<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 12, 1997
INTEGRATED ORTHOPAEDICS, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS
-----
(State or other jurisdiction of incorporation)
1-10677 76-0203483
------- ----------
(Commission File Number) (I.R.S. Employer Identification No.)
5858 Westheimer, Suite 500
Houston, Texas 77057
---------------------
(Address of principal executive office,
including zip code)
Registrant's telephone number, including area code: (713) 225-5464
----------------------------------------
(former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS
Effective December 12, 1997, the Company entered into a Securities Purchase
Agreement with two certain investors pursuant to which the Company obtained
gross proceeds of $25 million. The Company anticipates that the proceeds will
be used primarily as part of the Company's acquisition capital for its
establishment of affiliations with orthopaedic specialists in select markets in
the United States. In connection with the transaction, the Company issued (i)
250,000 shares of a new series of Series B Preferred Stock (the "Series B
Preferred") of the Company, which Series B Preferred shares can be converted
initially into 4,166,667 shares of the Company's Common Stock (at a conversion
rate of $6.00 per share) and (ii) warrants (the "Warrants") to purchase,
initially, up to five million additional shares of the Company's Common Stock.
The Series B Preferred entitles the holders to elect three of the eight
directors constituting the Company's board of directors, and, under certain
circumstances, a majority of the members of the board. In addition, the holders
of the Series B Preferred have the right to vote with the holders of the
Company's Common Stock on an as-converted basis on all matters except for
election of the other five board members. The Warrants are not presently vested
and have no exercise rights upon the initial issuance, but rather vest after
December 31, 1999, subject to certain adjustments. Pursuant to the terms of the
Warrants, the Company may cause expiration of some or all Warrants before they
have vested by achieving certain annual financial performance criteria through
the year 1999. If any of the Warrants actually vest, the Warrants may be
exercised only during the five-year period beginning on July 1, 2000 and ending
on July 1, 2005. The initial exercise price of any vested Warrants is $8.00 per
share. Both the Series B Preferred and the Warrants contain provisions that
could result in conversion of the Series B Preferred or exercise of any vested
Warrants at a per share price lower than $6.00 per share; provided, however,
such provisions shall not be effective without the approval of the Company's
shareholders (excluding for the purposes of such vote, the holders of the Series
B Preferred).
Due to the accounting treatment for the issuance of the Series B Preferred and
Warrants pursuant to generally accepted accounting principals (GAAP), it is
expected that the Company will take charges to retained earnings in the fourth
quarter of 1997. Net income for 1997 will not be affected by this charge. The
one-time accounting charge associated with issuance of the Series B Preferred is
estimated at approximately $9.4 million, representing an implied dividend equal
to the $2.25 per share difference between the initial $6.00 conversion price for
the Series B Preferred and the $8.25 per share market value of the Company's
Common Stock on the date of the closing of the transaction. The one-time
accounting charge to be taken in connection with the issuance of the Warrants
requires a third party valuation that has not been completed to date. The
charge to retained earnings attributable to the issuance of the Warrants will be
determined by multiplying the projected value per each common stock equivalent
by the five million shares underlying the Warrants.
At the same time, the Company terminated contracts to manage Occupational
Medicine Associates of Houston P.A. and Physicare, L.L.P., both located in
Houston, Texas. The Company does not believe that these two affiliated
practices fit strategically with the Company's group practice acquisition model.
For the nine months ending September 30, 1997, these
-2-
<PAGE>
operations had revenues of $2 million and contributed $100,000 in management
fees to the Company. In connection with these contract terminations, the
Company will take a one-time charge of approximately $450,000 before taxes.
In connection with these transactions, the Company has repaid all of the
outstanding loans due to Wells Fargo Bank in the amount of of approximately
$625,000, and has terminated its loan facilities with Wells Fargo Bank.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
4.01 Certificate of Designation and Determination of Rights and
Preferences of Cumulative Convertible Preferred Stock,
Series A of the Company.
4.02 Certificate of Designations, Rights and Preferences of
Series B Convertible, Non-Redeemable Preferred Stock of the
Company.
4.03 Warrant Agreement dated as of December 12, 1997, by and
among the Company, FW Integrated Orthopaedics Investors,
L.P. and FW Integrated Orthopaedics Investors II, L.P.
4.04 Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors, L.P.
4.05 Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors II, L.P.
99.01* Securities Purchase Agreement dated as of December 12, 1997,
by and among the Company, FW Integrated Orthopaedics
Investors, L.P., FW Integrated Orthopaedics Investors II,
L.P. and certain other signatories.
99.02 Registration Rights Agreement dated as of December 12, 1997,
by and among the Company, FW Integrated Orthopaedics
Investors, L.P. and FW Integrated Orthopaedics Investors II,
L.P.
99.03* Termination Agreement dated as of November 30, 1997, by and
among the Company, IOI Management Services of Houston, Inc.,
Physicare, L.L.P., William F. Donovan, M.D., Northshore
Orthopaedics Assoc. and Occupational Medicine Associates of
Houston, P.A.
-3-
<PAGE>
99.04* Donovan Termination Agreement dated as of December 12, 1997,
by and among Physicare, L.L.P., William F. Donovan, M.D.,
Northshore Orthopaedics Assoc. and Occupational Medicine
Associates of Houston, P.A.
* Schedules and exhibits have been omitted from the above listed
agreements. The Company agrees to furnish a supplementary copy of any omitted
exhibit or schedule to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
INTEGRATED ORTHOPAEDICS, INC.
(Registrant)
Date: December 29, 1997 By: /s/ Jeff R. Casey
------------------------------------
Jeff R. Casey, Senior Vice President
-4-
<PAGE>
EXHIBIT 4.01
CERTIFICATE OF DESIGNATION AND DETERMINATION OF RIGHTS AND
PREFERENCES OF CUMULATIVE CONVERTIBLE PREFERRED STOCK,
SERIES A,
OF
INTEGRATED ORTHOPAEDICS, INC.
Integrated Orthopaedics, Inc., a Texas corporation (the "Company"), does
hereby certify that:
FIRST: The name of the Company is Integrated Orthopaedics, Inc.
SECOND: By unanimous vote of the Board of Directors of the Company (the
"Board of Directors") at a meeting duly called and held, the following
resolutions were duly adopted:
RESOLVED, that pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation, as amended through the date hereof,
of the Company (the "Articles of Incorporation"), a series of the class of
authorized Preferred Stock, with a par value of $0.01 per share, of the Company
be hereby created, and that the designation of amount thereof and the voting
powers, preferences and relative, optional and other special rights of the
shares of such series, and the qualifications, limitations and restrictions of
such series, be as set forth below; and
RESOLVED FURTHER, that such provisions supersede any prior certificate
of designation filed by the Company with the Secretary of State of the State of
Texas with respect to such series of the class of Preferred Stock authorized
hereby.
1. Designation. The designation of the Series of Preferred Stock
authorized hereby shall be "Cumulative Convertible Preferred Stock, Series A"
("Series A Preferred Stock") with a par value of $0.01 per share, and 26,000
shares are hereby authorized for issuance.
2. Ranking. The Series A Preferred Stock shall rank as to dividends
(i) senior to the Common Stock, par value $0.001 per share, of the Company (the
"Common Stock") and any other class or series of capital stock that by its
express terms provides that it ranks junior to the Series A Preferred Stock as
to dividends or that does not expressly provide for any ranking as to dividends
("Junior Securities"), (ii) on a parity with the Series B Preferred Stock, par
value $0.01 per
<PAGE>
share, of the Company (the "Series B Preferred Stock") and any other class or
series of capital stock that by its express terms provides that it ranks on a
parity with the Series A Preferred Stock as to payment of dividends ("Parity
Securities") and (iii) junior to any class or series of capital stock that by
its express terms provides that it ranks senior to the Series A Preferred Stock
("Senior Securities").
3. Dividends. The holders of Series A Preferred Stock shall be
entitled to receive cumulative cash dividends at the rate of (i) $8.00 per share
for the period beginning on the date of issuance and ending on June 30, 2001,
(ii) $10.00 per share for the period beginning July 1, 2001 and ending on June
30, 2002, (iii) $12.00 per share for the period beginning July 1, 2002 and
ending on June 30, 2003, and (iv) $16.00 per share after July 1, 2004 (subject
to appropriate adjustments in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares) per annum,
and no more, payable quarterly on March 31, June 30, September 30 and December
31. Such dividends shall first be payable on June 30, 1999. Such dividends
shall be payable in preference and priority to any payment of any cash dividend
on Junior Securities, when and as declared by the Board of Directors of the
Company. Notwithstanding the foregoing, the Company may defer payment of
accrued dividends to the holders of the Series A Preferred Stock to the extent
the dividends cannot be paid from the Company's "Free Cash Flow" (as hereinafter
defined). Such dividends may be deferred until the earlier of such times as
Free Cash Flow is available for payment of same or June 30, 2001.
Free Cash Flow is defined as the Net Increase in Cash and Cash
Equivalents (as expressed in the Company's "Consolidated Statement of Cash
Flows" for the number of months which have passed since the end of the prior
fiscal year, calculated as of the end of the month most recently ended prior to
the due date of a dividend payment), adjusted to eliminate any net cash provided
or used by financing activities, minus any accrued dividends on Series A
Preferred Stock, less $750,000.
Such dividends shall (even though such dividends are not payable until
beginning June 30, 1999) accrue with respect to each share of Series A Preferred
Stock from the date on which such share is issued and outstanding and thereafter
shall be deemed to accrue from day to day whether or not earned or declared and
whether or not there exists profits, surplus or other funds legally available
for the payment of dividends, and shall be cumulative so that if such dividends
on the Series A Preferred Stock shall not have been paid, or declared and set
apart for payment, the deficiency shall be fully paid or declared and set apart
for payment before any dividend shall be paid or declared or set apart for any
Junior Securities or (other than dividends on Series B Preferred Stock or other
Parity Securities paid in additional shares of Series B Preferred Stock) any
Parity Securities and before any purchase or acquisition of any Junior
Securities or Parity Securities is made by the Company. At the earlier of: (1)
the redemption of the Series A Preferred Stock, (2) the liquidation, sale or
merger
2
<PAGE>
of the Company or (3) June 30, 2001, any accrued but unpaid dividends shall be
paid to the holders of record of outstanding shares of Series A Preferred Stock.
