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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-9387
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Empi, Inc.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1310335
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
599 CARDIGAN ROAD
ST. PAUL, MINNESOTA 55126
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (612) 415-9000
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Securities registered pursuant to Section 12 (b) OF THE ACT: NONE
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Securities registered pursuant to Section 12 (g) of the Act:
NO PAR VALUE COMMON STOCK
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 3, 1998, was approximately $ 129,760,391.
The number of shares outstanding of the registrant's class of common stock as of
March 3, 1998, was 7,746,889 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held April 29, 1998 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Empi, Inc. ("Empi" or the "Company") is one of the largest medical device
companies in rehabilitative medicine in the United States. The Company is a
leading supplier of electrotherapy, iontophoretic drug delivery, orthotic and
incontinence treatment products to the orthopedic rehabilitation and
incontinence treatment markets. Empi develops, markets and manufactures
products, supported by clinical research, that continuously improve the quality
of life for patients with functional disabilities, and are used in both the
clinic and home setting.
Empi was organized as a Minnesota corporation in October 1977. The Company's
corporate headquarters are located at 599 Cardigan Road, St. Paul, Minnesota
55126, (612) 415-9000.
ORTHOPEDIC REHABILITATION MARKET
Currently, the Company manufacturers and markets the following orthopedic
rehabilitation products: TENS (Transcutaneous Electrical Nerve Stimulation)
devices for the treatment of chronic and acute pain; NMES (neuromuscular
electrical stimulation) devices for restoring muscle tone and mobility;
iontophoretic drug delivery systems to non-invasively deliver local anesthesia
and anti-inflammatory medications through the skin; and dynamic splinting
orthoses for restoring joint range of motion. In addition, the Company
distributes functional active resistance orthoses for treatment of knee
dysfunction, patient-administered cervical traction devices to manage chronic
cervical pain and a complete line of accessories for its products.
To complement its orthopedic rehabilitation products offered, the Company
entered into a strategic alliance in August of 1995 with Tennessee-based Rehab
Med+Equip, Inc. Under which the Company markets a catalog of rehabilitation
products that meet the growing needs of its customers. The catalog includes
over 200 products, such as ice packs, whirlpool baths, lumbar and cervical rolls
and supports, as well as orthotics and bracing products.
INCONTINENCE TREATMENT MARKET
In 1992, the Company began marketing a proprietary pelvic floor stimulation
(PFS) system to physical therapists, family care physicians, gynecologists,
urogynecologists and urologists for the treatment of female urinary
incontinence. In 1993, the Company diversified its incontinence product line by
acquiring Physical Health Devices, Inc. (PHD), an electromyography (EMG)
biofeedback company. Electromyography is used in incontinence treatment as a
volitional method to reeducate the pelvic floor muscles. The Company's
incontinence treatment product line further expanded in 1997 with the
introduction of a device that combines both PFS and EMG, and in 1998 with a
simplified, low cost PFS device for home use.
INTERNATIONAL MARKET
The Company sells its products internationally through independent dealers.
With the acquisition of the Nortech division of Medtronic, inc. In November
1992, the Company gained new international marketing opportunities through
independent dealer relationships in Canada, Europe, Australia and New Zealand,
allowing for expanded distribution of its new products in both the orthopedic
rehabilitation and incontinence treatment markets. In 1994, the Company began
to focus on establishing master distributors for each business segment in key
international markets. In April 1995, the Company closed its Canadian office
and now markets its products through a master distributor located in Quebec,
Canada. One of the major objectives for the international market for 1998
involves introducing the Company's orthotic products in Japan and the
Scandinavian countries.
PRODUCTS
ELECTROTHERAPY
TENS DEVICES: Physicians and physical therapists have treated their
patients' chronic and acute pain with electrical stimulation, often referred
to as "transcutaneous electrical nerve stimulation" or "TENS," for over 20
years. Although TENS may not be effective for every patient or every
condition, medical professionals have accepted TENS as an effective treatment
for chronic or acute pain resulting from a variety of medical conditions.
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TENS devices are most frequently used to treat persistent orthopedic
conditions such as low back pain, joint stiffness and muscle spasm.
Physicians have also prescribed TENS for pain resulting from a variety of
other conditions including abdominal surgery, post-operative pain, arthritis,
tendonitis, phantom limb pain and childbirth. TENS devices generally reduce
pain while the device is being used, as well as for a period of time
following usage, but do not cure the cause of the pain.
TENS devices consist of a small, portable, battery-powered electrical pulse
generator which is connected via wires to electrodes placed at or near the
site of the patient's pain. The devices are small enough to fit into a shirt
pocket and weigh approximately 5 ounces, allowing patients to alleviate pain
conveniently at home or elsewhere. The electrodes are attached to the skin
with an interface layer of conductive gel. The stimulator produces low
voltage pulses of electricity that can be delivered continuously or
intermittently in different wave forms throughout the treatment session.
Empi's premier TENS products are market leaders due to their pre-programmed
features and high intensity capability. Epix VT-TM-, launched in 1997,
provides additional benefits through its outcomes measurement capabilities to
physicians and payors who desire objective documentation to validate the
effect of TENS for any given patient. The Company's other TENS devices
include: Epix XL-Registered Trademark-, Eclipse+-Registered Trademark- and
Dynex-Registered Trademark- IV.
Two theories have been advanced to explain the manner in which TENS
alleviates pain. The "gate control theory" postulates that the electrical
impulses from TENS devices block or interfere with the neurological
transmission of pain signals from the site of the injury to the brain. A
second theory suggests that the electrical impulses prompt the release of
endogenous endorphins, the body's natural pain suppressing agents. Neither
theory has conclusive support in the scientific literature. Under either
theory, TENS relieves pain without the costs and risks associated with
surgery or the undesirable side effects and physiological problems of
prolonged drug use which can include addiction, stupor, depression,
disorientation, nausea and ulcers.
NMES DEVICES: Medical professionals also use electrical stimulation to
activate and exercise muscles for rehabilitative purposes. "Neuromuscular
electrical stimulation" or "NMES" has proven effective in producing
controlled, involuntary muscle contractions which can maintain the strength
and mobility of a limb or prevent deterioration of muscle tissues in patients
who are unable to perform voluntary muscle contraction. Physicians have
prescribed neuromuscular stimulation in a variety of circumstances intended
to improve muscle tone, increase joint mobility and accelerate recovery from
traumatic injury. Common conditions for which NMES therapy may be prescribed
include common knee injuries, swelling, spasticity and improper gait. The
Company's current NMES devices are Focus-Registered Trademark- and Respond
Select-Registered Trademark-.
ACCESSORIES: The Company meets the needs of its customers by supplying
accessories such as electrodes, cables, conductive gel, skin care products,
batteries and other accessories, which are either manufactured by Empi or
purchased from other vendors for resale. The Company has exclusive rights to
distribute several unique models of electrodes.
Empi believes that the U.S. market for TENS, NMES and accessories exceeds
$100 million. The Company expects the market to grow, in unit volume, by
less than 5% per annum but anticipates experiencing continued pricing
pressures which may result in flat or declining revenues.
IONTOPHORETIC DRUG DELIVERY
IONTOPHORESIS: Iontophoresis is a process using electric current to assist
drug transfer through the skin. Iontophoretic applications include the
delivery of local anesthesia and anti-inflammatory medication for joint and
tissue treatment. For many applications, use of iontophoresis can be
advantageous when compared to a syringe because it allows medications to be
dispersed without invading the joint space. It can also avoid many of the
systemic and other side effects frequently associated with oral medications
or injections.
The Company has developed both a proprietary iontophoresis device and
patented buffered electrode capable of delivering small molecular drugs that
can be ionized, such as drugs for arthritis, bursitis, tendonitis and related
conditions. The system is controlled by a microprocessor and uses continuous
low voltage electrical current that delivers charged drug particles through
the skin's surface. The Company received FDA 510(K) clearance in July 1990
for its Dupel-Registered Trademark- iontophoresis device and in November 1991
for its buffered electrode. The Company introduced its iontophoresis system,
for human use, to the marketplace in the first quarter of 1992.
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The company estimates that the current market for human iontophoresis systems
is approximately $35 million domestically, and that the market defined in
sales dollars is growing at a rate of 5 to 10% per annum.
Empi is continually investigating alternate uses of its technologies in new
medical markets. During 1996, the Company developed and test marketed the
Relion-TM- iontophoresis drug delivery system for use in the equine
veterinary marketplace. Relion offers veterinarians a useful local drug
delivery system for a variety of drugs used in the treatment of horses. In
February of 1997, the Company launched Relion in the U.S. and international
marketplaces through regional veterinary distributors.
ORTHOTICS
ORTHOTICS: The Advance Dynamic ROM-Registered Trademark- orthoses product
line is used to correct joint range of motion limitations at the wrist,
elbow, knee or ankle. The Company's Advance Dynamic ROM orthosis is based on
the principle that particular connective tissue will remodel over time in
response to the type and amount of physical stress it receives. The Advance
Dynamic ROM orthosis addresses the permanent or plastic component of
connective tissue deformation to achieve long-term range of motion
improvement. It does this by gently delivering low-load stress at the
joint's end-range over a prolonged period of time. The Company's Advance
Dynamic ROM orthosis product line, introduced in the first quarter of 1995,
consists of models for forearm supination, elbow, wrist, knee and ankle
joints as well as below the knee amputee devices. Range of motion
limitations, generally referred to as contractures, often result following
long periods of restricted motion or when scar adhesions form following
trauma. The dynamic orthoses line fits very well with the Company's focus on
cost effective treatments used outside the clinic setting. The Company
estimates that the current ROM orthotics market is approximately $40 million
in the U.S. and that the potential sales growth rate over the next few years
will range between 10 and 15% per year.
Empi has entered into an agreement with Inverse Technology Corporation to
market Protonics-TM-, a functional active resistance orthosis, to physicians
and physical therapists. The innovative technology of Protonics-TM-
addresses neuromuscular disorders in patients with knee dysfunction problems
by helping to strengthen muscles, ligaments and tendons surrounding the knee
joint through resistive exercise. The addition of Protonics-TM- is part of
the Company's strategy to become a leader in the growing therapeutic bracing
market. The Company launched Protonics-TM- nationally in the fourth quarter
of 1996.
The Company also has a national distribution agreement with Glacier Cross,
Inc. to market Pronex-Registered Trademark-, a cervical traction device used
to relieve chronic neck pain by relaxing muscle tension and spasms by
mechanical separation of the cervical vertebrae. The Company sells Pronex to
patients through physical therapists.
INCONTINENCE TREATMENT
FEMALE URINARY INCONTINENCE PRODUCTS: In 1987, the Company began a research
project related to the application of its electro-therapeutic technology to
the treatment of female urinary incontinence. In July 1991, the Company
received FDA 510 (k) clearance for its first female pelvic floor
rehabilitation system, Innova-Registered Trademark- PFS. Urinary
incontinence is the involuntary loss of urine so severe as to have social,
psychological or hygienic consequences. According to the 1996 Agency for
Health Care Policy and Research (AHCPR) guidelines, "the U.S. spends $16
billion a year to care for people with urinary incontinence, up from $10
billion in 1990." At least 50% of the 1.5 million men and women in nursing
homes suffer from incontinence. This condition is often a principal reason
that families of the elderly commit them to full-time care. Current
treatments for female urinary incontinence range from surgical procedures,
with a three to four day hospital stay and a cost of $6,000 to $25,000, to
behavioral or pharmacologic therapy. Products designed to manage the problem
of urinary incontinence include appliances such as implantable stimulation
devices catheters, collection devices and urethral plugs as well as
disposable products such as adult diapers or briefs, padded undergarments and
bed pads designed to keep urine away from the patient's skin. PFS cures as
well as controls stress, urge and mixed incontinence. Stress incontinence,
the most common form, is the inability of the sphincter to hold back urine
when there is a sudden increased pressure on the bladder. Leakage of urine
commonly occurs with activities such as coughing, sneezing, lifting and
exercising. Urge incontinence occurs when the bladder is irritated and
contracts spontaneously causing a sudden need to urinate. Mixed incontinence
is a combination of both stress and urge incontinence. Traditionally, urge
incontinence has been treated with pharmacological therapy. Many patients
are intolerant of the medication's side effects. Stress incontinence is
poorly treated by pharmacological treatment and therefore, in most cases, has
resulted in surgical intervention.
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Empi's urinary incontinence treatment devices, Innova PFS, InnoSense-TM- and
Minnova-TM-, are composed of an externally worn, microprocessor-based
neuromuscular stimulator that activates a proprietary multi-channel vaginal
or rectal electrode. The devices automatically deliver timed dosages of
stimulation for the treatment of stress, urge and mixed incontinence during
twenty-minute treatment sessions. The treatment sessions are generally
performed twice a day in the convenience and privacy of the home. In
addition to PFS, InnoSense features EMG biofeedback capabilities for use in
volitional reeducation of the pelvic floor muscles. The regular use of PFS
can improve or cure stress, urge or mixed incontinence; published studies
indicate a cure/improvement rate of 60-90%. The cost of treatment with PFS
is approximately one thousand dollars or less, including physician fees.
The Company believes electro-therapeutic pelvic muscle stimulation will
eventually be selected as one of the first choice treatments before more
invasive treatments due to its noninvasive nature, lower cost, lower risk and
lack of side effects. The recent AHCPR guidelines, for the treatment of
adult urinary incontinence, gives PFS a "B" strength of evidence
recommendation for stress, urge and mixed incontinence. This is the same
rating currently enjoyed by available surgical alternatives. While there
are other pelvic muscle stimulation devices available, Innova PFS has been
proven to be safe and effective based on controlled clinical studies
published in peer-reviewed journals. The Company has designed an
intravaginal electrode which it believes has several significant advantages
over other electrodes, including the patented ComfortPulse-Registered
Trademark- technology which makes the electrode more comfortable and
effective during treatment.
It is estimated that more than 13 million women in the United States suffer
from urinary incontinence. The company believes that, for various reasons,
electro-therapeutic treatment will not be appropriate for a portion of these
women. The Company's initial target market includes women aged 35-65 who,
when properly diagnosed, would benefit from electrical stimulation therapy.
The Company estimates that at least 6 million women exist in this target
market. Future growth in incontinence product sales is dependent in part on
broad Medicare reimbursement. To date, Medicare coverage has been denied and
establishment of a favorable national policy coverage decision remains
doubtful in the foreseeable future despite the cost effectiveness of this
therapy. The Company is also investigating the use of PFS for the treatment
of post-prostatectomy incontinence, fecal incontinence and interstitial
cystitis. Studies using Innova to treat these conditions are under review.
MANUFACTURING
Empi manufactures its electrotherapy and Advance ROM orthotic devices, as well
as some components and related accessories, at its Clear Lake, South Dakota
facility. Manufacturing activities at the Clear Lake facility include
electronic and mechanical assembly, electrode fabrication and assembly, and
fabric sewing processes.
The Company's products are comprised of a variety of components including die
cast metal parts, injection-molded plastic parts, printed circuit boards,
electronic components, batteries and battery chargers, leadwires, electrodes and
other components. Parts for these components are purchased from outside
suppliers and are, in some instances, manufactured on a custom basis.
Many of the component parts and raw materials the Company uses in its
manufacturing and assembly operations are available from more than one supplier.
However, several component parts and accessory products are currently purchased
through a single supply source. If these components were no longer available,
the Company is able to develop alternative sources for these components,
avoiding any material adverse effect upon the Company's operations.
CUSTOMERS, MARKETING AND SALES
The Company's primary customers are patients, physical therapists and physical
therapy clinics, as well as U.S. distributors and dealers and international
dealers. These customers represented 60%, 33%, 4%, and 3%, respectively, of
Empi's net sales for fiscal 1997. As of year end 1997, Empi had over 100 field
sales representatives, selling rehabilitation products domestically on a direct
basis to physicians, physical therapists and their patients. The Company
currently serves nearly 80% of the 17,000 physical therapy clinics and hospital
physical therapy departments nationwide. The Company also provides its
customers a network for direct billing to insurance claims offices, Medicare
carriers, HMOs and other managed health care programs.
Empi has invested in both telemarketing and direct mail programs to contact
patients who use its TENS and NMES devices to help them meet their needs in
reordering accessory products. The Company utilizes direct sales programs
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to contact home health care dealers who purchase the Company's products for
resale to hospitals, clinicians and patients.
Given the consolidation of provider networks and larger payor groups, which have
continued to gain leverage in coverage and reimbursement decisions, the Company
established a national accounts group in 1994 to address coverage and
reimbursement issues and to gain preferred supplier agreements with these
providers.
Empi believes that the combination of its direct sales force, and patient care,
clinic customer, third party billing and national account services gives the
Company a distinct competitive advantage in today's marketplace.
The Company sells its products internationally through independent dealers. At
the end of 1997, Empi had 21 international distributors covering 16 countries,
worldwide. The Company introduced the orthotic product line in Germany, Holland
and Belgium in mid-1997, and plans to introduce these products to the
Scandinavian countries in 1998.
No individual customer accounted for 10 percent or more of total revenue for
1997, 1996 or 1995, respectively.
COMPETITION
ELECTROTHERAPY
The Company's two strongest competitors in the electrotherapy market, who
recently announced their intent to merge, are Rehabilicare, Inc. and Staodyn,
Inc. The principal competitive factors in the electrotherapy marketplace are
access to contracts due to managed care constraints, price, product quality and
service. Empi believes its competitive advantage in the electrotherapy
marketplace results from higher quality products and a strong distribution
network.
IONTOPHORETIC DRUG DELIVERY
The Company feels its primary competitors in the iontophoretic market are IOMED,
Inc., Dynatronics, Corp. and Henley Healthcare, Inc.
ORTHOTICS
The Company's major competitors in the orthotic market are Dynasplint Systems,
Inc., the LMB division of DeRoyal Industries, Inc. and Ultraflex Systems, Inc.
In the cervical traction market, the Company faces two main competitors:
Saunders Group, Inc. and Lossing Orthopedic, Inc.
INCONTINENCE TREATMENT
Several companies are developing new treatment products designed to cure or
control incontinence problems, including injectable biomaterials, improved drug
therapy, other electro-therapeutic devices and muscle contraction biofeedback
devices. Each of these treatment approaches is aimed at eliminating or reducing
a patient's reliance on incontinence appliances or disposable diapers. Both
InCare Medical Products, Inc. and Utah Medical Products, Inc. have pelvic floor
stimulation devices on the market. Currently, none of these competitive devices
have published placebo-controlled clinical studies to support the effectiveness
of their product claims.
PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
Empi's current research and development efforts are principally directed towards
the development of next generation products and technologies related to the
Company's orthotics, electrotherapy and iontophoretic drug delivery businesses,
enhancement of existing products, and manufacturing process developments to
improve product performance and costs. In 1997 research and development focused
on developing next-generation incontinence systems, a new TENS device with data
collection capabilities, new models for the Advance ROM and other new
therapeutic braces.
In fiscal 1997, 1996 and 1995, the Company's research and development expenses
(including clinical studies) were $3,984,000, $3,476,000 and $3,424,000
respectively. The Company anticipates research and development to grow
incrementally as a percent of sales in future years as the Company refocuses its
research and development emphasis
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on its new product lines. Expenditures on clinical research and outcomes
studies are expected to grow based on increased regulatory and provider
requirements.
BACKLOG
As of February 28, 1998, Empi did not have a material backlog situation and does
not expect to experience a material backlog situation in the foreseeable future.
PATENTS AND TRADEMARKS
The Company currently owns numerous U.S. patents issued between 1982 and 1997.
These patents cover various aspects and features of Empi's electrotherapy
devices and associated electrodes, incontinence devices and associated
electrodes, and range of motion orthotic devices. A number of patents and
trademarks were obtained as a result of the Nortech and PHD acquisitions that
cover various aspects of electrodes, stimulators and surface sEMG equipment. In
addition, numerous patent applications have been filed on various aspects of
electrotherapy and incontinence devices, range of motion orthoses, incontinence
and iontophoresis electrodes. The initial life of each patent issued to the
Company is either 14 or 17 years from the date of issue.
Although the Company generally seeks patent protection when possible, it does
not consider patent protection to be a significant, competitive advantage in the
marketplace for electro-therapeutic devices; however, patent protection may be
of significance with various aspects of the Company's incontinence electrode
technology and its orthosis technology. The Company has also registered, and
filed applications to register, various trademarks with the U.S. Patent and
Trademark Office and appropriate offices in foreign countries.
GOVERNMENT REGULATIONS AND REIMBURSEMENT
GOVERNMENT REGULATIONS
Medical device development, testing, manufacturing, labeling and marketing are
regulated under the Federal Food, Drug and Cosmetic Act (the "ACT"), as amended,
and additional regulations promulgated thereunder. These statutes and
regulations require that manufacturers adhere to certain standards designed to
assure product safety and effectiveness.
The FDA's "Quality System" regulation establishes standards for the Company's
manufacturing processes, requires maintenance of certain records and provides
for unscheduled inspections of the Company facilities. Certain requirements of
state, local and foreign governments must also be complied with in the
manufacture and marketing of the Company's products. The Company believes its
operations meet the requirements of these regulations.
New medical devices require regulatory approval prior to market introduction. In
the United States, new medical devices are subject to either the 510(k)
Pre-Market Notification regulation or the Pre-Market Approval (PMA) regulation
depending on the device's nature and intended use. International registration
and approval requirements vary and are country dependent. Most regulatory
approvals require submission of extensive documentation, engineering,
pre-clinical testing and manufacturing information to demonstrate compliance
with the pertinent regulations. In some cases, product electronics, appearance
or labeling must be modified in order to comply with the foreign regulations.
In addition, some products may require extensive clinical testing to obtain
regulatory approval. The Company anticipates the FDA may require submission of
additional clinical testing concerning iontophoretic drug delivery. In this
regard, the Company is preparing the necessary clinical trial data to support
the ongoing sale of its iontophoresis product, Dupel.
The Company contracts with an outside certification authority to review the
conformance of its quality assurance system to two recognized international
quality system standards, ISO-9001 and EN 46001. Continued certification is
essential for compliance with the Medical Device Directive in the European
Union. The Company received this certification in 1996.
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REIMBURSEMENT
The Company receives a significant portion of its revenues from third party
payors, such as Medicare, workers compensation, private insurance companies and
HMOs, who pay on behalf of the patients who rent and/or purchase the Company's
products. The Company maintains a large support staff that verifies third party
payor coverage and obtains physicians' prescriptions prior to claim submission.
When appropriate, the Company's staff obtains authorizations from third party
payors and letters of medical necessity from the prescribing physicians. Delays
in obtaining appropriate documentation and the time required for claims
processing by the third party payors significantly impact Empi's outstanding
receivables. The Company electronically bills claims to a multitude of third
party payors including Medicare.
Empi's dependence on third party payors exposes the Company to the risk of
government regulations and unilateral payor decisions, limiting the amount of
payor reimbursement and/or coverage for the Company's products. The Company
anticipates a continuing dependence on third party payors with respect to new
products, such as its pelvic floor stimulation devices. The process to
establish reimbursement for new technology in the current medical marketplace is
costly, time consuming and unpredictable.
EMPLOYEES
As of January 31, 1998, the Company had 527 employees. Of these, 168 were
engaged in production and production support, 25 in research and development,
121 in sales and marketing, 156 in sales operations, and 57 in various
administrative capacities.
None of the Company's employees are represented by a labor union, and the
Company believes that it has an amicable and positive working relationship with
its employees.
FORWARD-LOOKING STATEMENTS
The Company wishes to caution investors that certain statements made in this
Form 10-K, which are summarized below, are forward-looking statements that
involve risk and uncertainties, and actual results may be materially different.
Factors that could cause actual results to differ include, but are not limited
to those identified:
- - Success in achieving sales growth and improving profitability depends on the
Company's ability to continue to offer new proprietary products acceptable to
the marketplace, diversification of its product lines, and efficiencies in
the Company's distribution, manufacturing and medical billing systems.
- - Increased sales within the incontinence market depends in part on securing
Medicare reimbursement and general acceptance in the marketplace that the
Company's products provide preferable solutions to high-cost surgery for
certain incontinence products.
- - Growth within the TENS, NMES and accessories market, and the orthotics and
iontophoresis markets, as well as the Company's participation in such growth,
depends on general market and competitive conditions.
ITEM 2. PROPERTIES
On June 14, 1996, the Company and Cardigan Investments Limited Partnership
entered into an office/light manufacturing lease for a 93,666 square foot
building located at 599 Cardigan Road, St. Paul, Minnesota that now serves as
the Company's corporate headquarters. The lease that commenced on October 11,
1996 is for ten years with two options to renew for five years each. After
assuming occupancy of the Cardigan Road location, the Company vacated the other
two office buildings in Fridley and Arden Hills, Minnesota.
The Company owns two properties in Clear Lake, South Dakota consisting of a
24,000 square foot manufacturing facility on four acres of property and a 10,000
square foot warehouse on 1.3 acres.
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ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or of
which any of its property is the subject other than ordinary, routine litigation
incidental to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter ended December 31, 1997.
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EXECUTIVE OFFICERS OF THE COMPANY
Each executive officer is elected to office by the Board of Directors and holds
the office until his or her successor is elected and qualified. There are no
family relationships among any of the Company's directors or officers.
The following table sets forth information with regard to the executive officers
of the Company as of March 3, 1998:
PRINCIPAL OCCUPATION, BUSINESS
NAME AND AGE OF OFFICER EXPERIENCE PAST FIVE YEARS
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Joseph E. Laptewicz (49) President and Chief Executive officer since
October 1994. Acting Chief Financial Officer
from March 1997 to July 1997. Prior to
joining the Company, Mr. Laptewicz was
President and Chief Executive Officer of
Schneider (USA), Inc., a manufacturer of
products for interventional medicine and a
division of Pfizer, Inc., from April 1992 to
September 1994 and Executive Vice President
from July 1991 to March 1992.
Robert W. Clapp (48) Vice President of Manufacturing of the
Company since March 1993. Mr. Clapp served
in the capacity of Vice President of
Manufacturing at Dacomed Corp., a medical
products manufacturer and distributor, from
February 1987 to March 1993.
Shawn F. Featherston (44) Vice President of Sales Operations since July
1996. Mr. Featherston served as Vice
President of Human Resources of the Company
from January 1996 to June 1996 and Director
of Human Resources from January 1993 to
December 1995. Prior to joining the Company,
he served as Human Resources Consulting
Manager for Mcgladry and Pullen from January
1989 to December 1992.
Deborah L. Jensen (41) Vice President of Regulatory Affairs, Quality
Assurance and Clinical Research since April
1997. Ms. Jensen was Director of Regulatory
Affairs for the Company from October 1995 to
April 1997. Ms. Jensen served in the
capacity of Regulatory Affairs Manager for
Scimed, a division of Boston Scientific,
Inc., from May 1993 to October 1995.
Patrick D. Spangler (42) Vice President, Chief Financial Officer and
Assistant Secretary since July 1997. Prior
to joining the Company, Mr. Spangler served
in various capacities at Medtronic, Inc. from
March 1986 to June 1997, most recently as
Director of Treasury Operations.
Gary D. Sullivan (48) Executive Vice President of Sales and
Marketing since May 1997. Vice President of
Marketing from February 1995 to May 1997.
Prior to joining the Company, Mr. Sullivan
was Director of Sales and Marketing at
Schneider (USA) Inc. from October 1993 to
February 1995. From November 1991 to October
1993, he served as Director of Marketing for
Cordis Corp., a manufacturer of medical
devices.
H. Philip Vierling (42) Vice President of Sales since February 1998.
Vice President of Marketing from May 1997 to
February 1998. Mr. Vierling was Director of
Business Development for the Company from
January 1995 to May 1997; Director of
Marketing from May 1993 to January 1995; and
Regional Sales Manager from February 1986 to
May 1993.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's common stock trades on the Nasdaq Stock Market's National Market
under the symbol EMPI. High and low sale prices for each quarter of fiscal
years ended December 31, 1997 and 1996 are presented below.
<TABLE>
<CAPTION>
1997 1996
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First. . . . . . . . . . $ 20 5/8 $ 16 3/4 $ 25 7/8 $ 16 1/4
Second . . . . . . . . . $ 18 1/2 $ 15 1/2 $ 20 1/4 $ 12 1/2
Third. . . . . . . . . . $ 24 $ 19 3/4 $ 15 1/2 $ 11 1/4
Fourth . . . . . . . . . $ 25 3/8 $ 15 $ 21 3/4 $ 14
</TABLE>
The Company had 531 common shareholders of record at March 3, 1998. The Company
has never paid a cash dividend and does not anticipate the payment of cash
dividends in the foreseeable future since earnings are expected to be retained
to finance the Company's growth.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED SIX-YEAR FINANCIAL DATA
EMPI, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Net sales. . . . . . . . . . . . . . . . . . $ 73,468 $ 70,630 $ 67,342 $ 61,304 $ 66,377 $ 33,355
Gross profit . . . . . . . . . . . . . . . . 54,395 52,171 49,654 45,574 49,523 25,143
Operating income . . . . . . . . . . . . . . 16,105 14,420 12,335 6,197 15,325 6,309
Net income . . . . . . . . . . . . . . . . . 10,516 9,357 8,002 3,356 9,334 4,049
Diluted earnings per share . . . . . . . . . $ 1.27 $ 1.08 $ 0.90 $ 0.39 $ 1.08 $ 0.48
Diluted weighted averages shares
outstanding . . . . . . . . . . . . . . 8,258 8,660 8,899 8,611 8,660 8,438
Basic earnings per share . . . . . . . . . . $ 1.30 $ 1.11 $ 0.93 $ 0.39 $ 1.12 $ 0.51
Weighted average shares
outstanding. . . . . . . . . . . . . . . 8,077 8,448 8,588 8,536 8,334 7,957
BALANCE SHEET DATA
Cash and security investments . . . . . . . $ 24,500 $ 20,064 $ 21,039 $ 12,062 $ 6,981 $ 6,858
Working capital . . . . . . . . . . . . . . 50,357 43,186 44,512 35,445 30,684 22,076
Total assets . . . . . . . . . . . . . . . . 63,893 60,355 60,737 52,708 50,185 34,551
Long-term debt . . . . . . . . . . . . . . . 66 333 1,468 1,800 1,603 2,016
Shareholder's equity . . . . . . . . . . . . 58,689 53,657 53,079 45,000 41,355 27,265
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
EMPI, INC.
<TABLE>
<CAPTION>
YEAR ENDED (IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Net sales. . . . . . . . . . $ 18,025 $ 18,444 $ 18,409 $ 18,590
Operating income . . . . . . 3,685 3,840 4,159 4,421
Net income . . . . . . . . . 2,407 2,513 2,684 2,912
Diluted earnings per share . 0.29 0.30 0.33 0.35
DECEMBER 31, 1996
Net sales. . . . . . . . . . $ 16,892 $ 16,937 $ 17,758 $ 19,043
Operating income . . . . . . 3,123 3,292 3,640 4,365
Net income . . . . . . . . . 2,237 2,173 2,392 2,555
Diluted earnings per share . 0.25 0.25 0.28 0.30
</TABLE>
ALL SHARE AND PER SHARE DATA HAVE BEEN RESTATED TO REFLECT A 2-FOR-1 STOCK
SPLIT, EFFECTIVE JUNE 1993, AND THE ADOPTION OF SFAS NO. 128.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
reflected in the financial statements as a percent of sales:
PERCENT OF SALES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . 26.0 26.1 26.3
--------------------------
Gross profit . . . . . . . . . . . . 74.0 73.9 73.7
Selling, general and administrative. 46.7 48.6 50.3
Research and development . . . . . . 5.4 4.9 5.1
--------------------------
Operating income . . . . . . . . . . 21.9 20.4 18.3
Other income, net. . . . . . . . . . 1.4 1.2 1.2
--------------------------
Income before taxes. . . . . . . . . 23.3 21.6 19.5
Income tax expense . . . . . . . . . 9.0 8.3 7.6
--------------------------
Net income . . . . . . . . . . . . . 14.3 13.3 11.9
--------------------------
--------------------------
</TABLE>
RESULTS OF OPERATIONS
SALES
The Company's net sales for 1997 grew by 4 percent over the prior year from
$70.6 to $73.5 million. Electrotherapy sales accounted for 65 percent of total
sales or $47.9 million, a reduction of 1 percent from $48.5 million in 1996 due
primarily to continued pricing pressures. Iontophoretic drug delivery product
sales increased by 13 percent over the prior year, with increased volumes offset
by slight decreases in prices. Orthotic product sales grew by 26 percent over
1996 levels as the Company realized synergies resulting from the marketing of
Protonics-TM- and Advance Dynamic ROM-Registered Trademark- orthoses to both
physical therapists and orthopedic surgeons. Lack of consistent reimbursement
continued to adversely impact growth of the Company's incontinence product line
as 1997 incontinence treatment product sales decreased 13 percent from a
relatively small sales base in 1996. Dupel-Registered Trademark-, Protonics-TM-
and Advance Dynamic ROM accounted for most of the dollar gains in 1997 sales.
As of year end 1997, the Company had over 100 field sales representatives
selling products domestically on a retail basis. International sales, as a
percentage of total sales, were 3 percent in 1997 compared with 5 percent in
1996. The majority of international sales are generated through distribution
agreements with retailers located in Germany, Canada and Spain.
The Company's 1996 sales increased by 5 percent to $70.6 million from $67.3
million in 1995. Sales of the Company's electrotherapy products and related
accessories increased 5 percent in 1996. The iontophoretic drug delivery
product line sales increased 23 percent in 1996 compared with the year-earlier
period. Sales in 1996 of the orthotic product line increased 7 percent as
compared to 1995. The product line with the strongest relative sales growth was
the incontinence product line with a 26 percent growth.
Based on prior trends and faced with anticipated ongoing market pricing
pressures and offsetting price and volume concessions within preferred supplier
agreements, the Company would anticipate that future electrotherapy sales will
remain flat at best. Looking forward, iontophoresis and orthotic product sales
are expected to increase with most of the growth in Protonics-TM- and the
Advance Dynamic ROM product line.
GROSS PROFIT
Due to continued manufacturing and distribution efficiencies such as new surface
mount technology, offset by a shift in the product mix towards orthotic
products, gross profit as a percentage of sales remained relatively flat at
13
<PAGE>
74.0 percent in 1997, compared with 73.9 percent in 1996. Lower-margin wholesale
sales were 7 percent of total sales for 1997, compared with 9 percent for the
year-earlier period.
Gross profit for 1996 was 73.9 percent of sales, compared with 73.7 percent for
1995. Manufacturing efficiencies were partially offset by reduced margins on
iontophoretic drug delivery products given pricing pressures.
Looking forward, the Company expects a slight decrease in the gross profit
percentage due to a continued increase in orthotic products in the product mix
and increases in prices from suppliers. Through continued emphasis on
manufacturing and distribution efficiencies, the Company is working to minimize
the effects of these increases.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $34.3 million, or 46.7 percent
of sales, for 1997 versus $34.3 million, or 48.6 percent of sales, in 1996.
Continued efficiencies realized from the consolidation of two corporate
locations in 1996, offset by slight increases in incentive compensation, kept
selling, general and administrative dollars constant in 1997.
Selling, general and administrative expenses, stated as a percentage of sales
for 1996 and 1995, were 48.6 percent and 50.3 percent, respectively. Selling,
general and administrative expenses for 1996 totaled $34.3 million, compared
with $33.9 million in 1995. This improvement resulted from the Company's
continued expense control programs, including the consolidation of two corporate
locations and reductions in incentive compensation and administrative expenses.
The Company plans to increase marketing expenditures related to the new products
launched in late 1997 and early 1998. Increased efficiencies in selling,
general and administrative expenses are intended to substantially offset these
expenditures.
RESEARCH AND DEVELOPMENT
Research and development expenses increased slightly to $4.0 million in 1997
from $3.5 million in 1996, or 5.4 percent of 1997 sales as compared with 4.9
percent of 1996 sales. The Company's 1997 research and development efforts were
focused on designing new incontinence treatment products - InnoSense-TM- and
Minnova-TM-, developing next-generation electrotherapy devices - Epix VT, and
expansion of the orthotic product line as well as continued development of
next-generation orthotic devices.
Research and development expenses were $3.5 million and $3.4 million for 1996
and 1995, respectively. Stated as a percentage of sales, research and
development expenses for 1996 were 4.9 percent, compared with 5.1 percent for
1995. The Company's research and development expenses in 1996 were spread
relatively evenly among the electrotherapy, orthotic and iontophoretic drug
delivery product groups with slightly higher expenditures for incontinence
treatment products.
The Company anticipates research and development to grow incrementally as a
percent of sales in future years as the Company refocuses its research and
development emphasis on its new product lines. Expenditures on clinical
research and outcomes studies are expected to grow based on increased regulatory
and provider requirements.
OTHER INCOME AND EXPENSES
Other income, comprised primarily of interest and dividend income, totaled $1.0
million in both 1997 and 1996. Interest expense for 1997 was $2,000 versus
$69,000 in 1996. Additional non-recurring expenses of $54,000 were recorded in
1997 related to the Company's relocation to a new corporate facility in late
1996.
