Tax under the laws of the jurisdiction in which the Borrower is located, or any
treaty to which such jurisdiction is a party, with respect to payments under
this Agreement, deliver to the Borrower (with a copy to the Administrative
Agent), at the time or times prescribed by applicable law, such properly
completed and executed documentation prescribed by applicable law or reasonably
requested by the Borrower as will permit such payments to be made without
withholding or at a reduced rate. Notwithstanding any other provision of this
Section 2.17, a Non-U.S. Lender shall not be required to deliver any form
pursuant to this Section 2.17(e) that such Non-U.S. Lender is not legally able
to deliver.
(f) If the Administrative Agent or a Lender (or transferee)
determines, in its sole discretion, that it has received a refund of any Taxes
or Other Taxes as to which it has been indemnified by the Borrower or with
respect to which the Borrower has paid additional amounts pursuant to this
Section 2.17, it shall pay over such refund to the Borrower (but only to the
extent of indemnity payments made, or additional amounts paid, by the Borrower
under this Section 2.17 with respect to the Taxes or Other Taxes giving rise of
such refund), net of all out-of-pocket expenses of the Administrative Agent or
such Lender (or transferee) and without interest (other than any interest paid
by the relevant Governmental Authority with respect to such refund); provided,
however, that the Borrower, upon the request of the Administrative Agent or
such Lender (or transferee), agrees to repay the amount paid over to the
Borrower (plus any penalties, interest or other charges imposed by the relevant
Governmental Authority) to the Administrative Agent or such Lender (or
transferee) in the event the Administrative Agent or such Lender (or
transferee) is required to repay such refund to such Governmental Authority.
Nothing contained in this Section 2.17(f) shall require the Administrative
Agent or any Lender to make available its Tax returns (or any other information
relating to its Taxes which it deems confidential) to the Borrower or any other
Person.
SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing
of Set-offs. (a) The Borrower shall make each payment required to be made by
it hereunder or under any other Loan Document (whether of principal, interest,
fees or reimbursement of LC Disbursements, or of amounts payable under Section
2.15, 2.16 or 2.17, or otherwise) prior to 12:00 noon, New York City time, on
the date when due, in immediately available funds, without set-off or
counterclaim. Any amounts received after such time on any date may, in the
discretion of the Administrative Agent, be deemed to have been received on
<PAGE> 63
57
the next succeeding Business Day for purposes of calculating interest thereon.
All such payments shall be made to the Administrative Agent at its offices set
forth in Section 9.01 except payments to be made directly to the Issuing Bank
or Swingline Lender as expressly provided herein and except that payments
pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the
Persons entitled thereto and payments pursuant to other Loan Documents shall be
made to the Persons specified therein. The Administrative Agent shall
distribute any such payments received by it for the account of any other Person
to the appropriate recipient promptly following receipt thereof. If any
payment under any Loan Document shall be due on a day that is not a Business
Day, the date for payment shall be extended to the next succeeding Business
Day, and, in the case of any payment accruing interest, interest thereon shall
be payable for the period of such extension. All payments under each Loan
Document shall be made in dollars.
(b) If at any time insufficient funds are received by and
available to the Administrative Agent to pay fully all amounts of principal,
unreimbursed LC Disbursements, interest and fees then due hereunder, such funds
shall be applied (i) first, towards payment of interest and fees then due
hereunder, ratably among the parties entitled thereto in accordance with the
amounts of interest and fees then due to such parties, and (ii) second, towards
payment of principal and unreimbursed LC Disbursements then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
principal and unreimbursed LC Disbursements then due to such parties.
(c) If any Lender shall, by exercising any right of set-off or
counterclaim or otherwise, obtain payment in respect of any principal of or
interest on any of its Revolving Loans, Term Loans or participations in LC
Disbursements or Swingline Loans or any other payment due hereunder resulting
in such Lender receiving payment of a greater proportion of the aggregate
amount of its Revolving Loans, Term Loans and participations in LC
Disbursements and Swingline Loans and accrued interest thereon than the
proportion received by any other Lender, then the Lender receiving such greater
proportion shall purchase (for cash at face value) participations in the
Revolving Loans, Term Loans and participations in LC Disbursements and
Swingline Loans of other Lenders to the extent necessary so that the benefit of
all such payments shall be shared by the Lenders ratably in accordance with the
aggregate amount of principal of and accrued interest on their respective
Revolving Loans, Term Loans and participations in LC Disbursements and
Swingline Loans, provided that (i) if any such participations are purchased and
all or any portion of the payment giving rise thereto is recovered, such
participations shall be rescinded and the purchase price restored to the extent
of such recovery, without interest, and (ii) the provisions of this paragraph
shall not be construed to apply to (A) any payment made by the Borrower
pursuant to and in accordance with the express terms of this Agreement or (B)
any payment obtained by a Lender as consideration for the assignment of or sale
of a participation in any of its Loans or
<PAGE> 64
58
participations in LC Disbursements to any assignee or participant, other than
to the Borrower or any Subsidiary or Affiliate thereof (as to which the
provisions of this paragraph shall apply), provided that The Chase Manhattan
Bank and its Affiliates (other than Sponsor and Persons Controlled by Sponsor)
shall not be deemed to be Affiliates of Sponsor or any Person Controlled by
Sponsor. The Borrower consents to the foregoing and agrees, to the extent it
may effectively do so under applicable law, that any Lender acquiring a
participation pursuant to the foregoing arrangements may exercise against the
Borrower rights of set-off and counterclaim with respect to such participation
as fully as if such Lender were a direct creditor of the Borrower in the amount
of such participation.
(d) Unless the Administrative Agent shall have received notice
from the Borrower prior to the date on which any payment is due to the
Administrative Agent for the account of the Lenders or the Issuing Bank
hereunder that the Borrower will not make such payment, the Administrative
Agent may assume that the Borrower has made such payment on such date in
accordance herewith and may, in reliance upon such assumption, distribute to
the Lenders or the Issuing Bank, as the case may be, the amount due. In such
event, if the Borrower has not in fact made such payment, then each of the
Lenders or the Issuing Bank, as the case may be, severally agrees to repay to
the Administrative Agent forthwith on demand the amount so distributed to such
Lender or Issuing Bank with interest thereon, for each day from and including
the date such amount is distributed to it to but excluding the date of payment
to the Administrative Agent, at the greater of the Federal Funds Effective Rate
and a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be
made by it pursuant to Section 2.04(c), 2.05(d) or (e), 2.06(b), 2.18(d) or
9.03(c), then the Administrative Agent may, in its discretion (notwithstanding
any contrary provision hereof), apply any amounts thereafter received by the
Administrative Agent for the account of such Lender to satisfy such Lender's
obligations under such Sections until all such unsatisfied obligations are
fully paid.
SECTION 2.19. Mitigation Obligations; Replacement of Lenders.
(a) If any Lender requests compensation under Section 2.15, or if the Borrower
is required to pay any additional amount to any Lender or any Governmental
Authority for the account of any Lender pursuant to Section 2.17, then such
Lender shall use reasonable efforts to designate a different lending office for
funding or booking its Loans hereunder or to assign its rights and obligations
hereunder to another of its offices, branches or affiliates, if, in the
reasonable judgment of such Lender, such designation or assignment (i) would
eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the
case may be, in the future and (ii) would not subject such Lender to any
unreimbursed cost or expense and would not otherwise be disadvantageous to such
Lender. The Borrower hereby
<PAGE> 65
59
agrees to pay all reasonable costs and expenses incurred by any Lender in
connection with any such designation or assignment.
(b) If any Lender requests compensation under Section 2.15, or
if the Borrower is required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section 2.17,
or if any Lender defaults in its obligation to fund Loans hereunder, then the
Borrower may, at its sole expense and effort, upon notice to such Lender and
the Administrative Agent, require such Lender to assign and delegate, without
recourse (in accordance with and subject to the restrictions contained in
Section 9.04), all its interests, rights and obligations under this Agreement
to an assignee that shall assume such obligations (which assignee may be
another Lender, if a Lender accepts such assignment), provided that (i) the
Borrower shall have received the prior written consent of the Administrative
Agent (and, if a Revolving Commitment is being assigned, the Issuing Bank and
Swingline Lender), which consent shall not unreasonably be withheld, (ii) such
Lender shall have received payment of an amount equal to the outstanding
principal of its Loans and participations in LC Disbursements and Swingline
Loans, accrued interest thereon, accrued fees and all other amounts payable to
it hereunder, from the assignee (to the extent of such outstanding principal
and accrued interest and fees) or the Borrower (in the case of all other
amounts) and (iii) in the case of any such assignment resulting from a claim
for compensation under Section 2.15 or payments required to be made pursuant to
Section 2.17, such assignment will result in a material reduction in such
compensation or payments. A Lender shall not be required to make any such
assignment and delegation if, prior thereto, as a result of a waiver by such
Lender or otherwise, the circumstances entitling the Borrower to require such
assignment and delegation cease to apply.
ARTICLE III
Representations and Warranties
Each of Holdings and the Borrower represents and warrants to the
Lenders that (it being understood that for purposes of the representations and
warranties set forth in this Article III made on the Effective Date (and of all
defined terms used in conjunction therewith), the Transactions shall be deemed
to have been consummated immediately prior to the making of such
representations and warranties):
SECTION 3.01. Organization; Powers. Each of Holdings, the
Borrower and the Subsidiaries is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, has all
requisite power and authority to carry on its business as now conducted and,
except where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect, is
<PAGE> 66
60
qualified to do business in, and is in good standing in, every jurisdiction
where such qualification is required.
SECTION 3.02. Authorization; Enforceability. The Transactions
to be entered into by (and any payment of Transaction Costs to be made by) each
Loan Party are within such Loan Party's corporate powers and have been duly
authorized by all necessary corporate and, if required, stockholder or member
action. This Agreement has been duly executed and delivered by each of
Holdings and the Borrower and constitutes, and each other Loan Document to
which any Loan Party is to be a party, when executed and delivered by such Loan
Party, will constitute, a legal, valid and binding obligation of Holdings, the
Borrower or such Loan Party (as the case may be), enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and subject to
general principles of equity, regardless of whether considered in a proceeding
in equity or at law.
SECTION 3.03. Governmental Approvals; No Conflicts. The
Transactions and the payment of the Transaction Costs (a) do not require any
consent or approval of, registration or filing with, or any other action by,
any Governmental Authority, except such as have been obtained or made and are
in full force and effect or, if not obtained or made, would not, individually
or in the aggregate, be reasonably likely to have a Material Adverse Effect and
except filings necessary to perfect Liens created under the Loan Documents, (b)
will not violate any applicable law or regulation or the charter, by-laws or
other organizational documents of Holdings, the Borrower or any of the
Subsidiaries or any order of any Governmental Authority, except, with respect
to any violation of applicable law or regulation or any order of any
Governmental Authority, to the extent any such violation would not,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect, (c) will not violate or result in a default under any
indenture, agreement or other instrument binding upon Holdings, the Borrower or
any of the Subsidiaries or its assets, or give rise to a right thereunder to
require any payment to be made by Holdings, the Borrower or any of the
Subsidiaries, except to the extent any such violation, default or right would
not, individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect, and (d) will not result in the creation or imposition of any
Lien (other than any Lien expressly permitted by Section 6.02) on any asset of
Holdings, the Borrower or any of the Subsidiaries, except Liens created under
the Loan Documents.
SECTION 3.04. Financial Condition; No Material Adverse Change.
(a) The Borrower has heretofore furnished to the Lenders its consolidated
balance sheet and statement of income, members' equity and cash flows (i) as of
and for the year ending December 31, 1998, reported on by Ernst & Young,
independent public accountants, and (ii) as of and for the period and the
portion of the fiscal year ending April 3, 1999, certified by its chief
financial officer. Such financial statements present
<PAGE> 67
61
fairly, in all material respects, the financial position and results of
operations and cash flows of the Borrower and its consolidated Subsidiaries as
of such dates and for such periods in accordance with GAAP, subject to year end
audit adjustments and the absence of footnotes in the case of the statements
referred to in clause (ii) above.
(b) The Borrower has heretofore furnished to the Lenders its
pro forma consolidated balance sheet as of April 3, 1999, prepared giving
effect to the Transactions (and payment of the Transaction Costs) as if the
Transactions (and payment of the Transaction Costs) had occurred on such date.
Such pro forma consolidated balance sheet (i) has been prepared in good faith
based on the same assumptions used to prepare the pro forma financial
statements included in the Offering Memorandum for the Senior Subordinated
Notes (which assumptions are believed by Holdings and the Borrower to be
reasonable), (ii) is based on the best information available to Holdings and
the Borrower after due inquiry, (iii) accurately reflects all adjustments
necessary to give effect to the Transactions (and payment of the Transaction
Costs) and (iv) presents fairly, in all material respects, the pro forma
financial position of the Borrower and its consolidated Subsidiaries as of
April 3, 1999 as if the Transactions (and payment of the Transaction Costs) had
occurred on such date.
(c) Except as disclosed in the financial statements referred to
above or the notes thereto or in the Information Memorandum and except for the
Disclosed Matters, after giving effect to the Transactions (and payment of the
Transaction Costs), none of Holdings, the Borrower or any of the Subsidiaries
has, as of the Effective Date, any contingent liabilities, unusual long-term
commitments or unrealized losses, which contingent liabilities, unusual
long-term commitments or unrealized losses could, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(d) Since December 31, 1998, there has not occurred any event,
condition or circumstance that has had or could reasonably be expected to
result in a Material Adverse Effect.
SECTION 3.05. Properties. (a) Each of Holdings, the Borrower
and the Subsidiaries has good title to, or valid leasehold interests in, all
its real and personal property material to its business (including its
Mortgaged Properties), except for minor defects in title that do not interfere
with its ability to conduct its business as currently conducted or to utilize
such properties for their intended purposes.
(b) Each of the Borrower and the Subsidiaries has complied with
all material obligations under all leases to which it is a party and that are
material to the Borrower and the Subsidiaries taken as a whole and all such
leases are in full force and
<PAGE> 68
62
effect. Each of the Borrower and the Subsidiaries enjoys peaceful and
undisturbed possession under all such material leases in which a Borrower or a
Subsidiary is a lessee.
(c) Each of Holdings, the Borrower and the Subsidiaries owns,
or is licensed or otherwise permitted to use, all trademarks, trade names,
copyrights, patents and other intellectual property material to its business,
and the use thereof by Holdings, the Borrower and the Subsidiaries does not
infringe upon the rights of any other Person, except for any such infringements
that, individually or in the aggregate, could not reasonably be expected to
result in a Material Adverse Effect.
(d) Schedule 3.05 sets forth the address of each real property
that is owned or leased by the Borrower or any of the Subsidiaries as of the
Effective Date after giving effect to the Transactions.
(e) As of the Effective Date, neither Holdings, the Borrower
nor any of the Subsidiaries has received notice of, or has knowledge of, any
pending or contemplated condemnation proceeding affecting any Mortgaged
Property or any sale or disposition thereof in lieu of condemnation. Neither
any Mortgaged Property nor any interest therein is subject to any right of
first refusal, option or other contractual right to purchase such Mortgaged
Property or interest therein.
SECTION 3.06. Litigation and Environmental Matters. (a) There
are no actions, suits or proceedings by or before any arbitrator or
Governmental Authority pending against or, to the knowledge of Holdings or the
Borrower, threatened against or affecting Holdings, the Borrower or any of the
Subsidiaries (i) as to which there is a reasonable possibility of an adverse
determination and that, if adversely determined, could reasonably be expected,
individually or in the aggregate, to result in a Material Adverse Effect (other
than the Disclosed Matters) or (ii) that involve any of the Loan Documents or
the Transactions.
(b) Except for the Disclosed Matters and except with respect to
any other matters that, individually or in the aggregate, could not reasonably
be expected to result in a Material Adverse Effect, none of Holdings, the
Borrower or any of the Subsidiaries (i) has failed to comply with any
Environmental Law or to obtain, maintain or comply with any permit, license or
other approval required under any Environmental Law, (ii) has become subject to
any Environmental Liability, (iii) has received notice of any claim with
respect to any Environmental Liability or (iv) knows of any basis for any
Environmental Liability, including any on-site (at any current or former
facilities) or off-site releases of Hazardous Materials.
<PAGE> 69
63
(c) Since the date of this Agreement, there has been no change
in the status of the Disclosed Matters that, individually or in the aggregate,
has resulted in, or caused there to be a reasonable likelihood of, a Material
Adverse Effect.
SECTION 3.07. Compliance with Laws and Agreements. Except as
set forth in Schedule 3.07, each of Holdings, the Borrower and each of the
Subsidiaries is in compliance with all laws, regulations and orders of any
Governmental Authority applicable to it or its property and all indentures,
agreements and other instruments binding upon it or its property, except where
the failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect. No Default has occurred and
is continuing.
SECTION 3.08. Investment and Holding Company Status. None of
Holdings, the Borrower or any of the Subsidiaries is (a) an "investment
company" as defined in, or subject to regulation under, the Investment Company
Act of 1940 or (b) a "holding company" as defined in, or subject to regulation
under, the Public Utility Holding Company Act of 1935.
SECTION 3.09. Taxes. Each of Holdings, the Borrower and each
of the Subsidiaries has timely filed or caused to be filed all Tax returns and
reports required to have been filed and has paid or caused to be paid all Taxes
required to have been paid by it, except (a) any Taxes that are being contested
in good faith by appropriate proceedings and for which Holdings, the Borrower
or such Subsidiary, as applicable, has set aside on its books adequate reserves
or (b) to the extent that the failure to do so could not reasonably be expected
to result in a Material Adverse Effect.
SECTION 3.10. ERISA. No ERISA Event has occurred or is
reasonably expected to occur that, when taken together with all other such
ERISA Events for which liability is reasonably expected to occur, could
reasonably be expected to result in a Material Adverse Effect. The present
value of all accumulated benefit obligations under each Plan (based on the
assumptions used for purposes of Statement of Financial Accounting Standards
No. 87) did not, as of the date of the most recent financial statements
reflecting such amounts, exceed by more than $500,000 the fair market value of
the assets of such Plan, and the present value of all accumulated benefit
obligations of all underfunded Plans (based on the assumptions used for
purposes of Statement of Financial Accounting Standards No. 87) did not, as of
the date of the most recent financial statements reflecting such amounts,
exceed the fair market value of the assets of all such underfunded Plans by an
amount that would be reasonably likely to result in a Material Adverse Effect.
SECTION 3.11. Disclosure. The Borrower has disclosed to the
Lenders all agreements, instruments and corporate or other restrictions to
which Holdings, the
<PAGE> 70
64
Borrower or any of the Subsidiaries is subject, and all other matters known to
any of them, that, individually or in the aggregate, could reasonably be
expected to result in a Material Adverse Effect. Neither the Information
Memorandum nor any of the other reports, financial statements, certificates or
other information furnished by or on behalf of any Loan Party to the Agents or
any Lender in connection with the negotiation of this Agreement or any other
Loan Document or delivered hereunder or thereunder (as modified or supplemented
by other information so furnished) contains any material misstatement of fact
or omits to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
provided that, with respect to projected financial information, Holdings and
the Borrower represent only that such information was prepared in good faith
based upon assumptions believed to be reasonable at the time.
SECTION 3.12. Subsidiaries. Holdings does not have any
subsidiaries other than the Borrower and the Subsidiaries. Schedule 3.12 sets
forth the name of, and the ownership interest of the Borrower in, each
Subsidiary and identifies each Subsidiary that is a Subsidiary Loan Party, in
each case as of the Effective Date.
SECTION 3.13. Insurance. Schedule 3.13 sets forth a
description of all insurance maintained by or on behalf of the Borrower and the
Subsidiaries as of the Effective Date. As of the Effective Date, all premiums
in respect of such insurance that are due and payable have been paid.
SECTION 3.14. Labor Matters. As of the Effective Date, there
are no strikes, lockouts or slowdowns against Holdings, the Borrower or any
Subsidiary pending or, to the knowledge of Holdings or the Borrower,
threatened. The hours worked by and payments made to employees of Holdings,
the Borrower and the Subsidiaries have not been in violation of the Fair Labor
Standards Act or any other applicable Federal, state, local or foreign law
dealing with such matters, except where any such violations, individually or in
the aggregate, would not be reasonably likely to result in a Material Adverse
Effect. All material payments due from Holdings, the Borrower or any
Subsidiary, or for which any claim may be made against Holdings, the Borrower
or any Subsidiary, on account of wages and employee health and welfare
insurance and other benefits, have been paid or accrued as a liability on the
books of Holdings, the Borrower or such Subsidiary. The consummation of the
Transactions will not give rise to any right of termination or right of
renegotiation on the part of any union under any collective bargaining
agreement to which Holdings, the Borrower or any Subsidiary is bound.
SECTION 3.15. Solvency. Immediately after the consummation of
the Transactions to occur on the Effective Date (including immediately
following the making of each Loan made on the Effective Date and the giving of
effect to the application of the proceeds of such Loans) and payment of the
Transaction Costs to be paid on the Effective
<PAGE> 71
65
Date, (a) the fair value of the assets of each Loan Party, at a fair valuation,
will exceed its debts and liabilities, unsecured, contingent or otherwise; (b)
the present fair saleable value of the property of each Loan Party will be
greater than the amount that will be required to pay the probable liability of
its debts and other liabilities, unsecured, contingent or otherwise, as such
debts and other liabilities become absolute and matured; (c) each Loan Party
will be able to pay its debts and liabilities, unsecured, contingent or
otherwise, as such debts and liabilities become absolute and matured; and (d)
each Loan Party will not have unreasonably small capital with which to conduct
the business in which it is engaged as such business is now conducted and is
proposed to be conducted following the Effective Date.
SECTION 3.16. Security Documents. (a) The Pledge Agreement is
effective to create in favor of the Collateral Agent, for the ratable benefit
of the Secured Parties, a legal, valid and enforceable security interest in the
Collateral (as defined in the Pledge Agreement) and, when the Collateral is
delivered to the Collateral Agent or financing statements are filed (covering
certificated securities), the Pledge Agreement shall constitute a fully
perfected first priority Lien on, and security interest in, all right, title
and interest of the pledgor thereunder in such Collateral, in each case prior
and superior in right to any other Person.
(b) The Security Agreement is effective to create in favor of
the Collateral Agent, for the ratable benefit of the Secured Parties, a legal,
valid and enforceable security interest in the Collateral (as defined in the
Security Agreement) and, when financing statements in appropriate form are
filed in the offices specified on Schedule 6 to the Perfection Certificate, the
Security Agreement shall constitute a fully perfected Lien on, and security
interest in, all right, title and interest of the grantors thereunder in such
Collateral (other than the Intellectual Property (as defined in the Security
Agreement), in each case prior and superior in right to any other Person, other
than with respect to Liens expressly permitted by Section 6.02.
(c) When the Security Agreement is filed in the United States
Patent and Trademark Office and the United States Copyright Office, the
Security Agreement shall constitute a fully perfected Lien on, and security
interest in, all right, title and interest of the Loan Parties in the
Intellectual Property (as defined in the Security Agreement) in which a
security interest may be perfected by filing, recording or registering a
security agreement, financing statement or analogous document in the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable, in each case prior and superior in right to any other Person other
than Liens expressly permitted by Section 6.02 (it being understood that
subsequent recordings in the United States Patent and Trademark Office and the
United States Copyright Office may be necessary to perfect a Lien on registered
trademarks, trademark applications and copyrights acquired by the Loan Parties
after the date hereof).
<PAGE> 72
66
(d) The Mortgages are effective to create, subject to the
exceptions listed in each title insurance policy covering such Mortgage, in
favor of the Collateral Agent, for the ratable benefit of the Secured Parties,
a legal, valid and enforceable Lien on all of the Loan Parties' right, title
and interest in and to the Mortgaged Properties thereunder and the proceeds
thereof, and when the Mortgages are filed in the appropriate offices, the
Mortgages shall constitute a Lien on, and security interest in, all right,
title and interest of the Loan Parties in such Mortgaged Properties and the
proceeds thereof, in each case prior and superior in right to any other Person,
other than with respect to the rights of Persons pursuant to Liens expressly
permitted by Section 6.02.
SECTION 3.17. Federal Reserve Regulations. (a) Neither
Holdings, the Borrower nor any of the Subsidiaries is engaged principally, or
as one of its important activities, in the business of extending credit for the
purpose of buying or carrying Margin Stock.
(b) No part of the proceeds of any Loan or any Letter of Credit
will be used, whether directly or indirectly, and whether immediately,
incidentally or ultimately, for any purpose that entails a violation of, or
that is inconsistent with, the provisions of the Regulations of the Board,
including Regulation T, U or X.
SECTION 3.18. Year 2000 Compliance. To the best of Holdings's
and the Borrower's knowledge, any reprogramming required to permit the proper
functioning, in and following the year 2000, of (a) the computer systems of the
Borrower and its Subsidiaries and (b) equipment containing embedded microchips
(including systems and equipment supplied by others or with which systems of
the Borrower and its Subsidiaries interface) and the testing of all such
systems and equipment, as so reprogrammed, will be completed in all material
respects by September 30, 1999. To the best of Holdings's and the Borrower's
knowledge, the cost to the Borrower and its Subsidiaries of such reprogramming
and testing and of the reasonably foreseeable consequences of year 2000 to the
Borrower and its Subsidiaries (including reprogramming errors and the failure
of others' systems or equipment) will not result in a Default or a Material
Adverse Effect.
<PAGE> 73
67
ARTICLE IV
Conditions
SECTION 4.01. Effective Date. The obligations of the Lenders
to make Loans, of the Swingline Lender to make Swingline Loans and of the
Issuing Bank to issue Letters of Credit hereunder shall not become effective
until the date on which each of the following conditions is satisfied (or
waived in accordance with Section 9.02):
(a) The Agents (or their counsel) shall have received from each
party hereto either (i) a counterpart of this Agreement signed on behalf
of such party or (ii) written evidence satisfactory to the Agents (which
may include telecopy transmission of a signed signature page of this
Agreement) that such party has signed a counterpart of this Agreement.
(b) The Agents shall have received a favorable written opinion
(addressed to the Agents and the Lenders and dated the Effective Date) of
each of (i) O'Sullivan Graev & Karabell, LLP, counsel for the Borrower,
substantially in the form of Exhibit B, and (ii) local counsel in each
jurisdiction where a Mortgaged Property is located, substantially in the
form of Exhibit C, and, in the case of each such opinion required by this
paragraph, covering such other matters relating to the Loan Parties, the
Loan Documents or the Transactions as the Required Lenders shall
reasonably request. The Borrower hereby requests such counsel to deliver
such opinions.
(c) The Agents shall have received such documents and
certificates as the Agents or their counsel may reasonably request
relating to the organization, existence and good standing of each Loan
Party, the authorization of the Transactions and any other legal matters
relating to the Loan Parties, the Loan Documents or the Transactions, all
in form and substance satisfactory to the Agents and their counsel.
(d) The Agents shall have received a certificate, dated the
Effective Date and signed by the President, a Vice President or a
Financial Officer of the Borrower, confirming compliance with the
conditions set forth in paragraphs (a) and (b) of Section 4.02.
(e) The Agents shall have received all fees and other amounts
due and payable on or prior to the Effective Date, including, to the
extent invoiced, reimbursement or payment of all out-of-pocket expenses
required to be reimbursed or paid by any Loan Party hereunder or under any
other Loan Document.
<PAGE> 74
68
(f) The Agents shall have received counterparts of the Pledge
Agreement signed on behalf of Holdings, the Borrower and each Subsidiary
Loan Party which is a party thereto, and the Collateral Agent shall have
received certificates representing all the outstanding Equity Interests of
the Borrower and each Subsidiary or Joint Venture owned by or on behalf of
any Loan Party as of the Effective Date after giving effect to the
Transactions (except that stock certificates representing shares of common
stock of a Foreign Subsidiary may be limited to 65% of the outstanding
shares of common stock of such Foreign Subsidiary), promissory notes
evidencing all intercompany Indebtedness owed to any Loan Party by the
Borrower or any Subsidiary as of the Effective Date after giving effect to
the Transactions and stock powers or other instruments of transfer
reasonably satisfactory to the Agents, endorsed in blank, with respect to
such certificates representing Equity Interests and promissory notes.
(g) The Agents shall have received counterparts of the Security
Agreement signed on behalf of Holdings, the Borrower and each Subsidiary
Loan Party, together with the following:
(i) all documents and instruments, including Uniform
Commercial Code financing statements, required by law or reasonably
requested by the Agents to be filed, registered or recorded to create
or perfect the Liens intended to be created under the Security
Agreement; and
(ii) a completed Perfection Certificate dated the Effective
Date and signed by an executive officer or Financial Officer of the
Borrower, together with all attachments contemplated thereby,
including the results of a search of the Uniform Commercial Code (or
equivalent) filings made with respect to the Loan Parties in the
jurisdictions contemplated by the Perfection Certificate and copies
of the financing statements (or similar documents) disclosed by such
search and evidence reasonably satisfactory to the Agents that the
Liens indicated by such financing statements (or similar documents)
are permitted by Section 6.02 or have been released.
(h) The Agents shall have received (i) counterparts of the
Mortgage with respect to the Mortgaged Property signed on behalf of the
leasehold owner of the Mortgaged Property, (ii) a policy or policies of
title insurance issued by a nationally recognized title insurance company,
insuring the Lien of the Mortgage as a valid first Lien on the Mortgaged
Property described therein, free of any other Liens except as permitted by
Section 6.02, in form and substance reasonably acceptable to the
Collateral Agent, together with such endorsements, coinsurance and
reinsurance as the Collateral Agent or the Required Lenders may reasonably
request, (iii) such surveys as may be required pursuant to the Mortgage or
as the
<PAGE> 75
69
Administrative Agent or the Required Lenders may reasonably request, (iv)
a copy of the original permanent certificate or temporary certificate of
occupancy as the same may have been amended or issued from time to time,
covering each improvement located upon the Mortgaged Property, that was
required to have been issued by the appropriate Governmental Authority for
such improvement and (v) written confirmation from the applicable zoning
commission or other appropriate Governmental Authority stating that with
respect to the Mortgaged Property its current use complies with existing
land use and zoning ordinances, regulations and restrictions applicable to
the Mortgaged Property.
(i) The Administrative Agent shall have received (i)
counterparts of the Parent Guarantee Agreement signed on behalf of
Holdings, (ii) counterparts of the Subsidiary Guarantee Agreement signed
on behalf of each Subsidiary Loan Party and (iii) counterparts of the
Indemnity, Subrogation and Contribution Agreement signed on behalf of
Holdings, the Borrower and each Subsidiary Loan Party.
(j) The Administrative Agent shall have received evidence
satisfactory to it that the insurance required by Section 5.07 is in
effect.
(k) The Recapitalization and the other Transactions shall be
consummated simultaneously with the closing under the Loans in accordance
with applicable law, the Recapitalization Agreement and all other related
documentation (in each case without giving effect to any amendment or
waiver not approved by the Agents) and on terms substantially consistent
with those set forth in the preamble of this Agreement, and the Agents
shall be satisfied that the Transaction Costs shall not exceed $9,915,000.
(l) The Borrower shall have received not less than (i)
$100,000,000 in gross cash proceeds from the issuance of the Senior
Subordinated Notes and (ii) $31,415,000 in gross cash proceeds from the
issuance of the Preferred Units. The terms and conditions of the Senior
Subordinated Notes and the Preferred Units (including in each case terms
and conditions relating to the interest rate, fees, amortization,
maturity, covenants, events of default and remedies) and the provisions of
the Senior Subordinated Notes Indenture shall be satisfactory to the
Agents.
(m) After giving effect to the Transactions and the other
transactions contemplated hereby, Holdings, the Borrower and the
Subsidiaries shall have outstanding no Indebtedness or preferred stock
other than (i) the Loans, (ii) the Senior Subordinated Notes, (iii) the
Preferred Units and (iv) the Indebtedness set forth on Schedule 6.01 or
otherwise permitted pursuant to Section 6.01(a).
<PAGE> 76
70
(n) There shall be no litigation or administrative proceeding
that has had or is reasonably likely to have a Material Adverse Effect.
(o) The Agents shall have received a solvency letter, in form
and substance and from an independent valuation firm reasonably
satisfactory to the Agents, together with such other evidence reasonably
requested by the Agents, confirming the solvency of Holdings, the Borrower
and the Subsidiaries on a consolidated basis after giving effect to the
Transactions and the other transactions contemplated hereby (including
payment of the Transaction Costs).
(p) The consummation of the Transactions and the other
transactions contemplated hereby (including payment of the Transaction
Costs) shall not (a) violate any applicable material law, statute, rule or
regulation or (b) violate or result in a Default under any material
agreement of Holdings, the Borrower or any Subsidiary, and the Agents
shall have received one or more legal opinions to such effect,
satisfactory to the Agents, from counsel to the Borrower satisfactory to
the Agents.
(q) All requisite material Governmental Authorities and third
parties shall have approved or consented to the Transactions and the other
transactions contemplated hereby (including payment of the Transaction
Costs) to the extent required, and there shall be no governmental or
judicial action, actual or threatened, that could reasonably be expected
to restrain, prevent or impose burdensome conditions on the Transactions
or the other transactions contemplated hereby (including payment of the
Transaction Costs).
The Administrative Agent shall notify the Borrower and the Lenders of the
Effective Date, and such notice shall be conclusive and binding.
Notwithstanding the foregoing, the obligations of the Lenders to make Loans, of
the Swingline Lender to make Swingline Loans and of the Issuing Bank to issue
Letters of Credit hereunder shall not become effective unless each of the
foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or
prior to 3:00 p.m., New York City time, on June 30, 1999 (and, in the event
such conditions are not so satisfied or waived, the Commitments shall terminate
at such time).
SECTION 4.02. Each Credit Event. The obligation of each Lender
to make a Loan on the occasion of any Borrowing, of the Swingline Lender to
make a Swingline Loan on the occasion of any Swingline Borrowing and of the
Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject
to the satisfaction of the following conditions:
<PAGE> 77
71
(a) The representations and warranties of each Loan Party set
forth in the Loan Documents qualified as to materiality shall be true and
correct and those not so qualified shall be true and correct in all
material respects on and as of the date of such Borrowing or the date of
issuance, amendment, renewal or extension of such Letter of Credit, as
applicable, except to the extent such representations and warranties
expressly relate to an earlier date in which case such representations and
warranties shall be true and correct as of such earlier date.
(b) At the time of and immediately after giving effect to such
Borrowing or the issuance, amendment, renewal or extension of such Letter
of Credit, as applicable, no Default shall have occurred and be
continuing.
The making of a Loan on the occasion of each Borrowing and each issuance,
amendment, renewal or extension of a Letter of Credit shall be deemed to
constitute a representation and warranty by Holdings and the Borrower on the
date thereof as to the matters specified in paragraphs (a) and (b) of this
Section.
ARTICLE V
Affirmative Covenants
Until the Commitments have expired or been terminated and the
principal of and interest on each Loan and all fees payable hereunder shall
have been paid in full and all Letters of Credit shall have expired or
terminated and all LC Disbursements shall have been reimbursed, each of
Holdings and the Borrower covenants and agrees with the Lenders that:
SECTION 5.01. Financial Statements and Other Information. Each
of Holdings and the Borrower will furnish to the Administrative Agent and each
Lender:
(a) within 100 days after the end of each fiscal year of
Holdings, its audited consolidated balance sheet and related statements of
operations, members' equity and cash flows as of the end of and for such
year, setting forth in each case in comparative form the figures for the
previous fiscal year, all reported on by Ernst & Young or other
independent public accountants of recognized national standing (without a
"going concern" or like qualification or exception and without any
qualification or exception as to the scope of such audit) to the effect
that such consolidated financial statements present fairly in all material
respects the financial condition and results of operations of Holdings and
its consolidated subsidiaries on a consolidated basis in accordance with
GAAP consistently applied;
<PAGE> 78
72
(b) within 50 days after the end of each of the first three
fiscal quarters of each fiscal year of Holdings, its consolidated balance
sheet and related statements of operations, members' equity and cash flows
as of the end of and for such fiscal quarter and the then elapsed portion
of the fiscal year, setting forth in each case in comparative form the
figures for the corresponding period or periods of (or, in the case of the
balance sheet, as of the end of) the previous fiscal year, all certified
by one of its Financial Officers as presenting fairly in all material
respects the financial condition and results of operations of Holdings and
its consolidated subsidiaries on a consolidated basis in accordance with
GAAP consistently applied, subject to normal year-end audit adjustments
and the absence of footnotes;
(c) within 30 days after the end of each of (i) the five-week
fiscal period ending on the date after the last day of the most recent
fiscal quarter of Holdings then ended and (ii) the four-week fiscal period
ended after such five-week fiscal period, its consolidated balance sheet
and related statements of operations, members' equity and cash flows as of
the end of and for such fiscal month and the then elapsed portion of the
fiscal year, all certified by one of its Financial Officers as presenting
in all material respects the financial condition and results of operations
of Holdings and its consolidated subsidiaries on a consolidated basis in
accordance with GAAP consistently applied, subject to normal year-end
audit adjustments and the absence of footnotes;
(d) concurrently with any delivery of financial statements under
clause (a) or (b) above, a certificate of a Financial Officer of Holdings
(i) certifying as to whether a Default has occurred and, if a Default has
occurred, specifying the details thereof and any action taken or proposed
to be taken with respect thereto, (ii) setting forth reasonably detailed
calculations demonstrating compliance with Sections 6.12, 6.13 and 6.14
and (iii) stating whether any change in GAAP or in the application thereof
has occurred since the date of the Borrower's audited financial statements
referred to in Section 3.04 and, if any such change has occurred,
specifying the effect of such change on the financial statements
accompanying such certificate;
(e) concurrently with any delivery of financial statements under
clause (a) above, a certificate of the accounting firm that reported on
such financial statements stating whether they obtained knowledge during
the course of their examination of such financial statements of any
Default (which certificate may be limited to the extent required by
accounting rules or guidelines);
<PAGE> 79
73
(f) not later than 15 days following the commencement of each
fiscal year of the Borrower, a detailed consolidated budget for such
fiscal year (including a projected consolidated balance sheet and related
projected statements of operations and cash flow, including projections of
Consolidated EBITDA detailed on a quarterly basis, as of the end of and
for such fiscal year) and, promptly when available, the final version of
such budget and any significant revisions thereto;
(g) promptly after the same become publicly available, copies of
all periodic and other reports, proxy statements and other materials filed
by Holdings, the Borrower or any Subsidiary with the Securities and
Exchange Commission, or any Governmental Authority succeeding to any or
all of the functions of such Commission, or with any national securities
exchange, as the case may be; and
(h) promptly following any request therefor, such other
information regarding the operations, business affairs and financial
condition of Holdings, the Borrower or any Subsidiary, or compliance with
the terms of any Loan Document, as the Agents or any Lender may reasonably
request.
SECTION 5.02. Notices of Material Events. Holdings and the
Borrower will furnish to the Administrative Agent and each Lender prompt
written notice of the following:
(a) the occurrence of any Default;
(b) the filing or commencement of any action, suit or proceeding
by or before any arbitrator or Governmental Authority against or, to the
knowledge of an executive officer of Holdings or the Borrower, affecting
Holdings, the Borrower or any Affiliate thereof that could reasonably be
expected to result in a Material Adverse Effect;
(c) the occurrence of any ERISA Event that, alone or together
with any other ERISA Events that have occurred, could reasonably be
expected to result in liability of Holdings, the Borrower and the
Subsidiaries in an aggregate amount exceeding $1,000,000; and
(d) any other development that results in, or could reasonably
be expected to result in, a Material Adverse Effect.
Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the Borrower setting forth
the details of the event or development requiring such notice and any action
taken or proposed to be taken with respect thereto.
<PAGE> 80
74
SECTION 5.03. Information Regarding Collateral. (a) The
Borrower will furnish to the Administrative Agent prompt written notice of any
change (i) in any Loan Party's legal name or in any trade name used to identify
it in the conduct of its business or in the ownership of its properties, (ii)
in the location of any Loan Party's chief executive office, its principal place
of business, any office in which it maintains books or records relating to
Collateral owned by it or any office or facility at which Collateral owned by
it with an aggregate book value in excess of $250,000 is located (including the
establishment of any such new office or facility), (iii) in any Loan Party's
identity or corporate structure (within the meaning of the Uniform Commercial
Code (as defined in the Security Agreement)) or (iv) in any Loan Party's
Federal Taxpayer Identification Number. Each of Holdings and the Borrower
agrees not to effect or permit any change referred to in the preceding sentence
unless all filings have been made under the Uniform Commercial Code or
otherwise that are required in order for the Administrative Agent to continue
at all times following such change to have a valid, legal and perfected
security interest in all the Collateral. The Borrower also agrees promptly to
notify the Administrative Agent if Collateral with a fair market value in
excess of $250,000 is damaged in any material respect or destroyed.
(b) Each year, at the time of delivery of annual financial
statements with respect to the preceding fiscal year pursuant to clause (a) of
Section 5.01, the Borrower shall deliver to the Administrative Agent a
certificate of a Financial Officer of the Borrower (i) setting forth the
information required pursuant to the Perfection Certificate or confirming that
there has been no change in such information since the date of the Perfection
Certificate delivered on the Effective Date or the date of the most recent
certificate delivered pursuant to this Section. Each certificate delivered
pursuant to this Section 5.03(b) shall identify in the format of Schedule II,
III, IV or V of the Security Agreement, all registered Intellectual Property of
any Loan Party in existence on the date thereof and not then listed on such
Schedules or previously so identified.
SECTION 5.04. Existence; Conduct of Business. Each of Holdings
and the Borrower will, and will cause each of the Subsidiaries to, do or cause
to be done all things necessary to preserve, renew and keep in full force and
effect its legal existence and the rights, licenses, permits, privileges,
franchises, patents, copyrights, trademarks and trade names material to the
conduct of its business, provided that the foregoing shall not prohibit any
merger, consolidation, liquidation or dissolution permitted under Section 6.03.
SECTION 5.05. Payment of Obligations. Each of Holdings and the
Borrower will, and will cause each of the Subsidiaries to, pay (a) all material
Taxes and other charges of any Governmental Authority imposed on it or any of
its properties or assets or in respect of any of its franchises, business,
income or property before any
<PAGE> 81
75
material penalty or interest accrues thereon and (b) all claims (including
claims for labor, services, materials and supplies) for sums that have become
due and payable and that by law have or may become a Lien (other than a Lien
permitted under Section 6.02) upon any of the property or assets of Holdings,
the Borrower or any of its Subsidiaries, prior to the time when any penalty or
fine shall be incurred with respect thereto, except where (i) the validity or
amount thereof is being contested in good faith by appropriate proceedings,
(ii) Holdings, the Borrower or such Subsidiary has set aside on its books
adequate reserves with respect thereto in accordance with GAAP, (iii) such
contest effectively suspends collection of the contested obligation and the
enforcement of any Lien securing such obligation and (iv) the failure to make
payment pending such contest could not reasonably be expected to result in a
Material Adverse Effect.
SECTION 5.06. Maintenance of Properties. Each of Holdings and
the Borrower will, and will cause each of the Subsidiaries to, keep and
maintain all property material to the conduct of its business in reasonable
working order and condition, ordinary wear and tear excepted.
SECTION 5.07. Insurance. (a) Each of Holdings and the
Borrower will, and will cause each of the Subsidiaries to, at all times
maintain in full force and effect, with financially sound and reputable
insurance companies (i) adequate insurance for its insurable properties, all to
such extent and against such risks, including fire, casualty and other risks
insured against by extended coverage, as is customary with companies of the
same or similar size in the same or similar businesses operating in the same or
similar locations, (ii) such other insurance as is required pursuant to the
terms of any Security Document and (iii) liability and other insurance in at
least such amounts and against at least such risks as are usually insured
against by companies in the same or similar businesses, and in each case, will
furnish to the Lenders, upon written request from the Administrative Agent,
information presented in reasonable detail as to the insurance so carried.
SECTION 5.08. Casualty and Condemnation. (a) The Borrower
will furnish to the Administrative Agent and the Lenders prompt written notice
of any casualty or other insured damage to any portion of any Collateral with a
fair market value in excess of $250,000 or the commencement of any action or
proceeding for the taking of any Collateral or any part thereof or interest
therein under power of eminent domain or by condemnation or similar proceeding.
(b) If any event described in paragraph (a) of this Section
results in Net Proceeds (whether in the form of insurance proceeds,
condemnation award or otherwise), the Administrative Agent is authorized to
collect such Net Proceeds and, if received by Holdings, the Borrower or any
Subsidiary, such Net Proceeds shall be paid over to the Administrative Agent,
provided that (i) if the aggregate Net Proceeds in respect of such event (other
than proceeds of business income insurance) are less than $250,000, such
<PAGE> 82
76
Net Proceeds shall be paid over to the Borrower unless a Default has occurred
and is continuing, and (ii) all proceeds of business income insurance shall be
paid over to the Borrower unless a Default has occurred and is continuing. All
such Net Proceeds retained by or paid over to the Administrative Agent shall be
held by the Administrative Agent and released from time to time to pay the
costs of repairing, restoring or replacing the affected property or funding
expenditures for assets in the same business or any Related Business, in each
case in accordance with the terms of the applicable Security Document, subject
to the provisions of the applicable Security Document regarding application of
such Net Proceeds during a Default.
(c) If any Net Proceeds retained by or paid over to the
Administrative Agent as provided above continue to be held by the
Administrative Agent on the date that is 18 months after the receipt of such
Net Proceeds, then such Net Proceeds shall be applied to prepay Term Borrowings
as provided in Section 2.11(b).
SECTION 5.09. Books and Records; Inspection and Audit Rights.
Each of Holdings and the Borrower will, and will cause each of the Subsidiaries
to, keep proper books of record and account in which full, true and correct
entries in all material respects are made of all dealings and transactions in
relation to its business and activities. Each of Holdings and the Borrower
will, and will cause each of the Subsidiaries to, permit any representatives
designated by the Agents or any Lender, upon reasonable prior notice, to visit
and inspect its properties, to examine and make extracts from its books and
records, and to discuss its affairs, finances and condition with its officers
and independent accountants, all at such reasonable times and as often as
reasonably requested.
SECTION 5.10. Compliance with Laws. Each of Holdings and the
Borrower will, and will cause each of the Subsidiaries to, comply with all
laws, rules, regulations and orders of any Governmental Authority applicable to
it or its property, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect.
SECTION 5.11. Use of Proceeds and Letters of Credit. The
proceeds of the Loans and each Letter of Credit will be used only for the
purposes set forth in the preamble of this Agreement. No part of the proceeds
of any Loan will be used, whether directly or indirectly, for any purpose that
entails a violation of any of the Regulations of the Board, including
Regulations T, U and X.
SECTION 5.12. Additional Subsidiaries. If any additional
Subsidiary is formed or acquired after the Effective Date, the Borrower will
notify the Administrative Agent and the Lenders thereof and (a) if such
Subsidiary is a Subsidiary Loan Party, the Borrower will cause such Subsidiary
to become a party to the Subsidiary Guarantee Agreement, the Indemnity,
Subrogation and Contribution Agreement and each applicable
<PAGE> 83
77
Security Document in the manner provided therein within three Business Days
after such Subsidiary is formed or acquired and promptly take such actions to
create and perfect Liens on such Subsidiary's assets to secure the Obligations
as the Administrative Agent or the Required Lenders shall reasonably request
and (b) if any Equity Interests or Indebtedness of such Subsidiary are owned by
or on behalf of any Loan Party, the Borrower will cause such Equity Interests
and promissory notes evidencing such Indebtedness to be pledged pursuant to the
Pledge Agreement within three Business Days after such Subsidiary is formed or
acquired (except that, if such Subsidiary is a Foreign Subsidiary, shares of
voting common stock of such Subsidiary to be pledged pursuant to the Pledge
Agreement may be limited to 65% of the outstanding shares of voting common
stock of such Subsidiary).
SECTION 5.13. Further Assurances. (a) Each of Holdings and
the Borrower will, and will cause each Subsidiary Loan Party to, execute any
and all further documents, financing statements, agreements and instruments,
and take all such further actions (including the filing and recording of
financing statements, fixture filings, mortgages, deeds of trust and other
documents), that may be required under any applicable law, or which the
Administrative Agent or the Required Lenders may reasonably request, to
effectuate the transactions contemplated by the Loan Documents or to grant,
preserve, protect or perfect the Liens created or intended to be created by the
Security Documents or the validity or priority of any such Lien, all at the
expense of the Loan Parties. Holdings and the Borrower also agree to provide
to the Administrative Agent, from time to time upon request, evidence
reasonably satisfactory to the Administrative Agent as to the perfection and
priority of the Liens created or intended to be created by the Security
Documents.
(b) If any material assets (including any real property or
improvements thereto (other than any individual real property or improvements
with a fair market value not in excess of $250,000, provided that the aggregate
fair market value of all real property or improvements excluded pursuant to
this parenthetical shall in no event exceed $250,000 in the aggregate) or any
interest therein other than leasehold interests in real property) are acquired
by Holdings, the Borrower or any Subsidiary Loan Party after the Effective Date
(other than assets constituting Collateral under the Security Agreement that
become subject to the Lien of the Security Agreement upon acquisition thereof),
the Borrower will notify the Administrative Agent and the Lenders thereof, and,
if requested by the Administrative Agent or the Required Lenders, the Borrower
will cause such assets to be subjected to a Lien securing the Obligations and
will take, and cause the Subsidiary Loan Parties to take, such actions as shall
be necessary or reasonably requested by the Administrative Agent to grant and
perfect such Liens, including actions described in paragraph (a) of this
Section, all at the expense of the Loan Parties.
<PAGE> 84
78
ARTICLE VI
Negative Covenants
Until the Commitments have expired or terminated and the
principal of and interest on each Loan and all fees payable hereunder have been
paid in full and all Letters of Credit have expired or terminated and all LC
Disbursements shall have been reimbursed, each of Holdings and the Borrower
covenants and agrees with the Lenders that:
SECTION 6.01. Indebtedness; Certain Equity Securities. (a)
The Borrower will not, and will not permit any Subsidiary to, create, incur,
assume or permit to exist any Indebtedness, except:
(i) Indebtedness created under the Loan Documents;
(ii) the Senior Subordinated Notes and the Guarantees thereof;
(iii) Indebtedness existing on the date hereof and set forth in
Schedule 6.01 and extensions, renewals and replacements of any such
Indebtedness that do not increase the outstanding principal amount thereof
or result in an earlier final maturity date or decreased weighted average
life thereof;
(iv) Indebtedness of the Borrower to any Subsidiary and of any
Subsidiary to the Borrower or any other Subsidiary, provided that
Indebtedness of any Subsidiary that is not a Loan Party to the Borrower or
any Subsidiary Loan Party shall be subject to Section 6.04;
(v) Guarantees by the Borrower of Indebtedness of any Subsidiary
and by any Subsidiary of Indebtedness of the Borrower or any other
Subsidiary, provided that Guarantees by the Borrower or any Subsidiary
Loan Party of Indebtedness of any Subsidiary that is not a Loan Party
shall be subject to Section 6.04;
(vi) Indebtedness of the Borrower or any Subsidiary incurred to
finance the acquisition, construction or improvement of any fixed or
capital assets, including Capital Lease Obligations and any Indebtedness
assumed in connection with the acquisition of any such assets or secured
by a Lien on any such assets prior to the acquisition thereof, and
extensions, renewals and replacements of any such Indebtedness that do not
increase the outstanding principal amount thereof or result in an earlier
final maturity date or decreased weighted average life thereof, provided
that (A) such Indebtedness is incurred prior to or within 180 days after
such acquisition or the completion of such construction or improvement and
<PAGE> 85
79
(B) the aggregate principal amount of Indebtedness permitted by this
clause (vi) shall not exceed $7,500,000 at any time outstanding;
(vii) Indebtedness of any Person that becomes a Subsidiary after
the date hereof and extensions, renewals and replacements thereof that do
not increase the outstanding principal amount thereof, provided that (A)
such Indebtedness exists at the time such Person becomes a Subsidiary and
is not created in contemplation of or in connection with such Person
becoming a Subsidiary and (B) the aggregate principal amount of
Indebtedness permitted by this clause (vii) shall not exceed $7,500,000 at
any time outstanding;
(viii) unsecured Indebtedness not otherwise permitted hereunder
in an aggregate principal amount not exceeding $7,500,000 at any time
outstanding;
(ix) Indebtedness under Hedging Agreements entered into in
accordance with Section 6.07;
(x) Indebtedness with respect to letters of credit, surety,
appeal and performance bonds obtained by Holdings, the Borrower or any of
its Subsidiaries in the ordinary course of business;
(xi) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business; provided, however,
that such Indebtedness is extinguished within five Business Days of its
incurrence; and
(xii) unsecured Indebtedness of the Borrower or any Subsidiary,
that is subordinated to the Obligations, assumed or incurred in connection
with any Permitted Acquisition, provided that (A) the provisions
subordinating such Indebtedness to the Obligations are reasonably
satisfactory in all respects to the Agents, (B) the terms of such
Indebtedness shall not provide for any maturity, amortization, sinking
fund payment, mandatory redemption or other required repayment or
repurchase of such Indebtedness (other than any required offer to repay or
repurchase (x) with asset sale proceeds pursuant to customary arrangements
providing that the Borrower or such Subsidiary, as the case may be, may
(in lieu of making such offer) repay Indebtedness under this Agreement or
(y) pursuant to "change of control" provisions that are no more
restrictive than the analogous provisions contained in this Agreement), in
each case prior to the Term Maturity Date (C) the covenants and events of
default relating to such Indebtedness shall be no more restrictive than
those contained in this Agreement and (D) the aggregate principal amount
of such Indebtedness shall not exceed $10,000,000 in the aggregate at any
time outstanding, provided further that,
<PAGE> 86
80
notwithstanding clause (D) above, the aggregate principal amount of such
Indebtedness incurred by the Subsidiaries that are not Subsidiary Loan
Parties shall not exceed $2,500,000 in the aggregate at any time
outstanding;
(b) Holdings will not create, incur, assume or permit to exist
any Indebtedness, except:
(i) Indebtedness created under the Loan Documents;
(ii) unsecured Guarantees by Holdings of Indebtedness of the
Borrower or any Subsidiary permitted by clause (xii) of paragraph (a) of
this Section that are subordinated to the Obligations, provided that (A)
provisions subordinating such Guarantees to the Obligations are reasonably
satisfactory in all respects to the Agents, (B) the terms of such
Guarantees and the related Indebtedness shall not provide for any
maturity, amortization, sinking fund payment, mandatory redemption or
other required repayment or repurchase of such Indebtedness (other than
any required offer to repay or repurchase (x) with asset sale proceeds
pursuant to customary arrangements providing that the Borrower or such
Subsidiary, as the case may be, may (in lieu of making such offer) repay
Indebtedness under this Agreement or (y) pursuant to "change of control"
provisions that are no more restrictive than the analogous provisions
contained in this Agreement), in each case prior to the Term Maturity
Date, (C) the covenants and events of default relating to such Guarantees
and the related Indebtedness shall be no more restrictive than those
contained in this Agreement and (D) the aggregate principal amount of such
Guarantees shall not exceed $10,000,000 in the aggregate at any time
outstanding, provided further that, notwithstanding clause (D) above, the
aggregate principal amount of such Indebtedness incurred by the
Subsidiaries that are not Subsidiary Loan Parties shall not exceed
$2,500,000 in the aggregate at any time outstanding; and
(iii) unsecured Indebtedness of Holdings, that is subordinated
to the Obligations, incurred in connection with the repurchase of Equity
Interests of Holdings or options to acquire Equity Interests of Holdings
to the extent such Restricted Payments are permitted pursuant to Section
6.08(a) (iii) at the time of incurrence of such Indebtedness in an
aggregate principal amount not to exceed in any fiscal year of Holdings
$2,000,000 or $5,000,000 at any time outstanding, provided that (A) the
provisions subordinating such Indebtedness to the Obligations are
reasonably satisfactory in all respects to the Agents, (B) the terms of
such Indebtedness shall not provide for any maturity, amortization,
sinking fund payment, mandatory redemption or other required repayment or
repurchase of such Indebtedness, in each case prior to the Term Maturity
Date and (C) the
<PAGE> 87
81
covenants and events of default relating to such Indebtedness shall be no
more restrictive than those contained in this Agreement.
(c) Neither Holdings nor the Borrower will, nor will they
permit any Subsidiary to, issue any preferred Equity Interests (other than the
Preferred Units), or be or become liable in respect of any obligation
(contingent or otherwise) to purchase, redeem, retire, acquire or make any
other payment in respect of any Equity Interests of Holdings, the Borrower or
any Subsidiary (provided that Holdings may be required to repurchase or redeem
the Preferred Units to the extent required to do so by the Holdings Operating
Agreement (as in effect on the Effective Date)) or any option, warrant or other
right to acquire any such Equity Interests, except that Holdings may issue
preferred Equity Interests as financing for or otherwise in connection with any
Permitted Acquisition, provided that (A) the terms of such preferred Equity
Interests shall not provide for any amortization, sinking fund payment,
mandatory redemption, other required repayment or repurchase of, or other
Restricted Payment with respect to, such preferred Equity Interests (other than
any required offer to repay or repurchase pursuant to "change of control"
provisions that are no more restrictive than the analogous provisions contained
in this Agreement and Restricted Payments permitted by Section 6.08(a)(ii)), in
each case prior to the Term Maturity Date and (B) any covenants and events of
default relating to such preferred Equity Interests shall be no more
restrictive than those relating to the Preferred Units contained in the Holding
Operating Agreement as in effect on the Effective Date.
SECTION 6.02. Liens. (a) The Borrower will not, and will not
permit any Subsidiary to, create, incur, assume or permit to exist any Lien on
any property or asset now owned or hereafter acquired by it, or assign or sell
any income or revenues (including accounts receivable) or rights in respect of
any thereof, except:
(i) Liens created under the Loan Documents;
(ii) Permitted Encumbrances;
(iii) any Lien on any property or asset of the Borrower or any
Subsidiary existing on the date hereof and set forth in Schedule 6.02,
provided that (A) such Lien shall not apply to any other property or asset
of the Borrower or any Subsidiary except assets then being financed solely
by the same financing source and (B) except as permitted under clause (D)
of clause (v) of this Section, such Lien shall secure only those
obligations that it secures on the date hereof and extensions, renewals
and replacements thereof that do not increase the outstanding principal
amount thereof;
<PAGE> 88
82
(iv) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Subsidiary or existing on any
property or asset of any Person that becomes a Subsidiary after the date
hereof prior to the time such Person becomes a Subsidiary, provided that
(A) such Lien is not created in contemplation of or in connection with
such acquisition or such Person becoming a Subsidiary, as the case may be,
(B) such Lien shall not apply to any other property or assets of the
Borrower or any Subsidiary except assets then being financed solely by the
same financing source and (C) except as permitted under clause (D) of
clause (v) of this Section, such Lien shall secure only those obligations
that it secures on the date of such acquisition or the date such Person
becomes a Subsidiary, as the case may be and extensions, renewals and
replacements thereof that do not increase the outstanding principal amount
thereof;
(v) Liens on fixed or capital assets acquired, constructed or
improved by the Borrower or any Subsidiary and extensions, renewals and
replacements thereof that do not increase the outstanding principal amount
thereof, provided that (A) such security interests secure Indebtedness
permitted by clause (vi) of Section 6.01(a), (B) such security interests
and the Indebtedness secured thereby are incurred prior to or within 12
months after such acquisition or the completion of such construction or
improvement, (C) the Indebtedness secured thereby does not exceed 100% of
the cost of acquiring, constructing or improving such fixed or capital
assets and other fixed or capital assets then being financed solely by the
same financing source and (D) such security interests shall not apply to
any other property or assets of the Borrower or any Subsidiary except
assets then being financed solely by the same financing source;
(vi) Liens (other than those permitted by paragraphs (i) through
(v) above) securing liabilities permitted hereunder in an aggregate amount
not exceeding $1,000,000 at any time outstanding; and
(vii) leases and subleases of real property and tangible
personal property and licenses and sublicenses of intellectual property
rights, in each case granted in the ordinary course of business and not
interfering individually or in the aggregate (with all such licenses and
subleases being taken as a whole) in any material respect with the conduct
of the business of the Borrower and the Subsidiaries.
(b) Holdings will not create, incur, assume or permit to exist
any Lien on any property or asset now owned or hereafter acquired by it, or
assign or sell any income or revenues (including accounts receivable) or rights
in respect thereof, except Liens created under any of the Security Documents
and Permitted Encumbrances.
<PAGE> 89
83
SECTION 6.03. Fundamental Changes. (a) Holdings and the
Borrower will not and will not permit any Subsidiary to, merge into or
consolidate with any other Person, or permit any other Person to merge into or
consolidate with it, or liquidate or dissolve, except that, if at the time
thereof and immediately after giving effect thereto no Default shall have
occurred and be continuing (i) any Subsidiary may merge into the Borrower in a
transaction in which the Borrower is the surviving corporation, (ii) any
Subsidiary may merge into any Subsidiary Loan Party in a transaction in which
the surviving entity is a Subsidiary Loan Party, (iii) any Subsidiary that is
not a Loan Party may merge into any Subsidiary that is not a Loan Party, (iv)
any Subsidiary may merge into any other Person that becomes a Subsidiary Loan
Party in connection with a Permitted Acquisition, (v) any Subsidiary may
liquidate or dissolve if the Borrower determines in good faith that such
liquidation or dissolution is in the best interests of the Borrower and is not
materially disadvantageous to the Lenders and (vi) the Merger Subsidiary may
merge with Holdings if (A) the Merger Subsidiary is a wholly owned subsidiary
of Holdings at the time of such merger, (B) the Merger Subsidiary is the
surviving entity in such merger and (C) the consolidated net worth of the
Merger Subsidiary following such merger is equal to or greater than that of
Holdings immediately prior to such merger; provided, that, in each case, any
such merger involving a Person that is not a wholly owned Subsidiary
immediately prior to such merger shall not be permitted unless also permitted
by Section 6.04.
(b) Holdings will not engage in any business or activity other
than the ownership of all the outstanding Equity Interests of the Borrower and
activities incidental thereto; provided, that Holdings may form immediately
prior to a merger permitted by Section 6.03(a)(vi) a subsidiary (the "Merger
Subsidiary") that is a corporation organized under the laws of the United
States of America, any State thereof or the District of Columbia for the sole
purpose of merging Holdings into such Merger Subsidiary in accordance with, and
to the extent permitted by, Section 6.03(a)(vi). Holdings will not own or
acquire any assets (other than Equity Interests of the Borrower and the Merger
Subsidiary, cash and Permitted Investments and other assets incidental to
maintaining its existence and ownership of the foregoing assets) or incur any
liabilities (other than liabilities under the Loan Documents, liabilities under
certain employment agreements and other written employment arrangements,
liabilities in respect of the Preferred Units, liabilities imposed by law,
including Tax liabilities, and other liabilities incidental to its existence
and permitted business and activities).