The Company shall give written notice, sent by first class certified
mail, postage prepaid and return receipt requested, specifying the date and
amount of each dividend to be paid on Series A Preferred Stock, at least 5 days
in advance of the dividend payment date to all holders of record of the Series A
Preferred Stock as their names and addresses appear on the share register of the
Company on the date of such notice. Each dividend shall be mailed to the
holders of record of the Series A Preferred Stock as their names and addresses
appear on the share register of the Company on the corresponding dividend
payment date. Anything contained in this Section 3 to the contrary
notwithstanding, the holders of shares of Series A Preferred Stock with respect
to which dividends are to be paid in accordance with this Section shall have the
right, exercisable at any time up to the close of business on the applicable
dividend payment date to convert all or any part of such shares into shares of
Common Stock pursuant to Section 10 hereof and for such purpose such dividend
shall not be deemed to have been paid or set apart at the date of such
conversion.
4. Preference on Liquidation, etc. In the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, before any
payment or distribution of the assets of the Company (whether capital or
surplus), or proceeds thereof, shall be made to or set apart for the holders of
shares of any Junior Securities, the holders of shares of Series A Preferred
Stock shall be entitled to receive payment of $100 per share held by them, plus
an amount equal to all accrued and unpaid dividends thereon, whether or not
declared to the date of such payment. If, upon any liquidation, dissolution or
winding-up of the Company, the assets of the Company, or proceeds thereof,
distributed among the holders of shares of Series A Preferred Stock and the
holders of all Parity Securities shall be insufficient to pay in full the
respective preferential amounts on shares of Series A Preferred Stock and all
Parity Securities, then such assets, or the proceeds thereof, shall be
distributed among the holders of Series A Preferred Stock and the holders of
Parity Securities ratably in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full.
After payment of the full amount of the liquidation preference to which the
holders of Series A Preferred Stock are entitled, such holders will not be
entitled to any further participation in any distribution of assets of the
Company. For the purpose of this Section 4, none of the merger or the
consolidation of the Company into or with another corporation or the merger or
consolidation of any other corporation into or with the Company or the sale,
transfer, or other disposition of all or substantially all of the assets of the
Company, shall be deemed to be a voluntary or involuntary liquidation,
dissolution, or winding-up of the Company.
3
<PAGE>
5. Retirement of Shares. Shares of Series A Preferred Stock that
have been issued and have been redeemed, repurchased or reacquired in any manner
by the Company shall be retired and not reissued and shall resume the status of
authorized but unissued and non-designated shares of preferred stock of the
Company.
6. Voting. Each holder of Series A Preferred Stock shall be
entitled to the number of votes equal to the number of whole shares of Common
Stock into which such shares of Series A Preferred Stock could be converted
pursuant to the provisions of Section 10 hereof at the record date for the
determination of the shareholders entitled to vote on such matters or, if no
such record date is established, the date such vote is taken or any written
consent of shareholders is solicited. Each holder of Series A Preferred Stock
shall have full voting rights and powers equal to the voting rights and powers
of the holders of Common Stock, and shall be entitled to notice of any
shareholders' meeting in accordance with the bylaws of the Company (as in effect
at the time in question) and applicable law, and shall be entitled to vote,
together with the holders of Common Stock, with respect to any question upon
which holders of Common Stock have the right to vote, except for the election of
directors and as may be otherwise provided by applicable law. Except as
otherwise expressly provided herein or as required by law, and except for the
vote of the Series A Preferred Stock provided for in Section 7 and Section 8
hereof, the holders of Series A Preferred Stock and the holders of Common Stock
shall vote together and not as separate classes.
7. Special Voting Rights. After June 30, 2001, the number of
directors constituting the Board of Directors of the Company shall be increased
by one, and the holders of Series A Preferred Stock, voting as a separate series
shall be entitled by written consent or at the next annual meeting of
stockholders or the next special meeting of stockholders, or at a special
meeting of holders of Series A Preferred Stock called as hereinafter provided,
to elect a director to fill such newly created directorship, without diminution
of their right to participate with holders of Common Stock and holders, if any,
of any other capital stock of the Company entitled to vote for the election of
directors in the election of any other directors.
Whenever such voting right shall vest, it may be exercised initially
by consent in writing of the holders of two-thirds of the Series A Preferred
Stock at the time outstanding or at a special meeting of holders of Series A
Preferred Stock or at any annual or special stockholders' meeting, but
thereafter it shall be exercised only at annual stockholders' meetings. A
special meeting for the exercise of such right shall be called by the Secretary
of the Company within ten days after receipt of a written request therefor,
signed by the holders of record of at least 10% of the votes of the then
outstanding shares of Series A Preferred Stock; however, no such special meeting
shall be held during the 90-day period preceding the date fixed for the annual
meeting of stockholders.
4
<PAGE>
Any director who shall have been elected by holders of Series A
Preferred Stock as a series pursuant to this subsection shall hold office for a
term expiring (subject to the earlier termination of arrearages) at the next
annual meeting of stockholders, and during such term may be removed at any time,
either for or without cause, only by the affirmative votes of holders of record
of a majority of the votes of the then outstanding shares of Series A Preferred
Stock given at a special meeting of such stockholders called for the purpose or
by written consent of two-thirds. Any vacancy created by such removal may also
be filled at such meeting or by such a consent. A meeting for the removal of a
director elected by holders of Series A Preferred Stock as a series and the
filling of the vacancy created thereby shall be called by the Secretary of the
Company within ten days after receipt of a written request therefor, signed by
the holders of not less than 25% of the votes of the then outstanding shares of
Series A Preferred Stock. Such meeting shall be held at the earliest
practicable date thereafter.
Any vacancy caused by the death, resignation, or expiration of term
(except upon a termination of arrearages) of a director who shall have been
elected by the holders of Series A Preferred Stock as a series pursuant to this
subsection may be filled only by the holders of Series A Preferred Stock by
written consent of two-thirds, at any annual or special stockholders' meeting,
or at a meeting called for such purpose. Such meeting of the holders of Series
A Preferred Stock shall be called by the Secretary of the Company at the
earliest practicable date after any such death or resignation and in any event
within ten days after receipt of a written request therefor, signed by the
holders of record of at least 10% of the votes of the then outstanding shares of
Series A Preferred Stock.
If any meeting of the holders of Series A Preferred Stock required by
this subsection to be called shall not have been called within ten days after
personal service of a written request therefor upon the Secretary of the Company
or within 15 days after mailing the same within the United States of America by
registered mail addressed to the Secretary of the Company at its principal
office, then holders of record of at least 10% of the votes of the then
outstanding shares of Series A Preferred Stock may designate in writing one of
their number to call such a meeting may be called by such person so designated
upon the notice required for annual meetings of stockholders. Any holder of
Series A Preferred Stock so designated shall have access to the stock books of
the Company for the purpose of causing meetings of stockholders to be called
pursuant to these provisions.
Any meetings of holders of Series A Preferred Stock to vote as a
series for the election or removal of directors shall be held at such place or
places designated in the Company's Bylaws for meeting of its stockholders or at
such other place as the holders of at least 10% of the votes of the then
outstanding shares of Series A Preferred Stock may designate. At such meeting,
the presence in person or
5
<PAGE>
by proxy of holders of a majority of the votes of the then outstanding shares of
Series A Preferred Stock shall be required to constitute a quorum; in the
absence of a quorum, a majority of the holders present in person or by proxy
shall have power to adjourn the meeting from time to time without notice, other
than announcement at the meeting, until a quorum shall be present.
8. Other Rights and Amendments. Except as otherwise provided by
law, without the written consent of two-thirds of the outstanding shares of
Series A Preferred Stock or the vote of holders of two-thirds of the outstanding
shares of Series A Preferred Stock (voting as a class) at a meeting of the
holders of Series A Preferred Stock called for such purpose, the Company will
not (i) create, authorize or issue any Parity Securities or Senior Securities,
(ii) increase the authorized number of shares of Series A Preferred Stock or
(iii) amend, alter, repeal or waive any provision of the bylaws, the Articles of
Incorporation or this Certificate of Designation so as to adversely affect the
preferences, rights, powers or other terms of the Series A Preferred Stock.
9. Issuance. The Company will not issue more than 26,000 shares of
Series A Preferred Stock.
10. Conversion. The outstanding shares of Series A Preferred Stock
shall be convertible into Common Stock as follows:
10.1 Optional Conversion.
(a) At the option of the holder thereof, each share of Series A
Preferred Stock shall be convertible, at any time or from time to time, into
fully paid and nonassessable shares of Common Stock as provided herein.
(b) Each holder of Series A Preferred Stock who elects to convert
the same into shares of Common Stock shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Company or any
transfer agent for the Series A Preferred Stock or Common Stock, and shall give
written notice to the Company at such office that such holder elects to convert
the same and shall state therein the number of shares of Series A Preferred
Stock being converted. Thereupon the Company shall promptly issue and deliver at
such office to such holder a certificate or certificates for the number of
shares of Common Stock to which such holder is entitled upon such conversion.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the certificate or certificates
representing the shares of Series A Preferred Stock to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.
6
<PAGE>
10.2 Mandatory Conversion.
(a) Mandatory Conversion Event. The Company may, at its option,
require all (and not less than all) holders of shares of Series A Preferred
Stock then outstanding to convert their shares of Series A Preferred Stock into
shares of Common Stock, at the then effective Conversion Price if the average
daily trading volume of Common Stock for the 30 consecutive days of trading
ending not more than 5 calendar days immediately preceding the date of the
notice described in this subsection 10(a) equals or exceeds 16,500 shares
(33,000 if the principal trading market for Common Stock is a NASDAQ or other
over-the-counter market and such market includes, or "double counts," both buy
and sell transactions with respect to the same shares in reporting volume) and
the Company's Common Stock shall have had an average closing market price on
the principal stock exchange on which it is listed (or, if not listed on any
stock exchange, a last sale price on the NASDAQ National Market System, or if
not listed or admitted to trading on such system, a closing bid price in the
over-the-counter market) of not less than $5.50 (subject to appropriate
adjustments in the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares) on the same period of 30
consecutive trading days. All holders of record of shares of Series A Preferred
Stock then outstanding will be given at least 10 days' prior written notice of
the date fixed and the place designated for mandatory or special conversion of
all such shares of Series A Preferred Stock pursuant to this Section 10.2. Such
notice will be sent by first class or registered mail, postage prepaid, to each
record holder of Series A Preferred Stock at such holder's address last shown on
the records of the Company.