Interest income was $1.0 million in 1996, compared with $798,000 in 1995.
Interest expense was $69,000 in 1996 and $114,000 in 1995. The primary
contributor to interest expense in 1996 and 1995 was an interest-bearing note
issued to partially finance the Company's 1992 acquisition of Nortech, a
division of Medtronic, Inc. In the third quarter of 1996, the Company repaid
the remaining debt and retired the note. In the first quarter of 1996, the
Company recorded a one-time gain in excess of $200,000 from the settlement of a
trade dress infringement lawsuit, and in the fourth quarter of 1996 recorded
$378,000 in non-recurring expenses relating to the Company's relocation.
14
<PAGE>
NET INCOME
Net income in 1997 improved to $10.5 million, an increase of $1.2 million, or 12
percent. Higher sales, combined with relatively flat spending and no significant
one-time charges, were the main reasons for the increase in net income for 1997.
As a result of higher net income and the Company's stock buyback program, 1997
diluted earnings per share increased from $1.08 to $1.27, reflecting an 18
percent increase over 1996. Diluted earnings per share in 1997 increased by
approximately $.04 per share as a result of the stock buyback program.
Net income in 1996 was $9.4 million, compared with $8.0 million in 1995. The
improvement resulted from higher sales levels, combined with strong expense
controls. Diluted earnings per share in 1996 increased to $1.08 from $.90 in
1995, an increase of 20 percent.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $24.5 million as of
December 31, 1997, an increase of approximately $4.4 million from the year ended
December 31, 1996. Due to its strong cash position, the Company continued its
stock buyback program which began in 1995. During 1997, the Board of Directors
authorized an additional $17.5 million to buy back and retire shares. Some of
the shares repurchased under the program will be used to cover stock issuances
in connection with the Company's stock option and stock purchase plans. The
Company repurchased and retired 529,300 shares of common stock at a total cost
of $10.5 million in 1997. During 1996, the Company repurchased and retired
778,000 warrants and shares of common stock at a total cost of $9.9 million.
The Company intends to continue its stock repurchase program in 1998, given
favorable market conditions, the Company's cash position and other factors. As
of December 31, 1997, the Company's working capital was $50.4 million and its
current ratio was 10.8 to 1.0. Cash flows generated from operations were $12.3
million in 1997, $13.9 million in 1996 and $11.5 million in 1995.
Accounts receivable at December 31, 1997 increased 10 percent over December 31,
1996. The Company has continued to refine its collection efforts on receivables
which allowed a reduction in 1997 in its allowance against accounts receivable
by $200,000. Inventories increased approximately $700,000, or 9 percent, in
1997. The introduction of new products accounted for the majority of the
increase in inventories. Expenditures for property, plant and equipment were
$1.7 million in 1997, down 57 percent over 1996. After adjusting for the
one-time expenditures of approximately $2.5 million in leasehold improvements
and other equipment purchases related to the move to the new corporate facility,
capital expenditures in 1997 were flat compared to 1996. The Company believes
its cash and cash equivalents and short-term investments, together with cash
flow from operations, will be sufficient to meet the Company's currently
projected needs for working capital and capital requirements for the foreseeable
future.
A multifunctional team of internal staff is managing the Company's comprehensive
Year 2000 initiative. The team's activities are designed to ensure that there
is no adverse effect on the Company's core business operations and that
transactions with customers, suppliers, and financial institutions are fully
supported. While the Company believes there will be minimal to no impact on its
internal systems, there can be no guarantee that the systems of other companies
on which the Company's systems and operations rely will be converted on a timely
basis and will not have a material adverse effect on the Company. The cost of
the Year 2000 initiatives is not expected to be material to the Company's
results of operation or financial position.
OUTLOOK
The Company's strategic goals are to: (i) expand into related rehabilitation
markets with new and existing technology; and (ii) broaden medical device
offerings by bringing additional products to its existing markets. These
objectives will be pursued through internal development efforts and strategic
alliances, depending upon Company resources and the availability of
opportunities, while reinforcing the Company's leadership position with physical
therapists.
The Company's primary ongoing financial goals are to increase its revenue growth
and enhance profitability by focusing on its mission: to continuously improve
the quality of life for patients with functional disabilities through the
development, manufacturing and marketing of innovative, cost effective,
biomedical products and services.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements made in this Management's Discussion and Analysis, which are
summarized here, are forward-looking statements that involve risk and
uncertainties, and actual results may be materially different. Factors that
could cause actual results to differ include, but are not limited to those
identified:
- - The expectations that in the future electrotherapy sales will remain flat
at best and iontophoresis and orthotic products sales will increase, depend
on retaining reimbursement by Medicare carriers, workers' compensation
programs, managed care and private insurance payors. Increased sales of
incontinence products also depend on the Company's ability to obtain
Medicare reimbursement approval for the Company's pelvic floor stimulation
products. In addition, other general market conditions and competitive
factors within the rehabilitation market, including the introduction of new
products or technology by competitors, could adversely effect sales.
- - The expectation of a slight decrease in the gross profit percentage depends
on the actual product mix, prices from suppliers, other market conditions
and actual manufacturing and distribution efficiencies.
- - The expectation that the Company will increase marketing expenditures
related to recently launched products depends on market acceptance and the
necessary support for such products.
- - The Company's intention to continue its stock repurchase program in 1998
depends on the market conditions and the Company's cash position.
- - The sufficiency of the Company's cash and cash equivalents and short-term
investments, together with cash flow from operations, depends on general
market conditions and competitive conditions.
- - The Company's products are regulated under the federal Food, Drug and
Cosmetic Act, and the Company is required to secure clearance from the U.S.
Food and Drug Administration (FDA) prior to marketing new products. Lack
of clearance or delays in securing clearance could negatively impact sales
of new products.
- - If the Company is not successful in meeting the needs of patients,
providers and payors in the orthopedic rehabilitation and incontinence
treatment markets, its financial goals will likely not be met.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to List of Financial Statements and Financial Statement Schedule,
along with such financial statements, immediately following the signature page
of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 regarding the Company's directors included
in the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held April 29, 1998 under the caption "Election of Directors" is incorporated
herein by reference.
The information required by Item 10 regarding the Company's executive officers
is set forth in Part I of this report.
16
<PAGE>
The information required by Item 10 regarding compliance with Section 16(a) of
the Exchange Act included in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held April 29, 1998 under the caption "Compliance
with Section 16 (a) of the Exchange Act" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 regarding executive compensation included in
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
April 29, 1998 under the caption "Executive Compensation" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
The information required by Item 12 regarding voting securities and principal
holders thereof included in the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held April 29, 1998 under the caption "Principal
Shareholders and Management Ownership" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2) -- FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
See Index to Consolidated Financial Statements and Schedules, which begins
on Page F-1 immediately following the signature page to this report.
(3) -- EXHIBITS.
(3.1) Restated Articles of Incorporation, as amended, have been
filed as Exhibit 3.1 to the Company's Report on Form 10-K
for the fiscal year ended December 31, 1996, and are
included herein by reference pursuant to Rule 12b-32.
(3.2) Bylaws together with amendment adopted June 12, 1986 have
been filed as Exhibit 3.2 to the Company's Report on
Form 10-K for the fiscal year ended December 31, 1987, and
are included herein by reference pursuant to Rule 12b-32.
(4.1) Certificate for shares of Common Stock has been filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-2, Registration No. 33-42568, and is incorporated herein
by reference pursuant to Rule 12b-32.
(10.1) Employment agreement with Donald D. Maurer dated May 1, 1993
has been filed as Exhibit 10.3 to the Company's Report on
Form 10-K for the fiscal year ended December 31, 1993, and
is incorporated herein by reference pursuant to Rule
12b-32.*
(10.2) Empi, Inc. 1987 Stock Option Plan together with forms of
incentive and non-qualified option agreements has been filed
as Exhibit 10.7 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1987, and is incorporated
herein by reference pursuant to Rule 12b-32.*
(10.3) Amendment to Empi, Inc. 1987 Stock Option Plan has been
filed as Exhibit 10.8 to the Company's Report on Form 10-K
for the fiscal year ended December 31, 1992, and is
incorporated herein by reference pursuant to Rule 12b-32.*
(10.4) Amendment to Empi, Inc. 1987 Stock Option Plan dated
December 22, 1992 has been filed as Exhibit 10.13 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1993, and is incorporated herein by reference
pursuant to Rule 12b-32.*
(10.5) Amendment to Empi, Inc. 1987 Stock Option Plan dated
February 9, 1995 has been filed as Exhibit 10.16 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1994, and is incorporated herein by reference
pursuant Rule 12b-32.*
(10.6) Employment agreement with Joseph E. Laptewicz dated October
1, 1994 has been filed as Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended September 30,
1994, and is incorporated herein by reference pursuant to
Rule 12b-32.*
(10.7) Lease dated June 14, 1996 between the Company and Cardigan
Investments, a limited Partnership, covering office/light
manufacturing space in St. Paul, Minnesota has been filed as
Exhibit 10 to the Company's Report on Form 10-Q for the
quarter ended September 30, 1996, and is included herein by
reference pursuant to Rule 12b-32.
(10.8) Empi, Inc. 1997 Employee Stock Purchase Plan has been filed
as Exhibit 10.9 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1996, and is incorporated
herein by reference pursuant to Rule 12b-32.*
18
<PAGE>
ITEM 14. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K - CONTINUED
(10.9) Empi, Inc. 1997 Stock Option Plan together with forms of
incentive and non-qualified option agreements.*
(10.10) Separation Agreement with Donald D. Maurer dated May 1,
1997.*
(21) A list of Subsidiaries of the Company has been filed as
Exhibit 21 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1993, and is incorporated
herein by reference pursuant to Rule 12b-32.
(23) Consent of Independent Auditors.
(24) Power of Attorney for Joseph E. Laptewicz Jr., Patrick D.
Spangler, Donald D. Maurer, Scott R. Anderson, M. Nazie
Eftekhari, Kenneth F. Tempero, and Everett F. Carter.
(Included on signature page of this report.)
(27) Financial Data Schedule (Filed only in electronic format.)
* Management contract or compensatory plan.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1997.
(c) EXHIBITS
The response to this portion of Item 14 (a) (3) is submitted as a separate
section of this Report.
(d) FINANCIAL STATEMENT SCHEDULE
See Index to Consolidated Financial Statements and Financial Statement
Schedule beginning on Page F-1 immediately following the signature page of
this Report.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMPI, INC.
March 16, 1998 By /s/ Joseph E. Laptewicz, Jr.
-----------------------------------
Joseph E. Laptewicz Jr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints Joseph E.
Laptewicz Jr. and Patrick D. Spangler as his/her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him/her and in his/her name, place and stead, in any and
all capacities, to sign any or all amendments to this Annual Report on Form 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he/she
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his/her substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
March 16, 1998 /s/ Joseph E. Laptewicz, Jr.
-------------------------------------------------
Joseph E. Laptewicz Jr., President, Chief
Executive Officer and Director (Principal
Executive Officer)
March 16, 1998 /s/ Patrick D. Spangler
-------------------------------------------------
Patrick D. Spangler, Vice President, Chief
Financial Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
March 16, 1998 /s/ Donald D. Maurer
-------------------------------------------------
Donald D. Maurer, Chairman Emeritus
March 16, 1998 /s/ Scott R. Anderson
-------------------------------------------------
Scott R. Anderson, Chairman
March 16, 1998 /s/ M. Nazie Eftekhari
-------------------------------------------------
M. Nazie Eftekhari, Director
March 16, 1998 /s/ Kenneth F. Tempero
-------------------------------------------------
Kenneth F. Tempero, Director
March 16, 1998
-------------------------------------------------
Harold G. Olson, Director
March 16, 1998 /s/ Everett F. Carter
-------------------------------------------------
Everett F. Carter, Director
20
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) AND (2), AND ITEM 14 (d)
LIST OF FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1997
EMPI, INC.
ST. PAUL, MINNESOTA
F-1
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
EMPI, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
F-2
<PAGE>
FORM 10-K -- ITEM 14 (a) (1) and (2)
EMPI, INC.
INDEX TO LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Independent Auditors....................................... F-4
Report of Management................................................. F-5
Consolidated Balance Sheets -- December 31, 1997 and 1996............ F-6
Consolidated Statements of Operations -- Years ended December 31,
1997, 1996 and 1995.................................................. F-7
Consolidated Statements of Shareholders' Equity --
Years ended December 31, 1997, 1996 and 1995......................... F-8
Consolidated Statements of Cash Flows --
Years ended December 31, 1997, 1996 and 1995......................... F-9
Notes to Consolidated Financial Statements -- December 31, 1997...... F-10
2. FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts..................... F-16
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Empi, Inc.
We have audited the accompanying consolidated balance sheets of Empi, Inc. as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audit also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 Empi, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 23, 1998
F-4
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the accompanying consolidated financial
statements, which are prepared in accordance with generally accepted accounting
principles. In management's opinion, the consolidated financial statements
present fairly the Company's financial position, results of operations and cash
flows. In addition, information and representations included in the Company's
Annual Report are consistent with the financial statements.
The Company maintains a system of internal accounting policies, procedures and
controls intended to provide reasonable assurance, given the inherent
limitations of all internal control systems, at appropriate costs, that
transactions are executed in accordance with Company authorization, are properly
recorded and reported in the financial statements, and that assets are
adequately safeguarded. Corporate financial management continually evaluate the
adequacy and effectiveness of this system of internal accounting policies,
procedures and controls, and actions are taken to correct deficiencies as they
are identified.
The Audit Committee of the Board of Directors is comprised solely of nonemployee
directors and is responsible for overseeing and monitoring the quality of the
Company's accounting and auditing practices. The Audit Committee meets
regularly and on special occasions, as needed, with corporate financial
management and the independent auditors to review their activities. The
independent auditors have full and free access to the Audit Committee to discuss
the results of their work, the adequacy of internal financial controls and the
quality of financial reporting.
/s/ Joseph E. Laptewicz, Jr.
Joseph E. Laptewicz, Jr.
President and Chief Executive Officer
/s/ Patrick D. Spangler
Patrick D. Spangler
Vice President, Chief Financial Officer and Assistant Secretary
F-5
<PAGE>
EMPI, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,020 $ 2,849
Short-term investments 21,480 17,215
Accounts receivable, less allowances
($4,881 -- 1997; $5,062 -- 1996) 18,046 16,458
Inventories 8,003 7,320
Deferred income taxes 3,874 5,002
Other 1,072 707
----------- ----------
Total current assets 55,495 49,551
Equipment and improvements:
Equipment 12,558 10,995
Furniture and fixtures 1,663 1,630
Leasehold improvements 3,275 3,287
----------- ----------
17,496 15,912
Less accumulated depreciation and amortization 10,990 8,822
----------- ----------
Net equipment and improvements 6,506 7,090
Other assets 1,892 3,714
----------- ----------
Total assets $ 63,893 $ 60,355
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,990 $ 2,455
Customer advances 332 514
Employee compensation 1,655 1,792
Commissions payable 526 596
Current portion of long-term debt 269 287
Income taxes ---- 386
Other 366 335
----------- ----------
Total current liabilities 5,138 6,365
Long-term debt, less current portion 66 333
Shareholders' equity:
Common stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares -
8,032,011 in 1997 and 8,219,940 in 1996 9,847 15,331
Retained earnings 48,842 38,326
----------- ----------
Total shareholders' equity 58,689 53,657
Total liabilities and shareholders' equity $ 63,893 $ 60,355
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
EMPI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 73,468 $ 70,630 $ 67,342
Cost of goods sold 19,073 18,459 17,688
--------------------------------------
Gross profit 54,395 52,171 49,654
Operating expenses:
Selling, general and administrative 34,306 34,275 33,895
Research and development 3,984 3,476 3,424
--------------------------------------
Total operating expenses 38,290 37,751 37,319
--------------------------------------
Income from operations 16,105 14,420 12,335
Other income, net 995 795 783
--------------------------------------
Income before income taxes 17,100 15,215 13,118
Income tax expense 6,584 5,858 5,116
--------------------------------------
Net income $ 10,516 $ 9,357 $ 8,002
--------------------------------------
--------------------------------------
Diluted net income per share $ 1.27 $ 1.08 $ 0.90
--------------------------------------
--------------------------------------
Diluted weighted average shares outstanding 8,258 8,660 8,899
--------------------------------------
--------------------------------------
Basic net income per share $ 1.30 $ 1.11 $ 0.93
--------------------------------------
--------------------------------------
Weighted average shares outstanding 8,077 8,448 8,588
--------------------------------------
--------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
EMPI, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT EARNINGS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance January 1, 1995 8,570,371 $ 24,033 $ 20,967
Exercise of stock options 57,025 470 -
Tax benefits of stock options - 105 -
Employee stock purchase plan 103,263 722 -
Purchase and retirement of stock (62,000) (1,220) -
Net income - - 8,002
----------------------------------------
Balance December 31, 1995 8,668,659 24,110 28,969
Exercise of stock options 60,384 411 -
Tax benefits of stock options - 311 -
Employee stock purchase plan 18,897 359 -
Purchase and retirement of stock (528,000) (8,160) -
Purchase and retirement of warrant rights - (1,700) -
Net income - - 9,357
----------------------------------------
Balance December 31, 1996 8,219,940 15,331 38,326
Exercise of stock options 318,159 3,897 -
Tax benefits of stock options - 720 -
Employee stock purchase plan 23,212 354 -
Purchase and retirement of stock (529,300) (10,455) -
Net income - - 10,516
----------------------------------------
Balance December 31, 1997 8,032,011 $ 9,847 $ 48,842
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
EMPI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,516 $ 9,357 $ 8,002
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,648 3,506 3,512
Provision for deferred income taxes 1,128 (160) (566)
Gain on sale of long-term investments - - (70)
Loss on sale of equipment 5 101 56
Provision for loss on accounts receivable 2,442 2,216 2,565
Changes in operating assets and liabilities:
Accounts receivable (4,030) (2,828) (1,586)
Inventories (683) 949 (782)
Accounts payable and accrued expenses (854) 731 145
Income taxes payable 334 63 155
Other (243) (50) 25
----------------------------------------
Net cash provided by operating activities 12,263 13,885 11,456
INVESTING ACTIVITIES
Maturities of short-term investments 21,020 17,624 3,180
Purchase of short-term investments (25,285) (19,749) (11,790)
(Additions of) reductions in other assets 405 (233) (115)
Purchase of equipment and improvements (1,743) (4,013) (1,785)
----------------------------------------
Net cash used in investing activities (5,603) (6,371) (10,510)
FINANCING ACTIVITIES
Payments on long-term debt (285) (1,524) (619)
Purchase and retirement of common stock and warrant rights (10,455) (9,860) (1,220)
Proceeds from exercise of common stock options 4,251 770 1,190
----------------------------------------
Net cash used in financing activities ( 6,489) (10,614) (649)
----------------------------------------
----------------------------------------
Net increase (decrease) in cash and cash equivalents 171 (3,100) 297
Cash and cash equivalents at beginning of year 2,849 5,949 5,652
----------------------------------------
Cash and cash equivalents at end of year $ 3,020 $ 2,849 $ 5,949
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company develops, manufactures and distributes non-invasive biomedical
devices and accessories for applications in the orthopedic rehabilitation and
incontinence treatment markets. The primary market for the Company's products is
in the United States. The Company also does a small percentage of business in
Canada, Europe and the Far East.