<PAGE> 90
84
SECTION 6.04. Investments, Loans, Advances, Guarantees and
Acquisitions. (a) The Borrower will not, and will not permit any of the
Subsidiaries to, purchase, hold or acquire (including pursuant to any merger
with any Person that was not a wholly owned Subsidiary prior to such merger)
any Equity Interests, evidences of indebtedness or other securities (including
any option, warrant or other right to acquire any of the foregoing) of, make or
permit to exist any loans or advances to, Guarantee any obligations of, or make
or permit to exist any investment or any other interest in, any other Person,
or purchase or otherwise acquire (in one transaction or a series of
transactions) any assets of any other Person constituting a business unit,
except, subject to clause (b) hereof:
(i) Permitted Investments;
(ii) Permitted Acquisitions;
(iii) investments existing on the date hereof and set forth on
Schedule 6.04, to the extent such investments would not be permitted under
any other clause of this Section;
(iv) investments by the Borrower in the Equity Interests of the
Subsidiaries, provided that (A) any such Equity Interests shall be pledged
pursuant to the Pledge Agreement (subject to the limitations applicable to
voting common stock of a Foreign Subsidiary referred to in Section 5.12)
and (B) the amount of investments by the Borrower in Subsidiaries that are
not Loan Parties shall not exceed $1,500,000 in the aggregate at any time
outstanding;
(v) loans or advances made by the Borrower to any Subsidiary and
made by any Subsidiary to the Borrower or any other Subsidiary, provided
that (A) any such loans and advances made by a Loan Party shall be
evidenced by a promissory note pledged pursuant to the Pledge Agreement
and (B) the aggregate amount outstanding at any time of all such loans and
advances by Loan Parties to Subsidiaries that are not Loan Parties shall
not exceed the greater of (I) $2,500,000 or (II) the aggregate amount paid
(including any Indebtedness assumed in connection therewith) in connection
with all Permitted Acquisitions involving assets located outside the
United States of America or the Equity Interests of entities organized
outside the United States of America from and after the date hereof (but
not in excess of $10,000,000 during the term of this Agreement);
(vi) Guarantees constituting Indebtedness permitted by Section
6.01, provided that the aggregate amount outstanding at any time of
Indebtedness that is (A) outstanding with respect to Subsidiaries that are
not Loan Parties and
<PAGE> 91
85
(B) Guaranteed by any Loan Party shall not exceed the greater of (I)
$2,500,000 or (II) the aggregate amount paid (including any Indebtedness
assumed in connection therewith) in connection with all Permitted
Acquisitions involving assets located outside the United States of America
or the Equity Interests of entities organized outside the United States of
America from and after the date hereof (but not in excess of $10,000,000
during the term of this Agreement);
(vii) loans or advances to employees, officers, directors or
consultants of the Borrower and the Subsidiaries in their capacity as
such, in an aggregate principal amount not to exceed $1,500,000 at any
time outstanding except that loans to employees, officers, directors or
consultants for the purpose of acquiring Equity Interests in Holdings the
Net Proceeds of which Equity Interests are contributed to the capital of
the Borrower or used to acquire Equity Interests in the Borrower shall not
be subject to such limit;
(viii) Hedging Agreements permitted under Section 6.07;
(ix) investments in Joint Ventures in an aggregate amount not
to exceed $3,000,000 at any time outstanding;
(x) investments (including Equity Interests, obligations or
other securities) received in connection with a bankruptcy or
reorganization of, or settlement of delinquent accounts and disputes with,
a debtor, arising in each case in the ordinary course of business;
(xi) extensions of trade credit in the ordinary course of
business;
(xii) investments constituting non-cash proceeds of any sale,
transfer or other disposition permitted by Section 6.05;
(xiii) investments of any Person existing at the time such
Person becomes a Subsidiary or at the time such Person merges or
consolidates with the Borrower or any of its Subsidiaries, in either case
in compliance with the terms of this Agreement, provided that such
investments were not made by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Subsidiary or
such merger or consolidation;
(xiv) 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; and
<PAGE> 92
86
(xv) other investments in an aggregate amount not to exceed
$1,000,000 at any time outstanding.
(b) Notwithstanding anything to the contrary contained in this
Agreement, the Borrower will not, and will not permit any of the Subsidiaries
to, make any investments (by way of any loan, guarantee, capital contribution
to, or purchase of stock, bonds, notes or other securities of or any assets
constituting a business unit of, any Person or otherwise) outside the Permitted
Business in an aggregate amount in excess of $5,000,000 during the term of this
Agreement.
SECTION 6.05. Asset Sales. The Borrower will not, and will not
permit any of the Subsidiaries to, sell, transfer, lease or otherwise dispose
of any asset, including Equity Interests (other than any such sale, transfer,
lease or other disposition resulting from any casualty or condemnation of any
assets of the Borrower or any of its Subsidiaries), nor will the Borrower
permit any of its Subsidiaries to issue any additional Equity Interests,
except:
(a) sales of inventory, used or surplus tangible personal
property and Permitted Investments in the ordinary course of business;
(b) sales, transfers and dispositions to the Borrower or a
Subsidiary, provided that any such sales, transfers or dispositions
involving a Subsidiary that is not a Loan Party shall be made in
compliance with Section 6.09;
(c) any sale and lease-back transaction permitted pursuant to
Section 6.06; and
(d) sales, transfers and dispositions of assets (other than
Equity Interests of a Subsidiary) that are not permitted by any other
clause of this Section, provided that the aggregate fair market value of
all assets sold, transferred or otherwise disposed of in reliance upon
this clause (d) shall not exceed $5,000,000 during any fiscal year of the
Borrower,
provided that all sales, transfers, leases and other dispositions permitted
hereby shall be made for fair value (as determined in good faith by the Board
Managers, or if Holdings is then a corporation, its Board of Directors, in the
case of any such sale, transfer, lease or other disposition in one or more
related transactions for consideration in excess of $500,000) and for
consideration at least 80% of which is (i) cash, (ii) in the form of properties
or assets to be owned by the Borrower or any Subsidiary Loan Party for use in a
Permitted Business or (iii) voting Equity Interests in one or more Persons
engaged in a Permitted Business that are to become Subsidiary Loan Parties in
connection with such transaction (provided that such transaction is a Permitted
Acquisition). For purposes of
<PAGE> 93
87
this Section 6.05, the following shall be deemed to be cash: (a) the
assumption of any liabilities of the Borrower or any Subsidiary Loan Party with
respect to, and the release of the Borrower or such Subsidiary Loan Party from
all liability in respect of, any Indebtedness of the Borrower or the
Subsidiaries permitted hereunder (in the amount of such Indebtedness) in
connection with a sale, transfer, lease or other disposition permitted under
Section 6.05 and (b) securities received by the Borrower or any Subsidiary Loan
Party from the transferee that are immediately convertible into cash without
breach of their terms or the agreement pursuant to which they were purchased
and that are promptly converted by the Borrower or such Subsidiary Loan Party
into cash.
SECTION 6.06. Sale and Lease-Back Transactions. The Borrower
will not, and will not permit any of its Subsidiaries to, enter into any
arrangement, directly or indirectly, with any Person whereby it shall sell or
transfer any property, real or personal, used or useful in its business,
whether now owned or hereafter acquired, and thereafter rent or lease such
property or other property which it intends to use for substantially the same
purpose or purposes as the property being sold or transferred except for any
such sale (made in connection with the corresponding lease-back of the relevant
asset) of any fixed or capital assets acquired (or the construction of which is
completed) after the Effective Date that is made for cash consideration in an
amount not less than the cost of such fixed or capital asset and is consummated
within 180 days after the Borrower or such Subsidiary acquires or completes the
construction of such fixed or capital asset.
SECTION 6.07. Hedging Agreements. The Borrower will not, and
will not permit any of the Subsidiaries to, enter into any Hedging Agreement,
other than Hedging Agreements entered into in the ordinary course of business
to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed
in the conduct of its business or the management of its liabilities.
SECTION 6.08. Restricted Payments; Certain Payments of
Indebtedness. (a) Holdings and the Borrower will not, and will not permit any
Subsidiary to, declare or make, or agree to pay or make, directly or
indirectly, any Restricted Payment, except:
(i) (A) for so long as each of Holdings and the Borrower is
treated as a pass-through entity for United States Federal income Tax
purposes, each of Holdings and the Borrower may make Tax Distributions,
(B) in the event that Holdings is not treated as a pass-through entity for
United States Federal income Tax purposes, the Borrower may make dividends
or distributions to Holdings in amounts equal to amounts required for
Holdings to pay United States Federal, state and local income Taxes to the
extent such income Taxes are attributable to the income of the Borrower
and its consolidated Subsidiaries and (C) in the event that (I) Holdings
is treated as a pass-through entity for United States Federal income Tax
purposes and (II) the Borrower is not treated as a pass-through entity
<PAGE> 94
88
for United States Federal income Tax purposes, Holdings may make Tax
Distributions;
(ii) Holdings may make distributions with respect to its Equity
Interests payable solely in additional Equity Interests of Holdings (other
than preferred Equity Interests except to the extent permitted by
6.01(c));
(iii) to the extent that no Default or Event of Default has
occurred or is continuing or would be continuing after giving effect to
such Restricted Payment, Holdings may repurchase or acquire its Equity
Interests on the terms and subject to the limitations of, and only to the
extent of any payment received under, clause (B) of paragraph (v) (or, to
the extent permitted by Section 6.01(b)(iii), from the proceeds of the
incurrence of subordinated Indebtedness of Holdings on the terms and
subject to the limitations of clause (B) of paragraph (v));
(iv) Subsidiaries may declare and pay dividends ratably with
respect to their Equity Interests; and
(v) the Borrower may make Restricted Payments to Holdings (but
with respect to clause (B) below, only if no Default or Event of Default
has occurred and is continuing or would be continuing after giving effect
to such Restricted Payment) with respect to:
(A) payments, the proceeds of which shall be applied by
Holdings directly to pay out-of-pocket expenses, for administrative,
legal and accounting services provided by third parties that are
reasonable and customary and incurred in the ordinary course of
business for such professional services, or to pay franchise fees and
similar costs and other customary costs and expenses of being a
public company; provided, however, any such expenses shall not exceed
an aggregate amount of $500,000 per fiscal year;
(B) payments, the proceeds of which will be used to
repurchase Equity Interests of Holdings owned by former employees of
the Borrower and its Subsidiaries or their assigns, estates and
heirs, at a price not in excess of fair market value determined in
good faith by the Board Managers (or if Holdings is then a
corporation, the Board of Directors of Holdings), in an aggregate
amount not in excess of $2,000,000 per annum, net of the proceeds
received by Holdings as a result of any resales of any such Equity
Interests plus any unused amounts from any immediately preceding
fiscal year, provided that the aggregate amount of all such payments
shall not exceed $5,000,000 during the term of this Agreement,
<PAGE> 95
89
net of the proceeds received by Holdings as a result of any resales
of any such Equity Interests;
(C) payments, the proceeds of which will be used to pay any
purchase price adjustment that the Borrower is required to pay to the
Existing Shareholder in connection with the Recapitalization pursuant
to Article III of the Recapitalization Agreement as in effect on the
Effective Date; and
(D) payments, the proceeds of which will be used to pay fees
in accordance with the terms of the Management Agreement in an
aggregate amount not to exceed $250,000 during any fiscal year of the
Borrower.
(b) Holdings and the Borrower will not, and will not permit any
Subsidiary to, make or agree to pay or make, directly or indirectly,
any payment or other distribution (whether in cash securities or
other property) of or in respect of principal of or interest on any
Indebtedness, or any payment or other distribution (whether in cash,
securities or other property), including any sinking fund or similar
deposit, on account of the purchase, redemption, retirement,
acquisition, cancelation or termination of any Indebtedness, except:
(i) payment of Indebtedness created under the Loan Documents;
(ii) payment of regularly scheduled interest and principal
payments as and when due in respect of any Indebtedness permitted pursuant
to Section 6.01(a);
(iii) refinancings of Indebtedness to the extent permitted by
Section 6.01; and
(iv) payment of secured Indebtedness that becomes due as a
result of any transfer not prohibited by this Agreement of the property
or assets securing such Indebtedness.
SECTION 6.09. Transactions with Affiliates. Holdings and the
Borrower will not, and will not permit any Subsidiary to, sell, lease or
otherwise transfer any property or assets to, or purchase, lease or otherwise
acquire any property or assets from, or otherwise engage in any other
transactions with, any of its Affiliates, except (a) transactions in the
ordinary course of business that are at prices and on terms and conditions not
less favorable to the Borrower or such Subsidiary than could be obtained on an
arm's-length basis from unrelated third parties (as determined in good faith by
members of the Board of Managers having a majority of the voting power held by
all disinterested members of the Board of Managers or if Holdings is then a
corporation, by a majority of the Board of Directors of Holdings having a
majority of the voting power
<PAGE> 96
90
held by all disinterested members of the Board of Directors of Holdings), (b)
transactions between or among the Borrower and the Subsidiary Loan Parties not
involving any other Affiliate, (c) any Restricted Payment permitted by Section
6.08, (d) reasonable fees and compensation paid to, and indemnity provided on
behalf of, officers, directors, employees, consultants or agents of Holdings,
the Borrower or any Subsidiary as determined in good faith by the Board of
Managers (or if Holdings is then a corporation, the Board of Directors of
Holdings), (e) any transactions undertaken pursuant to any contractual
obligations in existence on the Effective Date (as in effect on the Effective
Date) and set forth on Schedule 6.09, (f) 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
Holdings and equity ownership or participation plans approved by the Board of
Managers (or if Holdings is then a corporation, its Board of Directors), (g)
the grant of options (and the exercise thereof) to purchase Equity Interests of
Holdings or similar rights to employees and directors of Holdings or the
Borrower pursuant to plans approved by the Board of Managers (or if Holdings is
then a corporation, its Board of Directors), (h) loans or advances to
officers, directors or employees in the ordinary course of business permitted
by Section 6.04(a)(vii), (i) the provision by Persons who may be deemed
Affiliates or stockholders of Holdings or the Borrower (other than Sponsor and
Person Controlled by Sponsor) of investment banking, commercial banking, trust,
lending or financing, investment underwriting, placement agent, financial
advisory or similar services to Holdings, the Borrower or any Subsidiary, (j)
(i) the existence or performance by the Borrower or any Subsidiary under any
agreement as in effect as of the Effective 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
interests of the Lender in any material respect than the original agreement as
in effect on the Effective Date and (ii) the execution, delivery and
performance of the consulting agreement dated as of June 30, 1999, among
Holdings, the Borrower and Charles T. Orsatti, provided that the amount payable
to Mr. Orsatti pursuant to such agreement shall not exceed $250,000 during any
fiscal year of the Borrower, (k) any tax sharing agreement or payments pursuant
thereto among the Borrower and any Subsidiary and any other Person with which
the Borrower or any Subsidiary is or could be part of a consolidated group for
tax purposes, which payments are not in excess of the tax liabilities
attributable solely to the Borrower and Subsidiaries (as a consolidated group),
and (l) any contribution to the capital of the Borrower by Holdings or any
purchase of Equity Interests of the Borrower by Holdings.
SECTION 6.10. Restrictive Agreements. Holdings and the
Borrower will not, and will not permit any Subsidiary to, directly or
indirectly, enter into, incur or permit to exist any agreement or other
arrangement that prohibits, restricts or imposes any condition upon (a) the
ability of Holdings, the Borrower or any Subsidiary to create, incur
<PAGE> 97
91
or permit to exist any Lien upon any of its property or assets, or (b) the
ability of any Subsidiary to pay dividends or other distributions with respect
to any class or series of its Equity Interests or to make or repay loans or
advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness
of the Borrower or any other Subsidiary, provided that (i) the foregoing shall
not apply to restrictions and conditions imposed by law or by any Loan
Document, (ii) the foregoing shall not apply to restrictions and conditions
existing on the date hereof identified on Schedule 6.10 (but shall apply to any
extension or renewal of, or any amendment or modification that, taken as a
whole with any simultaneous amendment or modification of any such restriction
or condition, expands the scope of, any such restriction or condition), (iii)
the foregoing shall not apply to customary restrictions and conditions
contained in agreements relating to the sale of a Subsidiary or any property or
assets of a Subsidiary pending such sale, provided such restrictions and
conditions apply only to the Subsidiary that is to be sold and such sale is
permitted hereunder, (iv) clause (a) of this Section shall not apply to
restrictions or conditions imposed by any agreement relating to secured
Indebtedness permitted by this Agreement if such restrictions or conditions
apply only to the property or assets securing such Indebtedness, (v) clause (a)
of this Section shall not apply to customary provisions in leases, licenses and
similar contracts restricting the subletting, assignment or transfer thereof,
or any property or asset the subject thereof, (vi) clause (a) of this Section
shall not apply to customary provisions in Joint Venture agreements and other
similar agreements entered into by the Borrower or any Subsidiary in the
ordinary course of business and (vii) clause (a) of this Section shall not
apply to net worth provisions in leases and other agreements entered into by
the Borrower or any Subsidiary in the ordinary course of business.
SECTION 6.11. Amendment of Material Documents. (a) Holdings
and the Borrower will not, and will not permit any Subsidiary to, amend, modify
or waive any of its rights under or with respect to (i) their respective
certificates of formation, limited liability company agreement (including the
Holdings Operating Agreement and the Borrower Operating Agreement),
certificates of incorporation, by-laws or other organizational documents, (ii)
the Management Agreement, (iii) the Recapitalization Agreement, (iv) the
Preferred Units, (v) the Senior Subordinated Notes or the Senior Subordinated
Notes Indenture or (vi) the Members' Agreement, in each case other than
amendments, modifications or waivers that would not reasonably be expected to
adversely affect the interests of the Lenders (it being understood that if any
question should arise as to the possible adverse nature of any such amendment,
modification or waiver, Holdings or the Borrower may consult with the Agents
and the Agents shall be entitled (but shall not be obligated) to determine, on
behalf of the Lenders, whether such amendment, modification or waiver would
violate this Section 6.11). Holdings and the Borrower will deliver to each
Lender a copy of each such permitted amendment, modification or waiver promptly
after the effectiveness thereof.
<PAGE> 98
92
SECTION 6.12. Capital Expenditures. (a) The Borrower will not
permit the aggregate amount of Capital Expenditures made by the Borrower and
the Subsidiaries in any fiscal year to exceed the amount set forth below
opposite such year, provided that if the Borrower or any consolidated
Subsidiary has made any Permitted Acquisition or any sale, transfer, lease or
other disposition of assets outside of the ordinary course of business
permitted by Section 6.05 during the period of four consecutive fiscal quarters
ending on any date during any fiscal year set forth below, the amount set forth
below opposite such year shall be adjusted from and after the date of
consummation of such Permitted Acquisition, sale, transfer, lease or other
disposition of assets (i) by multiplying such amount, without giving effect to
any increase thereto pursuant to paragraph (c) below, (the "Base Capex Amount")
by the fraction of which the numerator is equal to Consolidated EBITDA for the
four-fiscal-quarter period of the Borrower ending with the most recent fiscal
quarter then ended (as adjusted in accordance with the second sentence of the
definition of the term "Consolidated EBITDA" to give effect to such Permitted
Acquisition, sale, transfer, lease or other disposition of assets) and the
denominator of which is equal to budgeted Consolidated EBITDA for the same
four-fiscal-quarter period of the Borrower, as set forth in the budgets
delivered pursuant to Section 5.01(f) (other than any revisions delivered after
the delivery of the budget for any year) and (ii) with respect to any Permitted
Acquisition or any sale, transfer, lease or other disposition of assets outside
of the ordinary course of business that is consummated in the same fiscal year
in respect of which any adjustment pursuant to the preceding clause (i) is
being made, subtracting from the amount calculated in accordance with the
preceding clause (i) (the "Pro Forma Capex Amount") (or in the event that the
Pro Forma Capex Amount is less than the Base Capex Amount, adding to the Pro
Forma Capex Amount) an amount equal to (A) the portion of the excess of the Pro
Forma Capex Amount over the Base Capex Amount attributable to such Permitted
Acquisition, sale, transfer, lease or other disposition of assets (or in the
event that the Pro Forma Capex Amount is less than the Base Capex Amount, the
portion of the difference between the Pro Forma Capex Amount and the Base Capex
Amount attributable to such Permitted Acquisition, sale, transfer, lease or
other disposition of assets) multiplied by (B) the fraction of which the
numerator is the number of days from and including the date such Permitted
Acquisition, sale, transfer, lease or other disposition of assets is
consummated to and including December 31 and the numerator of which is 365.
<TABLE>
<CAPTION>
Fiscal Year Ending Amount
------------------ ------
<S> <C>
1999 $7,000,000
2000 $5,800,000
2001 $5,800,000
</TABLE>
<PAGE> 99
93
<TABLE>
<S> <C>
2002 $5,800,000
2003 $5,800,000
2004 $5,800,000
</TABLE>
(b) Notwithstanding the foregoing paragraph (a), in the event
that the amount of Capital Expenditures permitted to be made by the Borrower
and its Subsidiaries pursuant to paragraph (a) in any fiscal year is greater
than the amount of Capital Expenditures made by the Borrower and its
Subsidiaries during such fiscal year, 75% of such excess may be carried forward
and utilized in the immediately succeeding fiscal year (it being understood and
agreed that (i) no amount may be carried forward beyond the year immediately
succeeding the fiscal year in which it arose and (ii) no portion of the
carry-forward amount available in any fiscal year may be used until the entire
amount of Capital Expenditures permitted to be made in such fiscal year
(without giving effect to such carry-forward amount) shall have been made).
(c) In the event that the Borrower or any Subsidiary makes any
Capital Expenditures in connection with the construction or acquisition of any
Location and the Borrower or any of its Subsidiaries consummates a sale and
lease-back transaction with respect to such Location within 180 days after the
earlier of (i) completion of the construction of such Location and (ii) receipt
of the certificate of occupancy with respect thereto, the amount of Capital
Expenditures set forth in paragraph (a) for the fiscal year of the Borrower in
which the Borrower or its Subsidiaries receive the Net Proceeds from such sale
and lease-back transaction shall be increased by an amount equal to the lesser
of (A) the amount of such Net Proceeds or (B) the amount of Capital
Expenditures made with respect to such Location during the same and all prior
fiscal years ending on or after December 31, 1999.
(d) In addition to the Capital Expenditures permitted pursuant
to paragraph (a) of this Section 6.12, the Borrower and the Subsidiaries may
make additional Capital Expenditures (which shall not be counted towards the
amounts set forth in paragraph (a) of this Section 6.12) consisting of the
investment of cumulative Excess Cash Flow generated during fiscal years ending
on or after December 31, 1999 and not required to be applied pursuant to
Section 2.11(c), provided that any prepayments required by Section 2.11(c)
shall have been made. No portion of the amounts for Capital Expenditures
available in any fiscal year under this paragraph (d) may be used until the
entire amount of Capital Expenditures permitted to be made in such fiscal year
pursuant to paragraphs (a), (b) and (c) of this Section shall have been made.
<PAGE> 100
94
SECTION 6.13. Leverage Ratio. The Borrower will not permit the
Leverage Ratio as of any date during any period set forth below to be in excess
of the ratio set forth below opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
December 31, 1999 through June 29, 2000 5.75
June 30, 2000 through December 30, 2000 5.50
December 31, 2000 through December 30, 2001 5.00
December 31, 2001 through December 30, 2002 4.50
December 31, 2002 through December 30, 2003 4.00
December 31, 2003 and thereafter 3.50
</TABLE>
SECTION 6.14. Consolidated Interest Coverage Ratio. The
Borrower will not permit the Consolidated Interest Coverage Ratio for any
four-fiscal-quarter period ending during any period set forth below to be less
than the ratio set forth below opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
December 31, 1999 through December 30, 2000 1.50
December 31, 2000 through December 30, 2001 1.60
December 31, 2001 through December 30, 2002 1.80
December 31, 2002 through December 30, 2003 2.10
December 31, 2003 and thereafter 2.50
</TABLE>
SECTION 6.15. Changes in Fiscal Periods . Each of Holdings and
the Borrower will not, and will not permit any Subsidiary to, change its fiscal
year or its method of determining fiscal quarters without the prior written
approval of the Agents.
<PAGE> 101
95
ARTICLE VII
Events of Default
If any of the following events ("Events of Default") shall
occur:
(a) the Borrower shall fail to pay any principal of any Loan or
any reimbursement obligation in respect of any LC Disbursement when and as
the same shall become due and payable, whether at the due date thereof or
at a date fixed for prepayment thereof or otherwise;
(b) the Borrower shall fail to pay any interest on any Loan or
any fee or any other amount (other than an amount referred to in clause
(a) of this Article) payable under this Agreement or any other Loan
Document, when and as the same shall become due and payable, and such
failure shall continue unremedied for a period of three Business Days;
(c) any representation or warranty made or deemed made by or on
behalf of Holdings, the Borrower or any Subsidiary in or in connection
with any Loan Document or any amendment or modification thereof or waiver
thereunder, or in any report, certificate, financial statement or other
document furnished pursuant to or in connection with any Loan Document or
any amendment or modification thereof or waiver thereunder, shall prove to
have been incorrect, or in the case of any representation or warranty not
qualified as to materiality, incorrect in any material respect, when made
or deemed made;
(d) Holdings or the Borrower shall fail to observe or perform
any covenant, condition or agreement contained in Section 5.02, 5.04 (with
respect to the existence of Holdings or the Borrower) or 5.11 or in
Article VI;
(e) any Loan Party shall fail to observe or perform any
covenant, condition or agreement contained in any Loan Document (other
than those specified in clause (a), (b) or (d) of this Article), and such
failure shall continue unremedied for a period of 30 days after written
notice thereof from the Administrative Agent to the Borrower (which notice
will be given at the request of any Lender);
(f) Holdings, the Borrower or any Subsidiary shall fail to make
any payment (whether of principal or interest and regardless of amount) in
respect of any Material Indebtedness, when and as the same shall become
due and payable, including any applicable grace period;
<PAGE> 102
96
(g) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that enables
or permits (with or without the giving of notice, the lapse of time or
both) the holder or holders of any Material Indebtedness or any trustee or
agent on its or their behalf to cause any Material Indebtedness to become
due, or to require the prepayment, repurchase, redemption or defeasance
thereof, prior to its scheduled maturity, provided that this clause (g)
shall not apply to secured Indebtedness that becomes due as a result of
the voluntary sale or transfer of, or casualty or condemnation affecting,
the property or assets securing such Indebtedness;
(h) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed seeking (i) liquidation,
reorganization or other relief in respect of Holdings, the Borrower or any
Subsidiary or its debts, or of a substantial part of its assets, under any
Federal, state or foreign bankruptcy, insolvency, receivership or similar
law now or hereafter in effect or (ii) the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for
Holdings, the Borrower or any Subsidiary or for a substantial part of its
assets, and, in any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of
the foregoing shall be entered;
(i) Holdings, the Borrower or any Subsidiary shall (i)
voluntarily commence any proceeding or file any petition seeking
liquidation, reorganization or other relief under any Federal, state or
foreign bankruptcy, insolvency, receivership or similar law now or
hereafter in effect, (ii) consent to the institution of, or fail to
contest in a timely and appropriate manner, any proceeding or petition
described in clause (h) of this Article, (iii) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator, conservator
or similar official for Holdings, the Borrower or any Subsidiary or for a
substantial part of its assets, (iv) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (v)
make a general assignment for the benefit of creditors or (vi) take any
action for the purpose of effecting any of the foregoing;
(j) Holdings, the Borrower or any Subsidiary shall become
unable, admit in writing its inability or fail generally to pay its debts
as they become due;
(k) one or more judgments for the payment of money in an
aggregate amount in excess of $1,000,000 shall be rendered against
Holdings, the Borrower, any Subsidiary or any combination thereof and the
same shall remain undischarged for a period of 30 consecutive days during
which execution shall not be effectively stayed, or any action shall be
legally taken by a judgment creditor
<PAGE> 103
97
to attach or levy upon any assets of Holdings, the Borrower or any
Subsidiary to enforce any such judgment;
(l) an ERISA Event shall have occurred that, in the reasonable
opinion of the Required Lenders, when taken together with all other ERISA
Events that have occurred, could reasonably be expected to result in
liability of Holdings, the Borrower or any Subsidiary or any combination
thereof in an aggregate amount exceeding (i) $500,000 in any year or (ii)
$1,000,000 for all periods;
(m) any Lien purported to be created under any Security Document
shall cease to be, or shall be asserted by any Loan Party not to be, a
valid and perfected Lien on any Collateral with a fair market value in
excess of $500,000, with the priority required by the applicable Security
Document, except (i) as a result of the sale or other disposition of the
applicable Collateral in a transaction permitted under the Loan Documents
or (ii) as a result of the Administrative Agent's failure to maintain
possession of any stock certificates, promissory notes or other
instruments delivered to it under the Pledge Agreement; or
(n) a Change of Control shall occur;
then, and in every such event (other than an event with respect to the Borrower
described in clause(h) or (i) of this Article), and at any time thereafter
during the continuance of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the Borrower, take either
or both of the following actions, at the same or different times: (i)
terminate the Commitments, and thereupon the Commitments shall terminate
immediately, and (ii) declare the Loans then outstanding to be due and payable
in whole (or in part, in which case any principal not so declared to be due and
payable may thereafter be declared to be due and payable), and thereupon the
principal of the Loans so declared to be due and payable, together with accrued
interest thereon and all fees and other obligations of the Borrower accrued
hereunder, shall become due and payable immediately, without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower; and in case of any event with respect to the Borrower described
in clause (h) or (i) of this Article, the Commitments shall automatically
terminate and the principal of the Loans then outstanding, together with
accrued interest thereon and all fees and other obligations of the Borrower
accrued hereunder, shall automatically become due and payable, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower.
<PAGE> 104
98
ARTICLE VIII
The Administrative Agent
Each of the Lenders and the Issuing Bank hereby irrevocably
appoints the Administrative Agent as its agent and authorizes the
Administrative Agent to take such actions on its behalf and to exercise such
powers as are delegated to the Administrative Agent by the terms of the Loan
Documents, together with such actions and powers as are reasonably incidental
thereto.
The bank serving as the Administrative Agent hereunder shall
have the same rights and powers in its capacity as a Lender as any other Lender
and may exercise the same as though it were not the Administrative Agent, and
such bank and its Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with Holdings, the Borrower or any
Subsidiary or other Affiliate thereof as if it were not the Administrative
Agent hereunder.
The Administrative Agent shall not have any duties or
obligations except those expressly set forth in the Loan Documents. Without
limiting the generality of the foregoing, (a) the Administrative Agent shall
not be subject to any fiduciary or other implied duties, regardless of whether
a Default has occurred and is continuing, (b) the Administrative Agent shall
not have any duty to take any discretionary action or exercise any
discretionary powers, except discretionary rights and powers expressly
contemplated by the Loan Documents that the Administrative Agent is required to
exercise in writing by the Required Lenders (or such other number or percentage
of the Lenders as shall be necessary under the circumstances as provided in
Section 9.02), and (c) except as expressly set forth in the Loan Documents, the
Administrative Agent shall not have any duty to disclose, and shall not be
liable for the failure to disclose, any information relating to Holdings, the
Borrower or any of the Subsidiaries that is communicated to or obtained by the
bank serving as Administrative Agent or any of its Affiliates in any capacity.
The Administrative Agent shall not be liable for any action taken or not taken
by it with the consent or at the request of the Required Lenders (or such other
number or percentage of the Lenders as shall be necessary under the
circumstances as provided in Section 9.02) or in the absence of its own gross
negligence or wilful misconduct. The Administrative Agent shall not be deemed
to have knowledge of any Default unless and until written notice thereof is
given to the Administrative Agent by Holdings, the Borrower or a Lender, and
the Administrative Agent shall not be responsible for or have any duty to
ascertain or inquire into (a) any statement, warranty or representation made in
or in connection with any Loan Document, (b) the contents of any certificate,
report or other document delivered thereunder or in connection therewith, (c)
the performance or observance of any of the covenants, agreements or other
terms or conditions set forth in any Loan Document, (d) the validity,
enforceability, effectiveness or genuineness of any
<PAGE> 105
99
Loan Document or any other agreement, instrument or document or (e) the
satisfaction of any condition set forth in Article IV or elsewhere in any Loan
Document, other than to confirm receipt of items expressly required to be
delivered to the Administrative Agent.
The Administrative Agent shall be entitled to rely upon, and
shall not incur any liability for relying upon, any notice, request,
certificate, consent, statement, instrument, document or other writing believed
by it to be genuine and to have been signed or sent by the proper Person. The
Administrative Agent also may rely upon any statement made to it orally or by
telephone and believed by it to be made by the proper Person, and shall not
incur any liability for relying thereon. The Administrative Agent may consult
with legal counsel (who may be counsel for the Borrower), independent
accountants and other experts selected by it, and shall not be liable for any
action taken or not taken by it in accordance with the advice of any such
counsel, accountants or experts.
The Administrative Agent may perform any and all of its duties
and exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers
through their respective Related Parties. The exculpatory provisions of the
preceding paragraphs shall apply to any such sub-agent and to the Related
Parties of each Administrative Agent and any such sub-agent, and shall apply to
their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent.
Subject to the appointment and acceptance of a successor the
Administrative Agent as provided in this paragraph, the Administrative Agent
may resign at any time by notifying the Lenders, the Issuing Bank and the
Borrower. Upon any such resignation, the Required Lenders shall have the
right, with the consent of the Borrower (such consent not to be unreasonably
withheld), to appoint a successor. If no successor shall have been so
appointed by the Required Lenders and shall have accepted such appointment
within 30 days after the retiring Administrative Agent gives notice of its
resignation, then the retiring Administrative Agent may, on behalf of the
Lenders and the Issuing Bank, appoint a successor Administrative Agent that
shall be a bank with an office in New York, New York, or an Affiliate of any
such bank. Upon the acceptance of its appointment as Administrative Agent
hereunder by a successor, such successor shall succeed to and become vested
with all the rights, powers, privileges and duties of the retiring
Administrative Agent, and the retiring Administrative Agent shall be discharged
from its duties and obligations hereunder. The fees payable by the Borrower to
a successor Administrative Agent shall be the same as those payable to its
predecessor unless otherwise agreed between the Borrower and such successor.
After the Administrative Agent's resignation hereunder, the provisions of this
Article and Section 9.03 shall continue in effect for the benefit of such
retiring Administrative Agent,
<PAGE> 106
100
its sub-agents and their respective Related Parties in respect of any actions
taken or omitted to be taken by any of them while it was acting as
Administrative Agent.
Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make
its own decisions in taking or not taking action under or based upon this
Agreement, any other Loan Document or related agreement or any document
furnished hereunder or thereunder.
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. Except in the case of notices and other
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
(a) if to Holdings or the Borrower, to it at 2985 Scott Street,
Vista, California 92083, Attention of Chief Financial Officer (Telecopy
No. 760-734-3536) with a copy to Chase Capital Partners, 380 Madison
Avenue - 12th Floor, New York, NY 10017, Attention of John Daileader
(Telecopy No. 212-622-3101);
(b) if to the Administrative Agent or the Collateral Agent, to
First Union National Bank, Syndication Agency Services, One First Union
Center, 4th Floor, 301 South College Street, Charlotte, NC 28288-0680,
Attention of Kevin Stephens (Telecopy No. 704-383-0288) with a copy to
Paul Solitario (Telecopy No. 704-383-9144);
(c) if to the Issuing Bank, to The Chase Manhattan Bank, 55
Water Street, 17th Floor, Room 1708, New York, New York 10041, Attention
of Standby LC Department (Telecopy No. 212-363-5656) with a copy to The
Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention
of Stephen Rochford (Telecopy No. 212-270-3279);
<PAGE> 107
101
(d) if to the Swingline Lender, to The Chase Manhattan Bank,
Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New
York, New York 10081, Attention of Concetta Prainito (Telecopy No.
212-552-7500) with a copy to The Chase Manhattan Bank, 270 Park Avenue,
New York, New York 10017, Attention of Stephen Rochford (Telecopy No.
212-270-3279); and
(e) if to any other Lender, to it at its address (or telecopy
number) set forth in its Administrative Questionnaire.
Any party hereto may change its address or telecopy number for notices and
other communications hereunder by notice to the other parties hereto. All
notices and other communications given to any party hereto in accordance with
the provisions of this Agreement shall be deemed to have been given on the date
of receipt.
SECTION 9.02. Waivers; Amendments. (a) No failure or delay by
any Agent, the Issuing Bank, the Swingline Lender or any Lender in exercising
any right or power hereunder or under any other Loan Document shall operate as
a waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the Agents, the Issuing Bank,
the Swingline Lender and the Lenders hereunder and under the other Loan
Documents are cumulative and are not exclusive of any rights or remedies that
they would otherwise have. No waiver of any provision of any Loan Document or
consent to any departure by any Loan Party therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) of this Section,
and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. Without limiting the generality
of the foregoing, the making of a Loan or issuance of a Letter of Credit shall
not be construed as a waiver of any Default, regardless of whether any Agent,
any Lender, the Swingline Lender or the Issuing Bank may have had notice or
knowledge of such Default at the time.
(b) Neither this Agreement nor any other Loan Document nor any
provision hereof or thereof may be waived, amended or modified except, in the
case of this Agreement, pursuant to an agreement or agreements in writing
entered into by Holdings, the Borrower and the Required Lenders or, in the case
of any other Loan Document, pursuant to an agreement or agreements in writing
entered into by the Administrative Agent (or, if applicable, the Collateral
Agent) and the Syndication Agent and the Loan Party or Loan Parties that are
parties thereto, in each case with the consent of the Required Lenders,
provided that no such agreement shall (i) increase the Commitment of any Lender
without the written consent of such Lender, (ii) reduce the principal amount of
any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce
any fees payable hereunder, without the written consent of each Lender affected
<PAGE> 108
102
thereby, (iii) postpone the scheduled date of payment of the principal amount
of any Loan or LC Disbursement, or any interest thereon, or any fees payable
hereunder, or reduce the amount of, waive or excuse any such payment, or
postpone the scheduled date of expiration of any Commitment, without the
written consent of each Lender affected thereby, (iv) change Section 2.18(b) or
(c) in a manner that would alter the pro rata sharing of payments required
thereby, without the written consent of each Lender, (v) change any of the
provisions of this Section or the definition of the term "Required Lenders" or
any other provision of any Loan Document specifying the number or percentage of
Lenders (or Lenders of any Class) required to waive, amend or modify any rights
thereunder or make any determination or grant any consent thereunder, without
the written consent of each Lender (or each Lender of such Class, as the case
may be), (vi) release Holdings or any Subsidiary Loan Party from its Guarantee
under the applicable Guarantee Agreement (except as expressly provided in such
Guarantee Agreement), or limit its liability in respect of such Guarantee,
without the written consent of each Lender, (vii) release all or substantially
all of the Collateral from the Liens of the Security Documents, without the
written consent of each Lender, except for any Collateral sold or otherwise
transferred in accordance with the terms of this Agreement, or (viii) change
the allocation among the Lenders of any optional or mandatory prepayments of
the Loans set forth in Sections 2.10(d) and 2.11(e) without the written consent
of each Lender affected thereby and provided further that no such agreement
shall amend, modify or otherwise affect the rights or duties of the
Administrative Agent, the Collateral Agent, the Syndication Agent, the
Swingline Lender or the Issuing Bank without the prior written consent of the
Administrative Agent, the Collateral Agent, the Syndication Agent, the
Swingline Lender or the Issuing Bank, as the case may be.
SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The
Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the
Administrative Agent, the Collateral Agent, the Syndication Agent and their
respective Affiliates (other than Sponsor and Person Controlled by Sponsor),
including the reasonable fees, charges and disbursements of counsel for the
Agents, in connection with the syndication of the credit facilities provided
for herein, the preparation and administration of the Loan Documents or any
amendments, modifications or waivers of the provisions thereof (whether or not
the transactions contemplated hereby or thereby shall be consummated), (ii) all
reasonable out-of-pocket expenses incurred by the Issuing Bank in connection
with the issuance, amendment, renewal or extension of any Letter of Credit or
any demand for payment thereunder, and (iii) all out-of-pocket expenses
incurred by the Administrative Agent, the Collateral Agent, the Syndication
Agent, the Issuing Bank, the Swingline Lender or any Lender, including the
reasonable fees, charges and disbursements of any counsel for the
Administrative Agent, the Collateral Agent, the Syndication Agent, the Issuing
Bank, the Swingline Lender or any Lender, in connection with the enforcement or
protection of its rights in connection with the Loan Documents, including its
rights under this Section, or in connection with the Loans made or Letters of
<PAGE> 109
103
Credit issued hereunder, including all such out-of-pocket expenses incurred
during any workout, restructuring or negotiations in respect of such Loans or
Letters of Credit.
(b) The Borrower shall indemnify the Administrative Agent, the
Collateral Agent, the Syndication Agent, the Issuing Bank, the Swingline Lender
and each Lender, and each Related Party of any of the foregoing Persons (each
such Person being called an "Indemnitee") against, and hold each Indemnitee
harmless from, any and all losses, claims, damages, liabilities and related
expenses, including the fees, charges and disbursements of any counsel for any
Indemnitee, incurred by or asserted against any Indemnitee arising out of, in
connection with, or as a result of (i) the execution or delivery of any Loan
Document or any other agreement or instrument contemplated hereby, the
performance by the parties to the Loan Documents of their respective
obligations thereunder or the consummation of the Transactions or any other
transactions contemplated hereby (including payment of the Transaction Costs),
(ii) any Loan or Letter of Credit or the use of the proceeds therefrom
(including any refusal by the Issuing Bank to honor a demand for payment under
a Letter of Credit if the documents presented in connection with such demand do
not strictly comply with the terms of such Letter of Credit), (iii) any actual
or alleged presence or release of Hazardous Materials on or from any Mortgaged
Property or any other property currently or formerly owned or operated by
Holdings, the Borrower or any of the Subsidiaries, or any Environmental
Liability related in any way to Holdings, the Borrower or any of the
Subsidiaries or (iv) any actual or prospective claim, litigation, investigation
or proceeding relating to any of the foregoing, whether based on contract, tort
or any other theory and regardless of whether any Indemnitee is a party
thereto, provided that such indemnity shall not, as to any Indemnitee, be
available to the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent jurisdiction by a final
and non-appealable judgment to have resulted from the gross negligence or
wilful misconduct of such Indemnitee or any Affiliate of such Indemnitee (or of
any officer, director, employee, advisor or agent of such Indemnitee) or to the
extent such damages constitute special, indirect or consequential damages (as
opposed to direct or actual damages), and provided, further, that, for purposes
of the foregoing proviso, The Chase Manhattan Bank and its Affiliates (other
than Sponsor and Persons Controlled by Sponsor) shall not be deemed to be
Affiliates of Sponsor or any Person Controlled by Sponsor.
(c) To the extent that the Borrower fails to pay any amount
required to be paid by it to the Administrative Agent, the Collateral Agent,
the Syndication Agent, the Issuing Bank or the Swingline Lender under paragraph
(a) or (b) of this Section, each Lender severally agrees to pay to the
Administrative Agent, the Syndication Agent, the Collateral Agent, the Issuing
Bank or the Swingline Lender, as the case may be, such Lender's pro rata share
(determined as of the time that the applicable unreimbursed expense or
indemnity payment is sought) of such unpaid amount, provided that the
unreimbursed expense or indemnified loss, claim, damage, liability or related
expense, as
<PAGE> 110
104
the case may be, was incurred by or asserted against the Administrative Agent,
the Collateral Agent, the Syndication Agent, the Issuing Bank or the Swingline
Lender in its capacity as such. For purposes hereof, a Lender's "pro rata
share" shall be determined based upon its share of the sum of the total
Revolving Exposures, outstanding Term Loans and unused Commitments at the time.
(d) To the extent permitted by applicable law, Holdings and the
Borrower shall not assert, and each hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential or
punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement or any agreement or
instrument contemplated hereby, the Transactions, payment of the Transaction
Costs, any Loan or Letter of Credit or the use of the proceeds thereof.
(e) All amounts due under this Section shall be payable
promptly after written demand therefor.
SECTION 9.04. Successors and Assigns. (a) The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns permitted hereby (including
any Affiliate of the Issuing Bank that issues any Letter of Credit), except
that each of Holdings and the Borrower may not assign or otherwise transfer any
of its rights or obligations hereunder without the prior written consent of
each Lender (and any attempted assignment or transfer by Holdings or the
Borrower without such consent shall be null and void). Nothing in this
Agreement, expressed or implied, shall be construed to confer upon any Person
(other than the parties hereto, their respective successors and assigns
permitted hereby (including any Affiliate of the Issuing Bank that issues any
Letter of Credit) and, to the extent expressly contemplated hereby, the Related
Parties of each of the Administrative Agent, the Collateral Agent, the
Syndication Agent, the Issuing Bank, the Swingline Lender and the Lenders) any
legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) Any Lender may assign to one or more assignees all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans at the time owing to it), provided that
(i) except in the case of an assignment to a Lender or an Affiliate of a
Lender, each of the Borrower and the Administrative Agent (and, in the case of
an assignment of all or a portion of a Revolving Commitment or any Lender's
obligations in respect of its LC Exposure or Swingline Exposure, the Issuing
Bank and the Swingline Lender) must give their prior written consent to such
assignment (which consent shall not be unreasonably withheld or delayed), (ii)
except in the case of an assignment to a Lender or an Affiliate of a Lender or
an assignment of the entire remaining amount of the assigning Lender's
Commitment or Loans, the amount of the Commitment or Loans of the assigning
Lender subject to
<PAGE> 111
105
each such assignment (determined as of the date the Assignment and Acceptance
with respect to such assignment is delivered to the Administrative Agent) shall
not be less than $5,000,000 unless each of the Borrower and the Administrative
Agent otherwise consent, (iii) each partial assignment shall be made as an
assignment of a proportionate part of all the assigning Lender's rights and
obligations under this Agreement, except that this clause (iii) shall not be
construed to prohibit the assignment of a proportionate part of all the
assigning Lender's rights and obligations in respect of one Class of
Commitments or Loans, (iv) the parties to each assignment shall execute and
deliver to the Administrative Agent an Assignment and Acceptance, together with
a processing and recordation fee of $3,500, and (v) the assignee, if it shall
not be a Lender, shall deliver to the Administrative Agent an Administrative
Questionnaire, and provided further that any consent of the Borrower otherwise
required under this paragraph shall not be required if an Event of Default
under clause (h) or (i) of Article VII has occurred and is continuing. Subject
to acceptance and recording thereof pursuant to paragraph (d) of this Section,
from and after the effective date specified in each Assignment and Acceptance
the assignee thereunder shall be a party hereto and, to the extent of the
interest assigned by such Assignment and Acceptance, have the rights and
obligations of a Lender under this Agreement, and the assigning Lender
thereunder shall, to the extent of the interest assigned by such Assignment and
Acceptance, be released from its obligations under this Agreement (and, in the
case of an Assignment and Acceptance covering all of the assigning Lender's
rights and obligations under this Agreement, such Lender shall cease to be a
party hereto but shall continue to be entitled to the benefits of Sections
2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights
or obligations under this Agreement that does not comply with this paragraph
shall be treated for purposes of this Agreement as a sale by such Lender of a
participation in such rights and obligations in accordance with paragraph (e)
of this Section.
(c) The Administrative Agent, acting for this purpose as an
agent of the Borrower, shall maintain at one of its offices in Charlotte, North
Carolina a copy of each Assignment and Acceptance delivered to it and a
register for the recordation of the names and addresses of the Lenders, and the
Commitment of, and principal amount of the Loans and LC Disbursements owing to,
each Lender pursuant to the terms hereof from time to time (the "Register").
The entries in the Register shall be conclusive, and Holdings, the Borrower,
the Administrative Agent, the Issuing Bank, the Swingline Lender and the
Lenders may treat each Person whose name is recorded in the Register pursuant
to the terms hereof as a Lender hereunder for all purposes of this Agreement,
notwithstanding notice to the contrary. The Register shall be available for
inspection by the Borrower, the Issuing Bank, the Swingline Lender and any
Lender, at any reasonable time and from time to time upon reasonable prior
notice.
(d) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Lender and an assignee, the assignee's
completed
<PAGE> 112
106
Administrative Questionnaire (unless the assignee shall already be a Lender
hereunder), the processing and recordation fee referred to in paragraph (b) of
this Section and any written consent to such assignment required by paragraph
(b) of this Section, the Administrative Agent shall accept such Assignment and
Acceptance and record the information contained therein in the Register. No
assignment shall be effective for purposes of this Agreement unless it has been
recorded in the Register as provided in this paragraph.
(e) Any Lender may, without the consent of the Borrower, the
Administrative Agent, the Issuing Bank or the Swingline Lender, sell
participations to one or more banks or other entities (a "Participant") in all
or a portion of such Lender's rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans owing to it),
provided that (i) such Lender's obligations under this Agreement shall remain
unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) such Lender shall
be solely responsible for any withholding Taxes or any filing or reporting
requirements relating to such Participant and (iv) Holdings, the Borrower, the
Administrative Agent, the Issuing Bank, the Swingline Lender and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement. Any
agreement or instrument pursuant to which a Lender sells such a participation
shall provide that such Lender shall retain the sole right to enforce the Loan
Documents and to approve any amendment, modification or waiver of any provision
of the Loan Documents, provided that such agreement or instrument may provide
that such Lender will not, without the consent of the Participant, agree to any
amendment, modification or waiver described in the first proviso (other than
clause (vii) thereof) to Section 9.02(b) that affects such Participant.
Subject to paragraph (f) of this Section, the Borrower agrees that each
Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17
to the same extent as if it were a Lender and had acquired its interest by
assignment pursuant to paragraph (b) of this Section. To the extent permitted
by law, each Participant also shall be entitled to the benefits of Section 9.08
as though it were a Lender, provided such Participant agrees to be subject to
Section 2.18(c) as though it were a Lender.
(f) A Participant shall not be entitled to receive any greater
payment under Section 2.15, 2.16 or 2.17 than the applicable Lender would have
been entitled to receive with respect to the participation sold to such
Participant, unless this restriction is waived by the Borrower.
(g) Any Lender may at any time pledge or assign a security
interest in all or any portion of its rights under this Agreement to secure
obligations of such Lender, including any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section shall not apply to any
such pledge or assignment of a security interest,
<PAGE> 113
107
provided that no such pledge or assignment of a security interest shall release
a Lender from any of its obligations hereunder or substitute any such pledgee
or assignee for such Lender as a party hereto.
SECTION 9.05. Survival. All covenants, agreements,
representations and warranties made by the Loan Parties in the Loan Documents
and in the certificates or other instruments delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the other parties hereto and shall survive the
execution and delivery of the Loan Documents and the making of any Loans and
issuance of any Letters of Credit, regardless of any investigation made by any
such other party or on its behalf and notwithstanding that any Agent, the
Issuing Bank, the Swingline Lender or any Lender may have had notice or
knowledge of any Default or incorrect representation or warranty at the time
any credit is extended hereunder, and shall continue in full force and effect
as long as the principal of or any accrued interest on any Loan or any fee or
any other amount payable under this Agreement is outstanding and unpaid or any
Letter of Credit is outstanding and so long as the Commitments have not expired
or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and
Article VIII shall survive and remain in full force and effect regardless of
the consummation of the transactions contemplated hereby, the repayment of the
Loans, the expiration or termination of the Letters of Credit and the
Commitments or the termination of this Agreement or any provision hereof.
SECTION 9.06. Counterparts; Integration; Effectiveness. This
Agreement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all of
which when taken together shall constitute a single contract. This Agreement,
the other Loan Documents and any separate letter agreements with respect to
fees payable to the Administrative Agent or the Syndication Agent constitute
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof. Except as provided in Section 4.01,
this Agreement shall become effective when it shall have been executed by the
Administrative Agent and the Syndication Agent and when the Administrative
Agent shall have received counterparts hereof that, when taken together, bear
the signatures of each of the other parties hereto, and thereafter shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. Delivery of an executed counterpart of a
signature page of this Agreement by telecopy shall be effective as delivery of
a manually executed counterpart of this Agreement.
SECTION 9.07. Severability. Any provision of this Agreement
held to be invalid, illegal or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability without affecting the validity, legality and enforceability
of the remaining provisions hereof; and the
<PAGE> 114
108
invalidity of a particular provision in a particular jurisdiction shall not
invalidate such provision in any other jurisdiction.
SECTION 9.08. Right of Setoff. If an Event of Default shall
have occurred and be continuing, each Lender and each of its Affiliates is
hereby authorized at any time and from time to time, to the fullest extent
permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
obligations at any time owing by such Lender or Affiliate to or for the credit
or the account of the Borrower against any of and all the obligations of the
Borrower now or hereafter existing under this Agreement held by such Lender,
irrespective of whether or not such Lender shall have made any demand under
this Agreement and although such obligations may be unmatured. The rights of
each Lender under this Section are in addition to other rights and remedies
(including other rights of setoff) that such Lender may have.
SECTION 9.09. GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE
OF PROCESS. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
(b) Each of Holdings and the Borrower hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of the Supreme Court of the State of New York sitting in New York
County and of the United States District Court of the Southern District of New
York, and any appellate court from any thereof, in any action or proceeding
arising out of or relating to any Loan Document, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. Nothing in this Agreement or any other Loan Document
shall affect any right that the Administrative Agent, the Issuing Bank, the
Swingline Lender or any Lender may otherwise have to bring any action or
proceeding relating to this Agreement or any other Loan Document against
Holdings, the Borrower or its properties in the courts of any jurisdiction.
(c) Each of Holdings and the Borrower hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement or
any other Loan Document in any court referred to in paragraph (b) of this
Section. Each of the parties hereto hereby
<PAGE> 115
109
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
(d) Each party to this Agreement irrevocably consents to
service of process in the manner provided for notices in Section 9.01. Nothing
in this Agreement or any other Loan Document will affect the right of any party
to this Agreement to serve process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY
HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING
OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings. Article and Section headings and the
Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and shall not affect the construction of, or be taken
into consideration in interpreting, this Agreement.
SECTION 9.12. Confidentiality. Each of the Agents, the Issuing
Bank, the Swingline Lender and the Lenders agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its Affiliates' directors, officers, employees
and agents, including accountants, legal counsel and other advisors, and to any
direct or indirect contractual counterparty in swap agreements or to such
contractual counterparty's professional advisors (it being understood that the
Persons to whom such disclosure is made will be informed of the confidential
nature of such Information and instructed to keep such Information
confidential), (b) to the extent requested by any regulatory authority, (c) to
the extent required by applicable laws or regulations or by any subpoena or
similar legal process, provided that, to the extent reasonably practicable and
not prohibited by applicable laws or regulations or by any judicial or
administrative order, such Person will provide the Borrower with prior notice
of such disclosure, (d) to any other party to this Agreement, (e) in connection
with the exercise of any remedies hereunder or any suit, action or
<PAGE> 116
110
proceeding relating to this Agreement or any other Loan Document or the
enforcement of rights hereunder or thereunder, (f) subject to an agreement
containing provisions substantially the same as those of this Section, to any
assignee of or Participant in, or any prospective assignee of or Participant
in, any of its rights or obligations under this Agreement, (g) with the consent
of the Borrower or (h) to the extent such Information (i) becomes publicly
available other than as a result of a breach of this Section or (ii) becomes
available to any Agent, the Issuing Bank, the Swingline Lender or any Lender on
a nonconfidential basis from a source other than Holdings or the Borrower. For
the purposes of this Section, the term "Information" means all information
received from Holdings or the Borrower relating to Holdings or the Borrower or
its business, other than any such information that is available to any Agent,
the Issuing Bank, the Swingline Lender or any Lender on a nonconfidential basis
prior to disclosure by Holdings or the Borrower. Any Person required to
maintain the confidentiality of Information as provided in this Section shall
be considered to have complied with its obligation to do so if such Person has
exercised the same degree of care to maintain the confidentiality of such
Information as such Person would accord to its own confidential information.
SECTION 9.13. Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the interest rate applicable to
any Loan, together with all fees, charges and other amounts that are treated as
interest on such Loan under applicable law (collectively, the "Charges"), shall
exceed the maximum lawful rate (the "Maximum Rate") that may be contracted for,
charged, taken, received or reserved by the Lender holding such Loan in
accordance with applicable law, the rate of interest payable in respect of such
Loan hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the interest and Charges
that would have been payable in respect of such Loan but were not payable as a
result of the operation of this Section shall be cumulated and the interest and
Charges payable to such Lender in respect of other Loans or periods shall be
increased (but not above the Maximum Rate therefor) until such cumulated
amount, together with interest thereon at the Federal Funds Effective Rate to
the date of repayment, shall have been received by such Lender.
<PAGE> 117
111
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
DJ ORTHOPEDICS LLC,
by
/ s / Cyril Talbot III
-------------------------------------------------
Name: Cyril Talbot III
Title: VP, CFO, and Secretary
DONJOY, L.L.C.,
by
/ s / Cyril Talbot III
-------------------------------------------------
Name: Cyril Talbot III
Title: VP, CFO, and Secretary
FIRST UNION NATIONAL BANK,
individually and as Administrative Agent and
Collateral Agent,
by
/ s / J. Matt MacIver Jr.
------------------------------------------------
Name: J. Matt MacIver Jr.
Title: Vice President
THE CHASE MANHATTAN BANK,
individually and as Syndication Agent, Issuing Bank
and Swingline Lender,
by
/ s / Stephen P. Rochford
--------------------------------------------
Name: Stephen P. Rochford
Title: Vice President
<PAGE> 118
112
AMSOUTH BANK,
by
/ s / Joseph B. Hutson
----------------------------------------
Name: Joseph B. Huston
Title: Attorney-In-Law
BANK AUSTRIA
CREDITANSTALT CORPORATE
FINANCE, INC,
by
/ s / Greg Roux
-------------------------------------------
Name: Greg Roux
Title: Vice President
by
/ s / Jack R. Bertges
--------------------------------------------
Name: Jack R. Bertges
Title: Senior Vice President
BANKBOSTON, N.A.,
by
/ s / Christopher J. Wickles
-------------------------------------------
Name: Christopher J. Wickles
Title: Vice President
BANK LEUMI USA,
by
/ s / Del Lorimer
-----------------------------------------------
Name: Del Lorimer
Title: VP/MGR Corporate Finance
FLEET CAPITAL
CORPORATION,
by
/ s / Mark D. Newlun
------------------------------------------
<PAGE> 119
113
Name: Mark D. Newlun
Title: Senior Vice President
FIRST SECURITY BANK, N.A.,
by
/ s / Richard I. Polver
------------------------------------------------
Name: Richard I. Polver
Title: Executive Vice President
THE PROVIDENT BANK,
by
/ s / Thomas W. Doe
------------------------------------------
Name: Thomas W. Doe
Title: Vice President
PROVIDENT BANK OF MARYLAND,
by
/ s / Jennifer D. Patton
-------------------------------------
Name: Jennifer D. Patton
Title: Assistant Vice President
<PAGE> 1
EXHIBIT 10.12
INDEMNITY, SUBROGATION and CONTRIBUTION AGREEMENT
dated as of June 30, 1999, among DJ ORTHOPEDICS, LLC, a
Delaware limited liability company (the "Borrower"), each
subsidiary of the Borrower listed on Schedule I hereto
(the "Guarantors") and FIRST UNION NATIONAL BANK ("First
Union"), as collateral agent (in such capacity, the
"Collateral Agent") for the Secured Parties (as defined in
the Credit Agreement referred to below).
Reference is made to (a) the Credit Agreement dated as of June 30, 1999
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among the Borrower, DONJOY, L.L.C., a Delaware limited liability
company, the lenders from time to time party thereto (the "Lenders"), First
Union, as administrative agent for the Lenders (in such capacity, the
"Administrative Agent") and Collateral Agent, and THE CHASE MANHATTAN BANK, as
Syndication Agent and as issuing bank (in such capacity, the "Issuing Bank"),
and (b) the Subsidiary Guarantee Agreement dated as of June 30, 1999 between
the Guarantors and the Collateral Agent (the "Subsidiary Guarantee Agreement").
Capitalized terms used herein and not defined herein shall have the meanings
assigned to such terms in the Credit Agreement.
The Lenders have agreed to make Loans to the Borrower, and the Issuing
Bank has agreed to issue Letters of Credit for the account of the Borrower,
pursuant to, and upon the terms and subject to the conditions specified in, the
Credit Agreement. The Guarantors have guaranteed such Loans and the other
Obligations (as defined in the Subsidiary Guarantee Agreement) of the Borrower
under the Credit Agreement pursuant to the Subsidiary Guarantee Agreement;
certain Guarantors have granted Liens on and security interests in certain of
their assets to secure such guarantees. The obligations of the Lenders to make
Loans and of the Issuing Bank to issue Letters of Credit are conditioned on,
among other things, the execution and delivery by the Borrower and the
Guarantors of an agreement in the form hereof.
<PAGE> 2
Accordingly, the Borrower, each Guarantor and the Collateral Agent agree
as follows:
SECTION 1. Indemnity and Subrogation. In addition to all such rights of
indemnity and subrogation as the Guarantors may have under applicable law (but
subject to Section 3), the Borrower agrees that (a) in the event a payment
shall be made by any Guarantor under the Subsidiary Guarantee Agreement, (i)
the Borrower shall indemnify such Guarantor for the full amount of such payment
and (ii) such Guarantor shall be subrogated to the rights of the Person to whom
such payment shall have been made to the extent of such payment and (b) in the
event any assets of any Guarantor shall be sold pursuant to any Security
Document to satisfy a claim of any Secured Party, the Borrower shall indemnify
such Guarantor in an amount equal to the greater of (i) the book value of the
assets so sold and (ii) the fair market value of the assets so sold.