(b) Effect of Mandatory Conversion. Upon the date filed for
conversion in accordance with Section 10.2(a) hereof, the outstanding shares of
Series A Preferred Stock shall be converted into Common Stock automatically
without the need for any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Company or its transfer agent; provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such conversion unless the certificates evidencing such shares of Series A
Preferred Stock are either delivered to the Company or its transfer agent as
provided below, or the holder notifies the Company or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates. Upon the occurrence of such mandatory
conversion of the Series A Preferred Stock, the holders of Series A Preferred
Stock shall surrender the certificates representing such shares at the office of
the Company or any transfer agent for the Series A Preferred Stock or Common
Stock. Thereupon, there shall be issued and delivered to such holder promptly
at such office and in its name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of Common
Stock
7
<PAGE>
into which the shares of Series A Preferred Stock surrendered were convertible
on the date on which such mandatory conversion occurred.
10.3 Conversion Price. Each share of Series A Preferred Stock shall
be convertible in accordance with Section 10.1 or 10.2 hereof into the number of
shares of Common Stock that results from dividing the liquidation value for
Series A Preferred Stock (including the stated liquidation preference and
accrued but unpaid dividends) by the conversion price for Series A Preferred
Stock that is in effect at the time of conversion (the "Conversion Price"). The
initial Conversion Price for the Series A Preferred Stock shall be the lesser of
(a) $3.50 per share and (b) the average closing sales price for the twenty days
immediately preceding the conversion of the Series A Preferred Stock. The
Conversion Price of the Series A Preferred Stock shall be subject to adjustment
from time to time as provided below.
10.4 Adjustment Upon Common Stock Event. Upon the happening of a
Common Stock Event (as hereinafter defined), the Conversion Price of the Series
A Preferred Stock shall, simultaneously with the happening of such Common Stock
Event, be adjusted by multiplying the Conversion Price of Series A Preferred
Stock in effect immediately prior to such Common Stock Event by a fraction, (a)
the numerator of which shall be the number of shares of Common Stock issued and
outstanding immediately prior to such Common Stock Event, and (b) the
denominator of which shall be the number of shares of Common Stock issued and
outstanding immediately after such Common Stock Event, and the product so
obtained shall thereafter be the Conversion Price for Series A Preferred Stock.
The Conversion Price for Series A Preferred Stock shall be readjusted in the
same manner upon the happening of each subsequent Common Stock Event. As used
herein, the term "Common Stock Event" means (i) the issue by the Company of
additional shares of Common Stock as a dividend or other distribution on
outstanding Common Stock, (ii) a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock or (iii) a combination of
the outstanding shares of Common Stock into a smaller number of shares of Common
Stock.
10.5 Adjustment for Other Dividends and Distributions. If at any time
or from time to time after the Original Issue Date the Company pays a dividend
or makes any other distribution to the holders of the Common Stock payable in
securities of the Company other than shares of Common Stock, then in each such
event provision shall be made so that the holders of the Series A Preferred
Stock shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable upon conversion thereof, the amount of securities of
the Company that they would have received had their Series A Preferred Stock
been converted into Common Stock on the date of such event (or such record date,
as applicable) and had they thereafter, during the period from the date of such
event (or such record date, as applicable) to and including the conversion date,
retained such securities receivable by
8
<PAGE>
them as aforesaid during such period, subject to all other adjustments called
for during such period under this Section 10 with respect to the rights of the
holders of the Series A Preferred Stock or with respect to such other securities
by their terms.
10.6 Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series A Preferred Stock is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than by a Common Stock
Event or a stock dividend, reorganization, merger, consolidation or sale of
assets provided for elsewhere in this Section 10), then in any such event each
holder of Series A Preferred Stock shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares of Series
A Preferred Stock could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof. The Company shall give each holder of Series A Preferred Stock
at least 30 days prior written notice of any event requiring adjustment pursuant
to this Section 10.6.
10.7 Sale of Shares Below Conversion Price.
(a) Adjustment Formula. If at any time or from time to time after
the Original Issue Date the Company issues or sells, or is deemed by the
provisions of this Section 10.7 to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), otherwise than in connection with a
Common Stock Event as provided in Section 10.4 hereof, a dividend or
distribution as provided in Section 10.5 hereof or a recapitalization,
reclassification or other change as provided in Section 10.6 hereof, for an
Effective Price (as hereinafter defined) that is less than the Conversion Price
for Series A Preferred Stock in effect immediately prior to such issue or sale,
then, and in each such case, the Conversion Price for Series A Preferred Stock
shall be reduced, as of the close of business on the date of such issue or sale,
to the price obtained by multiplying such Conversion Price by a fraction:
(1) The numerator of which shall be the sum of (A) the number
of Common Stock Equivalents Outstanding (as hereinafter defined)
immediately prior to such issue or sale of Additional Shares of Common
Stock plus (B) the quotient obtained by dividing the Aggregate
Consideration Received (as hereinafter defined) by the Company for the
total number of Additional Shares of Common Stock so issued or sold (or
deemed so issued and sold pursuant to the provisions of Section 10.7(c)
hereof) by the
9
<PAGE>
Conversion Price for Series A Preferred Stock in effect immediately prior
to such issue or sale; and
(2) The denominator of which shall be the sum of (A) the
number of Common Stock Equivalents Outstanding immediately prior to such
issue or sale plus (B) the number of Additional Shares of Common Stock so
issued or sold (or deemed so issued and sold pursuant to the provisions of
Section 10.7(c) hereof).
(b) Certain Definitions. For the purpose of making any
adjustment required under this Section 10.7:
(1) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued by the Company, whether or not subsequently
reacquired or retired by the Company and whether or not restricted at the
time of issuance or sale (or deemed issuance or sale), other than (A)
shares of Common Stock issued or issuable upon conversion of Series A
Preferred Stock and (B) Excluded Securities.
(2) The "Aggregate Consideration Received" by the Company for
any issue or sale (or deemed issue or sale) of securities shall (A) to the
extent it consists of cash, be computed at the gross amount of cash
received by the Company after deduction of any underwriting or similar
commissions, compensation or concessions paid or allowed by the Company in
connection with such issue or sale and any expenses payable by the Company;
(B) to the extent it consists of property other than cash, be computed at
the fair value of that property as determined in good faith by the Board of
Directors; and (C) if Additional Shares of Common Stock, Convertible
Securities or Rights or Options to purchase either Additional Shares of
Common Stock or Convertible Securities are issued or sold together with
other stock or securities or other assets of the Company for a
consideration that covers both, be computed as the portion of the
consideration so received that may be reasonably determined in good faith
by the Board of Directors to be allocable to such Additional Shares of
Common Stock, Convertible Securities or Rights or Options.
(3) "Common Stock Equivalents Outstanding" shall mean the
number of shares of Common Stock that is equal to the sum of (A) all shares
of Common Stock of the Company that are outstanding at the time in
question, plus (B) all shares of Common Stock of the Company issuable upon
conversion of all shares of Series A Preferred Stock or other Convertible
Securities that are outstanding at the time in question, plus (C) all
shares of Common Stock of the Company that are issuable upon the exercise
of vested
10
<PAGE>
Rights or Options that are outstanding at the time in question assuming the
full conversion or exchange into Common Stock of all such vested Rights or
Options that are vested Rights or Options to purchase or acquire
Convertible Securities into or for Common Stock.
(4) "Convertible Securities" shall mean stock or other
securities convertible into or exchangeable for shares of Common Stock,
other than Excluded Securities.
(5) The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been
issued or sold, by the Company under this Section 10.7, into the Aggregate
Consideration Received, or deemed to have been received, by the Company
under this Section 10.7, for the issue of such Additional Shares of Common
Stock.
(6) "Excluded Securities" shall mean, collectively (i) shares
of Common Stock issued or issuable upon conversion of the Series B
Preferred Stock (including additional shares of Series B Preferred Stock
that may have been heretofore issued or may be issued after the date hereof
as a stock dividend in the Series B Preferred Stock) and (ii) the Common
Stock issuable by the Company upon exercise of stock options to acquire
shares of Common Stock that have been granted by the Company prior to the
Original Issue Date.
(7) "Rights or Options" shall mean warrants, options or other
rights to purchase or acquire shares of Common Stock or Convertible
Securities, other than Excluded Securities.
(c) Deemed Issuances. For the purpose of making any adjustment to
the Conversion Price of the Series A Preferred Stock required under this Section
10.7, if the Company issues or sells any Rights or Options or Convertible
Securities and if the Effective Price of the shares of Common Stock issuable
upon exercise of such Rights or Options and/or the conversion or exchange of
Convertible Securities (computed without reference to any additional or similar
protective or antidilution clauses) is less than the Conversion Price, then the
Company shall be deemed to have issued, at the time of the issuance of such
Rights, Options or Convertible Securities, that number of Additional Shares of
Common Stock that is equal to the maximum number of shares of Common Stock
issuable upon exercise or conversion of such Rights, Options or Convertible
Securities upon their issuance and to have received, as the Aggregate
Consideration Received for the issuance of such shares, an amount equal to the
total amount of the consideration, if any, received by
11
<PAGE>
the Company for the issuance of such Rights or Options or Convertible
Securities, plus, in the case of such Rights or Options, the minimum amounts of
consideration, if any, payable to the Company upon the exercise in full of such
Rights or Options, plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion or exchange thereof; provided that:
(a) if the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective
clauses, then the Company shall be deemed to have received the minimum
amounts of consideration without reference to such clauses;
(b) if the minimum amount of consideration payable to the Company
upon the exercise of Rights or Options or the conversion or exchange of
Convertible Securities is reduced over time or upon the occurrence or non-
occurrence of specified events other than by reason of antidilution or
similar protective adjustments, then the Effective Price shall be
recalculated using the figure to which such minimum amount of consideration
is reduced; and
(c) if the minimum amount of consideration payable to the Company
upon the exercise of such Rights or Options or the conversion or exchange
of Convertible Securities is subsequently increased, then the Effective
Price shall again be recalculated using the increased minimum amount of
consideration payable to the Company upon the exercise of such Rights or
Options or the conversion or exchange of such Convertible Securities.