BASIS OF PRESENTATION
The consolidated financial statements include the Company and its wholly-owned
subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVESTMENTS
Short-term investments, consisting of debt securities and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at cost, which approximates fair value.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated on the basis of cost. Depreciation and
amortization of equipment and improvements are computed on the straight-line
method for book purposes (accelerated methods for income tax purposes) over
estimated useful lives of 25 years for building improvements, seven to eight
years for furniture and fixtures, five years for equipment, and three years for
computers.
OTHER ASSETS
Other assets consist primarily of intangible assets including goodwill,
non-compete agreements, costs paid to wholesale distributors for territorial
distribution rights and patent costs. These assets are being amortized on a
straight-line basis over their estimated useful lives ranging from four to seven
years. Accumulated amortization was $7,201,000 and $5,887,000 at December 31,
1997 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
F-10
<PAGE>
EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for its plans. Under APB 25, when the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," requiring
dual presentation of basic earnings per share and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average shares outstanding. Diluted earnings per share is calculated by
dividing net income by the weighted average diluted shares outstanding, which
includes the dilutive effect of options outstanding. SFAS No. 128 was adopted
by the Company on December 31, 1997. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to SFAS
No. 128 requirements.
RECLASSIFICATION
Certain prior year items have been reclassified to conform to current year
presentation.
NOTE 2. INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN THOUSANDS)
<S> <C> <C>
Municipal bonds $ 11,874 $ 6,813
U. S. Government bonds 9,606 5,402
Preferred stock - 5,000
Cash equivalents 662 1,319
--------------------
$ 22,142 $ 18,534
--------------------
--------------------
</TABLE>
Interest income included in other income was $1,031,000, $1,039,000, and
$798,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 5,515 $ 5,399
Work in process 556 678
Raw materials 1,932 1,243
--------------------
$ 8,003 $ 7,320
--------------------
--------------------
</TABLE>
NOTE 4. BORROWINGS
Long-term borrowings consist of:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable $ 335 $ 620
Less current maturities 269 287
------------------
$ 66 $ 333
------------------
------------------
</TABLE>
F-11
<PAGE>
EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable at December 31, 1997 and 1996 consists entirely of debt issued in
conjunction with dealer acquisitions and non-compete agreements.
Annual maturities of long-term debt are: 1998--$269,000 and 1999--$66,000.
Total interest paid for the years ended December 31, 1997, 1996 and 1995 was
$2,000, $79,000 and $121,000, respectively. Interest expense included in other
income (expense) was $2,000, $69,000 and $114,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
NOTE 5. INCOME TAXES
At December 31, 1997, the Company has a net operating loss carryforward of
$861,000 for income tax purposes, resulting from the Company's 1993 acquisition
of Physical Health Devices, Inc., which will expire in the year 2007. The
Company's ability to utilize the net operating loss carryforward will be subject
to Internal Revenue Code Section 382 limitations. For financial reporting
purposes, at December 31, 1996, a valuation allowance of $332,000 had been
recognized to offset the deferred tax asset related to the carryforward. In the
second quarter of 1997, the Company determined that recognition of the deferred
tax asset was probable and reversed the valuation allowance, reducing the
goodwill related to the acquisition of Physical Health Devices, Inc.
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,053 $ 3,716
Amortization of non-compete agreement 805 592
Accrued expenses 316 234
Inventory 300 257
Other 675 747
----------------------
Total deferred tax assets 4,149 5,546
Deferred tax liabilities (275) (165)
----------------------
Net deferred tax assets 3,874 5,381
Valuation allowance for deferred tax assets - (379)
----------------------
$ 3,874 $ 5,002
----------------------
----------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 4,834 $ 5,040 $ 4,811
State 622 978 871
Deferred:
Federal 999 (118) (504)
State 129 (42) (62)
--------------------------------------
$ 6,584 $ 5,858 $ 5,116
--------------------------------------
--------------------------------------
</TABLE>
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal
tax benefit 4.0 4.0 4.0
Amortization of goodwill - 0.5 1.0
Other 0.5 - -
------------------------------------
Effective rate 38.5% 38.5% 39.0%
------------------------------------
------------------------------------
</TABLE>
F-12
<PAGE>
EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total income taxes paid during the years ended December 31, 1997, 1996 and 1995
were $4,845,000, $5,876,000 and $5,469,000, respectively.
NOTE 6. STOCK PLANS
The Company has a qualified and nonqualified stock option plan for officers, key
employees and nonemployee directors. The options are granted at fair market
value and are exercisable over periods up to 10 years from grant date in various
increments. Shares reserved in the Company's 1987 and 1997 Stock Option Plans
for issuance upon the exercise of warrants and options were 1,187,281 at
December 31, 1997.
Option activity in the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED WEIGHTED
OPTION OPTION AVERAGE EXERCISE
SHARES SHARES PRICE
----------------------------------------------
<S> <C> <C> <C>
Balance January 1, 1995 393,820 304,757 $ 12.52
Granted 77,015 31,568 8.73
Canceled/expired (16,700) (2,500) 21.21
Exercised (42,025) (15,000) 9.42
---------------------------
Balance December 31, 1995 412,110 318,825 11.97
---------------------------
Granted 77,104 26,846 21.36
Canceled/expired (96,013) (30,806) 15.13
Exercised (44,479) (15,905) 6.82
---------------------------
Balance December 31, 1996 348,722 298,960 13.34
---------------------------
Granted 67,182 46,400 17.85
Canceled/expired (52,655) (8,106) 17.51
Exercised (184,906) (133,253) 12.25
---------------------------
Balance December 31, 1997 178,343 204,001 $ 14.93
---------------------------
---------------------------
</TABLE>
As of December 31, 1997 there were 150,450 options outstanding with exercise
prices between $7.50 and $8.75, 135,344 options outstanding with exercise prices
between $9.88 and $17.88, and 96,550 options outstanding with exercise prices
between $19.25 and $28.00. At December 31, 1997 outstanding options had a
weighted average remaining contractual life of 7 years. The number of options
exercisable as of December 31, 1997, 1996 and 1995 were 76,055, 213,725 and
158,000, respectively, at weighted average exercise prices of $12.96, $13.30 and
$14.27.
The Company also has an Employee Stock Purchase Plan. The Plan enables
employees to contribute up to 10 percent of their compensation toward the
purchase of the Company's common stock at 85 percent of market value. At
December 31, 1997, 276,788 shares are reserved for future employee purchases of
stock under the Plan.
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures, as prescribed by SFAS No. 123, is the estimated
present value at grant date using a Black-Scholes option-pricing model with the
following weighted average assumptions for 1997, 1996 and 1995: dividend yield
of 0%; expected volatility of 61.36%; a risk free interest rate of 5.66% and
an expected holding period of 3.79 years.
The weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995 was $8.86, $10.47 and $4.48, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
F-13
<PAGE>
EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If the Company had elected to recognize compensation cost for the stock option
plan and employee stock purchase plan based on the fair value at the grant dates
for awards under those plans, consistent with the method prescribed by SFAS 123,
net income and earnings per share would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income: As reported $ 10,516 $ 9,357 $ 8,002
Pro forma 9,933 9,051 7,613
Diluted earnings per share: As reported $ 1.27 $ 1.08 $ 0.90
Pro forma 1.20 1.05 0.86
Basic earnings per share: As reported $ 1.30 $ 1.08 $ 0.93
Pro forma 1.23 1.05 0.89
</TABLE>
Note: The pro forma effect on net income for 1997, 1996 and 1995 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
NOTE 7. CAPITAL STOCK
The Company purchased and retired 529,300 shares of common stock for $10.5
million and 528,000 shares of common stock for $8.2 million in 1997 and 1996,
respectively.
In 1996, the Company purchased and retired 250,000 warrant rights for $1.7
million which were originally issued in conjunction with the 1992 acquisition of
the Nortech division of Medtronic, Inc.
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 10,516 $ 9,357 $ 8,002
Denominator for earnings per share:
Weighted average shares; denominator for basic earnings per share 8,077 8,448 8,588
Effect of dilutive securities:
Employee and nonemployee stock options 181 212 311
-----------------------------------------
Dilutive common shares; denominator for diluted earnings per share 8,258 8,660 8,899
-----------------------------------------
-----------------------------------------
Basic earnings per share $ 1.30 $ 1.11 $ 0.93
-----------------------------------------
-----------------------------------------
Diluted earnings per share $ 1.27 $ 1.08 $ 0.90
-----------------------------------------
-----------------------------------------
</TABLE>
NOTE 9. LEASES
The Company leases office space under noncancelable operating leases. These
leases expire on various dates through 2006.
Future minimum payments under all lease arrangements subsequent to 1997 are:
1998--$567,000, 1999--$564,000, 2000--$564,000, 2001--$564,000, 2002--$564,000,
and thereafter--$2,142,000.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $576,000,
$660,000 and $526,000, respectively.
F-14
<PAGE>
EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. RETIREMENT PLAN
The Company has a Retirement Profit Sharing and Savings Plan under
Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer
up to 15% of their income on a pre-tax basis through contributions to the Plan.
For every dollar the employee contributes up to 6% of their income, the Company
will contribute $.50. In 1997, 1996 and 1995, the Company's matching
contribution was $444,000, $404,000 and $421,000, respectively.
F-15
<PAGE>
EMPI, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
---------
(1) (2)
Charged to Other
Beginning Of Charged to Costs Accounts -- Deductions - Balance at End
Description Period and Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1997:
Allowance for
doubtful accounts $ 5,062 $ 2,442 $ -0- $ 2,623 $ 4,881
Inventory reserve 2,769 128 -0- 289 2,608
-------- -------- -------- -------- -------
Total $ 7,831 $ 2,570 $ -0- $ 2,912 $ 7,489
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Year ended
December 31, 1996:
Allowance for
doubtful accounts $ 5,966 $ 2,416 $ -0- $ 3,320 $ 5,062
Inventory reserve 2,757 766 -0- 754 2,769
-------- -------- -------- -------- -------
Total $ 8,723 $ 3,182 $ -0- $ 4,074 $ 7,831
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Year ended
December 31, 1995:
Allowance for
doubtful accounts $ 7,684 $ 2,565 $ -0- $ 4,283 $ 5,966
Inventory reserve $ 2,490 875 -0- 608 2,757
-------- -------- -------- -------- -------
Total $ 10,174 $ 3,440 $ -0- $ 4,891 $ 8,723
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
</TABLE>
(1) Provisions for write-off of uncollectable receivables and inventory
adjustments.
(2) Represents write-offs of doubtful accounts, net of recoveries, and
write-offs and disposals of inventory.
F-16
<PAGE>
EXHIBIT 10.9 - 1997 STOCK OPTION PLAN
EXHIBIT A
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated below:
(a) "Committee" shall mean a Committee of two or more directors who shall be
appointed by and serve at the pleasure of the Board. As long as the Company's
securities are registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended, then, to the extent necessary for compliance with Rule
16b-3, or any successor provision, each of the members of the Committee shall be
a "Non-Employee Director." For purposes of this Section 1(a), "Non-Employee
Director" shall have the same meaning as set forth in Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
(b) The "Company" shall mean Empi, Inc., a Minnesota corporation.
(c) "Fair Market Value" as of any day shall mean (i) if such stock is
reported by the NASDAQ National Market or NASDAQ SmallCap Market or is listed
upon an established stock exchange or exchanges, the reported closing price of
such stock by the NASDAQ National Market or NASDAQ SmallCap Market or on such
stock exchange or exchanges on such date or, if no sale of such stock shall have
occurred on such date, on the next preceding day on which there was a sale of
stock; (ii) if such stock is not so reported by the NASDAQ National Market or
NASDAQ SmallCap Market or listed upon an established stock exchange, the average
of the closing "bid" and "asked" prices quoted by the National Quotation Bureau,
Inc. (or any comparable reporting service) on such date or, if there are no
quoted "bid" and "asked" prices on such date, on the next preceding date for
which there are such quotes; or (iii) if such stock is not publicly traded as of
such date, the per share value as determined by the Board, or the Committee, in
its sole discretion by applying principles of valuation with respect to the
Company's Common Stock.
(d) "Incumbent Director" means a Non-Employee Director who is serving as a
member of the Board of Directors of the Company as of the effective date of the
Plan.
(e) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as
amended from time to time.
(f) "New Director" means a Non-Employee Director who becomes a member of the
Board of Directors of the Company on or after the effective date of the Plan.
(g) "Non-Employee Director" shall mean members of the Board who are not
employees of the Company or any Subsidiary.
(h) "Option Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 13) reserved for options pursuant to this
Plan.
(i) The "Optionee" means an employee of the Company or any Subsidiary to whom
an incentive stock option has been granted pursuant to Section 9; a consultant
or advisor to or director (including a Non-Employee Director), employee or
officer of the Company or any Subsidiary to whom a nonqualified stock option has
been granted pursuant to Section 10; and a Non-Employee Director to whom a
nonqualified stock option has been granted pursuant to Section 11.
(j) "Parent" shall mean any corporation which owns, directly or indirectly in
an unbroken chain, fifty percent (50%) or more of the total voting power of the
Company's outstanding stock.
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(k) The "Plan" means the Empi, Inc. 1997 Stock Option Plan, as amended
hereafter from time to time, including the form of Option Agreements as they may
be modified by the Board from time to time.
(l) A "Subsidiary" shall mean any corporation of which fifty percent (50%) or
more of the total voting power of outstanding stock is owned, directly or
indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and its
Subsidiaries by facilitating the retention of competent personnel and by
furnishing incentive to officers, directors, employees, consultants, and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, pursuant to Section 9 of this Plan, and through the granting of
"nonqualified stock options" pursuant to Section 10 of this Plan. Adoption of
this Plan shall be and is expressly subject to the condition of approval by the
shareholders of the Company within twelve (12) months before or after the
adoption of the Plan by the Board of Directors. Any incentive stock options
granted after adoption of the Plan by the Board of Directors shall be treated as
nonqualified stock options if shareholder approval is not obtained within such
twelve-month period.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date of adoption by the Board of
Directors, subject to approval by the shareholders of the Company as required in
Section 2.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Committee which may be
appointed by the Board from time to time (collectively referred to as the
"Administrator"). The Administrator shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described in the Plan) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option.
The Administrator shall have full power and authority to administer and
interpret the Plan, to make and amend rules, regulations and guidelines for
administering the Plan, to prescribe the form and conditions of the respective
stock option agreements (which may vary from Optionee to Optionee) evidencing
each option and to make all other determinations necessary or advisable for the
administration of the Plan. The Administrator's interpretation of the Plan, and
all actions taken and determinations made by the Administrator pursuant to the
power vested in it hereunder, shall be conclusive and binding on all parties
concerned.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith in connection with the administration
of the Plan. In the event the Board appoints a Committee as provided hereunder,
any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
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SECTION 5.
PARTICIPANTS
The Administrator shall from time to time, at its discretion and without
approval of the shareholders, designate those employees, officers, directors
(including Non-Employee Directors), consultants, and advisors of the Company or
of any Subsidiary to whom nonqualified stock options shall be granted pursuant
to Section 9 of the Plan; provided, however, that consultants or advisors shall
not be eligible to receive stock options hereunder unless such consultant or
advisor renders bona fide services to the Company or Subsidiary and such
services are not in connection with the offer or sale of securities in a capital
raising transaction; and provided, further, that Non-Employee Directors shall be
granted nonqualified stock options pursuant to Section 11 of the Plan without
any further action by the Administrator. The Administrator shall, from time to
time, at its discretion and without approval of the shareholders, designate
those employees of the Company or any Subsidiary to whom incentive stock options
shall be granted under this Plan. The Administrator may grant additional
incentive stock options or nonqualified stock options under this Plan to some or
all participants then holding options or may grant options solely or partially
to new participants. In designating participants, the Administrator shall also
determine the number of shares to be optioned to each such participant. The
Board may from time to time designate individuals as being ineligible to
participate in the Plan.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of Option Stock. Five Hundred Thousand (500,000) shares of
Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time to
time during a period of ten (10) years from the effective date as defined in
Section 3. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the effective date of the Plan and until the Plan is
discontinued or terminated by the Board. Any incentive stock option granted
during such ten-year period and any nonqualified stock option granted prior to
the termination of the Plan by the Board shall remain in full force and effect
until the expiration of the option as specified in the written stock option
agreement and shall remain subject to the terms and conditions of this Plan.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to
this Plan with cash, personal check, certified check, Common Stock of the
Company valued at such Stock's then Fair Market Value, or such other form of
payment as may be authorized by the Administrator. The Administrator may, in
its sole discretion, limit the forms of payment available to the Optionee and
may exercise such discretion any time prior to the termination of the option
granted to the Optionee or upon any exercise of the option by the Optionee.
With respect to payment in the form of Common Stock of the Company, the
Administrator may require advance approval or adopt such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor provision, as
then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
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SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Administrator and may vary from Optionee to Optionee; provided, however,
that each Optionee and each Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall
state the total number of shares covered by the incentive stock option.
To the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, the option price per share shall not be less than one hundred
percent (100%) of the Fair Market Value of the Common Stock per share on
the date the Administrator grants the option; provided, however, that if
an Optionee owns stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of
its Parent or any Subsidiary, the option price per share of an incentive
stock option granted to such Optionee shall not be less than one hundred
ten percent (110%) of the Fair Market Value of the Common Stock per share
on the date of the grant of the option. The Administrator shall have
full authority and discretion in establishing the option price and shall
be fully protected in so doing.
(b) TERM AND EXERCISABILITY OF INCENTIVE STOCK OPTION. The term
during which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. To the
extent required to qualify the Option as an incentive stock option under
Section 422 of the Internal Revenue Code, or any successor provision, in
no event shall any incentive stock option be exercisable during a term of
more than ten (10) years after the date on which it is granted; provided,
however, that if an Optionee owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Company or of its parent or any Subsidiary, the incentive stock option
granted to such Optionee shall be exercisable during a term of not more
than five (5) years after the date on which it is granted.