SECTION 2. Contribution and Subrogation. Each Guarantor (a "Contributing
Guarantor") agrees (subject to Section 3) that, in the event a payment shall be
made by any other Guarantor under the Subsidiary Guarantee Agreement or assets
of any other Guarantor shall be sold pursuant to any Security Document to
satisfy a claim of any Secured Party and such other Guarantor (the "Claiming
Guarantor") shall not have been fully indemnified by the Borrower as provided
in Section 1, the Contributing Guarantor shall indemnify the Claiming Guarantor
in an amount equal to the amount of such payment or the greater of (i) the book
value of the assets so sold and (ii) the fair market value of such assets, as
the case may be, in each case multiplied by a fraction of which the numerator
shall be the net worth of the Contributing Guarantor on the date hereof and the
denominator shall be the aggregate net worth of all the Guarantors on the date
hereof (or, in the case of any Guarantor becoming a party hereto pursuant to
Section 12, the date of the Supplement hereto executed and delivered by such
Guarantor). Any Contributing Guarantor making any payment to a Claiming
Guarantor pursuant to this Section 2 shall be subrogated to the rights of such
Claiming Guarantor under Section 1 to the extent of such payment.
SECTION 3. Subordination. Notwithstanding any provision of this
Agreement to the contrary, all rights of the Guarantors under Sections 1 and 2
and all other rights of indemnity, contribution or subrogation under applicable
law or otherwise shall be fully subordinated to the indefeasible payment in
full in cash of the Obligations. No failure on the part of the Borrower or any
Guarantor to make the payments required by Sections 1 and 2 (or any other
payments required under applicable law or otherwise) shall in any respect limit
the obligations and liabilities of any Guarantor with respect to its
obligations hereunder, and each Guarantor shall remain liable for the full
amount of the obligations of such Guarantor hereunder.
SECTION 4. Termination. Subject to the provisions of the last sentence
of Section 8 of this Agreement, this Agreement shall survive and be in full
force and effect so long as any Obligation is outstanding and has not been
indefeasibly paid in full in cash, and so long as the LC Exposure has not been
reduced to zero or any of the Commitments under the Credit Agreement have not
been terminated, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment, or any part thereof, of any
<PAGE> 3
Obligation is rescinded or must otherwise be restored by any Secured Party or
any Guarantor upon the bankruptcy or reorganization of the Borrower, any
Guarantor or otherwise.
SECTION 5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 6. No Waiver; Amendment. (a) No failure on the part of the
Collateral Agent or any Guarantor to exercise, and no delay in exercising, any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, power or remedy by the
Collateral Agent or any Guarantor preclude any other or further exercise
thereof or the exercise of any other right, power or remedy. All remedies
hereunder are cumulative and are not exclusive of any other remedies provided
by law. None of the Collateral Agent or any of the Guarantors shall be deemed
to have waived any rights hereunder unless such waiver shall be in writing and
signed by such parties.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to a written agreement entered into among
the Borrower, the Guarantors and the Collateral Agent, with the prior written
consent of the Required Lenders (except as otherwise provided in the Credit
Agreement).
SECTION 7. Notices. All communications and notices hereunder shall be in
writing and given as provided in the Subsidiary Guarantee Agreement and
addressed as specified therein.
SECTION 8. Binding Agreement; Assignments. Whenever in this Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party, and all covenants, promises
and agreements by or on behalf of the parties that are contained in this
Agreement shall bind and inure to the benefit of their respective successors
and assigns. Neither the Borrower nor any Guarantor may assign or transfer any
of its rights or obligations hereunder (and any such attempted assignment or
transfer shall be void) without the prior written consent of the Required
Lenders. Notwithstanding the foregoing, at the time any Guarantor is released
from its obligations under the Subsidiary Guarantee Agreement in accordance
with such Subsidiary Guarantee Agreement and the Credit Agreement, such
Guarantor will cease to have any rights or obligations under this Agreement.
SECTION 9. Survival of Agreement; Severability. (a) All covenants and
agreements made by the Borrower and each Guarantor herein and in the
certificates or
<PAGE> 4
other instruments prepared or delivered in connection with this Agreement or
the other Loan Documents shall be considered to have been relied upon by the
Collateral Agent, the other Secured Parties and each Guarantor and shall
survive the making by the Lenders of the Loans and the issuance of the Letters
of Credit by the Issuing Bank, and shall continue in full force and effect as
long as the principal of or any accrued interest on any Loans or any other fee
or amount payable under the Credit Agreement or this Agreement or under any of
the other Loan Documents is outstanding and unpaid or the LC Exposure does not
equal zero and as long as the Commitments have not been terminated.
(b) In the event any one or more of the provisions contained in this
Agreement or in any other Loan Document should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby (it being understood that the invalidity of a
particular provision in a particular jurisdiction shall not in and of itself
affect the validity of such provision in any other jurisdiction). The parties
shall endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 10. Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This Agreement shall be
effective with respect to any Guarantor when a counterpart bearing the
signature of such Guarantor shall have been delivered to the Collateral Agent.
Delivery of an executed signature page to this Agreement by facsimile
transmission shall be as effective as delivery of a manually signed counterpart
of this Agreement.
SECTION 11. Rules of Interpretation. The rules of interpretation
specified in Section 1.03 of the Credit Agreement shall be applicable to this
Agreement.
<PAGE> 5
SECTION 12. Additional Guarantors. Pursuant to Section 5.12 of the
Credit Agreement, the Borrower is required to cause each Subsidiary that was
not in existence or not such a Subsidiary on the date of the Credit Agreement
to enter into the Subsidiary Guarantee Agreement as a Subsidiary Guarantor upon
becoming such a Subsidiary that is a Subsidiary Loan Party. Upon execution and
delivery, after the date hereof, by the Collateral Agent and such a Subsidiary
of an instrument in the form of Annex 1 hereto, such Subsidiary shall become a
Guarantor hereunder with the same force and effect as if originally named as a
Guarantor hereunder. The execution and delivery of any instrument adding an
additional Guarantor as a party to this Agreement shall not require the consent
of any Guarantor hereunder. The rights and obligations of each Guarantor
hereunder shall remain in full force and effect notwithstanding the addition of
any new Guarantor as a party to this Agreement.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first appearing
above.
DJ ORTHOPEDICS, LLC,
by /s/ Cyril Talbot III
---------------------------
Title: V.P., CFO and Secretary
DJ ORTHOPEDICS CAPITAL
CORPORATION, as a Guarantor,
by /s/ Cyril Talbot III
---------------------------
Title: V.P., CFO and Secretary
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by /s/ J. Matt Maclver, Jr.
---------------------------
Title: Vice President
<PAGE> 7
Schedule I to
the Indemnity, Subrogation and
Contribution Agreement
<TABLE>
<CAPTION>
Subsidiary Guarantor Address
-------------------- -------
<S> <C>
DJ Orthopedics Capital Corporation 2985 Scott Street
Vista, California 92083
</TABLE>
<PAGE> 8
Annex 1 to
the Indemnity, Subrogation and
Contribution Agreement
SUPPLEMENT NO. dated as of , to the
Indemnity, Subrogation and Contribution Agreement
dated as of June 30, 1999 (as the same may be
amended, supplemented or otherwise modified from
time to time, the "Indemnity, Subrogation and
Contribution Agreement"), among DJ ORTHOPEDICS,
LLC, a Delaware limited liability company (the
"Borrower"), each Subsidiary of the Borrower listed
on Schedule I thereto (the "Guarantors"), and FIRST
UNION NATIONAL BANK ("First Union"), as collateral
agent (the "Collateral Agent") for the Secured
Parties (as defined in the Credit Agreement
referred to below).
A. Reference is made to (a) the Credit Agreement dated as of June 30,
1999 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among the Borrower, DONJOY, L.L.C., a Delaware limited
liability company, the lenders from time to time party thereto (the "Lenders"),
First Union, as administrative agent for the Lenders (in such capacity, the
"Administrative Agent") and Collateral Agent, and THE CHASE MANHATTAN BANK, as
Syndication Agent and as issuing bank (in such capacity, the "Issuing Bank"),
and (b) the Subsidiary Guarantee Agreement dated as of June 30, 1999, among the
Guarantors and the Collateral Agent (the "Subsidiary Guarantee Agreement").
B. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Indemnity, Subrogation and
Contribution Agreement and the Credit Agreement.
C. The Borrower and the Guarantors have entered into the Indemnity,
Subrogation and Contribution Agreement in order to induce the Lenders to make
Loans and the Issuing Bank to issue Letters of Credit. Pursuant to Section 5.12
of the Credit Agreement, each Subsidiary that was not in existence or not such
a Subsidiary on the date of the Credit Agreement is required to enter into the
Subsidiary Guarantee Agreement as a Guarantor upon becoming a Subsidiary that
is a Subsidiary Loan Party. Section 12 of the Indemnity, Subrogation and
Contribution Agreement provides that additional Subsidiaries of the Borrower
may become Guarantors under the Indemnity, Subrogation and Contribution
Agreement by execution and delivery of an instrument in the form of this
Supplement. The undersigned Subsidiary (the "New Guarantor") is executing this
Supplement in accordance with the requirements of the Credit Agreement to
become a Guarantor under the Indemnity, Subrogation and Contribution Agreement
in order to induce the Lenders to make additional Loans and the Issuing Bank to
issue
<PAGE> 9
additional Letters of Credit and as consideration for Loans previously made and
Letters of Credit previously issued.
Accordingly, the Collateral Agent and the New Guarantor agree as
follows:
SECTION 1. In accordance with Section 12 of the Indemnity, Subrogation
and Contribution Agreement, the New Guarantor by its signature below becomes a
Guarantor under the Indemnity, Subrogation and Contribution Agreement with the
same force and effect as if originally named therein as a Guarantor and the New
Guarantor hereby agrees to all the terms and provisions of the Indemnity,
Subrogation and Contribution Agreement applicable to it as a Guarantor
thereunder. Each reference to a "Guarantor" in the Indemnity, Subrogation and
Contribution Agreement shall be deemed to include the New Guarantor. The
Indemnity, Subrogation and Contribution Agreement is hereby incorporated herein
by reference.
SECTION 2. The New Guarantor represents and warrants to the Collateral
Agent and the other Secured Parties that this Supplement has been duly
authorized, executed and delivered by it and constitutes its legal, valid and
binding obligation, enforceable against it in accordance with its terms.
SECTION 3. This Supplement may be executed in counterparts, each of
which shall constitute an original, but all of which when taken together shall
constitute a single contract. This Supplement shall become effective when the
Collateral Agent shall have received counterparts of this Supplement that, when
taken together, bear the signatures of the New Guarantor and the Collateral
Agent. Delivery of an executed signature page to this Supplement by facsimile
transmission shall be as effective as delivery of a manually signed counterpart
of this Supplement.
SECTION 4. Except as expressly supplemented hereby, the Indemnity,
Subrogation and Contribution Agreement shall remain in full force and effect.
SECTION 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 6. In the event any one or more of the provisions contained in
this Supplement should be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein and in the Indemnity, Subrogation and Contribution
Agreement shall not in any way be affected or impaired (it being understood
that the invalidity of a particular provision in a particular jurisdiction
shall not in and of itself affect the validity of such provision in any other
jurisdiction). The parties shall endeavor in good-faith negotiations to replace
the invalid, illegal or unenforceable provisions with valid provisions the
economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
<PAGE> 10
SECTION 7. All communications and notices hereunder shall be in writing
and given as provided in Section 7 of the Indemnity, Subrogation and
Contribution Agreement. All communications and notices hereunder to the New
Guarantor shall be given to it care of the Borrower.
SECTION 8. The New Guarantor agrees to reimburse the Collateral Agent
for its reasonable out-of-pocket expenses in connection with this Supplement,
including the reasonable fees, other charges and disbursements of counsel for
the Collateral Agent.
<PAGE> 11
IN WITNESS WHEREOF, the New Guarantor and the Collateral Agent have duly
executed this Supplement to the Indemnity, Subrogation and Contribution
Agreement as of the day and year first above written.
[Name Of New Guarantor],
by
Name:
Title:
Address:
-------------------
---------------------------
---------------------------
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by
---------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.13
PARENT GUARANTEE AGREEMENT dated as of June 30,
1999, between DONJOY, L.L.C., a Delaware limited liability
company (the "Guarantor"), and FIRST UNION NATIONAL BANK
("First Union"), as collateral agent (the "Collateral
Agent") for the Secured Parties (as defined in the Credit
Agreement referred to below).
Reference is made to the Credit Agreement dated as of June 30, 1999 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among DJ ORTHOPEDICS, LLC, a Delaware limited liability company
(the "Borrower"), the Guarantor, the lenders from time to time party thereto
(the "Lenders"), First Union, as administrative agent for the Lenders (in such
capacity, the "Administrative Agent") and Collateral Agent, and THE CHASE
MANHATTAN BANK, as Syndication Agent and as issuing bank (in such capacity, the
"Issuing Bank"). Capitalized terms used herein and not defined herein shall
have the meanings assigned to such terms in the Credit Agreement.
The Lenders have agreed to make Loans to the Borrower, and the Issuing
Bank has agreed to issue Letters of Credit for the account of the Borrower,
pursuant to, and upon the terms and subject to the conditions specified in, the
Credit Agreement. As the owner of all of the issued and outstanding membership
interests of the Borrower, the Guarantor acknowledges that it will derive
substantial benefit from the making of Loans by the Lenders and the issuance of
Letters of Credit by the Issuing Bank. The obligations of the Lenders to make
Loans and of the Issuing Bank to issue Letters of Credit are conditioned on,
among other things, the execution and delivery by the Guarantor of a Parent
Guarantee Agreement in the form hereof. As consideration therefor and in order
to induce the Lenders to make Loans and the Issuing Bank to issue Letters of
Credit, the Guarantor is willing to execute this Agreement.
Accordingly, the parties hereto agree as follows:
<PAGE> 2
2
SECTION 1. Guarantee. The Guarantor unconditionally and irrevocably
guarantees (the "Guarantee"), as a primary obligor and not merely as a surety,
(a) the due and punctual payment by the Borrower of (i) the principal of and
premium, if any, and interest (including interest accruing during the pendency
of any bankruptcy, insolvency, receivership or other similar proceeding,
regardless of whether such interest is allowed or allowable in such proceeding)
on the Loans, when and as due, whether at maturity, by acceleration, upon one
or more dates set for prepayment or otherwise, (ii) each payment required to be
made by the Borrower under the Credit Agreement in respect of any Letter of
Credit, when and as due, including payments in respect of reimbursement of
disbursements, interest thereon and obligations to provide cash collateral, and
(iii) all other monetary obligations, including fees, costs, expenses and
indemnities, whether primary, secondary, direct, contingent, fixed or otherwise
(including monetary obligations incurred during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding, regardless of whether
such monetary obligations are allowed or allowable in such proceeding), of the
Borrower to the Secured Parties under the Credit Agreement and the other Loan
Documents, (b) the due and punctual performance of all covenants, agreements,
obligations and liabilities of the Borrower under or pursuant to the Credit
Agreement and the other Loan Documents, (c) the due and punctual payment and
performance of all the covenants, agreements, obligations and liabilities of
each other Loan Party under or pursuant to this Agreement and the other Loan
Documents and (d) the due and punctual payment of all obligations of Holdings,
the Borrower and any Subsidiary Loan Party under each Hedging Agreement entered
into with any counterparty that was a Lender (or an Affiliate of a Lender) at
the time such Hedging Agreement was entered into (all the monetary and other
obligations described in the preceding clauses (a) through (d) being
collectively called the "Obligations"). The Guarantor further agrees that the
Obligations may be extended or renewed, in whole or in part, without notice to
or further assent from it, and that it will remain bound upon the Guarantee
notwithstanding any extension or renewal of any Obligation.
SECTION 2. Obligations Not Waived. To the fullest extent permitted by
applicable law, the Guarantor waives presentment to, demand of payment from and
protest to the Borrower of any of the Obligations, and also waives notice of
acceptance of the Guarantee and notice of protest for nonpayment. To the
fullest extent permitted by applicable law, the obligations of the Guarantor
hereunder shall not be affected by (a) the failure of the Collateral Agent or
any other Secured Party to assert any claim or demand or to enforce or exercise
any right or remedy against the Borrower or any other guarantor of the
Obligations under the provisions of the Credit Agreement, any other Loan
Document or otherwise, (b) any rescission, waiver, amendment or modification
of, or any release from any of the terms or provisions of, this Agreement, any
other Loan Document, any Guarantee or any other agreement, including with
respect to any other guarantor of the Obligations under this Agreement, or (c)
the
<PAGE> 3
3
failure to perfect any security interest in, or the release of, any of the
security held by or on behalf of the Collateral Agent or any other Secured
Party.
SECTION 3. Security. The Guarantor authorizes the Collateral Agent and
each of the other Secured Parties to (a) take and hold security for the payment
of the Guarantee and the Obligations and exchange, enforce, waive and release
any such security, (b) apply such security and direct the order or manner of
sale thereof as they in their sole discretion may determine and (c) release or
substitute any one or more endorsees, other guarantors or other obligors. To
the extent that security is given for the payment of this Guarantee or the
Obligations, the Guarantor authorizes the Collateral Agent and the Lenders to
apply such security and direct the order or manner of sale thereof as they in
their sole discretion may determine. The Guarantor further authorizes the
Collateral Agent to release or substitute any one or more endorsees, other
guarantors or other obligors.
SECTION 4. Guarantee of Payment. The Guarantor further agrees that the
Guarantee constitutes a guarantee of payment when due and not of collection,
and waives any right to require that any resort be had by the Collateral Agent
or any other Secured Party to any of the security held for payment of the
Obligations or to any balance of any deposit account or credit on the books of
the Collateral Agent or any other Secured Party in favor of the Borrower or any
other Person.
SECTION 5. No Discharge or Diminishment of Guarantee. The obligations of
the Guarantor hereunder shall not be subject to any reduction, limitation,
impairment or termination for any reason (other than the indefeasible payment
in full in cash of the Obligations), including any claim of waiver, release,
surrender, alteration or compromise of any of the Obligations, and shall not be
subject to any defense or set-off, counterclaim, recoupment or termination
whatsoever by reason of the invalidity, illegality or unenforceability of the
Obligations or otherwise. Without limiting the generality of the foregoing, the
obligations of the Guarantor hereunder shall not be discharged or impaired or
otherwise affected by the failure of any Agent or any other Secured Party to
assert any claim or demand or to enforce any remedy under the Credit Agreement,
any other Loan Document or any other agreement, by any waiver or modification
of any provision of any thereof, by any default, failure or delay, wilful or
otherwise, in the performance of the Obligations, or by any other act or
omission that may or might in any manner or to any extent vary the risk of the
Guarantor or that would otherwise operate as a discharge of the Guarantor as a
matter of law or equity (other than the indefeasible payment in full in cash of
all the Obligations).
SECTION 6. Defenses of Borrower Waived. To the fullest extent permitted
by applicable law, the Guarantor waives any defense based on or arising out of
any defense of the Borrower or the unenforceability of the Obligations or any
part thereof
<PAGE> 4
4
from any cause, or the cessation from any cause of the liability of the
Borrower, other than the indefeasible payment in full in cash of all the
Obligations. The Collateral Agent and the other Secured Parties may, at their
election, foreclose on any security held by one or more of them by one or more
judicial or nonjudicial sales, accept an assignment of any such security in
lieu of foreclosure, compromise or adjust any part of the Obligations, make any
other accommodation with the Borrower or any other guarantor or exercise any
other right or remedy available to them against the Borrower or any other
guarantor, without affecting or impairing in any way the liability of the
Guarantor hereunder except to the extent that all the Obligations have been
indefeasibly paid in full in cash. Pursuant to applicable law, the Guarantor
waives any defense arising out of any such election even though such election
operates, pursuant to applicable law, to impair or to extinguish any right of
reimbursement or subrogation or other right or remedy of the Guarantor against
the Borrower or any other guarantor, as the case may be, or any security.
SECTION 7. Agreement to Pay; Subordination. In furtherance of the
foregoing and not in limitation of any other right that the Collateral Agent or
any other Secured Party has at law or in equity against the Guarantor by virtue
hereof, upon the failure of the Borrower or any other Loan Party to pay any
Obligation when and as the same shall become due, whether at maturity, by
acceleration, after notice of prepayment or otherwise, the Guarantor hereby
promises to and will forthwith pay, or cause to be paid, to the Collateral
Agent or such other Secured Party as designated thereby in cash the amount of
such unpaid Obligations. Upon payment by the Guarantor of any sums to the
Collateral Agent or any Secured Party as provided above, all rights of the
Guarantor against the Borrower arising as a result thereof by way of right of
subrogation, contribution, reimbursement, indemnity or otherwise shall in all
respects be subordinate and junior in right of payment to the prior
indefeasible payment in full in cash of all the Obligations. In addition, any
indebtedness of the Borrower now or hereafter held by the Guarantor is hereby
subordinated in right of payment to the prior payment in full of the
Obligations. If any amount shall erroneously be paid to the Guarantor on
account of (a) such subrogation, contribution, reimbursement, indemnity or
similar right or (b) any such indebtedness of the Borrower, such amount shall
be held in trust for the benefit of the Secured Parties and shall forthwith be
paid to the Collateral Agent to be credited against the payment of the
Obligations, whether matured or unmatured, in accordance with the terms of the
Loan Documents.
SECTION 8. Information. The Guarantor assumes all responsibility for
being and keeping itself informed of the Borrower's financial condition and
assets, and of all other circumstances bearing upon the risk of nonpayment of
the Obligations and the nature, scope and extent of the risks that the
Guarantor assumes and incurs hereunder, and agrees that none of the Collateral
Agent or the other Secured Parties will have any duty to advise the Guarantor
of information known to it or any of them regarding such circumstances or
risks.
<PAGE> 5
5
SECTION 9. Termination. The Guarantee (a) shall terminate when all the
Obligations have been indefeasibly paid in full in cash and the Lenders have no
further commitment to lend under the Credit Agreement, the LC Exposure has been
reduced to zero and the Issuing Bank has no further obligation to issue Letters
of Credit under the Credit Agreement and (b) shall continue to be effective or
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any Obligation is rescinded or must otherwise be restored by any Secured
Party or the Guarantor upon the bankruptcy or reorganization of the Borrower,
the Guarantor or otherwise.
SECTION 10. Binding Effect; Several Agreement; Assignments. Whenever in
this Agreement any of the parties hereto is referred to, such reference shall
be deemed to include the successors and assigns of such party, and all
covenants, promises and agreements by or on behalf of the Guarantor that are
contained in this Agreement shall bind and inure to the benefit of each party
hereto and their respective successors and assigns. This Agreement shall become
effective as to the Guarantor when a counterpart hereof executed on behalf of
the Guarantor shall have been delivered to the Collateral Agent, and a
counterpart hereof shall have been executed on behalf of the Collateral Agent,
and thereafter shall be binding upon the Guarantor and the Collateral Agent and
their respective successors and assigns, and shall inure to the benefit of the
Guarantor, the Collateral Agent and the other Secured Parties, and their
respective successors and assigns, except that the Guarantor shall not have the
right to assign its rights or obligations hereunder or any interest herein (and
any such attempted assignment shall be void).
SECTION 11. Waivers; Amendment. (a) No failure or delay of the
Collateral Agent in exercising any power or right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the Collateral Agent hereunder
and of the other Secured Parties under the other Loan Documents are cumulative
and are not exclusive of any rights or remedies that they would otherwise have.
No waiver of any provision of this Agreement or consent to any departure by the
Guarantor therefrom shall in any event be effective unless the same shall be
permitted by paragraph (b) below, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice or demand on the Guarantor in any case shall entitle the Guarantor to
any other or further notice or demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to a written agreement entered into between
the Guarantor
<PAGE> 6
6
and the Administrative Agent, with the prior written consent of the Required
Lenders (except as otherwise provided in the Credit Agreement).
SECTION 12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 13. Notices. All communications and notices hereunder shall be
in writing and given as provided in Section 9.01 of the Credit Agreement. All
communications and notices hereunder to the Guarantor shall be given to it in
care of the Borrower.
SECTION 14. Survival of Agreement; Severability. (a) All covenants,
agreements, representations and warranties made the Guarantor herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Agent and the other Secured Parties and shall
survive the making by the Lenders of the Loans and the issuance of the Letters
of Credit by the Issuing Bank regardless of any investigation made by the
Secured Parties or on their behalf, and shall continue in full force and effect
as long as the principal of or any accrued interest on any Loan or any other
fee or amount payable under this Agreement or any other Loan Document is
outstanding and unpaid or the LC Exposure does not equal zero and as long as
the Commitments have not been terminated.
(b) In the event any one or more of the provisions contained in this
Agreement or in any other Loan Document should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby (it being understood that the invalidity of a
particular provision in a particular jurisdiction shall not in and of itself
affect the validity of such provision in any other jurisdiction). The parties
shall endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 15. Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute a single contract, and shall become effective
as provided in Section 10. Delivery of an executed signature page to this
Agreement by facsimile transmission shall be as effective as delivery of a
manually executed counterpart of this Agreement.
<PAGE> 7
7
SECTION 16. Rules of Interpretation. The rules of interpretation
specified in Section 1.03 of the Credit Agreement shall be applicable to this
Agreement.
<PAGE> 8
8
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
DONJOY, L.L.C.,
by /s/ Cyril Talbot III
-----------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by /s/ J. Matt MacIver, Jr.
-----------------------
Name: J. Matt MacIver, Jr.
Title: Vice President
<PAGE> 1
EXHIBIT 10.14
SUBSIDIARY GUARANTEE AGREEMENT dated as of June 30,
1999, among each of the subsidiaries listed on Schedule I
hereto (each such subsidiary, individually, a "Subsidiary
Guarantor" and, collectively, the "Subsidiary Guarantors")
of DJ ORTHOPEDICS, LLC, a Delaware limited liability
company (the "Borrower"), and FIRST UNION NATIONAL BANK
("First Union"), as collateral agent (the "Collateral
Agent") for the Secured Parties (as defined in the Credit
Agreement referred to below).
Reference is made to the Credit Agreement dated as of June 30, 1999 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among the Borrower, DONJOY, L.L.C., a Delaware limited liability
company, the lenders from time to time party thereto (the "Lenders"), First
Union, as administrative agent for the Lenders (in such capacity, the
"Administrative Agent") and Collateral Agent and, THE CHASE MANHATTAN BANK, as
Syndication Agent and as issuing bank (in such capacity, the "Issuing Bank").
Capitalized terms used herein and not defined herein shall have the meanings
assigned to such terms in the Credit Agreement.
The Lenders have agreed to make Loans to the Borrower, and the Issuing
Bank has agreed to issue Letters of Credit for the account of the Borrower, or
any of its Subsidiaries pursuant to, and upon the terms and subject to the
conditions specified in, the Credit Agreement. Each of the Subsidiary Guarantors
is a wholly owned Subsidiary and acknowledges that it will derive substantial
benefit from the making of the Loans by the Lenders, and the issuance of the
Letters of Credit by the Issuing Bank. The obligations of the Lenders to make
Loans and of the Issuing Bank to issue Letters of Credit are conditioned on,
among other things, the execution and delivery by the Subsidiary Guarantors of a
Subsidiary Guarantee Agreement in the form hereof. As consideration therefor and
in order to induce the Lenders to make Loans and the Issuing Bank to issue
Letters of Credit, the Subsidiary Guarantors are willing to execute this
Agreement.
Accordingly, the parties hereto agree as follows:
<PAGE> 2
2
SECTION 1. Guarantee. Each Subsidiary Guarantor unconditionally
guarantees (the "Guarantee"), jointly with the other Subsidiary Guarantors and
severally, as a primary obligor and not merely as a surety, (a) the due and
punctual payment by the Borrower of (i) the principal of and premium, if any,
and interest (including interest accruing during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding, regardless of whether such
interest is allowed or allowable in such proceeding) on the Loans, when and as
due, whether at maturity, by acceleration, upon one or more dates set for
prepayment or otherwise, (ii) each payment required to be made by the Borrower
under the Credit Agreement in respect of any Letter of Credit, when and as due,
including payments in respect of reimbursement of disbursements, interest
thereon and obligations to provide cash collateral, and (iii) all other monetary
obligations, including fees, costs, expenses and indemnities, whether primary,
secondary, direct, contingent, fixed or otherwise (including monetary
obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding, regardless of whether such monetary
obligations are allowed or allowable in such proceeding), of the Borrower to the
Secured Parties under the Credit Agreement and the other Loan Documents, (b) the
due and punctual performance of all covenants, agreements, obligations and
liabilities of the Borrower under or pursuant to the Credit Agreement and the
other Loan Documents, (c) the due and punctual payment and performance of all
the covenants, agreements, obligations and liabilities of each other Loan Party
under or pursuant to this Agreement and the other Loan Documents and (d) the due
and punctual payment and performance of all obligations of Holdings, the
Borrower and any Subsidiary Loan Party, under each Hedging Agreement entered
into with any counterparty that was a Lender (or an Affiliate of a Lender) at
the time such Hedging Agreement was entered into (all the monetary and other
obligations described in the preceding clauses (a) through (d) being
collectively called the "Obligations"). Each Subsidiary Guarantor further agrees
that the Obligations may be extended or renewed, in whole or in part, without
notice to or further assent from it, and that it will remain bound upon the
Guarantee notwithstanding any extension or renewal of any Obligation.
Anything contained in this Agreement to the contrary notwithstanding, the
obligations of each Subsidiary Guarantor hereunder shall be limited to a maximum
aggregate amount equal to the greatest amount that would not render such
Subsidiary Guarantor's obligations hereunder subject to avoidance as a
fraudulent transfer or conveyance under Section 548 of Title 11 of the United
States Code or any provisions of applicable state law (collectively, the
"Fraudulent Transfer Laws"), in each case after giving effect to all other
liabilities of such Subsidiary Guarantor, contingent or otherwise, that are
relevant under the Fraudulent Transfer Laws (specifically excluding, however,
any liabilities of such Subsidiary Guarantor (a) in respect of intercompany
indebtedness to the Borrower or Affiliates of the Borrower to the extent that
such indebtedness would be discharged in an amount equal to the amount paid by
such Subsidiary Guarantor hereunder and (b) under any guarantee of senior
unsecured indebtedness or Indebtedness
<PAGE> 3
3
subordinated in right of payment to the Obligations, which guarantee contains a
limitation as to maximum amount similar to that set forth in this paragraph,
pursuant to which the liability of such Subsidiary Guarantor hereunder is
included in the liabilities taken into account in determining such maximum
amount) and after giving effect as assets to the value (as determined under the
applicable provisions of the Fraudulent Transfer Laws) of any rights to
subrogation, contribution, reimbursement, indemnity or similar rights of such
Subsidiary Guarantor pursuant to (i) applicable law or (ii) any agreement
providing for an equitable allocation among such Subsidiary Guarantor and other
Affiliates of the Borrower of obligations arising under Guarantees by such
parties (including the Indemnity, Subrogation and Contribution Agreement).
SECTION 2. Obligations Not Waived. To the fullest extent permitted by
applicable law, each Subsidiary Guarantor waives presentment to, demand of
payment from and protest to the Borrower of any of the Obligations, and also
waives notice of acceptance of the Guarantee and notice of protest for
nonpayment. To the fullest extent permitted by applicable law, the obligations
of each Subsidiary Guarantor hereunder shall not be affected by (a) the failure
of the Collateral Agent or any other Secured Party to assert any claim or demand
or to enforce or exercise any right or remedy against the Borrower or any other
Subsidiary Guarantor under the provisions of the Credit Agreement, any other
Loan Document or otherwise, (b) any rescission, waiver, amendment or
modification of, or any release from any of the terms or provisions of this
Agreement, any other Loan Document, any Guarantee or any other agreement,
including with respect to any other Subsidiary Guarantor under this Agreement,
or (c) the failure to perfect any security interest in, or the release of, any
of the security held by or on behalf of the Collateral Agent or any other
Secured Party.
SECTION 3. Security. Each of the Subsidiary Guarantors authorizes the
Collateral Agent and each of the other Secured Parties to (a) take and hold
security for the payment of the Guarantee and the Obligations and exchange,
enforce, waive and release any such security, (b) apply such security and direct
the order or manner of sale thereof as they in their sole discretion may
determine and (c) release or substitute any one or more endorsees, other
Subsidiary Guarantors or other obligors.
SECTION 4. Guarantee of Payment. Each Subsidiary Guarantor further agrees
that the Guarantee constitutes a guarantee of payment when due and not of
collection, and waives any right to require that any resort be had by the
Collateral Agent or any other Secured Party to any of the security held for
payment of the Obligations or to any balance of any deposit account or credit on
the books of the Collateral Agent or any other Secured Party in favor of the
Borrower or any other Person.
SECTION 5. No Discharge or Diminishment of Guarantee. The obligations of
each Subsidiary Guarantor hereunder shall not be subject to any reduction,
limitation,
<PAGE> 4
4
impairment or termination for any reason (other than the indefeasible payment in
full in cash of the Obligations), including any claim of waiver, release,
surrender, alteration or compromise of any of the Obligations, and shall not be
subject to any defense or set-off, counterclaim, recoupment or termination
whatsoever by reason of the invalidity, illegality or unenforceability of the
Obligations or otherwise. Without limiting the generality of the foregoing, the
obligations of each Subsidiary Guarantor hereunder shall not be discharged or
impaired or otherwise affected by the failure of the Collateral Agent or any
other Secured Party to assert any claim or demand or to enforce any remedy under
the Credit Agreement, any other Loan Document or any other agreement, by any
waiver or modification of any provision of any thereof, by any default, failure
or delay, wilful or otherwise, in the performance of the Obligations, or by any
other act or omission that may or might in any manner or to any extent vary the
risk of any Subsidiary Guarantor or that would otherwise operate as a discharge
of each Subsidiary Guarantor as a matter of law or equity (other than the
indefeasible payment in full in cash of all the Obligations).
SECTION 6. Defenses of Borrower Waived. To the fullest extent permitted
by applicable law, each of the Subsidiary Guarantors waives any defense based on
or arising out of any defense of the Borrower or the unenforceability of the
Obligations or any part thereof from any cause, or the cessation from any cause
of the liability of the Borrower, other than the indefeasible payment in full in
cash of all the Obligations. The Collateral Agent and the other Secured Parties
may, at their election, foreclose on any security held by one or more of them by
one or more judicial or nonjudicial sales, accept an assignment of any such
security in lieu of foreclosure, compromise or adjust any part of the
Obligations, make any other accommodation with the Borrower or any other
Subsidiary Guarantor or exercise any other right or remedy available to them
against the Borrower or any other Subsidiary Guarantor, without affecting or
impairing in any way the liability of any Subsidiary Guarantor hereunder except
to the extent that all the Obligations have been indefeasibly paid in full in
cash. Pursuant to applicable law, each of the Subsidiary Guarantors waives any
defense arising out of any such election even though such election operates,
pursuant to applicable law, to impair or to extinguish any right of
reimbursement or subrogation or other right or remedy of such Subsidiary
Guarantor against the Borrower or any other Subsidiary Guarantor or guarantor,
as the case may be, or any security.
SECTION 7. Agreement to Pay; Subordination. In furtherance of the
foregoing and not in limitation of any other right that the Collateral Agent or
any other Secured Party has at law or in equity against any Subsidiary Guarantor
by virtue hereof, upon the failure of the Borrower or any other Loan Party to
pay any Obligation when and as the same shall become due, whether at maturity,
by acceleration, after notice of prepayment or otherwise, each Subsidiary
Guarantor hereby promises to and shall forthwith pay, or cause to be paid, to
the Collateral Agent or such other Secured Party as designated thereby in cash
the amount of such unpaid Obligations. Upon payment by any Subsidiary
<PAGE> 5
5
Guarantor of any sums to the Collateral Agent or any Secured Party as provided
above, all rights of such Subsidiary Guarantor against the Borrower arising as a
result thereof by way of right of subrogation, contribution, reimbursement,
indemnity or otherwise shall in all respects be subordinate and junior in right
of payment to the prior indefeasible payment in full in cash of all the
Obligations. In addition, any indebtedness of the Borrower now or hereafter held
by any Subsidiary Guarantor is hereby subordinated in right of payment to the
prior payment in full in cash of the Obligations. If any amount shall
erroneously be paid to any Subsidiary Guarantor on account of (a) such
subrogation, contribution, reimbursement, indemnity or similar right or (b) any
such indebtedness of the Borrower, such amount shall be held in trust for the
benefit of the Secured Parties and shall forthwith be paid to the Collateral
Agent to be credited against the payment of the Obligations, whether matured or
unmatured, in accordance with the terms of the Loan Documents.
SECTION 8. Information. Each of the Subsidiary Guarantors assumes all
responsibility for being and keeping itself informed of the Borrower's financial
condition and assets, and of all other circumstances bearing upon the risk of
nonpayment of the Obligations and the nature, scope and extent of the risks that
such Subsidiary Guarantor assumes and incurs hereunder, and agrees that none of
the Collateral Agent or the other Secured Parties will have any duty to advise
any of the Subsidiary Guarantors of information known to it or any of them
regarding such circumstances or risks.
SECTION 9. Representations and Warranties. Each of the Subsidiary
Guarantors represents and warrants as to itself that all representations and
warranties relating to it contained in the Credit Agreement are true and
correct.
SECTION 10. Termination. The Guarantees (a) shall terminate when all the
Obligations have been indefeasibly paid in full in cash and the Lenders have no
further commitment to lend under the Credit Agreement, the LC Exposure has been
reduced to zero and the Issuing Bank has no further obligation to issue Letters
of Credit under the Credit Agreement and (b) shall continue to be effective or
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any Obligation is rescinded or must otherwise be restored by any Secured
Party or any Subsidiary Guarantor upon the bankruptcy or reorganization of the
Borrower, any Subsidiary Guarantor or otherwise.
SECTION 11. Binding Effect; Several Agreement; Assignments. Whenever in
this Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party, and all covenants,
promises and agreements by or on behalf of the Subsidiary Guarantors that are
contained in this Agreement shall bind and inure to the benefit of each party
hereto and their respective successors and assigns. This Agreement shall become
effective as to any Subsidiary Guarantor when a counterpart hereof executed on
behalf of such Subsidiary Guarantor
<PAGE> 6
6
shall have been delivered to the Collateral Agent, and a counterpart hereof
shall have been executed on behalf of the Collateral Agent, and thereafter shall
be binding upon such Subsidiary Guarantor and the Collateral Agent and their
respective successors and assigns, and shall inure to the benefit of such
Subsidiary Guarantor, the Collateral Agent and the other Secured Parties, and
their respective successors and assigns, except that no Subsidiary Guarantor
shall have the right to assign its rights or obligations hereunder or any
interest herein (and any such attempted assignment shall be void). If all of the
capital stock (or membership interests or other equity interests) of a
Subsidiary Guarantor is (or are) sold, transferred or otherwise disposed of
pursuant to a transaction permitted by Section 6.05 of the Credit Agreement,
such Subsidiary Guarantor shall be released from its obligations under this
Agreement without further action. This Agreement shall be construed as a
separate agreement with respect to each Subsidiary Guarantor and may be amended,
modified, supplemented, waived or released with respect to any Subsidiary
Guarantor without the approval of any other Subsidiary Guarantor and without
affecting the obligations of any other Subsidiary Guarantor hereunder.
SECTION 12. Waivers; Amendment. (a) No failure or delay of the Collateral
Agent in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Collateral Agent hereunder and of
the other Secured Parties under the other Loan Documents are cumulative and are
not exclusive of any rights or remedies that they would otherwise have. No
waiver of any provision of this Agreement or consent to any departure by any
Subsidiary Guarantor therefrom shall in any event be effective unless the same
shall be permitted by paragraph (b) below, and then such waiver or consent shall
be effective only in the specific instance and for the purpose for which given.
No notice or demand on any Subsidiary Guarantor in any case shall entitle such
Subsidiary Guarantor to any other or further notice or demand in similar or
other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to a written agreement entered into between
the Subsidiary Guarantors with respect to which such waiver, amendment or
modification relates and the Collateral Agent, with the prior written consent of
the Required Lenders (except as otherwise provided in the Credit Agreement).
SECTION 13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 14. Notices. All communications and notices hereunder shall be in
writing and given as provided in Section 9.01 of the Credit Agreement. All
<PAGE> 7
7
communications and notices hereunder to each Subsidiary Guarantor shall be given
to it in care of the Borrower.
SECTION 15. Survival of Agreement; Severability. (a) All covenants,
agreements, representations and warranties made by the Subsidiary Guarantors
herein and in the certificates or other instruments prepared or delivered in
connection with or pursuant to this Agreement or any other Loan Document shall
be considered to have been relied upon by the Collateral Agent and the other
Secured Parties and shall survive the making by the Lenders of the Loans and the
issuance of the Letters of Credit by the Issuing Bank regardless of any
investigation made by the Secured Parties or on their behalf, and shall continue
in full force and effect as long as the principal of or any accrued interest on
any Loan or any other fee or amount payable under this Agreement or any other
Loan Document is outstanding and unpaid or the LC Exposure does not equal zero
and as long as the Commitments have not been terminated.
(b) In the event any one or more of the provisions contained in this
Agreement or in any other Loan Document should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby (it being understood that the invalidity of a
particular provision in a particular jurisdiction shall not in and of itself
affect the validity of such provision in any other jurisdiction). The parties
shall endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 16. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original, but all of which when taken together
shall constitute a single contract, and shall become effective as provided in
Section 11. Delivery of an executed signature page to this Agreement by
facsimile transmission shall be as effective as delivery of a manually executed
counterpart of this Agreement.
SECTION 17. Rules of Interpretation. The rules of interpretation
specified in Section 1.03 of the Credit Agreement shall be applicable to this
Agreement.
SECTION 18. Jurisdiction; Consent to Service of Process. (a) Each
Subsidiary Guarantor hereby irrevocably and unconditionally submits, for itself
and its property, to the nonexclusive jurisdiction of the Supreme Court of the
State of New York sitting in New York County and of the United States District
Court of the Southern District of New York, and any appellate court from any
thereof, in any action or proceeding arising out of or relating to this
Agreement or any other Loan Document, or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may be
<PAGE> 8
8
heard and determined in such New York State or, to the extent permitted by law,
in such Federal court. Each of the parties hereto agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Agreement or any other Loan Document shall affect any right
that the Collateral Agent or any other Secured Party may otherwise have to bring
any action or proceeding relating to this Agreement or any other Loan Document
against any Subsidiary Guarantor or its properties in the courts of any
jurisdiction.
(b) Each Subsidiary Guarantor irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any other Loan
Document in any court referred to in paragraph (a) of this Section. Each of the
parties hereto hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance of such action or
proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 14. Nothing in this
Agreement or any other Loan Document will affect the right of any party to this
Agreement to serve process in any other manner permitted by law.
SECTION 19. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO
(A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES
THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 19.
SECTION 20. Additional Subsidiary Guarantors. Pursuant to Section 5.12 of
the Credit Agreement, the Borrower is required to cause each Subsidiary that was
not in existence or not a Subsidiary on the date of the Credit Agreement to
enter into this Agreement as a Subsidiary Guarantor upon becoming a Subsidiary
that is a Subsidiary Loan Party. Upon execution and delivery after the date
hereof by the Collateral Agent
<PAGE> 9
9
and such a Subsidiary of an instrument in the form of Annex 1, such Subsidiary
shall become a Subsidiary Guarantor hereunder with the same force and effect as
if originally named as a Subsidiary Guarantor herein. The execution and delivery
of any instrument adding an additional Subsidiary Guarantor as a party to this
Agreement shall not require the consent of any other Subsidiary Guarantor
hereunder. The rights and obligations of each Subsidiary Guarantor hereunder
shall remain in full force and effect notwithstanding the addition of any new
Subsidiary Guarantor as a party to this Agreement.
SECTION 21. Right of Setoff. If an Event of Default shall have occurred
and be continuing, each Secured Party is hereby authorized at any time and from
time to time, to the fullest extent permitted by law, to set off and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held and other Indebtedness at any time owing by such Secured Party to
or for the credit or the account of any Subsidiary Guarantor against any or all
the obligations of such Subsidiary Guarantor now or hereafter existing under
this Agreement and the other Loan Documents held by such Secured Party,
irrespective of whether or not such Secured Party shall have made any demand
under this Agreement or any other Loan Document and although such obligations
may be unmatured. The rights of each Secured Party under this Section 21 are in
addition to other rights and remedies (including other rights of setoff) that
such Secured Party may have.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
DJ ORTHOPEDICS CAPITAL
CORPORATION,
by /s/ Cyril Talbot III
-------------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by /s/ J. Matt MacIver, Jr.
-------------------------
Name: J. Matt MacIver, Jr.
Title: Vice President
<PAGE> 10
10
Schedule I to the
Subsidiary Guarantee Agreement
<TABLE>
<CAPTION>
Subsidiary Guarantor Address
-------------------- -------
<S> <C>
DJ Orthopedics Capital Corporation 2985 Scott Street
Vista, California 92083
</TABLE>
<PAGE> 11
Annex 1 to the
Subsidiary Guarantee Agreement
SUPPLEMENT NO. dated as of , to the
Subsidiary Guarantee Agreement dated as of June 30, 1999,
among each of the subsidiaries listed on Schedule I thereto
(each such subsidiary, individually, a "Subsidiary
Guarantor" and, collectively, the "Subsidiary Guarantors")
of DJ ORTHOPEDICS, LLC, a Delaware limited liability
company (the "Borrower"), and FIRST UNION NATIONAL BANK
("First Union"), as collateral agent (the "Collateral
Agent") for the Secured Parties (as defined in the Credit
Agreement referred to below).
A. Reference is made to the Credit Agreement dated as of June 30, 1999
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among the Borrower, DONJOY, L.L.C., a Delaware limited liability
company, the lenders from time to time party thereto (the "Lenders"), First
Union, as administrative agent for the Lenders (in such capacity the
"Administrative Agent") and Collateral Agent, and THE CHASE MANHATTAN BANK, as
Syndication Agent and as issuing bank (in such capacity, the "Issuing Bank").
B. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Subsidiary Guarantee Agreement
and the Credit Agreement.
C. The Subsidiary Guarantors have entered into the Subsidiary Guarantee
Agreement in order to induce the Lenders to make Loans and the Issuing Bank to
issue Letters of Credit. Pursuant to Section 5.12 of the Credit Agreement, the
Borrower is required to cause each Subsidiary that was not in existence or not a
Subsidiary on the date of the Credit Agreement to enter into the Subsidiary
Guarantee Agreement as a Subsidiary Guarantor upon becoming a Subsidiary that is
a Subsidiary Loan Party. Section 20 of the Subsidiary Guarantee Agreement
provides that additional Subsidiaries of the Borrower may become Subsidiary
Guarantors under the Subsidiary Guarantee Agreement by execution and delivery of
an instrument in the form of this Supplement. The undersigned Subsidiary (the
"New Subsidiary Guarantor") is executing this Supplement in accordance with the
requirements of the Credit Agreement to become a Subsidiary Guarantor under the
Subsidiary Guarantee Agreement in order to induce the Lenders to make additional
Loans and the Issuing Bank to issue additional Letters of Credit and as
consideration for Loans previously made and Letters of Credit previously issued.
Accordingly, the Collateral Agent and the New Subsidiary Guarantor agree
as follows:
<PAGE> 12
2
SECTION 1. In accordance with Section 20 of the Subsidiary Guarantee
Agreement, the New Subsidiary Guarantor by its signature below becomes a
Subsidiary Guarantor under the Subsidiary Guarantee Agreement with the same
force and effect as if originally named therein as a Subsidiary Guarantor and
the New Subsidiary Guarantor hereby (a) agrees to all the terms and provisions
of the Subsidiary Guarantee Agreement applicable to it as a Subsidiary Guarantor
thereunder and (b) represents and warrants that the representations and
warranties made by it as a Subsidiary Guarantor thereunder are true and correct
on and as of the date hereof. Each reference to a "Subsidiary Guarantor" in the
Subsidiary Guarantee Agreement shall be deemed to include the New Subsidiary
Guarantor. The Subsidiary Guarantee Agreement is hereby incorporated herein by
reference.
SECTION 2. The New Subsidiary Guarantor represents and warrants to the
Collateral Agent and the other Secured Parties that this Supplement has been
duly authorized, executed and delivered by it and constitutes its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
SECTION 3. This Supplement may be executed in counterparts, each of which
shall constitute an original, but all of which when taken together shall
constitute a single contract. This Supplement shall become effective when the
Collateral Agent shall have received counterparts of this Supplement that, when
taken together, bear the signatures of the New Subsidiary Guarantor and the
Collateral Agent. Delivery of an executed signature page to this Supplement by
facsimile transmission shall be as effective as delivery of a manually executed
counterpart of this Supplement.
SECTION 4. Except as expressly supplemented hereby, the Subsidiary
Guarantee Agreement shall remain in full force and effect.
SECTION 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 6. In case any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and in the Subsidiary Guarantee Agreement shall not in any way be
affected or impaired thereby (it being understood that the invalidity of a
particular provision hereof in a particular jurisdiction shall not in and of
itself affect the validity of such provision in any other jurisdiction). The
parties hereto shall endeavor in good-faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions the economic effect of
<PAGE> 13
3
which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
SECTION 7. All communications and notices hereunder shall be in writing
and given as provided in Section 14 of the Subsidiary Guarantee Agreement. All
communications and notices hereunder to the New Subsidiary Guarantor shall be
given to it care of the Borrower.
SECTION 8. The New Subsidiary Guarantor agrees to reimburse the
Collateral Agent for its out-of-pocket expenses in connection with this
Supplement, including the reasonable fees, disbursements and other charges of
counsel for the Collateral Agent.
<PAGE> 14
4
IN WITNESS WHEREOF, the New Subsidiary Guarantor and the Collateral Agent have
duly executed this Supplement to the Subsidiary Guarantee Agreement as of the
day and year first above written.
<TABLE>
<S> <C>
[Name Of New Subsidiary Guarantor],
by
------------------------------
Name:
Title:
Address:
----------------------
-----------------------------------
-----------------------------------
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by
------------------------------
Name:
Title:
</TABLE>
<PAGE> 1
EXHIBIT 10.15
PLEDGE AGREEMENT dated as of June 30, 1999, among DJ
ORTHOPEDICS, LLC, a Delaware limited liability company (the
"Borrower"), DONJOY, L.L.C., a Delaware limited liability
company ("Holdings"), each subsidiary of the Borrower
listed on Schedule I hereto (each such subsidiary
individually, a "Subsidiary Pledgor" and collectively, the
"Subsidiary Pledgors"; the Borrower, Holdings and the
Subsidiary Pledgors are referred to collectively herein as
the "Pledgors") and FIRST UNION NATIONAL BANK ("First
Union"), as collateral agent (in such capacity, the
"Collateral Agent") for the Secured Parties (as defined in
the Credit Agreement referred to below).
Reference is made to (a) the Credit Agreement dated as of June 30, 1999
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among the Borrower, Holdings, the lenders from time to time party
thereto (the "Lenders"), First Union, as Administrative Agent and Collateral
Agent, and THE CHASE MANHATTAN BANK, as Syndication Agent and as issuing bank
(in such capacity, the "Issuing Bank"), (b) the Parent Guarantee Agreement dated
as of June 30, 1999 (as amended, supplemented or otherwise modified from time to
time, the "Parent Guarantee Agreement"), between Holdings and the Collateral
Agent and (c) the Subsidiary Guarantee Agreement dated as of June 30, 1999 (as
amended, supplemented or otherwise modified from time to time, the "Subsidiary
Guarantee Agreement"; and, collectively with the Parent Guarantee Agreement, the
"Guarantee Agreements") among the Subsidiary Pledgors and the Collateral Agent.
The Lenders have agreed to make Loans to the Borrower and the Issuing
Bank has agreed to issue Letters of Credit for the account of the Borrower,
pursuant to, and upon the terms and subject to the conditions specified in, the
Credit Agreement. Holdings and the Subsidiary Guarantors (as defined in the
Security Agreement) have agreed to guarantee, among other things, all the
obligations of the Borrower under the Credit Agreement. The obligations of the
Lenders to make Loans and of the Issuing Bank to issue Letters of Credit are
conditioned upon, among other things, the execution and delivery by the Pledgors
of a Pledge Agreement in the form hereof to secure (a) the due and punctual
payment by the Borrower of (i) the principal of and premium, if any, and
interest (including interest accruing during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding, regardless of whether
allowed or allowable in such proceeding) on the Loans, when and as due, whether
at maturity, by acceleration,
<PAGE> 2
2
upon one or more dates set for prepayment or otherwise, (ii) each payment
required to be made by the Borrower under the Credit Agreement in respect of any
Letter of Credit, when and as due, including payments in respect of
reimbursement of disbursements, interest thereon and obligations to provide cash
collateral and (iii) all other monetary obligations, including fees, costs,
expenses and indemnities, whether primary, secondary, direct, contingent, fixed
or otherwise (including monetary obligations incurred during the pendency of any
bankruptcy, insolvency, receivership or other similar proceeding, regardless of
whether allowed or allowable in such proceeding), of the Borrower to the Secured
Parties under the Credit Agreement and the other Loan Documents, (b) the due and
punctual performance of all covenants, agreements, obligations and liabilities
of the Borrower under or pursuant to the Credit Agreement and the other Loan
Documents, (c) the due and punctual payment and performance of all the
covenants, agreements, obligations and liabilities of each other Loan Party
under or pursuant to this Agreement and the other Loan Documents and (d) the due
and punctual payment and performance of all obligations of Holdings, the
Borrower and any Subsidiary Loan Party under each Hedging Agreement entered into
with any counterparty that was a Lender (or an Affiliate of a Lender) at the
time such Hedging Agreement was entered into (all the monetary and other
obligations referred to in the preceding clauses (a) through (d) being referred
to collectively as the "Obligations"). Capitalized terms used herein and not
defined herein shall have meanings assigned to such terms in the Credit
Agreement.
Accordingly, the Pledgors and the Collateral Agent, on behalf of itself
and each Secured Party (and each of their respective successors or assigns),
hereby agree as follows:
<PAGE> 3
3
SECTION 1. Pledge. As security for the payment and performance, as the
case may be, in full of the Obligations, each Pledgor hereby transfers, grants,
bargains, sells, conveys, hypothecates, pledges, sets over and delivers unto the
Collateral Agent, its successors and assigns, and hereby grants to the
Collateral Agent, its successors and assigns, for the ratable benefit of the
Secured Parties, a security interest in all of the Pledgor's right, title and
interest in, to and under (a) the shares of capital stock, membership interests
or other equity interests owned by it and listed on Schedule II hereto and any
shares of capital stock, membership interests or other equity interests of the
Borrower or any Subsidiary obtained in the future by such Pledgor and the
certificates representing all such shares, membership interests or other equity
interests (collectively, the "Pledged Equity Interests"); provided that the
Pledged Equity Interests shall not include (i) more than 65% of the issued and
outstanding shares of stock, membership interests or other equity interests of
any Foreign Subsidiary or (ii) to the extent that applicable law requires that a
Subsidiary of the Pledgor issue directors' qualifying shares, such qualifying
shares; (b)(i) the debt securities listed opposite the name of such Pledgor on
Schedule II hereto, (ii) any debt securities in the future issued to such
Pledgor and (iii) the promissory notes and any other instruments evidencing such
debt securities (the "Pledged Debt Securities"); (c) all other property that may
be delivered to and held by the Collateral Agent pursuant to the terms hereof;
(d) subject to Section 5, all payments of principal or interest, dividends,
cash, instruments and other property from time to time received, receivable or
otherwise distributed, in respect of, in exchange for or upon the conversion of
the securities referred to in clauses (a) and (b) above; (e) subject to Section
5, all rights and privileges of the Pledgor with respect to the securities,
membership interests, other equity interests and other property referred to in
clauses (a), (b), (c) and (d) above; and (f) all proceeds of any of the
foregoing (the items referred to in clauses (a) through (f) above being
collectively referred to as the "Collateral"). Upon delivery to the Collateral
Agent, (a) any stock certificates, membership interest certificates,
certificates with respect to other equity interests, notes or other securities
now or hereafter included in the Collateral (the "Pledged Securities") shall be
accompanied by stock powers duly executed in blank or other instruments of
transfer satisfactory to the Collateral Agent and by such other instruments and
documents as the Collateral Agent may reasonably request and (b) all other
property comprising part of the Collateral shall be accompanied by proper
instruments of assignment duly executed by the applicable Pledgor and such other
instruments or documents as the Collateral Agent may reasonably request. Each
delivery of Pledged Securities shall be accompanied by a schedule describing the
securities theretofore and then being pledged hereunder, which schedule shall be
attached hereto as Schedule II and made a part hereof. Each schedule so
delivered shall supersede any prior schedules so delivered.
TO HAVE AND TO HOLD the Collateral, together with all right, title,
interest, powers, privileges and preferences pertaining or incidental thereto,
unto the Collateral
<PAGE> 4
4
Agent, its successors and assigns, for the ratable benefit of the Secured
Parties, forever; subject, however, to the terms, covenants and conditions
hereinafter set forth.
SECTION 2. Delivery of the Collateral. (a) Each Pledgor agrees promptly
to deliver or cause to be delivered to the Collateral Agent any and all Pledged
Securities, and any and all certificates or other instruments or documents
representing the Collateral.
(b) Each Pledgor will cause any Indebtedness for borrowed money owed to
the Pledgor by any Person to be evidenced by a duly executed promissory note
that is pledged and delivered to the Collateral Agent pursuant to the terms
thereof.
(c) Each Pledgor agrees that, to the extent it becomes the owner of any
interest in a limited liability company or a limited partnership and such
Pledgor would be required to pledge such interest to the Collateral Agent
pursuant to Section 1(a), it will cause the issuer of such interest to provide
in such issuer's limited liability company operating agreement, or partnership
agreement or other relevant constitutive documents that its limited liability
company interests or partnership interests, respectively, shall at all times be
represented by certificates, shall constitute "securities" within the meaning of
Section 8-102 and Section 8-103 of Article 8 of the Uniform Commercial Code and
shall be governed by Article 8 of the Uniform Commercial Code.
SECTION 3. Representations, Warranties and Covenants. Each Pledgor hereby
represents, warrants and covenants, as to itself and the Collateral pledged by
it hereunder, to and with the Collateral Agent that:
(a) the Pledged Equity Interests represent that percentage as set
forth on Schedule II of the issued and outstanding shares and units of
each class of the capital stock, membership interests or other equity
interests of the issuer with respect thereto;
(b) except for the security interest granted hereunder, the
Pledgor (i) is and will at all times continue to be the direct owner,
beneficially and of record, of the Pledged Securities indicated on
Schedule II, (ii) holds the same free and clear of all Liens, (iii) will
make no assignment, pledge, hypothecation or transfer of, or create or
permit to exist any security interest in or other Lien on, the
Collateral, other than pursuant hereto, and (iv) subject to Section 5,
will cause any and all Collateral, whether for value paid by the Pledgor
or otherwise, to be forthwith deposited with the Collateral Agent and
pledged or assigned hereunder;
(c) the Pledgor (i) has the power and authority to pledge the
Collateral in the manner hereby done or contemplated and (ii) will defend
its title or interest
<PAGE> 5
5
thereto or therein against any and all Liens (other than the Lien
created by this Agreement), however arising, of all Persons whomsoever;
(d) no consent of any other Person (including stockholders or
creditors of any Pledgor) and no consent or approval of any Governmental
Authority or any securities exchange was or is necessary to the validity
of the pledge effected hereby;
(e) by virtue of the execution and delivery by the Pledgors of
this Agreement, when the Pledged Securities, certificates or other
documents representing or evidencing the Collateral are delivered to the
Collateral Agent in accordance with this Agreement, the Collateral Agent
will obtain a valid and perfected first lien upon and security interest
in such Pledged Securities as security for the payment and performance of
the Obligations;
(f) the pledge effected hereby is effective to vest in the
Collateral Agent, on behalf of the Secured Parties, the rights of the
Collateral Agent in the Collateral as set forth herein;
(g) all of the Pledged Equity Interests have been duly authorized
and validly issued and are fully paid and nonassessable;
(h) all information set forth herein relating to the Pledged
Equity Interests is accurate and complete in all material respects as of
the date hereof; and
(i) the pledge of the Pledged Equity Interests pursuant to this
Agreement does not violate Regulation T, U or X of the Federal Reserve
Board or any successor thereto as of the date hereof.
SECTION 4. Registration in Nominee Name; Denominations. The Collateral
Agent, on behalf of the Secured Parties, shall have the right (in its sole and
absolute discretion) to hold the Pledged Securities in its own name as pledgee,
the name of its nominee (as pledgee or as sub-agent) or the name of the
Pledgors, endorsed or assigned in blank or in favor of the Collateral Agent.
Each Pledgor will promptly give to the Collateral Agent copies of any notices or
other communications received by it with respect to Pledged Securities
registered in the name of such Pledgor. The Collateral Agent shall at all times
have the right to exchange the certificates representing Pledged Securities for
certificates of smaller or larger denominations for any purpose consistent with
this Agreement.
<PAGE> 6
6
SECTION 5. Voting Rights; Dividends and Interest, etc. (a) Unless and
until an Event of Default shall have occurred and be continuing:
(i) Each Pledgor shall be entitled to exercise any and all voting,
management and/or other consensual rights and powers inuring to an owner
of Pledged Securities or any part thereof for any purpose consistent with
the terms of this Agreement, the Credit Agreement and the other Loan
Documents; provided, however, that such Pledgor will not be entitled to
exercise any such right if the result thereof could materially and
adversely affect the rights inuring to a holder of the Pledged Securities
or the rights and remedies of any of the Secured Parties under this
Agreement or the Credit Agreement or any other Loan Document or the
ability of the Secured Parties to exercise the same.
(ii) The Collateral Agent shall execute and deliver to each
Pledgor, or cause to be executed and delivered to each Pledgor, all such
proxies, powers of attorney and other instruments as such Pledgor may
reasonably request for the purpose of enabling such Pledgor to exercise
the voting, management and/or consensual rights and powers it is entitled
to exercise pursuant to subparagraph (i) above and to receive the cash
dividends it is entitled to receive pursuant to subparagraph (iii) below.
(iii) Each Pledgor shall be entitled to receive and retain any and
all cash dividends, distributions, interest and principal paid on the
Pledged Securities to the extent and only to the extent that such cash
dividends, distributions, interest and principal are permitted by, and
otherwise paid in accordance with, the terms and conditions of the Credit
Agreement, the other Loan Documents (and, in the case of payments by the
Borrower, its limited liability company agreement) and applicable laws.