No further adjustment of the Conversion Price, adjusted upon the issuance of
such Rights or Options or Convertible Securities, shall be made as a result of
the actual issuance of shares of Common Stock on the exercise of any such Rights
or Options or the conversion or exchange of any such Convertible Securities. If
any such Rights or Options or the conversion rights represented by any such
Convertible Securities shall expire without having been fully exercised, then
the Conversion Price as adjusted upon the issuance of such Rights or Options or
Convertible Securities shall be readjusted to the Conversion Price that would
have been in effect had an adjustment been made on the basis that the only
shares of Common Stock so issued were the shares of Common Stock, if any, that
were actually issued or sold on the exercise of such Rights or Options or rights
of conversion or exchange of such Convertible Securities, and such shares of
Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise, plus the consideration, if any,
actually received by the Company for the granting of any such
12
<PAGE>
Rights or Options, whether or not exercised, plus the consideration received for
issuing or selling all such Convertible Securities actually converted or
exchanged, plus the consideration, if any, actually received by the Company
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) on the conversion or exchange of such Convertible
Securities, provided that such readjustment shall not apply to prior conversions
of Series A Preferred Stock.
10.8 Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price for Series A Preferred Stock, the Company,
at its expense, shall cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder of
the Series A Preferred Stock at the holder's address as shown in the Company's
books.
10.9 Fractional Shares. No fractional shares of Common Stock shall be
issued upon any conversion of Series A Preferred Stock. In lieu of any
fractional share to which the holder would otherwise be entitled, the Company
shall pay the holder cash equal to the product of such fraction multiplied by
the Common Stock's fair market value as determined in good faith by the Board of
Directors as of the date of conversion.
10.10 Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
10.11 Notices. Any notice required by the provisions of this Section
10 to be given to the holders of shares of the Series A Preferred Stock shall be
deemed given upon the earlier of actual receipt or deposit in the United States
mail, by certified or registered mail, return receipt requested, postage
prepaid, addressed to each holder of record at the address of such holder
appearing on the books of the Company.
10.12 No Impairment. The Company shall not avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed
13
<PAGE>
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
Stock against impairment.
11. Redemption of the Series A Preferred Stock.
(a) Optional Redemption; Notice. If, on June 30, 2001, any shares of
Series A Preferred Stock shall be then outstanding, the Company may redeem
(unless otherwise prevented by law) all (but not less than all) such outstanding
shares at any amount per share equal to $100.00 plus an amount equal to accrued
but unpaid dividends, if any, to the date of redemption of such share (the
"Redemption Price"). 60 days' prior notice by the Company of such redemption
shall be sent by first-class certified mail, postage prepaid and return receipt
requested, by the Company to the holders of the shares of Series A Preferred
Stock to be redeemed at their respective addresses as the same shall appear on
the books of the Company.
(b) Deposit. On or prior to the date of redemption contained in a
notice pursuant to Section 11(a) hereof (the "Redemption Date"), the Company
shall deposit the Redemption Price of all shares of Series A Preferred Stock
with a bank or trust corporation having aggregate capital and surplus in excess
of $100,000 as a trust fund for the benefit of the respective holders of Series
A Preferred Stock, with irrevocable instructions and authority to the bank or
trust corporation to pay the Redemption Price for such shares to their
respective holder on or after the Redemption Date upon receipt of his share
certificate or notification from the Company that such holder has surrendered
his share certificate to the Company. As of the Redemption Date, the deposit
shall constitute full payment of the Redemption Price to their holders, and from
and after the Redemption Date the shares so called for redemption shall be
redeemed and shall be deemed to be no longer outstanding, and the holders
thereof shall cease to be stockholders with respect to such shares and shall
have no rights with respect thereto except the rights to receive from the bank
or trust corporation payment of the Redemption Price of the shares, without
interest, upon surrender of their certificates therefor. Such instructions
shall also provide that any moneys deposited by the Company pursuant to this
Section 11(b) for the redemption of the shares thereafter converted into shares
of the Company's Common Stock pursuant to Section 10 hereof prior to Redemption
Date shall be returned to the Company forthwith upon such conversion. The
balance of any moneys deposited by the Company pursuant to this Section 11(b)
remaining unclaimed at the expiration of six (6) months following the Redemption
Date shall thereafter be returned to the Company upon its request expressed in a
resolution of its Board of Directors. The Company will be responsible for costs
and expenses to be incurred in connection with such deposit arrangement, such
amounts to be offset by any interest earned on the deposit, with any excess
interest to be payable to the Company.
14
<PAGE>
(c) Repurchase Prohibited. The Company will not, and will not permit
any affiliate (as defined in the Securities Exchange Act of 1934, as amended) of
the Company to, purchase or acquire any shares of Series A Preferred Stock
otherwise than pursuant to (i) the terms of this Section 11, or (ii) an offer
made on the same terms to all holders of Series A Preferred Stock at the time
outstanding.
(d) Right to Convert Unaffected. Anything contained in this Section
11 to the contrary notwithstanding, the holders of shares of Series A Preferred
Stock to be redeemed in accordance with this Section 11 shall have the right,
exercisable at any time up to the close of business on the applicable redemption
date (unless the Company is legally prohibited from redeeming such shares on
such date, in which event such right shall be exercisable until the removal of
such legal disability), to convert all or any part of such shares to be redeemed
as herein provided into shares of Common Stock pursuant to Section 10 hereof.
12. General Provisions.
(a) The term "Person" as used herein means any corporation,
partnership, trust, organization, association, or other entity or individual.
(b) The term "outstanding", when used with reference to shares of
stock, shall mean issued shares, excluding shares held by the Company or a
subsidiary.
(c) The headings of the paragraphs, subparagraphs, clauses and
subclauses of this Certificate of Designation are for convenience of reference
only and shall not define, limit or affect any of the provisions hereof.
THIRD: The foregoing resolutions were duly adopted as of December 1, 1997
by all necessary action on the part of the Company.
Dated: December 12, 1997 INTEGRATED ORTHOPAEDICS, INC.
By: /s/ JEFF R. CASEY
_____________________
Jeff R. Casey,
Senior Vice President
15
<PAGE>
EXHIBIT 4.02
CERTIFICATE OF DESIGNATIONS, RIGHTS AND PREFERENCES OF
SERIES B CONVERTIBLE, NON-REDEEMABLE PREFERRED STOCK
OF INTEGRATED ORTHOPAEDICS, INC.
Integrated Orthopaedics, Inc., a Texas corporation (the "Company"),
acting pursuant to Article 2.13 of the Texas Business Corporation Act, does
hereby submit the following Certificate of Designations, Rights and Preferences
of its Series B Convertible, Non-Redeemable Preferred Stock.
FIRST: The name of the Company is Integrated Orthopaedics, Inc.
SECOND: By unanimous vote of the Board of Directors of the Company
(the "Board of Directors") at a meeting duly called and held, the following
resolutions were duly adopted:
RESOLVED, that pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation, as amended through the date hereof,
of the Company (the "Articles of Incorporation"), a series of the class of
authorized Preferred Stock, with a par value of $0.01 per share, of the Company
be hereby created, and that the designation of amount thereof and the voting
powers, preferences and relative, optional and other special rights of the
shares of such series, and the qualifications, limitations and restrictions of
such series, be as set forth below:
1. Designation. The designation of the Series of Preferred Stock
authorized hereby shall be "Series B Convertible, Non-Redeemable Preferred
Stock" (the "Series B Preferred Stock") with a par value of $0.01 per share, and
400,000 shares are hereby authorized for issuance.
2. Ranking. The Series B Preferred Stock shall rank as to dividends
(i) senior to the Common Stock, par value $0.001 per share, of the Company (the
"Common Stock") and any other class or series of capital stock that by its
express terms provides that it ranks junior to the Series B Preferred Stock as
to dividends or that does not expressly provide for any ranking as to dividends
(except for the Series A Preferred Stock) ("Junior Securities"), (ii) on a
parity with the Series A Preferred Stock, par value $0.01 per share, of the
Company (the "Series A Preferred Stock") and any other class or series of
capital stock that by its express terms provides that it ranks on a parity with
the Series B Preferred Stock as to payment of dividends ("Parity Securities")
and (iii) junior to any class or series of
<PAGE>
capital stock that by its express terms provides that it ranks senior to the
Series B Preferred Stock ("Senior Securities").
3. Dividends. The holders of Series B Preferred Stock shall be
entitled to receive cumulative cash dividends at a rate per annum (the "Dividend
Rate") of $9.00 per share. Such dividends shall be payable, as and when
declared by the Board of Directors out of funds legally available therefor, on
the last day of March, June, September and December of each year, commencing
December 31, 1997 (each a "Dividend Payment Date") (unless such day is not a
business day, in which event on the next succeeding business day), to holders of
record as they appear on the register for the Series B Preferred Stock (the
"Preferred Stock Register") on the March 15, June 15, September 15, and December
15, as appropriate, immediately preceding such Dividend Payment Date.
At the option of the Company and except as provided below with respect
to the payment of cash in respect of fractional shares, dividends on the Series
B Preferred Stock may be paid, instead of in cash, in whole or in part, on
declaration of the Board of Directors, in additional shares of the Series B
Preferred Stock (the "Dividend Shares"); provided, however, that if no such
declaration is made on or before a Dividend Payment Date, the quarterly dividend
shall automatically accrue in Dividend Shares on the Dividend Payment Date. To
the extent dividends are payable in whole or in part in Dividend Shares, such
Dividend Shares shall be valued at $100 per share with a liquidation value of
$100 per share and shall have all rights and preferences of the Series B
Preferred Stock hereunder, including dividends payable at the rate specified in
the preceding paragraph, subject to the option of the Company to pay such
dividends in Dividend Shares of the Series B Preferred Stock in lieu of cash.
Notwithstanding any other provisions hereof, certificates representing Dividend
Shares shall not be issued to the holder entitled thereto until requested by
such holder.
Dividends shall accrue from the date of original issue of the Series B
Preferred Stock, except that dividends on Dividend Shares of the Series B
Preferred Stock shall accrue from the date such Dividend Shares are issued. To
the extent that all or any part of dividends in Dividend Shares of the Series B
Preferred Stock would result in the issuance of a fractional Dividend Share of
such series, then such amount shall be paid in cash.