The Option Agreement shall state when the incentive stock option becomes
exercisable and shall also state the maximum term during which the option
may be exercised. In the event an incentive stock option is exercisable
immediately, the manner of exercise of the option in the event it is not
exercised in full immediately shall be specified in the Option Agreement.
The Administrator may accelerate the exercisability of any incentive
stock option granted hereunder which is not immediately exercisable as of
the date of grant.
(c) OTHER PROVISIONS. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Administrator shall
deem advisable. Any such Option Agreement shall contain such limitations
and restrictions upon the exercise of the option as shall be necessary to
ensure that such option will be considered an "incentive stock option" as
defined in Section 422 of the Internal Revenue Code or to conform to any
change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to this Section 10 shall
be evidenced by a written Option Agreement. The Option Agreement shall be in
such form as may be approved from time to time by the Administrator and may vary
from Optionee to Optionee; provided, however, that each Optionee and each Option
Agreement shall comply with and be subject to the following terms and
conditions:
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall
state the total number of shares covered by the nonqualified stock
option. Unless otherwise determined by the Administrator, the
option price per share shall be one hundred percent (100%) of the
Fair Market Value of the Common Stock per share on the date the
Administrator grants the option; provided, however, that the option
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price may not be less than eighty-five percent (85%) of the Fair
Market Value of the Common Stock per share on the date of grant.
(b) TERM AND EXERCISABILITY OF NONQUALIFIED STOCK OPTION. The term
during which any nonqualified stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. The
Option Agreement shall state when the nonqualified stock option becomes
exercisable and shall also state the maximum term during which the option
may be exercised. In the event a nonqualified stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
stock option agreement. The Administrator may accelerate the
exercisability of any nonqualified stock option granted hereunder which
is not immediately exercisable as of the date of grant.
(c) WITHHOLDING. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the Optionee all legally
required amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Optionee's exercise of a
nonqualified stock option. In the event the Optionee is required under
the Option Agreement to pay the Company, or make arrangements
satisfactory to the Company respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its discretion and
pursuant to such rules as it may adopt, permit the Optionee to satisfy
such obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Optionee as a
result of the option's exercise equal to the amount required to be
withheld for tax purposes. Any stock elected to be withheld shall be
valued at its Fair Market Value, as of the date the amount of tax to be
withheld is determined under applicable tax law. The Optionee's election
to have shares withheld for this purpose shall be made on or before the
date the option is exercised or, if later, the date that the amount of
tax to be withheld is determined under applicable tax law. Such election
shall be approved by the Administrator and otherwise comply with such
rules as the Administrator may adopt to assure compliance with Rule
16b-3, or any successor provision, as then in effect, of the General
Rules and Regulations under the Securities Exchange Act of 1934, if
applicable.
(d) OTHER PROVISIONS. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Administrator shall
deem advisable.
SECTION 11.
NONQUALIFIED STOCK OPTIONS FOR NON-EMPLOYEE DIRECTORS
(a) GRANT OF NONQUALIFIED STOCK OPTIONS. All grants of nonqualified
stock options to Non-Employee Directors under this Section 11 shall be
automatic and nondiscretionary and shall be made strictly in accordance
with the following provisions:
(1) The Administrator shall not have any discretion to select
the Non-Employee Directors that shall be eligible for
nonqualified stock options or to determine the number of
shares of Common Stock to be subject to such options, the
option price per share or the date of grant.
(2) INITIAL GRANTS. Each New Director shall be granted a
nonqualified stock option to purchase 5,000 shares of Common
Stock on the date that the New Director first becomes
elected to the Board of Directors of the Company.
(3) ANNUAL GRANTS.
a. Each Incumbent Director shall be granted a nonqualified
stock option to purchase 500 shares of Common Stock on
the date of the annual meeting of the shareholders of
the Company immediately following the effective date of
the Plan, and on the date of each annual meeting of the
shareholders thereafter, so long as the Incumbent
Director continues to serve on the Board.
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b. Each New Director shall be granted a nonqualified stock
option to purchase 500 shares of Common Stock on the
date of the annual meeting coincident with or
immediately following the third anniversary of the date
that the New Director was elected to the Board of
Directors and on the date of each annual meeting
thereafter, so long as the New Director continues to
serve on the Board.
(b) OPTION PRICE. The option price per share for all nonqualified
stock options granted pursuant to Sections 11(a) above shall be one
hundred percent (100%) of the Fair Market Value of a share of Common
Stock on the date the nonqualified stock option is granted.
(c) DURATION AND EXERCISE OF OPTIONS.
(1) DURATION OF OPTIONS. Except as otherwise provided in this
Plan, the period during which any nonqualified stock option
granted to Non-Employee Directors under this Section 11 may
be exercised shall be seven (7) years after the date that
the option is granted.
(2) EXERCISABILITY OF NONQUALIFIED STOCK OPTIONS.
a. In no event shall any nonqualified stock options
granted to Non-Employee Directors be exercisable prior
to the date that this Plan is approved by the
shareholders of the Company. If shareholder approval
of the Plan is not obtained within twelve (12) months
following its adoption by the Board, any nonqualified
stock options previously granted to Non-Employee
Directors shall be revoked.
b. All nonqualified stock options granted to Non-Employee
Directors pursuant to Section 11(a)(2) shall become
exercisable to the extent of twenty-five percent (25%)
of the shares subject to the nonqualified stock option
on each of the four succeeding anniversaries of the
date that the option is granted. If the Non-Employee
Director does not purchase in any year the full number
of shares which the Non-Employee Director is entitled
to purchase in that year, the Non-Employee Director
shall be entitled to purchase in any subsequent year
such previously unpurchased shares, subject to the
expiration of such nonqualified stock option as
specified in Section 11(c)(1) above.
c. All nonqualified stock options granted to Non-Employee
Directors pursuant to Section 11(a)(3) shall become
fully exercisable on the first anniversary of the date
that the option is granted. If the Non-Employee
Director does not purchase in any year the full number
of shares which the Non-Employee Director is entitled
to purchase in that year, the Non-Employee Director
shall be entitled to purchase in any subsequent year
such previously unpurchased shares, subject to the
expiration of such nonqualified stock option as
specified in Section 11(c)(1) above.
(d) PAYMENT OF OPTION PRICE. Upon the exercise of any nonqualified
stock option granted to a Non-Employee Director pursuant to this
Section 11, the purchase price for such shares of Common Stock
subject to such option shall be paid in cash or certified check,
unless the Administrator, in its sole discretion and subject to any
applicable rules or regulations it may adopt, allows such payment
to be made, in whole or in part, by the transfer from the
Non-Employee Director to the Company of previously acquired shares
of Common Stock. Any Common Stock so transferred shall be valued
at its Fair Market Value on the day immediately preceding the
effective exercise of the nonqualified stock option. For purposes
of this Section 11(d), "previously acquired shares of Common Stock"
shall include shares of Common Stock that are already owned by the
Non-Employee Director at the time of exercise.
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(e) RIGHTS AS A SHAREHOLDER. The Non-Employee Director shall have no
rights as a shareholder with respect to any shares of Common Stock
subject to a nonqualified stock option until the Non-Employee
Director becomes the holder of record of such shares. Except as
provided in Section 13, no adjustments shall be made for dividends
or other cash distributions or for other rights that have a record
date preceding the date the Non-Employee Director becomes the
holder of record of such shares of Stock.
(f) TERMINATION OF STATUS AS A DIRECTOR. In the event that a
Non-Employee Director's membership on the Board terminates, the
following provisions shall apply:
(1) If the Non-Employee Director's membership on the Board
terminates for any reason other than the Non-Employee
Director's retirement, death or disability, the Non-Employee
Director shall be entitled to exercise any nonqualified
stock option granted to such Non-Employee Director pursuant
to this Section 11 to the extent such option was exercisable
as of the date of such termination for a period of three (3)
months following the date of such termination unless the
Option, by its terms, expires before the end of such
three-month period. To the extent that the nonqualified
stock option is not exercisable as of the date the
Non-Employee Director's membership on the Board terminates
for any reason other than retirement, death or disability,
or to the extent the Non-Employee Director does not exercise
such Option within the period specified in this Section
11(f)(1), all rights of the Non-Employee Director under such
Option shall be forfeited.
(2) If the Non-Employee Director's membership on the Board
terminates because of disability, the Non-Employee Director
shall be entitled to exercise any nonqualified stock option
to the extent such option was exercisable as of the date
such Non-Employee Director's membership on the Board is
terminated by reason of disability for a period of twelve
(12) months following the date of such termination unless
the option, by its terms, expires before the end of such
twelve-month period. To the extent that such Option was not
exercisable as of the date the Non-Employee Director's
membership on the Board terminates because of disability, or
if the Non-Employee Director does not exercise the
nonqualified stock option within the twelve-month period
specified in this Section 11(f)(2), all rights of the
Non-Employee Director under the option shall be forfeited.
For purposes of this Section 11(f)(2), "disability" shall
mean a mental or physical condition of the Non-Employee
Director, resulting from illness, injury or disease which,
as determined by the Board, causes the Non-Employee director
to resign from the Board and is reasonably expected to be of
long and indefinite duration or result in death.
(3) If the Non-Employee Director's membership on the Board
terminates because of retirement, any nonqualified stock
option granted to the Non-Employee Director pursuant to this
Section 11 shall become immediately exercisable to the
extent of one hundred percent (100%) of the shares subject
to the nonqualified stock option and shall terminate on the
date such option will, by its terms, expire. To the extent
the Non-Employee Director does not exercise such option
within the period specified in this Section 11(f)(3), all
rights of the Non-Employee Director under such option shall
be forfeited. For purposes of this Section 11(f)(3)
"retirement" shall mean termination of the Non-Employee
Director's membership on the Board after reaching age 60 and
completing a minimum of five (5) years of service on the
Board.
(4) If the Non-Employee Director dies (i) while a member of the
Board, (ii) within the three (3) months following the
termination of the Non-Employee Director's membership on the
Board in the case of Section 11(f)(1) above, (iii) within the
twelve (12) months following the termination of the
Non-Employee Director's membership on the Board in the case of
Section 11(f)(2) above, or (iv) at any time after the
Non-Employee Director's retirement from the Board in the case
of Section 11(f)(3) above, any nonqualified stock option
granted to such Non-Employee Director shall become immediately
exercisable in full and may be exercised by the Non-Employee
Director's estate or any person who acquired the right to
exercise any nonqualified stock option granted to such
Non-Employee Director pursuant to this Section 11 by bequest
or inheritance until the date such Option expires as specified
in Section 11(c)(1) above.
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SECTION 12.
TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part, by
the Optionee other than by will or by the laws of descent and distribution and,
during the Optionee's lifetime, the option may be exercised only by the
Optionee. If the Optionee shall attempt any transfer of any incentive stock
option granted under the Plan during the Optionee's lifetime, such transfer
shall be void and the incentive stock option, to the extent not fully exercised,
shall terminate.
The Administrator may, in its sole discretion, permit the Optionee to
transfer any or all nonqualified stock options to any member of the Optionee's
"immediate family" as such term is defined in Rule 16a-1(e) promulgated under
the Securities Exchange Act of 1934, or any successor provision, or to one or
more trusts whose beneficiaries are members of such Optionee's "immediate
family" or partnerships in which such family members are the only partners;
provided, however, that the Optionee receives no consideration for the transfer
and such transferred nonqualified stock option shall continue to be subject to
the same terms and conditions as were applicable to such nonqualified stock
option immediately prior to its transfer.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Option Stock reserved under Section 6 hereof and the number
of shares of Option Stock covered by each outstanding option and the price per
share thereof shall be adjusted by the Board to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the stock option agreement, in the event of
an acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company (collectively referred to as
a "transaction"), all outstanding options shall become immediately exercisable,
whether or not such options had become exercisable prior to the transaction;
provided, however, that if the acquiring party seeks to have the transaction
accounted for on a "pooling of interests" basis and, in the opinion of the
Company's independent certified public accountants, accelerating the
exercisability of such options would preclude a pooling of interests under
generally accepted accounting principles, the exercisability of such options
shall not accelerate. In addition to the foregoing, or in the event a pooling
of interests transaction precludes the acceleration of the exercisability of
outstanding options, the Board may provide for one or more of the following:
(a) the complete termination of this Plan and cancellation of outstanding
options not exercised prior to a date specified by the Board (which date
shall give Optionees a reasonable period of time in which to exercise the
options prior to the effectiveness of such transaction);
(b) that Optionees holding outstanding incentive or nonqualified
options shall receive, with respect to each share of Option Stock
subject to such options, as of the effective date of any such
transaction, cash in an amount equal to the excess of the Fair
Market Value of such Option Stock on the date immediately
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preceding the effective date of such transaction over the option
price per share of such options; provided that the Board may, in
lieu of such cash payment, distribute to such Optionees shares of
stock of the Company or shares of stock of any corporation
succeeding the Company by reason of such transaction, such shares
having a value equal to the cash payment herein; or
(c) the continuance of the Plan with respect to the exercise of options
which were outstanding as of the date of adoption by the Board of such
plan for such transaction and provide to Optionees holding such options
the right to exercise their respective options as to an equivalent number
of shares of stock of the corporation succeeding the Company by reason of
such transaction.
The Board may restrict the rights of or the applicability of this Section 13 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934, the Internal Revenue Code or any other applicable law or regulation.
The grant of an option pursuant to the Plan shall not limit in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure or to merge, exchange or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION 14.
SECURITIES LAW COMPLIANCE
No shares of Common Stock shall be issued pursuant to the Plan unless and
until there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Option Stock to Optionee, the Administrator may require Optionee to
(i) represent that the shares of Option Stock are being acquired for investment
and not resale and to make such other representations as the Administrator shall
deem necessary or appropriate to qualify the issuance of the shares as exempt
from the Securities Act of 1933 and any other applicable securities laws, and
(ii) represent that Optionee shall not dispose of the shares of Option Stock in
violation of the Securities Act of 1933 or any other applicable securities laws.
As a further condition to the grant of any incentive or nonqualified
stock option or the issuance of Option Stock to Optionee, Optionee agrees to the
following:
(a) In the event the Company advises Optionee that it plans an
underwritten public offering of its Common Stock in compliance with the
Securities Act of 1933, as amended, and the underwriter(s) seek to impose
restrictions under which certain shareholders may not sell or contract to
sell or grant any option to buy or otherwise dispose of part or all of
their stock purchase rights of the underlying Common Stock, Optionee will
not, for a period not to exceed 180 days from the prospectus, sell or
contract to sell or grant an option to buy or otherwise dispose of any
incentive or nonqualified stock option granted to Optionee pursuant to
the Plan or any of the underlying shares of Common Stock without the
prior written consent of the underwriter(s) or its representative(s).
(b) In the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to
reduce the number of issued but unexercised stock purchase rights so as
to comply with any states securities or Blue Sky law limitations with
respect thereto, the Board of Directors of the Company shall have the
right (i) to accelerate the exercisability of any incentive or
nonqualified stock option and the date on which such option must be
exercised, provided that the Company gives Optionee prior written notice
of such acceleration, and (ii) to cancel any options or portions thereof
which Optionee does not exercise prior to or contemporaneously with such
public offering.
(c) In the event of a transaction (as defined in Section 13 of the
Plan) which is treated as a "pooling of interests" under generally
accepted accounting principles, Optionee will comply with Rule 145 of the
Securities Act of 1933 and any other restrictions imposed under other
applicable legal or accounting principles if Optionee is an "affiliate"
(as defined in such applicable legal and accounting principles) at the
time of the transaction, and Optionee will execute any documents
necessary to ensure compliance with such rules.
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The Company reserves the right to place a legend on any stock certificate
issued upon exercise of an option granted pursuant to the Plan to assure
compliance with this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the Optionee without
the consent of the Optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 13 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to Optionees under the Plan without the approval of the shareholders of the
Company if such approval is required for compliance with the requirements of any
applicable law or regulation. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period.
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EXHIBIT B
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made as of the ______ day of ___________, 19___, by and
between Empi, Inc., a Minnesota corporation (the "Company"), and ______________
(the "Optionee");
WITNESSETH
WHEREAS, the Optionee on the date hereof is a non-employee director of the
Company or a Subsidiary of the Company;
WHEREAS, the Company's Board of Directors has adopted a stock option plan
providing for the grant of nonqualified stock options known as the "Empi, Inc.
1997 Stock Option Plan" (hereinafter referred to as the "Plan");
WHEREAS, Section 11 of the Plan provides for the automatic and
non-discretionary grant of nonqualified stock options to a non-employee director
of the Company (referred to under the Plan as "Outside Directors") at the time
such Outside Director first becomes elected to the Board of directors of the
Company and on the date of each annual meeting of the shareholders thereafter,
so long as such Outside Director continues to serve on the Board of Directors;
WHEREAS, Optionee has qualified for the grant of a nonqualified stock
option in accordance with Section 11 of the Plan; and
WHEREAS, Optionee and the Company desire to enter into this Agreement to
set forth the terms of such nonqualified stock option, consistent with the
requirements of Section 11 of the Plan;
NOW THEREFORE, in consideration of the promises and the mutual covenants
herein contained, the Company and the Optionee hereby agree as follows:
1. GRANT OF OPTION. In accordance with Section 11 of the Plan, the
Optionee is hereby granted, on the date of this Agreement, the option to
purchase _________(____) shares of Common Stock of the Company (the "Option
Stock) subject to the terms and conditions herein contained, and subject only to
adjustment in such number of shares as provided in Section 13 of the Plan.
2. OPTION PRICE. During the term of this option, the purchase price for
the shares of Option Stock granted herein is $____________ per share (one
hundred percent (100%) of the fair market value of a share of common stock as of
the date of grant), subject only to adjustment of such price as provided in
Section 13 of the Plan.
3. TERM OF OPTION. The term during which this option may be exercised
expires at the close of business on _________________, 19___ (seven (7) years
after the date of grant), unless terminated earlier under the provisions of
Paragraphs 10, 11 or 12 below. If the Optionee does not purchase in any option
year the full number of shares which the Optionee is entitled to purchase that
year, the Optionee may purchase in any subsequent option year such previously
unpurchased shares in addition to those the Optionee is otherwise entitled to
purchase. If this option has been granted prior to approval of the Plan by the
Company's shareholders, this option shall not be exercisable until such approval
is obtained.
This option shall be exercisable on the following date for the following number
of shares:
VESTING DATE NUMBER OF SHARES
______
4. PERSONAL EXERCISE BY OPTIONEE. This option shall, during the lifetime
of the Optionee, be exercisable only by said Optionee and shall not be
transferable by the Optionee, in whole or in part, other than by will or by the
laws of descent and distribution.