All noncash dividends, distributions, interest and principal, and all
dividends, distributions, interest and principal paid or payable in cash
or otherwise in connection with a partial or total liquidation or
dissolution, return of capital, capital surplus or paid-in surplus, and
all other distributions (other than distributions referred to in the
preceding sentence) made on or in respect of the Pledged Securities,
whether paid or payable in cash or otherwise, whether resulting from a
subdivision, combination or reclassification of the outstanding capital
stock, membership interests or other equity interests of the issuer of
any Pledged Securities or received in exchange for Pledged Securities or
any part thereof, or in redemption thereof, or as a result of any merger,
consolidation, acquisition or other exchange of assets to which such
issuer may be a party or otherwise, shall be and become part of the
Collateral, and, if received by any Pledgor, shall not be commingled by
such Pledgor with any of its other funds or property but shall be held
separate and apart therefrom, shall be held in trust for the benefit of
the
<PAGE> 7
7
Collateral Agent and shall be forthwith delivered to the Collateral Agent
in the same form as so received (with any necessary endorsement).
(b) Upon the occurrence and during the continuance of an Event of Default
(except with respect to Tax Distributions permitted by clause (a) (i) of Section
6.08 of the Credit Agreement which shall continue to be governed by paragraph
(a)(iii) above), all rights of any Pledgor to dividends, distributions, interest
or principal that such Pledgor is authorized to receive pursuant to paragraph
(a)(iii) above shall cease, and all such rights shall thereupon become vested in
the Collateral Agent, which shall have the sole and exclusive right and
authority to receive and retain such dividends, distributions, interest or
principal. All dividends, distributions, interest or principal received by the
Pledgor contrary to the provisions of this Section 5 shall be held in trust for
the benefit of the Collateral Agent, shall be segregated from other property or
funds of such Pledgor and shall be forthwith delivered to the Collateral Agent
upon demand in the same form as so received (with any necessary endorsement).
Any and all money and other property paid over to or received by the Collateral
Agent pursuant to the provisions of this paragraph (b) shall be retained by the
Collateral Agent in an account to be established by the Collateral Agent upon
receipt of such money or other property and shall be applied in accordance with
the provisions of Section 7. After all Events of Default have been cured or
waived, the Collateral Agent shall, within five Business Days after all such
Events of Default have been cured or waived, repay to each Pledgor all cash
dividends, distribution, interest or principal (without interest), that such
Pledgor would otherwise be permitted to retain pursuant to the terms of
paragraph (a)(iii) above and which remain in such account.
(c) Upon the occurrence and during the continuance of an Event of
Default, all rights of any Pledgor to exercise the voting, management and
consensual rights and powers it is entitled to exercise pursuant to paragraph
(a)(i) of this Section 5, and the obligations of the Collateral Agent under
paragraph (a)(ii) of this Section 5, shall cease, upon notice thereof by the
Collateral Agent, and all such rights shall thereupon become vested in the
Collateral Agent, which shall have the sole and exclusive right and authority to
exercise such voting, management and consensual rights and powers, provided
that, upon an Event of Default pursuant to clause (h) or (i) of Article VII of
the Credit Agreement such rights shall automatically vest in the Collateral
Agent without any action on the part of the Collateral Agent. After all Events
of Default have been cured or waived, such Pledgor will have the right to
exercise the voting, management and consensual rights and powers that it would
otherwise be entitled to exercise pursuant to the terms of paragraph (a)(i)
above.
SECTION 6. Remedies upon Default. Upon the occurrence and during the
continuance of an Event of Default, subject to applicable regulatory and legal
requirements, the Collateral Agent may sell the Collateral, or any part thereof,
at public or private sale or at any broker's board or on any securities
exchange, for cash, upon credit or for future delivery as the Collateral Agent
shall deem appropriate. The Collateral
<PAGE> 8
8
Agent shall be authorized at any such sale (if it deems it advisable to do so)
to restrict the prospective bidders or purchasers to persons who will represent
and agree that they are purchasing the Collateral for their own account for
investment and not with a view to the distribution or sale thereof, and upon
consummation of any such sale the Collateral Agent shall have the right to
assign, transfer and deliver to the purchaser or purchasers thereof the
Collateral so sold. Each such purchaser at any such sale shall hold the property
sold absolutely free from any claim or right on the part of any Pledgor, and, to
the extent permitted by applicable law, the Pledgors hereby waive all rights of
redemption, stay, valuation and appraisal any Pledgor now has or may at any time
in the future have under any rule of law or statute now existing or hereafter
enacted.
The Collateral Agent shall give a Pledgor 10 days' prior written notice
(which each Pledgor agrees is reasonable notification within the meaning of
Section 9-504(3) of the Uniform Commercial Code as in effect in the State of New
York or its equivalent in other jurisdictions) of the Collateral Agent's
intention to make any sale of such Pledgor's Collateral. Such notice, in the
case of a public sale, shall state the time and place for such sale and, in the
case of a sale at a broker's board or on a securities exchange, shall state the
board or exchange at which such sale is to be made and the day on which the
Collateral, or portion thereof, will first be offered for sale at such board or
exchange. Any such public sale shall be held at such time or times within
ordinary business hours and at such place or places as the Collateral Agent may
fix and state in the notice of such sale. At any such sale, the Collateral, or
portion thereof, to be sold may be sold in one lot as an entirety or in separate
parcels, as the Collateral Agent may (in its sole and absolute discretion)
determine. The Collateral Agent shall not be obligated to make any sale of any
Collateral if it shall determine not to do so, regardless of the fact that
notice of sale of such Collateral shall have been given. The Collateral Agent
may, without notice or publication, adjourn any public or private sale or cause
the same to be adjourned from time to time by announcement at the time and place
fixed for sale, and such sale may, without further notice, be made at the time
and place to which the same was so adjourned. In case any sale of all or any
part of the Collateral is made on credit or for future delivery, the Collateral
so sold may be retained by the Collateral Agent until the sale price is paid in
full by the purchaser or purchasers thereof, but the Collateral Agent shall not
incur any liability in case any such purchaser or purchasers shall fail to take
up and pay for the Collateral so sold and, in case of any such failure, such
Collateral may be sold again upon like notice. At any public (or, to the extent
permitted by applicable law, private) sale made pursuant to this Section 6, any
Secured Party may bid for or purchase, free from any right of redemption, stay
or appraisal on the part of any Pledgor (all said rights being also hereby
waived and released), the Collateral or any part thereof offered for sale and
may make payment on account thereof by using any claim then due and payable to
it from such Pledgor as a credit against the purchase price, and it may, upon
compliance with the terms of sale, hold, retain and dispose of such property
without further accountability to such Pledgor therefor. For purposes hereof,
(a) a written agreement to purchase the Collateral
<PAGE> 9
9
or any portion thereof shall be treated as a sale thereof, (b) the Collateral
Agent shall be free to carry out such sale pursuant to such agreement and (c)
such Pledgor shall not be entitled to the return of the Collateral or any
portion thereof subject thereto, notwithstanding the fact that after the
Collateral Agent shall have entered into such an agreement all Events of Default
shall have been remedied and the Obligations paid in full. As an alternative to
exercising the power of sale herein conferred upon it, the Collateral Agent may
proceed by a suit or suits at law or in equity to foreclose upon the Collateral
and to sell the Collateral or any portion thereof pursuant to a judgment or
decree of a court or courts having competent jurisdiction or pursuant to a
proceeding by a court-appointed receiver. Any sale pursuant to the provisions of
this Section 6 shall be deemed to conform to the commercially reasonable
standards as provided in Section 9-504(3) of the Uniform Commercial Code as in
effect in the State of New York or its equivalent in other jurisdictions.
SECTION 7. Application of Proceeds of Sale. The proceeds of any sale of
Collateral pursuant to Section 6, as well as any Collateral consisting of cash,
shall be applied by the Collateral Agent as follows:
FIRST, to the payment of all costs and expenses incurred by the
Collateral Agent in connection with such sale or otherwise in connection
with this Agreement, any other Loan Document or any of the Obligations,
including all court costs and the reasonable fees and expenses of its
agents and legal counsel, the repayment of all advances made by the
Collateral Agent hereunder or under any other Loan Document on behalf of
any Pledgor and any other costs or expenses incurred in connection with
the exercise of any right or remedy hereunder or under any other Loan
Document;
SECOND, to the payment in full of the Obligations (the amounts so
applied to be distributed among the Secured Parties pro rata in
accordance with the amounts of the Obligations owed to them on the date
of any such distribution); and
THIRD, to the Pledgors, their successors or assigns, or as a court
of competent jurisdiction may otherwise direct.
The Collateral Agent shall have absolute discretion as to the time of
application of any such proceeds, moneys or balances in accordance with this
Agreement. Upon any sale of the Collateral by the Collateral Agent (including
pursuant to a power of sale granted by statute or under a judicial proceeding),
the receipt of the purchase money by the Collateral Agent or of the officer
making the sale shall be a sufficient discharge to the purchaser or purchasers
of the Collateral so sold and such purchaser or purchasers shall not be
obligated to see to the application of any part of the purchase money paid over
to the Collateral Agent or such officer or be answerable in any way for the
misapplication thereof.
<PAGE> 10
10
SECTION 8. Reimbursement of Collateral Agent. (a) Each Pledgor agrees to
pay upon demand to the Collateral Agent the amount of any and all reasonable
expenses, including the reasonable fees, other charges and disbursements of its
counsel and of any experts or agents, that the Collateral Agent may incur in
connection with (i) the administration of this Agreement, (ii) the custody or
preservation of, or the sale of, collection from, or other realization upon, any
of the Collateral, (iii) the exercise or enforcement of any of the rights of the
Collateral Agent hereunder or (iv) the failure by such Pledgor to perform or
observe any of the provisions hereof.
(b) Without limitation of its indemnification obligations under the other
Loan Documents, each Pledgor agrees to indemnify the Collateral Agent and the
Indemnitees (as defined in Section 9.03(b) of the Credit Agreement) against, and
hold each Indemnitee harmless from, any and all losses, claims, damages,
liabilities and related expenses, including reasonable counsel fees, other
charges and disbursements, incurred by or asserted against any Indemnitee
arising out of, in any way connected with, or as a result of (i) the execution
or delivery of this Agreement or any other Loan Document or any agreement or
instrument contemplated hereby or thereby, the performance by the parties hereto
of their respective obligations thereunder or the consummation of the
Transactions and the other transactions contemplated thereby or (ii) any claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether or not any Indemnitee is a party thereto, provided that such indemnity
shall not, as to any Indemnitee, be available to the extent that such losses,
claims, damages, liabilities or related expenses are determined by a court of
competent jurisdiction by final and nonappealable judgment to have resulted from
the gross negligence or wilful misconduct of such Indemnitee.
(c) Any amounts payable as provided hereunder shall be additional
Obligations secured hereby and by the other Security Documents. The provisions
of this Section 8 shall remain operative and in full force and effect regardless
of the termination of this Agreement, the consummation of the transactions
contemplated hereby, the repayment of any of the Obligations, the invalidity or
unenforceability of any term or provision of this Agreement or any other Loan
Document or any investigation made by or on behalf of the Collateral Agent or
any other Secured Party. All amounts due under this Section 8 shall be payable
on written demand therefor and shall bear interest at the rate specified in
Section 2.13(c)(ii) of the Credit Agreement.
SECTION 9. Collateral Agent Appointed Attorney-in-Fact. Each Pledgor
hereby appoints the Collateral Agent the attorney-in-fact of such Pledgor, upon
the occurrence and during the continuance of an Event of Default, for the
purpose of carrying out the provisions of this Agreement and taking any action
and executing any instrument that the Collateral Agent may deem necessary or
advisable to accomplish the purposes hereof, which appointment is irrevocable
and coupled with an interest. Without limiting the
<PAGE> 11
11
generality of the foregoing, the Collateral Agent shall have the right, upon the
occurrence and during the continuance of an Event of Default, with full power of
substitution either in the Collateral Agent's name or in the name of such
Pledgor, to ask for, demand, sue for, collect, receive and give acquittance for
any and all moneys due or to become due under and by virtue of any Collateral,
to endorse checks, drafts, orders and other instruments for the payment of money
payable to the Pledgor representing any interest or dividend or other
distribution payable in respect of the Collateral or any part thereof or on
account thereof and to give full discharge for the same, to settle, compromise,
prosecute or defend any action, claim or proceeding with respect thereto, and to
sell, assign, endorse, pledge, transfer and to make any agreement respecting, or
otherwise deal with, the same; provided, however, that nothing herein contained
shall be construed as requiring or obligating the Collateral Agent to make any
commitment or to make any inquiry as to the nature or sufficiency of any payment
received by the Collateral Agent, or to present or file any claim or notice, or
to take any action with respect to the Collateral or any part thereof or the
moneys due or to become due in respect thereof or any property covered thereby.
The Collateral Agent and the other Secured Parties shall be accountable only for
amounts actually received as a result of the exercise of the powers granted to
them herein, and neither they nor their officers, directors, employees or agents
shall be responsible to any Pledgor for any act or failure to act hereunder,
except for their own gross negligence or wilful misconduct.
SECTION 10. Waivers; Amendment. (a) No failure or delay of the Collateral
Agent in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Collateral Agent hereunder and of
the Collateral Agent and the other Secured Parties under the other Loan
Documents are cumulative and are not exclusive of any rights or remedies that
they would otherwise have. No waiver of any provisions of this Agreement or
consent to any departure by any Pledgor therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) below, and then
such waiver or consent shall be effective only in the specific instance and for
the purpose for which given. No notice or demand on any Pledgor in any case
shall entitle such Pledgor to any other or further notice or demand in similar
or other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to a written agreement entered into between
the Collateral Agent and the Pledgor or Pledgors with respect to which such
waiver, amendment or modification is to apply, with the prior written consent of
the Required Lenders (except as otherwise provided by the Credit Agreement).
<PAGE> 12
12
SECTION 11. Securities Act, etc. In view of the position of the Pledgors
in relation to the Pledged Securities, or because of other current or future
circumstances, a question may arise under the Securities Act of 1933, as now or
hereafter in effect, or any similar statute hereafter enacted analogous in
purpose or effect (such Act and any such similar statute as from time to time in
effect being called the "Federal Securities Laws") with respect to any
disposition of the Pledged Securities permitted hereunder. Each Pledgor
understands that compliance with the Federal Securities Laws might very strictly
limit the course of conduct of the Collateral Agent if the Collateral Agent were
to attempt to dispose of all or any part of the Pledged Securities, and might
also limit the extent to which or the manner in which any subsequent transferee
of any Pledged Securities could dispose of the same. Similarly, there may be
other legal restrictions or limitations affecting the Collateral Agent in any
attempt to dispose of all or part of the Pledged Securities under applicable
"blue sky" or other state securities laws or similar laws analogous in purpose
or effect. Each Pledgor recognizes that in light of such restrictions and
limitations the Collateral Agent may, with respect to any sale of the Pledged
Securities, limit the purchasers to those who will agree, among other things, to
acquire such Pledged Securities for their own account, for investment, and not
with a view to the distribution or resale thereof. Each Pledgor acknowledges and
agrees that in light of such restrictions and limitations, the Collateral Agent,
in its sole and absolute discretion, (a) may proceed to make such a sale whether
or not a registration statement for the purpose of registering such Pledged
Securities or part thereof shall have been filed under the Federal Securities
Laws and (b) may approach and negotiate with a single potential purchaser to
effect such sale. Each Pledgor acknowledges and agrees that any such sale might
result in prices and other terms less favorable to the seller than if such sale
were a public sale without such restrictions. In the event of any such sale, the
Collateral Agent shall incur no responsibility or liability for selling all or
any part of the Pledged Securities at a price that the Collateral Agent, in its
sole and absolute discretion, may in good faith deem reasonable under the
circumstances, notwithstanding the possibility that a substantially higher price
might have been realized if the sale were deferred until after registration as
aforesaid or if more than a single purchaser were approached. The provisions of
this Section 11 will apply notwithstanding the existence of a public or private
market upon which the quotations or sales prices may exceed substantially the
price at which the Collateral Agent sells.
SECTION 12. Registration, etc. Each Pledgor agrees that, upon the
occurrence and during the continuance of an Event of Default hereunder, if for
any reason the Collateral Agent desires to sell any of the Pledged Securities of
the Borrower at a public sale, it will, at any time and from time to time, upon
the written request of the Collateral Agent, use its best efforts to take or to
cause the issuer of such Pledged Securities to take such action and prepare,
distribute and/or file such documents, as are required or advisable in the
reasonable opinion of counsel for the Collateral Agent to permit the public sale
of such Pledged Securities. Each Pledgor further agrees to indemnify, defend and
hold
<PAGE> 13
13
harmless the Collateral Agent, each other Secured Party, any underwriter and
their respective officers, directors, affiliates and controlling persons from
and against all loss, liability, expenses, costs of counsel (including, without
limitation, reasonable fees and expenses to the Collateral Agent of legal
counsel), and claims (including the costs of investigation) that they may incur
insofar as such loss, liability, expense or claim arises out of or is based upon
any alleged untrue statement of a material fact contained in any prospectus (or
any amendment or supplement thereto) or in any notification or offering
circular, or arises out of or is based upon any alleged omission to state a
material fact required to be stated therein or necessary to make the statements
in any thereof not misleading, except insofar as the same may have been caused
by any untrue statement or omission based upon information furnished in writing
to such Pledgor or the issuer of such Pledged Securities by the Collateral Agent
or any other Secured Party expressly for use therein. Each Pledgor further
agrees, upon such written request referred to above, to use its best efforts to
qualify, file or register, or cause the issuer of such Pledged Securities to
qualify, file or register, any of the Pledged Securities under the "blue sky" or
other securities laws of such states as may be requested by the Collateral Agent
and keep effective, or cause to be kept effective, all such qualifications,
filings or registrations. Each Pledgor will bear all costs and expenses of
carrying out its obligations under this Section 12. Each Pledgor acknowledges
that there is no adequate remedy at law for failure by it to comply with the
provisions of this Section 12 and that such failure would not be adequately
compensable in damages, and therefore agrees that its agreements contained in
this Section 12 may be specifically enforced.
SECTION 13. Security Interest Absolute. All rights of the Collateral
Agent hereunder, the grant of a security interest in the Collateral and all
obligations of each Pledgor hereunder, shall be absolute and unconditional
irrespective of (a) any lack of validity or enforceability of the Credit
Agreement, any other Loan Document, any agreement with respect to any of the
Obligations or any other agreement or instrument relating to any of the
foregoing, (b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or waiver
of or any consent to any departure from the Credit Agreement, any other Loan
Document or any other agreement or instrument relating to any of the foregoing,
(c) any exchange, release or nonperfection of any other collateral, or any
release or amendment or waiver of or consent to or departure from any guaranty,
for all or any of the Obligations or (d) any other circumstance that might
otherwise constitute a defense available to, or a discharge of, any Pledgor in
respect of the Obligations or in respect of this Agreement (other than the
indefeasible payment in full of all the Obligations).
SECTION 14. Termination or Release. (a) This Agreement and the security
interests granted hereby shall terminate when all the principal of and interest
on each Loan and all other fees and amounts payable under this Agreement or any
other Loan Document
<PAGE> 14
14
have been indefeasibly paid in full in cash, the LC Exposure has been reduced to
zero and the Commitments have been terminated.
(b) Upon any sale or other transfer by any Pledgor of any Collateral that
is permitted under the Credit Agreement to any Person that is not a Pledgor, or,
upon the effectiveness of any written consent to the release of the security
interest granted hereby in any Collateral pursuant to Section 9.02(b) of the
Credit Agreement, the security interest in such Collateral shall be
automatically released.
(c) In connection with any termination or release pursuant to paragraph
(a) or (b), the Collateral Agent shall execute and deliver to any Pledgor, at
such Pledgor's expense, all documents that such Pledgor shall reasonably request
to evidence such termination or release. Any execution and delivery of documents
pursuant to this Section 14 shall be without recourse to or warranty by the
Collateral Agent.
SECTION 15. Notices. All communications and notices hereunder shall be in
writing and given as provided in Section 9.01 of the Credit Agreement. All
communications and notices hereunder to any Subsidiary Pledgor shall be given to
it in care of the Borrower.
SECTION 16. Further Assurances. Each Pledgor agrees to do such further
acts and things, and to execute and deliver such additional conveyances,
assignments, agreements and instruments, as the Collateral Agent may at any time
reasonably request in connection with the administration and enforcement of this
Agreement or with respect to the Collateral or any part thereof or in order
better to assure and confirm unto the Collateral Agent its rights and remedies
hereunder.
SECTION 17. Binding Effect; Several Agreement; Assignments. Whenever in
this Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of any Pledgor that are contained in
this Agreement shall bind and inure to the benefit of its successors and
assigns. This Agreement shall become effective as to any Pledgor when a
counterpart hereof executed on behalf of such Pledgor shall have been delivered
to the Collateral Agent and a counterpart hereof shall have been executed on
behalf of the Collateral Agent, and thereafter shall be binding upon such
Pledgor and the Collateral Agent and their respective successors and assigns,
and shall inure to the benefit of such Pledgor, the Collateral Agent and the
other Secured Parties, and their respective successors and assigns, except that
no Pledgor shall have the right to assign its rights hereunder or any interest
herein or in the Collateral (and any such attempted assignment shall be void),
except as expressly contemplated by this Agreement or the other Loan Documents.
If all of the capital stock, membership interests or other equity interests of a
Pledgor is or are sold, transferred or otherwise disposed of to a
<PAGE> 15
15
Person that is not an Affiliate of the Borrower pursuant to a transaction
permitted by Section 6.05 of the Credit Agreement, such Pledgor shall be
released from its obligations under this Agreement without further action. This
Agreement shall be construed as a separate agreement with respect to each
Pledgor and may be amended, modified, supplemented, waived or released with
respect to any Pledgor without the approval of any other Pledgor and without
affecting the obligations of any other Pledgor hereunder
SECTION 18. Survival of Agreement; Severability. (a) All covenants,
agreements, representations and warranties made by each Pledgor herein and in
the certificates or other instruments prepared or delivered in connection with
or pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Collateral Agent and the other Secured Parties and
shall survive the making by the Lenders of the Loans and the issuance of the
Letters of Credit by the Issuing Bank, regardless of any investigation made by
the Secured Parties or on their behalf, and shall continue in full force and
effect as long as the principal of or any accrued interest on any Loan or any
other fee or amount payable under this Agreement or any other Loan Document is
outstanding and unpaid or the LC Exposure does not equal zero and as long as the
Commitments have not been terminated.
(b) In the event any one or more of the provisions contained in this
Agreement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby (it being understood
that the invalidity of a particular provision in a particular jurisdiction shall
not in and of itself affect the validity of such provision in any other
jurisdiction). The parties shall endeavor in good-faith negotiations to replace
the invalid, illegal or unenforceable provisions with valid provisions the
economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
SECTION 19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute a single contract, and shall become effective
as provided in Section 17. Delivery of an executed counterpart of a signature
page to this Agreement by facsimile transmission shall be as effective as
delivery of a manually executed counterpart of this Agreement.
SECTION 21. Rules of Interpretation. The rules of interpretation
specified in Section 1.03 of the Credit Agreement shall be applicable to this
Agreement.
<PAGE> 16
16
Section headings used herein are for convenience of reference only, are not part
of this Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 22. Jurisdiction; Consent to Service of Process. (a) Each Pledgor
hereby irrevocably and unconditionally submits, for itself and its property, to
the nonexclusive jurisdiction of any New York State court or Federal court of
the United States of America sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to this
Agreement or the other Loan Documents, or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and unconditionally
agrees that, to the extent permitted by applicable law, all claims in respect of
any such action or proceeding may be heard and determined in such New York State
or, to the extent permitted by law, in such Federal court. Each of the parties
hereto agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that the Collateral Agent or any other Secured Party may otherwise have to
bring any action or proceeding relating to this Agreement or the other Loan
Documents against any Pledgor or its properties in the courts of any
jurisdiction.
(b) Each Pledgor hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection that it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement or the other Loan Documents in any
New York State or Federal court. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 15. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
SECTION 23. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER
<PAGE> 17
17
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.
SECTION 24. Additional Pledgors. Pursuant to Section 5.12 of the Credit
Agreement, the Borrower is required to cause each Subsidiary of the Borrower
that was not in existence or not a Subsidiary on the date of the Credit
Agreement to enter in this Agreement as a Subsidiary Pledgor upon becoming a
Subsidiary that is a Subsidiary Loan Party if such Subsidiary owns or possesses
property of a type that would be considered Collateral hereunder. Upon execution
and delivery by the Collateral Agent and a Subsidiary of an instrument in the
form of Annex 1, such Subsidiary shall become a Subsidiary Pledgor hereunder
with the same force and effect as if originally named as a Subsidiary Pledgor
herein. The execution and delivery of such instrument shall not require the
consent of any Pledgor hereunder. The rights and obligations of each Pledgor
hereunder shall remain in full force and effect notwithstanding the addition of
any new Subsidiary Pledgor as a party to this Agreement.
SECTION 25. Execution of Financing Statements. Pursuant to Section 9-402
of the Uniform Commercial Code as in effect in the State of New York or its
equivalent in other jurisdictions, each Pledgor authorizes the Collateral Agent
to file financing statements with respect to the Collateral owned by it without
the signature of such Pledgor in such form and in such filing offices as the
Collateral Agent reasonably determines appropriate to perfect the security
interests of the Collateral Agent under this Agreement. A carbon, photographic
or other reproduction of this Agreement shall be sufficient as a financing
statement for filing in any jurisdiction.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
<TABLE>
<S> <C>
DJ ORTHOPEDICS, LLC,
by /s/ Cyril Talbot III
----------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
DONJOY, L.L.C.,
by /s/ Cyril Talbot III
----------------------
Name: Cyril Talbot III
</TABLE>
<PAGE> 18
18
<TABLE>
<S> <C>
Title: V.P., CFO and Secretary
THE SUBSIDIARY PLEDGORS LISTED
ON SCHEDULE I HERETO
by /s/ Leslie H. Cross
----------------------
Name: Leslie H. Cross
Title: Authorized Officer
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by /s/ J. Matt MacIver, Jr.
----------------------
Name: J. Matt MacIver, Jr.
Title: Vice President
</TABLE>
<PAGE> 19
Schedule I to the
Pledge Agreement
SUBSIDIARY PLEDGORS
<TABLE>
<CAPTION>
Name Address
- ---- -------
<S> <C>
DJ Orthopedics Capital Corporation 2985 Scott Street
Vista, California 92083
</TABLE>
<PAGE> 20
Schedule II to the
Pledge Agreement
EQUITY SECURITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number and Class Percentage of
of Shares/ Shares/
Membership Membership
Number of Registered Interests/Equity Interests/Equity
Issuer Certificate Owner Interests Interests
- ------ ----------- ---------- ----------------- -------------------
</TABLE>
DEBT SECURITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Principal
Issuer Amount Date of Note Maturity Date
- ------ --------- ------------ -------------
</TABLE>
<PAGE> 21
Annex 1 to the
Pledge Agreement
SUPPLEMENT NO. dated as of , to the PLEDGE
AGREEMENT dated as of June 30, 1999, among DJ ORTHOPEDICS,
LLC, a Delaware limited liability company (the "Borrower"),
DONJOY, L.L.C., a Delaware limited liability company
("Holdings"), and each subsidiary of the Borrower listed on
Schedule I thereto (each such subsidiary individually a
"Subsidiary Pledgor" and collectively, the "Subsidiary
Pledgors"; the Borrower, Holdings and Subsidiary Pledgors
are referred to collectively herein as the "Pledgors") and
FIRST UNION NATIONAL BANK ("First Union"), as collateral
agent (in such capacity, the "Collateral Agent") for the
Secured Parties (as defined in the Credit Agreement
referred to below).
A. Reference is made to (a) the Credit Agreement dated as of June 30,
1999 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among the Borrower, Holdings, the lenders from time to time
party thereto (the "Lenders"), First Union, as Administrative Agent and
Collateral Agent, and THE CHASE MANHATTAN BANK, as Syndication Agent and as
issuing bank (in such capacity, the "Issuing Bank"), (b) the Parent Guarantee
Agreement dated as of June 30, 1999 (as amended, supplemented or otherwise
modified from time to time, the "Parent Guarantee Agreement"), between Holdings
and the Collateral Agent and (c) the Subsidiary Guarantee Agreement dated as of
June 30, 1999 (as amended, supplemented or otherwise modified from time to time,
the "Subsidiary Guarantee Agreement"; and, collectively with the Parent
Guarantee Agreement, the "Guarantee Agreements") among the Subsidiary Pledgors
and the Collateral Agent.
B. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Pledge Agreement and the Credit
Agreement.
C. The Pledgors have entered into the Pledge Agreement in order to induce
the Lenders to make Loans and the Issuing Bank to issue Letters of Credit.
Pursuant to Section 5.12 of the Credit Agreement, the Borrower is required to
cause each Subsidiary that was not in existence or not a Subsidiary on the date
of the Credit Agreement to enter into the Pledge Agreement as a Subsidiary
Pledgor upon becoming a Subsidiary that is a Subsidiary Loan Party. Section 24
of the Pledge Agreement provides that such Subsidiaries may become Subsidiary
Pledgors under the Pledge Agreement by execution and delivery of an instrument
in the form of this Supplement. The undersigned Subsidiary (the "New Pledgor")
is executing this Supplement in accordance with the requirements of the Credit
Agreement to become a Subsidiary Pledgor under the Pledge Agreement in order to
induce the Lenders to make additional Loans and the Issuing Bank to issue
<PAGE> 22
additional Letters of Credit and as consideration for Loans previously made and
Letters of Credit previously issued.
Accordingly, the Collateral Agent and the New Pledgor agree as follows:
SECTION 1. In accordance with Section 24 of the Pledge Agreement, the New
Pledgor by its signature below becomes a Pledgor under the Pledge Agreement with
the same force and effect as if originally named therein as a Pledgor and the
New Pledgor hereby agrees (a) to all the terms and provisions of the Pledge
Agreement applicable to it as a Pledgor thereunder and (b) represents and
warrants that the representations and warranties made by it as a Pledgor
thereunder are true and correct on and as of the date hereof. In furtherance of
the foregoing, the New Pledgor, as security for the payment and performance in
full of the Obligations (as defined in the Pledge Agreement), does hereby create
and grant to the Collateral Agent, its successors and assigns, for the benefit
of the Secured Parties, their successors and assigns, a security interest in and
lien on all of the New Pledgor's right, title and interest in and to the
Collateral (as defined in the Pledge Agreement) of the New Pledgor. Each
reference to a "Subsidiary Pledgor" or a "Pledgor" in the Pledge Agreement shall
be deemed to include the New Pledgor. The Pledge Agreement is hereby
incorporated herein by reference.
SECTION 2. The New Pledgor represents and warrants to the Collateral
Agent and the other Secured Parties that this Supplement has been duly
authorized, executed and delivered by it and constitutes its legal, valid and
binding obligation, enforceable against it in accordance with its terms.
SECTION 3. This Supplement may be executed in counterparts, each of which
shall constitute an original, but all of which when taken together shall
constitute a single contract. This Supplement shall become effective when the
Collateral Agent shall have received counterparts of this Supplement that, when
taken together, bear the signatures of the New Pledgor and the Collateral Agent.
Delivery of an executed signature page to this Supplement by facsimile
transmission shall be as effective as delivery of a manually signed counterpart
of this Supplement.
SECTION 4. The New Pledgor hereby represents and warrants that set forth
on Schedule I attached hereto is a true and correct schedule of all its Pledged
Securities.
SECTION 5. Except as expressly supplemented hereby, the Pledge Agreement
shall remain in full force and effect.
SECTION 6. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. In case any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect,
neither party hereto shall be required to comply with such provision for so long
as such provision is
<PAGE> 23
4
held to be invalid, illegal or unenforceable, but the validity, legality and
enforceability of the remaining provisions contained herein and in the Pledge
Agreement shall not in any way be affected or impaired. The parties hereto shall
endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 8. All communications and notices hereunder shall be in writing
and given as provided in Section 15 of the Pledge Agreement. All communications
and notices hereunder to the New Pledgor shall be given to it in care of the
Borrower.
SECTION 9. The New Pledgor agrees to reimburse the Collateral Agent for
its reasonable out-of-pocket expenses in connection with this Supplement,
including the reasonable fees, other charges and disbursements of counsel for
the Collateral Agent.
IN WITNESS WHEREOF, the New Pledgor and the Collateral Agent have duly
executed this Supplement to the Pledge Agreement as of the day and year first
above written.
<TABLE>
<S> <C>
[Name of New Pledgor],
by
----------------------
Name:
Title:
Address:
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by
----------------------
Name:
Title:
</TABLE>
<PAGE> 24
Schedule I to
to the Pledge Agreement
Pledged Securities of the New Pledgor
-------------------------------------
EQUITY SECURITIES
<TABLE>
<S> <C> <C> <C> <C>
Number and Class Percentage of
of Shares/ Shares/
Membership Membership
Number of Registered Interests/Equity Interests/Equity
Issuer Certificate Owner Interests Interests
- ------ ----------- ---------- ---------------- --------------------
</TABLE>
DEBT SECURITIES
<TABLE>
<S> <C> <C> <C>
Principal
Issuer Amount Date of Note Maturity Date
- ------ --------- ------------ -------------
</TABLE>
<PAGE> 1
EXHIBIT 10.16
SECURITY AGREEMENT dated as of June 30, 1999, among DJ
ORTHOPEDICS, LLC, a Delaware limited liability company (the
"Borrower"), DONJOY, L.L.C., a Delaware limited liability
company ("Holdings"), each subsidiary of the Borrower listed
on Schedule I hereto (each such subsidiary individually a
"Subsidiary Guarantor" and collectively, the "Subsidiary
Guarantors"; the Subsidiary Guarantors, Holdings and the
Borrower are referred to collectively herein as the
"Grantors") and FIRST UNION NATIONAL BANK ("First Union"), as
collateral agent (in such capacity, the "Collateral Agent")
for the Secured Parties (as defined herein).
Reference is made to (a) the Credit Agreement dated as of June 30, 1999
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among the Borrower, Holdings, the lenders from time to time party
thereto (the "Lenders"), First Union, as administrative agent for the Lenders
(in such capacity, the "Administrative Agent") and Collateral Agent, and THE
CHASE MANHATTAN BANK, as Syndication Agent and as issuing bank (in such
capacity, the "Issuing Bank") and (b) the Parent Guarantee Agreement dated as of
June 30, 1999 (as amended, supplemented or otherwise modified from time to time,
the "Parent Guarantee Agreement"), between Holdings and the Collateral Agent and
(c) the Subsidiary Guarantee Agreement dated as of June 30, 1999 (as amended,
supplemented or otherwise modified from time to time, the "Subsidiary Guarantee
Agreement"), among the Subsidiary Guarantors and the Collateral Agent.
The Lenders have agreed to make Loans to the Borrower, and the Issuing
Bank has agreed to issue Letters of Credit for the account of the Borrower and
its Subsidiaries, pursuant to, and upon the terms and subject to the conditions
specified in, the Credit Agreement. Each of Holdings and the Subsidiary
Guarantors has agreed to guarantee, among other things, all the obligations of
the Borrower under the Credit Agreement. The obligations of the Lenders to make
Loans and of the Issuing Bank to issue Letters of Credit are conditioned upon,
among other things, the execution and delivery by the Grantors of an agreement
in the form hereof to secure (a) the due and punctual payment by the Borrower of
(i) the principal of and premium, if any, and interest (including interest
accruing during the pendency of any bankruptcy, insolvency, receivership or
other similar proceeding, regardless of whether allowed or allowable in such
proceeding) on the Loans, when and as due, whether at maturity, by acceleration,
upon one or more dates set for prepayment or otherwise, (ii) each payment
required to be made by the Borrower under the Credit Agreement in respect of any
Letter of Credit, when and as due, including payments in respect of
reimbursement of disbursements, interest thereon and obligations to provide cash
<PAGE> 2
3
collateral and (iii) all other monetary obligations, including fees, costs,
expenses and indemnities, whether primary, secondary, direct, contingent, fixed
or otherwise (including monetary obligations incurred during the pendency of any
bankruptcy, insolvency, receivership or other similar proceeding, regardless of
whether allowed or allowable in such proceeding), of the Borrower to the Secured
Parties under the Credit Agreement and the other Loan Documents, (b) the due and
punctual performance of all covenants, agreements, obligations and liabilities
of the Borrower under or pursuant to the Credit Agreement and the other Loan
Documents, (c) the due and punctual payment and performance of all the
covenants, agreements, obligations and liabilities of each other Loan Party
under or pursuant to this Agreement and the other Loan Documents and (d) the due
and punctual payment and performance of all obligations of Holdings, the
Borrower and any Subsidiary Loan Party under each Hedging Agreement entered into
with any counterparty that was a Lender (or an Affiliate of a Lender) at the
time such Hedging Agreement was entered into (all the monetary and other
obligations described in the preceding clauses (a) through (d) being referred to
collectively as the "Obligations").
Accordingly, the Grantors and the Collateral Agent, on behalf of itself
and each Secured Party (and each of their respective successors or assigns),
hereby agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Definition of Terms Used Herein. Unless the context
otherwise requires, all capitalized terms used but not defined herein shall have
the meanings set forth in the Credit Agreement and all references to the Uniform
Commercial Code shall mean the Uniform Commercial Code in effect in the State of
New York as of the date hereof.
SECTION 1.02. Definition of Certain Terms Used Herein. As used
herein, the following terms shall have the following meanings:
"Account Debtor" shall mean any Person who is or who may become obligated
to any Grantor under, with respect to or on account of an Account or chattel
paper.
"Accounts" shall mean any and all right, title and interest of any Grantor
to payment for goods and services sold or leased, including any such right
evidenced by chattel paper, whether due or to become due, whether or not it has
been earned by performance, and whether now or hereafter acquired or arising in
the future, including Accounts Receivable from Affiliates of the Grantors.
<PAGE> 3
4
"Accounts Receivable" shall mean all Accounts and all right, title and
interest in any returned goods, together with all rights, titles, securities and
guarantees with respect thereto, including any rights to stoppage in transit,
replevin, reclamation and resales, and all related security interests, liens and
pledges, whether voluntary or involuntary, in each case whether now existing or
owned or hereafter arising or acquired.
"Collateral" shall mean all (a) Accounts Receivable, (b) Documents, (c)
Equipment, (d) General Intangibles, (e) Inventory, (f) cash and cash accounts,
including deposit accounts, (g) Investment Property and (h) Proceeds, provided
that "Collateral" shall not include, with respect to any Grantor, any item of
property to the extent the grant by such Grantor of a security interest pursuant
to this Agreement in its right, title and interest in such item of property is
prohibited by an applicable contractual obligation or requirement of law or
would give any other Person the right to terminate its obligations with respect
to such item of property, and provided further, that the limitation in the
foregoing proviso shall not affect, limit, restrict or impair the grant by any
Grantor of a security interest pursuant to this Agreement in any money or other
amounts due or to become due under any Account, Investment Property, contract,
agreement or General Intangible.
"Commodity Account" shall mean an account maintained by a Commodity
Intermediary in which a Commodity Contract is carried out for a Commodity
Customer.
"Commodity Contract" shall mean a commodity futures contract, an option on
a commodity futures contract, a commodity option or any other contract that, in
each case, is (a) traded on or subject to the rules of a board of trade that has
been designated as a contract market for such a contract pursuant to the Federal
commodities laws or (b) traded on a foreign commodity board of trade, exchange
or market, and is carried on the books of a Commodity Intermediary for a
Commodity Customer.
"Commodity Customer" shall mean a Person for whom a Commodity Intermediary
carries a Commodity Contract on its books.
"Commodity Intermediary" shall mean (a) a Person who is registered as a
futures commission merchant under the Federal commodities laws or (b) a Person
who in the ordinary course of its business provides clearance or settlement
services for a board of trade that has been designated as a contract market
pursuant to Federal commodities laws.
"Copyright License" shall mean any written agreement, now or hereafter in
effect, granting any right to any third party under any Copyright now or
hereafter owned by any Grantor or which such Grantor otherwise has the right to
license, or granting any right to such Grantor under any Copyright now or
hereafter owned by any third party, and all rights of such Grantor under any
such agreement.
<PAGE> 4
5
"Copyrights" shall mean all of the following now owned or hereafter
acquired by any Grantor: (a) all copyright rights in any work subject to the
copyright laws of the United States of America or any other country, whether as
author, assignee, transferee or otherwise, and (b) all registrations and
applications for registration of any such copyright in the United States of
America or any other country, including registrations, recordings, supplemental
registrations and pending applications for registration in the United States
Copyright Office, including those listed on Schedule II.
"Credit Agreement" shall have the meaning assigned to such term in the
preliminary statement of this Agreement.
"Documents" shall mean all instruments, files, records, ledger sheets and
documents covering or relating to any of the Collateral.
"Entitlement Holder" shall mean a Person identified in the records of a
Securities Intermediary as the Person having a Security Entitlement against the
Securities Intermediary. If a Person acquires a Security Entitlement by virtue
of Section 8-501(b)(2) or (3) of the Uniform Commercial Code, such Person is the
Entitlement Holder.
"Equipment" shall mean all equipment, furniture and furnishings, and all
tangible personal property similar to any of the foregoing, including tools,
parts and supplies of every kind and description, and all improvements,
accessions or appurtenances thereto, that are now or hereafter owned by any
Grantor. The term Equipment shall include Fixtures.
"Financial Asset" shall mean (a) a Security, (b) an obligation of a Person
or a share, participation or other interest in a Person or in property or an
enterprise of a Person, which is, or is of a type, dealt with in or traded on
financial markets, or which is recognized in any area in which it is issued or
dealt in as a medium for investment or (c) any property that is held by a
Securities Intermediary for another Person in a Securities Account if the
Securities Intermediary has expressly agreed with the other Person that the
property is to be treated as a Financial Asset under Article 8 of the Uniform
Commercial Code. As the context requires, the term Financial Asset shall mean
either the interest itself or the means by which a Person's claim to it is
evidenced, including a certificated or uncertificated Security, a certificate
representing a Security or a Security Entitlement.
"Fixtures" shall mean all items of Equipment or goods, whether now owned
or hereafter acquired, of any Grantor that become so related to particular real
estate that an interest in them arises under any real estate law applicable
thereto.
"General Intangibles" shall mean all choses in action and causes of action
and all other assignable intangible personal property of any Grantor of every
kind and nature (other than Accounts Receivable) now owned or hereafter acquired
by any Grantor, including all
<PAGE> 5
6
rights and interests in partnerships, limited partnerships, limited liability
companies and other unincorporated entities, corporate or other business
records, indemnification claims, contract rights (including rights under leases,
whether entered into as lessor or lessee, Hedging Agreements and other
agreements), Intellectual Property, goodwill, registrations, franchises, Tax
refund claims and any letter of credit, guarantee, claim, security interest or
other security held by or granted to any Grantor to secure payment by an Account
Debtor of any of the Accounts Receivable.
"Intellectual Property" shall mean all intellectual and similar property
of any Grantor of every kind and nature now owned or hereafter acquired by any
Grantor, including inventions, designs, Patents, Copyrights, Licenses,
Trademarks, trade secrets, confidential or proprietary technical and business
information, know-how, show-how or other data or information, software and
databases and all embodiments or fixations thereof and related documentation,
registrations and franchises, and all additions, improvements and accessions to,
and books and records describing or used in connection with, any of the
foregoing.
"Inventory" shall mean all goods of any Grantor, whether now owned or
hereafter acquired, held for sale or lease, or furnished or to be furnished by
any Grantor under contracts of service, or consumed in any Grantor's business,
including raw materials, intermediates, work in process, packaging materials,
finished goods, semi-finished inventory, scrap inventory, manufacturing supplies
and spare parts, and all such goods that have been returned to or repossessed by
or on behalf of any Grantor.
"Investment Property" shall mean all Securities (whether certificated or
uncertificated), Security Entitlements, Securities Accounts, Commodity Contracts
and Commodity Accounts of any Grantor, whether now owned or hereafter acquired
by any Grantor.
"License" shall mean any Patent License, Trademark License, Copyright
License or other license or sublicense to which any Grantor is a party,
including those listed on Schedule III (other than those license agreements in
existence on the date hereof and listed on Schedule III and those license
agreements entered into after the date hereof, which by their terms prohibit
assignment or a grant of a security interest by such Grantor as licensee
thereunder).
"Obligations" shall have the meaning assigned to such term in the
preliminary statement of this Agreement.
"Patent License" shall mean any written agreement, now or hereafter in
effect, granting to any third party any right to make, use or sell any invention
on which a Patent, now or hereafter owned by any Grantor or which any Grantor
otherwise has the right to license, is in existence, or granting to any Grantor
any right to make, use or sell any
<PAGE> 6
7
invention on which a Patent, now or hereafter owned by any third party, is in
existence, and all rights of any Grantor under any such agreement.
"Patents" shall mean all of the following now owned or hereafter acquired
by any Grantor: (a) all letters patent of the United States or any other
country, all registrations and recordings thereof, and all applications for
letters patent of the United States or any other country, including
registrations, recordings and pending applications in the United States Patent
and Trademark Office or any similar offices in any other country, including
those listed on Schedule IV, and (b) all reissues, continuations, divisions,
continuations-in-part, renewals or extensions thereof, and the inventions
disclosed or claimed therein, including the right to make, use or sell the
inventions disclosed or claimed therein.
"Perfection Certificate" shall mean a certificate substantially in the
form of Annex 1 hereto, completed and supplemented with the schedules and
attachments contemplated thereby, and duly executed by a Financial Officer and
the chief legal officer of the Borrower.
"Proceeds" shall mean any consideration received from the sale, exchange,
license, lease or other disposition of any asset or property that constitutes
Collateral, any value received as a consequence of the possession of any
Collateral and any payment received from any insurer or other Person or entity
as a result of the destruction, loss, theft, damage or other involuntary
conversion of whatever nature of any asset or property which constitutes
Collateral, and shall include (a) any claim of any Grantor against any third
party for (and the right to sue and recover for and the rights to damages or
profits due or accrued arising out of or in connection with) (i) past, present
or future infringement of any Patent now or hereafter owned by any Grantor, or
licensed under a Patent License, (ii) past, present or future infringement or
dilution of any Trademark now or hereafter owned by any Grantor or licensed
under a Trademark License or injury to the goodwill associated with or
symbolized by any Trademark now or hereafter owned by any Grantor, (iii) past,
present or future breach of any License and (iv) past, present or future
infringement of any Copyright now or hereafter owned by any Grantor or licensed
under a Copyright License and (b) any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral.
"Secured Parties" shall mean (a) the Lenders, (b) the Administrative
Agent, (c) the Collateral Agent, (d) the Issuing Bank, (e) each counterparty to
an Hedging Agreement entered into with Holdings, the Borrower or any Subsidiary
Loan Party if such counterparty was a Lender (or an Affiliate of a Lender) at
the time the Hedging Agreement was entered into, (f) the beneficiaries of each
indemnification obligation undertaken by any Grantor under any Loan Document and
(g) the successors and assigns of each of the foregoing.
"Securities" shall mean any obligations of an issuer or any shares,
participations, membership interests or other interests in an issuer or in
property or an enterprise of an issuer
<PAGE> 7
8
which (a) are represented by a certificate representing a security in bearer or
registered form, or the transfer of which may be registered upon books
maintained for that purpose by or on behalf of the issuer, (b) are one of a
class or series or by its terms is divisible into a class or series of shares,
participations, membership interests, other interests or obligations and (c)(i)
are, or are of a type, dealt with or traded on securities exchanges or
securities markets or (ii) are a medium for investment and by their terms
expressly provide that they are a security governed by Article 8 of the Uniform
Commercial Code.
"Securities Account" shall mean an account to which a Financial Asset is
or may be credited in accordance with an agreement under which the Person
maintaining the account undertakes to treat the Person for whom the account is
maintained as entitled to exercise rights that comprise the Financial Asset.
"Security Entitlements" shall mean the rights and property interests of an
Entitlement Holder with respect to a Financial Asset.
"Security Interest" shall have the meaning assigned to such term in
Section 2.01.
"Securities Intermediary" shall mean (a) a clearing corporation or (b) a
Person, including a bank or broker, that in the ordinary course of its business
maintains securities accounts for others and is acting in that capacity.
"Trademark License" shall mean any written agreement, now or hereafter in
effect, granting to any third party any right to use any Trademark now or
hereafter owned by any Grantor or which any Grantor otherwise has the right to
license, or granting to any Grantor any right to use any Trademark now or
hereafter owned by any third party, and all rights of any Grantor under any such
agreement.
"Trademarks" shall mean all of the following now owned or hereafter
acquired by any Grantor: (a) all trademarks, service marks, trade names,
corporate names, company names, business names, fictitious business names, trade
styles, trade dress, logos, other source or business identifiers, designs and
general intangibles of like nature, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all registration and
recording applications filed in connection therewith, including registrations
and registration applications in the United States Patent and Trademark Office,
any State of the United States or any similar offices in any other country or
any political subdivision thereof, and all extensions or renewals thereof,
including those listed on Schedule V, (b) all goodwill associated therewith or
symbolized thereby and (c) all other assets, rights and interests that uniquely
reflect or embody such goodwill.
SECTION 1.03. Rules of Interpretation. The rules of
interpretation specified in Section 1.03 of the Credit Agreement shall
be applicable to this Agreement.
<PAGE> 8
9
ARTICLE II
Security Interest
SECTION 2.01. Security Interest. As security for the payment or
performance, as the case may be, in full of the Obligations, each Grantor hereby
bargains, sells, conveys, assigns, sets over, mortgages, pledges, hypothecates
and transfers to the Collateral Agent, its successors and assigns, for the
ratable benefit of the Secured Parties, and hereby grants to the Collateral
Agent, its successors and assigns, for the ratable benefit of the Secured
Parties, a security interest in, all of such Grantor's right, title and interest
in, to and under the Collateral (the "Security Interest"). Without limiting the
foregoing, the Collateral Agent is hereby authorized, to the extent permitted by
applicable law, to file one or more financing statements (including fixture
filings), continuation statements, filings with the United States Patent and
Trademark Office or United States Copyright Office (or any successor office or
any similar office in any other country) or other documents for the purpose of
perfecting, confirming, continuing, enforcing or protecting the Security
Interest granted by each Grantor, without the signature of any Grantor, and
naming any Grantor or the Grantors as debtors and the Collateral Agent as
secured party.
SECTION 2.02. No Assumption of Liability. The Security Interest is granted
as security only and shall not subject the Collateral Agent or any other Secured
Party to, or in any way alter or modify, any obligation or liability of any
Grantor with respect to or arising out of the Collateral.
ARTICLE III
Representations and Warranties
The Grantors jointly and severally represent and warrant to the Collateral
Agent and the Secured Parties that:
SECTION 3.01. Title and Authority. Each Grantor has good and valid rights
in and title to the Collateral with respect to which it has purported to grant a
Security Interest hereunder and has full power and authority to grant to the
Collateral Agent the Security Interest in such Collateral pursuant hereto and to
execute, deliver and perform its obligations in accordance with the terms of
this Agreement, without the consent or approval of any other Person other than
any consent or approval which has been obtained or the failure of which to
obtain could not reasonably be expected to have a Material Adverse Effect.
<PAGE> 9
10
SECTION 3.02. Filings. (a) The Perfection Certificate has been duly
prepared, completed and executed and the information set forth therein is
correct and complete. Fully executed Uniform Commercial Code financing
statements (including fixture filings, as applicable) or other appropriate
filings, recordings or registrations containing a description of the Collateral
have been delivered to the Collateral Agent for filing in each governmental,
municipal or other office specified in Schedule 6 to the Perfection Certificate,
which are all the filings, recordings and registrations (other than filings
required to be made in the United States Patent and Trademark Office and the
United States Copyright Office in order to perfect the Security Interest in
Collateral consisting of United States Patents, United States registered
Trademarks and United States registered Copyrights) that are necessary to
publish notice of and protect the validity of and to establish a legal, valid
and perfected security interest in favor of the Collateral Agent (for the
ratable benefit of the Secured Parties) in respect of all Collateral in which
the Security Interest may be perfected by filing, recording or registration in
the United States (or any political subdivision thereof) and its territories and
possessions, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the filing
of continuation statements.
(b) Each Grantor represents and warrants that fully executed security
agreements in the form hereof and containing a description of all Collateral
consisting of Intellectual Property shall have been recorded within three months
after the execution of this Agreement with respect to United States Patents and
United States registered Trademarks (and Trademarks for which United States
registration applications are pending) and within one month after the execution
of this Agreement with respect to United States registered Copyrights have been
delivered to the Collateral Agent for recording by the United States Patent and
Trademark Office and the United States Copyright Office pursuant to 35 U.S.C.
Section 261, 15 U.S.C. Section 1060 or 17 U.S.C. Section 205 and the regulations
thereunder, as applicable, and otherwise as may be required pursuant to the laws
of any other necessary jurisdiction, to protect the validity of and to establish
a legal, valid and perfected security interest in favor of the Collateral Agent
(for the ratable benefit of the Secured Parties) in respect of all Collateral
consisting of Patents, Trademarks and Copyrights in which a security interest
may be perfected by filing, recording or registration in the United States (or
any political subdivision thereof) and its territories and possessions, or in
any other necessary jurisdiction, and no further or subsequent filing, refiling,
recording, rerecording, registration or reregistration is necessary (other than
such actions as are necessary to perfect the Security Interest with respect to
any Collateral consisting of Patents, Trademarks and Copyrights (or registration
or application for registration thereof) acquired or developed after the date
hereof).
SECTION 3.03. Validity of Security Interest. The Security Interest
constitutes (a) a legal and valid security interest in all the Collateral
securing the payment and performance of the Obligations, (b) subject to the
filings described in Section 3.02 above, a perfected security interest in all
Collateral in which a security interest may be perfected by filing,
<PAGE> 10
11
recording or registering a financing statement or analogous document in the
United States (or any political subdivision thereof) and its territories and
possessions pursuant to the Uniform Commercial Code or other applicable law in
such jurisdictions and (c) a security interest that shall be perfected in all
Collateral in which a security interest may be perfected upon the receipt and
recording of this Agreement with the United States Patent and Trademark Office
and the United States Copyright Office, as applicable, within the three month
period (commencing as of the date hereof) pursuant to 35 U.S.C. Section 261 or
15 U.S.C. Section 1060 or the one month period (commencing as of the date
hereof) pursuant to 17 U.S.C. Section 205 and otherwise as may be required
pursuant to the laws of any other necessary jurisdiction. The Security Interest
is and shall be prior to any other Lien on any of the Collateral, other than
Liens expressly permitted to be prior to the Security Interest pursuant to
Section 6.02 of the Credit Agreement.
SECTION 3.04. Absence of Other Liens. The Collateral is owned by the
Grantors free and clear of any Lien, except for Liens expressly permitted
pursuant to Section 6.02 of the Credit Agreement. The Grantor has not filed or
consented to the filing of (a) any financing statement or analogous document
under the Uniform Commercial Code or any other applicable laws covering any
Collateral, (b) any assignment in which any Grantor assigns any Collateral or
any security agreement or similar instrument covering any Collateral with the
United States Patent and Trademark Office or the United States Copyright Office
or (c) any assignment in which any Grantor assigns any Collateral or any
security agreement or similar instrument covering any Collateral with any
foreign governmental, municipal or other office, which financing statement or
analogous document, assignment, security agreement or similar instrument is
still in effect, except, in each case, for Liens expressly permitted pursuant to
Section 6.02 of the Credit Agreement.
ARTICLE IV
Covenants
SECTION 4.01. Change of Name; Location of Collateral; Records; Place of
Business. (a) Each Grantor agrees promptly to notify the Collateral Agent in
writing of any change (i) in its corporate name or in any trade name used to
identify it in the conduct of its business or in the ownership of its
properties, (ii) in the location of its chief executive office, its principal
place of business, any office in which it maintains books or records relating to
Collateral owned by it or any office or facility at which Collateral owned by it
is located (including the establishment of any such new office or facility),
(iii) in its identity or corporate structure or (iv) in its Federal Taxpayer
Identification Number. Each Grantor agrees not to effect or permit any change
referred to in the preceding sentence unless all filings have been made under
the Uniform Commercial Code or otherwise that are required in order for the
Collateral Agent to continue at all times following such change to have a valid,
legal and perfected first priority security interest in all the Collateral.
<PAGE> 11
12
(b) Each Grantor agrees to maintain, at its own cost and expense, such
complete and accurate records with respect to the Collateral owned by it as is
consistent with its current practices and in accordance with such prudent and
standard practices used in industries that are the same as or similar to those
in which such Grantor is engaged, but in any event to include accounting records
sufficient to enable the preparation of financial statements in accordance with
GAAP indicating all payments and proceeds received with respect to any part of
the Collateral, and, at such time or times as the Collateral Agent may
reasonably request, promptly to prepare and deliver to the Collateral Agent a
duly certified schedule or schedules in form and detail reasonably satisfactory
to the Collateral Agent showing the identity, amount and location of any and all
Collateral.
SECTION 4.02. Protection of Security. Each Grantor shall, at its own cost
and expense, take any and all actions necessary to defend title to the
Collateral against all Persons and to defend the Security Interest of the
Collateral Agent in the Collateral and the priority thereof against any Lien not
expressly permitted pursuant to Section 6.02 of the Credit Agreement.
SECTION 4.03. Further Assurances. Each Grantor agrees, at its own expense,
to execute, acknowledge, deliver and cause to be duly filed all such further
instruments and documents and take all such actions as the Collateral Agent may
from time to time request to better assure, preserve, protect and perfect the
Security Interest and the rights and remedies created hereby, including the
payment of any fees and Taxes required in connection with the execution and
delivery of this Agreement, the granting of the Security Interest and the filing
of any financing statements (including fixture filings) or other documents in
connection herewith or therewith. If any amount payable under or in connection
with any of the Collateral shall be or become evidenced by any promissory note
or other instrument, such note or instrument shall be immediately pledged and
delivered to the Collateral Agent, duly endorsed in a manner satisfactory to the
Collateral Agent.
Without limiting the generality of the foregoing, each Grantor hereby
authorizes the Collateral Agent, with prompt notice thereof to the Grantors, to
supplement this Agreement by supplementing Schedule II, III, IV or V hereto or
adding additional schedules hereto to specifically identify any registered asset
or item that may constitute Copyrights, Licenses, Patents or Trademarks;
provided, however, that any Grantor shall have the right, exercisable within 10
days after it has been notified by the Collateral Agent of the specific
identification of such Collateral, to advise the Collateral Agent in writing of
any inaccuracy of the representations and warranties made by such Grantor
hereunder with respect to such Collateral. Each Grantor agrees that it will use
its best efforts to take such action as shall be necessary in order that all
representations and warranties hereunder shall be true and correct with respect
to such Collateral within 30 days after the date it has been notified by the
Collateral Agent of the specific identification of such Collateral.
<PAGE> 12
13
SECTION 4.04. Inspection and Verification. The Collateral Agent and such
Persons as the Collateral Agent may reasonably designate shall have the right,
at the Grantors' own cost and expense, to inspect the Collateral, all records
related thereto (and to make extracts and copies from such records) and the
premises upon which any of the Collateral is located, to discuss the Grantors'
affairs with the officers of the Grantors and their independent accountants and
to verify under reasonable procedures, the validity, amount, quality, quantity,
value, condition and status of, or any other matter relating to, the Collateral,
including, in the case of Accounts or Collateral in the possession of any third
Person, by contacting Account Debtors or the third Person possessing such
Collateral for the purpose of making such a verification. The Collateral Agent
shall have the absolute right to share any information it gains from such
inspection or verification with any Secured Party (it being understood that any
such information shall be deemed to be "Information" subject to the provisions
of Section 9.12 of the Credit Agreement), provided that unless and until an
Event of Default shall have occurred and be continuing, any inspection or
verification pursuant to this Section 4.04 shall be conducted in consultation
with the Borrower.
SECTION 4.05. Taxes; Encumbrances. At its option, the Collateral Agent may
discharge past due Taxes, assessments, charges, fees, Liens, security interests
or other encumbrances at any time levied or placed on the Collateral and not
permitted pursuant to Section 6.02 of the Credit Agreement, and may pay for the
maintenance and preservation of the Collateral to the extent any Grantor fails
to do so as required by the Credit Agreement and each Grantor jointly and
severally agrees to reimburse the Collateral Agent on demand for any payment
made or any expense incurred by the Collateral Agent pursuant to the foregoing
authorization; provided, however, that nothing in this Section 4.05 shall be
interpreted as excusing any Grantor from the performance of, or imposing any
obligation on the Collateral Agent or any Secured Party to cure or perform, any
covenants or other promises of any Grantor with respect to Taxes, assessments,
charges, fees, liens, security interests or other encumbrances and maintenance
as set forth herein or in the other Loan Documents.
SECTION 4.06. Assignment of Security Interest. If at any time any Grantor
shall take a security interest in any property of an Account Debtor or any other
Person to secure payment and performance of an Account, such Grantor shall
promptly assign such security interest to the Collateral Agent. Such assignment
need not be filed of public record unless necessary to continue the perfected
status of the security interest against creditors of and transferees from the
Account Debtor or other Person granting the security interest.
SECTION 4.07. Continuing Obligations of the Grantors. Each Grantor shall
remain liable to observe and perform all the conditions and obligations to be
observed and performed by it under each contract, agreement or instrument
relating to the Collateral, all in accordance with the terms and conditions
thereof, and each Grantor jointly and severally
<PAGE> 13
14
agrees to indemnify and hold harmless the Collateral Agent and the Secured
Parties from and against any and all liability for such performance.
SECTION 4.08. Use and Disposition of Collateral. None of the Grantors
shall make or permit to be made an assignment, pledge or hypothecation of the
Collateral or shall grant any other Lien in respect of the Collateral, except as
expressly permitted by Section 6.02 of the Credit Agreement. None of the
Grantors shall make or permit to be made any transfer of the Collateral and each
Grantor shall remain at all times in possession of the Collateral owned by it,
except that (a) Inventory may be sold in the ordinary course of business and (b)
the Grantors may use and dispose of the Collateral in any lawful manner not
inconsistent with the provisions of this Agreement, the Credit Agreement or any
other Loan Document. Without limiting the generality of the foregoing, each
Grantor agrees that it shall not permit any Inventory to be in the possession or
control of any warehouseman, bailee, agent or processor at any time unless such
warehouseman, bailee, agent or processor shall have been notified of the
Security Interest and shall have agreed in writing to hold the Inventory subject
to the Security Interest and the instructions of the Collateral Agent and to
waive and release any Lien held by it with respect to such Inventory, whether
arising by operation of law or otherwise.