Notwithstanding any other provision hereof, prior to the second
anniversary of the date of filing of this Certificate of Designation with the
Secretary of State of the State of Texas (the "Original Issue Date"), the
Company shall elect, by written notice to the holders of the Series B Preferred
Stock, to have one of the following options govern the Dividend Rate (provided,
that if no election is made by the Company, Option 2 shall govern; and provided
further that the volume and price information set forth in the following options
shall be equitably adjusted in the event
2
<PAGE>
of any stock split, stock dividend, recapitalization or reclassification with
respect to or otherwise affecting the Common Stock at any time after the date
hereof):
OPTION 1
If both of the following minimum price and volume requirements are met for
a designated quarterly period during 2001 or 2002, the Dividend Rate
payable on the Series B Preferred Stock will be reduced from and after the
date of the next succeeding quarterly period following such designated
quarterly period (but not retroactively) as follows:
Dividend Rate during 2001 = $6.00 per share
Dividend Rate during 2002 = $4.00 per share
Minimum Share Price: The minimum share price, determined by the average
closing sales price of the Common Stock for the twenty trading days
immediately following the public release of actual earnings by the Company
for the quarter in question or, in the case of the fourth quarter, the
public release of actual annual earnings, for calendar quarters during 2001
and 2002 shall be as follows:
Year Q1 Q2 Q3 Q4
---- -- -- -- --
2001 $20.08 $21.48 $22.88 $24.28
2002 $24.88 $25.49 $26.10 $26.70
Minimum Average Daily Trading Volume: The minimum average daily trading
volume shall be 125,000 shares, calculated in a manner consistent with that
of the American Stock Exchange. The trading period shall be the twenty
trading days immediately preceding the most recent public release of
quarterly or annual earnings by the Company, provided that the Company
shall not have issued any press releases during such twenty trading day
period. If the Company shall have issued a press release during such
twenty trading day period, the trading period shall be the 60 consecutive
trading days beginning on the 40th trading day immediately preceding the
most recent public release of quarterly or annual earnings. For purposes
of such calculation, (i) daily trading volume will be capped at 375,000
shares and (ii) share repurchases by the Company and block trades (single
trades in excess of 10,000 shares) will be excluded.
3
<PAGE>
OPTION 2
If both of the following minimum price and volume requirements are met for
a designated quarterly period during 2000, 2001 or 2002, the Dividend Rate
payable on the Series B Preferred Stock will be reduced from and after the
first day of the next succeeding quarterly period (but not retroactively)
as follows:
Dividend Rate during 2000 = $7.00 per share
Dividend Rate during 2001 = $6.00 per share
Dividend Rate during 2002 = $4.00 per share
Minimum Share Price: The minimum share price, determined by the average
closing sales price of the Common Stock for the twenty trading days
immediately following the public release of actual earnings by the Company
for the quarter in question or, in the case of the fourth quarter, the
public release of actual annual earnings, for calendar quarters during
2000, 2001 and 2002 shall be as follows:
Year Q1 Q2 Q3 Q4
---- -- -- -- --
2000 $15.44 $16.52 $17.60 $18.67
2001 $20.08 $21.48 $22.88 $24.28
2002 $24.88 $25.49 $26.10 $26.70
Minimum Average Daily Trading Volume: The minimum average daily trading
volume shall be 160,000 shares, calculated in a manner consistent with that
of the American Stock Exchange. The trading period shall be the twenty
trading days immediately preceding the most recent public release of
quarterly or annual earnings by the Company, provided that the Company
shall not have issued any press releases during such twenty trading day
period. If the Company shall have issued a press release during such
twenty trading day period, the trading period shall be the 60 consecutive
trading days beginning on the 40th trading day immediately preceding the
most recent public release of quarterly or annual earnings. For purposes
of such calculation, (i) daily trading volume will be capped at 480,000
shares and (ii) share repurchases by the Company and block trades (single
trades in excess of 10,000 shares) will be excluded.
No dividend or distribution in cash, shares of capital stock or other
property shall be paid or declared and set apart for payment on any date on or
in
4
<PAGE>
respect of any Junior Securities, and the Company shall not redeem, purchase or
otherwise acquire for value any Junior Securities while shares of Series B
Preferred Stock remain outstanding.
No dividend may be paid or declared and set apart for payment on any
share of Series B Preferred Stock unless at the same time a ratable dividend in
cash or Dividend Shares, as the case may be, is paid or set apart for payment on
all shares of Series B Preferred Stock then outstanding.
4. Preference on Liquidation, etc. In the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, before any
payment or distribution of the assets of the Company (whether capital or
surplus), or proceeds thereof, shall be made to or set apart for the holders of
shares of any Junior Securities, the holders of shares of Series B Preferred
Stock shall be entitled to receive payment of $100 per share held by them, plus
an amount equal to all accrued and unpaid dividends thereon, whether or not
declared to the date of such payment. If, upon any liquidation, dissolution or
winding-up of the Company, the assets of the Company, or proceeds thereof,
distributed among the holders of shares of Series B Preferred Stock shall be
insufficient to pay in full the respective preferential amounts on shares of
Series B Preferred Stock and all Parity Securities, then such assets, or the
proceeds thereof, shall be distributed among the holders of Series B Preferred
Stock and the holders of Parity Securities ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full. After payment of the full amount of the liquidation
preference to which the holders of Series B Preferred Stock are entitled, such
holders will not be entitled to any further participation in any distribution of
assets of the Company. For the purpose of this Section 4, none of the merger or
the consolidation of the Company into or with another corporation or the merger
or consolidation of any other corporation into or with the Company or the sale,
transfer, or other disposition of all or substantially all of the assets of the
Company, shall be deemed to be a voluntary or involuntary liquidation,
dissolution, or winding-up of the Company.
5. Retirement of Shares. Shares of Series B Preferred Stock that
have been issued and have been redeemed, repurchased or reacquired in any manner
by the Company shall be retired and not reissued and shall resume the status of
authorized but unissued and non-designated shares of preferred stock of the
Company.
6. Voting. Each holder of Series B Preferred Stock shall be
entitled to the number of votes equal to the number of whole shares of Common
Stock into which such shares of Series B Preferred Stock could be converted
pursuant to the provisions of Section 10 hereof at the record date for the
determination of the shareholders entitled to vote on such matters or, if no
such record date is established, the date such vote is taken or any written
consent of shareholders is solicited. Each
5
<PAGE>
holder of Series B Preferred Stock shall have full voting rights and powers
equal to the voting rights and powers of the holders of Common Stock, and shall
be entitled to notice of any shareholders' meeting in accordance with the bylaws
of the Company (as in effect at the time in question) and applicable law, and
shall be entitled to vote, together with the holders of Common Stock, with
respect to any question upon which holders of Common Stock have the right to
vote, except for the election of directors and as may be otherwise provided by
applicable law. Except as otherwise expressly provided herein or as required by
law, and except for the vote of the Series B Preferred Stock provided for in
Section 7 hereof, the holders of Series B Preferred Stock and the holders of
Common Stock shall vote together and not as separate classes.
7. Special Voting Rights.
(a) Election of Directors. The holders of Series B Preferred Stock
shall be entitled to one vote for each share of Series B Preferred Stock held by
such holders on a record date set to hold a meeting at which the holders of
Series B Preferred Stock shall be entitled to elect, as a class, three
directors. The Company agrees to call a meeting of holders of shares of Series
B Preferred Stock in order that the Series B Preferred Stock may be represented
on the Board of Directors in accordance with the preceding sentence. In the
event of any breach by the Company of any of the financial covenants set forth
in Section 13 hereof, the holders of the majority of the issued and outstanding
Series B Preferred Stock shall be entitled to elect a majority of the Board of
Directors.
(b) Affiliate Transactions. The holders of Series B Preferred Stock
shall be entitled to a special class vote in connection with any proposed
Affiliate Transaction (as hereinafter defined). The Company agrees to call a
special meeting of holders of shares of Series B Preferred Stock in order that
the holders of Series B Preferred Stock may consider and vote upon any proposed
Affiliate Transaction. As used herein, the term "Affiliate Transaction" means
any proposed transaction or series of related transactions between the Company
or its subsidiaries and any officer, director, 5% or greater shareholder or any
immediate family member of any of the foregoing involving commitments or
expenditures on the part of the Company or its subsidiaries in excess of
$60,000.
(c) Approval Rights. Until such time that FW Integrated Orthopaedics
Investors, L.P. and FW Integrated Orthopaedics Investors II, L.P. or their
affiliates own less than a majority of the Series B Preferred Stock (or the
shares of Common Stock issuable upon conversion thereof): (i) neither the
Company nor its subsidiaries shall make or commit to any capital expenditures
(A) exceeding $1 million for purposes other than the purchase of Physician
Practice Groups (as defined) (directly or indirectly, including through practice
management arrangements or other
6
<PAGE>
affiliations) and (B) exceeding $10 million total purchase consideration for the
purchase of Physician Practice Groups (directly or indirectly, including through
practice management arrangements or other affiliations), and (ii) no capital
structure changes (including debt financings) may be effected by the Company or
its subsidiaries without the prior written consent of the holders of a majority
of the Series B Preferred Stock or the majority of the Common Stock issuable
upon conversion thereof. "Physician Practice Groups" shall mean (x) physicians
and groups of physicians engaged in, and professional medical corporations and
other entities employing or engaging physicians for, the provision of medical
services and (y) physician practice management companies.
(d) Action By Written Consent. Any vote of Series B Preferred Stock
permitted hereby may be taken without a meeting, without prior notice, and
without a vote if a consent or consents in writing setting forth the action so
taken, shall be signed by the holder or holders of shares having not less than
the minimum number of votes that would be necessary to take such action at a
meeting duly held.
8. Other Rights and Amendments. Except as otherwise provided by
law, without the written consent of a majority of the outstanding shares of
Series B Preferred Stock or the vote of holders of a majority of the outstanding
shares of Series B Preferred Stock (voting as a class) at a meeting of the
holders of Series B Preferred Stock called for such purpose, the Company will
not (i) create, authorize or issue any Parity Securities or Senior Securities,
(ii) increase the authorized number of shares of Series B Preferred Stock, other
increases necessary to permit the issuance of Dividend Shares, or (iii) amend,
alter, repeal or waive any provision of the bylaws, the Articles of
Incorporation or this Certificate of Designation so as to adversely affect the
preferences, rights, powers or other terms of the Series B Preferred Stock.
9. Issuance. The Company will not issue more than 400,000 shares of
Series B Preferred Stock (which includes 250,000 original issuance shares and up
to 150,000 shares which may be issued as Dividend Shares in lieu of cash
dividends in accordance with Section 3 hereof).
10. Conversion. The outstanding shares of Series B Preferred Stock
shall be convertible into Common Stock as follows:
10.1 Optional Conversion.
(a) At the option of the holder thereof, each share of Series B
Preferred Stock shall be convertible, at any time or from time to time, into
fully paid and nonassessable shares of Common Stock as provided herein.