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5. MANNER OF EXERCISE
a. GENERAL. The Option may be exercised only by Optionee (or other
proper party in the event of death or incapacity), subject to the conditions of
the Plan and subject to such other administrative rules as the Administrator may
deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that complies with the terms of
the Plan and this Agreement. The Option may be exercised with respect to any
number or all of the shares as to which it can then be exercised and, if
partially exercised, may be exercised as to the unexercised shares any number of
times during the option period as provided herein.
b. FORM OF PAYMENT. Subject to the approval of the Administrator,
payment of the option price by Optionee shall be in the form of cash, personal
check, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such
payment shall be valued at its Fair Market Value as provided in the Plan. For
purposes of this Agreement, "previously acquired shares of Common Stock" shall
include shares of Common Stock that are already owned by Optionee at the time of
exercise.
c. STOCK TRANSFER RECORDS. As soon as practicable after the
effective exercise of all or any part of the Option, Optionee shall be recorded
on the stock transfer books of the Company as the owner of the shares purchased,
and the Company shall deliver to Optionee one or more duly issued stock
certificates evidencing such ownership. All requisite original issue or
transfer documentary stamp taxes shall be paid by the Company.
6. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by this option
until the date of the issuance of a stock certificate for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is issued, except as
provided in Section 13 of the Plan.
7. STOCK OPTION PLAN. The option evidenced by this Agreement is granted
pursuant to the Plan, a copy of which Plan is attached hereto or has been made
available to the Optionee and is hereby made a part of this Agreement. This
Agreement is subject to and in all respects limited and conditioned as provided
in the Plan, including, without limitation, the provisions of Section 11 of the
Plan. The Plan governs this option and the Optionee, and in the event of any
question as to the construction of this Agreement or of a conflict between the
Plan and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
8. WITHHOLDING TAXES. In order to permit the Company to receive a tax
deduction in connection with the exercise of this option, the Optionee agrees
that as a condition to any exercise of this option, the Optionee will also pay
to the Company, or make arrangements satisfactory to the Company regarding
payment of, any federal, state, local or other taxes required by law to be
withheld with respect to the option's exercise.
9. INVESTMENT PURPOSE. The Company requires, as a condition to the grant
and exercise of this option, that any stock acquired pursuant to this option be
acquired for only investment if, in the opinion of counsel for the Company, such
is required or deemed advisable under securities laws or any other applicable
law, regulation or rule or any government or governmental agency. In this
regard, if requested by the Company, the Optionee, prior to the acquisition of
any shares pursuant to this option, shall execute an investment letter to the
effect that the Optionee is acquiring shares pursuant to the option for
investment purposes only and not with the intention of making any distribution
of such shares and will not dispose of the shares in violation of the applicable
federal and state securities laws.
10. TERMINATION OF STATUS AS A DIRECTOR. If the Optionee's membership on
the Board of Directors terminates for any reason (including resignation or
removal), other than because of death, disability or retirement (described
below), this option shall terminate on the earlier of: (i) the close of
business on the three-month anniversary of the date the Optionee ceased to be a
director, and (ii) this option's originally stated expiration date. In such
period following such termination of Optionee's directorship, the Optionee shall
be entitled to exercise the option to the extent such option was exercisable as
of the date of such termination. To the extent that the option is not
exercisable as of the date the Optionee's membership on the Board terminates, or
to the extent the Optionee does
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not exercise the Option within such three month period, all rights of the
Optionee under the Option shall be forfeited.
11. DEATH OF OPTIONEE. If the Optionee dies (i) while a member of the
Board, (ii) within the three (3) month period following the termination of the
Optionee's membership on the Board as provided under Paragraph 10 above, or
(iii) within the twelve (12) month period following the termination of the
Optionee's membership on the Board due to disability as provided under Paragraph
12 below, this option shall become immediately exercisable in full and may be
exercised only by the person or persons to whom the Optionee's rights under this
option shall have passed by the Optionee's will or by the laws of descent and
distribution until the date such Option expires as specified in Paragraph 3
above.
12. DISABILITY. If the Optionee's membership on the Board of Directors
terminates because of disability, this option shall terminate on the earlier of:
(i) the close of business on the twelve-month anniversary of the date the
Optionee ceased to be a director due to disability, and (ii) this option's
originally stated expiration date. In such period following such termination of
Optionee's directorship due to disability, the Optionee shall be entitled to
exercise the option to the extent such option was exercisable as of the date of
such termination. To the extent that the option is not exercisable as of the
date the Optionee's membership on the Board terminates due to disability, or to
the extent the Optionee does not exercise the Option within such twelve month
period, all rights of the Optionee under the Option shall be forfeited. For
purposes of this Paragraph 12, "disability" shall mean a mental or physical
condition of the Optionee, resulting from illness, injury or disease which, as
determined by the Board, causes the Optionee to resign from the Board and is
reasonably expected to be of long and indefinite duration or result in death.
13. RETIREMENT. If the Optionee's membership on the Board terminates
because of retirement, this Option shall immediately become exercisable to the
extent of 100% of the aggregate number of shares specified in Paragraph 1 above
and shall terminate on the expiration date of this Option stated in Paragraph 3
above. If Optionee does not exercise the Option within the time specified in
this Paragraph 13, all rights of Optionee under this Option shall be forfeited.
For purposes of this Paragraph 13, "retirement" shall mean termination of
employment with the Company of Subsidiary after reaching age sixty (60) and
completing a minimum of five (5) years of service with the Company or
Subsidiary.
14. RECAPITALIZATIONS, SALES, MERGERS, EXCHANGES, CONSOLIDATIONS,
LIQUIDATION. In the event of a stock dividend or stock split, the number of
shares of Option Stock and option exercise price shall be adjusted as provided
in Section 13 of the Plan. Similarly, in the event of a sale, merger, exchange,
consolidation or liquidation of the Company, this option shall be adjusted as
provided in Section 13 of the Plan.
15. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and the Optionee and any
successor or successors of the Optionee permitted by Paragraph 4 above.
16. MISCELLANEOUS.
a. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event the
Company advises Optionee that it plans an underwritten public offering of its
Common Stock in compliance with the Securities Act of 1933, as amended, and that
the underwriter(s) seek to impose restrictions under which certain shareholders
may not sell or contract to sell or grant any option to buy or otherwise dispose
of part or all of their stock purchase rights of the underlying Common Stock,
Optionee hereby agrees that for a period not to exceed 180 days from the
prospectus, Optionee will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or its
representative(s).
b. BLUE SKY LIMITATION. Notwithstanding anything in this Agreement
to the contrary, in the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to comply with
any state securities or Blue Sky law limitations with respect thereto, the Board
of Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Optionee 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this Option or
any other option granted to Optionee pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed
given when delivered personally or when
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deposited in the United States mail, first class postage prepaid and addressed
to Optionee at the address of Optionee on file with the Company.
c. STOCK LEGEND. The Administrator may require that the
certificates for any shares of Common Stock purchased by Optionee (or, in the
case of death, Optionee's successors) shall bear an appropriate legend to
reflect the restrictions of Paragraph 16(a) and 16(b) of this Agreement.
d. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or any
attorney who has practiced securities or business litigation for at least 10
years. If the parties cannot agree on an arbitrator within 20 days, any party
may request that the chief judge of the District Court for Ramsey County,
Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the
provisions of this Agreement, and the commercial arbitration rules of the
American Arbitration Association, unless such rules are inconsistent with the
provisions of this Agreement. Limited civil discovery shall be permitted for
the production of documents and taking of depositions. Unresolved discovery
disputes may be brought to the attention of the arbitrator who may dispose of
such dispute. The arbitrator shall have the authority to award any remedy or
relief that a court of this state could order or grant; provided, however, that
punitive or exemplary damages shall not be awarded. The arbitrator may award to
the prevailing part, if any, as determined by the arbitrator, all of its costs
and fees, including the arbitrator's fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed
by the parties, the place of any arbitration proceedings shall be Ramsey County,
Minnesota.
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<PAGE>
EXHIBIT C
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made effective as of this ______ day of ______________, 19___,
by and between Empi, Inc., a Minnesota corporation (the "Company"), and
_________________________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee, officer,
consultant, nonemployee director or advisor of the Company or one of its
Subsidiaries; and
WHEREAS, the Company wishes to grant a nonqualified stock option to
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's 1997 Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator has authorized the grant of a nonqualified stock
option to Optionee and has determined that, as of the effective date of this
Agreement, the fair market value of the Company's Common Stock is $________ per
share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee on the date
set forth above (the "Date of Grant"), the right and option (the "Option") to
purchase all or portions of an aggregate of _______________________________ ( )
shares of Common Stock at a per share price of $_____________ on the terms and
conditions set forth herein, and subject to adjustment pursuant to Section 13 of
the Plan. This Option is a nonqualified stock option and will not be treated as
an incentive stock option, as defined under Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised shall
terminate on __________________________, ________, except as otherwise provided
in Paragraphs 2(b) through 2(e) below. This Option shall become exercisable
according to the following schedule:
Percentage/Number
Vesting Date of Shares
------------ --------------
Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
b. TERMINATION OF RELATIONSHIP (OTHER THAN CHANGE OF CONTROL, DEATH
OR RETIREMENT). If Optionee ceases to be an employee, consultant, nonemployee
director or an advisor of the Company or any Subsidiary for any reason other
than because of a "change of control transaction" as described in Paragraph 2(c)
or because of retirement or death, this Option shall completely terminate on the
earlier of (i) the close of business on the one-month anniversary date of the
termination of all such relationships, and (ii) the expiration date of this
Option stated in Paragraph 2(a) above. In such period following such
termination, this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately preceding the date on which all of
Optionee's relationships with the Company or Subsidiary have terminated, but had
not previously been exercised. To the extent this Option was not exercisable
upon the termination of such relationship, or if Optionee does not exercise the
Option within the time specified in this Paragraph 2(b), all rights of Optionee
under this Option shall be forfeited.
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<PAGE>
c. CHANGE OF CONTROL. If Optionee ceases to be an employee,
consultant, nonemployee director or advisor of the Company or any Subsidiary
because of a "change of control transaction," this Option shall completely
terminate on the earlier of (i) the close of business on the one-month
anniversary date of the termination of all such relationships, and (ii) the
expiration date of this Option stated in Paragraph 2 above; provided, however,
that if such transaction is treated as a "pooling of interests" under generally
accepted accounting principles, and Optionee is an "affiliate" of the Company or
Subsidiary under applicable legal and accounting principles, this Option shall
completely terminate on the later of (A) the close of business on the one-month
anniversary date of such termination of employment or (B) the close of business
on the date that is sixty (60) days after the date on which affiliates are no
longer restricted from selling, transferring or otherwise disposing of the
shares of stock received in the change of control transaction. In such period
following such termination, this Option shall be fully exercisable unless the
acceleration of the exercisability of this Option has been prevented as provided
in Section 13 of the Plan, in which case this Option shall be exercisable only
to the extent the Option was exercisable on the vesting date immediately
preceding the date on which all of Optionee's relationships with the Company or
Subsidiary have terminated, but had not previously been exercised. To the
extent this Option was not exercisable upon such termination of such
relationships, or if Optionee does not exercise the Option within the time
specified in this Paragraph 2(c), all rights of Optionee under this Option shall
be forfeited.
For purposes of this Paragraph 2(c), a "change of control
transaction" means an acquisition of the Company through the sale of
substantially all of the Company's assets and the consequent discontinuance of
its business or through a merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture or liquidation of the
Company.
d. DEATH. In the event of Optionee's death, this Option shall
terminate on the earlier of (i) the close of business on the six-month
anniversary date of the date of Optionee's death, and (ii) the expiration date
of this Option stated in Paragraph 2(a) above. In such period following
Optionee's death, this Option may be exercised by the person or persons to whom
Optionee's rights under this Option shall have passed by Optionee's will or by
the laws of descent and distribution only to the extent the Option was
exercisable on the vesting date immediately preceding the date of Optionee's
death. If such person or persons fail to exercise this Option within the time
specified in this Paragraph 2(d), all rights under this Option shall be
forfeited.
e. RETIREMENT. If Optionee's employment with the Company or any
Subsidiary terminates because of retirement, this Option shall immediately
become exercisable to the extent of 100% of the aggregate number of shares
specified in Paragraph 1 above and shall terminate on the expiration date of
this Option stated in Paragraph 2(a) above. If Optionee does not exercise the
Option within the time specified in this Paragraph 2(e) all rights of Optionee
under this Option shall be forfeited. For purposes of this Paragraph 2(e)
"retirement" shall mean termination of employment with the Company or Subsidiary
after reaching age fifty-five (55) and completing a minimum of ten (10) years of
service with the Company or Subsidiary.
Notwithstanding the foregoing, if, during the period that this
Option remains exercisable, Optionee directly or indirectly, engages in (whether
as an employee, consultant, proprietor, partner, director or otherwise), has any
ownership interest in, or participates in the financing, operation, management
or control of any firm, corporation or business that engages in or intends to
engage in business that is in direct competition with the Company's principal
business as defined and discussed in the documents filed by the Company with the
Securities Exchange Commission (collectively referred to as "competitive
activity"), this Option shall immediately terminate on the date on which
Optionee first engages in such competitive activity or, if earlier, on the
expiration date of this Option stated in Paragraph 2(a) above, and all rights of
Optionee under this Option shall be immediately forfeited.
3. MANNER OF EXERCISE.
a. GENERAL. The Option may be exercised only by Optionee (or other
proper party in the event of death or incapacity), subject to the conditions of
the Plan and subject to such other administrative rules as the Administrator may
deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that complies with the terms of
the Plan and this Agreement. The Option may be exercised with respect to any
number or all of the shares as to which it can then be exercised and, if
partially exercised, may be exercised as to the unexercised shares any number of
times during the option period as provided herein.
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<PAGE>
b. FORM OF PAYMENT. Subject to the approval of the Administrator,
payment of the option price by Optionee shall be in the form of cash, personal
check, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such
payment shall be valued at its Fair Market Value as provided in the Plan. For
purposes of this Agreement, "previously acquired shares of Common Stock" shall
include shares of Common Stock that are already owned by Optionee at the time of
exercise.
c. STOCK TRANSFER RECORDS. As soon as practicable after the
effective exercise of all or any part of the Option, Optionee shall be recorded
on the stock transfer books of the Company as the owner of the shares purchased,
and the Company shall deliver to Optionee one or more duly issued stock
certificates evidencing such ownership. All requisite original issue or
transfer documentary stamp taxes shall be paid by the Company.
4. MISCELLANEOUS.
a. RIGHTS AS SHAREHOLDER. This Agreement shall not confer on
Optionee any right with respect to the continuance of any relationship with the
Company or any of its Subsidiaries, nor will it interfere in any way with the
right of the Company to terminate any such relationship. Optionee shall have no
rights as a shareholder with respect to shares subject to this Option until such
shares have been issued to Optionee upon exercise of this Option. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property), distributions or other rights for which the
record date is prior to the date such shares are issued, except as provided in
Section 13 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of
this Option shall only be effective at such time as counsel to the Company shall
have determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof and that such shares will be not transferred or
disposed of except in compliance with applicable state and federal securities
laws.
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the
option period reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES. In order to permit the Company to comply with
all applicable federal or state income tax laws or regulations, the Company may
take such action as it deems appropriate to insure that, if necessary, all
applicable federal or state payroll, income or other taxes are withheld from any
amounts payable by the Company to Optionee. If the Company is unable to
withhold such federal and state taxes, for whatever reason, Optionee hereby
agrees to pay to the Company an amount equal to the amount the Company would
otherwise be required to withhold under federal or state law. Optionee may,
subject to the approval and discretion of the Administrator or such
administrative rules it may deem advisable, elect to have all or a portion of
such tax withholding obligations satisfied by delivering shares of the Company's
Common Stock having a fair market value equal to such obligations.
f. NONTRANSFERABILITY. During the lifetime of Optionee, the accrued
Option shall be exercisable only by Optionee or by the Optionee's guardian or
other legal representative, and shall not be assignable or transferable by
Optionee, in whole or in part, other than by will or by the laws of descent and
distribution.
g. 1997 STOCK OPTION PLAN. The Option evidenced by this Agreement
is granted pursuant to the Plan, a copy of which Plan has been made available to
Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
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<PAGE>
h. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event the
Company advises Optionee that it plans an underwritten public offering of its
Common Stock in compliance with the Securities Act of 1933, as amended, and that
the underwriter(s) seek to impose restrictions under which certain shareholders
may not sell or contract to sell or grant any option to buy or otherwise dispose
of part or all of their stock purchase rights of the underlying Common Stock,
Optionee hereby agrees that for a period not to exceed 180 days from the
prospectus, Optionee will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or its
representative(s).
i. BLUE SKY LIMITATION. Notwithstanding anything in this Agreement
to the contrary, in the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to comply with
any state securities or Blue Sky law limitations with respect thereto, the Board
of Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Optionee 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this Option or
any other option granted to Optionee pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed
given when delivered personally or when deposited in the United States mail,
first class postage prepaid and addressed to Optionee at the address of Optionee
on file with the Company.
j. ACCOUNTING COMPLIANCE. Optionee agrees that, in the event a
"change of control transaction" (as defined in Paragraph 2(c) above) is treated
as a "pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of Rule 145 of
the Securities Act of 1933, as amended, and the requirements of such other legal
or accounting principles, and will execute any documents necessary to ensure
such compliance.
k. STOCK LEGEND. The Administrator may require that the
certificates for any shares of Common Stock purchased by Optionee (or, in the
case of death, Optionee's successors) shall bear an appropriate legend to
reflect the restrictions of Paragraph 4(b), 4(h), 4(i) and 4(j) of this
Agreement.
l. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 2 or Paragraph 4(f)
above.
m. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an
attorney who has practiced securities or business litigation for at least 10
years. If the parties cannot agree on an arbitrator within 20 days, any party
may request that the chief judge of the District Court for Ramsey County,
Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the
provisions of this Agreement, and the commercial arbitration rules of the
American Arbitration Association, unless such rules are inconsistent with the
provisions of this Agreement. Limited civil discovery shall be permitted for
the production of documents and taking of depositions. Unresolved discovery
disputes may be brought to the attention of the arbitrator who may dispose of
such dispute. The arbitrator shall have the authority to award any remedy or
relief that a court of this state could order or grant; provided, however, that
punitive or exemplary damages shall not be awarded. The arbitrator may award to
the prevailing party, if any, as determined by the arbitrator, all of its costs
and fees, including the arbitrator's fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed
by the parties, the place of any arbitration proceedings shall be Ramsey County,
Minnesota.