SECTION 4.09. Limitation on Modification of Accounts. None of the Grantors
will, without the Collateral Agent's prior written consent, grant any extension
of the time of payment of any of the Accounts Receivable, compromise, compound
or settle the same for less than the full amount thereof, release, wholly or
partly, any Person liable for the payment thereof or allow any credit or
discount whatsoever thereon, other than extensions, credits, discounts,
compromises or settlements granted or made in the ordinary course of business
and consistent with its current practices and in accordance with such prudent
and standard practices used in industries that are the same as or similar to
those in which such Grantor is engaged.
SECTION 4.10. Insurance. The Grantors, at their own expense, shall
maintain or cause to be maintained insurance covering physical loss or damage to
the Inventory and Equipment in accordance with Section 5.07 of the Credit
Agreement. Each Grantor irrevocably makes, constitutes and appoints the
Collateral Agent (and all officers, employees or agents designated by the
Collateral Agent) as such Grantor's true and lawful agent (and attorney-in-fact)
for the purpose, during the continuance of an Event of Default, of making,
settling and adjusting claims in respect of Collateral under policies of
insurance, endorsing the name of such Grantor on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect thereto. In the event that
any Grantor at any time or times shall fail to obtain or maintain any of the
policies of insurance required hereby or to pay any premium in whole or part
relating thereto, the Collateral Agent may, without waiving or releasing any
obligation or liability of the Grantors hereunder or any Event of Default, in
its sole
<PAGE> 14
15
discretion, obtain and maintain such policies of insurance and pay such premium
and take any other actions with respect thereto as the Collateral Agent deems
advisable. All sums disbursed by the Collateral Agent in connection with this
Section 4.10, including reasonable attorneys' fees, court costs, expenses and
other charges relating thereto, shall be payable, upon demand, by the Grantors
to the Collateral Agent and shall be additional Obligations secured hereby.
SECTION 4.11. Legend. Each Grantor shall legend, in form and manner
satisfactory to the Collateral Agent, its books, records and documents
evidencing or pertaining to Accounts Receivable with an appropriate reference to
the fact that such Accounts Receivable have been assigned to the Collateral
Agent for the benefit of the Secured Parties and that the Collateral Agent has a
security interest therein.
SECTION 4.12. Covenants Regarding Patent, Trademark and Copyright
Collateral. (a) Each Grantor agrees that it will not, nor will it permit any of
its licensees to do any act, or omit to do any act, whereby any Patent which is
used in the conduct of such Grantor's business may become invalidated or
dedicated to the public, and agrees that it shall continue to mark any products
covered by a Patent with the relevant patent number as necessary and sufficient
to establish and preserve its maximum rights under applicable patent law, except
in each case if the failure to do so would not have a Material Adverse Effect.
(b) Each Grantor (either itself or through its licensees or its
sublicensees) will, for each Trademark used in the conduct of such Grantor's
business, (i) maintain such Trademark in full force free from any claim of
abandonment or invalidity for non-use, (ii) maintain the quality of products and
services offered under such Trademark, (iii) display such Trademark with notice
of Federal or foreign registration to the extent necessary and sufficient to
establish and preserve its maximum rights under applicable law and (iv) not
knowingly use or knowingly permit the use of such Trademark in violation of any
third party right, except in each case if the failure to do so would not have a
Material Adverse Effect.
(c) Each Grantor (either itself or through licensees) will, for each work
covered by any Copyright, continue to publish, reproduce, display, adopt and
distribute the work with appropriate copyright notice as necessary and
sufficient to establish and preserve its maximum rights under applicable
copyright law, except in each case if the failure to do so would not have a
Material Adverse Effect.
(d) Each Grantor shall notify the Collateral Agent immediately if it knows
or has reason to know that any Patent, Trademark or Copyright used in the
conduct of its business may become abandoned, lost or dedicated to the public,
or of any adverse determination or development (including the institution of, or
any such determination or development in, any proceeding in the United States
Patent and Trademark Office, United States Copyright Office or any court or
similar office of any country) regarding such Grantor's ownership of any
<PAGE> 15
16
Patent, Trademark or Copyright, its right to register the same, or to keep and
maintain the same, except if any such event or development would not have a
Material Adverse Effect.
(e) In no event shall any Grantor, either itself or through any agent,
employee, licensee or designee, file an application for any Patent, Trademark or
Copyright (or for the registration of any Trademark or Copyright) with the
United States Patent and Trademark Office, United States Copyright Office or any
office or agency in any political subdivision of the United States or in any
other country or any political subdivision thereof, unless it promptly informs
the Collateral Agent, and, upon request of the Collateral Agent, executes and
delivers any and all agreements, instruments, documents and papers as the
Collateral Agent may request to evidence the Collateral Agent's security
interest in such Patent, Trademark or Copyright, and each Grantor hereby
appoints the Collateral Agent as its attorney-in-fact to execute and file such
writings for the foregoing purposes, all acts of such attorney being hereby
ratified and confirmed; such power, being coupled with an interest, is
irrevocable.
(f) Each Grantor will take all necessary steps that are consistent with
the practice in any proceeding before the United States Patent and Trademark
Office, United States Copyright Office or any office or agency in any political
subdivision of the United States or in any other country or any political
subdivision thereof, to maintain and pursue each material application relating
to the Patents, Trademarks and/or Copyrights (and to obtain the relevant grant
or registration) and to maintain each issued Patent and each registration of the
Trademarks and Copyrights that is used in the conduct of any Grantor's business,
including timely filings of applications for renewal, affidavits of use,
affidavits of incontestability and payment of maintenance fees, and, if
consistent with good business judgment, to initiate opposition, interference and
cancelation proceedings against third parties, except if the failure to do so
would not have a Material Adverse Effect.
(g) In the event that any Grantor has reason to believe that any
Collateral consisting of a Patent, Trademark or Copyright used in the conduct of
any Grantor's business has been or is about to be infringed, misappropriated or
diluted by a third party and such infringement, misappropriation or dilution
would have a Material Adverse Effect, such Grantor promptly shall notify the
Collateral Agent and shall, if consistent with good business judgment, promptly
sue for infringement, misappropriation or dilution and to recover any and all
damages for such infringement, misappropriation or dilution, and take such other
actions as are appropriate under the circumstances to protect such Collateral.
(h) Upon and during the continuance of an Event of Default, each Grantor
shall use its best efforts (and without any obligation to make any payment
therefor) to obtain all requisite consents or approvals by the licensor of each
Copyright License, Patent License or Trademark License to effect the assignment
of all of such Grantor's right, title and interest thereunder to the Collateral
Agent or its designee.
<PAGE> 16
17
SECTION 4.13. Certain Deposit Accounts. With respect to any deposit
account located in California, Hawaii, Idaho, Illinois or Indiana or any other
state in which on the date hereof or hereafter a security interest in a deposit
account may be perfected by notifying the bank maintaining such deposit account
of a secured party's security interest in such deposit account, the Grantors
shall provide to each bank maintaining such a deposit account the notice
necessary under the laws of the applicable state to perfect the Secured Parties'
security interest in such deposit account.
ARTICLE V
Power of Attorney
<PAGE> 17
18
Each Grantor irrevocably makes, constitutes and appoints the Collateral
Agent (and all officers, employees or agents designated by the Collateral Agent)
as such Grantor's true and lawful agent and attorney-in-fact, and in such
capacity the Collateral Agent shall have the right, with power of substitution
for each Grantor and in each Grantor's name or otherwise, for the use and
benefit of the Collateral Agent and the Secured Parties, upon the occurrence and
during the continuance of an Event of Default (a) to receive, endorse, assign
and/or deliver any and all notes, acceptances, checks, drafts, money orders or
other evidences of payment relating to the Collateral or any part thereof; (b)
to demand, collect, receive payment of, give receipt for and give discharges and
releases of all or any of the Collateral; (c) to sign the name of any Grantor on
any invoice or bill of lading relating to any of the Collateral; (d) to send
verifications of Accounts Receivable to any Account Debtor; (e) to commence and
prosecute any and all suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect or otherwise realize on all or any of
the Collateral or to enforce any rights in respect of any Collateral; (f) to
settle, compromise, compound, adjust or defend any actions, suits or proceedings
relating to all or any of the Collateral; (g) to notify, or to require any
Grantor to notify, Account Debtors to make payment directly to the Collateral
Agent; and (h) to use, sell, assign, transfer, pledge, make any agreement with
respect to or otherwise deal with all or any of the Collateral, and to do all
other acts and things necessary to carry out the purposes of this Agreement, as
fully and completely as though the Collateral Agent were the absolute owner of
the Collateral for all purposes; provided, however, that nothing herein
contained shall be construed as requiring or obligating the Collateral Agent or
any Secured Party to make any commitment or to make any inquiry as to the nature
or sufficiency of any payment received by the Collateral Agent or any Secured
Party, or to present or file any claim or notice, or to take any action with
respect to the Collateral or any part thereof or the moneys due or to become due
in respect thereof or any property covered thereby, and no action taken or
omitted to be taken by the Collateral Agent or any Secured Party with respect to
the Collateral or any part thereof shall give rise to any defense, counterclaim
or offset in favor of any Grantor or to any claim or action against the
Collateral Agent or any Secured Party. It is understood and agreed that the
appointment of the Collateral Agent as the agent and attorney-in-fact of the
Grantors for the purposes set forth above is coupled with an interest and is
irrevocable. The provisions of this Section shall in no event relieve any
Grantor of any of its obligations hereunder or under any other Loan Document
with respect to the Collateral or any part thereof or impose any obligation on
the Collateral Agent or any Secured Party to proceed in any particular manner
with respect to the Collateral or any part thereof, or in any way limit the
exercise by the Collateral Agent or any Secured Party of any other or further
right which it may have on the date of this Agreement or hereafter, whether
hereunder, under any other Loan Document, by law or otherwise.
<PAGE> 18
19
ARTICLE VI
Remedies
SECTION 6.01. Remedies upon Default. Upon the occurrence and during the
continuance of an Event of Default, each Grantor agrees to deliver each item of
Collateral to the Collateral Agent on demand, and it is agreed that the
Collateral Agent shall have the right to take any of or all the following
actions at the same or different times: (a) with respect to any Collateral
consisting of Intellectual Property, on demand, to cause the Security Interest
to become an assignment, transfer and conveyance of any of or all such
Collateral by the applicable Grantors to the Collateral Agent, or to license or
sublicense, whether general, special or otherwise, and whether on an exclusive
or non-exclusive basis, any such Collateral throughout the world on such terms
and conditions and in such manner as the Collateral Agent shall determine (other
than in violation of any then-existing licensing arrangements to the extent that
waivers cannot be obtained), and (b) with or without legal process and with or
without prior notice or demand for performance, to take possession of the
Collateral and without liability for trespass to enter any premises where the
Collateral may be located for the purpose of taking possession of or removing
the Collateral and, generally, to exercise any and all rights afforded to a
secured party under the Uniform Commercial Code or other applicable law. Without
limiting the generality of the foregoing, each Grantor agrees that the
Collateral Agent shall have the right, subject to the mandatory requirements of
applicable law, to sell or otherwise dispose of all or any part of the
Collateral, at public or private sale or at any broker's board or on any
securities exchange, for cash, upon credit or for future delivery as the
Collateral Agent shall deem appropriate. The Collateral Agent shall be
authorized at any such sale (if it deems it advisable to do so) to restrict the
prospective bidders or purchasers to Persons who will represent and agree that
they are purchasing the Collateral for their own account for investment and not
with a view to the distribution or sale thereof, and upon consummation of any
such sale the Collateral Agent shall have the right to assign, transfer and
deliver to the purchaser or purchasers thereof the Collateral so sold. Each such
purchaser at any such sale shall hold the property sold absolutely, free from
any claim or right on the part of any Grantor, and each Grantor hereby waives
(to the extent permitted by applicable law) all rights of redemption, stay and
appraisal which such Grantor now has or may at any time in the future have under
any rule of law or statute now existing or hereafter enacted.
The Collateral Agent shall give the Grantors 10 days' written notice
(which each Grantor agrees is reasonable notification within the meaning of
Section 9-504(3) of the Uniform Commercial Code as in effect in the State of New
York or its equivalent in other jurisdictions) of the Collateral Agent's
intention to make any sale of Collateral. Such notice, in the case of a public
sale, shall state the time and place for such sale and, in the case of a sale at
a broker's board or on a securities exchange, shall state the board or exchange
at which such sale is to be made and the day on which the Collateral, or portion
thereof, will
<PAGE> 19
20
first be offered for sale at such board or exchange. Any such public sale shall
be held at such time or times within ordinary business hours and at such place
or places as the Collateral Agent may fix and state in the notice (if any) of
such sale. At any such sale, the Collateral, or portion thereof, to be sold may
be sold in one lot as an entirety or in separate parcels, as the Collateral
Agent may (in its sole and absolute discretion) determine. The Collateral Agent
shall not be obligated to make any sale of any Collateral if it shall determine
not to do so, regardless of the fact that notice of sale of such Collateral
shall have been given. The Collateral Agent may, without notice or publication,
adjourn any public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for sale, and such sale may,
without further notice, be made at the time and place to which the same was so
adjourned. In case any sale of all or any part of the Collateral is made on
credit or for future delivery, the Collateral so sold may be retained by the
Collateral Agent until the sale price is paid by the purchaser or purchasers
thereof, but the Collateral Agent shall not incur any liability in case any such
purchaser or purchasers shall fail to take up and pay for the Collateral so sold
and, in case of any such failure, such Collateral may be sold again upon like
notice. At any public (or, to the extent permitted by applicable law, private)
sale made pursuant to this Section, any Secured Party may bid for or purchase,
free (to the extent permitted by applicable law) from any right of redemption,
stay, valuation or appraisal on the part of any Grantor (all said rights being
also hereby waived and released to the extent permitted by applicable law), the
Collateral or any part thereof offered for sale and may make payment on account
thereof by using any claim then due and payable to such Secured Party from any
Grantor as a credit against the purchase price, and such Secured Party may, upon
compliance with the terms of sale, hold, retain and dispose of such property
without further accountability to any Grantor therefor. For purposes hereof, a
written agreement to purchase the Collateral or any portion thereof shall be
treated as a sale thereof; the Collateral Agent shall be free to carry out such
sale pursuant to such agreement and no Grantor shall be entitled to the return
of the Collateral or any portion thereof subject thereto, notwithstanding the
fact that after the Collateral Agent shall have entered into such an agreement
all Events of Default shall have been remedied and the Obligations paid in full.
As an alternative to exercising the power of sale herein conferred upon it, the
Collateral Agent may proceed by a suit or suits at law or in equity to foreclose
this Agreement and to sell the Collateral or any portion thereof pursuant to a
judgment or decree of a court or courts having competent jurisdiction or
pursuant to a proceeding by a court-appointed receiver.
SECTION 6.02. Application of Proceeds. The Collateral Agent
shall apply the proceeds of any collection or sale of the Collateral,
as well as any Collateral consisting of cash, as follows:
FIRST, to the payment of all costs and expenses incurred by the
Administrative Agent or the Collateral Agent (in its capacity as such
hereunder or under any other Loan Document) in connection with such
collection or sale or otherwise in connection with this Agreement or any
of the Obligations, including all
<PAGE> 20
21
court costs and the fees and expenses of its agents and legal counsel,
the repayment of all advances made by the Collateral Agent hereunder or
under any other Loan Document on behalf of any Grantor and any other
costs or expenses incurred in connection with the exercise of any right
or remedy hereunder or under any other Loan Document;
SECOND, to the payment in full of the Obligations (the amounts so
applied to be distributed among the Secured Parties pro rata in accordance
with the amounts of the Obligations owed to them on the date of any such
distribution); and
THIRD, to the Grantors, their successors or assigns, or as a court
of competent jurisdiction may otherwise direct.
The Collateral Agent shall have absolute discretion as to the time of
application of any such proceeds, moneys or balances in accordance with this
Agreement. Upon any sale of the Collateral by the Collateral Agent (including
pursuant to a power of sale granted by statute or under a judicial proceeding),
the receipt of the Collateral Agent or of the officer making the sale shall be a
sufficient discharge to the purchaser or purchasers of the Collateral so sold
and such purchaser or purchasers shall not be obligated to see to the
application of any part of the purchase money paid over to the Collateral Agent
or such officer or be answerable in any way for the misapplication thereof.
SECTION 6.03. Grant of License to Use Intellectual Property. For the
purpose of enabling the Collateral Agent to exercise rights and remedies under
this Article at such time as the Collateral Agent shall be lawfully entitled to
exercise such rights and remedies, subject to the provisions of any license or
other restriction applicable to such Collateral, each Grantor hereby grants to
the Collateral Agent an irrevocable, non-exclusive license (exercisable without
payment of royalty or other compensation to the Grantors) to use, license or
sub-license any of the Collateral consisting of Intellectual Property now owned
or hereafter acquired by such Grantor, and wherever the same may be located, and
including in such license reasonable access to all media in which any of the
licensed items may be recorded or stored and to all computer software and
programs used for the compilation or printout thereof. The use of such license
by the Collateral Agent shall be exercised, at the option of the Collateral
Agent, upon the occurrence and during the continuation of an Event of Default;
provided that any license, sub-license or other transaction entered into by the
Collateral Agent in accordance herewith shall be binding upon the Grantors
notwithstanding any subsequent cure of an Event of Default.
<PAGE> 21
22
ARTICLE VII
Miscellaneous
SECTION 7.01. Notices. All communications and notices hereunder shall be
in writing and given as provided in Section 9.01 of the Credit Agreement. All
communications and notices hereunder to any Subsidiary Guarantor shall be given
to it at its address or telecopy number set forth on Schedule I, with a copy to
the Borrower.
SECTION 7.02. Security Interest Absolute. All rights of the Collateral
Agent hereunder, the Security Interest and all obligations of the Grantors
hereunder shall be absolute and unconditional irrespective of (a) any lack of
validity or enforceability of the Credit Agreement, any other Loan Document, any
agreement with respect to any of the Obligations or any other agreement or
instrument relating to any of the foregoing, (b) any change in the time, manner
or place of payment of, or in any other term of, all or any of the Obligations,
or any other amendment or waiver of or any consent to any departure from the
Credit Agreement, any other Loan Document or any other agreement or instrument,
(c) any exchange, release or non-perfection of any Lien on other collateral, or
any release or amendment or waiver of or consent under or departure from any
guarantee, securing or guaranteeing all or any of the Obligations, or (d) any
other circumstance that might otherwise constitute a defense available to, or a
discharge of, any Grantor in respect of the Obligations or this Agreement.
SECTION 7.03. Survival of Agreement. All covenants, agreements,
representations and warranties made by any Grantor herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement shall be considered to have been relied upon by the
Secured Parties and shall survive the making by the Lenders of the Loans, and
the execution and delivery to the Lenders of any notes evidencing such Loans,
regardless of any investigation made by the Lenders or the other Secured Parties
or on their behalf, and shall continue in full force and effect until this
Agreement shall terminate.
SECTION 7.04. Binding Effect; Several Agreement. This Agreement shall
become effective as to any Grantor when a counterpart hereof executed on behalf
of such Grantor shall have been delivered to the Collateral Agent and a
counterpart hereof shall have been executed on behalf of the Collateral Agent,
and thereafter shall be binding upon such Grantor and the Collateral Agent and
their respective successors and assigns, and shall inure to the benefit of such
Grantor, the Collateral Agent and the other Secured Parties and their respective
successors and assigns, except that no Grantor shall have the right to assign or
transfer its rights or obligations hereunder or any interest herein or in the
Collateral (and any such assignment or transfer shall be void) except as
expressly contemplated by this Agreement or the Credit Agreement. This Agreement
shall be construed as a separate
<PAGE> 22
23
agreement with respect to each Grantor and may be amended, modified,
supplemented, waived or released with respect to any Grantor without the
approval of any other Grantor and without affecting the obligations of any other
Grantor hereunder.
SECTION 7.05. Successors and Assigns. Whenever in this Agreement any of
the parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party; and all covenants, promises and agreements
by or on behalf of any Grantor or the Collateral Agent that are contained in
this Agreement shall bind and inure to the benefit of their respective
successors and assigns.
SECTION 7.06. Collateral Agent's Fees and Expenses; Indemnification. (a)
Each Grantor jointly and severally agrees to pay upon demand to the Collateral
Agent the amount of any and all reasonable expenses, including the reasonable
fees, disbursements and other charges of its counsel and of any experts or
agents, which the Collateral Agent may incur in connection with (i) the
administration of this Agreement (including the customary fees and charges of
the Collateral Agent for any audits conducted by it or on its behalf with
respect to the Accounts Receivable or Inventory), (ii) the custody or
preservation of, or the sale of, collection from or other realization upon any
of the Collateral, (iii) the exercise, enforcement or protection of any of the
rights of the Collateral Agent hereunder or (iv) the failure of any Grantor to
perform or observe any of the provisions hereof.
(b) Without limitation of its indemnification obligations under the other
Loan Documents, each Grantor jointly and severally agrees to indemnify the
Collateral Agent and the other Indemnitees against, and hold each of them
harmless from, any and all losses, claims, damages, liabilities and related
expenses, including reasonable fees, disbursements and other charges of counsel,
incurred by or asserted against any of them arising out of, in any way connected
with, or as a result of, the execution, delivery or performance of this
Agreement or any claim, litigation, investigation or proceeding relating hereto
or to the Collateral, whether or not any Indemnitee is a party thereto; provided
that such indemnity shall not, as to any Indemnitee, be available to the extent
that such losses, claims, damages, liabilities or related expenses are
determined by a court of competent jurisdiction by final and nonappealable
judgment to have resulted from the gross negligence or willful misconduct of
such Indemnitee.
(c) Any such amounts payable as provided hereunder shall be additional
Obligations secured hereby and by the other Security Documents. The provisions
of this Section 7.06 shall remain operative and in full force and effect
regardless of the termination of this Agreement or any other Loan Document, the
consummation of the transactions contemplated hereby, the repayment of any of
the Loans, the invalidity or unenforceability of any term or provision of this
Agreement or any other Loan Document, or any investigation made by or on behalf
of the Collateral Agent or any other Secured Party. All amounts due under this
<PAGE> 23
24
Section 7.06 shall be payable on written demand therefor and shall bear interest
at the rate specified in Section 2.13 (c) (ii) of the Credit Agreement.
SECTION 7.07. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
NOTWITHSTANDING THE FOREGOING, ALL PROVISIONS OF THIS AGREEMENT, TO THE EXTENT
THEY RELATE TO DEPOSIT ACCOUNTS LOCATED IN THE STATE OF CALIFORNIA, SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
SECTION 7.08. Waivers; Amendment. (a) No failure or delay of the
Collateral Agent in exercising any power or right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the Collateral Agent hereunder
and of the Collateral Agent and the other Secured Parties under the other Loan
Documents are cumulative and are not exclusive of any rights or remedies that
they would otherwise have. No waiver of any provisions of this Agreement or any
other Loan Document or consent to any departure by any Grantor therefrom shall
in any event be effective unless the same shall be permitted by paragraph (b)
below, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on any
Grantor in any case shall entitle such Grantor or any other Grantor to any other
or further notice or demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived, amended
or modified except pursuant to an agreement or agreements in writing entered
into by the Collateral Agent and the Grantor or Grantors with respect to which
such waiver, amendment or modification is to apply, with the prior written
consent of the Required Lenders (except as otherwise provided by the Credit
Agreement).
SECTION 7.09. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.
EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER
<PAGE> 24
25
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 7.09.
SECTION 7.10. Severability. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired thereby
(it being understood that the invalidity of a particular provision in a
particular jurisdiction shall not in and of itself affect the validity of such
provision in any other jurisdiction). The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.
SECTION 7.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original but all of which when
taken together shall constitute but one contract (subject to Section 7.04), and
shall become effective as provided in Section 7.04. Delivery of an executed
signature page to this Agreement by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.
SECTION 7.12. Headings. Article and Section headings used herein are for
the purpose of reference only, are not part of this Agreement and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Agreement.
SECTION 7.13. Jurisdiction; Consent to Service of Process. (a) Each
Grantor hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that the
Collateral Agent or any other Secured Party may otherwise have to bring any
action or proceeding relating to this Agreement or the other Loan Documents
against any Grantor or its properties in the courts of any jurisdiction.
<PAGE> 25
26
(b) Each Grantor hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement or the other Loan Documents in any
New York State or Federal court. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 7.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
SECTION 7.14. Termination. This Agreement and the Security Interest shall
terminate when all the principal of and interest on each Loan and all other fees
and amounts payable under this Agreement or any other Loan Document have been
indefeasibly paid in full in cash, the LC Exposure has been reduced to zero and
the Commitments have been terminated. Upon any sale or other transfer by any
Grantor of any Collateral that is permitted under the Credit Agreement to any
Person that is not a Grantor, or, upon the effectiveness of any written consent
to the release of the security interest granted hereby in any Collateral
pursuant to Section 9.02(b) of the Credit Agreement, the security interest in
such Collateral shall be automatically released. In connection with any
termination or release pursuant to the preceding sentences, the Collateral Agent
shall execute and deliver to the Grantors, at the Grantors' expense, all
documents that such Grantor shall reasonably request to evidence such
termination or release. Any execution and delivery of documents pursuant to this
Section 7.14 shall be without recourse to or warranty by the Collateral Agent.
If all the capital stock, membership interests or other equity interests of a
Subsidiary Guarantor is (or are) sold, transferred or otherwise disposed of
pursuant to a transaction permitted by Section 6.05 of the Credit Agreement,
such Subsidiary Guarantor shall be released from its obligations under this
Agreement without further action.
SECTION 7.15. Additional Grantors. Upon execution and delivery by the
Collateral Agent and a Subsidiary of an instrument in the form of Annex 2
hereto, such Subsidiary shall become a Grantor hereunder with the same force and
effect as if originally named as a Grantor herein. The execution and delivery of
any such instrument shall not require the consent of any Grantor hereunder. The
rights and obligations of each Grantor hereunder shall remain in full force and
effect notwithstanding the addition of any new Grantor as a party to this
Agreement.
<PAGE> 26
27
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
DJ ORTHOPEDICS, LLC,
by /s/ Cyril Talbot III
------------------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
DONJOY, L.L.C.,
by /s/ Cyril Talbot III
------------------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
EACH OF THE SUBSIDIARY
GUARANTORS LISTED ON
SCHEDULE I HERETO,
by /s/ Leslie H. Cross
------------------------------
Name: Leslie H. Cross
Title: Authorized Officer
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by /s/ J. Matt MacIver, Jr.
------------------------------
Name: J. Matt MacIver, Jr.
Title: Vice President
<PAGE> 27
SCHEDULE I
SUBSIDIARY GUARANTORS
DJ Orthopedics Capital Corporation
<PAGE> 28
SCHEDULE II
COPYRIGHTS
<PAGE> 29
SCHEDULE III
LICENSES
<PAGE> 30
SCHEDULE IV
PATENTS
<PAGE> 31
SCHEDULE V
TRADEMARKS
<PAGE> 32
Annex 1 to the
Security Agreement
[Form Of]
PERFECTION CERTIFICATE
Reference is made to (a) the Credit Agreement dated as of June 30, 1999
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among the Borrower, Holdings, the lenders from time to time party
thereto (the "Lenders"), FIRST UNION NATIONAL BANK, as administrative agent (in
such capacity, the "Administrative Agent") and Collateral Agent, and THE CHASE
MANHATTAN BANK, as Syndication Agent and as issuing bank (in such capacity, the
"Issuing Bank") and (b) the Parent Guarantee Agreement dated as of June 30, 1999
(as amended, supplemented or otherwise modified from time to time, the "Parent
Guarantee Agreement"), between Holdings and the Collateral Agent and (c) the
Subsidiary Guarantee Agreement dated as of June 30, 1999 (as amended,
supplemented or otherwise modified from time to time, the "Subsidiary Guarantee
Agreement"), among the Subsidiary Guarantors and the Collateral Agent.
The undersigned, a Financial Officer and a legal officer, respectively, of
Holdings, hereby certify to the Collateral Agent and each other Secured Party as
follows:
1. Names. (a) The exact corporate or limited liability company
name of each Grantor, as such name appears in its respective
certificate of incorporation, is as follows:
(b) Set forth below is each other corporate or limited liability company
name each Grantor has had in the past five years, together with the date of the
relevant change:
(c) Except as set forth in Schedule 1 hereto, no Grantor has changed its
identity or corporate structure in any way within the past five years. Changes
in identity or corporate structure would include mergers, consolidations and
acquisitions, as well as any change in the form, nature or jurisdiction of
corporate organization. If any such change has occurred, include in Schedule 1
the information required by Sections 1 and 2 of this certificate as to each
acquiree or constituent party to a merger or consolidation.
(d) The following is a list of all other names (including trade names or
similar appellations) used by each Grantor or any of its divisions or other
business units in connection with the conduct of its business or the ownership
of its properties at any time during the past five years:
(e) Set forth below is the Federal Taxpayer Identification Number of each
Grantor:
<PAGE> 33
2. Current Locations. (a) The chief executive office of each Grantor is
located at the address set forth opposite its name below:
Grantor Mailing Address County State
- ------- --------------- ------ -----
(b) Set forth below opposite the name of each Grantor are all locations
where such Grantor maintains any books or records relating to any Accounts
Receivable (with each location at which chattel paper, if any, is kept being
indicated by an "*"):
Grantor Mailing Address County State
- ------- --------------- ------ -----
(c) Set forth below opposite the name of each Grantor are all the places
of business of such Grantor not identified in paragraph (a) or (b) above:
Grantor Mailing Address County State
- ------- --------------- ------ -----
(d) Set forth below opposite the name of each Grantor are all the
locations where such Grantor maintains any Collateral not identified above:
Grantor Mailing Address County State
- ------- --------------- ------ -----
(e) Set forth below opposite the name of each Grantor are the names and
addresses of all Persons other than such Grantor that have possession of any of
the Collateral of such Grantor:
Grantor Mailing Address County State
- ------- --------------- ------ -----
3. Unusual Transactions. All Accounts Receivable have been originated by
the Grantors and all Inventory has been acquired by the Grantors in the ordinary
course of business.
4. File Search Reports. Attached hereto as Schedule 4(A) are true copies
of file search reports from the Uniform Commercial Code filing offices where
filings described in Section 3.16 of the Credit Agreement are to be made.
Attached hereto as Schedule 4(B) is a true copy of each financing statement or
other filing identified in such file search reports.
<PAGE> 34
3
5. UCC Filings. Duly signed financing statements on Form UCC-1 in
substantially the form of Schedule 5 hereto have been prepared for filing in the
Uniform Commercial Code filing office in each jurisdiction where a Grantor has
Collateral as identified in Section 2 hereof.
6. Schedule of Filings. Attached hereto as Schedule 6 is a schedule
setting forth, with respect to the filings described in Section 5 above, each
filing and the filing office in which such filing is to be made.
7. Filing Fees. All filing fees and Taxes payable in connection with the
filings described in Section 5 above have been paid or will be paid by the end
of the day on which the Effective Date occurs.
8. Equity Ownership. Attached hereto as Schedule 8 is a true and correct
list of all the duly authorized, issued and outstanding stock, membership
interests or other equity interests of the Borrower and each Subsidiary and the
record and beneficial owners of such stock, membership interests or other equity
interests.
9. Notes. Attached hereto as Schedule 9 is a true and correct list of all
notes held by Holdings and each subsidiary of Holdings and all intercompany
notes between Holdings and each subsidiary of Holdings and between each
subsidiary of Holdings and each other such subsidiary.
10. Advances. Attached hereto as Schedule 10 is (a) a true and correct
list of all advances made by Holdings to any subsidiary of Holdings or made by
any subsidiary of Holdings to Holdings or any other subsidiary of Holdings,
which advances will be on and after the date hereof evidenced by one or more
intercompany notes pledged to the Collateral Agent under the Pledge Agreement,
and (b) a true and correct list of all unpaid intercompany transfers of goods
sold and delivered by or to Holdings or any subsidiary of Holdings.
11. Mortgage Filings. Attached hereto as Schedule 11 is a schedule setting
forth, with respect to the Mortgaged Property, (i) the exact corporate or
limited liability company name of the corporation or limited liability company
that owns such property as such name appears in its certificate of
incorporation, (ii) if different from the name identified pursuant to clause
(i), the exact name of the current record owner of such property reflected in
the records of the filing office for such property identified pursuant to the
following clause and (iii) the filing office in which the Mortgage must be filed
or recorded in order for the Collateral Agent to obtain a perfected security
interest therein.
IN WITNESS WHEREOF, the undersigned have duly executed this certificate on
this 30th day of June, 1999.
<PAGE> 35
4
DJ ORTHOPEDICS, LLC,
by
------------------------
Name:
Title:[Financial Officer]
by
------------------------
Name:
Title: [Legal Officer]
<PAGE> 36
Annex 2 to the
Security Agreement
SUPPLEMENT NO. dated as of , to the Security
Agreement dated as of June 30, 1999, among DJ ORTHOPEDICS, LLC, a
Delaware limited liability company (the "Borrower"), DONJOY
L.L.C., a Delaware limited liability company ("Holdings"), each
subsidiary of the Borrower listed on Schedule I thereto (each such
subsidiary individually a "Subsidiary Guarantor" and collectively,
the "Subsidiary Guarantors"; the Subsidiary Guarantors, Holdings
and the Borrower are referred to collectively herein as the
"Grantors") and FIRST UNION NATIONAL BANK ("First Union"), as
collateral agent (in such capacity, the "Collateral Agent") for
the Secured Parties (as defined herein).
A. Reference is made to (a) the Credit Agreement dated as of June 30, 1999
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among the Borrower, Holdings, the lenders from time to time party
thereto (the "Lenders"), First Union, as administrative agent for the Lenders
(in such capacity, the "Administrative Agent") and Collateral Agent, and THE
CHASE MANHATTAN BANK, as Syndication Agent and as issuing bank (in such
capacity, the "Issuing Bank") and (b) the Parent Guarantee Agreement dated as of
June 30, 1999 (as amended, supplemented or otherwise modified from time to time,
the "Parent Guarantee Agreement"), between Holdings and the Collateral Agent and
(c) the Subsidiary Guarantee Agreement dated as of June 30, 1999 (as amended,
supplemented or otherwise modified from time to time, the "Subsidiary Guarantee
Agreement"), among the Subsidiary Guarantors and the Collateral Agent.
B. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Security Agreement and the
Credit Agreement.
C. The Grantors have entered into the Security Agreement in order to
induce the Lenders to make Loans and the Issuing Bank to issue Letters of
Credit. Pursuant to Section 5.12 of the Credit Agreement, the Borrower is
required to cause each Subsidiary that was not in existence or not a Subsidiary
on the date of the Credit Agreement to enter into the Security Agreement as a
Grantor upon becoming a Subsidiary that is a Subsidiary Loan Party. Section 7.15
of Security Agreement provides that additional Subsidiaries of the Borrower may
become Grantors under the Security Agreement by execution and delivery of an
instrument in the form of this Supplement. The undersigned Subsidiary (the "New
Grantor") is executing this Supplement in accordance with the requirements of
the Credit Agreement to become a Grantor under the Security Agreement in order
to induce the Lenders to make additional Loans and the Issuing Bank to issue
additional Letters of Credit and as consideration for Loans previously made and
Letters of Credit previously issued.
Accordingly, the Collateral Agent and the New Grantor agree as follows:
<PAGE> 37
2
SECTION 1. In accordance with Section 7.15 of the Security Agreement, the
New Grantor by its signature below becomes a Grantor under the Security
Agreement with the same force and effect as if originally named therein as a
Grantor and the New Grantor hereby (a) agrees to all the terms and provisions of
the Security Agreement applicable to it as a Grantor thereunder and (b)
represents and warrants that the representations and warranties made by it as a
Grantor thereunder are true and correct on and as of the date hereof. In
furtherance of the foregoing, the New Grantor, as security for the payment and
performance in full of the Obligations, does hereby create and grant to the
Collateral Agent, its successors and assigns, for the benefit of the Secured
Parties, their successors and assigns, a security interest in and lien on all of
the New Grantor's right, title and interest in and to the Collateral of the New
Grantor. Each reference to a "Grantor" in the Security Agreement shall be deemed
to include the New Grantor. The Security Agreement is hereby incorporated herein
by reference.
SECTION 2. The New Grantor represents and warrants to the Collateral Agent
and the other Secured Parties that this Supplement has been duly authorized,
executed and delivered by it and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms.
SECTION 3. This Supplement may be executed in counterparts (and by
different parties hereto on different counterparts), each of which shall
constitute an original, but all of which when taken together shall constitute a
single contract. This Supplement shall become effective when the Collateral
Agent shall have received counterparts of this Supplement that, when taken
together, bear the signatures of the New Grantor and the Collateral Agent.
Delivery of an executed signature page to this Supplement by facsimile
transmission shall be as effective as delivery of a manually signed counterpart
of this Supplement.
SECTION 4. The New Grantor hereby represents and warrants that (a) set
forth on Schedule I attached hereto is a true and correct schedule of the
location of any and all Collateral of the New Grantor and (b) set forth under
its signature hereto, is the true and correct location of the chief executive
office of the New Grantor.
SECTION 5. Except as expressly supplemented hereby, the Security Agreement
shall remain in full force and effect.
SECTION 6. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. In case any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and in the Security Agreement shall not in any way be affected or
impaired thereby (it being understood that the invalidity
<PAGE> 38
3
of a particular provision in a particular jurisdiction shall not in and of
itself affect the validity of such provision in any other jurisdiction). The
parties hereto shall endeavor in good-faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions the economic effect of
which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
SECTION 8. All communications and notices hereunder shall be in writing
and given as provided in Section 7.01 of the Security Agreement. All
communications and notices hereunder to the New Grantor shall be given to it at
the address set forth under its signature below.
SECTION 9. The New Grantor agrees to reimburse the Collateral Agent for
its reasonable out-of-pocket expenses in connection with this Supplement,
including the reasonable fees, other charges and disbursements of counsel for
the Collateral Agent.
<PAGE> 39
4
IN WITNESS WHEREOF, the New Grantor and the Collateral Agent have duly
executed this Supplement to the Security Agreement as of the day and year first
above written.
[Name Of New Grantor],
by
----------------------------
Name:
Title:
Address:
--------------------
--------------------
--------------------
FIRST UNION NATIONAL BANK, as
Collateral Agent,
by
----------------------------
Name:
Title:
<PAGE> 40
SCHEDULE I
to Supplement No. to the
Security Agreement
LOCATION OF COLLATERAL
Description Location
----------- --------
<PAGE> 1
EXHIBIT 10.17
EXECUTION COPY
LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT,
AND ASSIGNMENT OF LEASES AND RENTS
================================================================================
made by
D.J. Orthopedics, LLC,
as Grantor
to
FIRST AMERICAN TITLE INSURANCE COMPANY,
as Trustee
for the benefit of
FIRST UNION NATIONAL BANK,
as Collateral Agent, as Beneficiary
================================================================================
Prepared Out of State by and,
When Recorded, Mail to:
Amy Delsack, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
<PAGE> 2
LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING
AND ASSIGNMENT OF LEASES AND RENTS
THIS LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT AND
ASSIGNMENT OF LEASES AND RENTS dated as of June 30, 1999 (this
"Deed of Trust"), by DJ Orthopedics, LLC, a Delaware limited
liability corporation, having an office at 2985 Scott Street,
Vista California, 92083 (the "Grantor"), to First American Title
Insurance Company, 114 East Fifth Street, Santa Ana, California
92701 as trustee ("Trustee") for the benefit of FIRST UNION
NATIONAL BANK, a New York banking corporation ("First Union"),
having an office at 301 South College Street, Charlotte, North
Carolina 28288 as collateral agent (in such capacity, the
"Collateral Agent") for the benefit of the Secured Parties (as
defined below) (the "Beneficiary");
WITNESSETH THAT:
A. Reference is made to the Credit Agreement dated as of June 30,
1999 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among Grantor, DonJoy, L.L.C. ("DonJoy"), a Delaware
limited liability company, the financial institutions party thereto as lenders
(together with the Swingline Lender (as defined below) the "Lenders"), First
Union, as administrative agent (in such capacity, the "Administrative Agent")
and as Collateral Agent and The Chase Manhattan Bank, as syndication agent, as
the issuing bank (in such capacity, the "Issuing Bank") and as swingline lender
(in such capacity, the "Swingline Lender"). As used herein, the term "Secured
Parties" shall mean (i) the Lenders, (ii) the Administrative Agent, (iii) the
Collateral Agent, (iv) the Issuing Bank, (v) each counterparty to a Hedging
Agreement entered into with the Borrower if such counterparty was a Lender (or
an Affiliate of a Lender) at the time the Hedging Agreement was entered into,
(vi) the beneficiaries of each indemnification obligation undertaken by the
Borrower under any Loan Document and (vii) the successors and permitted assigns
of each of the foregoing. Pursuant to the Credit Agreement, (i) the Lenders have
lent or agreed to lend to the Borrower (a) on a term basis, Term Loans (such
term and each other capitalized term used herein but not defined herein shall
have the meaning assigned to such term in the Credit Agreement) in an aggregate
principal amount not in excess of $28,500,000, and (b) on a revolving basis,
Revolving Loans, at any time after the
<PAGE> 3
Effective Date and from time to time prior to the Revolving Maturity Date, in an
aggregate principal amount at any time outstanding not in excess of the
difference between $25,000,000 and the sum of (x) the aggregate principal amount
of the Swingline Loans outstanding at such time and (y) the L/C Exposure at such
time, (ii) the Issuing Bank has agreed to issue Letters of Credit at any time
and from time to time prior to the Revolving Maturity Date, in an aggregate
stated amount at any time outstanding not in excess of the lesser of (A)
$5,000,000 and (B) the difference between $25,000,000 and the sum of (x) the
aggregate principal amount of the Swingline Loans outstanding at such time and
(y) the L/C Exposure at such time and (iii) the Swingline Lender has agreed to
lend, on a revolving basis, Swingline Loans, at any time and from time to time
prior to the Revolving Maturity Date, in an aggregate principal amount at any
time outstanding not in excess of the lesser of (A) $2,500,000 and (B) the
difference between $25,000,000 and the sum of (x) the aggregate principal amount
of the Swingline Loans outstanding at such time and (y) the L/C Exposure at such
time.
B. The obligations of the Lenders to make Loans and of the Issuing
Bank to issue Letters of Credit under the Credit Agreement are conditioned upon,
among other things, the execution and delivery by the Grantor of this Deed of
Trust in the form hereof, to secure the due and punctual payment of (a) the
principal of and premium, if any, and interest (including interest accruing
during the pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding) on
the Loans when and as due, whether at maturity, by acceleration, upon one or
more dates set for prepayment or otherwise, (b) each payment required to be made
by the Grantor under the Credit Agreement in respect of any Letter of Credit,
when and as due, including payments in respect of reimbursement of
disbursements, interest thereon and obligations to provide cash collateral, (c)
all other monetary obligations, including fees, costs, expenses and indemnities,
whether primary, secondary, direct, contingent, fixed or otherwise (including
monetary obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding, regardless of whether allowed or
allowable in such proceeding), of the Grantor to the Secured Parties under the
Credit Agreement, this Deed of Trust and the other Loan Documents to which the
Grantor is or is to be a party, (d) the due and punctual performance of all
covenants, agreements, obligations and liabilities of the Grantor under or
pursuant to the Credit Agreement, this Deed of Trust and the other Loan
Documents and (e) the due and punctual payment and performance of all
obligations of the Grantor under each Hedging Agreement entered into with a
counterparty that was a Lender (or an Affiliate of a Lender) at the time such
Hedging Agreement was entered into (all the obligations referred to in the
preceding clauses (a) through (e) being referred to collectively, as the
"Obligations").
C. Grantor is the subtenant under that certain sublease dated as of
June _, 1999, by and between, Smith & Nephew, Inc. as sublessor, and Grantor as
sublessee (such lease as amended, supplemented or otherwise modified from time
to time, the "Subject Lease").
Granting Clauses
2
<PAGE> 4
NOW THEREFORE, IN CONSIDERATION OF the foregoing and in order to secure
(A) the due and punctual payment and performance of the Obligations, (B) the due
and punctual payment by the Grantor of all taxes and insurance premiums relating
to the Trust Property and (C) all disbursements made by Beneficiary for the
payment of taxes, common area charges or insurance premiums, all fees, expenses
or advances in connection with or relating to the Trust Property, and interest
on such disbursements and other amounts not timely paid in accordance with the
terms of the Credit Agreement, this Deed of Trust and the other Loan Documents,
Grantor hereby grants, conveys, mortgages, assigns and grants a security
interest in and pledges to the Trustee, IN TRUST FOREVER, with power of sale,
for the benefit of Beneficiary (for the ratable benefit of the Secured Parties),
a security interest in, all the following described property (the "Trust
Property") whether now owned or held or hereafter acquired:
(1) all Grantor's right, title and interest in the subleasehold
estate in the land more particularly described on Exhibit A hereto (the
"Land"), as created by the Subject Lease, including all rights of Grantor
under the Subject Lease, including the easements over certain other
adjoining land granted by any easement agreements, covenant or
restrictive agreements and all air rights, mineral rights, water rights,
oil and gas rights and development rights, if any, relating thereto, and
also together with all of the other easements, rights, privileges,
interests, hereditaments and appur tenances thereunto belonging or in
anyway appertaining and all of the estate, right, title, interest, claim
or demand whatsoever of Grantor therein and in the streets and ways
adjacent thereto, either in law or in equity, in possession or
expectancy, now or hereafter acquired (the "Premises");
(2) all Grantor's right, title and interest in all buildings,
improvements, structures, paving, parking areas, walkways and landscaping
now or hereafter erected or located upon the Land, and all fixtures of
every kind and type affixed to the Premises or attached to or forming
part of any structures, buildings or improvements and replacements
thereof now or hereafter erected or located upon the Land (the
"Improvements");
(3) all Grantor's right, title and interest in all apparatus,
movable appliances, building materials, equipment, fittings, furnishings,
furniture, machinery and other articles of tangible personal property of
every kind and nature, and replacements thereof, now or at any time
hereafter placed upon or used in any way in connection with the use,
enjoyment, occupancy or operation of the Improvements or the Premises,
including all of Grantor's books and records relating thereto and
including all pumps, tanks, goods, machinery, tools, equipment, lifts
(including fire sprinklers and alarm systems, fire prevention or control
systems, cleaning rigs, air conditioning, heating, boilers,
refrigerating, electronic monitoring, water, loading, unloading,
lighting, power, sanitation, waste removal, entertainment,
communications, computers, recreational, window or structural,
maintenance, truck or car repair and all other equipment of every kind),
restaurant, bar and all other indoor or outdoor furniture (including
tables, chairs, booths, serving stands, planters, desks, sofas, racks,
shelves, lockers and cabinets), bar equipment, glasses, cutlery,
uniforms, linens, memorabilia and other decorative items, furnishings,
appliances, supplies, inventory,
3
<PAGE> 5
rugs, carpets and other floor coverings, draperies, drapery rods and
brackets, awnings, venetian blinds, partitions, chandeliers and other
lighting fixtures, freezers, refrigerators, walk-in coolers, signs
(indoor and outdoor), computer sys tems, cash registers and inventory
control systems, and all other apparatus, equipment, furniture,
furnishings, and articles used in connection with the use or operation of
the Improvements or the Premises, it being understood that the
enumeration of any specific articles of property shall in no way result
in or be held to exclude any items of property not specifically
mentioned, provided that, to the extent inconsistent with the Loan
Documents, the definitions in the Loan Documents shall control (the
property referred to in this subparagraph (3), the "Personal Property");
(4) all Grantor's right, title and interest in all general
intangibles relating to design, development, operation, management and
use of the Premises or the Improvements, all certificates of occupancy,
zoning variances, building, use or other permits, approvals,
authorizations and consents obtained from and all materials prepared for
filing or filed with any governmental agency in connection with the
development, use, operation or management of the Premises and
Improvements, all construction, service, engineering, consulting,
leasing, architectural and other similar contracts concerning the design,
construction, management, operation, occupancy and/or use of the Premises
and Improvements, all architectural drawings, plans, specifications, soil
tests, feasibility studies, appraisals, environmental studies, engi
neering reports and similar materials relating to any portion of or all
of the Premises and Improvements, and all payment and performance bonds
or warranties or guarantees relating to the Premises or the Improvements,
all to the extent assignable provided that, to the extent inconsistent
with the Loan Documents, the definitions in the Loan Documents shall
control (the "Permits, Plans and Warranties");
(5) Grantor's interest in and rights under any and all now or
hereafter existing leases or licenses (under which Grantor is landlord or
licensor) and subleases (subject to prohibitions therein) (under which
Grantor is sublandlord), concession, management, mineral or other
agreements of a similar kind that permit the use or occupancy of the
Premises or the Improvements for any purpose in return for any payment,
or the extraction or taking of any gas, oil, water or other minerals from
the Premises in return for payment of any fee, rent or royalty
(collectively, "Leases"), and all agreements or contracts for the sale or
other disposition of all or any part of the Premises or the Improvements,
now or hereafter entered into by Grantor, together with all charges,
fees, income, issues, profits, receipts, rents, revenues or royalties
payable thereunder ("Rents");
(6) Subject to Section 5.08 of the Credit Agreement, all Grantor's
right, title and interest in and to all real estate tax refunds and all
proceeds of the conversion, voluntary or involuntary, of any of the Trust
Property into cash or liquidated claims ("Proceeds"), including Proceeds
of insurance maintained by the Grantor and condemnation awards, any
awards that may become due by reason of the taking by eminent domain or
any transfer in lieu thereof of the whole or any part of the Premises or
Improvements or any rights appurtenant thereto, and any awards for change
of grade of streets, together with any and all moneys now or hereafter on
4
<PAGE> 6
deposit for the payment of real estate taxes, assessments or common area
charges levied against the Trust Property, unearned premiums on policies
of fire and other insurance maintained by the Grantor covering any
interest in the Trust Property or required by the Credit Agreement; and
(7) all Grantor's right, title and interest in and to all
extensions, improvements, betterments, renewals, substitutes and
replacements of and all additions and appurtenances to, the Land, the
Premises, the Improvements, the Personal Property, the Permits, Plans and
Warranties and the Leases, hereinafter acquired by or released to the
Grantor or constructed, assembled or placed by the Grantor on the Land,
the Premises or the Improvements, and all conversions of the security
constituted thereby, immediately upon such acquisition, release,
construction, assembling, placement or conversion, as the case may be,
and in each such case, without any further mortgage, deed of trust,
conveyance, assignment or other act by the Grantor, all of which shall
become subject to the lien of this Deed of Trust as fully and completely,
and with the same effect, as though now owned by the Grantor and
specifically described herein.
TO HAVE AND TO HOLD the Trust Property unto the Trustee, its successors
and assigns, for the benefit of Beneficiary (for the ratable benefit of the
Secured Parties), forever, subject only to the Permitted Encumbrances (as
hereinafter defined) and to satisfaction and cancelation as provided in Section
3.04. IN TRUST NEVERTHELESS, upon the terms and trust herein set forth for the
benefit and security of the Beneficiary.
ARTICLE I
Representations, Warranties and Covenants of Grantor
Grantor agrees, covenants, represents and/or warrants as follows:
SECTION 1.01. Title. (a) Grantor is lawfully seized and possessed of, and
has a valid, subsisting leasehold estate in the Land and Improvements subject to
no lien, charge or encumbrance, and this Deed of Trust is and will remain a
valid and enforceable first and prior lien on the Premises, Improvements and the
Rents subject only to, in each case, Liens permitted by Section 6.02 of the
Credit Agreement and the exceptions and encumbrances referred to in Schedule B
to the title insurance policy being issued to insure the lien of this Deed of
Trust (collectively, the "Permitted Encumbrances").
(b) Grantor has good and marketable title to or a leasehold interest in
all the Personal Property subject to no lien, charge or encumbrance other than
this Deed of Trust and the Permitted Encumbrances and as otherwise permitted by
the Credit Agreement. Except as may be permitted under the Credit Agreement, the
Personal Property is not and will not become the subject matter of any lease or
other arrangement that is not a Permitted Encumbrance whereby the ownership of
any Personal Property will be held by any person or entity other than Grantor;
except as permitted under the Credit Agreement, none of the Personal Property
will be removed from the Premises or the Improvements unless the same is no
longer needed for the continued operation of the Premises and the Improvements
as
5
<PAGE> 7
currently operated (or as then operated, to the extent that any change from the
current manner of operation was permitted by the Credit Agreement) or is
replaced by other Personal Property of substantially equal or greater utility
and value; and Grantor will not create or cause to be created (other than
Permitted Encumbrances) any security interest covering any of the Personal
Property other than the security interest in the Personal Property created in
favor of Beneficiary by this Deed of Trust or any other agreement collateral
hereto. The Trust Property is served by water, gas, electric, septic storm and
sanitary sewage facilities, and such utilities serving the Premises and the
Improvements are located in and in the future will be located fully within the
Premises. There is vehicular access to the Premises and the Improvements which
is provided by, either a public right-of-way abutting and contiguous with the
Land or valid recorded unsubordinated easements.
(c) Except as set forth on Schedule A hereto, there are no leases
affecting a material portion of the Trust Property. Each Lease is in full force
and effect, and, except as set forth on Schedule A hereto, Grantor has not
given, nor to Grantor's knowledge has it received, any uncured or unwaived
notice of default with respect to any material obligation under any Lease. Each
Lease is subject to no lien, charge or encumbrance other than this Deed of Trust
and the Permitted Encumbrances. Grantor has not received any notice of, nor has
any knowledge of any pending or contemplated condemnation proceeding affecting
the Trust Property or any sale or disposition thereof in lieu of condemnation.
(d) All easement agreements, covenant or restrictive agreements,
supplemental agreements and any other instruments hereinabove referred to and
mortgaged hereby are and will remain valid, subsisting and in full force and
effect, unless the failure to remain valid, subsisting and in full force and
effect, individually or in the aggregate, could not reasonably be expected to
have a material adverse effect on the Trust Property, and Grantor is not in
default thereunder and has fully performed the material terms thereof required
to be performed through the date hereof, and has no knowledge of any default
thereunder or failure to fully perform the terms thereof by any other party, nor
of the occurrence of any event that after notice or the passage of time or both
will constitute a default thereunder.
(e) Grantor has good and lawful right and full power and authority to
mortgage the Trust Property and will forever warrant and defend its title to the
Trust Property, the rights of Beneficiary therein under this Deed of Trust and
the validity and priority of the lien of this Deed of Trust thereon against the
claims of all persons and parties except those having rights under Permitted
Encumbrances to the extent of those rights.
(f) This Deed of Trust, when duly recorded in the appropriate public
records and when financing statements are duly filed in the appropriate public
records, will create a valid and enforceable lien upon and security interest in
all the Trust Property and there will be no defenses or offsets to this Deed of
Trust that will be asserted by Grantor or its Affiliates (or any third party
defense or offset now known to Grantor or its Affiliates) or to any of the
Obligations secured hereby for so long as any portion of the Obligations is
outstanding, other than payment of the Obligations.
SECTION 1.02. Credit Agreement; Certain Amounts. (a) This Deed of Trust
is given pursuant to the Credit Agreement. Each and every term and provision of
the Credit
6
<PAGE> 8
Agreement (excluding the governing law provisions thereof), including the
rights, remedies, obligations, covenants, conditions, agreements, indemnities,
representations and warranties of the parties thereto shall be considered as if
a part of this Deed of Trust and to the extent there is a specific conflict
between the terms hereof and the terms of the Credit Agreement (except with
respect to Section 1.01 hereof), the terms of the Credit Agreement shall
control.
(b) If any remedy or right of Trustee or Beneficiary pursuant hereto is
acted upon by Trustee or Beneficiary or if any actions or proceedings (including
any bankruptcy, insolvency or reorganization proceedings) are commenced in which
Trustee or Beneficiary is made a party and is obliged to defend or uphold or
enforce this Deed of Trust or the rights of Trustee or Beneficiary hereunder or
the terms of any Lease, or if a condemnation proceeding is instituted affecting
the Trust Property, Grantor will pay all reasonable sums, including reasonable
attorneys' fees and disbursements, incurred by Trustee or Beneficiary related to
the exercise of any remedy or right of Trustee or Beneficiary pursuant hereto or
for the reasonable expense of any such action or proceeding together with all
statutory or other costs, disbursements and allowances, interest thereon from
the date of demand for payment thereof at the rate specified in clause (b) of
Section 2.07 of the Credit Agreement (the "Default Interest Rate"), and such
sums and the interest thereon shall, to the extent permissible by law, be a lien
on the Trust Property prior to any right, title to, interest in or claim upon
the Trust Property attaching or accruing subsequent to the recording of this
Deed of Trust and shall be secured by this Deed of Trust to the extent permitted
by law. Any payment of amounts due to Trustee or Beneficiary under this Deed of
Trust not made on or before the due date for such payments shall accrue interest
daily without notice from the due date until paid at the Default Interest Rate,
and such interest at the Default Interest Rate shall be immediately due upon
demand by Trustee or Beneficiary.
SECTION 1.03. Payment of Taxes, Liens and Charges. (a) Except as may be
permitted by Section 5.03 of the Credit Agreement, Grantor will pay and
discharge from time to time prior to the time when the same shall become
delinquent, and before any interest or penalty accrues thereon or attaches
thereto, all taxes of every kind and nature, all general and special
assessments, levies, permits, inspection and license fees, all water and sewer
rents, all vault charges, and all other public charges, and all service charges,
common area charges, private maintenance charges, utility charges and all other
private charges, whether of a like or different nature, imposed upon or assessed
against the Trust Property or any part thereof or upon the Rents from the Trust
Property or arising in respect of the occupancy, use or possession thereof.
(b) At any time that an Event of Default shall occur hereunder and be
continuing, or if required by any law applicable to Grantor or to Beneficiary,
Beneficiary shall have the right to direct Grantor to make an initial deposit on
account of real estate taxes and assessments, insurance premiums and common area
charges, levied against or payable in respect of the Trust Property in advance
and thereafter semi-annually, each such deposit to be equal to one-half of any
such annual charges estimated in a reasonable manner by Beneficiary in order to
accumulate with Beneficiary sufficient funds to pay such taxes, assessments,
insurance premiums and charges.
7
<PAGE> 9
SECTION 1.04. Payment of Closing Costs. Grantor shall pay all costs in
connection with, relating to or arising out of the preparation, execution and
recording of this Deed of Trust, including title company premiums and charges,
inspection costs, survey costs, recording fees and taxes which are due,
reasonable attorneys', engineers', appraisers' and consultants' fees and
disbursements and all other similar reasonable expenses of every kind.
SECTION 1.05. Alterations and Waste; Plans. (a) Except as may be
permitted under the Credit Agreement, no Improvements will be materially altered
or demolished or removed in whole or in part by Grantor. Grantor will not erect
any additions to the existing Improvements or other structures on the Premises
which will materially interfere with the operation conducted thereon on the date
hereof, without the written consent of Beneficiary. Grantor will not commit any
waste on the Trust Property or make any alteration to, or change in the use of,
the Trust Property that will diminish the utility thereof for the operation of
the business except as may be permitted under the Credit Agreement or materially
in crease any ordinary fire or other hazard arising out of construction or
operation, but in no event shall any such alteration or change be contrary to
the terms of any insurance policy required to be kept pursuant to Section 1.06.
In accordance with the Credit Agreement, Grantor will maintain and operate the
Improvements and Personal Property in good repair, working order and condition,
reasonable wear and tear excepted.
(b) To the extent the same exist on the date hereof or are obtained in
connection with future permitted alterations, Grantor shall maintain a complete
set of final plans, specifications, blueprints and drawings for the Trust
Property either at the Trust Property or in a particular office at the
headquarters of Grantor to which Beneficiary shall have access upon reasonable
advance notice and at reasonable times.
SECTION 1.06. Insurance. Grantor will keep or cause to be kept the
Improvements and Personal Property insured against such risks, and in the
manner, required by Section 5.02 of the Credit Agreement.
SECTION 1.07. Casualty; Restoration of Casualty Damage. The Grantor
shall, in accordance with Section 5.12 of the Credit Agreement, give Beneficiary
prompt written notice of any Casualty to the Trust Property. Subject to the
limitations and provisions of Section 5.12 of the Credit Agreement, payment of
any loss will be made directly in its entirety to Beneficiary and any such
proceeds relating to a Casualty shall be held or applied by Beneficiary in
accordance with Section 5.12 of the Credit Agreement.
SECTION 1.08. Condemnation/Eminent Domain. The Grantor shall, in
accordance with Section 5.12 of the Credit Agreement, notify the Beneficiary
promptly upon obtaining knowledge of any pending or threatened Condemnation of
the Trust Property. All Condemnation Proceeds shall be held and applied by
Beneficiary in accordance with Section 5.12 of the Credit Agreement.
SECTION 1.09. Assignment of Leases and Rents. (a) Grantor hereby
irrevocably and absolutely grants, transfers and assigns to the Trustee for the
benefit of Beneficiary (for the ratable benefit of the Secured Parties), all of
its right title and interest in all Leases, together with any and all extensions
and renewals thereof for purposes of securing and discharging the
8
<PAGE> 10
performance by Grantor of the Obligations. Grantor has not assigned or executed
any assignment of, and will not assign or execute any assignment of, any other
Lease or their respective Rents to anyone other than Trustee for the benefit of
Beneficiary (for the ratable benefit of the Secured Parties).
(b) Without Beneficiary's prior written consent, Grantor will not (i)
modify, amend, terminate or consent to the cancelation or surrender of any Lease
if such modification, amendment, termination or consent would, in the reasonable
judgment of the Beneficiary, be adverse in any material respect to the interests
of the Lenders, the value of the Trust Property or the lien created by this Deed
of Trust or (ii) consent to an assignment of any tenant's interest in any Lease
or to a subletting thereof covering a material portion of the Trust Property.
(c) Subject to Section 1.09(d), Grantor has assigned and transferred to
Trustee for the benefit of Beneficiary (for the ratable benefit of the Secured
Parties) all of Grantor's right, title and interest in and to the Rents now or
hereafter arising from each Lease heretofore or hereafter made or agreed to by
Grantor, it being intended that this assignment establish, subject to Section
1.09(d), an absolute transfer and assignment of all Rents and all Leases to
Beneficiary and not merely to grant a security interest therein. Subject to
Section 1.09(d), Beneficiary may in Grantor's name and stead (with or without
first taking possession of any of the Trust Property personally or by receiver
as provided herein) operate the Trust Property and rent, lease or let all or any
portion of any of the Trust Property to any party or parties at such rental and
upon such terms as Beneficiary shall, in its sole discretion, determine, and may
collect and have the benefit of all of said Rents arising from or accruing at
any time thereafter or that may thereafter become due under any Lease.