7
<PAGE>
(b) Each holder of Series B Preferred Stock who elects to convert
the same into shares of Common Stock shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Company or any
transfer agent for the Series B Preferred Stock or Common Stock, and shall give
written notice to the Company at such office that such holder elects to convert
the same and shall state therein the number of shares of Series B Preferred
Stock being converted. Thereupon the Company shall promptly issue and deliver at
such office to such holder a certificate or certificates for the number of
shares of Common Stock to which such holder is entitled upon such conversion.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the certificate or certificates
representing the shares of Series B Preferred Stock to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.
10.2 Mandatory Conversion.
(a) Mandatory Conversion Event. Upon 30 days written notice from
the Company to each holder of Series B Preferred Stock, each share of Series B
Preferred Stock may be converted into fully paid and nonassessable shares of
Common Stock at the option of the Company after the fifth anniversary of the
Original Issue Date.
(b) Effect of Mandatory Conversion. Upon the occurrence of the
event specified in Section 10.2(a) hereof, the outstanding shares of Series B
Preferred Stock shall be converted into Common Stock automatically without the
need for any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless the certificates evidencing such shares of Series B Preferred
Stock are either delivered to the Company or its transfer agent as provided
below, or the holder notifies the Company or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates. Upon the occurrence of such mandatory
conversion of the Series B Preferred Stock, the holders of Series B Preferred
Stock shall surrender the certificates representing such shares at the office of
the Company or any transfer agent for the Series B Preferred Stock or Common
Stock. Thereupon, there shall be issued and delivered to such holder promptly at
such office and in its name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of Common
Stock into which the shares of Series B Preferred Stock surrendered were
convertible on the date on which such mandatory conversion occurred.
8
<PAGE>
10.3 Conversion Price. Each share of Series B Preferred Stock shall
be convertible in accordance with Section 10.1 or 10.2 hereof into the number of
shares of Common Stock that results from dividing the liquidation value for
Series B Preferred Stock (including the stated liquidation preference and
accrued but unpaid dividends) by the conversion price for Series B Preferred
Stock that is in effect at the time of conversion (the "Conversion Price"). The
initial Conversion Price for the Series B Preferred Stock shall be $6.00 per
share; provided, however, that upon receipt of the requisite vote of the holders
of Common Stock approving the following adjustment, the Conversion Price shall
be the lesser of (a) $6.00 per share, (b) the average closing sales price of the
Common Stock for the twenty trading days immediately following the Original
Issue Date, and (c) the average closing sales price of the Common Stock for the
twenty trading days immediately preceding the conversion of the Series B
Preferred Stock. The Conversion Price of the Series B Preferred Stock shall be
subject to adjustment from time to time as provided below.
10.4 Adjustment Upon Common Stock Event. Upon the happening of a
Common Stock Event (as hereinafter defined), the Conversion Price of the Series
B Preferred Stock shall, simultaneously with the happening of such Common Stock
Event, be adjusted by multiplying the Conversion Price of Series B Preferred
Stock in effect immediately prior to such Common Stock Event by a fraction, (a)
the numerator of which shall be the number of shares of Common Stock issued and
outstanding immediately prior to such Common Stock Event, and (b) the
denominator of which shall be the number of shares of Common Stock issued and
outstanding immediately after such Common Stock Event, and the product so
obtained shall thereafter be the Conversion Price for Series B Preferred Stock.
The Conversion Price for Series B Preferred Stock shall be readjusted in the
same manner upon the happening of each subsequent Common Stock Event. As used
herein, the term "Common Stock Event" means (i) the issue by the Company of
additional shares of Common Stock as a dividend or other distribution on
outstanding Common Stock, (ii) a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock or (iii) a combination of
the outstanding shares of Common Stock into a smaller number of shares of Common
Stock.
10.5 Adjustment for Other Dividends and Distributions. If at any time
or from time to time after the Original Issue Date the Company pays a dividend
or makes any other distribution to the holders of the Common Stock payable in
securities of the Company other than shares of Common Stock, then in each such
event provision shall be made so that the holders of the Series B Preferred
Stock shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable upon conversion thereof, the amount of securities of
the Company that they would have received had their Series B Preferred Stock
been converted into Common Stock on the date of such event (or such record date,
as applicable) and had they thereafter, during the period from the date of such
event (or such record date, as
9
<PAGE>
applicable) to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 10 with respect to
the rights of the holders of the Series B Preferred Stock or with respect to
such other securities by their terms.
10.6 Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series B Preferred Stock is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than by a Common Stock
Event or a stock dividend, reorganization, merger, consolidation or sale of
assets provided for elsewhere in this Section 10), then in any such event each
holder of Series B Preferred Stock shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares of Series
B Preferred Stock could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof. The Company shall give each holder of Series B Preferred Stock
at least 30 days prior written notice of any event requiring adjustment pursuant
to this Section 10.6.
10.7 Sale of Shares Below Conversion Price.
(a) Adjustment Formula. If at any time or from time to time after
the Original Issue Date the Company issues or sells, or is deemed by the
provisions of this Section 10.7 to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), otherwise than in connection with a
Common Stock Event as provided in Section 10.4 hereof, a dividend or
distribution as provided in Section 10.5 hereof or a recapitalization,
reclassification or other change as provided in Section 10.6 hereof, for an
Effective Price (as hereinafter defined) that is less than the Conversion Price
for Series B Preferred Stock in effect immediately prior to such issue or sale,
then, and in each such case, the Conversion Price for Series B Preferred Stock
shall be reduced, as of the close of business on the date of such issue or sale,
to the price obtained by multiplying such Conversion Price by a fraction:
(1) The numerator of which shall be the sum of (A) the number
of Common Stock Equivalents Outstanding (as hereinafter defined)
immediately prior to such issue or sale of Additional Shares of Common
Stock plus (B) the quotient obtained by dividing the Aggregate
Consideration Received (as hereinafter defined) by the Company for the
total number of Additional Shares of Common Stock so issued or sold (or
deemed so issued and sold pursuant to the provisions of Section 10.7(c)
hereof) by the
10
<PAGE>
Conversion Price for Series B Preferred Stock in effect immediately prior
to such issue or sale; and
(2) The denominator of which shall be the sum of (A) the
number of Common Stock Equivalents Outstanding immediately prior to such
issue or sale plus (B) the number of Additional Shares of Common Stock so
issued or sold (or deemed so issued and sold pursuant to the provisions of
Section 10.7(c) hereof).
(b) Certain Definitions. For the purpose of making any
adjustment required under this Section 10.7:
(1) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued by the Company, whether or not subsequently
reacquired or retired by the Company and whether or not restricted at the
time of issuance or sale (or deemed issuance or sale), other than (A)
shares of Common Stock issued or issuable upon conversion of Series B
Preferred Stock and (B) Excluded Securities.
(2) The "Aggregate Consideration Received" by the Company for
any issue or sale (or deemed issue or sale) of securities shall (A) to the
extent it consists of cash, be computed at the gross amount of cash
received by the Company after deduction of any underwriting or similar
commissions, compensation or concessions paid or allowed by the Company in
connection with such issue or sale and any expenses payable by the Company;
(B) to the extent it consists of property other than cash, be computed at
the fair value of that property as determined in good faith by the Board of
Directors; and (C) if Additional Shares of Common Stock, Convertible
Securities or Rights or Options to purchase either Additional Shares of
Common Stock or Convertible Securities are issued or sold together with
other stock or securities or other assets of the Company for a
consideration that covers both, be computed as the portion of the
consideration so received that may be reasonably determined in good faith
by the Board of Directors to be allocable to such Additional Shares of
Common Stock, Convertible Securities or Rights or Options.
(3) "Common Stock Equivalents Outstanding" shall mean the
number of shares of Common Stock that is equal to the sum of (A) all shares
of Common Stock of the Company that are outstanding at the time in
question, plus (B) all shares of Common Stock of the Company issuable upon
conversion of all shares of Series B Preferred Stock or other Convertible
Securities that are outstanding at the time in question, plus (C) all
shares of Common Stock of the Company that are issuable upon the exercise
of vested
11
<PAGE>
Rights or Options that are outstanding at the time in question assuming the
full conversion or exchange into Common Stock of all such vested Rights or
Options that are vested Rights or Options to purchase or acquire
Convertible Securities into or for Common Stock.
(4) "Convertible Securities" shall mean stock or other
securities convertible into or exchangeable for shares of Common Stock,
other than Excluded Securities.
(5) The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been
issued or sold, by the Company under this Section 10.7, into the Aggregate
Consideration Received, or deemed to have been received, by the Company
under this Section 10.7, for the issue of such Additional Shares of Common
Stock.
(6) "Excluded Securities" shall mean, collectively, (i) the
shares of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock (including additional shares of Series A Preferred Stock
that have been heretofore issued or may be issued after the date hereof as
a stock dividend on the Series A Preferred Stock), (ii) the shares of
Common Stock issued or issuable by the Company in connection with the
acquisition of Merritt Orthopedic Associates, P.C., Westside Orthopaedic
Clinic, P.C., Lancaster Orthopedic Group, Inc., Longmont Orthopedic &
Sports Medicine Clinic, P.C., and Crossroads Orthopaedics, P.C., and (iii)
up to 1,682,582 shares of common stock issuable by the Company upon
exercise of stock options to acquire shares of Common Stock that have been
granted by the Company prior to the Original Issue Date.
(7) "Rights or Options" shall mean warrants, options or other
rights to purchase or acquire shares of Common Stock or Convertible
Securities, other than Excluded Securities.
(c) Deemed Issuances. For the purpose of making any adjustment to the
Conversion Price of the Series B Preferred Stock required under this Section
10.7, if the Company issues or sells any Rights or Options or Convertible
Securities and if the Effective Price of the shares of Common Stock issuable
upon
12
<PAGE>
exercise of such Rights or Options and/or the conversion or exchange of
Convertible Securities (computed without reference to any additional or similar
protective or antidilution clauses) is less than the Conversion Price, then the
Company shall be deemed to have issued, at the time of the issuance of such
Rights, Options or Convertible Securities, that number of Additional Shares of
Common Stock that is equal to the maximum number of shares of Common Stock
issuable upon exercise or conversion of such Rights, Options or Convertible
Securities upon their issuance and to have received, as the Aggregate
Consideration Received for the issuance of such shares, an amount equal to the
total amount of the consideration, if any, received by the Company for the
issuance of such Rights or Options or Convertible Securities, plus, in the case
of such Rights or Options, the minimum amounts of consideration, if any, payable
to the Company upon the exercise in full of such Rights or Options, plus, in the
case of Convertible Securities, the minimum amounts of consideration, if any,
payable to the Company (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion or exchange
thereof; provided that:
(a) if the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective
clauses, then the Company shall be deemed to have received the minimum
amounts of consideration without reference to such clauses;
(b) if the minimum amount of consideration payable to the
Company upon the exercise of Rights or Options or the conversion or
exchange of Convertible Securities is reduced over time or upon the
occurrence or non-occurrence of specified events other than by reason of
antidilution or similar protective adjustments, then the Effective Price
shall be recalculated using the figure to which such minimum amount of
consideration is reduced; and
(c) if the minimum amount of consideration payable to the
Company upon the exercise of such Rights or Options or the conversion or
exchange of Convertible Securities is subsequently increased, then the
Effective Price shall again be recalculated using the increased minimum
amount of consideration payable to the Company upon the exercise of such
Rights or Options or the conversion or exchange of such Convertible
Securities.