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EXHIBIT D
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, MADE EFFECTIVE AS OF THIS ____ day of _____________,
19____, by and between Empi, Inc., a Minnesota corporation (the "Company"), and
___________________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee or officer of the
Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant an incentive stock option to Optionee
to purchase shares of the Company's Common Stock pursuant to the Company's 1997
Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator of the Plan has authorized the grant of an
incentive stock option to Optionee and has determined that, as of the effective
date of this Agreement, the fair market value of the Company's Common Stock is
$_____ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee on the date
set forth above (the "Date of Grant"), the right and option (the "Option") to
purchase all or portions of an aggregate of ________________________________
(____) shares of Common Stock at a per share price of $________ on the terms and
conditions set forth herein, and subject to adjustment pursuant to Section 13 of
the Plan. Except as otherwise provided in Paragraphs 2(b) and 2(c), this Option
is intended to be an incentive stock option within the meaning of Section 422,
or any successor provision, of the Internal Revenue Code of 1986, as amended
(the "Code"), and the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. The term during which this Option may be exercised shall
terminate on _____________________, ________, except as otherwise provided in
Paragraphs 2(b) through 2(e) below. This Option shall become exercisable
according to the following schedule:
Percentage/Number
Vesting Date of Shares
--------------- --------------
Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
b. TERMINATION OF EMPLOYMENT (OTHER THAN CHANGE OF CONTROL,
RETIREMENT OR DEATH). If Optionee's employment with the Company or any
Subsidiary is terminated for any reason other than because of a "change of
control transaction" as described in Paragraph 2(c) or because of retirement or
death, this Option shall completely terminate on the earlier of (i) the close of
business on the one-month anniversary date of such termination of employment,
and (ii) the expiration date of this Option stated in Paragraph 2 above.
Notwithstanding the foregoing, if, upon such termination of
employment, Optionee continues to serve as a consultant, advisor or nonemployee
director of the Company or Subsidiary, this Option shall terminate on the
earlier of (i) the close of business on the one-month anniversary date of the
termination of all of Optionee's relationships with the Company or Subsidiary,
and (ii) the expiration date of this Option stated in Paragraph
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2(a) above, and the Option shall not, upon Optionee's termination of employment,
be treated as an incentive stock option within the meaning of Code Section 422.]
In such period following the termination of Optionee's
employment, this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately preceding such termination of
employment, but had not previously been exercised. To the extent this Option
was not exercisable upon such termination of employment, or if Optionee does not
exercise the Option within the time specified in this Paragraph 2(b), all rights
of Optionee under this Option shall be forfeited.
c. CHANGE OF CONTROL. If Optionee's employment with the Company or
any Subsidiary is terminated because of a "change of control transaction," this
Option shall completely terminate on the earlier of (i) the close of business on
the one-month anniversary date of such termination of employment, and (ii) the
expiration date of this Option stated in Paragraph 2 above; provided, however,
that if (x) such transaction is treated as a "pooling of interests" under
generally accepted accounting principles, and (y) Optionee is an "affiliate" of
the Company or Subsidiary under applicable legal and accounting principles, this
Option shall completely terminate on the later of (A) the close of business on
the one-month anniversary date of such termination of employment or (B) the
close of business on the date that is sixty (60) days after the date on which
affiliates are no longer restricted from selling, transferring or otherwise
disposing of the shares of stock received in the change of control transaction.
Notwithstanding the foregoing, if, upon such termination of
employment, Optionee continues to serve as a consultant, advisor or nonemployee
director of the Company or Subsidiary, this Option shall terminate on the later
of (X) the close of business on the ONE-month anniversary date of the
termination of all of Optionee's relationships with the Company or Subsidiary
and (Y) the close of business on the date that is sixty (60) days after the date
on which affiliates are no longer restricted from selling, transferring or
otherwise disposing of the shares of stock received in the change of control
transaction. In addition, this Option shall not, upon Optionee's termination of
employment, be treated as an incentive stock option within the meaning of Code
Section 422.
In such period following the termination of Optionee's
employment, this Option shall be fully exercisable unless the acceleration of
the exercisability of this Option has been prevented as provided in Section 13
of the Plan, in which case this Option shall be exercisable only to the extent
the Option was exercisable on the vesting date immediately preceding such
termination of employment, but had not previously been exercised. To the extent
this Option was not exercisable upon such termination of employment, or if
Optionee does not exercise the Option within the time specified in this
Paragraph 2(c), all rights of Optionee under this Option shall be forfeited.
For purposes of this Paragraph 2(c), a "change of control
transaction" means an acquisition of the Company through the sale of
substantially all of the Company's assets and the consequent discontinuance of
its business or through a merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture (including a spin-off) or
liquidation of the Company.
d. DEATH. In the event of Optionee's death, this Option shall
terminate on the earlier of (i) the close of business on the six-month
anniversary date of the date of Optionee's death, and (ii) the expiration date
of this Option stated in Paragraph 2(a) above. In such period following
Optionee's death, this Option shall be exercisable by the person or persons to
whom Optionee's rights under this Option shall have passed by Optionee's will or
by the laws of descent and distribution only to the extent the Option was
exercisable on the vesting date immediately preceding the date of Optionee's
death. If such person or persons do not exercise this Option within the time
specified in this Paragraph 2(d), all rights under this Option shall be
forfeited.
e. RETIREMENT. If Optionee's employment with the Company or any
Subsidiary terminates because of retirement, this Option shall immediately
become exercisable to the extent of 100% of the aggregate number of shares
specified in Paragraph 1 above and shall terminate on the expiration date of
this Option stated in Paragraph 2(a) above; provided, however, that if Optionee
exercises this Option on a date that is after the three-month anniversary of
Optionee's retirement, this Option shall not be treated as an incentive stock
option within the meaning of Code Section 422. If Optionee does not exercise
the Option within the time specified in this Paragraph 2(e), all rights of
Optionee under this Option shall be forfeited. For purposes of this Paragraph
2(e), "retirement" shall mean termination of employment with the Company or
Subsidiary after reaching age fifty-five (55) and completing a minimum of ten
(10) years of service with the Company or Subsidiary.
Notwithstanding the foregoing, if, during the period that this
Option remains exercisable, Optionee directly or indirectly, engages in (whether
as an employee, consultant, proprietor, partner, director or otherwise), has any
ownership interest in, or participates in the financing, operation, management
or control of any
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firm, corporation or business that engages in or intends to engage in business
that is in direct competition with the Company's principal business as defined
and discussed in the documents filed by the Company with the Securities Exchange
Commission (collectively referred to as "competitive activity"), this Option
shall immediately terminate on the date on which Optionee first engages in such
competitive activity or, if earlier, on the expiration date of this Option
stated in Paragraph 2(a) above, and all rights of Optionee under this Option
shall be immediately forfeited.
3. MANNER OF EXERCISE.
a. GENERAL. The Option may be exercised only by Optionee (or other
proper party in the event of death or incapacity), subject to the conditions of
the Plan and subject to such other administrative rules as the Administrator may
deem advisable, by delivering within the Option Period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the Option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that complies with the terms of
the Plan and this Agreement. The Option may be exercised with respect to any
number or all of the shares as to which it can then be exercised and, if
partially exercised, may be so exercised as to the unexercised shares any number
of times during the Option period as provided herein.
b. FORM OF PAYMENT. Subject to approval by the Administrator,
payment of the Option price by Optionee shall be in the form of cash, personal
check, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such
payment shall be valued at its Fair Market Value as provided in the Plan. For
purposes of this Agreement, "previously acquired shares of Common Stock" shall
include shares of Common Stock that are already owned by Optionee at the time of
exercise.
c. STOCK TRANSFER RECORDS. As soon as practicable after the
effective exercise of all or any part of the Option, Optionee shall be recorded
on the stock transfer books of the Company as the owner of the shares purchased,
and the Company shall deliver to Optionee one or more duly issued stock
certificates evidencing such ownership. All requisite original issue or
transfer documentary stamp taxes shall be paid by the Company.
4. MISCELLANEOUS.
a. EMPLOYMENT; RIGHTS AS SHAREHOLDER. This Agreement shall not
confer on Optionee any right with respect to continuance of employment by the
Company or any of its Subsidiaries, nor will it interfere in any way with the
right of the Company to terminate such employment. Optionee shall have no
rights as a shareholder with respect to shares subject to this Option until such
shares have been issued to Optionee upon exercise of this Option. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property), distributions or other rights for which the
record date is prior to the date such shares are issued, except as provided in
Section 13 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of
this Option shall only be effective at such time as counsel to the Company shall
have determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (I.E., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the
option period reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION. In the event of
a disqualifying disposition of the shares acquired through the exercise of this
Option, Optionee hereby agrees to inform the Company
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of such disposition. Upon notice of a disqualifying disposition, the Company
may take such action as it deems appropriate to insure that, if necessary to
comply with all applicable federal or state income tax laws or regulations, all
applicable federal and state payroll, income or other taxes are withheld from
any amounts payable by the Company to Optionee. If the Company is unable to
withhold such federal and state taxes, for whatever reason, Optionee hereby
agrees to pay to the Company an amount equal to the amount the Company would
otherwise be required to withhold under federal or state law. Optionee may,
subject to the approval and discretion of the Administrator or such
administrative rules it may deem advisable, elect to have all or a portion of
such tax withholding obligations satisfied by delivering shares of the Company's
Common Stock having a fair market value equal to such obligations.
f. NONTRANSFERABILITY. During the lifetime of Optionee, the accrued
Option shall be exercisable only by Optionee or by the Optionee's guardian or
other legal representative, and shall not be assignable or transferable by
Optionee, in whole or in part, other than by will or by the laws of descent and
distribution.
g. 1997 STOCK OPTION PLAN. The Option evidenced by this Agreement
is granted pursuant to the Plan, a copy of which Plan has been made available to
Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
h. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event the
Company advises Optionee that it plans an underwritten public offering of its
Common Stock in compliance with the Securities Act of 1933, as amended, and that
the underwriter(s) seek to impose restrictions under which certain shareholders
may not sell or contract to sell or grant any option to buy or otherwise dispose
of part or all of their stock purchase rights of the underlying Common Stock,
Optionee hereby agrees that for a period not to exceed 180 days from the
prospectus, Optionee will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or its
representative(s).
i. BLUE SKY LIMITATION. Notwithstanding anything in this Agreement
to the contrary, in the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to comply with
any state securities or Blue Sky law limitations with respect thereto, the Board
of Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Optionee 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this Option or
any other option granted to Optionee pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed
given when delivered personally or when deposited in the United States mail,
first class postage prepaid and addressed to Optionee at the address of Optionee
on file with the Company.
j. ACCOUNTING COMPLIANCE. Optionee agrees that, in the event a
"change of control transaction" (as defined in Paragraph 4(g) above) is treated
as a "pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of Rule 145 of
the Securities Act of 1933, as amended, and the requirements of such other legal
or accounting principles, and will execute any documents necessary to ensure
such compliance.
k. STOCK LEGEND. The Administrator may require that the
certificates for any shares of Common Stock purchased by Optionee (or, in the
case of death, Optionee's successors) bear an appropriate legend to reflect the
restrictions of Paragraphs 4(b), 4(h), 4(i) and 4(j) of this Agreement.
l. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 2 or Paragraph 4(f)
above.
m. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an
attorney who has practiced securities or business litigation for at least 10
years. If the parties cannot agree on an arbitrator within 20 days, any party
may request that the chief judge of the District Court for Ramsey County,
Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the
provisions of this
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Agreement, and the commercial arbitration rules of the American Arbitration
Association, unless such rules are inconsistent with the provisions of this
Agreement. Limited civil discovery shall be permitted for the production of
documents and taking of depositions. Unresolved discovery disputes may be
brought to the attention of the arbitrator who may dispose of such dispute. The
arbitrator shall have the authority to award any remedy or relief that a court
of this state could order or grant; provided, however, that punitive or
exemplary damages shall not be awarded. The arbitrator may award to the
prevailing party, if any, as determined by the arbitrator, all of its costs and
fees, including the arbitrator's fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed
by the parties, the place of any arbitration proceedings shall be Ramsey County,
Minnesota.
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EXHIBIT 10.10 - SEPARATION AGREEMENT WITH DONALD D. MAURER
EXHIBIT A
SEPARATION AGREEMENT
This Agreement (the "Agreement) is hereby entered into by and between EMPI,
INC. (the "Company") and DONALD D. MAURER ("Executive") effective as of May 1,
1997.
RECITALS
Donald D. Maurer is the founder and current Chairman of the Board and Chief
Scientific Officer of the Company. On May 1, 1993, the Company and Executive
signed an Employment Agreement with a five-year term under which Executive was
to serve as the Company's Chairman of the Board and as an officer of the
Company. The Board of Directors of the Company is deeply appreciative of the
leadership and many contributions of Executive, without which the Company would
not be the success it is today. The Board of Directors believes, however, that
from a corporate governance viewpoint, it is in the best interests of the
Company to effect an early termination of Executive's Employment Agreement and
to affirm a plan of succession. Accordingly, the Company has terminated this
Employment Agreement and in consideration of Executive's covenants hereunder and
Executive's agreement to release of claims set forth herein, the Company has
made provision for Executive to remain as a non-officer employee of the Company
through April 30, 1998, and for certain payments and other benefits to be paid
to Executive.
AGREEMENT
Now therefore for good and valuable consideration, the parties agree as
follows:
1. COMPANY. Company, as used herein, means Empi, Inc., its
successors and assigns, its subsidiaries, and its present and former
directors, officers, shareholders, employees and agents, whether in
their individual or official capacities.
2. EXECUTIVE. Executive, as used herein, means Donald D.
Maurer and anyone who has or obtains legal rights or claims through
him.
3. RESIGNATIONS. Effective as of the Company's 1997 Annual
Meeting of Shareholders, Executive will resign as Chief Scientific
Officer of the Company. Effective as of the date of the Company's
1998 Annual Meeting of Shareholders, Executive will resign as Chairman
of the Board of the Company and assume the honorary position of
Chairman Emeritus until his term as a director of the Company expires
in 1999. Effective as of the Company's 1999 Annual Meeting of
Shareholders, Executive will resign as a director of the Company.
4. EMPLOYMENT AND DUTIES.
a. TERM AND DUTIES. From the date of the Company's
Annual Meeting through April 30, 1998, Executive will serve as
the Company's Director of Research, reporting to Joseph
Laptewicz, the Company's Chief Executive Officer ("CEO").
Executive will perform such functions and duties as agreed upon
by the CEO and himself.
b. TIME COMMITMENT. The Company recognizes this
one-year employment period to be a time of transition and desires
to facilitate Executive's pursuit of other interests.
Accordingly, Executive will be on a full-time work schedule for a
maximum of three months, an 80% work schedule during the second
three months, a
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60% work schedule during the third three months and a 40% work
schedule during the last three months.
c. COMPENSATION PAYMENTS. Executive will be paid at
his current salary throughout the one-year Employment Period and
he will continue to receive his regular automobile and cellular
telephone allowance during this period. Executive in his
discretion may determine when to take the salary payments, in
equal installments or in one or two lump sum payments as he
determines in his discretion. For 1997, Executive will continue
to participate in the Company's incentive bonus plans and will be
eligible for stock options granted under the Company's Incentive
Plan in accordance with the Employment Agreement between
Executive and the Company dated May 1, 1993 (the "Employment
Agreement"). The 1997 bonus payment, if any, will be paid to
Executive concurrently with the payment of bonuses to the other
participants in the Incentive Plan. All stock options granted to
Executive, if any, will be 100% vested upon grant. All other
benefits currently provided to Executive will continue until May
1, 1998. Benefits after May 1, 1998 will be as set forth in
Section 5 of this Agreement.
d. STOCK OPTIONS. All stock options currently held
by Executive will be deemed to be immediately exercisable in
accordance with Section 6(a)(iii) of his Employment Agreement.
All such stock options will be exercisable until May 30, 1998 in
compliance with the Company's stock option plan.
e. OTHER BENEFITS. Accrued vacation pay, if any,
will be paid in accordance with the Company's vacation pay
policies for retiring employees. Executive will continue to
participate in the Company's 401(k) Plan until April 30, 1998.
Executive's 401(k) benefits as of April 30, 1998 will be
allocated in accordance with the Plan terms.
5. CONSULTANT.
a. TERM AND DUTIES. From May 1, 1998 through April
30, 2001, Executive shall serve as a consultant to the Company
and shall perform such duties as are agreed upon by the CEO and
Executive.
b. TIME COMMITMENT. Executive agrees to provide
consulting services up to a maximum of 40 days during each twelve
(12) month period and such additional time as is agreeable to
Executive. Executive will perform such services at such
locations as the Company may reasonably request, but it is
understood that without Executive's consent he will not be
required to provide services for more than five consecutive days.
c. COMPENSATION. For the first year as a consultant,
Executive will continue to receive compensation equal to his
salary in effect immediately prior to beginning his consultancy.
In the second and third years, Executive will be paid $36,000 per
year. Executive in his discretion may determine when to take the
salary payments, in equal installments or in one or two lump sum
payments. For any consulting time in excess of 40 days,
Executive will be paid the sum of $1,200 per day or per partial
day.
d. BENEFITS. After May 1, 1998, Executive will
receive no further benefits from the Company except the following
insurance benefits. After May 1, 1998, the Company guarantees to
provide Executive and his eligible family members health
insurance coverage until the earliest date he becomes eligible
for Medicare, either through the continuation of present Company
health coverage or through the purchase of an individual health
insurance plan providing reasonably comparable benefits. The
costs of such health coverage will be assumed by the Company and
the Company will pay to Executive on an annual ("grossed up")
basis an amount to cover any tax costs if such insurance payments
are taxable income to him. The Company and Executive will comply
with COBRA requirements as applicable. The Company will continue
to pay Ernst & Young for providing tax services to Executive in
the years 1997, 1998, 1999 and 2000.
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e. TERMINATION. Executive may terminate his
consulting arrangement with the Company at any time upon written
notice to the Company. The Company may not terminate the
consulting arrangement with Executive except for "Cause." Cause
shall be defined as termination of the Executive because of: (1)
gross misconduct, dishonesty or disloyalty; (2) willful and
material breach of this Agreement by Executive; or (3) conviction
or entry of a plea of guilty or nolo contendere to any felony or
gross misdemeanor or the entry of any final civil judgment in
connection with any allegation of fraud, misrepresentation,
misappropriation or any other intentional tort or statutory
violation.
6. INVENTIONS.
a. DEFINITIONS. For purpose of this Agreement:
(i) "Invention" means by invention,
enhancement, alteration, modification improvement,
discovery, new idea, formula, process, design, trade secret
or other useful technical writing, whether or not
copyrightable or patentable, relating to the existing or
reasonably foreseeable business of the Company.
(ii) "Proprietary Information" means any
information that is not generally known and relates to the
Company's existing or reasonably foreseeable business which
is not readily disclosed by inspection of the Company's
products and has been expressly or implicitly protected by
the Company from unrestricted use by persons not associated
with the Company, including trade secrets and Inventions.