(d) So long as an Event of Default shall not have occurred and be
continuing, Beneficiary will not exercise any of its rights under Section
1.09(c), and Grantor shall receive and collect the Rents accruing under any
Lease; but after the happening and during the continuance of any Event of
Default, Beneficiary may, at its option, receive and collect all Rents and enter
upon the Premises and Improvements through its officers, agents, employees or
attorneys for such purpose and for the operation and maintenance thereof.
Grantor hereby irrevocably authorizes and directs each tenant, if any, and each
successor, if any, to the interest of any tenant under any Lease, respectively,
to rely upon any notice of a claimed Event of Default sent by Beneficiary to any
such tenant or any of such tenant's successors in interest, and thereafter to
pay Rents to Beneficiary without any obligation or right to inquire as to
whether an Event of Default actually exists and even if some notice to the
contrary is received from the Grantor, who shall have no right or claim against
any such tenant or successor in interest for any such Rents so paid to
Beneficiary. Each tenant or any of such tenant's successors in interest from
whom Beneficiary or any officer, agent, attorney or employee of Beneficiary
shall have collected any Rents, shall be authorized to pay Rents to Grantor only
after such tenant or any of their successors in interest shall have received
written notice from Beneficiary that the Event of Default is no longer
continuing, unless and until a further notice of an Event of Default is given by
Beneficiary to such tenant or any of its successors in interest.
9
<PAGE> 11
(e) Beneficiary will not become a mortgagee in possession so long as it
does not enter or take actual possession of the Trust Property. In addition,
Beneficiary shall not be responsible or liable for performing any of the
obligations of the landlord under any Lease, for any waste by any tenant, or
others, for any dangerous or defective conditions of any of the Trust Property,
for negligence in the management, upkeep, repair or control of any of the Trust
Property or any other act or omission by any other person.
(f) Grantor shall furnish to Beneficiary, within 30 days after a request
by Beneficiary to do so, a written statement containing the names of all
tenants, subtenants and concessionaires of the Premises or Improvements, the
terms of any Lease, the space occupied and the rentals or license fees payable
thereunder.
SECTION 1.10. Restrictions on Transfers and Encumbrances. Except as
permitted by the Credit Agreement, Grantor shall not directly or indirectly
sell, convey, alienate, assign, lease, sublease, license, mortgage, pledge,
encumber or otherwise transfer, create, consent to or suffer the creation of any
lien, charges or any form of encumbrance upon any interest in or any part of the
Trust Property, or be divested of its title to the Trust Property or any
interest therein in any manner or way, whether voluntarily or involuntarily
(other than resulting from a Condemnation), or engage in any common,
cooperative, joint, time-sharing or other congregate ownership of all or part
thereof; provided, however, that Grantor may in the ordinary course of business
within reasonable commercial standards, enter into easement or covenant
agreements that relate to and/or benefit the operation of the Trust Property and
that do not materially or adversely affect the use and operation of the same
(except for customary utility easements that service the Trust Property, which
are permitted).
SECTION 1.11. Security Agreement. This Deed of Trust is both a mortgage
of real property and a grant of a security interest in personal property, and
shall constitute and serve as a "Security Agreement" within the meaning of the
uniform commercial code as adopted in the state wherein the Premises are located
("UCC"). Grantor has hereby granted unto Beneficiary a security interest in and
to all the Trust Property described in this Deed of Trust that is not real
property, and simultaneously with the recording of this Deed of Trust, Grantor
has filed or will file UCC financing statements, and will file continuation
statements prior to the lapse thereof, at the appropriate offices in the state
in which the Premises are located to perfect the security interest granted by
this Deed of Trust in all the Trust Property that is not real property. Grantor
hereby appoints Beneficiary as its true and lawful attorney-in-fact and agent,
for Grantor and in its name, place and stead, in any and all capacities, to
execute any document and to file the same in the appropriate offices (to the
extent it may lawfully do so), and to perform each and every act and thing
reasonably requisite and necessary to be done to perfect the security interest
contemplated by the preceding sentence. Beneficiary shall have all rights with
respect to the part of the Trust Property that is the subject of a security
interest afforded by the UCC in addition to, but not in limitation of, the other
rights afforded Beneficiary hereunder and under the Security Agreement.
SECTION 1.12. Filing and Recording. Grantor will cause this Deed of
Trust, any other security instrument creating a security interest in or
evidencing the lien hereof upon the Trust Property and each instrument of
further assurance to be filed, registered or recorded in such manner and in such
places as may be required by any present or future law in order to
10
<PAGE> 12
publish notice of and fully to protect the lien hereof upon, and the security
interest of Beneficiary in, the Trust Property. Grantor will pay all filing,
registration or recording fees, and all reasonable expenses incidental to the
execution and acknowledgment of this Deed of Trust, any mortgage supplemental
hereto, any security instrument with respect to the Personal Property, and any
instrument of further assurance and all Federal, state, county and municipal
recording, documentary or intangible taxes and other taxes, duties, imposts,
assessments and charges arising out of or in connection with the execution,
delivery and recording of this Deed of Trust, any mortgage supplemental hereto,
any security instrument with respect to the Personal Property or any instrument
of further assurance.
SECTION 1.13. Further Assurances. Upon demand by Beneficiary, Grantor
will, at the cost of Grantor and without expense to Trustee or Beneficiary, do,
execute, acknowledge and deliver all such further acts, deeds, conveyances,
mortgages, assignments, notices of assignment, transfers and assurances as
Beneficiary shall from time to time reasonably require for the better assuring,
conveying, assigning, transferring and confirming unto Beneficiary the property
and rights hereby conveyed or assigned or intended now or hereafter so to be, or
which Grantor may be or may hereafter become bound to convey or assign to
Beneficiary, or for carrying out the intention or facilitating the performance
of the terms of this Deed of Trust, or for filing, registering or recording this
Deed of Trust, and on demand, Grantor will also execute and deliver and hereby
appoints Beneficiary as its true and lawful attorney-in-fact and agent, for
Grantor and in its name, place and stead, in any and all capacities, to execute
and file to the extent it may lawfully do so, one or more financing statements,
chattel mortgages or comparable security instruments reasonably requested by
Beneficiary to evidence more effectively the lien hereof upon the Personal
Property and to perform each and every act and thing requisite and necessary to
be done to accomplish the same.
SECTION 1.14. Additions to Trust Property. All right, title and interest
of Grantor in and to all extensions, improvements, betterments, renewals,
substitutes and replacements of, and all additions and appurtenances to, the
Trust Property hereafter acquired by or released to Grantor or constructed,
assembled or placed by Grantor upon the Premises or the Improvements, and all
conversions of the security constituted thereby, immediately upon such
acquisition, release, construction, assembling, placement or conversion, as the
case may be, and in each such case without any further mortgage, conveyance,
assignment or other act by Grantor, shall become subject to the lien and
security interest of this Deed of Trust as fully and completely and with the
same effect as though now owned by Grantor and specif ically described in the
grant of the Trust Property above, but at any and all times Grantor will execute
and deliver to Beneficiary any and all such further assurances, mortgages,
conveyances or assignments thereof as Beneficiary may reasonably require for the
purpose of expressly and specifically subjecting the same to the lien and
security interest of this Deed of Trust.
SECTION 1.15. No Claims Against Trustee or Beneficiary. Nothing contained
in this Deed of Trust shall constitute any consent or request by Trustee or
Beneficiary, express or implied, for the performance of any labor or services or
the furnishing of any materials or other property in respect of the Trust
Property or any part thereof, nor as giving Grantor any right, power or
authority to contract for or permit the performance of any labor or services or
11
<PAGE> 13
the furnishing of any materials or other property in such fashion as would
permit the making of any claim against Trustee or Beneficiary in respect
thereof.
SECTION 1.16. Fixture Filing. Certain of the Trust Property is or will
become "fixtures" (as that term is defined in the UCC) on the Land, and this
Deed of Trust upon being filed for record in the real estate records of the
county wherein such fixtures are situated shall operate also as a financing
statement filed as a fixture filing in accordance with the applicable provisions
of said UCC upon such of the Trust Property that is or may become fixtures.
ARTICLE II
Defaults and Remedies
SECTION 2.01. Events of Default. It shall be an Event of Default under
this Deed of Trust if any Event of Default (as therein defined) shall exist
pursuant to the Credit Agreement.
SECTION 2.02. Demand for Payment. If an Event of Default shall occur and
be continuing, then, upon written demand of Beneficiary, Grantor will pay to
Beneficiary all amounts due hereunder and such further amount as shall be
sufficient to cover the costs and expenses of collection, including attorneys'
fees, disbursements and expenses incurred by Trustee or Beneficiary and Trustee
or Beneficiary shall be entitled and empowered to institute an action or
proceedings at law or in equity for the collection of the sums so due and
unpaid, to prosecute any such action or proceedings to judgment or final decree,
to enforce any such judgment or final decree against Grantor and to collect, in
any manner provided by law, all moneys adjudged or decreed to be payable.
SECTION 2.03. Rights To Take Possession, Operate and Apply Revenues. (a)
If an Event of Default shall occur and be continuing, Grantor shall, upon demand
of Beneficiary, forthwith surrender to Beneficiary actual possession of the
Trust Property and, if and to the extent permitted by law, Beneficiary itself,
or by such officers or agents as it may appoint, may then enter and take
possession of all the Trust Property without the appointment of a receiver or an
application therefor, exclude Grantor and its agents and employees wholly
therefrom, and have access to the books, papers and accounts of Grantor.
(b) If Grantor shall for any reason fail to surrender or deliver the
Trust Property or any part thereof after such demand by Beneficiary, Beneficiary
may obtain a judgment or decree conferring upon Beneficiary the right to
immediate possession or requiring Grantor to deliver immediate possession of the
Trust Property to Beneficiary, to the entry of which judgment or decree Grantor
hereby specifically consents. Grantor will pay to Beneficiary, upon demand, all
reasonable expenses of obtaining such judgment or decree, including reasonable
compensation to Beneficiary's attorneys and agents with interest thereon at the
Default Interest Rate; and all such expenses and compensation shall, until paid,
be secured by this Deed of Trust.
12
<PAGE> 14
(c) Upon every such entry or taking of possession, Beneficiary may hold,
store, use, operate, manage and control the Trust Property, conduct the business
thereof and, from time to time, (i) make all necessary and proper maintenance,
repairs, renewals, replacements, additions, betterments and improvements thereto
and thereon, (ii) purchase or otherwise acquire additional fixtures, personalty
and other property, (iii) insure or keep the Trust Property insured, (iv) manage
and operate the Trust Property and exercise all the rights and powers of Grantor
to the same extent as Grantor could in its own name or otherwise with respect to
the same, or (v) enter into any and all agreements with respect to the exercise
by others of any of the powers herein granted Beneficiary, all as may from time
to time be directed or determined by Beneficiary to be in its best interest and
Grantor hereby appoints Beneficiary as its true and lawful attorney-in-fact and
agent, for Grantor and in its name, place and stead, in any and all capacities,
to perform any of the foregoing acts. Beneficiary may collect and receive all
the Rents, issues, profits and revenues from the Trust Property, including those
past due as well as those accruing thereafter, and, after deducting (i) all
expenses of taking, holding, managing and operating the Trust Property
(including compensation for the services of all persons employed for such
purposes), (ii) the costs of all such maintenance, repairs, renewals,
replacements, additions, betterments, improvements, purchases and acquisitions,
(iii) the costs of insurance, (iv) such taxes, assessments and other similar
charges as Beneficiary may at its option pay, (v) other proper charges upon the
Trust Property or any part thereof and (vi) the compensation, expenses and
disbursements of the attorneys and agents of Beneficiary, Beneficiary shall
apply the remainder of the moneys and proceeds so received first to the payment
of the Beneficiary for the satisfaction of the Obligations, and second, if there
is any surplus, to Grantor, subject to the entitlement of others thereto under
applicable law.
(d) Whenever, before any sale of the Trust Property under Section 2.06,
all Obligations that are then due shall have been paid and all Events of Default
fully cured, Beneficiary will surrender possession of the Trust Property back to
Grantor, its successors or assigns. The same right of taking possession shall,
however, arise again if any subsequent Event of Default shall occur and be
continuing.
SECTION 2.04. Right To Cure Grantor's Failure to Perform. If an Event of
Default has occurred and is continuing, should Grantor fail in the payment,
performance or observance of any term, covenant or condition required by this
Deed of Trust or the Credit Agreement (with respect to the Trust Property),
Beneficiary may pay, perform or observe the same, and all payments made or costs
or expenses incurred by Beneficiary in connection therewith shall be secured
hereby and shall be, without demand, immediately repaid by Grantor to
Beneficiary with interest thereon at the Default Interest Rate. Beneficiary
shall be the judge using reasonable discretion of the necessity for any such
actions and of the amounts to be paid. Beneficiary is hereby empowered to enter
and to authorize others to enter upon the Premises or the Improvements or any
part thereof for the purpose of performing or observing any such defaulted term,
covenant or condition without having any obligation to so perform or observe and
without thereby becoming liable to Grantor, to any person in possession holding
under Grantor or to any other person.
SECTION 2.05. Right to a Receiver. If an Event of Default shall occur and
be continuing, Beneficiary, upon application to a court of competent
jurisdiction, shall be
13
<PAGE> 15
entitled as a matter of right to the appointment of a receiver to take
possession of and to operate the Trust Property and to collect and apply the
Rents. The receiver shall have all of the rights and powers permitted under the
laws of the state wherein the Trust Property is located. Grantor shall pay to
Beneficiary upon demand all reasonable expenses, including receiver's fees,
reasonable attorney's fees and disbursements, costs and agent's compensation
incurred pursuant to the provisions of this Section 2.05; and all such expenses
shall be secured by this Deed of Trust and shall be, without demand, immediately
repaid by Grantor to Beneficiary with interest thereon at the Default Interest
Rate.
SECTION 2.06. Foreclosure and Sale. (a) If an Event of Default shall
occur and be continuing, Beneficiary may elect to sell or to cause and direct
the Trustee to sell the Trust Property or any part of the Trust Property by
exercise of the power of foreclosure or of sale granted to Trustee and/or
Beneficiary by applicable law or this Deed of Trust. In such case, Trustee or
Beneficiary may commence a civil action to foreclose this Deed of Trust, or
Trustee may proceed and sell the Trust Property to satisfy any Obligation.
Trustee or Beneficiary or an officer appointed by a judgment of foreclosure to
sell the Trust Property, may sell all or such parts of the Trust Property as may
be chosen by Trustee or Beneficiary at the time and place of sale fixed by it in
a notice of sale, either as a whole or in separate lots, parcels or items as
Trustee or Beneficiary shall deem expedient, and in such order as it may
determine, at public auction to the highest bidder. Trustee or Beneficiary or an
officer appointed by a judgment of foreclosure to sell the Trust Property may
postpone any fore closure or other sale of all or any portion of the Trust
Property by public announcement at such time and place of sale, and from time to
time thereafter may postpone such sale by public announcement or subsequently
noticed sale. Without further notice, Trustee or Beneficiary or an officer
appointed to sell the Trust Property may make such sale at the time fixed by the
last postponement, or may, in its discretion, give a new notice of sale. Any
person, including Grantor or Beneficiary or any designee or affiliate thereof,
may purchase at such sale.
(b) The Trust Property may be sold subject to unpaid taxes and Permitted
Encumbrances, and, after deducting all costs, fees and expenses of Trustee and
Beneficiary (including costs of evidence of title in connection with the sale),
Trustee or Beneficiary or an officer that makes any sale shall apply the
proceeds of sale in the manner set forth in Section 2.08.
(c) Any foreclosure or other sale of less than the whole of the Trust
Property or any defective or irregular sale made hereunder shall not exhaust the
power of foreclosure provided for herein; and subsequent sales may be made
hereunder until the Obligations have been satisfied, or the entirety of the
Trust Property has been sold.
(d) If an Event of Default shall occur and be continuing, Trustee or
Beneficiary may instead of, or in addition to, exercising the rights described
in Section 2.06(a) above and either with or without entry or taking possession
as herein permitted, proceed by a suit or suits in law or in equity or by any
other appropriate proceeding or remedy (i) to specifically enforce payment of
some or all of the Obligations, or the performance of any term, covenant,
condition or agreement of this Deed of Trust or any other Loan Document or any
other right,
14
<PAGE> 16
or (ii) to pursue any other remedy available to Trustee or Beneficiary, all as
Trustee or Beneficiary shall determine most effectual for such purposes.
SECTION 2.07. Other Remedies. (a) In case an Event of Default shall occur
and be continuing, Beneficiary may also exercise, to the extent not prohibited
by law, any or all of the remedies available to a secured party under the UCC.
(b) In connection with a sale of the Trust Property or any Personal
Property and the application of the proceeds of sale as provided in Section
2.08, Beneficiary shall be entitled to enforce payment of and to receive up to
the principal amount of the Obligations, plus all other charges, payments and
costs due under this Deed of Trust, and to recover a deficiency judgment for any
portion of the aggregate principal amount of the Obligations remaining unpaid,
with interest.
SECTION 2.08. Application of Sale Proceeds and Rents. After any
foreclosure sale of all or any of the Trust Property, Trustee or Beneficiary
shall receive the proceeds of sale, no purchaser shall be required to see to the
application of the proceeds and Trustee or Beneficiary shall apply the proceeds
of the sale together with any Rents that may have been collected and any other
sums that then may be held by Trustee or Beneficiary under this Deed of Trust as
follows:
FIRST, to the payment of the costs and expenses of such sale,
including compensation to Trustee or Beneficiary's attorneys and agents,
and of any judicial proceedings wherein the same may be made, and of all
expenses, liabilities and advances made or incurred by Beneficiary under
this Deed of Trust, together with interest at the Default Interest Rate
on all advances made by Beneficiary, including all taxes or assessments
(except any taxes, assessments or other charges subject to which the
Trust Property shall have been sold) and the cost of removing any
Permitted Encumbrance (except any Permitted Encumbrance subject to which
the Trust Property was sold);
SECOND, to the Beneficiary for the distribution to the Secured
Parties for the satisfaction of the Obligations owed to the Secured
Parties; and
THIRD, to the Grantor, its successors or assigns, or as a court of
competent jurisdiction may otherwise direct.
The Beneficiary shall have absolute discretion as to the time of application of
any such proceeds, moneys or balances in accordance with this Deed of Trust.
Upon any sale of the Trust Property by the Trustee or Beneficiary (including
pursuant to a power of sale granted by statute or under a judicial proceeding),
the receipt of the Trustee or Beneficiary or of the officer making the sale
shall be a sufficient discharge to the purchaser or purchasers of the Trust
Property so sold and such purchaser or purchasers shall not be obligated to see
to the application of any part of the purchase money paid over to the Trustee
or Beneficiary or such officer or be answerable in any way for the
misapplication thereof.
15
<PAGE> 17
SECTION 2.09. Grantor as Tenant Holding Over. If Grantor remains in
possession of any of the Trust Property after any foreclosure sale by Trustee or
Beneficiary, at Beneficiary's election Grantor shall be deemed a tenant holding
over and shall forthwith surrender possession to the purchaser or purchasers at
such sale or be summarily dispossessed or evicted according to provisions of law
applicable to tenants holding over.
SECTION 2.10. Waiver of Appraisement, Valuation, Stay, Extension and
Redemption Laws. Grantor waives, to the extent not prohibited by law, (i) the
benefit of all laws now existing or that hereafter may be enacted providing for
any appraisement of any portion of the Trust Property, (ii) the benefit of all
laws now existing or that may be hereafter enacted in any way extending the time
for the enforcement or the collection of amounts due under any of the
Obligations or creating or extending a period of redemption from any sale made
in collecting said debt or any other amounts due Beneficiary, (iii) any right to
at any time insist upon, plead, claim or take the benefit or advantage of any
law now or hereafter in force providing for any appraisement, homestead
exemption valuation, stay, statute of limitations extension or redemption, or
sale of the Trust Property as separate tracts, units or estates or as a single
parcel in the event of foreclosure or notice of deficiency, and (iv) all rights
of redemption, valuation, appraisement, stay of execution, notice of election to
mature or declare due the whole of or each of the Obligations and marshaling in
the event of foreclosure of this Deed of Trust.
SECTION 2.11. Discontinuance of Proceedings. In case Trustee or
Beneficiary shall proceed to enforce any right, power or remedy under this Deed
of Trust by foreclosure, entry or otherwise, and such proceedings shall be
discontinued or abandoned for any reason, or shall be determined adversely to
Trustee or Beneficiary, then and in every such case Grantor, Trustee and
Beneficiary shall be restored to their former positions and rights hereunder,
and all rights, powers and remedies of Trustee or Beneficiary shall continue as
if no such proceeding had been taken.
SECTION 2.12. Suits To Protect the Trust Property. Trustee and/or
Beneficiary shall have power (a) to institute and maintain suits and proceedings
to prevent any impairment of the Trust Property by any acts that may be unlawful
or in violation of this Deed of Trust, (b) to preserve or protect its interest
in the Trust Property and in the Rents arising therefrom and (c) to restrain the
enforcement of or compliance with any legislation or other governmental
enactment, rule or order that may be unconstitutional or otherwise invalid if
the enforcement of or compliance with such enactment, rule or order would impair
the security or be prejudicial to the interest of Trustee or Beneficiary
hereunder.
SECTION 2.13. Filing Proofs of Claim. In case of any receivership,
insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or
other proceedings affecting Grantor, Beneficiary shall, to the extent permitted
by law, be entitled to file such proofs of claim and other documents as may be
necessary or advisable in order to have the claims of Beneficiary allowed in
such proceedings for the Obligations secured by this Deed of Trust at the date
of the institution of such proceedings and for any interest accrued, late
charges and additional interest or other amounts due or that may become due and
payable hereunder after such date.
16
<PAGE> 18
SECTION 2.14. Possession by Beneficiary. Notwithstanding the appointment
of any receiver, liquidator or trustee of Grantor, any of its property or the
Trust Property, Beneficiary shall be entitled, to the extent not prohibited by
law, to remain in possession and control of all parts of the Trust Property now
or hereafter granted under this Deed of Trust to Beneficiary in accordance with
the terms hereof and applicable law.
SECTION 2.15. Waiver. (a) No delay or failure by Trustee or Beneficiary
to exercise any right, power or remedy accruing upon any breach or Event of
Default shall exhaust or impair any such right, power or remedy or be construed
to be a waiver of any such breach or Event of Default or acquiescence therein;
and every right, power and remedy given by this Deed of Trust to Trustee or
Beneficiary may be exercised from time to time and as often as may be deemed
expedient by Trustee or Beneficiary. No consent or waiver by Beneficiary to or
of any breach or default by Grantor in the performance of the Obligations shall
be deemed or construed to be a consent or waiver to or of any other breach or
Event of Default in the performance of the same or any other Obligations by
Grantor hereunder. No failure on the part of Beneficiary to complain of any act
or failure to act or to declare an Event of Default, irrespective of how long
such failure continues, shall constitute a waiver by Beneficiary of its rights
hereunder or impair any rights, powers or remedies consequent on any future
Event of Default by Grantor.
(b) Even if Beneficiary (i) grants some forbearance or an extension of
time for the payment of any sums secured hereby, (ii) takes other or additional
security for the payment of any sums secured hereby, (iii) waives or does not
exercise some right granted herein or under the Loan Documents, (iv) releases a
part of the Trust Property from this Deed of Trust, (v) agrees to change some of
the terms, covenants, conditions or agreements of any of the Loan Documents,
(vi) consents to the filing of a map, plat or replat affecting the Premises
(vii) consents to the granting of an easement or other right affecting the
Premises or (viii) makes or consents to an agreement subordinating Beneficiary's
lien on the Trust Property hereunder; no such act or omission shall preclude
Beneficiary from exercising any other right, power or privilege herein granted
or intended to be granted in the event of any breach or Event of Default then
made or of any subsequent default; nor, except as otherwise expressly provided
in an instrument executed by Trustee and Beneficiary, shall this Deed of Trust
be altered thereby. In the event of the sale or transfer by operation of law or
otherwise of all or part of the Trust Property, Beneficiary is hereby authorized
and empowered to deal with any vendee or transferee with reference to the Trust
Property secured hereby, or with reference to any of the terms, covenants,
conditions or agreements hereof, as fully and to the same extent as it might
deal with the original parties hereto and without in any way releasing or
discharging any liabilities, obligations or undertakings.
SECTION 2.16. Remedies Cumulative. No right, power or remedy conferred
upon or reserved to Trustee or Beneficiary by this Deed of Trust is intended to
be exclusive of any other right, power or remedy, and each and every such
right, power and remedy shall be cumulative and concurrent and in addition to
any other right, power and remedy given hereunder or now or hereafter existing
at law or in equity or by statute.
17
<PAGE> 19
ARTICLE III
Miscellaneous
SECTION 3.01. Partial Invalidity. In the event any one or more of the
provisions contained in this Deed of Trust shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such validity, illegality or
unenforceability shall, at the option of Beneficiary, not affect any other
provision of this Deed of Trust, and this Deed of Trust shall be construed as if
such invalid, illegal or unenforceable provision had never been contained herein
or therein.
SECTION 3.02. Notices. All communications and notices hereunder shall be
in writing and given to Trustee in accordance with the terms of the Credit
Agreement at the address set forth on the first page of this Deed of Trust and
to Grantor or the Collateral Agent, as provided in the Credit Agreement.
SECTION 3.03. Successors and Assigns. All of the grants, covenants,
terms, provisions and conditions herein shall run with the Premises and the
Improvements and shall apply to, bind and inure to, the benefit of the permitted
successors and assigns of Grantor and the successors and assigns of Beneficiary.
SECTION 3.04. Satisfaction and Cancelation. (a) The conveyance to Trustee
of the Trust Property for the benefit of Beneficiary (for the ratable benefit of
the Secured Parties) created and consummated by this Deed of Trust shall be null
and void when all the Obligations have been indefeasibly paid in full in
accordance with the terms of the Loan Documents and the Lenders have no further
commitment to make Loans under the Credit Agreement, no Letters of Credit are
outstanding and the Issuing Bank has no further obligation to issue Letters of
Credit under the Credit Agreement.
(b) The lien of this mortgage shall be released from such portion of the
Trust Property as is required pursuant to and in accordance with the operative
provisions of Section 6.05 of the Credit Agreement.
(c) In connection with any termination or release pursuant to paragraph
(a), the Deed of Trust shall be marked "satisfied" by the Beneficiary and/or
Trustee, and this Deed of Trust shall be canceled of record at the request and
at the expense of the Grantor. Beneficiary and Trustee shall execute any
documents reasonably requested by Grantor to accomplish the foregoing or to
accomplish any release contemplated by paragraph (a) and Grantor will pay all
costs and expenses, including reasonable attorneys' fees, disbursements and
other charges, incurred by Beneficiary and Trustee in connection with the
preparation and execution of such documents.
SECTION 3.05. Definitions. As used in this Deed of Trust, the singular
shall include the plural as the context requires and the following words and
phrases shall have the following meanings: (a) "including" shall mean "including
but not limited to"; (b) "provisions" shall mean "provisions, terms, covenants
and/or conditions"; (c) "lien" shall mean "lien, charge, encumbrance, security
interest, mortgage or deed of trust";
18
<PAGE> 20
(d) "obligation" shall mean "obligation, duty, covenant and/or condition"; and
(e) "any of the Trust Property" shall mean "the Trust Property or any part
thereof or interest therein". Any act that Trustee or Beneficiary is permitted
to perform hereunder may be performed at any time and from time to time by
Trustee Beneficiary or any person or entity designated by Trustee or
Beneficiary. Any act that is prohibited to Grantor hereunder is also prohibited
to all lessees of any of the Trust Property. Each appointment of Trustee or
Beneficiary as attorney-in-fact for Grantor under the Deed of Trust is
irrevocable, with power of substitution and coupled with an interest. Subject to
the applicable provisions hereof, Beneficiary has the right to refuse to grant
its consent, approval or acceptance or to indicate its satisfaction, in its sole
discretion, whenever such consent, approval, acceptance or satisfaction is
required hereunder.
SECTION 3.06. Multisite Real Estate Transaction. Grantor acknowledges
that this Deed of Trust is one of a number of Security Documents that secure the
Obligations. Grantor agrees that the lien of this Deed of Trust shall be
absolute and unconditional and shall not in any manner be affected or impaired
by any acts or omissions whatsoever of Trustee or Beneficiary and without
limiting the generality of the foregoing, the lien hereof shall not be impaired
by any acceptance by the Trustee or Beneficiary of any security for or
guarantees of any of the Obligations hereby secured, or by any failure, neglect
or omission on the part of Trustee or Beneficiary to realize upon or protect any
Obligation or indebtedness hereby secured or any collateral security therefor
including other Security Documents, except as otherwise provided by the laws of
the State of California. The lien hereof shall not in any manner be impaired or
affected by any release (except as to the property released), sale, pledge,
surrender, compromise, settlement, renewal, extension, indulgence, alteration,
changing, modification or disposition of any of the Obligations secured or of
any of the collateral security therefor, including other Security Documents or
of any guarantee thereof, and Trustee or Beneficiary may at its discretion
foreclose, exercise any power of sale, or exercise any other remedy available to
it under any or all of the other Security Documents without first exercising or
enforcing any of its rights and remedies hereunder. Such exercise of Trustee's
or Beneficiary's rights and remedies under any or all of the other Security
Documents shall not in any manner impair the indebtedness hereby secured or the
lien of this Deed of Trust and any exercise of the rights or remedies of Trustee
or Beneficiary hereunder shall not impair the lien of any other Security
Documents or any of Trustee's or Beneficiary's rights and remedies thereunder.
The Grantor specifically consents and agrees that Beneficiary may exercise its
rights and remedies hereunder and under the other Security Documents separately
or concurrently and in any order that it may deem appropriate and waives any
rights of subrogation.
19
<PAGE> 21
ARTICLE IV
Particular Provisions
This Deed of Trust is subject to the following provisions relating to the
particular laws of the state wherein the Premises are located:
SECTION 4.01. Applicable Law; Certain Particular Provisions. This Deed of
Trust shall be governed by and construed in accordance with the internal law of
the State of New York; provided, however, that the provisions of this Deed of
Trust relating to the creation, perfection and enforcement of the lien and
security interest created by this Deed of Trust in respect of the Trust Property
and the exercise of each remedy provided hereby, including the power of
foreclosure or power of sale procedures set forth in this Deed of Trust, shall
be governed by and construed in accordance with the internal law of the state
where the Trust Property is located, and Grantor and Beneficiary agrees to
submit to jurisdiction and the laying of venue for any suit on this Deed of
Trust in such state. The terms and provisions set forth in Appendix A attached
hereto are hereby incorporated by reference as though fully set forth herein. In
the event of any conflict between the terms and provisions contained in the body
of this Deed of Trust and the terms and provisions set forth in Appendix A, the
terms and provisions set forth in Appendix A shall govern and control.
SECTION 4.02. Trustee's Powers and Liabilities. (a) Trustee, by
acceptance hereof, covenants faithfully to perform and fulfill the trusts herein
created, being liable, however, only for gross negligence, bad faith or wilful
misconduct, and hereby waives any statutory fee and agrees to accept reasonable
compensation, in lieu thereof, for any services rendered by it in accordance
with the terms hereof. All authorities, powers and discretions given in this
Deed of Trust to Trustee and/or Beneficiary may be exercised by either, without
the other, with the same effect as if exercised jointly.
(b) Trustee may resign at any time upon giving 30 days' notice in writing
to Grantor and to Beneficiary.
(c) Beneficiary may remove Trustee at any time or from time to time and
select a successor trustee. In the event of the death, removal, resignation,
refusal to act, inability to act or absence of Trustee from the state in which
the premises are located, or in its sole discretion for any reason whatsoever,
Beneficiary may, upon notice to the Grantor and without specifying the reason
therefor and without applying to any court, select and appoint a successor
trustee, and all powers, rights, duties and authority of the former Trustee, as
aforesaid, shall thereupon become vested in such successor. Such substitute
trustee shall not be required to give bond for the faithful performance of his
duties unless required by Beneficiary. Such substitute trustee shall be
appointed by written instrument duly recorded in the county where the Land is
located. Grantor hereby ratifies and confirms any and all acts that the herein
named Trustee, or his successor or successors in this trust, shall do lawfully
by virtue hereof. Grantor hereby agrees, on behalf of itself and its heirs,
executors, administrators and assigns, that the recitals contained in any deed
or deeds executed in due form by any Trustee or substitute trustee, acting under
the provisions of this instrument, shall be prima facie evidence of the facts
recited, and that it shall not be necessary to prove in any
20
<PAGE> 22
court, otherwise than by such recitals, the existence of the facts essential to
authorize the execution and delivery of such deed or deeds and the passing of
title thereby.
(d) Trustee shall not be required to see that this Deed of Trust is
recorded, nor liable for its validity or its priority as a first deed of trust,
or otherwise, nor shall Trustee be answerable or responsible for performance or
observance of the covenants and agreements imposed upon Grantor or Beneficiary
by this Deed of Trust or any other agreement. Trustee, as well as Beneficiary,
shall have authority in their respective discretion to employ agents and
attorneys in the execution of this trust and to protect the interest of the
Beneficiary hereunder, and to the extent permitted by law they shall be
compensated and all expenses relating to the employment of such agents and/or
attorneys, including expenses of litigations, shall be paid out of the proceeds
of the sale of the Trust Property conveyed hereby should a sale be had, but if
no such sale be had, all sums so paid out shall be recoverable to the extent
permitted by law by all remedies at law or in equity.
(e) At any time, or from time to time, without liability therefor and
with 10 days' prior written notice to Grantor, upon written request of
Beneficiary and without affecting the effect of this Deed of Trust upon the
remainder of the Trust Property, Trustee may (i) reconvey any part of the Trust
Property, (ii) consent in writing to the making of any map or plat thereof, so
long as Grantor has consented thereto, (iii) join in granting any easement
thereon, so long as Grantor has consented thereto, or (iv) join in any extension
agreement or any agreement subordinating the lien or charge hereof.
ARTICLE V
Subject Lease
SECTION 5.01. The Subject Lease. (a) The Subject Lease is a valid and
subsisting lease of that portion of the Premises demised thereunder for the term
therein set forth, is in full force and effect in accordance with the terms
thereof, and has not been modified except as expressly set forth herein. Grantor
has delivered to Beneficiary a true, correct and complete copy of the Subject
Lease. No material default exists, and to the Grantor's actual knowledge, no
event or act has occurred and no condition exists which with the passage of time
or the giving of notice or both would constitute a default, under the Subject
Lease.
(b) Without the prior written consent of Beneficiary, Grantor will not
modify, amend, or in any way alter the terms of the Subject Lease if such
modification, amendment or alteration would increase the monetary obligations,
except to a de minimis extent, of the Grantor under the Subject Lease or
otherwise be adverse in any respect to the interests of Beneficiary or the value
of the Trust Property. Except to the extent permitted under the Credit
Agreement, without the prior written consent of Beneficiary, Grantor will not
(i) in any way cancel, release, terminate, surrender or reduce the term of the
Subject Lease, (ii) waive, excuse, condone or in any way release or discharge
landlord of or from the obligations, covenants, conditions and agreements by
said landlord to be done and performed and (iv) consent to the subordination of
the Subject Lease to any mortgage except if Grantor and Beneficiary receive a
nondisturbance agreement reasonably acceptable to Beneficiary.
21
<PAGE> 23
Any attempt on the part of Grantor to do any of the foregoing without such
written consent of Beneficiary shall be null and void and of no effect and shall
constitute a Default hereunder.
(c) Grantor shall at all times promptly and faithfully keep and perform
in all material respects, or cause to be kept and performed in all material
respects, all the covenants and conditions contained in the Subject Lease by the
lessee therein to be kept and performed and shall in all material respects
conform to and comply with the terms and conditions of the Subject Lease and
Grantor further covenants that it will not knowingly do or permit anything to be
done, the doing of which, or refrain from doing anything, the omission of which,
will impair the security of this Deed of Trust or will be reason for declaring a
default under the Subject Lease.
(d) Grantor shall give Trustee and Beneficiary prompt notice in writing
of any default on the part of the landlord under the Subject Lease or of the
receipt by Grantor of any notice of default from the landlord thereunder by
providing to Trustee and Beneficiary a copy of any such notice received by
Grantor from such landlord and this shall be done without regard to the fact
that Trustee or Beneficiary may be entitled to such notice directly from the
landlord. Grantor shall promptly notify Trustee and Beneficiary of any default
under the Subject Lease by landlord or giving of any notice by the landlord to
Grantor of such landlord's intention to end the term thereof. Grantor shall
furnish to Trustee or Beneficiary promptly upon Trustee's or Beneficiary's
request any and all information concerning the performance by Grantor of the
covenants of the Subject Lease and shall permit Trustee or Beneficiary or its
representative at all reasonable times, upon reasonable notice, to make
investigation or examination concerning the performance by Grantor of the
covenants of the Subject Lease. Grantor shall deposit with Trustee and
Beneficiary an exact copy of any notice, communication, plan, specification or
other instrument or document received or given by Grantor in any way relating to
or affecting the Subject Lease which may concern or affect the estate of the
landlord or the lessee in or under the Subject Lease or the property leased
thereby.
(e) If an Event of Default has occurred and is continuing, Trustee or
Beneficiary may (but shall not be obligated to) take any such action Trustee or
Beneficiary deems necessary or desirable to cure, in whole or in part, any
failure of compliance by Grantor under the Subject Lease; and upon the receipt
by Trustee or Beneficiary from Grantor or the landlord under the Subject Lease
of any written notice of default by Grantor as the lessee thereunder, Grantor
may rely thereon, and such notice shall constitute full authority and protection
to Trustee or Beneficiary for any action taken or omitted to be taken in good
faith reliance thereon. All sums, including reasonable attorneys' fees, so
expended by the Trustee or Beneficiary to cure or prevent any such default, or
expended to sustain the lien of this Deed of Trust or its priority, shall be
deemed secured by this Deed of Trust and shall be paid by the Grantor on demand,
with interest accruing thereon at the Default Interest Rate. Grantor hereby
expressly grants to Trustee for the benefit of Beneficiary (subject to the terms
of the Subject Lease), and agrees that Trustee, for the benefit of Beneficiary
shall have, the absolute and immediate right to enter in and upon the Land and
the Improvements or any part thereof to such extent and as often as Trustee or
Beneficiary, in its discretion, deems necessary or desirable in order to cure
any such default or alleged default by Grantor.
22
<PAGE> 24
(f) Except as required by Section 5.01(g), Grantor shall not make any
election or exercise any option or right or give any consent or approval for
which a right to do so is expressly conferred upon Grantor as lessee under the
Subject Lease without Beneficiary's prior written consent unless such election,
exercise consent or approval would be adverse in any material respect to the
interests of Beneficiary. Upon the occurrence and continuance of any Event of
Default hereunder, all such rights, together with the right of termination,
cancelation, modification, change, supplement, alteration or amendment of the
Subject Lease, all of which have been assigned for collateral purposes to
Beneficiary, shall automatically vest exclusively in and be exercisable solely
by Beneficiary.
(g) Grantor shall (i) exercise any option to renew or extend the term of
the Subject Lease in such manner as will cause the term of the Subject Lease
effectively to be renewed or extended for the period provided by such option and
(ii) give immediate written notice thereof to Beneficiary; provided that in the
event of failure of Grantor so to do, Beneficiary shall have, and is hereby
granted, the irrevocable right to exercise any such option, whether in its own
name and behalf or in the name and behalf of its designee or nominee or in the
name and behalf of Grantor or in any other manner authorized under the Subject
Lease as Beneficiary shall in its sole discretion determine.
(h) Grantor will give Beneficiary prompt written notice of the
commencement of any arbitration or appraisal proceeding under and pursuant to
the provisions of the Subject Lease. Following the occurrence and during the
continuance of an Event of Default, Beneficiary shall have the right, but not
the obligation, to participate in any such proceeding and Grantor shall confer
with Beneficiary to the extent which Beneficiary deems necessary for the
protection of Beneficiary. Grantor may compromise any dispute or approval which
is the subject of an arbitration or appraisal proceeding with the prior written
consent of Beneficiary which approval will not be unreasonably withheld or
delayed.
(i) So long as this Deed of Trust is in effect, there shall be no merger
of the Subject Lease or any interest therein, or of the leasehold estate created
thereby, with the fee estate in the Land or any portion thereof by reason of the
fact that the Subject Lease or such interest therein may be held directly or
indirectly by or for the account of any person who shall hold the landlord's
leasehold estate or fee estate in the Land or any portion thereof or any
interest of the landlord under the Subject Lease. In case the Grantor acquires
fee title to the Land, this Deed of Trust shall attach to and cover and be a
lien upon the fee title or such other estate so acquired, and such fee title or
other estate shall, without further assignment, mortgage or conveyance, become
and be subject to the lien of and covered by this Deed of Trust. Grantor shall
notify Beneficiary of any such acquisition and, on written request by
Beneficiary, shall cause to be executed and recorded all such other and further
assurances or other instruments in writing as may in the reasonable opinion of
Beneficiary be necessary or appropriate to effect the intent and meaning hereof
and shall deliver to Beneficiary an endorsement to Beneficiary's loan title
insurance policy insuring that such fee title or other estate is subject to the
lien of this Deed of Trust.
(j) In the event that the Subject Lease is terminated and Grantor obtains
a new lease directly from the owner of the Trust Property, this Deed of Trust
shall attach to and cover and be a lien upon the leasehold estate so acquired
and such leasehold estate shall become and be
23
<PAGE> 25
subject to the lien of and covered by this Deed of Trust. Grantor shall notify
Beneficiary of any such lease and, on written request by Beneficiary, shall
cause to be executed and recorded all such other and further assurances or other
instruments in writing as may in the reasonable opinion of Beneficiary be
necessary or appropriate, to effect the intent and meaning hereof and shall
deliver to Beneficiary an endorsement to Beneficiary's loan title insurance
policy insuring that such leasehold estate is subject to the lien of this Deed
of Trust.
(k) In the event that the Grantor as lessee under the Subject Lease
exercises any option or right to purchase any parcel of land which option or
right is granted under said Subject Lease, then upon the vesting of the title of
such parcel in the Grantor, this Deed of Trust shall attach to and cover and be
a lien upon the fee title or such other estate so acquired, and such fee title
or other estate shall, without further assignment, mortgage or conveyance,
become and be subject to the lien of and covered by this Deed of Trust.
(l) If any action or proceeding shall be instituted to evict Grantor or
to recover possession of any leasehold parcel or any part thereof or interest
therein or any action or proceeding otherwise affecting the Subject Lease or
this Deed of Trust shall be instituted, then Grantor will, immediately upon
service thereof on or to Grantor, deliver to Beneficiary a notice of motion,
order to show cause and of all other provisions, pleadings, and papers, however
designated, served in any such action or proceeding.
(m) The lien of this Deed of Trust shall attach to all of Grantor's
rights and remedies at any time arising under or pursuant to Subsection 365(h)
of the Bankruptcy Code, 11 U.S.C. 365(h), as the same may hereafter be amended
(the "Bankruptcy Code"), including, without limitation, all of Grantor's rights
to remain in possession of each leasehold parcel.
(n) Grantor hereby unconditionally assigns, transfers and sets over to
Trustee for the benefit of Beneficiary all of Grantor's claims and rights to the
payment of damages arising from any rejection of the Subject Lease by the lessor
or any other fee owner of any leasehold parcel or any portion thereof under the
Bankruptcy Code. Notwithstanding the foregoing, provided that no Event of
Default shall have occurred and be continuing, Grantor shall have the right to
collect such damages. Beneficiary shall have the right to proceed in its own
name or in the name of Grantor in respect of any claim, suit, action or
proceeding relating to the rejection of the Subject Lease, including, without
limitation, the right to file and prosecute, without joining or the joinder of
Grantor, any proofs of claim, complaints, motions, applications, notices and
other documents, in any case with respect to the lessor or any fee owner of all
or a portion of any leasehold parcel under the Bankruptcy Code. This assignment
constitutes a present, irrevocable and unconditional assignment of the foregoing
claims, rights and remedies, and shall continue in effect until all of the
Obligations shall have been satisfied and discharged in full. Any amounts
received by Beneficiary as damages arising out of the rejection of the Subject
Lease as aforesaid shall be applied first to all costs and expenses of Trustee
or Beneficiary (including, without limitation, reasonable attorneys' fees)
incurred in connection with the exercise of any of its rights or remedies under
this paragraph. Grantor shall promptly make, execute, acknowledge and deliver,
in form and substance satisfactory to Beneficiary, a UCC financing statement
(Form UCC-1) and all such additional instruments, agreements and other
documents, as may at any time hereafter be
24
<PAGE> 26
reasonably required by Beneficiary to effectuate and carry out the assignment
pursuant to this paragraph.
(o) If pursuant to Subsection 365(h)(2) of the Bankruptcy Code, 11 U.S.C.
Section 365(h)(2), Grantor shall seek to offset against the rent reserved in the
Subject Lease the amount of any damages caused by the nonperformance by the
lessor or any fee owner of any of their respective obligations under such
Subject Lease after the rejection by the lessor or any fee owner of such Subject
Lease under the Bankruptcy Code, then Grantor shall, prior to effecting such
offset, notify Beneficiary of its intent to do so, setting forth the amount
proposed to be so offset and the basis therefor. Beneficiary shall have the
right to object to all or any part of such offset that, in the reasonable
judgment of Beneficiary, would constitute a breach of such Subject Lease, and in
the event of such objection, Grantor shall not effect any offset of the amounts
so objected to by Beneficiary. Neither Beneficiary's failure to object as
aforesaid nor any objection relating to such offset shall constitute an approval
of any such offset by Beneficiary.
(p) If an Event of Default shall occur and be continuing, if any action,
proceeding, motion or notice shall be commenced or filed in respect of the
lessor or any fee owner of any leasehold parcel, or any portion thereof or
interest therein, or the Subject Lease in connection with any case under the
Bankruptcy Code, then Beneficiary shall have the option, exercisable upon
written notice from Beneficiary to Grantor, to conduct and control any such
litigation with counsel of Beneficiary's choice. Beneficiary may proceed in its
own name or in the name of Grantor in connection with any such litigation, and
Grantor agrees to execute any and all powers, authorizations, consents or other
documents required by Beneficiary in connection therewith. Grantor shall, upon
demand, pay to Beneficiary all reasonable costs and expenses (including
attorneys' fees) paid or incurred by Beneficiary in connection with the
prosecution or conduct of any such proceedings. Grantor shall not commence any
action, suit, proceeding or case, or file any application or make any motion, in
respect of the Subject Lease in any such case under Bankruptcy Code without the
prior written consent of Beneficiary which consent shall not be unreasonably
withheld or delayed.
(q) Grantor shall, after obtaining actual knowledge thereof, promptly
notify Beneficiary of any filing by or against the lessor or fee owner of any
leasehold parcel of a petition under the Bankruptcy Code. Grantor shall promptly
deliver to Trustee and Beneficiary, following receipt, copies of any and all
notices, summonses, pleadings, applications and other documents received by
Grantor in connection with any such petition and any proceedings relating
thereto.
(r) If there shall be filed by or against Grantor a petition under the
Bankruptcy Code and Grantor, as lessee under a Subject Lease, shall determine to
reject such Subject Lease pursuant to Section 365(a) of the Bankruptcy Code,
then Grantor shall give Beneficiary not less than twenty days' prior notice of
the date on which Grantor shall apply to the Bankruptcy Court for authority to
reject such Subject Lease. Beneficiary shall have the right, but not the
obligation, to serve upon Grantor within such twenty day period a notice stating
that Beneficiary demands that Grantor assume and assign such Subject Lease to
Beneficiary pursuant to Section 365 of the Bankruptcy Code. If Beneficiary shall
serve upon Grantor the
25
<PAGE> 27
notice described in the preceding sentence, Grantor shall not seek to reject
such Subject Lease and shall comply with the demand provided for in the
preceding sentence.
(s) Effective upon the entry of an order for relief with respect to
Grantor under the Bankruptcy Code, Grantor hereby assigns and transfers to
Beneficiary a non-exclusive right to apply to the Bankruptcy Court under
subsection 365(d)(4) of the Bankruptcy Code for an order extending the period
during which the Subject Lease may be rejected or assumed.
26
<PAGE> 28
IN WITNESS WHEREOF, this Deed of Trust has been duly authorized and has
been executed and delivered to Trustee and Beneficiary by Grantor on the date
first written above.
D.J. ORTHOPEDICS, LLC,
by /s/ Cyril Talbot III
------------------------------
Name: Cyril Talbot III
Title: V.P., CFO and Secretary
Attest:
by /s/ Nicole L. Fenton
----------------------------
Name: Nicole L. Fenton
Witness
[CORPORATE SEAL]
27
<PAGE> 29
STATE OF CALIFORNIA
COUNTY OF SAN DIEGO
On this 25th day of June 1999, before me, the undersigned officer,
personally appeared Cyril Talbot III, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument and acknowledged to me that he/she executed the same in
his/her authorized capacity, and that his/her signature on the instrument the
person, or entity upon behalf of which the person acted, executed the
instrument.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Agnes A. Cortez
--------------------
Notary Public
[SEAL]
<PAGE> 30
Exhibit A
to the Deed of Trust
Legal Description
<PAGE> 31
Schedule A
to the Deed of Trust
Leases of Trust Property
<PAGE> 32
Appendix A
Deed of Trust, Security Agreement and
Assignment of Leases and Rents
1. The following provision is hereby added to the end of Section 1.11
of this Deed of Trust:
"This Deed of Trust shall also constitute a financing statement, filed as a
fixture filing in the real estate records of the County of the State in which
the Premises is located, with respect to any and all fixtures included within
the terms "Improvements" under this Deed of Trust and to any goods or other
personal property that are now or hereafter become a part of the Trust Property
as fixtures."
2. The Trustee accepts this trust when this Deed of Trust, duly
executed and acknowledged, becomes a public record as provided by law. The
Trustee shall not be obligated to perform any act required of it hereunder
unless the performance of such act is requested in writing and the Trustee is
reasonably indemnified against loss, cost, liability and expense.
3. The Trustee (or Beneficiary) may from time to time apply in any
Court of competent jurisdiction for aid and direction in the execution of the
trusts and the enforcement of the rights and remedies available hereunder, and
the Trustee (or Beneficiary) may obtain orders or decrees directing, confirming
or approving acts in the execution of such trusts and the enforcement of such
remedies. All costs and expenses of any such proceeding (including reasonable
attorneys' fees) shall be borne by Grantor.
4. Upon an Event of Default which is continuing, Beneficiary shall
have the right, as more particularly set forth in the Credit Agreement, to
declare all or any portion of the Secured Obligations secured hereby immediately
due and payable, without presentment, demand, protest or notice of any kind, all
of which are hereby expressly waived by Grantor, and exercise any or all of the
remedies provided for in Article II hereof.
5. Notwithstanding anything to the contrary contained herein,
Beneficiary's rights and remedies under California Code of Civil Procedure
Section 736 shall not be waived, limited or otherwise adversely affected by
virtue of a full or partial credit bid upon foreclosure of this Deed of Trust.
6. The Credit Agreement, the Loan Documents, the Senior Note
Documents or the Tranche A Exchange Note Purchase Agreements (with respect to
the Trust Property) may contain provisions imposing a late charge and past due
rate of interest if payments are not timely made, and prepayment restrictions
and premiums as more particularly described in such documents.
7. GRANTOR PLEASE NOTE: IN THE EVENT OF YOUR DEFAULT, THIS DEED OF
TRUST AND APPLICABLE LAW PERMITS THE TRUSTEE TO SELL
<PAGE> 33
THE TRUST PROPERTY AT A SALE HELD WITHOUT SUPERVISION BY ANY COURT AFTER
EXPIRATION OF A PERIOD PRESCRIBED BY LAW. SEE SECTION 2.06 FOR A DESCRIPTION OF
THIS PROCEDURE. UNLESS YOU PROVIDE AN ADDRESS FOR THE GIVING OF NOTICE, YOU MAY
NOT BE ENTITLED TO OTHER NOTICE OF THE COMMENCEMENT OF SALE PROCEEDINGS. BY
EXECUTION OF THIS DEED OF TRUST, YOU CONSENT TO THIS PROCEDURE. IF YOU HAVE ANY
QUESTIONS CONCERNING IT, YOU SHOULD CONSULT YOUR LEGAL ADVISOR. BENEFICIARY AND
TRUSTEE URGE YOU TO GIVE BENEFICIARY PROMPT NOTICE OF ANY CHANGE IN YOUR ADDRESS
SO THAT YOU MAY RECEIVE ANY NOTICE OF DEFAULT AND NOTICE OF SALE GIVEN PURSUANT
TO THIS DEED OF TRUST.
8. Grantor requests that a copy of any notice of default and notice
of sale hereunder be mailed to Grantor in the manner indicated in Section 3.02
of this Deed of Trust.
9. Suretyship Waivers. Insofar as this Deed of Trust has been
executed by Grantor to secure in part performance of the obligations of Borrower
as described hereinabove. Grantor acknowledges the possibility that this Deed of
Trust could be construed by a court of competent jurisdiction as a form of
disguised guaranty of such obligations, notwithstanding the express intent of
Grantor and Beneficiary that this Deed of Trust not be so construed as creating
a relationship of surety and principal. However, if and to the extent that his
Deed of Trust is construed by a court of competent jurisdiction to constitute a
form of disguised guaranty, Grantor hereby expressly acknowledges and agrees as
follows:
(a) Unconditional Obligation.
The obligations, covenants, agreements and duties of
Grantor shall in no way be affected or impaired by reason of the
happening from time to time of any of the following events, even
if such event takes place without notice to or the further consent
of Grantor: (i) the waiver by Beneficiary of the performance or
observance by Borrower, Grantor, or any other party of any of the
agreements, covenants, terms or conditions contained in any of the
Loan Documents; (ii) the extension, in whole or in part, of the
time for payment by Borrower or Grantor of any sums owing or
payable under any of the Loan Documents; (iii) the modification or
amendment, whether material or otherwise, of any of the
obligations of Borrower under the Loan Documents, whether the same
be in the form of a new agreement or the modification or amendment
of an existing Loan Document (any of the foregoing being a
"Modification"); provided, however, that unless such modification
is required by law or on account of bankruptcy or insolvency, no
Modification that has the effect of materially increasing the
obligations of Grantor hereunder shall be effective against
Grantor to the extent of such material increase unless Grantor
shall be a party to, or consent to, such Modification, which
consent Grantor agrees shall not be unreasonably withheld or
delayed; provided, further, that if any Modification is made
without such consent of Grantor, such Modification shall be
ineffective as against Grantor only to the extent
<PAGE> 34
that same shall materially increase the obligations of Grantor
under this Deed of Trust, it being expressly agreed that, even if
such Modification has the effect of increasing the likelihood of a
default by Borrower under the Loan Documents, Grantor shall remain
liable to the full extent of this Deed of Trust as if such
Modification had not been made; (iv) the doing or the omission of
any of the acts referred to in the Loan Documents; (v) any
failure, omission or delay on the part of Beneficiary to enforce,
assert or exercise any right, power or remedy conferred on or
available to Beneficiary in or by any of the Loan Documents or any
action on the part of Beneficiary granting indulgence or extension
in any form whatsoever; (vi) the voluntary or involuntary
liquidation, dissolution, sale of all or substantially all of the
assets, marshaling of assets and liabilities, receivership,
conservatorship, custodianship, insolvency, bankruptcy, assignment
for the benefit of creditors, reorganization, arrangement,
composition or readjustment of, or other similar proceeding
affecting Borrower or Grantor or any of its assets; (vii) the
inability of Beneficiary or Borrower to enforce any provision of
the Loan Documents; (viii) any change in the relationship between
Borrower and Grantor or any termination of such relationship; (ix)
the inability of Borrower to perform, or the release of Borrow or
Grantor from the performance of, any obligation, agreement,
covenant, term or condition of Borrower under any of the Loan
Documents and this Deed of Trust by reason of any law, regulation
or decree, now or hereafter in effect; or (x) any action or
inaction by Beneficiary that results in any impairment or
destruction of any subrogation rights of Grantor or any rights of
Grantor to proceed against Borrower for reimbursement.
(b) Subrogation.
Grantor understands and acknowledges that Beneficiary's
exercise of certain rights and remedies in the Loan Documents may
affect or eliminate Grantor's right of subrogation against
Borrower, and as result, Grantor may succeed to a partially or
totally nonreimbursable liability under this Deed of Trust.
Grantor hereby authorizes and empowers Beneficiary to exercise, in
Beneficiary's own discretion, any rights and remedies or any
combination thereof, which may then be available since it is the
intent and purpose of Grantor that the obligations under this Deed
of Trust shall be absolute, independent and unconditional under
any and all circumstances. Until all of Borrower's obligations
have been performed under the Loan Documents, Grantor: (i) shall
have no right of subrogation against Borrower by reason of any
payments or acts of performance by Grantor in compliance with the
obligations of Grantor under this Deed of Trust; (ii) waives any
right to enforce any remedy that Grantor may have against Borrower
by reason of any one or more payments or acts of performance in
compliance with the obligations of Grantor under this Deed of
Trust; and (iii) subordinates any liability or indebtedness of
Borrower held by Grantor to the obligations of Borrower to
Beneficiary under any of the Loan Documents and any other
instruments of indebtedness.
3
<PAGE> 35
(c) Waivers.
Grantor hereby waives: (i) diligence and demand of payment
except as otherwise required hereunder; (ii) all notices to
Grantor, to Borrower, or to any other person, including, but not
limited to, notices of the creation, renewal, extension,
modification, or accrual, of any obligations contained in the Loan
Documents or notice of any other matters relating thereto not
expressly required under the Loan Documents or this Deed of Trust;
(iii) all demands whatsoever; (iv) any statute of limitations
affecting liability under this Deed of Trust or the enforcement of
this Deed of Trust; (v) any duty on the part of Beneficiary to
disclose to Grantor any facts that it may now or hereafter know
about Borrower, regardless of whether Beneficiary has reason to
believes that any such facts materially increase the risk beyond
that which Grantor intends to assume or has reason to believe that
such facts are unknown to Grantor or has reasonable opportunity to
communicate such facts to Grantor, it being understood and agreed
that Grantor is fully responsible for being and keeping informed
of the financial condition of Borrower and of all circumstances
bearing on the risk of nonpayment of any amount hereby secured;
(vi) all principal or provisions of law that conflict with the
terms of this Deed of Trust or any circumstances which would
otherwise constitute a legal or equitable discharge of Grantor
hereunder; (vii) any right Grantor may have to require Beneficiary
to proceed against Borrower or against any other party to
foreclose any lien on any real or personal property, to exercise
any right or remedy under the Loan Documents, or to pursue any
other remedy, or to enforce any other right; and (viii) any and
all benefits of California Civil Code Sections 2809, 2810, 2819,
2822, 2845, 2849, 2850 and 2855, and California Code of Civil
Procedure Sections 580a, 580b, 580d and 726.
(d) Acknowledgments.
Grantor specifically understands and agrees as follows: (i)
that all of Grantor's obligations under this Deed of Trust are
independent of the obligations of Borrower under the Loan
Documents, and that a separate action may be bought against
Grantor whether or not an action has commenced against Borrower
under any such Loan Documents or from exercising any rights
available to Beneficiary under the Loan Documents; (ii) nothing in
this Deed of Trust shall prevent Beneficiary from suing on the
Loan Documents; (iii) that the exercise of any of Beneficiary's
rights under this Deed of Trust shall not constitute a legal or
equitable discharge of Grantor; and (iv) that under certain
circumstances, if Beneficiary elects to nonjudicial foreclose on
real property (if any) owned by Borrower in the State of
California, Grantor's subrogation rights against Borrower will be
destroyed because California Code of Civil Procedure Section 580d
precludes anyone, including Grantor, from obtaining a deficiency
judgment after a nonjudicial foreclosure sale, and that Grantor
has waived any defense it may have based upon the loss of
Grantor's subrogation rights against Borrower resulting from
Beneficiary's
4
<PAGE> 36
election to nonjudicial foreclose on real property owned by
Borrower (if any) located in the State of California to the Deed
of Trust.
5
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT dated as of June 30,
1999 (the "Agreement"), between DJ Orthopedics, LLC,
a Delaware limited liability company (the "Company")
and a wholly owned subsidiary of DonJoy, L.L.C., a
Delaware limited liability company ("DonJoy"), and
Leslie H. Cross (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is being made simultaneously with the closing of the transactions
contemplated by the Recapitalization Agreement dated as of April 29, 1999 (as
the same may be amended or otherwise modified from time to time, the "Purchase
Agreement", the terms defined therein being used herein as therein defined), by
and among Smith & Nephew, Inc., a Delaware corporation, DonJoy and Chase DJ
Partners, LLC, a Delaware limited liability company ("Chase").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT.
The Company shall employ the Executive, and the Executive accepts
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the date hereof and ending as provided in
Paragraph 4 (the "Employment Period").
2. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall serve as
Chief Executive Officer and President of the Company and shall have the usual
and customary duties, responsibilities and authority of a President subject to
the power of the board of directors of the Company (the "Board") (i) with the
Executive's consent, to expand or limit such duties, responsibilities and
authority and (ii) to override the actions of the Executive. The Executive shall
perform his duties principally at Vista, CA or such other location as the
Executive and the Board shall agree.
(b) (i) The Executive shall report to the Board and shall
devote his best efforts and substantially all of his active business time and
attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company and its
Affiliates. The Executive shall perform his duties and responsibilities to the
best of his abilities in a diligent and professional manner.
(ii) During the Employment Period, the Executive shall not
engage in any business activity which, in the reasonable judgment of the Board,
conflicts or substantially interferes with the duties of the Executive
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage.
<PAGE> 2
(c) The foregoing restrictions shall not limit or prohibit the
Executive from engaging in passive investment, inactive business ventures and
community, charitable and social activities not interfering with the Executive's
performance and obligations hereunder.
3. BASE SALARY AND BENEFITS.
(a) During the Employment Period, the Executive's base salary
shall be $235,900 per annum, or such higher rate as the Board (excluding the
Executive if he should be a member of the Board at the time of such
determination) may designate from time to time (the "Base Salary"), which Base
Salary shall be payable in regular installments in accordance with the
Company's general payroll practices and subject to withholding and other
payroll taxes. In addition, during the Employment Period, the Executive shall
be entitled to participate in all employee benefit and insurance programs for
which executive employees of the Company are generally eligible.