No further adjustment of the Conversion Price, adjusted upon the issuance of
such Rights or Options or Convertible Securities, shall be made as a result of
the actual issuance of shares of Common Stock on the exercise of any such Rights
or Options or the conversion or exchange of any such Convertible Securities. If
any such Rights or Options or the conversion rights represented by any such
Convertible Securities shall
13
<PAGE>
expire without having been fully exercised, then the Conversion Price as
adjusted upon the issuance of such Rights or Options or Convertible Securities
shall be readjusted to the Conversion Price that would have been in effect had
an adjustment been made on the basis that the only shares of Common Stock so
issued were the shares of Common Stock, if any, that were actually issued or
sold on the exercise of such Rights or Options or rights of conversion or
exchange of such Convertible Securities, and such shares of Common Stock, if
any, were issued or sold for the consideration actually received by the Company
upon such exercise, plus the consideration, if any, actually received by the
Company for the granting of any such Rights or Options, whether or not
exercised, plus the consideration received for issuing or selling all such
Convertible Securities actually converted or exchanged, plus the consideration,
if any, actually received by the Company (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities) on the
conversion or exchange of such Convertible Securities, provided that such
readjustment shall not apply to prior conversions of Series B Preferred Stock.
10.8 Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price for Series B Preferred Stock, the Company,
at its expense, shall cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder of
the Series B Preferred Stock at the holder's address as shown in the Company's
books.
10.9 Fractional Shares. No fractional shares of Common Stock shall be
issued upon any conversion of Series B Preferred Stock. In lieu of any
fractional share to which the holder would otherwise be entitled, the Company
shall pay the holder cash equal to the product of such fraction multiplied by
the Common Stock's fair market value as determined in good faith by the Board of
Directors as of the date of conversion.
10.10 Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series B Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series B Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series B
Preferred Stock, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
14
<PAGE>
10.11 Notices. Any notice required by the provisions of this Section
10 to be given to the holders of shares of the Series B Preferred Stock shall be
deemed given upon the earlier of actual receipt or deposit in the United States
mail, by certified or registered mail, return receipt requested, postage
prepaid, addressed to each holder of record at the address of such holder
appearing on the books of the Company.
10.12 No Impairment. The Company shall not avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series B Preferred
Stock against impairment.
11. Merger, Consolidation and Sale of Assets. The Company may not merge
or consolidate with or into or transfer all or substantially all of its assets
(as an entirety in one transaction or a series of related transactions), to any
person without the consent of the holders of a majority of the issued and
outstanding shares of Series B Preferred Stock, voting separately as a class.
12. Acquisition and Budget Committee Designees. At all times in which
shares of Series B Preferred Stock shall be issued and outstanding, the holders
of a majority of such issued and outstanding shares shall be entitled to
designate two members to the Company's Acquisition and Budget Committee and the
total number of persons constituting such Committee shall be three (including
the two designees of the holders of the Series B Preferred Stock). The Company
shall not, without the prior written consent of the Acquisition and Budget
Committee, enter into any agreement to acquire, or consummate the purchase of,
(a) any equity or ownership interest or investment in any Physician Practice
Group or other Person (as defined below) or (b) any material assets of any
Physician Practice Group or other Person.
13. Financial Covenants. At all times in which shares of Series B
Preferred Stock shall be issued and outstanding:
(a) The ratio of total Indebtedness to EBITDA (as such terms are
defined below) of the Company shall not exceed the following:
Calendar Year Ratio
1998 7.0
1999 4.0
2000 3.0
2001 3.0
2002 3.0
15
<PAGE>
(b) Retained earnings of the Company shall not be less than the
amounts set forth below, exclusive of the effect of the preferred dividend
adjustment that will result from the issuance of the Series B Preferred
Stock (as computed in accordance with EITF Topic D-60, "Accounting for the
Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature") and the related warrants, including any
costs of issuance allocable to retained earnings resulting from the
issuance of such securities:
Calendar Year Amount (in millions)
1998 $ 4.2
1999 $12.0
2000 $27.3
2001 $31.4
2002 $36.1
(c) Total Indebtedness of the Company shall be no greater than:
Calendar Year Amount (in millions)
1998 $ 71.0
1999 $110.0
2000 $133.0
2001 $152.0
2002 $175.0
(d) For purposes of this Section, "Indebtedness" shall mean all
obligations which in accordance with generally accepted accounting
principles consistently applied are classified as liabilities upon a
balance sheet of the Company and in any event shall include, without
duplication: (i) all obligations of the Company and its subsidiaries for
borrowed money or for the deferred purchase price of property acquired by
the Company or its subsidiaries, (ii) all obligations of the Company or its
subsidiaries created or arising under any conditional sale or other title
retention agreement with respect to any property acquired by the Company or
its subsidiaries (other than in each case accounts payable and accrued
liabilities that arose in the ordinary course of business and not overdue),
(iii) all capitalized lease obligations of the Company and its
subsidiaries, and (iv) all obligations of others secured by a Lien on any
asset of the Company or its subsidiaries, whether or not such obligations
are expressly assumed by the Company or its subsidiaries. For purposes of
this Section, "EBITDA" shall mean consolidated earnings before interest,
income taxes, depreciation and amortization determined in accordance with
generally accepted accounting principles consistently applied.
16
<PAGE>
14. Repurchase by Company.
(a) The Company will not, and will not permit any subsidiary to,
purchase or acquire any shares of Series B Preferred Stock otherwise than
pursuant to a pro rata offer made on substantially equivalent terms to all
holders of Series A Preferred Stock at the time outstanding.
(b) The provisions of this Section 14 may not be amended without the
affirmative vote of the holders of a majority of the Series A Preferred Stock
outstanding.
15. General Provisions.
(a) The term "Person" as used herein means any corporation,
partnership, trust, organization, association, or other entity or individual.
(b) The term "outstanding", when used with reference to shares of
stock, shall mean issued shares, excluding shares held by the Company or a
subsidiary.
(c) The headings of the paragraphs, subparagraphs, clauses and
subclauses of this Certificate of Designation are for convenience of reference
only and shall not define, limit or affect any of the provisions hereof.
THIRD: The foregoing resolutions were duly adopted as of December 1,
1997, by all necessary action on the part of the Company.
Dated: December 12, 1997 INTEGRATED ORTHOPAEDICS, INC.
By: /s/ JEFF R. CASEY
---------------------------
Jeff R. Casey,
Senior Vice President
17
<PAGE>
EXHIBIT 4.03
- --------------------------------------------------------------------------------
WARRANT AGREEMENT
Among
INTEGRATED ORTHOPAEDICS, INC.,
FW INTEGRATED ORTHOPAEDICS INVESTORS, L.P.
AND
FW INTEGRATED ORTHOPAEDICS INVESTORS II, L.P.
Dated as of December 12, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. Definitions; Accounting Terms and Determinations................................................ 1
1.01 Definitions..................................................................................... 1
1.02 Accounting Terms and Determinations............................................................. 4
SECTION 2. Purchase and Sale of Warrant.................................................................... 5
2.01 Authorization and Issuance of Warrant Stock and Warrants........................................ 5
2.02 Issuance of the Warrant......................................................................... 5
2.03 Securities Act Compliance....................................................................... 5
SECTION 3. Representations and Warranties.................................................................. 5
SECTION 4. Restrictions on Transferability................................................................. 5
4.01 Transfers Generally............................................................................. 5
4.02 Transfers of Restricted Securities Pursuant to Registration Statements, Rule 144 and Rule 144A.. 6
4.03 Restrictive Legends............................................................................. 6
4.04 Termination of Restrictions..................................................................... 6
SECTION 5. Dispositions of Securities...................................................................... 7
5.01 Dispositions of Securities...................................................................... 7
SECTION 6. Adjustments..................................................................................... 7
6.01 Dividends, Distributions and Purchases.......................................................... 7
6.02 Subdivisions and Combinations................................................................... 8
6.03 Issuance of Common Stock........................................................................ 9
6.04 Issuance of other Securities, Rights or Obligation.............................................. 10
6.05 Superseding Adjustment.......................................................................... 11
6.06 Other Provisions Applicable to Adjustments under this Section 6................................. 12
6.07 Merger, Consolidation or Disposition of Assets.................................................. 12
6.08 Other Action Affecting Common Stock............................................................. 13
6.09 Notice of Adjustments........................................................................... 13
6.10 Notice of Certain Corporate Action.............................................................. 13
SECTION 7. Holders' Rights................................................................................. 14
7.01 Delivery Expenses............................................................................... 14
7.02 Taxes........................................................................................... 14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
7.03 Replacement of Instruments...................................................................... 15
SECTION 8. Other Covenants of Issuer....................................................................... 15
8.01 Restrictions on Performance..................................................................... 15
8.02 Modification of Other Equity Documents.......................................................... 15
SECTION 9. Miscellaneous................................................................................... 15
9.01 Home Office Payment............................................................................. 15
9.02 Waiver.......................................................................................... 16
9.03 Notices......................................................................................... 16
9.04 Amendments, Etc................................................................................. 17
9.05 Successors and Assigns.......................................................................... 17
9.06 Survival........................................................................................ 17
9.07 Specific Performance............................................................................ 17
9.08 Captions........................................................................................ 18
9.09 Counterparts.................................................................................... 18
9.10 Governing Law................................................................................... 18
9.11 Severability.................................................................................... 18
9.12 Entire Agreement................................................................................ 18
ii
</TABLE>
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT is made and entered into as of December 12, 1997, by
and among Integrated Orthopaedics, Inc., a corporation duly organized and
validly existing under the laws of the State of Texas (the "Issuer"), FW
Integrated Orthopaedics Investors, L.P., a Texas limited partnership, and FW
Integrated Orthopaedics Investors II, L.P., a Texas limited partnership (each a
"Purchaser" and together, the "Purchasers").