Proprietary Information includes, but is not limited to,
information contained in or relating to the Company's
product designs, tolerances, manufacturing methods,
processes, techniques, treatment or chemical composition of
material, plant layout, tooling, marketing plans or
proposals, and customer information.
b. DISCLOSURE AND ASSIGNMENT. Executive agrees to
promptly disclose to the Company in writing complete information
concerning all Inventions and Proprietary Information made,
generated, discovered, developed, conceived, perfected or first
reduced to practice by Executive alone or in conjunction with
others, during or after working hours, while employed by the
Company that:
(i) Relate to any subject matter
pertaining to Executive's employment or consultancy;
(ii) Relate to or is directly or
indirectly connected with the business, products, projects
or Proprietary Information of the Company; or
(iii) Involve the use of any time, material
or facility of the Company.
Executive hereby acknowledges that all said Inventions and
Proprietary Information shall be "work made for hire" as defined in 17
U.S.C. Section 101 (1976), as amended, and as such, shall be the
exclusive property of the Company. Executive hereby assigns to the
Company all his right, title and interest in such Inventions and
Proprietary Information, except as otherwise specifically agreed by
the Company in writing.
c. NONDISCLOSURE OF PROPRIETARY INFORMATION. Unless
authorized in writing by an Officer or General Counsel for the
Company, Executive will not divulge or use any of the Proprietary
Information for his own or another's benefit, either during his
employment or afterwards, nor will Executive accept any
employment which would, by the nature of the position, inherently
involve the use or disclosure by him of Proprietary Information.
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<PAGE>
d. LIMITATION OF SECTION 6(B). The provisions of
Section 6(b) shall not apply to any Invention meeting all of the
following conditions:
(i) Such Invention was developed entirely
on Executive's own time;
(ii) Such Invention was made without the
use of any of the Company's equipment, supplies, facility or
trade secret information;
(iii) Such Invention does not relate (1)
directly to the business of the Company or (2) to the
Company's actual or demonstrably anticipated research and
development; and
(iv) Such Invention does not result from
any work performed by Executive for the Company.
e. ASSISTANCE OF EXECUTIVE. Executive agrees, at the
Company's expense, to give the Company all assistance it
reasonably requires to perfect, protect, and use its rights to
Inventions and Confidential Information. In particular, but
without limitation, Executive agrees to sign all documents, do
all things, and supply all information that the Company may deem
necessary or desirable to (i) transfer or record the transfer of
Executive's entire right, title, and interest in Inventions and
Proprietary Information; and (ii) enable the Company to obtain
patent, copyright, or trademark protection for Inventions
anywhere in the world.
f. CONTINUING OBLIGATIONS AFTER TERMINATION OF
EMPLOYMENT. The obligations of this Section 6 shall continue
beyond the termination of Executive's employment with respect to
Inventions conceived or made by Executive during the period of
Executive's employment with the Company and shall be binding upon
Executive's assigns, executors, administrators, and to other
legal representatives. In the event Executive is called upon to
render assistance to the Company pursuant to Section 6(c) after
termination of Executive's employment or consultancy with the
Company, the Company shall pay Executive reasonable compensation
for the assistance rendered and shall call upon Executive for
assistance at such reasonable times so as not to interfere with
Executive's new employment or business. For purposes of this
Agreement, any Invention or discovery relating to the business of
the Company upon which Executive files a patent application
within one (1) year after termination of Executive's employment
or consultant relationship with the Company shall be presumed to
have been made while Executive was employed by the Company or for
which he provided services as a consultant, subject to proof to
the contrary by good faith, written and duly corroborated records
establishing that such Invention or discovery was conceived and
made by Executive following termination of employment.
g. RECORDS. Executive shall keep complete, accurate
and authentic accounts, notes, data and records of all Inventions
in manner and form requested by the Company. Such accounts,
notes, data and records shall be the property of the Company, and
upon its request Executive shall promptly surrender the same to
the Company.
7. AGREEMENT NOT TO COMPETE.
a. RESTRICTIVE COVENANT. Executive agrees that until
May 1, 2001, he shall not, directly or indirectly, engage in
competition with the Company in any capacity (e.g., as an
advisor, principal, agent, partner, officer, director,
stockholder or employee) as follows:
1) For as long as Executive serves on
the Company's Board of Directors, Executive will not compete
with the Company in any way with the business of the Company
currently being conducted by the Company or which business
the Company intends to conduct as evidenced by a
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<PAGE>
business plan communicated to Executive and approved by the
Board of Directors.
2) During the period in which Executive
serves as a consultant to the Company, Executive will not
compete in any way with the business of the Company or which
the Company intends to conduct if information about its
intended business plans was made known to Executive in his
capacity as a director of or a consultant to the Company.
The Company agrees that Executive will not be
precluded from serving as an employee or consultant to a person
or company interested in implantable medical devices or any other
devices which the Company is not then manufacturing, marketing or
developing and are not included in a business plan which has been
communicated to Executive as a device which the Company intends
to manufacture, market or develop. If Executive is unsure about
the application of this Restrictive Covenant to his service as an
employee or consultant to another organization or his ownership
in another organization, he may request a waiver from the
Company's Corporate Governance Committee. If a waiver is
granted, it will be binding upon the Company and the Executive
will be free to work for or consult with the party named in the
request. If a waiver is not granted, Executive will not be
precluded from testing the validity of this Restrictive Covenant
in a court of law.
b. EQUITABLE REMEDIES. The payments to be made to
Executive through May 1, 2001 as set forth in this Agreement are
in part in consideration for Executive's agreement not to
compete. If Executive violates his agreement not to compete, the
Company shall have the right to terminate his payments and seek
injunctive relief prohibiting Executive from competing against
the Company.
c. GEOGRAPHIC EXTENT OF COVENANT. The obligations of
Executive not to compete shall apply to the entire United States.
d. NON-SOLICITATION. Executive further agrees that
through May 1, 2001, he will not solicit or encourage employees
of the Company to terminate their employment with the Company or
in any way interfere or attempt to interfere with the Company's
relationship with any current or potential customers of Empi.
e. CONSTRUCTION OF AGREEMENT NOT TO COMPETE. To the
extent any provision of this Section 7 shall be invalid or
unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and this Section 7 shall be
unaffected and shall continue in full force and effect. In
furtherance to and not in limitation of the foregoing, should the
duration or geographical extent of, or business activities
covered by, any provision of this Section 7 be in excess of that
which is valid and enforceable under applicable law, then such
provision shall be construed to cover only that duration, extent
or activities which are validly and enforceably covered.
Executive acknowledges the uncertainty of the law in this respect
and expressly stipulates that this Section 7 be given the
construction which renders its provisions valid and enforceable
to the maximum extent (not exceeding its expressed terms)
possible under applicable laws.
8. RELEASES. Executive agrees that, on or before May 1, 1998,
he will execute a separate written "Release of Claims" which the
Company will provide and which will in substantial part provide as
follows:
a. RELEASE OF CLAIMS. Executive will release, agree
not to sue, and forever discharge Empi, Inc., its subsidiaries,
successors and assigns, insurers, and affiliated and predecessor
companies, their successors and assigns, their insurers, and the
present and former owners, officers, directors, employees,
shareholders, consultants, and agents of any of them, whether in
their individual or official capacities, and the current and
former trustees or administrators of any pension or other benefit
plan applicable to the employees or former employees of Empi,
Inc., in their official and individual
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<PAGE>
capacities, from all claims and demands whatsoever, whether known
or unknown, in law or equity, Executive ever had, now have, or
shall have up to and through the date of his signing this Release
of Claims, including, but not limited to, any claims arising by
statute, in tort or contract, arising out of or in connection
with my employment by Empi, Inc., the termination of that
employment, or otherwise. This release includes, without
limiting the generality of the foregoing, any claims Executive
has or may have for wages, commissions, penalties, vacation pay
or other benefit, defamation, or improper discharge (based on
contract, at common law or under any federal, state or local
statute or ordinance prohibiting discrimination in employment,
particularly discrimination based on race, sex, national origin,
age, color, creed, religion, marital status, disability, or
sexual orientation, including but not limited to the Minnesota
Human Rights Act, Minn. Stat. Section 363.01 ET SEQ., Title VII
of the Civil Rights Act of 1964 as amended, 42 U.S.C. Section
2000e ET SEQ., and the Age Discrimination in Employment Act, 29
U.S.C. Section 621 ET SEQ.), or attorney's fees or costs.
b. NOTIFICATION OF RIGHTS. Executive is hereby
notified of his right to rescind the Release of Claims with
regard to claims arising under the Minnesota Human Rights Act,
Minnesota Statutes Chapter 363, within 15 days after Executive
signs this Release of Claims. In order to be effective, the
rescission must be in writing and delivered to Joseph E.
Laptewicz, Empi, Inc., 599 Cardigan Road, St. Paul, Minnesota
55126-3965 by hand or mail. If delivered by mail, the rescission
must be postmarked within the required period, properly addressed
to Joseph E. Laptewicz as set forth above, and sent by certified
mail, return receipt requested.
c. FULL RELEASE. Executive will have read the above
Release of Claims and understand it as a full and final release
of all claims he may have against Empi, Inc. and the other
entities and individuals covered by this Release of Claims. He
shall agree that he has had an opportunity to consult with an
attorney and that Executive will enter into this Release of
Claims knowingly and voluntarily.
9. CORPORATE INFORMATION. Executive agrees that he will not
remove any proprietary corporate information from the Company's
offices, including the office he occupied. The determination of what
information is proprietary will be in the discretion of the Company.
Subject to the foregoing, corporate information shall include, but not
be limited to, sales plans, customer information, employee
information, business correspondence and any other information which
is related to Empi, Inc. or its subsidiaries or their businesses. All
personal property of the Executive, property which is not owned by or
is not proprietary or confidential to the Company, will be returned to
Executive.
10. ASSIGNMENT. The obligations of Executive under this
Agreement may not be assigned by Executive. However, in the event of
Executive's mental or physical disability, incapacitation or death,
all remaining payments shall continue to be made to Executive's
spouse, or in the event of the death of the Executive's spouse, the
payments will be made to Executive's estate. As defined in this
Section 10, payments shall include, but not be limited to, Executive's
salary through April 1998, bonus payments for 1997 and consulting
payments through April 2001. Unexercised option rights may be
exercised by Executive's estate through May 1998. In the event of
Executive's death, the Company will provide health insurance benefits
to Executive's wife through the earliest date when Executive would
have been eligible for Medicare. The Company's rights and obligations
under this Agreement will inure to the benefit and be binding upon the
Company's successors and assignees. In the event that the Company is
acquired, merged or reorganized, Executive may choose to continue
consulting with the Company, but he will have no obligation to do so.
If he chooses to consult with the Company after its acquisition,
merger or reorganization, it will be on terms agreed upon with the
Company's new owners. Whether or not Executive chooses to enter in a
new consulting agreement with the new owners, the Company will honor
its payment obligations under Section 5 above.
11. SEVERABILITY. If a court rules that any part of this
Agreement is not enforceable, that part may be modified by the court
to make it enforceable. The parties expressly agree that the
restrictions contained in Sections 4, 6 and 7 are reasonable and
should be enforced to the maximum extent and scope possible.
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<PAGE>
12. DUE AUTHORIZATION. The Board of Directors of the Company
has approved this Agreement and authorized Kenneth Tempero to execute
the Agreement on behalf of the Board of Directors and the Company.
13. GOVERNING LAW. Any disputes arising under this Agreement
shall be governed by the laws of the State of Minnesota.
14. FULL AGREEMENT. This Agreement contains the full agreement
of the parties and may not be modified, altered, or changed in any way
except by written agreement signed by both parties. Except as
expressly stated in this Agreement, the parties agree that this
Agreement supersedes and terminates any and all oral and written prior
agreements and understandings between the parties.
EMPI, INC.
Dated: May 12, 1997 By /s/ Kenneth Tempero
----------------------- ------------------------------------------
Kenneth Tempero, on behalf of the
Board of Directors of Empi, Inc.
Dated: May 12, 1997 /s/ Donald D. Maurer
----------------------- ---------------------------------------------
Donald D. Maurer
E-30
<PAGE>
EXHIBIT B
AMENDMENT TO SEPARATION AGREEMENT
This Amendment to Separation Agreement (the "Amendment"), made and entered
into by and between EMPI, INC. (the "Company") and DONALD D. MAURER
("Executive") effective as of October 14, 1997, amends the Separation Agreement
entered into between the Company and Executive effective as of May 1, 1997 (the
"Separation Agreement").
RECITALS
Executive has been employed with the Company since May 1, 1997 pursuant to
the terms and conditions set forth in the Separation Agreement. Executive and
the Company now desire to amend certain terms and conditions of the Separation
Agreement and to set forth those amendments in writing.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the parties agree as follows:
1. Paragraph 3, the second sentence, of the Separation Agreement
(Resignations) is deleted in its entirety and replaced by the following
sentence:
Effective as of October 14, 1997 Executive will resign as Chairman of
the Board of Directors of the Company and assume the honorary position
of Chairman Emeritus of the Board until his term as a director of the
Company expires in 1999. This position is honorary only and as
Chairman Emeritus, Executive will not serve as a legal representative
of the Company. As Chairman Emeritus, Executive will serve at the
discretion of the Board of Directors.
2. Paragraph 4.a. of the Separation Agreement (Term and Duties) is
deleted in its entirety and replaced by the following paragraph:
a. TERM AND DUTIES. Effective as of October 14, 1997, through April
30, 1998, Executive will serve as a Senior Adviser to the
Company, reporting to Joseph Laptewicz, the Company's Chief
Executive Officer ("CEO"). Executive will perform only such
functions and duties as reasonably agreed upon by the CEO and
Executive.
3. Paragraph 4.b. of the Separation Agreement (Time Commitment) is
deleted in its entirety and replaced by the following paragraph:
b. TIME COMMITMENT. Effective as of October 14, 1997 through April
30, 1998, Executive will maintain a work schedule sufficient to
perform only those functions and duties reasonably agreed upon by
the CEO and Executive pursuant to Paragraph 4.a. above. It is
understood that Executive will perform his work duties on the
Company's premises only if expressly requested by the CEO.
4. Paragraph 6.b. of the Separation Agreement (Disclosure and Assignment)
is clarified by inserting the phrase "or under contract as a consultant"
immediately after the phrase "while employed".
5. Paragraph 6.c. of the Separation Agreement (Nondisclosure of
Proprietary Information) is clarified by inserting the phrase "or consultant
relationship" immediately after the phrase "nor will Executive accept any
employment".
6. Paragraph 6.f., the heading and first sentence, of the Separation
Agreement (Continuing Obligations after Termination of Employment) are deleted
in their entirety and replaced by the following heading and sentence:
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<PAGE>
CONTINUING OBLIGATIONS AFTER TERMINATION OF EMPLOYMENT AND CONSULTANT
RELATIONSHIP. The obligations of this Section 6 shall continue beyond
the termination of Executive's employment and consultant relationship
with respect to Inventions conceived or made by Executive during the
period of Executive's employment and/or consultant relationship with
the Company and shall be binding upon Executive's assigns, executors,
administrators, and to other legal representatives.
7. Notwithstanding the amendments set forth above in Paragraphs 4, 5 and
6 of this Amendment, the Company and Executive do not desire to change the
spirit and the intentions of the parties as they were expressed in Paragraph 6
of the aforesaid Separation Agreement. The parties hereby reaffirm in "plain
English" that they understand Executive is required to disclose and assign to
the Company any invention or discovery which he made during his employment or
consultancy if: (i) the invention is related to the Company's business or its
actual or demonstrably anticipated research and development; or (ii) the
invention was made with the use of the Company's proprietary information or any
of its resources. Those inventions or discoveries made during this period which
are not related to the Company's business and which were not made with the use
of the Company's proprietary information or resources are the sole property of
Executive and need not be disclosed or assigned to the Company.
8. Paragraph 8.b., the first sentence, of the Separation Agreement
(Notification of Rights) is deleted in its entirety and replaced by the
following sentence:
Executive is hereby notified of his right to rescind the Release of
Claims with regard to claims arising under the Minnesota Human Rights
Act, Minnesota Statutes Chapter 363, within 15 calendar days of his
signing this Release of Claims, and with regard to his rights under
the federal Age Discrimination in Employment Act, 29 U.S.C. Section
621 ET SEQ., within 7 calendar days of his signing this Release of
Claims, rescission periods to run concurrently.
9. Paragraph 8.c., of the Separation Agreement (Full Release) is amended
by adding the following sentence immediately after the current second sentence:
Executive also shall agree that the Company informed him that he has
not less than 21 days from his receipt of the Release of Claims to
consider whether the terms are acceptable to him and that, by his
signature to the Release of Claims, he acknowledges that he has had
the benefit of the 21-day period.
10. Except as specifically provided herein, all other terms of the
Separation Agreement remain unchanged and are hereby reaffirmed by the Company
and Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the day and year first above written.
EMPI, INC.
Dated: October 20, 1997 By /s/ Kenneth Tempero
-------------------- -------------------------------
Kenneth Tempero, on behalf of the Board of
Directors of Empi, Inc.
Dated: October 24, 1997 /s/ Donald D. Maurer
-------------------- -------------------------------
Donald D. Maurer
E-32
<PAGE>
EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Form S-8, Registration Statement
Nos. 33-28177, 33-42510, 33-49614, 33-49616, 333-02199, 333-18549 and 333-27249
dated May 4, 1989, August 23, 1991, July 10, 1992, July 10, 1992, April 3, 1996,
December 23, 1996 and May 16,1997, respectively, and in Registration Statement
No. 33-57780 on Form S-3 dated February 3, 1993, of our report dated January 23,
1998, with respect to the consolidated financial statements and schedule of
Empi, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,020
<SECURITIES> 21,480
<RECEIVABLES> 22,927
<ALLOWANCES> 4,881
<INVENTORY> 8,003
<CURRENT-ASSETS> 55,495
<PP&E> 17,496
<DEPRECIATION> 10,990
<TOTAL-ASSETS> 63,893
<CURRENT-LIABILITIES> 5,138
<BONDS> 0
0
0
<COMMON> 9,847
<OTHER-SE> 48,842
<TOTAL-LIABILITY-AND-EQUITY> 58,689
<SALES> 73,468
<TOTAL-REVENUES> 73,468
<CGS> 19,073
<TOTAL-COSTS> 19,073
<OTHER-EXPENSES> 38,290
<LOSS-PROVISION> 2,442
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<INCOME-PRETAX> 17,100
<INCOME-TAX> 6,584
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<CHANGES> 0
<NET-INCOME> 10,516
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.27
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