(b) The Company shall reimburse the Executive for all
reasonable expenses incurred by him in the course of performing his duties under
this Agreement, which are consistent with the Company's policies in effect from
time to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and documenting
of such expenses.
(c) During the Employment Period, the Executive shall be
entitled to four weeks paid vacation during each 12-month period worked,
commencing on the date hereof.
(d) In addition to the Base Salary, the Executive shall be
eligible to receive an annual bonus (either in cash or equity interests of
DonJoy) as determined by the Board (excluding the Executive if he should be a
member of the Board at the time of such determination) in its sole discretion.
(e) In addition to the foregoing and for the 1999 calendar
year only, the Executive shall be entitled to (i) club membership dues, (ii)
car allowance and (iii) tax preparation fee consistent with the benefits
previously provided to Executive by Smith & Nephew, Inc. and each of which
shall be payable only, to the extent such benefits have not already been paid
by Smith & Nephew, Inc.; provided, however, that following the 1999 calendar
year, the Executive shall be entitled to the car allowance for the remainder of
the Employment Period in accordance with past practice.
4. TERM.
(a) The Employment Period shall end on the third anniversary of
the date of this Agreement, but may be extended annually for additional one year
terms by the mutual agreement of the Company and the Executive; provided,
however, that (i) the Employment Period shall terminate prior to such date upon
the Executive's resignation, death or Disability (as defined in the following
sentence), and (ii) the Employment Period may be terminated by the Company at
any time prior to such date for Cause (as defined below) or without Cause. For
purposes of this Agreement the term "Disability" means any long-term disability
or incapacity which (i) renders the Executive unable to substantially perform
his duties hereunder for 120 days during any 12-month period or (ii) would
reasonably be expected to
2
<PAGE> 3
render the Executive unable to substantially perform his duties for 120 days
during any 12-month period, in each case as determined by the Board (excluding
the Executive if he should be a member of the Board at the time of such
determination) in its good faith judgment; provided, however, that if the
Executive disputes any determination of Disability made by the Board pursuant to
clause (ii) of the following sentence, the dispute shall be referred to three
licensed physicians practicing within a 100-mile radius of the city or township
nearest to the Executive's place of employment by the Company, one of whom shall
be selected by the Board, a second of whom shall be selected by the Executive
and the third of whom shall be selected by the two physicians selected by the
Board and the Executive, respectively, and the opinion of the majority of such
physicians shall be the determination of Disability, and shall be final and
binding on both the Executive and the Company.
(b) If the Employment Period is terminated by the Company
without Cause, the Executive shall be entitled to receive only his Base Salary
for a period equal to twenty-four months following such termination. Such
payments of the Base Salary as severance will be made periodically in the same
amounts and at the same intervals as if the Employment Period had not ended and
the Base Salary otherwise continued to be paid unless otherwise accelerated by
the Board.
(c) If the Employment Period is terminated by the Company for
Cause, or by reason of the Executive's resignation, death or Disability, the
Executive shall be entitled to receive only his Base Salary, but only to the
extent such amount has accrued through the termination date.
(d) Except as otherwise required by law (e.g., COBRA) or as
specifically provided herein, all of the Executive's rights to salary,
severance, fringe benefits and bonuses hereunder (if any) accruing after the
termination of the Employment Period shall cease upon termination of the
Employment Period. In the event the Executive is terminated by the Company
without Cause, the sole remedy of the Executive and his successors, assigns,
heirs, representatives and estate shall be to receive the severance payments
described in Paragraph 4(b). In the event the Executive is terminated by the
Company for Cause or by reason of the Executive's death, Disability or
resignation, the sole remedy of the Executive and his successors, assigns,
heirs, representatives and estate shall be to receive the severance payment
described in Paragraph 4(c).
For purposes of this Agreement, "Cause" means the (i) failure by the
Executive to perform such duties as are reasonably requested by the Board as
documented in writing to the Executive, (ii) the Executive's willful disregard
of his duties or failure to act, where such action would be in the ordinary
course of the Executive's duties, (iii) the failure by the Executive to observe
all material Company policies and material policies of all Affiliates of the
Company generally applicable to executives of the Company and/or its Affiliates,
(iv) gross negligence or willful misconduct by the Executive in the performance
of his duties, (v) the commission by the Executive of any act of fraud, theft or
financial dishonesty with respect to the Company or any of its Affiliates, or
any felony or criminal act involving moral turpitude, (vi) the material breach
by the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of Paragraph 5, Paragraph 6 or Paragraph 7, or
(a) the Amended and Restated Operating Agreement of DonJoy, (b) the Members'
Agreement of DonJoy, (c) any option
3
<PAGE> 4
agreement to which DonJoy and the Executive may become a party, or (d) the
Secured Promissory Note and Pledge Agreement dated the date hereof, (vii)
chronic absenteeism, or (viii) alcohol or other substance abuse. For purposes of
this Agreement, "Affiliates" means DonJoy (or its successors or assigns) and all
subsidiaries thereof.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose or use at any time, either
during the Employment Period or thereafter, any Confidential Information (as
defined below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance in good
faith of duties assigned to the Executive by the Board. The Executive will take
all appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. The Executive shall
deliver to the Company at the termination of the Employment Period, or at any
time the Company may request, all memoranda, notes, plans, records, reports,
computer tapes and software and other documents and data (and copies thereof)
relating to the Confidential Information, Work Product (as defined below) of the
business of the Company or any of its Affiliates which the Executive may then
possess or have under his control.
(b) As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the Company in connection with its
business, including but not limited to (i) information, observations and data
obtained by the Executive while employed by the Company or any predecessors
thereof (including those obtained prior to the date of this Agreement)
concerning the business or affairs of the Company (or such predecessors), (ii)
products or services, (iii) fees, costs and pricing structures, (iv) designs,
(v) analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and business
methods, (xi) inventions, devices, new developments, methods and processes,
whether patentable or unpatentable and whether or not reduced to practice, (xii)
customers and clients and customer or client lists, (xiii) copyrightable works,
(xiv) all production methods, processes, technology and trade secrets and (xv)
all similar and related information in whatever form. Confidential Information
will not include any information that has been published in a form generally
available to the public prior to the date the Executive proposes to disclose or
use such information.
6. INVENTIONS AND PATENTS.
The Executive agrees that all inventions, innovations, improvements,
technical information, systems, software developments, methods, designs,
analyses, drawings, reports, service marks, trademarks, trade names, logos and
all similar or related information (whether patentable or unpatentable) which
relates to the Company's or any of its Affiliates' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by the Executive (whether or not
during usual business hours and whether or not alone or in conjunction with any
other person) while employed by the Company (including those conceived,
developed or made prior to the date of this Agreement)
4
<PAGE> 5
together with all patent applications, letters patent, trademark, tradename and
service mark applications or registrations, copyrights and reissues thereof
that may be granted for or upon any of the foregoing (collectively referred to
herein as, the "Work Product"), belong in all instances to the Company or such
Affiliate. The Executive will promptly disclose such Work Product to the Board
and perform (at the Company's expense) all actions reasonably requested by the
Board (whether during or after the Employment Period) to establish and confirm
the Company's ownership of such Work Product (including, without limitation,
the execution and delivery of assignments, consents, powers of attorney and
other instruments) and to provide (at the Company's expense) reasonable
assistance to the Company or any of its Affiliates in connection with the
prosecution of any applications for patents, trademarks, trade names, service
marks or reissues thereof or in the prosecution or defense of interferences
relating to any Work Product.
7. NON-SOLICITATION.
The Executive agrees that, for the period that includes (i) the
Employment Period and (ii) four (4) years after the termination of the
Employment Period (the "Non-Solicit Period"), the Executive shall not directly
or indirectly through another person or entity (i) induce or attempt to induce
any employee of the Company or any Affiliate of the Company to leave the employ
of the Company or such Affiliate, or in any way interfere with the relationship
between the Company or any such Affiliate, on the one hand, and any employee
thereof, on the other hand, (ii) hire any person who was an employee of the
Company, until six months after such individual's employment relationship with
the Company or any Affiliate of the Company has been terminated or (iii) 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, on the one hand, and the
Company or any Affiliate, on the other hand.
8. ENFORCEMENT.
Because the Executive's services are unique and because the Executive has
access to Confidential Information and Work Product, the parties hereto agree
that money damages would be an inadequate remedy for any breach of this
Agreement. Therefore, in the event of a breach or threatened breach of this
Agreement, the Company or its successors or assigns may, in addition to other
rights and remedies existing in their favor, apply to any court of competent
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce, or prevent any violations of, the provisions hereof (without posting
a bond or other security), or require the Executive to account for and pay over
to the Company all compensation, profits, moneys, accruals, increments or other
benefits derived from or received as a result of any transactions
constituting a breach of the covenants contained in this Agreement, if and when
final judgment of a court of competent jurisdiction is so entered against the
Executive.
9. INSURANCE.
The Company may, for its own benefit, maintain "keyman" life and
disability insurance policies covering the Executive. The Executive will
cooperate with the Company and
5
<PAGE> 6
provide such information or other assistance as the Company may reasonably
request in connection with the Company obtaining and maintaining such policies.
10. SEVERANCE PAYMENTS.
In addition to the foregoing, and not in any way in limitation thereof,
or in limitation of any right or remedy otherwise available to the Company, if
the Executive violates any provision of the foregoing Paragraph 5, Paragraph 6
or Paragraph 7, any severance payments then or thereafter due from the Company
to the Executive shall be terminated forthwith and the Company's obligation to
pay and the Executive's right to receive such severance payments shall terminate
and be of no further force or effect, if and when determined by a court of
competent jurisdiction, in each case without limiting or affecting the
Executive's obligations under such Paragraph 5, Paragraph 6 and Paragraph 7 or
the Company's other rights and remedies available at law or equity.
11. REPRESENTATIONS AND WARRANTIES.
(a) The Executive hereby represents and warrants to the Company
that (i) the execution, delivery and performance of this Agreement by the
Executive does not and will not conflict with, breach, violate or cause a
default under any agreement, contract or instrument to which the Executive is a
party or any judgment, order or decree to which the Executive is subject, (ii)
the Executive is not a party to or bound by any employment agreement, consulting
agreement, non-compete agreement or confidentiality agreement or similar
agreement with any other person or entity and (iii) upon the execution and
delivery of this Agreement by the Company and the Executive, this Agreement will
be a valid and binding obligation of the Executive, enforceable in accordance
with its terms.
(b) The Company hereby represents and warrants to the Executive
that (i) this Agreement has been duly authorized by all necessary limited
liability company action on the part of the Company, (ii) the execution,
delivery and performance of this Agreement by the Company does not and will not
conflict with, breach, violate or cause a default under any agreement, contract
or instrument to which the Company is a party or any judgment, order or decree
to which the Company is subject, and (iii) upon the execution and delivery of
this Agreement by the Company and the Executive, this Agreement will be a valid
and binding obligation of the Company.
12. TERMINATION OF EXISTING EMPLOYMENT ARRANGEMENTS.
Effective upon the singing of this Agreement, the Employee Retention
Agreement Resulting from a Change in Control or Division Divestiture, dated as
of December 14, 1998, by and between Smith & Nephew, Inc. and the Executive
shall be terminated and shall be of no further force or effect and the Executive
hereby agrees to take all action necessary to affect such termination.
13. NOTICES.
All notices, requests, demands, claims, and other communications
hereunder shall be in writing. Any notice, request, demand, claim or other
communication hereunder shall be
6
<PAGE> 7
delivered personally to the recipient, delivered by United States Post Office
mail, telecopied to the intended recipient at the telecopy number set forth
therefor below (with hard copy to follow), or sent to the recipient by reputable
express courier service (charges prepaid) and addressed to the intended
recipient as set forth below:
If to the Company to:
DJ Orthopedics, LLC
2985 Scott St.
Vista, CA 92083
Telephone: (760) 727-1280
Telecopy: (760) 734-3536;
with a copy to:
Chase DJ Partners, LLC
c/o Chase Capital Partners Inc.
380 Madison Avenue
New York, NY 10017
Attention: Damion Wicker, John Daileader
Telephone: (212) 622-3100
Telecopy: (212) 622-3101;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: John J. Suydam, Esq.
Telephone: (212) 408-2400
Telecopy: (212) 408-2420.
If to the Executive, to:
Les Cross
c/o DJ Orthopedic, LLC
2985 Scott St.
Vista, CA 92083
Telephone: (760) 727-1280
Telecopy: (760) 734-3536;
or such other address as the recipient party to whom notice is to be given may
have furnished to the other party in writing in accordance herewith. Any such
communication shall deemed to have been delivered and received (a) when
delivered, if personally delivered, sent by telecopier or sent by overnight
courier, and (b) on the fifth business day following the date posted, if sent by
mail.
7
<PAGE> 8
14. GENERAL PROVISIONS.
(a) Severability. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
(b) Complete Agreement. This Agreement, those documents
expressly referred to herein and each of (i) DonJoy's 1999 Option Plan and
related option agreements, (ii) the Members' Agreement of DonJoy, (iii) the
Amended and Restated Operating Agreement of DonJoy, (iv) the Secured Promissory
Note and (v) Pledge Agreement (collectively, the "Management Related Documents")
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
(c) Right of Set Off. In the event of a breach by the Executive
of the provisions of any of the Management Documents, the Company is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all amounts at any time held by the Company on
behalf of the Executive and all indebtedness at any time owing by the Company to
the Executive against any and all of the obligations of the Executive now or
hereafter existing under the Management Related Documents.
(d) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be
enforceable by the Executive and the Company and their respective successors,
assigns, heirs, representatives and estate; provided, however, that the rights
and obligations of the Executive under this Agreement shall not be assigned
without the prior written consent of the Company.
(e) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF DELAWARE, WITHOUT
GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF
THE STATE OF DELAWARE OR ANY OTHER JURISDICTION), THAT WOULD CAUSE THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE TO BE APPLIED. IN FURTHERANCE
OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
8
<PAGE> 9
(f) Jurisdiction and Venue.
(i) The Company and the Executive hereby irrevocably and
unconditionally submit, for themselves and their property, to the
non-exclusive jurisdiction of any New York court or federal court of the
United States of America sitting in New York, New York and any appellate
court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or for recognition or enforcement of any
judgment, and the Company and the Executive hereby irrevocably and
unconditionally agree that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court
or, to the extent permitted by law, in such federal court. The Company
and the Executive agree that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law.
(ii) The Company and the Executive irrevocably and
unconditionally waive, to the fullest extent they may legally and
effectively do so, any objection that they may now or hereafter have to
the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any New York State or federal court sitting
in New York, New York. The Company and the Executive irrevocably waive,
to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(iii) The Company and the Executive further agree that the mailing
by certified or registered mail, return receipt requested, of any process
required by any such court shall constitute valid and lawful service of
process against them, without the necessity for service by any other
means provided by law.
(g) Amendment and Waiver. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company, the
Executive and Chase, and no course of conduct or failure or delay in enforcing
the provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement or any provision hereof.
(h) Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(j) Attorney's Fees. The Company agrees to pay reasonable and
substantiated fees and out-of-pocket expenses of counsel to the Executive for
such counsels' review of this Agreement and the Management Related Documents.
* * * *
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
DJ ORTHOPEDICS, LLC
By: /s/ Cyril Talbot III
---------------------------------------
Name: Cyril Talbot III
Title: V.P., CFO, and Secretary
/s/ Leslie H. Cross
------------------------------------------
Leslie H. Cross
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT dated as of June 30,
1999 (the "Agreement"), between DJ Orthopedics, LLC,
a Delaware limited liability company (the "Company")
and a wholly owned subsidiary of DonJoy, L.L.C., a
Delaware limited liability company ("DonJoy"), and
Cyril Talbot III (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is being made simultaneously with the closing of the transactions
contemplated by the Recapitalization Agreement dated as of April 29, 1999 (as
the same may be amended or otherwise modified from time to time, the "Purchase
Agreement", the terms defined therein being used herein as therein defined), by
and among Smith & Nephew, Inc., a Delaware corporation, DonJoy and Chase DJ
Partners, LLC, a Delaware limited liability company ("Chase").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT.
The Company shall employ the Executive, and the Executive accepts
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the date hereof and ending as provided in
Paragraph 4 (the "Employment Period").
2. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall serve as
Vice President of Finance, Chief Financial Officer and Secretary of the Company
and shall have the usual and customary duties, responsibilities and authority of
a Vice President subject to the power of the board of directors of the Company
(the "Board") (i) with the Executive's consent, to expand or limit such duties,
responsibilities and authority and (ii) to override the actions of the
Executive. The Executive shall perform his duties principally at Vista, CA or
such other location as the Executive and the Board shall agree.
(b) (i) The Executive shall report to the Board and shall
devote his best efforts and substantially all of his active business time and
attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company and its
Affiliates. The Executive shall perform his duties and responsibilities to the
best of his abilities in a diligent and professional manner.
(ii) During the Employment Period, the Executive shall not
engage in any business activity which, in the reasonable judgment of the Board,
conflicts or substantially interferes with the duties of the Executive
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage.
<PAGE> 2
(c) The foregoing restrictions shall not limit or prohibit the
Executive from engaging in passive investment, inactive business ventures and
community, charitable and social activities not interfering with the Executive's
performance and obligations hereunder.
3. BASE SALARY AND BENEFITS.
(a) During the Employment Period, the Executive's base salary
shall be $151,945 per annum, or such higher rate as the Board (excluding the
Executive if he should be a member of the Board at the time of such
determination) may designate from time to time (the "Base Salary"), which Base
Salary shall be payable in regular installments in accordance with the Company's
general payroll practices and subject to withholding and other payroll taxes. In
addition, during the Employment Period, the Executive shall be entitled to
participate in all employee benefit and insurance programs for which executive
employees of the Company are generally eligible.
(b) The Company shall reimburse the Executive for all
reasonable expenses incurred by him in the course of performing his duties under
this Agreement, which are consistent with the Company's policies in effect from
time to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and documenting
of such expenses.
(c) During the Employment Period, the Executive shall be
entitled to three weeks paid vacation during each 12-month period worked,
commencing on the date hereof.
(d) In addition to the Base Salary, the Executive shall be
eligible to receive an annual bonus (either in cash or equity interests of
DonJoy) as determined by the Board (excluding the Executive if he should be a
member of the Board at the time of such determination) in its sole discretion.
(e) In addition to the foregoing and for the 1999 calendar year
only, the Executive shall be entitled to (i) club membership dues, (ii) car
allowance and (iii) tax preparation fee consistent with the benefits previously
provided to Executive by Smith & Nephew, Inc. and each of which shall be payable
only, to the extent such benefits have not already been paid by Smith & Nephew,
Inc.; provided, however, that following the 1999 calendar year, the Executive
shall be entitled to the car allowance for the remainder of the Employment
Period in accordance with past practice.
4. TERM.
(a) The Employment Period shall end on the third anniversary of
the date of this Agreement, but may be extended annually for additional one year
terms by the mutual agreement of the Company and the Executive; provided,
however, that (i) the Employment Period shall terminate prior to such date upon
the Executive's resignation, death or Disability (as defined in the following
sentence), and (ii) the Employment Period may be terminated by the Company at
any time prior to such date for Cause (as defined below) or without Cause. For
purposes of this Agreement the term "Disability" means any long-term disability
or incapacity which (i) renders the Executive unable to substantially perform
his duties hereunder for 120 days during any 12-month period or (ii) would
reasonably be expected to
2
<PAGE> 3
render the Executive unable to substantially perform his duties for 120 days
during any 12-month period, in each case as determined by the Board (excluding
the Executive if he should be a member of the Board at the time of such
determination) in its good faith judgment; provided, however, that if the
Executive disputes any determination of Disability made by the Board pursuant to
clause (ii) of the following sentence, the dispute shall be referred to three
licensed physicians practicing within a 100-mile radius of the city or township
nearest to the Executive's place of employment by the Company, one of whom shall
be selected by the Board, a second of whom shall be selected by the Executive
and the third of whom shall be selected by the two physicians selected by the
Board and the Executive, respectively, and the opinion of the majority of such
physicians shall be the determination of Disability, and shall be final and
binding on both the Executive and the Company.
(b) If the Employment Period is terminated by the Company
without Cause, the Executive shall be entitled to receive only his Base Salary
for a period equal to twelve months following such termination. Such payments of
the Base Salary as severance will be made periodically in the same amounts and
at the same intervals as if the Employment Period had not ended and the Base
Salary otherwise continued to be paid unless otherwise accelerated by the Board.
(c) If the Employment Period is terminated by the Company for
Cause, or by reason of the Executive's resignation, death or Disability, the
Executive shall be entitled to receive only his Base Salary, but only to the
extent such amount has accrued through the termination date.
(d) Except as otherwise required by law (e.g., COBRA) or as
specifically provided herein, all of the Executive's rights to salary,
severance, fringe benefits and bonuses hereunder (if any) accruing after the
termination of the Employment Period shall cease upon termination of the
Employment Period. In the event the Executive is terminated by the Company
without Cause, the sole remedy of the Executive and his successors, assigns,
heirs, representatives and estate shall be to receive the severance payments
described in Paragraph 4(b). In the event the Executive is terminated by the
Company for Cause or by reason of the Executive's death, Disability or
resignation, the sole remedy of the Executive and his successors, assigns,
heirs, representatives and estate shall be to receive the severance payment
described in Paragraph 4(c).
For purposes of this Agreement, "Cause" means the (i) failure by the
Executive to perform such duties as are reasonably requested by the Board as
documented in writing to the Executive, (ii) the Executive's willful disregard
of his duties or failure to act, where such action would be in the ordinary
course of the Executive's duties, (iii) the failure by the Executive to observe
all material Company policies and material policies of all Affiliates of the
Company generally applicable to executives of the Company and/or its Affiliates,
(iv) gross negligence or willful misconduct by the Executive in the performance
of his duties, (v) the commission by the Executive of any act of fraud, theft or
financial dishonesty with respect to the Company or any of its Affiliates, or
any felony or criminal act involving moral turpitude, (vi) the material breach
by the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of Paragraph 5, Paragraph 6 or Paragraph 7, or
(a) the Amended and Restated Operating Agreement of DonJoy, (b) the Members'
Agreement of DonJoy, (c) any option
3
<PAGE> 4
agreement to which DonJoy and the Executive may become a party, or (d) the
Secured Promissory Note and Pledge Agreement dated the date hereof, (vii)
chronic absenteeism, or (viii) alcohol or other substance abuse. For purposes of
this Agreement, "Affiliates" means DonJoy (or its successors or assigns) and all
subsidiaries thereof.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose or use at any time, either
during the Employment Period or thereafter, any Confidential Information (as
defined below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance in good
faith of duties assigned to the Executive by the Board. The Executive will take
all appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. The Executive shall
deliver to the Company at the termination of the Employment Period, or at any
time the Company may request, all memoranda, notes, plans, records, reports,
computer tapes and software and other documents and data (and copies thereof)
relating to the Confidential Information, Work Product (as defined below) of the
business of the Company or any of its Affiliates which the Executive may then
possess or have under his control.
(b) As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the Company in connection with its
business, including but not limited to (i) information, observations and data
obtained by the Executive while employed by the Company or any predecessors
thereof (including those obtained prior to the date of this Agreement)
concerning the business or affairs of the Company (or such predecessors), (ii)
products or services, (iii) fees, costs and pricing structures, (iv) designs,
(v) analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and business
methods, (xi) inventions, devices, new developments, methods and processes,
whether patentable or unpatentable and whether or not reduced to practice, (xii)
customers and clients and customer or client lists, (xiii) copyrightable works,
(xiv) all production methods, processes, technology and trade secrets and (xv)
all similar and related information in whatever form. Confidential Information
will not include any information that has been published in a form generally
available to the public prior to the date the Executive proposes to disclose or
use such information.
6. INVENTIONS AND PATENTS.
The Executive agrees that all inventions, innovations, improvements,
technical information, systems, software developments, methods, designs,
analyses, drawings, reports, service marks, trademarks, trade names, logos and
all similar or related information (whether patentable or unpatentable) which
relates to the Company's or any of its Affiliates' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by the Executive (whether or not
during usual business hours and whether or not alone or in conjunction with any
other person) while employed by the Company (including those conceived,
developed or made prior to the date of this Agreement)
4
<PAGE> 5
together with all patent applications, letters patent, trademark, tradename and
service mark applications or registrations, copyrights and reissues thereof that
may be granted for or upon any of the foregoing (collectively referred to herein
as, the "Work Product"), belong in all instances to the Company or such
Affiliate. The Executive will promptly disclose such Work Product to the Board
and perform (at the Company's expense) all actions reasonably requested by the
Board (whether during or after the Employment Period) to establish and confirm
the Company's ownership of such Work Product (including, without limitation, the
execution and delivery of assignments, consents, powers of attorney and other
instruments) and to provide (at the Company's expense) reasonable assistance to
the Company or any of its Affiliates in connection with the prosecution of any
applications for patents, trademarks, trade names, service marks or reissues
thereof or in the prosecution or defense of interferences relating to any Work
Product.
7. NON-SOLICITATION.
The Executive agrees that, for the period that includes (i) the
Employment Period and (ii) four (4) years after the termination of the
Employment Period (the "Non-Solicit Period"), the Executive shall not directly
or indirectly through another person or entity (i) induce or attempt to induce
any employee of the Company or any Affiliate of the Company to leave the employ
of the Company or such Affiliate, or in any way interfere with the relationship
between the Company or any such Affiliate, on the one hand, and any employee
thereof, on the other hand, (ii) hire any person who was an employee of the
Company, until six months after such individual's employment relationship with
the Company or any Affiliate of the Company has been terminated or (iii) 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, on the one hand, and the
Company or any Affiliate, on the other hand.
8. ENFORCEMENT.
Because the Executive's services are unique and because the Executive has
access to Confidential Information and Work Product, the parties hereto agree
that money damages would be an inadequate remedy for any breach of this
Agreement. Therefore, in the event of a breach or threatened breach of this
Agreement, the Company or its successors or assigns may, in addition to other
rights and remedies existing in their favor, apply to any court of competent
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce, or prevent any violations of, the provisions hereof (without posting
a bond or other security), or require the Executive to account for and pay over
to the Company all compensation, profits, moneys, accruals, increments or other
benefits derived from or received as a result of any transactions constituting a
breach of the covenants contained in this Agreement, if and when final judgment
of a court of competent jurisdiction is so entered against the Executive.
9. INSURANCE.
The Company may, for its own benefit, maintain "keyman" life and
disability insurance policies covering the Executive. The Executive will
cooperate with the Company and
5
<PAGE> 6
provide such information or other assistance as the Company may reasonably
request in connection with the Company obtaining and maintaining such policies.
10. SEVERANCE PAYMENTS.
In addition to the foregoing, and not in any way in limitation thereof,
or in limitation of any right or remedy otherwise available to the Company, if
the Executive violates any provision of the foregoing Paragraph 5, Paragraph 6
or Paragraph 7, any severance payments then or thereafter due from the Company
to the Executive shall be terminated forthwith and the Company's obligation to
pay and the Executive's right to receive such severance payments shall terminate
and be of no further force or effect, if and when determined by a court of
competent jurisdiction, in each case without limiting or affecting the
Executive's obligations under such Paragraph 5, Paragraph 6 and Paragraph 7 or
the Company's other rights and remedies available at law or equity.
11. REPRESENTATIONS AND WARRANTIES.
(a) The Executive hereby represents and warrants to the Company
that (i) the execution, delivery and performance of this Agreement by the
Executive does not and will not conflict with, breach, violate or cause a
default under any agreement, contract or instrument to which the Executive is a
party or any judgment, order or decree to which the Executive is subject, (ii)
the Executive is not a party to or bound by any employment agreement, consulting
agreement, non-compete agreement or confidentiality agreement or similar
agreement with any other person or entity and (iii) upon the execution and
delivery of this Agreement by the Company and the Executive, this Agreement will
be a valid and binding obligation of the Executive, enforceable in accordance
with its terms.
(b) The Company hereby represents and warrants to the Executive
that (i) this Agreement has been duly authorized by all necessary limited
liability company action on the part of the Company, (ii) the execution,
delivery and performance of this Agreement by the Company does not and will not
conflict with, breach, violate or cause a default under any agreement, contract
or instrument to which the Company is a party or any judgment, order or decree
to which the Company is subject, and (iii) upon the execution and delivery of
this Agreement by the Company and the Executive, this Agreement will be a valid
and binding obligation of the Company.
12. TERMINATION OF EXISTING EMPLOYMENT ARRANGEMENTS.
Effective upon the singing of this Agreement, the Employee Retention
Agreement Resulting from a Change in Control or Division Divestiture, dated as
of December 14, 1998, by and between Smith & Nephew, Inc. and the Executive
shall be terminated and shall be of no further force or effect and the Executive
hereby agrees to take all action necessary to affect such termination.
13. NOTICES.
All notices, requests, demands, claims, and other communications
hereunder shall be in writing. Any notice, request, demand, claim or other
communication hereunder shall be
6
<PAGE> 7
delivered personally to the recipient, delivered by United States Post Office
mail, telecopied to the intended recipient at the telecopy number set forth
therefor below (with hard copy to follow), or sent to the recipient by reputable
express courier service (charges prepaid) and addressed to the intended
recipient as set forth below:
If to the Company to:
DJ Orthopedic, LLC
2985 Scott St.
Vista, CA 92083
Telephone: (760) 727-1280
Telecopy: (760) 734-3536;
with a copy to:
Chase DJ Partners, LLC
c/o Chase Capital Partners Inc.
380 Madison Avenue
New York, NY 10017
Attention: Damion Wicker, John Daileader
Telephone: (212) 622-3100
Telecopy: (212) 622-3101;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: John J. Suydam, Esq.
Telephone: (212) 408-2400
Telecopy: (212) 408-2420.
If to the Executive, to:
Cy Talbot
c/o DJ Orthopedics, LLC
2985 Scott St.
Vista, CA 92083
Telephone: (760) 727-1280
Telecopy: (760) 734-3536;
or such other address as the recipient party to whom notice is to be given may
have furnished to the other party in writing in accordance herewith. Any such
communication shall deemed to have been delivered and received (a) when
delivered, if personally delivered, sent by telecopier or sent by overnight
courier, and (b) on the fifth business day following the date posted, if sent by
mail.
7
<PAGE> 8
14. GENERAL PROVISIONS.
(a) Severability. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
(b) Complete Agreement. This Agreement, those documents
expressly referred to herein and each of (i) DonJoy's 1999 Option Plan and
related option agreements, (ii) the Members' Agreement of DonJoy, (iii) the
Amended and Restated Operating Agreement of DonJoy, (iv) the Secured Promissory
Note and (v) Pledge Agreement (collectively, the "Management Related Documents")
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
(c) Right of Set Off. In the event of a breach by the Executive
of the provisions of any of the Management Documents, the Company is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all amounts at any time held by the Company on
behalf of the Executive and all indebtedness at any time owing by the Company to
the Executive against any and all of the obligations of the Executive now or
hereafter existing under the Management Related Documents.
(d) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be
enforceable by the Executive and the Company and their respective successors,
assigns, heirs, representatives and estate; provided, however, that the rights
and obligations of the Executive under this Agreement shall not be assigned
without the prior written consent of the Company.
(e) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF DELAWARE, WITHOUT
GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF
THE STATE OF DELAWARE OR ANY OTHER JURISDICTION), THAT WOULD CAUSE THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE TO BE APPLIED. IN FURTHERANCE
OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
8
<PAGE> 9
(f) Jurisdiction and Venue.
(i) The Company and the Executive hereby irrevocably and
unconditionally submit, for themselves and their property, to the
non-exclusive jurisdiction of any New York court or federal court of the
United States of America sitting in New York, New York and any appellate
court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or for recognition or enforcement of any
judgment, and the Company and the Executive hereby irrevocably and
unconditionally agree that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court
or, to the extent permitted by law, in such federal court. The Company
and the Executive agree that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law.
(ii) The Company and the Executive irrevocably and
unconditionally waive, to the fullest extent they may legally and
effectively do so, any objection that they may now or hereafter have to
the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any New York State or federal court sitting
in New York, New York. The Company and the Executive irrevocably waive,
to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(iii) The Company and the Executive further agree that the mailing
by certified or registered mail, return receipt requested, of any
process required by any such court shall constitute valid and lawful
service of process against them, without the necessity for service by any
other means provided by law.
(g) Amendment and Waiver. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company, the
Executive and Chase, and no course of conduct or failure or delay in enforcing
the provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement or any provision hereof.
(h) Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(j) Attorney's Fees. The Company agrees to pay reasonable and
substantiated fees and out-of-pocket expenses of counsel to the Executive for
such counsels' review of this Agreement and the Management Related Documents.
* * * *
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
DJ ORTHOPEDICS, LLC
By: /s/ Leslie H. Cross
---------------------------------
Name: Leslie H. Cross
Title: President and CEO
/s/ Cyril Talbot III
------------------------------------
Cyril Talbot III
<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT dated as of June 30,
1999 (the "Agreement"), between DJ Orthopedics, LLC,
a Delaware limited liability company (the "Company")
and a wholly owned subsidiary of DonJoy, L.L.C., a
Delaware limited liability company ("DonJoy"), and
Michael R. McBrayer (the "Executive").
The execution and delivery of this Agreement by the Company and the
Executive is being made simultaneously with the closing of the transactions
contemplated by the Recapitalization Agreement dated as of April 29, 1999 (as
the same may be amended or otherwise modified from time to time, the "Purchase
Agreement", the terms defined therein being used herein as therein defined), by
and among Smith & Nephew, Inc., a Delaware corporation, DonJoy and Chase DJ
Partners, LLC, a Delaware limited liability company ("Chase").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT.
The Company shall employ the Executive, and the Executive accepts
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the date hereof and ending as provided in
Paragraph 4 (the "Employment Period").
2. POSITION AND DUTIES.
(a) During the Employment Period, the Executive shall serve as
Vice President of Sales and Assistant Secretary of the Company and shall have
the usual and customary duties, responsibilities and authority of a Vice
President subject to the power of the board of directors of the Company (the
"Board") (i) with the Executive's consent, to expand or limit such duties,
responsibilities and authority and (ii) to override the actions of the
Executive. The Executive shall perform his duties principally at Vista, CA or
such other location as the Executive and the Board shall agree.
(b) (i) The Executive shall report to the Board and shall
devote his best efforts and substantially all of his active business time and
attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company and its
Affiliates. The Executive shall perform his duties and responsibilities to the
best of his abilities in a diligent and professional manner.
(ii) During the Employment Period, the Executive shall
not engage in any business activity which, in the reasonable judgment of the
Board, conflicts or substantially interferes with the duties of the Executive
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage.
<PAGE> 2
(c) The foregoing restrictions shall not limit or prohibit the
Executive from engaging in passive investment, inactive business ventures and
community, charitable and social activities not interfering with the Executive's
performance and obligations hereunder.
3. BASE SALARY AND BENEFITS.
(a) During the Employment Period, the Executive's base salary
shall be $155,715 per annum, or such higher rate as the Board (excluding the
Executive if he should be a member of the Board at the time of such
determination) may designate from time to time (the "Base Salary"), which Base
Salary shall be payable in regular installments in accordance with the Company's
general payroll practices and subject to withholding and other payroll taxes. In
addition, during the Employment Period, the Executive shall be entitled to
participate in all employee benefit and insurance programs for which executive
employees of the Company are generally eligible.
(b) The Company shall reimburse the Executive for all
reasonable expenses incurred by him in the course of performing his duties
under this Agreement, which are consistent with the Company's policies in
effect from time to time with respect to travel, entertainment and other
business expenses, subject to the Company's requirements with respect to
reporting and documenting of such expenses.
(c) During the Employment Period, the Executive shall be
entitled to four weeks paid vacation during each 12-month period worked,
commencing on the date hereof.
(d) In addition to the Base Salary, the Executive shall be
eligible to receive an annual bonus (either in cash or equity interests of
DonJoy) as determined by the Board (excluding the Executive if he should be a
member of the Board at the time of such determination) in its sole discretion.
(e) In addition to the foregoing and for the 1999 calendar year
only, the Executive shall be entitled to (i) club membership dues, (ii) car
allowance and (iii) tax preparation fee consistent with the benefits previously
provided to Executive by Smith & Nephew, Inc. and each of which shall be payable
only, to the extent such benefits have not already been paid by Smith & Nephew,
Inc.; provided, however, that following the 1999 calendar year, the Executive
shall be entitled to the car allowance for the remainder of the Employment
Period in accordance with past practice.
4. TERM.
(a) The Employment Period shall end on the third anniversary of
the date of this Agreement, but may be extended annually for additional one year
terms by the mutual agreement of the Company and the Executive; provided,
however, that (i) the Employment Period shall terminate prior to such date upon
the Executive's resignation, death or Disability (as defined in the following
sentence), and (ii) the Employment Period may be terminated by the Company at
any time prior to such date for Cause (as defined below) or without Cause. For
purposes of this Agreement the term "Disability" means any long-term disability
or incapacity which (i) renders the Executive unable to substantially perform
his duties hereunder for 120 days during any 12-month period or (ii) would
reasonably be expected to
2
<PAGE> 3
render the Executive unable to substantially perform his duties for 120 days
during any 12-month period, in each case as determined by the Board (excluding
the Executive if he should be a member of the Board at the time of such
determination) in its good faith judgment; provided, however, that if the
Executive disputes any determination of Disability made by the Board pursuant to
clause (ii) of the following sentence, the dispute shall be referred to three
licensed physicians practicing within a 100-mile radius of the city or township
nearest to the Executive's place of employment by the Company, one of whom shall
be selected by the Board, a second of whom shall be selected by the Executive
and the third of whom shall be selected by the two physicians selected by the
Board and the Executive, respectively, and the opinion of the majority of such
physicians shall be the determination of Disability, and shall be final and
binding on both the Executive and the Company.
(b) If the Employment Period is terminated by the Company
without Cause, the Executive shall be entitled to receive only his Base Salary
for a period equal to twelve months following such termination. Such payments of
the Base Salary as severance will be made periodically in the same amounts and
at the same intervals as if the Employment Period had not ended and the Base
Salary otherwise continued to be paid unless otherwise accelerated by the Board.
(c) If the Employment Period is terminated by the Company for
Cause, or by reason of the Executive's resignation, death or Disability, the
Executive shall be entitled to receive only his Base Salary, but only to the
extent such amount has accrued through the termination date.
(d) Except as otherwise required by law (e.g., COBRA) or as
specifically provided herein, all of the Executive's rights to salary,
severance, fringe benefits and bonuses hereunder (if any) accruing after the
termination of the Employment Period shall cease upon termination of the
Employment Period. In the event the Executive is terminated by the Company
without Cause, the sole remedy of the Executive and his successors, assigns,
heirs, representatives and estate shall be to receive the severance payments
described in Paragraph 4(b). In the event the Executive is terminated by the
Company for Cause or by reason of the Executive's death, Disability or
resignation, the sole remedy of the Executive and his successors, assigns,
heirs, representatives and estate shall be to receive the severance payment
described in Paragraph 4(c).
For purposes of this Agreement, "Cause" means the (i) failure by the
Executive to perform such duties as are reasonably requested by the Board as
documented in writing to the Executive, (ii) the Executive's willful disregard
of his duties or failure to act, where such action would be in the ordinary
course of the Executive's duties, (iii) the failure by the Executive to observe
all material Company policies and material policies of all Affiliates of the
Company generally applicable to executives of the Company and/or its Affiliates,
(iv) gross negligence or willful misconduct by the Executive in the performance
of his duties, (v) the commission by the Executive of any act of fraud, theft or
financial dishonesty with respect to the Company or any of its Affiliates, or
any felony or criminal act involving moral turpitude, (vi) the material breach
by the Executive of this Agreement, including, without limitation, any breach by
the Executive of the provisions of Paragraph 5, Paragraph 6 or Paragraph 7, or
(a) the Amended and Restated Operating Agreement of DonJoy, (b) the Members'
Agreement of DonJoy, (c) any option
3
<PAGE> 4
agreement to which DonJoy and the Executive may become a party, or (d) the
Secured Promissory Note and Pledge Agreement dated the date hereof, (vii)
chronic absenteeism, or (viii) alcohol or other substance abuse. For purposes of
this Agreement, "Affiliates" means DonJoy (or its successors or assigns) and all
subsidiaries thereof.
5. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose or use at any time, either
during the Employment Period or thereafter, any Confidential Information (as
defined below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance in good
faith of duties assigned to the Executive by the Board. The Executive will take
all appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. The Executive shall
deliver to the Company at the termination of the Employment Period, or at any
time the Company may request, all memoranda, notes, plans, records, reports,
computer tapes and software and other documents and data (and copies thereof)
relating to the Confidential Information, Work Product (as defined below) of the
business of the Company or any of its Affiliates which the Executive may then
possess or have under his control.
(b) As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the Company in connection with its
business, including but not limited to (i) information, observations and data
obtained by the Executive while employed by the Company or any predecessors
thereof (including those obtained prior to the date of this Agreement)
concerning the business or affairs of the Company (or such predecessors), (ii)
products or services, (iii) fees, costs and pricing structures, (iv) designs,
(v) analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and business
methods, (xi) inventions, devices, new developments, methods and processes,
whether patentable or unpatentable and whether or not reduced to practice, (xii)
customers and clients and customer or client lists, (xiii) copyrightable works,
(xiv) all production methods, processes, technology and trade secrets and (xv)
all similar and related information in whatever form. Confidential Information
will not include any information that has been published in a form generally
available to the public prior to the date the Executive proposes to disclose or
use such information.
6. INVENTIONS AND PATENTS.
The Executive agrees that all inventions, innovations, improvements,
technical information, systems, software developments, methods, designs,
analyses, drawings, reports, service marks, trademarks, trade names, logos and
all similar or related information (whether patentable or unpatentable) which
relates to the Company's or any of its Affiliates' actual or anticipated
business, research and development or existing or future products or services
and which are conceived, developed or made by the Executive (whether or not
during usual business hours and whether or not alone or in conjunction with any
other person) while employed by the Company (including those conceived,
developed or made prior to the date of this Agreement)
4
<PAGE> 5
together with all patent applications, letters patent, trademark, tradename and
service mark applications or registrations, copyrights and reissues thereof that
may be granted for or upon any of the foregoing (collectively referred to herein
as, the "Work Product"), belong in all instances to the Company or such
Affiliate. The Executive will promptly disclose such Work Product to the Board
and perform (at the Company's expense) all actions reasonably requested by the
Board (whether during or after the Employment Period) to establish and confirm
the Company's ownership of such Work Product (including, without limitation, the
execution and delivery of assignments, consents, powers of attorney and other
instruments) and to provide (at the Company's expense) reasonable assistance to
the Company or any of its Affiliates in connection with the prosecution of any
applications for patents, trademarks, trade names, service marks or reissues
thereof or in the prosecution or defense of interferences relating to any Work
Product.
7. NON-SOLICITATION.
The Executive agrees that, for the period that includes (i) the
Employment Period and (ii) four (4) years after the termination of the
Employment Period (the "Non-Solicit Period"), the Executive shall not directly
or indirectly through another person or entity (i) induce or attempt to induce
any employee of the Company or any Affiliate of the Company to leave the employ
of the Company or such Affiliate, or in any way interfere with the relationship
between the Company or any such Affiliate, on the one hand, and any employee
thereof, on the other hand, (ii) hire any person who was an employee of the
Company, until six months after such individual's employment relationship with
the Company or any Affiliate of the Company has been terminated or (iii) 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, on the one hand, and the
Company or any Affiliate, on the other hand.
8. ENFORCEMENT.
Because the Executive's services are unique and because the Executive has
access to Confidential Information and Work Product, the parties hereto agree
that money damages would be an inadequate remedy for any breach of this
Agreement. Therefore, in the event of a breach or threatened breach of this
Agreement, the Company or its successors or assigns may, in addition to other
rights and remedies existing in their favor, apply to any court of competent
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce, or prevent any violations of, the provisions hereof (without posting
a bond or other security), or require the Executive to account for and pay over
to the Company all compensation, profits, moneys, accruals, increments or other
benefits derived from or received as a result of any transactions constituting a
breach of the covenants contained in this Agreement, if and when final judgment
of a court of competent jurisdiction is so entered against the Executive.
9. INSURANCE.
The Company may, for its own benefit, maintain "keyman" life and
disability insurance policies covering the Executive. The Executive will
cooperate with the Company and
5
<PAGE> 6
provide such information or other assistance as the Company may reasonably
request in connection with the Company obtaining and maintaining such policies.
10. SEVERANCE PAYMENTS.
In addition to the foregoing, and not in any way in limitation thereof,
or in limitation of any right or remedy otherwise available to the Company, if
the Executive violates any provision of the foregoing Paragraph 5, Paragraph 6
or Paragraph 7, any severance payments then or thereafter due from the Company
to the Executive shall be terminated forthwith and the Company's obligation to
pay and the Executive's right to receive such severance payments shall terminate
and be of no further force or effect, if and when determined by a court of
competent jurisdiction, in each case without limiting or affecting the
Executive's obligations under such Paragraph 5, Paragraph 6 and Paragraph 7 or
the Company's other rights and remedies available at law or equity.
11. REPRESENTATIONS AND WARRANTIES.
(a) The Executive hereby represents and warrants to the Company
that (i) the execution, delivery and performance of this Agreement by the
Executive does not and will not conflict with, breach, violate or cause a
default under any agreement, contract or instrument to which the Executive is a
party or any judgment, order or decree to which the Executive is subject, (ii)
the Executive is not a party to or bound by any employment agreement, consulting
agreement, non-compete agreement or confidentiality agreement or similar
agreement with any other person or entity and (iii) upon the execution and
delivery of this Agreement by the Company and the Executive, this Agreement will
be a valid and binding obligation of the Executive, enforceable in accordance
with its terms.
(b) The Company hereby represents and warrants to the Executive
that (i) this Agreement has been duly authorized by all necessary limited
liability company action on the part of the Company, (ii) the execution,
delivery and performance of this Agreement by the Company does not and will not
conflict with, breach, violate or cause a default under any agreement, contract
or instrument to which the Company is a party or any judgment, order or decree
to which the Company is subject, and (iii) upon the execution and delivery of
this Agreement by the Company and the Executive, this Agreement will be a valid
and binding obligation of the Company.
12. TERMINATION OF EXISTING EMPLOYMENT ARRANGEMENTS.
Effective upon the singing of this Agreement, the Employee Retention
Agreement Resulting from a Change in Control or Division Divestiture, dated as
of December 14, 1998, by and between Smith & Nephew, Inc. and the Executive
shall be terminated and shall be of no further force or effect and the Executive
hereby agrees to take all action necessary to affect such termination.
13. NOTICES.
All notices, requests, demands, claims, and other communications
hereunder shall be in writing. Any notice, request, demand, claim or other
communication hereunder shall be
6
<PAGE> 7
delivered personally to the recipient, delivered by United States Post Office
mail, telecopied to the intended recipient at the telecopy number set forth
therefor below (with hard copy to follow), or sent to the recipient by reputable
express courier service (charges prepaid) and addressed to the intended
recipient as set forth below:
If to the Company to:
DJ Orthopedics, LLC
2985 Scott St.
Vista, CA 92083
Telephone: (760) 727-1280
Telecopy: (760) 734-3536;
with a copy to:
Chase DJ Partners, LLC
c/o Chase Capital Partners Inc.
380 Madison Avenue
New York, NY 10017
Attention: Damion Wicker, John Daileader
Telephone: (212) 622-3100
Telecopy: (212) 622-3101;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: John J. Suydam, Esq.
Telephone: (212) 408-2400
Telecopy: (212) 408-2420.
If to the Executive, to:
Michael McBrayer
c/o DJ Orthopedics, LLC
2985 Scott St.
Vista, CA 92083
Telephone: (760) 727-1280
Telecopy: (760) 734-3536;
or such other address as the recipient party to whom notice is to be given may
have furnished to the other party in writing in accordance herewith. Any such
communication shall deemed to have been delivered and received (a) when
delivered, if personally delivered, sent by telecopier or sent by overnight
courier, and (b) on the fifth business day following the date posted, if sent by
mail.
7
<PAGE> 8
14. GENERAL PROVISIONS.
(a) Severability. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
(b) Complete Agreement. This Agreement, those documents
expressly referred to herein and each of (i) DonJoy's 1999 Option Plan and
related option agreements, (ii) the Members' Agreement of DonJoy, (iii) the
Amended and Restated Operating Agreement of DonJoy, (iv) the Secured Promissory
Note and (v) Pledge Agreement (collectively, the "Management Related Documents")
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
(c) Right of Set Off. In the event of a breach by the Executive
of the provisions of any of the Management Documents, the Company is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all amounts at any time held by the Company on
behalf of the Executive and all indebtedness at any time owing by the Company to
the Executive against any and all of the obligations of the Executive now or
hereafter existing under the Management Related Documents.
(d) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Executive and the Company and their respective successors, assigns,
heirs, representatives and estate; provided, however, that the rights and
obligations of the Executive under this Agreement shall not be assigned without
the prior written consent of the Company.
(e) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF DELAWARE, WITHOUT
GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF
THE STATE OF DELAWARE OR ANY OTHER JURISDICTION), THAT WOULD CAUSE THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE TO BE APPLIED. IN FURTHERANCE
OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
8
<PAGE> 9
(f) Jurisdiction and Venue.
(i) The Company and the Executive hereby irrevocably and
unconditionally submit, for themselves and their property, to the
non-exclusive jurisdiction of any New York court or federal court of the
United States of America sitting in New York, New York and any appellate
court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or for recognition or enforcement of any
judgment, and the Company and the Executive hereby irrevocably and
unconditionally agree that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court
or, to the extent permitted by law, in such federal court. The Company
and the Executive agree that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law.
(ii) The Company and the Executive irrevocably and
unconditionally waive, to the fullest extent they may legally and
effectively do so, any objection that they may now or hereafter have to
the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any New York State or federal court sitting
in New York, New York. The Company and the Executive irrevocably waive,
to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(iii) The Company and the Executive further agree that the
mailing by certified or registered mail, return receipt requested, of any
process required by any such court shall constitute valid and lawful
service of process against them, without the necessity for service by any
other means provided by law.
(g) Amendment and Waiver. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company, the
Executive and Chase, and no course of conduct or failure or delay in enforcing
the provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement or any provision hereof.
(h) Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(j) Attorney's Fees. The Company agrees to pay reasonable and
substantiated fees and out-of-pocket expenses of counsel to the Executive for
such counsels' review of this Agreement and the Management Related Documents.
* * * *
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
DJ ORTHOPEDICS, LLC
By: /s/ Leslie H. Cross
-------------------------------
Name: Leslie H. Cross
Title: President and CEO
/s/ Michael R. McBrayer
-----------------------------------
Michael R. McBrayer
<PAGE> 1
EXHIBIT 10.21
DONJOY, L.L.C.
1999 OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the DonJoy, L.L.C. 1999 Option Plan (the "Plan") is (i) to
further the growth and success of, DonJoy, L.L.C. (the "Company") and its
Subsidiaries (as hereinafter defined) by enabling directors and employees of,
and independent consultants and contractors to, the Company and any of its
Subsidiaries to acquire equity ownership interests in the Company (the "Units"),
thereby increasing their personal interest in such growth and success, and (ii)
to provide a means of rewarding outstanding performance by such persons to the
Company and/or its Subsidiaries. For purposes of the Plan, the term "Subsidiary"
shall mean "Subsidiary Corporation" as defined in Section 424(f) of the Internal
Revenue Code of 1986, as amended.
2. ADMINISTRATION OF THE PLAN
(a) Option Committee
The Plan shall be administered by the Board of Managers of the Company
(the "Board") or a three-person Option Committee (the "Committee") appointed
from time to time by the Board. Any reference in the Plan to action by the
Company means action by or under the authority of the Board or the Committee.
The members of the Committee may be removed by the Board at any time either with
or without cause. Any vacancy on the Committee, whether due to action of the
Board or any other cause, shall be filled by the Board. The term "Committee"
shall, for all purposes of the Plan other than this Section 2, be deemed to
refer to the Board if the Board is administering the Plan.
(b) Procedures
The Committee shall adopt such rules and regulations as it shall deem
appropriate concerning the holding of meetings and the administration of the
Plan. A majority of the entire Committee shall constitute a quorum and the
actions of a majority of the members of the Committee present at a meeting at
which a quorum is present, or actions approved in writing by all of the members
of the Committee, shall be the actions of the Committee.
(c) Interpretation
Except as otherwise expressly provided in the Plan, the Committee shall
have all powers with respect to the administration of the Plan, including,
without limitation, full power and authority to interpret the provisions of the
Plan and any Option Agreement (as defined in Section 5(b)), and to resolve all
questions arising under the Plan. All decisions of the Board or the Committee,
as the case may be, shall be conclusive and binding on all participants in the
Plan.
<PAGE> 2
3. UNITS SUBJECT TO THE PLAN.
(a) Number of Units
Subject to the provisions of Section 9 (relating to adjustments upon
changes in capital structure and other limited liability company transactions),
the maximum number of Units subject at any one time to options granted under the
Plan ("Options"), plus the number of Units theretofore issued and delivered
pursuant to the exercise of Options granted under the Plan, shall not in
aggregate exceed 133,799(1) Units, as follows:
(i) Options relating to up to 53,520(2) Units may be granted
pursuant to Option Agreements substantially in the form of Exhibit A hereto
("Tier I Options");
(ii) Options relating to up to 35,680(3) Units may be granted
pursuant to Option Agreements substantially in the form of Exhibit B hereto
("Tier II Options"); and
(iii) Options relating to up to 44,599(4) Units may be granted
pursuant to Option Agreements substantially in the form of Exhibit C hereto
("Tier III Options").
If and to the extent that Options granted under [clauses (i) through
(iii) above] [the Plan] terminate, expire or are canceled without having been
fully exercised, new Options may be granted under [clauses (i) through (iii)
above] [the Plan] with respect to the Units covered by the unexercised portion
of such terminated, expired or canceled Options.
(b) Character of Units
The Units issuable upon exercise of an Option granted under the Plan
shall be (i) authorized but unissued Units, (ii) Units held in the Company's
treasury or (iii) a combination of the foregoing.
(c) Reservation of Units
The number of Units reserved for issuance under the Plan shall at no time
be less than the maximum number of Units which may be purchased at any time
pursuant to outstanding Options.
4. ELIGIBILITY
Options may be granted under the Plan only to (i) persons who are
employees of, or independent consultants to, the Company or any of its
Subsidiaries and (ii) persons who are directors or managers of the Company or
any of its Subsidiaries. Notwithstanding the foregoing,
- ----------
(1) 15% of total Units at Closing.
(2) 6% of total Units at Closing.
(3) 4% of total Units at Closing.
(4) 5% of total Units at Closing.
2
<PAGE> 3
Options may be conditionally granted to persons who are prospective employees or
directors or managers of, or independent consultants to, the Company or any of
its Subsidiaries.
5. GRANT OF OPTIONS
(a) General
Options may be granted under the Plan at any time and from time to time
on or prior to the tenth anniversary of the Effective Date (as defined in
Section 11). Subject to the provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to determine:
(i) the persons (from among the class of persons eligible to
receive Options under the Plan) whom Options shall be granted (the
"Optionees");
(ii) the time or times at which Options shall be granted;
(iii) the number of Units subject to each Option;
(iv) the Option Price of the Units subject to each Option; and
(v) the time or times when each Option shall become exercisable
and the duration of the exercise period.
(b) Option Agreements
Each Option granted under the Plan shall be evidenced by a written
agreement (an "Option Agreement"), containing such terms and conditions and in
such form, not inconsistent with the Plan, as the Committee shall, in its
discretion, provide. Each Option Agreement shall be executed by the Company and
the Optionee.
(c) No Evidence of Employment or Service
Nothing contained in the Plan or in any Option Agreement shall confer
upon any Optionee any right with respect to the continuation of his or her
employment by or service with the Company or any of its Subsidiaries or
interfere in any way with the right of the Company or any such Subsidiary
(subject to the terms of any separate agreement to the contrary) at any time to
terminate such employment or service or to increase or decrease the compensation
of the Optionee from the rate in existence at the time of the grant of an
Option.
(d) Date of Grant
The date of grant of an Option under the Plan shall be the date as of
which the Committee approves the grant; provided, however, that the grant shall
in no event be earlier than the date as of which the Optionee becomes an
employee of the Company or one of its Subsidiaries.
3
<PAGE> 4
6. OPTION PRICE
Subject to Section 9, the price (the "Option Price") at which each Unit
subject to an Option granted under the Plan may be purchased shall be determined
by the Committee at the time the Option is granted.
7. EXERCISABILITY OF OPTIONS
(a) Committee Determination
Each Option granted under the Plan shall be exercisable at such time or
times, or upon the occurrence of such event or events, and for such number of
Units subject to the Option, as shall be determined by the Committee and set
forth in the Option Agreement evidencing such Option. If an Option is not at the
time of grant immediately exercisable, the Committee may (i) in the Option
Agreement evidencing such Option, provide for the acceleration of the exercise
date or dates of the subject Option upon the occurrence of specified events
and/or (ii) at any time prior to the complete termination of an Option,
accelerate the exercise date or dates of such Option.
(b) Automatic Termination of Options
The unexercised portion of any Option granted under the Plan shall
automatically terminate and shall become null and void and be of no further
force or effect upon the first to occur of the following:
(i) the end of the stated term thereof;
(ii) if the Optionee is an employee, unless a shorter period is
provided for in any Option Agreement, the expiration of three months from the
date that the Optionee ceases to be an employee of the Company or any of its
Subsidiaries (other than as a result of an Involuntary Termination (as
defined in clause (iii) below) or termination For Cause (as defined herein));
provided, however, that if the Optionee shall die during such three-month
period, the time of termination of the unexercised portion of such Option
shall be the expiration of 12 months from the date that such Optionee ceased
to be an employee of the Company or any of its Subsidiaries;
(iii) if the Optionee is an employee, the expiration of 12 months
from the date that the Optionee ceases to be an employee of the Company or
any of its Subsidiaries, if such termination is due to such Optionee's death
or Disability (as defined below) (an "Involuntary Termination");
(iv) if the Optionee is an employee, immediately upon the date
that the Optionee ceases to be an employee of the Company or any of its
Subsidiaries, if such termination is For Cause;
(v) the expiration of such period of time or the occurrence of
such event as the Committee in its discretion may provide in the Option
Agreement;
4
<PAGE> 5
(vi) on the effective date of a Material Transaction (as defined
in Section 9(b)(i)) to which Section 9(b)(ii) (relating to assumptions
and substitutions of Options) does not apply; and
(vii) except to the extent permitted by Section 9(b)(ii), the date
on which an Option or any part thereof or right or privilege relating
thereto is transferred (otherwise than by will or the laws of descent and
distribution), assigned, pledged, hypothecated, attached or otherwise
disposed of by the Optionee.
As used herein, "Disability" means any accident, sickness, incapacity or
other disability which (i) renders the Optionee unable to substantially perform
all of his duties for 90 days during any period of 360 consecutive days or (ii)
would reasonably be expected to render the Optionee unable to substantially
perform all of his duties for 90 days during any period of 360 consecutive days,
in the case of each of clauses (i) or (ii), as determined by the Board
(excluding the Optionee should he be a member of the Board at the time of such
determination) in its good faith judgment.
As used herein, "For Cause" shall mean (i) the failure by the Optionee to
perform such duties as are reasonably requested by the Board or the Chief
Executive Officer of the Company or its Subsidiaries, as applicable, (ii) the
Optionee's failure to observe any material policies of the Company or its
Subsidiaries, as applicable, (iii) gross negligence or willful misconduct by the
Optionee in the performance of his duties, (iv) the commission by the Optionee
of any act of fraud, theft or financial dishonesty with respect to the Company
or any of its Affiliates, or any felony or act involving moral turpitude, (v)
the material breach by the Optionee of his/her employment agreement (if
applicable) with the Company or its Subsidiaries, as applicable, or of any other
agreement or contract with the Company or any Affiliate thereof (including,
without limitation, the Members' Agreement of the Company or any option
agreement which must be entered into pursuant to this Plan), (vi) chronic
absenteeism or (vii) the failure of the Optionee to give at least 30 days' prior
written notice of his termination of employment with the Company or its
Subsidiaries, as applicable. For purposes of this Agreement, "Affiliates" means
DJ Orthopedic, LLC (or its successors or assigns) and all subsidiaries thereof.
Anything contained in the Plan to the contrary notwithstanding, unless
otherwise provided in an Option Agreement, no Option granted under the Plan
shall be affected by any change of duties or position of the Optionee (including
a transfer to or from the Company or one of its Subsidiaries), so long as such
Optionee continues to be an employee of the Company or one of its Subsidiaries.
8. PROCEDURE FOR EXERCISE
(a) Payment
Payment upon exercise of an Option shall be made, at the election of the
Optionee, (i) in cash or personal or certified check payable to the Company in
an amount equal to the aggregate Option Price of the Units with respect to which
the Option is being exercised or (ii) upon the surrender of Units or option to
buy Units, in each case with such Units or Options to
5
<PAGE> 6
buy Units, as the case may be, valued at the Fair Value per Unit (as defined in
Section 8) thereof as determined by the Committee.
(b) Notice
An Optionee (or other person, as provided in Section 10(b)) may exercise
an Option granted under the Plan in whole or in part (but for the purchase of
whole Units only), as provided in the Option Agreement evidencing his Option, by
delivering a written notice (the "Notice") to the Secretary of the Company. The
Notice shall state:
(i) that the Optionee elects to exercise the Option;
(ii) the number of Units with respect to which the Option is being
exercised (the "Optioned Units");
(iii) the method of payment for the Optioned Units (which method
must be available to the Optionee under the terms of his or her Option
Agreement);
(iv) the date upon which the Optionee desires to consummate the
purchase (which date must be prior so the termination of such Option);
(v) a copy of any election filed by the Optionee pursuant to
Section 83(b) of the Code; and
(vi) such further provisions consistent with the Plan as the
Committee may from time to time require.
The exercise date of an Option shall be the date on which the Company
receives the Notice from the Optionee.
(c) Issuance of Certificates
The Company shall issue a certificate in the name of the Optionee (or
such other person exercising the Option in accordance with the provisions of
Section 10(b)) for the Optioned Units as soon as practicable after receipt of
the Notice and payment of the aggregate Option Price for such Units. Neither the
Optionee nor any person exercising an Option in accordance with the provisions
of Section 10(b) shall have any privileges as a holder of Units with respect to
any Units subject to an Option granted under the Plan until the date of payment
for such Units pursuant to the Option.
(d) Determination of Fair Market Value.
Fair Market Value of each Unit shall be determined in accordance with the
following:
(i) "FAIR VALUE PER UNIT " shall mean, as of any date of
determination, the fair value of each Unit (or, with respect to a warrant
or option, the fair value of each Unit obtainable upon exercise thereof
net of the exercise price), determined as follows:
6
<PAGE> 7
At any time that the Fair Value Per Unit shall be required to be
determined hereunder, the Board shall make a good faith determination
(the "Board's Determination") of the fair value of each Unit within 30
days of the delivery by the Company of a Repurchase Notice (as defined in
the Operating Agreement) (without taking into account that the Units may
be "restricted securities" but with a reasonable discount, for the
minority position represented by the Units and shall provide to the
Member (as defined in the Operating Agreement) with respect to whose Unit
such determination is being made a written notice thereof which notice
shall set forth supporting data in respect of such calculation (the
"Determination Notice"). The Member shall have 10 days following receipt
of the Determination Notice within which to deliver to the Company a
written notice (the "Objection Notice") of an objection, if any, to the
Board's Determination, which Objection Notice shall set forth the
Member's good faith determination (the "Member's Determination") of the
fair value of each Unit. The failure by the Member to deliver the
Objection Notice within such 10-day period shall constitute the Member's
acceptance of the Board's Determination as conclusive. In the event of
the timely delivery of an Objection Notice, the Company and the Member
shall attempt in good faith to arrive at an agreement with respect to the
Fair Value per Unit, which agreement shall be set forth in writing within
15 days following delivery of the Objection Notice. If the Company and
the Member are unable to reach an agreement within such 15-day period,
the matter shall be promptly referred for determination to a regionally
or nationally recognized investment banking or valuation firm (the
"Valuer") reasonably acceptable to the Company and the Member. The
Company and the Member will cooperate with each other in good faith to
select such Valuer. The Valuer may select the Board's Determination or
the Member's Determination as the Fair Value Per Unit or may select any
other number or value (determined without taking into account that the
Units may be "restricted securities" but with a reasonable discount, not
to exceed 20% for the minority position represented by the Units). The
Valuer's selection will be furnished to the Company and the Member in
writing and conclusive and binding upon the Company and the Member. The
fees and expenses of the Valuer shall be borne equally by the Company and
the Member with respect to whose Units such determination relates;
provided, however, that if the Fair Value per Unit, as determined by the
Valuer, shall be more than 15% greater than the Board's Determination of
such Fair Value per Unit, then such fees and expenses of the Valuer
shall be borne entirely by the Company.
9. ADJUSTMENTS
(a) Changes in Capital Structure
Subject to Section 9(b), if the Unit is changed by reason of a split,
reverse split or recapitalization, or converted into or exchanged for other
securities as a result of a merger, consolidation or reorganization, the
Committee shall make such adjustments in the number and class of Units with
respect to which Options may be granted under the Plan as shall be equitable and
appropriate in order to make such Options, as nearly as may be practicable,
equivalent to such Options immediately prior to such change. A corresponding
adjustment changing the
7
<PAGE> 8
number and class of Units allocated to, and the Option Price of, each Option or
portion thereof outstanding at the time of such change shall likewise be made.
(b) Material Transactions
The following rules shall apply in connection with the dissolution or
liquidation of the Company, a reorganization, merger or consolidation in which
the Company is not the surviving corporation, or a sale of all or substantially
all of the assets of the Company to another person or entity (each, a "Material
Transaction"), unless otherwise provided in the Option Agreement or in the
Members' Agreement of even date herewith:
(i) each holder of an Option outstanding at such time shall be
given (A) written notice of such Material Transaction at least 20 days
prior to its proposed effective date (as specified in such notice) and
(B) an opportunity, during the period commencing with delivery of such
notice and ending 10 days prior to such proposed effective date, to
exercise the Option to the full extent to which such Option would have
been exercisable by the Optionee at the expiration of such 20-day period;
provided, however, that upon the occurrence of a Material Transaction,
all Options granted under the Plan and not so exercised shall
automatically terminate; and
(ii) Notwithstanding anything contained in the Plan to the
contrary, Section 9(b)(i) shall not be applicable if provision shall be
made in connection with such Material Transaction for the assumption of
outstanding Options by, or the substitution for such Options of new
options covering the equity securities of, the surviving, successor or
purchasing corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number, kind and option prices of Units
subject to such options.
(c) Special Rules
The following rules shall apply in connection with Section 9(a) and
(b) above:
(i) no fractional Units shall be issued as a result of any such
adjustment, and any fractional Units resulting from the computations
pursuant to Section 9(a) or (b) shall be eliminated and the Optionee
shall receive cash consideration for such fractional Unit at the rate of
the Fair Market Value of such Unit, determined in accordance with clause
(d) below;
(ii) no adjustment shall be made for cash dividends or the
issuance to holders of rights to subscribe for additional Units or other
securities; and
(iii) any adjustments referred to in Section 9(a) or (b) shall be
made by the Board or Committee (as the case may be) in good faith and
shall be conclusive and binding on all persons holding Options granted
under the Plan.
8
<PAGE> 9
10. RESTRICTIONS ON OPTIONS AND OPTIONED UNITS
(a) Compliance With Securities Laws
No Options shall be granted under the Plan, and no Units shall be issued
and delivered upon the exercise of Options granted under the Plan, unless and
until the Company and/or the Optionee shall have complied with all applicable
Federal or state registration, listing and/or qualification requirements and all
other requirements of law or of any regulatory agencies having jurisdiction.
The Committee in its discretion may, as a condition to the exercise of
any Option granted under the Plan, require an Optionee (i) to represent in
writing that the Units received upon exercise of an Option are being acquired
for investment and not with a view to distribution and (ii) to make such other
representations and warranties as are deemed appropriate by the Company.
Certificates representing Units acquired upon the exercise of Options that have
not been registered under the Securities Act shall, if required by the
Committee, bear the following legend and such additional legends as may be
required by the Option Agreement evidencing a particular Option:
"THE UNITS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"). THE UNITS HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE UNITS UNDER THE SECURITIES ACT OR AN
OPINION OF COUNSEL TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT."
(b) Nonassignability of Option Rights
No Option granted under the Plan shall be assignable or otherwise
transferable by the Optionee except by will or by the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by the Optionee. If an Optionee dies, his or her Option shall thereafter be
exercisable, during the period specified in Section 7(b)(ii) or (iii) (as the
case may be), by his or her executors or administrators to the full extent to
which such Option was exercisable by the Optionee at the time of his or her
death.
11. EFFECTIVE DATE OF PLAN
The Plan shall become effective on the date of its adoption by the Board.
12. EXPIRATION AND TERMINATION OF THE PLAN
Except with respect to Options then outstanding, the Plan shall expire on
the first to occur of (i) the fifteenth anniversary of the date on which the
Plan is approved by the holders of Units and (ii) the date as of which the
Board, in its sole discretion, determines that the Plan
9
<PAGE> 10
shall terminate (the "Expiration Date"). Any Options outstanding as of the
Expiration Date shall remain in effect until they have been exercised or
terminated or have expired by their respective terms.
13. AMENDMENT OF PLAN
The Board may at any time prior to the Expiration Date modify and amend
the Plan in any respect. No such amendment to the Plan shall affect the terms or
provisions of any Option granted by the Company prior to the effectiveness of
such amendment.
14. CAPTIONS
The use of captions in the Plan is for convenience. The captions are
not intended to provide substantive rights.
15. WITHHOLDING TAXES
Whenever under the Plan, Units are to be delivered by an Optionee upon
exercise of an Option, the Company shall be entitled to require as a condition
of delivery that the Optionee remit or, in appropriate cases, agree to remit
when due, an amount sufficient to satisfy all current or estimated future
Federal, state and local income tax withholding the employee's portion of any
employment tax requirements relating thereto.
16. OTHER PROVISIONS
Each Option granted under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Committee,
in its sole discretion.
17. NUMBER AND GENDER
With respect to words used in the Plan, the singular form shall
include the plural form, the masculine gender shall include the feminine gender,
and vice-versa, as the context requires
18. GOVERNING LAW
The validity and construction of the Plan and the instruments evidencing
the Options granted hereunder shall be governed by the laws of the State of
Delaware.
AS ADOPTED BY THE BOARD OF MANAGERS
OF DONJOY, L.L.C.
ON JUNE 30, 1999.
10
<PAGE> 1
EXHIBIT 10.22
* CONFIDENTIAL *
Employee Retention Agreement
Resulting from a Change in Control or Division Divestiture
AGREEMENT made as of December 14, 1998, by and between Smith & Nephew,
Inc. (the "Company") and Les Cross (the "Executive").
WHEREAS, the Company recognizes that the possibility of an occurrence of
a Change in Control or the Divestiture of the BASS Division of the Company can
result in significant distractions of the Company's key management personnel
because of the uncertainties inherent in such a situation; as well as
uncertainty in the business and potentially the employee's position in the
future creates uncertainty for the employee's continued employment and the
employee's position;
WHEREAS, the Executive possesses certain skills unique to the Company's
business;
WHEREAS, the Company has determined that it is in the best interest of
the Company to retain the services of the Executive and to ensure his continued
dedication and efforts without undue concern for his personal security; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Company, particularly in the event of a Change in Control or Division
Divestiture, the Company desires to enter into this Agreement with the Executive
to provide the Executive with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control or the
Divestment of a Division, and to provide the Executive with certain other
benefits whether or not the Executive's employment is terminated.
NOW, THEREFORE, it is agreed as follows:
1. Term. This Agreement shall commence as of December 31, 1998, and
shall continue in effect until December 31, 1999, when it shall
terminate, unless extended by written mutual agreement signed by
the Company and the Executive; provided, however, that in the
event that a Change in Control or Division Divestiture occurs on
or before December 31, 1999, the term of this Agreement shall not
expire prior to the expiration of twelve (12) months after the
occurrence of the Change in Control or the Divestiture of the BASS
Division.
2. Definitions:
2.1 Cause. For purposes of this Agreement, "Cause" shall mean the
misappropriation of corporate funds or other acts of dishonesty,
activities materially harmful to the Company's business or
reputation, willful refusal to perform or substantial disregard of
Executive's assigned duties, or any violation of any legal
obligation to the Company.
<PAGE> 2
2.2 Change in Control / Division Divestiture. For purposes of this
Agreement, "Change in Control" of BASS shall be deemed to have
occurred if as a result of a tender offer, merger consolidation,
sale of assets, acquisition of shares or contested election, or
any combination of the foregoing transactions, (i) any person
shall become the owner, beneficially or of record, of more than
30% of the aggregate voting power of the Company, other than a
member of the Smith & Nephew Group of companies, (ii)
substantially all of the assets of the Company shall be sold to
another corporation; provided that the other corporation is not a
member of the Smith & Nephew Group of companies or (iii) the
persons who were directors of the Company immediately before the
transaction shall cease to constitute a majority of the Board of
Directors of the Company or any successor to the Company.
2.3 Disability. For purposes of this Agreement, "Disability" shall
mean a physical or mental condition which impairs the Executive's
ability to substantially perform his duties under this Agreement
for a period of one hundred eighty (180) consecutive days as
determined by a company appointed health care provider.
2.4 Good Reason. For purposes of this Agreement, "Good Reason" shall
mean the occurrence after a Change in Control or a Division
Divestiture of any of the events or conditions described in
Subsections (1) through (8) hereof:
(1) a change in the Executive's title, position or
responsibilities (including reporting responsibilities)
which represents an adverse change from his present
position or responsibilities in effect immediately prior to
the Change in Control or the Divestiture of BASS; the
assignment to the Executive of any duties or
responsibilities which are inconsistent with his present
position or responsibilities in effect immediately prior to
the Change in Control or Divestiture of BASS; or
(2) a material reduction in the Executive's compensation or any
failure to pay the Executive any compensation or benefits
to which he is entitled within thirty (30) days of the date
due;
(3) the Company requiring the Executive to be based at any
place outside a 50-mile radius from his current location
except for reasonably required travel on the Company's
business which is not substantially greater than such
current travel requirements.
(4) the failure by the Company to continue in effect any
compensation or employee benefit plan in which the
Executive is participating, unless a substitute or
replacement plan has been implemented which provides
substantially identical compensation or benefits to the
Executive or unless the compensation and benefit plans are
the same as those offered by the company to those in
similar executive positions;
(5) the insolvency or the filing of a petition for bankruptcy
by the Company;
(6) any material breach by the Company of any provision of this
Agreement;
2
<PAGE> 3
(7) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms
of Section 2.1; or
(8) the failure of the Company to obtain an agreement from any
successor or assign of the Company to assume and agree to
perform this Agreement, as contemplated in Section 7
hereof.
3. Position and Duties. The Executive shall continue to have such
responsibilities and authority as may be given to him from time to
time by either the Chief Executive, President of the Company, or
the Company's Board of Directors. The Executive shall devote
substantially all his working time and efforts to the business of
the Company.
4. Compensation and Benefits.
a. Salary. During the period of the Executive's employment
hereunder, the Company shall pay to the Executive his
current salary with the same frequency and on the same
basis that the Company normally makes salary payments to
other Executive personnel. This salary may be increased
from time to time in accordance with normal business
practices of the Company. If such increases take place, the
Company shall not thereafter decrease the Executive's
salary without the Executive's consent during the term of
this Agreement.
b. Benefits. The Executive shall participate in all other
compensation and benefit plans which are offered by the
Company to employees in similar executive positions, in
accordance with the terms of the plans.
c. Retention Bonus. Promptly following the Divestiture of the
BASS Division or a Change in Control, the Executive shall
receive a special retention taxable bonus equal to twelve
months base salary for full on-going commitment of the
Executive during the divestiture process and if he remains
in his position through the completion of the Divestiture
or Change in Control as determined by the Company.
If the Division is not sold by December 31, 1999, and the
Divestiture process has ceased, the Executive will be
eligible to receive a taxable Retention Bonus equal to 50%
of the Retention Bonus, as outlined in paragraph one of
Section 4c.
d. Special Sale Bonus. The Executive will be eligible to
receive an additional taxable bonus payment of 150% of his
base salary if the BASS Division is sold during the
Executive's employment for an amount equal to or greater
than $350 million ("Special Sale Bonus"). If the BASS
Division is sold for an amount between $225 million and
$350 million, then the Executive shall receive a pro rata
share of the Special Sale Bonus. (Accordingly, if the sale
price were $225 million, $250 million, $300 million, or
$350 million, the Special Sale Bonus would be,
respectively, 25%, 50%, 100%, or 150% of the Executive's
base salary).
3
<PAGE> 4
5. Severance and Benefits.
5.1 If within one year of a Change in Control or a Divestiture of
BASS, the Executive is terminated by the purchasers for reasons
other than Cause or if the executive resigns for Good Reason, then
the Executive will be entitled to one year's base salary plus one
year's taxable bonus (calculated as maximum normal bonus,
excluding retention bonus), payable by the purchaser. "Severance
Payments."
5.2 The Severance Payments provided for in 5.1 shall be reduced by 50%
if, upon termination of his employment, the Executive does not
accept within ten (10) days a written offer of employment by an
affiliate of the Company, if such offer provides for a similar
position of employment, base salary equal to or greater than 90%
of Executive's salary at the time of termination, relocation
costs, temporary living expenses, and guaranteed employment for
eighteen (18) months unless employment is terminated for Cause,
Disability or as a result of death.
6. Termination Date. "Termination Date" shall mean in the case of the
Executive's death, his date of death, and in all other cases, the
date specified in the Notice of Termination subject to the
following:
a. If the Executive's employment is terminated by the Company
for Cause, the date specified in the notice of Termination
shall be the date of the action.
b. If the Executive's employment is terminated for Good
Reason, the date specified in the Notice of Termination
shall be at least thirty (30) days, except by mutual
agreement.
c. If the Executive Voluntarily terminates the employment
following the payment of the Retention Bonus and/or
Severance Payments without Good Reason, he agrees to
provide thirty (30) calendar days notice.
7. Successors; Binding Agreement.
a. This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns, and the
Company shall require any successor or assign to expressly
assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be
required to perform it if no such succession or assignment
had taken place.
b. Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except for
compensation due the Executive as a result of his death
which may pass by will or by the laws of descent and
distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal personal
representative (executors, administrators, heirs, devisees,
and/or legatees).
4
<PAGE> 5
8. Notice. For purposes of this Agreement, notices and other
communications provided for in the Agreement (including the Notice
of Termination) shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified
mail, return receipt requested, addressed to the respective
addresses last given by each party to the other. All notices and
communications shall be deemed to have been received on the date
of personal delivery thereof or on the third business day after
the mailing thereof, except that notice of change of address shall
be effective only upon receipt by a designated representative of
Smith & Nephew, Inc.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the
Company and for which the Executive may qualify, nor shall
anything herein limit or reduce such rights as the Executive may
have under any other agreements with the Company. Provided,
however, that to the extent that the Executive receives benefits
under this Agreement because of a Division Divestiture, he or she
is not entitled to severance pay under any other severance plan,
policy or arrangement of the Company. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive
under any plan or program of the Company shall be payable in
accordance with such plan or program, except as explicitly
modified by this Agreement.
10. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Executive and the
Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or
subsequent time. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set
forth in this Agreement.
11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of
California without giving effect to the conflicts of law
principles thereof.
5
<PAGE> 6
12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision
shall not effect the validity or enforceability of the other
provisions hereof.
13. Reduction of Payments by the Company. If any payment or benefit
received by or in respect of the Executive under this Agreement or
any other plan, arrangement or agreement with the Company or any
other member of the Smith & Nephew Group of companies, (determined
without regard to any additional payments required under this
Section 13) (a "Payment") would be subject to the tax (the "Excise
Tax") imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (or any similar tax that may hereafter be
imposed), the Company shall pay to the Executive with respect to
such Payment an additional amount (the "Gross-up Payment") such
that the net amount retained by the Executive from the Payment and
the Gross-up Payment, after reduction for any Excise Tax upon the
Payment and any federal, state and local income tax and Excise Tax
upon the Gross-up Payment, shall be equal to the Payment.
SMITH & NEPHEW, INC.
By: /s/ Clifford Lomax
----------------------------
Clifford Lomax
Director
/s/ Leslie Cross
----------------------------
Leslie Cross
6
<PAGE> 1
EXHIBIT 10.23
* CONFIDENTIAL *
Employee Retention Agreement
Resulting from a Change in Control or Division Divestiture
AGREEMENT made as of December 14, 1998, by and between Smith & Nephew,
Inc. (the "Company") and Cy Talbot (the "Executive").
WHEREAS, the Company recognizes that the possibility of an occurrence of
a Change in Control or the Divestiture of a Division of the Company can result
in significant distractions of the Company's key management personnel because of
the uncertainties inherent in such a situation; as well as uncertainty in the
business and potentially the employee's position in the future creates
uncertainty for the employee's continued employment and the employee's position;
WHEREAS, the Executive possesses certain skills unique to the Company's
business;
WHEREAS, the Company has determined that it is in the best interest of
the Company to retain the services of the Executive and to ensure his continued
dedication and efforts without undue concern for his personal security; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Company, particularly in the event of a Change in Control or Division
Divestiture, the Company desires to enter into this Agreement with the Executive
to provide the Executive with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control or the
Divestment of a Division, and to provide the Executive with certain other
benefits whether or not the Executive's employment is terminated.
NOW, THEREFORE, it is agreed as follows:
1. Term. This Agreement shall commence as of December 31, 1998, and
shall continue in effect until December 31, 1999, when it shall
terminate, unless extended by mutual written agreement signed by
the Company and the Executive; provided, however, that in the
event that a Change in Control or Division Divestiture occurs on
or before December 31, 1999. The term of this Agreement shall not
expire prior to the expiration of twelve (12) months after the
occurrence of a Change in Control or a Division Divestiture.
2. Definitions:
2.1 Cause. For purposes of this Agreement, "Cause" shall mean the
misappropriation of corporate funds or other acts of dishonesty,
activities materially harmful to the Company's business or
reputation, willful refusal to perform or substantial disregard of
Executive's assigned duties, or any violation of any legal
obligation to the Company.
2.2 Change in Control / Division Divestiture. For purposes of this
Agreement, a "Change in Control" shall be deemed to have occurred
if the Company shall
<PAGE> 2
become a subsidiary of another corporation, shall be merged or
consolidated into another corporation, if substantially all of the
assets of the Company shall be sold to another corporation, or if
another corporation shall acquire 30% or more of the outstanding
shares of the Company; provided in each case that the other
corporation is not a member of the Smith & Nephew Group of
companies. A Division Divestiture is the sale of a Division by the
Company to another corporation.
2.3 Disability. For purposes of this Agreement, "Disability" shall
mean a physical or mental condition which impairs the Executive's
ability to substantially perform his duties under this Agreement
for a period of one hundred eighty (180) consecutive days as
determined by a company appointed health care provider.
2.4 Good Reason. For purposes of this Agreement, "Good Reason" shall
mean the occurrence after a Change in Control or a Division
Divestiture of any of the events or conditions described in
Subsections (1) through (8) hereof:
(1) a change in the Executive's title, position or
responsibilities (including reporting responsibilities)
which represents an adverse change from his title, position
or responsibilities in effect immediately prior to a Change
in Control or Division Divestiture; the assignment to the
Executive of any duties or responsibilities which are
inconsistent with his status, title, position or
responsibilities in effect immediately prior to a Change in
Control or Division Divestiture; or any removal of the
Executive from or failure to reappoint or re-elect him to
any of such offices or positions, except in connection with
the termination of his employment for Disability, Cause, or
as a result of his death; or
(2) a reduction in the Executive's compensation or any failure
to pay the Executive any compensation or benefits to which
he is entitled within thirty (30) days of the date due;
(3) the Company requiring the Executive to be based at any
place outside a 50-mile radius from his current location
except for reasonably required travel on the Company's
business which is not substantially greater than such
current travel requirements.
(4) the failure by the Company to continue in effect (without a
material reduction in benefit level, and/or reward
opportunities) any compensation or employee benefit plan in
which the Executive is participating, unless a substitute
or replacement plan has been implemented which provides
substantially identical compensation or benefits to the
Executive or unless the compensation and benefit plans are
the same as those offered by the company to those in
similar executive positions;
(5) the insolvency or the filing of a petition for bankruptcy
by the Company;
(6) any material breach by the Company of any provision of this
Agreement;
2
<PAGE> 3
(7) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms
of Section 2.1; or
(8) the failure of the Company to obtain an agreement from any
successor or assign of the Company to assume and agree to
perform this Agreement, as contemplated in Section 7
hereof.
3. Position and Duties. The Executive shall continue to have such
responsibilities and authority as may be given to him from time to
time by either the Chief Executive, President of the Company, or
the Company's Board of Directors. The Executive shall devote
substantially all his working time and efforts to the business of
the Company.
4. Compensation and Benefits.
a. Salary. During the period of the Executive's employment
hereunder, the Company shall pay to the Executive his
current salary with the same frequency and on the same
basis that the Company normally makes salary payments to
other Executive personnel. This salary may be increased
from time to time in accordance with normal business
practices of the Company. If such increases take place, the
Company shall not thereafter decrease the Executive's
salary without the Executive's consent during the term of
this Agreement.
b. Benefits. The Executive shall participate in all other
compensation and benefit plans which are offered by the
Company to employees in similar executive positions, in
accordance with the terms of the plans.
c. Retention Bonus. In the event of a Division Divestiture,
the Executive shall receive a special retention taxable
bonus equal to twelve months base salary for full on-going
commitment of the Executive during the divestiture process
and if he remains in his position through the completion of
the Divestiture as determined by the Company.
If the Division is not sold by December 31, 1999, and the
Divestiture process has ceased, the Executive will be
eligible to receive a taxable Retention Bonus equal to 50%
of the Retention Bonus, as outlined in paragraph one of
Section 4c.
d. Executive Benefits. For purposes of this Agreement,
incentive bonuses, stock options, car, club dues,
memberships, and financial planning/tax preparation are
considered to be a part of compensation.
d(1) In the event of a Change in Control or Division
Divestiture occurring on or before December 31,
1999, the Executive will earn a pro rata bonus based
on results up to and including the date on which the
Change in Control or Division Divestiture takes
place.
d(2) The Company's customary accounting policies shall be
used for determination of financial results.
3
<PAGE> 4
5. Severance and Benefits.
5.1 If, on or before December 31, 1999, the Company successfully
divests the Division and the Executive's employment with the
Company shall be terminated by the purchasers for reasons other
than Cause, Disability or Death within one year of the completion
of the divestiture, then the Executive will be entitled to one
year's base salary plus one year's taxable bonus (calculated as
maximum normal bonus achievable in 1999), payable by the
purchaser.
5.2 The Severance payments shall be reduced by 50% if, upon
termination of his employment, the Executive does not accept
within ten (10) days a written offer of employment by an affiliate
of the Company, if such offer provides for a similar position of
employment, base salary equal to or greater than 90% of
Executive's salary at the time of termination, relocation costs,
temporary living expenses, and guaranteed employment for eighteen
(18) months unless employment is terminated for Cause, disability
or as a result of Death.
5.3 In the event the Executive's employment is terminated by Death,
his estate shall receive a pro rata share of any severance or
benefits provided for under Sections 4 and 5 of this Agreement up
to the date of the Executive's death.
6. Termination Date. "Termination Date" shall mean in the case of the
Executive's death, his date of death, and in all other cases, the
date specified in the Notice of Termination subject to the
following:
a. If the Executive's employment is terminated by the Company
for Cause, the date specified in the notice of Termination
shall be the date of the action.
b. If the Executive's employment is terminated for Good
Reason, the date specified in the Notice of Termination
shall be at least thirty (30) days except by mutual
agreement.
c. If the Executive Voluntarily terminates the Agreement
without Good Reason, he agrees to do so under the following
terms:
(1) Provide thirty (30) calendar days notice.
(2) Agree not to compete with the Company or any
affiliate for a period of six (6) months.
(3) Agree not to solicit the Company's employees for
hire for a period of six (6) months.
4
<PAGE> 5
Successors; Binding Agreement.
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns, and the
Company shall require any successor or assign to expressly
assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be
required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except for
compensation due the Executive as a resulot of his death
which may pass by will or by the laws of descent and
distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal personal
representative (executors, administrators, heirs, devisees,
and/or legatees).
8. Notice. For purposes of this Agreement, notices and other
communications provided for in the Agreement (including the Notice
of Termination) shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified
mail, return receipt requested, addressed to the respective
addresses last given by each party to the other. All notices and
communications shall be deemed to have been received on the date
of personal delivery thereof or on the third business day after
the mailing thereof, except that notice of change of address shall
be effective only upon receipt by a designated representative of
Smith & Nephew, Inc.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the
Company and for which the Executive may qualify, nor shall
anything herein limit or reduce such rights as the Executive may
have under any other agreements with the Company. Provided,
however, that to the extent that the Executive receives benefits
under this Agreement because of a Division Divestiture, he or she
is not entitled to severance pay under any other severance plan,
policy or arrangement of the Company. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive
under any plan or program of the Company shall be payable in
accordance with such plan or program, except as explicitly
modified by this Agreement.
10. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Executive and the
Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or
subsequent time. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set
forth in this Agreement.
5
<PAGE> 6
11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of
California without giving effect to the conflicts of law
principles thereof.
12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision
shall not effect the validity or enforceability of the other
provisions hereof.
SMITH & NEPHEW, INC.
By: /s/ Clifford Lomax
---------------------------
Clifford Lomax
Director
/s/ Cyril Talbot III
----------------------------
Cyril Talbot III
6
<PAGE> 1
EXHIBIT 10.24
* CONFIDENTIAL *
Employee Retention Agreement
Resulting from a Change in Control or Division Divestiture
AGREEMENT made as of December 14, 1998, by and between Smith & Nephew,
Inc. (the "Company") and Michael McBrayer (the "Executive").
WHEREAS, the Company recognizes that the possibility of an occurrence of
a Change in Control or the Divestiture of a Division of the Company can result
in significant distractions of the Company's key management personnel because of
the uncertainties inherent in such a situation; as well as uncertainty in the
business and potentially the employee's position in the future creates
uncertainty for the employee's continued employment and the employee's position;
WHEREAS, the Executive possesses certain skills unique to the Company's
business;
WHEREAS, the Company has determined that it is in the best interest of
the Company to retain the services of the Executive and to ensure his continued
dedication and efforts without undue concern for his personal security; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Company, particularly in the event of a Change in Control or Division
Divestiture, the Company desires to enter into this Agreement with the Executive
to provide the Executive with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control or the
Divestment of a Division, and to provide the Executive with certain other
benefits whether or not the Executive's employment is terminated.
NOW, THEREFORE, it is agreed as follows:
1. Term. This Agreement shall commence as of December 31, 1998, and
shall continue in effect until December 31, 1999, when it shall
terminate, unless extended by mutual written agreement signed by
the Company and the Executive; provided, however, that in the
event that a Change in Control or Division Divestiture occurs on
or before December 31, 1999. The term of this Agreement shall not
expire prior to the expiration of twelve (12) months after the
occurrence of a Change in Control or a Division Divestiture.
2. Definitions:
2.1 Cause. For purposes of this Agreement, "Cause" shall mean the
misappropriation of corporate funds or other acts of dishonesty,
activities materially harmful to the Company's business or
reputation, willful refusal to perform or substantial disregard of
Executive's assigned duties, or any violation of any legal
obligation to the Company.
2.2 Change in Control / Division Divestiture. For purposes of this
Agreement, a "Change in Control" shall be deemed to have occurred
if the Company shall
<PAGE> 2
become a subsidiary of another corporation, shall be merged or
consolidated into another corporation, if substantially all of the
assets of the Company shall be sold to another corporation, or if
another corporation shall acquire 30% or more of the outstanding
shares of the Company; provided in each case that the other
corporation is not a member of the Smith & Nephew Group of
companies. A Division Divestiture is the sale of a Division by the
Company to another corporation.
2.3 Disability. For purposes of this Agreement, "Disability" shall
mean a physical or mental condition which impairs the Executive's
ability to substantially perform his duties under this Agreement
for a period of one hundred eighty (180) consecutive days as
determined by a company appointed health care provider.
2.4 Good Reason. For purposes of this Agreement, "Good Reason" shall
mean the occurrence after a Change in Control or a Division
Divestiture of any of the events or conditions described in
Subsections (1) through (8) hereof:
(1) a change in the Executive's title, position or
responsibilities (including reporting responsibilities)
which represents an adverse change from his title, position
or responsibilities in effect immediately prior to a Change
in Control or Division Divestiture; the assignment to the
Executive of any duties or responsibilities which are
inconsistent with his status, title, position or
responsibilities in effect immediately prior to a Change in
Control or Division Divestiture; or any removal of the
Executive from or failure to reappoint or re-elect him to
any of such offices or positions, except in connection with
the termination of his employment for Disability, Cause, or
as a result of his death; or
(2) a reduction in the Executive's compensation or any failure
to pay the Executive any compensation or benefits to which
he is entitled within thirty (30) days of the date due;
(3) the Company requiring the Executive to be based at any
place outside a 50-mile radius from his current location
except for reasonably required travel on the Company's
business which is not substantially greater than such
current travel requirements.
(4) the failure by the Company to continue in effect (without a
material reduction in benefit level, and/or reward
opportunities) any compensation or employee benefit plan in
which the Executive is participating, unless a substitute
or replacement plan has been implemented which provides
substantially identical compensation or benefits to the
Executive or unless the compensation and benefit plans are
the same as those offered by the company to those in
similar executive positions;
(5) the insolvency or the filing of a petition for bankruptcy
by the Company;
(6) any material breach by the Company of any provision of this
Agreement;
2
<PAGE> 3
(7) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms
of Section 2.1; or
(8) the failure of the Company to obtain an agreement from any
successor or assign of the Company to assume and agree to
perform this Agreement, as contemplated in Section 7
hereof.
3. Position and Duties. The Executive shall continue to have such
responsibilities and authority as may be given to him from time to
time by either the Chief Executive, President of the Company, or
the Company's Board of Directors. The Executive shall devote
substantially all his working time and efforts to the business of
the Company.
4. Compensation and Benefits.
a. Salary. During the period of the Executive's employment
hereunder, the Company shall pay to the Executive his
current salary with the same frequency and on the same
basis that the Company normally makes salary payments to
other Executive personnel. This salary may be increased
from time to time in accordance with normal business
practices of the Company. If such increases take place, the
Company shall not thereafter decrease the Executive's
salary without the Executive's consent during the term of
this Agreement.
b. Benefits. The Executive shall participate in all other
compensation and benefit plans which are offered by the
Company to employees in similar executive positions, in
accordance with the terms of the plans.
c. Retention Bonus. In the event of a Division Divestiture,
the Executive shall receive a special retention taxable
bonus equal to twelve months base salary for full on-going
commitment of the Executive during the divestiture process
and if he remains in his position through the completion of
the Divestiture as determined by the Company.
If the Division is not sold by December 31, 1999, and the
Divestiture process has ceased, the Executive will be
eligible to receive a taxable Retention Bonus equal to 50%
of the Retention Bonus, as outlined in paragraph one of
Section 4c.
d. Executive Benefits. For purposes of this Agreement,
incentive bonuses, stock options, car, club dues,
memberships, and financial planning/tax preparation
are considered to be a part of compensation.
d(1) In the event of a Change in Control or
Division Divestiture occurring on or
before December 31, 1999, the Executive will
earn a pro rata bonus based on results up
to and including the date on which the
Change in Control or Division Divestiture
takes place.
d(2) The Company's customary accounting policies
shall be used for determination of financial
results.
3
<PAGE> 4
5. Severance and Benefits.
5.1 If, on or before December 31, 1999, the Company successfully
divests the Division and the Executive's employment with the
Company shall be terminated by the purchasers for reasons other
than Cause, Disability or Death within one year of the completion
of the divestiture, then the Executive will be entitled to one
year's base salary plus one year's taxable bonus (calculated as
maximum normal bonus achievable in 1999), payable by the
purchaser.
5.2 The Severance payments shall be reduced by 50% if, upon
termination of his employment, the Executive does not accept
within ten (10) days a written offer of employment by an affiliate
of the Company, if such offer provides for a similar position of
employment, base salary equal to or greater than 90% of
Executive's salary at the time of termination, relocation costs,
temporary living expenses, and guaranteed employment for eighteen
(18) months unless employment is terminated for Cause, disability
or as a result of Death.
5.3 In the event the Executive's employment is terminated by Death,
his estate shall receive a pro rata share of any severance or
benefits provided for under Sections 4 and 5 of this Agreement up
to the date of the Executive's death.
6. Termination Date. "Termination Date" shall mean in the case of the
Executive's death, his date of death, and in all other cases, the
date specified in the Notice of Termination subject to the
following:
a. If the Executive's employment is terminated by the Company
for Cause, the date specified in the notice of Termination
shall be the date of the action.
b. If the Executive's employment is terminated for Good
Reason, the date specified in the Notice of Termination
shall be at least thirty (30) days except by mutual
agreement.
c. If the Executive Voluntarily terminates the Agreement
without Good Reason, he agrees to do so under the following
terms:
(1) Provide thirty (30) calendar days notice.
(2) Agree not to compete with the Company or any
affiliate for a period of six (6) months.
(3) Agree not to solicit the Company's employees for
hire for a period of six (6) months.
4
<PAGE> 5
Successors; Binding Agreement.
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns, and the
Company shall require any successor or assign to expressly
assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be
required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except for
compensation due the Executive as a resulot of his death
which may pass by will or by the laws of descent and
distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal personal
representative (executors, administrators, heirs, devisees,
and/or legatees).
8. Notice. For purposes of this Agreement, notices and other
communications provided for in the Agreement (including the Notice
of Termination) shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified
mail, return receipt requested, addressed to the respective
addresses last given by each party to the other. All notices and
communications shall be deemed to have been received on the date
of personal delivery thereof or on the third business day after
the mailing thereof, except that notice of change of address shall
be effective only upon receipt by a designated representative of
Smith & Nephew, Inc.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the
Company and for which the Executive may qualify, nor shall
anything herein limit or reduce such rights as the Executive may
have under any other agreements with the Company. Provided,
however, that to the extent that the Executive receives benefits
under this Agreement because of a Division Divestiture, he or she
is not entitled to severance pay under any other severance plan,
policy or arrangement of the Company. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive
under any plan or program of the Company shall be payable in
accordance with such plan or program, except as explicitly
modified by this Agreement.
10. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Executive and the
Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or
subsequent time. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set
forth in this Agreement.
5
<PAGE> 6
11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of
California without giving effect to the conflicts of law
principles thereof.
12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision
shall not effect the validity or enforceability of the other
provisions hereof.
SMITH & NEPHEW, INC.
By: /s/ Clifford Lomax
-------------------------
Clifford Lomax
Director
/s/ Michael McBrayer
---------------------
Michael McBrayer
6
<PAGE> 1
EXHIBIT 10.25
* CONFIDENTIAL *
Employee Retention Agreement
Resulting from a Change in Control or Division Divestiture
AGREEMENT made as of December 14, 1998, by and between Smith & Nephew,
Inc. (the "Company") and Chuck Bastyr (the "Executive").
WHEREAS, the Company recognizes that the possibility of an occurrence of
a Change in Control or the Divestiture of a Division of the Company can result
in significant distractions of the Company's key management personnel because of
the uncertainties inherent in such a situation; as well as uncertainty in the
business and potentially the employee's position in the future creates
uncertainty for the employee's continued employment and the employee's position;
WHEREAS, the Executive possesses certain skills unique to the Company's
business;
WHEREAS, the Company has determined that it is in the best interest of
the Company to retain the services of the Executive and to ensure his continued
dedication and efforts without undue concern for his personal security; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Company, particularly in the event of a Change in Control or Division
Divestiture, the Company desires to enter into this Agreement with the Executive
to provide the Executive with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control or the
Divestment of a Division, and to provide the Executive with certain other
benefits whether or not the Executive's employment is terminated.
NOW, THEREFORE, it is agreed as follows:
1. Term. This Agreement shall commence as of December 31, 1998, and
shall continue in effect until December 31, 1999, when it shall
terminate, unless extended by mutual written agreement signed by
the Company and the Executive; provided, however, that in the
event that a Change in Control or Division Divestiture occurs on
or before December 31, 1999. The term of this Agreement shall not
expire prior to the expiration of twelve (12) months after the
occurrence of a Change in Control or a Division Divestiture.
2. Definitions:
2.1 Cause. For purposes of this Agreement, "Cause" shall mean the
misappropriation of corporate funds or other acts of dishonesty,
activities materially harmful to the Company's business or
reputation, willful refusal to perform or substantial disregard of
Executive's assigned duties, or any violation of any legal
obligation to the Company.
2.2 Change in Control / Division Divestiture. For purposes of this
Agreement, a "Change in Control" shall be deemed to have occurred
if the Company shall
<PAGE> 2
become a subsidiary of another corporation, shall be merged or
consolidated into another corporation, if substantially all of the
assets of the Company shall be sold to another corporation, or if
another corporation shall acquire 30% or more of the outstanding
shares of the Company; provided in each case that the other
corporation is not a member of the Smith & Nephew Group of
companies. A Division Divestiture is the sale of a Division by the
Company to another corporation.
2.3 Disability. For purposes of this Agreement, "Disability" shall
mean a physical or mental condition which impairs the Executive's
ability to substantially perform his duties under this Agreement
for a period of one hundred eighty (180) consecutive days as
determined by a company appointed health care provider.
2.4 Good Reason. For purposes of this Agreement, "Good Reason" shall
mean the occurrence after a Change in Control or a Division
Divestiture of any of the events or conditions described in
Subsections (1) through (8) hereof:
(1) a change in the Executive's title, position or
responsibilities (including reporting responsibilities)
which represents an adverse change from his title, position
or responsibilities in effect immediately prior to a Change
in Control or Division Divestiture; the assignment to the
Executive of any duties or responsibilities which are
inconsistent with his status, title, position or
responsibilities in effect immediately prior to a Change in
Control or Division Divestiture; or any removal of the
Executive from or failure to reappoint or re-elect him to
any of such offices or positions, except in connection with
the termination of his employment for Disability, Cause, or
as a result of his death; or
(2) a reduction in the Executive's compensation or any failure
to pay the Executive any compensation or benefits to which
he is entitled within thirty (30) days of the date due;
(3) the Company requiring the Executive to be based at any
place outside a 50-mile radius from his current location
except for reasonably required travel on the Company's
business which is not substantially greater than such
current travel requirements.
(4) the failure by the Company to continue in effect (without a
material reduction in benefit level, and/or reward
opportunities) any compensation or employee benefit plan in
which the Executive is participating, unless a substitute
or replacement plan has been implemented which provides
substantially identical compensation or benefits to the
Executive or unless the compensation and benefit plans are
the same as those offered by the company to those in
similar executive positions;
(5) the insolvency or the filing of a petition for bankruptcy
by the Company;
(6) any material breach by the Company of any provision of this
Agreement;
2
<PAGE> 3
(7) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms
of Section 2.1; or
(8) the failure of the Company to obtain an agreement from any
successor or assign of the Company to assume and agree to
perform this Agreement, as contemplated in Section 7
hereof.
3. Position and Duties. The Executive shall continue to have such
responsibilities and authority as may be given to him from time to
time by either the Chief Executive, President of the Company, or
the Company's Board of Directors. The Executive shall devote
substantially all his working time and efforts to the business of
the Company.
4. Compensation and Benefits.
a. Salary. During the period of the Executive's employment
hereunder, the Company shall pay to the Executive his
current salary with the same frequency and on the same
basis that the Company normally makes salary payments to
other Executive personnel. This salary may be increased
from time to time in accordance with normal business
practices of the Company. If such increases take place, the
Company shall not thereafter decrease the Executive's
salary without the Executive's consent during the term of
this Agreement.
b. Benefits. The Executive shall participate in all other
compensation and benefit plans which are offered by the
Company to employees in similar executive positions, in
accordance with the terms of the plans.
c. Retention Bonus. In the event of a Division Divestiture,
the Executive shall receive a special retention taxable
bonus equal to six months base salary for full on-going
commitment of the Executive during the divestiture process
and if he remains in his position through the completion of
the Divestiture as determined by the Company.
If the Division is not sold by December 31, 1999, and the
Divestiture process has ceased, the Executive will be
eligible to receive a taxable Retention Bonus equal to 50%
of the Retention Bonus, as outlined in paragraph one of
Section 4c.
d. Executive Benefits. For purposes of this Agreement,
incentive bonuses, stock options, car, club dues,
memberships, and financial planning/tax preparation
are considered to be a part of compensation.
d(1) In the event of a Change in Control or
Division Divestiture occurring on or
before December 31, 1999, the Executive will
earn a pro rata bonus based on results up
to and including the date on which the
Change in Control or Division Divestiture
takes place.
d(2) The Company's customary accounting policies
shall be used for determination of financial
results.
3
<PAGE> 4
5. Severance and Benefits.
5.1 If, on or before December 31, 1999, the Company successfully
divests the Division and the Executive's employment with the
Company shall be terminated by the purchasers for reasons other
than Cause, Disability or Death within one year of the completion
of the divestiture, then the Executive will be entitled to one
year's base salary plus one year's taxable bonus (calculated as
maximum normal bonus achievable in 1999), payable by the
purchaser.
5.2 The Severance payments shall be reduced by 50% if, upon
termination of his employment, the Executive does not accept
within ten (10) days a written offer of employment by an affiliate
of the Company, if such offer provides for a similar position of
employment, base salary equal to or greater than 90% of
Executive's salary at the time of termination, relocation costs,
temporary living expenses, and guaranteed employment for eighteen
(18) months unless employment is terminated for Cause, disability
or as a result of Death.
5.3 In the event the Executive's employment is terminated by Death,
his estate shall receive a pro rata share of any severance or
benefits provided for under Sections 4 and 5 of this Agreement up
to the date of the Executive's death.
6. Termination Date. "Termination Date" shall mean in the case of the
Executive's death, his date of death, and in all other cases, the
date specified in the Notice of Termination subject to the
following:
a. If the Executive's employment is terminated by the Company for
Cause, the date specified in the notice of Termination shall
be the date of the action.
b. If the Executive's employment is terminated for Good Reason,
the date specified in the Notice of Termination shall be at
least thirty (30) days except by mutual agreement.
c. If the Executive Voluntarily terminates the Agreement without
Good Reason, he agrees to do so under the following terms:
(1) Provide thirty (30) calendar days notice.
(2) Agree not to compete with the Company or any
affiliate for a period of six (6) months.
(3) Agree not to solicit the Company's employees for
hire for a period of six (6) months.
4
<PAGE> 5
Successors; Binding Agreement.
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns, and the
Company shall require any successor or assign to expressly
assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be
required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except for
compensation due the Executive as a resulot of his death
which may pass by will or by the laws of descent and
distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal personal
representative (executors, administrators, heirs, devisees,
and/or legatees).
8. Notice. For purposes of this Agreement, notices and other
communications provided for in the Agreement (including the Notice
of Termination) shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified
mail, return receipt requested, addressed to the respective
addresses last given by each party to the other. All notices and
communications shall be deemed to have been received on the date
of personal delivery thereof or on the third business day after
the mailing thereof, except that notice of change of address shall
be effective only upon receipt by a designated representative of
Smith & Nephew, Inc.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the
Company and for which the Executive may qualify, nor shall
anything herein limit or reduce such rights as the Executive may
have under any other agreements with the Company. Provided,
however, that to the extent that the Executive receives benefits
under this Agreement because of a Division Divestiture, he or she
is not entitled to severance pay under any other severance plan,
policy or arrangement of the Company. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive
under any plan or program of the Company shall be payable in
accordance with such plan or program, except as explicitly
modified by this Agreement.
10. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Executive and the
Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or
subsequent time. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set
forth in this Agreement.
5
<PAGE> 6
11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of
California without giving effect to the conflicts of law
principles thereof.
12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision
shall not effect the validity or enforceability of the other
provisions hereof.
SMITH & NEPHEW, INC.
By: /s/ Clifford Lomax
-------------------------
Clifford Lomax
Director
/s/ Chuck Bastyr
----------------------
Chuck Bastyr
6
<PAGE> 1
EXHIBIT 10.26
* CONFIDENTIAL *
Employee Retention Agreement
Resulting from a Change in Control or Division Divestiture
AGREEMENT made as of December 14, 1998, by and between Smith & Nephew,
Inc. (the "Company") and Peter Bray (the "Executive").
WHEREAS, the Company recognizes that the possibility of an occurrence of
a Change in Control or the Divestiture of a Division of the Company can result
in significant distractions of the Company's key management personnel because of
the uncertainties inherent in such a situation; as well as uncertainty in the
business and potentially the employee's position in the future creates
uncertainty for the employee's continued employment and the employee's position;
WHEREAS, the Executive possesses certain skills unique to the Company's
business;
WHEREAS, the Company has determined that it is in the best interest of
the Company to retain the services of the Executive and to ensure his continued
dedication and efforts without undue concern for his personal security; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Company, particularly in the event of a Change in Control or Division
Divestiture, the Company desires to enter into this Agreement with the Executive
to provide the Executive with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control or the
Divestment of a Division, and to provide the Executive with certain other
benefits whether or not the Executive's employment is terminated.
NOW, THEREFORE, it is agreed as follows:
1. Term. This Agreement shall commence as of December 31, 1998, and
shall continue in effect until December 31, 1999, when it shall
terminate, unless extended by mutual written agreement signed by
the Company and the Executive; provided, however, that in the
event that a Change in Control or Division Divestiture occurs on
or before December 31, 1999. The term of this Agreement shall not
expire prior to the expiration of twelve (12) months after the
occurrence of a Change in Control or a Division Divestiture.
2. Definitions:
2.1 Cause. For purposes of this Agreement, "Cause" shall mean the
misappropriation of corporate funds or other acts of dishonesty,
activities materially harmful to the Company's business or
reputation, willful refusal to perform or substantial disregard of
Executive's assigned duties, or any violation of any legal
obligation to the Company.
2.2 Change in Control / Division Divestiture. For purposes of this
Agreement, a "Change in Control" shall be deemed to have occurred
if the Company shall become a subsidiary of another corporation,
shall be merged or consolidated into another corporation, if
substantially all of the assets of the Company shall be sold to
another corporation, or if another corporation shall acquire 30%
or more of the outstanding shares of the Company; provided in each
case that the other corporation is not a member of the
<PAGE> 2
Smith & Nephew Group of companies. A Division Divestiture is the
sale of a Division by the Company to another corporation.
2.3 Disability. For purposes of this Agreement, "Disability" shall
mean a physical or mental condition which impairs the Executive's
ability to substantially perform his duties under this Agreement
for a period of one hundred eighty (180) consecutive days as
determined by a company appointed health care provider.
2.4 Good Reason. For purposes of this Agreement, "Good Reason" shall
mean the occurrence after a Change in Control or a Division
Divestiture of any of the events or conditions described in
Subsections (1) through (8) hereof:
(1) a change in the Executive's title, position or
responsibilities (including reporting responsibilities)
which represents an adverse change from his title, position
or responsibilities in effect immediately prior to a Change
in Control or Division Divestiture; the assignment to the
Executive of any duties or responsibilities which are
inconsistent with his status, title, position or
responsibilities in effect immediately prior to a Change in
Control or Division Divestiture; or any removal of the
Executive from or failure to reappoint or re-elect him to
any of such offices or positions, except in connection with
the termination of his employment for Disability, Cause, or
as a result of his death; or
(2) a reduction in the Executive's compensation or any failure
to pay the Executive any compensation or benefits to which
he is entitled within thirty (30) days of the date due;
(3) the Company requiring the Executive to be based at any
place outside a 50-mile radius from his current location
except for reasonably required travel on the Company's
business which is not substantially greater than such
current travel requirements.
(4) the failure by the Company to continue in effect (without a
material reduction in benefit level, and/or reward
opportunities) any compensation or employee benefit plan in
which the Executive is participating, unless a substitute
or replacement plan has been implemented which provides
substantially identical compensation or benefits to the
Executive or unless the compensation and benefit plans are
the same as those offered by the company to those in
similar executive positions;
(5) the insolvency or the filing of a petition for bankruptcy
by the Company;
(6) any material breach by the Company of any provision of this
Agreement;
(7) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms
of Section 2.1; or
(8) the failure of the Company to obtain an agreement from any
successor or assign of the Company to assume and agree to
perform this Agreement, as contemplated in Section 7
hereof.
3. Position and Duties. The Executive shall continue to have such
responsibilities and authority as may be given to him from time to
time by either the Chief Executive,
2
<PAGE> 3
President of the Company, or the Company's Board of Directors. The
Executive shall devote substantially all his working time and
efforts to the business of the Company.
4. Compensation and Benefits.
a. Salary. During the period of the Executive's employment
hereunder, the Company shall pay to the Executive his
current salary with the same frequency and on the same
basis that the Company normally makes salary payments to
other Executive personnel. This salary may be increased
from time to time in accordance with normal business
practices of the Company. If such increases take place, the
Company shall not thereafter decrease the Executive's
salary without the Executive's consent during the term of
this Agreement.
b. Benefits. The Executive shall participate in all other
compensation and benefit plans which are offered by the
Company to employees in similar executive positions, in
accordance with the terms of the plans.
c. Retention Bonus. In the event of a Division Divestiture,
the Executive shall receive a special retention taxable
bonus equal to six months base salary for full on-going
commitment of the Executive during the divestiture process
and if he remains in his position through the completion of
the Divestiture as determined by the Company.
If the Division is not sold by December 31, 1999, and the
Divestiture process has ceased, the Executive will be
eligible to receive a taxable Retention Bonus equal to 50%
of the Retention Bonus, as outlined in paragraph one of
Section 4c.
d. Executive Benefits. For purposes of this Agreement,
incentive bonuses, stock options, car, club dues,
memberships, and financial planning/tax preparation are
considered to be a part of compensation.
d(1) In the event of a Change in Control or Division
Divestiture occurring on or before December 31,
1999, the Executive will earn a pro rata bonus based
on results up to and including the date on which the
Change in Control or Division Divestiture takes
place.
d(2) The Company's customary accounting policies shall be
used for determination of financial results.
5. Severance and Benefits.
5.1 If, on or before December 31, 1999, the Company successfully
divests the Division and the Executive's employment with the
Company shall be terminated by the purchasers for reasons other
than Cause, Disability or Death within one year of the completion
of the divestiture, then the Executive will be entitled to one
year's base salary plus one year's taxable bonus (calculated as
maximum normal bonus achievable in 1999), payable by the
purchaser.
5.2 The Severance payments shall be reduced by 50% if, upon
termination of his employment, the Executive does not accept
within ten (10) days a written offer of employment by an affiliate
of the Company, if such offer provides for a similar position of
employment, base salary equal to or greater than 90% of
Executive's salary at the
3
<PAGE> 4
time of termination, relocation costs, temporary living expenses,
and guaranteed employment for eighteen (18) months unless
employment is terminated for Cause, disability or as a result of
Death.
5.3 In the event the Executive's employment is terminated by Death,
his estate shall receive a pro rata share of any severance or
benefits provided for under Sections 4 and 5 of this Agreement up
to the date of the Executive's death.
6. Termination Date. "Termination Date" shall mean in the case of the
Executive's death, his date of death, and in all other cases, the
date specified in the Notice of Termination subject to the
following:
a. If the Executive's employment is terminated by the Company
for Cause, the date specified in the notice of Termination
shall be the date of the action.
b. If the Executive's employment is terminated for Good
Reason, the date specified in the Notice of Termination
shall be at least thirty (30) days except by mutual
agreement.
c. If the Executive Voluntarily terminates the Agreement
without Good Reason, he agrees to do so under the following
terms:
(1) Provide thirty (30) calendar days notice.
(2) Agree not to compete with the Company or any
affiliate for a period of six (6) months.
(3) Agree not to solicit the Company's employees for
hire for a period of six (6) months.
4
<PAGE> 5
Successors; Binding Agreement.
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns, and the
Company shall require any successor or assign to expressly
assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be
required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except for
compensation due the Executive as a resulot of his death
which may pass by will or by the laws of descent and
distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal personal
representative (executors, administrators, heirs, devisees,
and/or legatees).
8. Notice. For purposes of this Agreement, notices and other
communications provided for in the Agreement (including the Notice
of Termination) shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified
mail, return receipt requested, addressed to the respective
addresses last given by each party to the other. All notices and
communications shall be deemed to have been received on the date
of personal delivery thereof or on the third business day after
the mailing thereof, except that notice of change of address shall
be effective only upon receipt by a designated representative of
Smith & Nephew, Inc.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the
Company and for which the Executive may qualify, nor shall
anything herein limit or reduce such rights as the Executive may
have under any other agreements with the Company. Provided,
however, that to the extent that the Executive receives benefits
under this Agreement because of a Division Divestiture, he or she
is not entitled to severance pay under any other severance plan,
policy or arrangement of the Company. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive
under any plan or program of the Company shall be payable in
accordance with such plan or program, except as explicitly
modified by this Agreement.
10. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Executive and the
Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or
subsequent time. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set
forth in this Agreement.
11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of
California without giving effect to the conflicts of law
principles thereof.
5
<PAGE> 6
12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision
shall not effect the validity or enforceability of the other
provisions hereof.
SMITH & NEPHEW, INC.
By: /s/ Clifford Lomax
---------------------------
Clifford Lomax
Director
/s/ Peter Bray
-----------------------
Peter Bray
6
<PAGE> 1
Exhibit 12.1
Earnings to Fixed Charges
DonJoy,LLC
Computation of Rate of Earnings to Fixed Charges
(dollars in thousands)
<TABLE>
Historical Historical Pro Forma Pro Forma
------------------------------------------ ----------------------- ------------------------
Years Ended December 31, Six Months Ended 12 Months 6 Months
------------------------------------------ ----------------------- Ended Ended
1994 1995 1996 1997 1998 06/27/1998 06/29/1998 12/31/1998 06/29/1999
------------------------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before income
taxes ............... $11,943 $11,440 $ 9,483 $10,904 $8,345 $2,010 $5,819 $ (468) $1,494
Interest ............. - 989 2,459 2,072 - - - 14,029 7,015
Amortization of Debt
Issuance Costs ...... - - - - - - - 802 401
Amortization of
Discount on Sr. Notes - - - - - - - 200 100
1/3 of rental expense-
operating leases .... 377 546 765 775 1,064 772 393 1,064 393
------- ------- ------- ------- ------ ------ ------ ------- ------
Earnings ............. $12,320 $12,975 $12,707 $13,751 $9,409 $2,782 $6,212 $15,627 $9,403
======= ======= ======= ======= ====== ====== ====== ======= ======
Interest ............. $ - $ 989 $ 2,459 $ 2,072 $ - $ - $ - $14,029 $7,015
Amortization of Debt
Issuance Costs ...... - - - - - - - 802 401
Amortization of
Discount on Sr. Notes - - - - - - - 200 100
1/3 of rental expense-
operating leases .... 377 546 765 775 1,064 772 393 1,064 393
------- ------- ------- ------- ------ ------ ------ ------- ------
Fixed Charges ........ $ 377 $ 1,535 $ 3,224 $ 2,847 $1,064 $ 772 $ 393 $16,095 $7,909
======= ======= ======= ======= ====== ====== ====== ======= ======
Ratio of Earnings
to Fixed Charges .... 32.71 8.45 3.94 4.83 8.84 3.60 15.79 - 1.19
======= ======= ======= ======= ====== ====== ====== ======= ======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of DonJoy, L.L.C.
dj Orthopedics, LLC Delaware limited liability company
DonJoy de Mexico, S.A. de C.V. Mexican corporation
Subsidiaries of dj Orthopedics, LLC
DJ Orthopedics Capital Corporation Delaware corporation
DonJoy de Mexico, S.A. de C.V. Mexican corporation
Subsidiaries of DJ Orthopedics Capital Corporation
None.
<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 the Registration Statement (Form S-4) 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
September 7, 1999
<PAGE> 1
===============================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) | |
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
DJ ORTHOPEDICS, LLC
(Exact name of obligor as specified in its charter)
Delaware 52-2165554
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
DJ ORTHOPEDICS CAPITAL CORPORATION
(Exact name of obligor as specified in its charter)
Delaware 52-2157537
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
DONJOY, L.L.C.
(Exact name of obligor as specified in its charter)
Delaware 33-0848317
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2985 Scott Street
Vista, California 92038
(Address of principal executive offices) (Zip code)
----------------------
12-5/8% Senior Subordinated Notes due 2009
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B)WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains
the authority to commence business and a grant of powers to
exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to
Form T-1 filed with Registration Statement No. 33-6215, Exhibits
1a and 1b to Form T-1 filed with Registration Statement No.
33-21672 and Exhibit 1 to Form T-1 filed with Registration
Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 24th day of August, 1999.
THE BANK OF NEW YORK
By: /s/ MICHELE L. RUSSO
-----------------------------
Name: MICHELE L. RUSSO
Title: ASSISTANT TREASURER
<PAGE> 4
EXHIBIT 7
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1999,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS In Thousands
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin . $ 5,597,807
Interest-bearing balances .......................... 4,075,775
Securities:
Held-to-maturity securities ........................ 785,167
Available-for-sale securities ...................... 4,159,891
Federal funds sold and Securities purchased under
agreements to resell ............................... 2,476,963
Loans and lease financing receivables:
Loans and leases, net of unearned
income...............38,028,772
LESS: Allowance for loan and
lease losses............568,617
LESS: Allocated transfer risk
reserve........................16,352
Loans and leases, net of unearned income,
allowance, and reserve ........................... 37,443,803
Trading Assets ........................................ 1,563,671
Premises and fixed assets (including capitalized
leases) ............................................ 683,587
Other real estate owned ............................... 10,995
Investments in unconsolidated subsidiaries and
associated companies ............................... 184,661
Customers' liability to this bank on acceptances
outstanding ........................................ 812,015
Intangible assets ..................................... 1,135,572
Other assets .......................................... 5,607,019
-----------
Total assets .......................................... $64,536,926
===========
LIABILITIES
Deposits:
In domestic offices ................................ $26,488,980
Noninterest-bearing.......................10,626,811
Interest-bearing..........................15,862,169
In foreign offices, Edge and Agreement
subsidiaries, and IBFs ........................... 20,655,414
Noninterest-bearing..........................156,471
Interest-bearing..........................20,498,943
Federal funds purchased and Securities sold under
agreements to repurchase ........................... 3,729,439
Demand notes issued to the U.S.Treasury ............... 257,860
Trading liabilities ................................... 1,987,450
Other borrowed money:
With remaining maturity of one year or less ........ 496,235
With remaining maturity of more than one year
through three years .............................. 465
With remaining maturity of more than three years ... 31,080
Bank's liability on acceptances executed and
outstanding ........................................ 822,455
Subordinated notes and debentures ..................... 1,308,000
Other liabilities ..................................... 2,846,649
-----------
Total liabilities ..................................... 58,624,027
===========
EQUITY CAPITAL
Common stock .......................................... 1,135,284
Surplus ............................................... 815,314
Undivided profits and capital reserves ................ 4,001,767
Net unrealized holding gains (losses) on
available-for-sale securities ...................... (7,956)
Cumulative foreign currency translation adjustments (31,510)
-----------
Total equity capital .................................. 5,912,899
-----------
Total liabilities and equity capital .................. $64,536,926
===========
</TABLE>
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni }
Alan R. Griffith } Directors
Gerald L. Hassell }
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the balance
sheet as of December 31, 1998 and June 29, 1999 and the statements of income for
the year ended December 31, 1998 and the six months ended June 29, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001094053
<NAME> DONJOY, L.L.C
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-29-1999
<CASH> 809 1,086
<SECURITIES> 0 0
<RECEIVABLES> 19,844 18,398
<ALLOWANCES> 356 745
<INVENTORY> 14,368 14,441
<CURRENT-ASSETS> 35,832 34,507
<PP&E> 7,400 6,377
<DEPRECIATION> (12,710) (12,327)
<TOTAL-ASSETS> 77,056 75,627
<CURRENT-LIABILITIES> 20,207 11,041
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 12,832 64,586
<TOTAL-LIABILITY-AND-EQUITY> 77,056 75,627
<SALES> 101,169 54,653
<TOTAL-REVENUES> 101,169 54,653
<CGS> (46,329) (25,642)
<TOTAL-COSTS> (46,495) (23,192)
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 8,345 5,819
<INCOME-TAX> (3,394) (2,387)
<INCOME-CONTINUING> 4,951 3,432
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,951 3,432
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