WHEREAS, the Issuer and Purchasers and, for certain limited purposes,
certain other parties have entered into a Securities Purchase Agreement, dated
as of December 12, 1997 (the "Securities Purchase Agreement").
WHEREAS, pursuant to the Securities Purchase Agreement, for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Issuer has agreed to issue Warrants (as hereinafter defined)
to the Purchasers providing for the purchase of shares of Stock Units (as
hereinafter defined) of the Issuer, in the manner hereinafter provided.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; Accounting Terms and Determinations.
1.01 Definitions. As used herein, the following terms shall have the
following meanings (all terms defined in this Section 1 or in other provisions
of this Agreement in the singular to have the same meanings when used in the
plural and vice versa):
"Affiliate" shall mean, with respect to a specified Person, another Person
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.
"Board" shall mean the Board of Directors of Issuer.
"Business Day" shall mean any day that is not a Saturday, Sunday or other
day on which commercial banks in Houston, Texas are authorized or required by
law to remain closed.
"Closing Date" shall mean the date of the original issuance of the Warrants
hereunder.
<PAGE>
"Commission" shall mean the Securities and Exchange Commission or any other
similar or successor agency of the Federal government administering the
Securities Act and/or the Exchange Act.
"Common Stock" shall mean the Common Stock of the Issuer, par value $0.001
per share, or any other common stock or other securities receivable thereon, or
into which the Common Stock is convertible or exchangeable, as a result of any
recapitalization, reclassification, merger or consolidation of, or disposition
of assets by, the Issuer.
"Control" shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of a Person,
whether through the ability to exercise voting power, by contract or otherwise.
"Controls" and "Controlled" shall have meanings correlative thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Excluded Securities" shall mean, collectively, (i) the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, par value $.01
per share, of the Issuer (including additional shares of Series A Preferred
Stock that have been heretofore issued or may be issued after the date hereof as
a stock dividend on the Series A Preferred Stock), (ii) the shares of Common
Stock issued or issuable by the Issuer in connection with the acquisition of
Merritt Orthopedic Associates, P.C., Westside Orthopaedic Clinic, P.C.,
Lancaster Orthopedic Group, Inc., Longmont Orthopedic Sports Medicine Clinic,
P.C., and Crossroads Orthopaedics, P.C., (iii) up to 1,682,582 shares of Common
Stock issuable by the Company upon exercise of stock options to acquire shares
of Common Stock that have been granted by the Company prior to the Original
Issue Date, and (iv) up to 800,000 additional shares of Common Stock that may be
issuable upon exercise of stock options that may be granted pursuant to the
Company's 1997 Long Term Incentive Plan within the two year period after the
Original Issue Date. For purposes of clause (iv) above, the first 800,000 stock
option awards granted within such two year period shall be the shares included.
"Exercise Price" shall have the meaning assigned to such term in the form
of Warrant attached as Annex 1 hereto.
"Expiration Date" shall have the meaning assigned to such terms in the form
of the Warrant attached as Annex 1 hereto.
2
<PAGE>
"GAAP" shall mean generally accepted accounting principles, consistently
applied throughout the specified period.
"Governmental Authority" shall mean the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory, monetary or administrative powers or functions of or
pertaining to government.
"Holder" shall mean any Person who acquires Warrants or Warrant Stock
pursuant to the provisions of this Agreement, including any transferees of
Warrants or Warrant Stock; provided, however, that a holder of Warrant Stock
purchased pursuant to an effective registration statement or pursuant to Rule
144 shall not be deemed a Holder.
"include" and "including" shall be construed as if followed by the phrase
"without being limited to".
"Issuer" shall have the meaning assigned to such term in the preamble of
this Agreement.
"Lien" shall mean, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset that it has acquired or holds subject to the interest of a vendor
or lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"Option Plans" shall mean any employee stock option plan of the Issuer.
"Other Equity Documents" shall mean the articles of incorporation of the
Issuer, the by-laws of the Issuer and any Option Plan.
"Person" shall mean any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.
"Restricted Certificate" shall mean a certificate for Warrant Stock or
Warrants required to bear the restrictive legend set forth in Section 4.03.
"Restricted Securities" shall mean Restricted Warrant Stock and Restricted
Warrants.
"Restricted Warrant Stock" shall mean Warrant Stock evidenced by a
Restricted Certificate.
3
<PAGE>
"Restricted Warrants" shall mean Warrants evidenced by a Restricted
Certificate.
"Rule 144" shall mean Rule 144 promulgated by the Commission under the
Securities Act (or any successor or similar rule then in force).
"Rule 144A" shall mean Rule 144A promulgated by the Commission under the
Securities Act (or any successor or similar rule then in force).
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Shareholder" shall mean any Person who directly or indirectly owns any
shares of Common Stock (including Warrant Stock).
"Stock Unit" shall mean one share of Common Stock, as such Common Stock is
constituted on the date hereof, and thereafter shall mean such number of shares
(including any fractional shares) of Common Stock and other securities, cash or
other property as shall result from the adjustments specified in Section 6.
"Subsidiary" of a Person means (a) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(b) any company, partnership, association, joint venture or similar business
organization more than 50% of the ownership interests having ordinary voting
power of which shall at the time be so owned or controlled. Unless otherwise
expressly provided, all references herein to a "Subsidiary" shall mean a direct
or indirect Subsidiary of the Issuer.
"Warrant Stock" shall mean all shares of Common Stock issuable from time to
time upon exercise of the Warrant.
"Warrant" and "Warrants" shall mean the Warrant issued by the Issuer
pursuant to this Agreement, evidencing rights to purchase Stock Units, and all
Warrants issued upon transfer, division or combination of, or in substitution
for, any thereof.
1.02 Accounting Terms and Determinations. Except as otherwise may be
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Holder hereunder shall be
prepared, in accordance with GAAP. All calculations made for
4
<PAGE>
the purposes of determining compliance with the terms of this Agreement shall
(except as otherwise may be expressly provided herein) be made by application of
GAAP.
SECTION 2. Purchase and Sale of Warrant.
2.01 Authorization and Issuance of Warrant Stock and Warrants. The Issuer
has authorized (a) the issuance of the Warrants evidenced by the warrant
certificates in the form of Annex 1 hereto; and (b) the issuance of such number
of shares of Warrant Stock as shall be necessary to permit the Issuer to comply
with its obligations to issue shares of Warrant Stock pursuant to the Warrants.
2.02 Issuance of the Warrant. In consideration of the execution and
delivery of the Securities Purchase Agreement by Purchasers and for other good
and valuable consideration:
(a) the Issuer shall issue to the Purchasers the Warrants; and
(b) the Issuer shall deliver to each of the Purchasers a single
certificate for the Warrants, registered in the name of the respective
Purchaser, except that if the Purchasers shall notify the Issuer in writing
prior to such issuance that they desire certificates for Warrants to be
issued in other denominations or registered in the name or names of any
Affiliate, nominee or nominees of the Purchasers for its or their benefit,
then the certificates for Warrants shall be issued to the Purchasers in the
denominations and registered in the name or names specified in such notice.
2.03 Securities Act Compliance. The Purchasers understand that the Issuer
has not registered the Warrants or the Warrant Stock under the Securities Act or
applicable state securities laws, and the Purchasers agree that neither the
Warrants nor the Warrant Stock shall be sold or transferred or offered for sale
or transfer without registration or qualification under the Securities Act or
applicable state securities laws or the availability of an exemption therefrom,
all as more fully provided in Section 4.
SECTION 3. Representations and Warranties. The Issuer confirms that each
of the representations and warranties contained in the Securities Purchase
Agreement are true and correct as of the date hereof.
SECTION 4. Restrictions on Transferability.
4.01 Transfers Generally. Except as otherwise provided in Section 5, the
Restricted Securities shall be transferable only upon the conditions specified
in this Section 4, which conditions are intended to ensure compliance with the
provisions of the Securities Act and applicable state securities laws in respect
of the transfer of any Restricted Securities.
5
<PAGE>
4.02 Transfers of Restricted Securities Pursuant to Registration
Statements, Rule 144 and Rule 144A. The Restricted Securities may be offered or
sold by the Holder thereof pursuant to (a) an effective registration statement
under the Securities Act, (b) to the extent applicable, Rule 144 or Rule 144A or
(c) any other legally available means of transfer.
4.03 Restrictive Legends. Unless and until otherwise permitted by this
Section 4, the certificates for the Warrants issued under this Agreement, each
certificate for any Warrants issued to any subsequent transferee of any such
certificate, each certificate for any Warrant Stock issued upon exercise of any
Warrant and each certificate for any Warrant Stock issued to any subsequent
transferee of any such certificate, shall be stamped or otherwise imprinted with
a legend in substantially the following form:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT
TO THE CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED AS OF
DECEMBER 12, 1997 (THE "WARRANT AGREEMENT"), AMONG INTEGRATED ORTHOPAEDICS,
INC., A TEXAS CORPORATION (THE "ISSUER"), FW INTEGRATED ORTHOPAEDICS
INVESTORS, L.P., AND FW INTEGRATED ORTHOPAEDICS INVESTORS II, L.P., AS THE
WARRANT AGREEMENT MAY BE MODIFIED AND SUPPLEMENTED AND IN EFFECT FROM TIME
TO TIME, AND NO TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. A
COPY OF THE FORM OF THE WARRANT AGREEMENT IS ON FILE AND MAY BE INSPECTED
AT THE PRINCIPAL EXECUTIVE OFFICE OF THE ISSUER. THE HOLDER OF THIS
CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE
PROVISIONS OF THE WARRANT AGREEMENT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, AND ACCORDINGLY, SUCH SECURITIES MAY NOT BE TRANSFERRED,
SOLD OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE REGISTRATION OR
QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR
APPLICABLE EXEMPTIONS THEREFROM.
4.04 Termination of Restrictions. All of the restrictions imposed by this
Section 4 upon the transferability of the Restricted Securities shall cease and
terminate as to any particular Restricted Security when such Restricted Security
shall have been effectively registered under the Securities Act and applicable
state securities laws and sold by the Holder thereof in accordance with such
registration or sold under and pursuant to Rule 144 or is
6
<PAGE>
eligible to be sold under and pursuant to paragraph (k) of Rule 144. Whenever
the restriction imposed by this Section 4 shall terminate as to any Restricted
Security as hereinabove provided, the Holder thereof shall be entitled to
receive from the Issuer, without expense, a new certificate evidencing such
Restricted Security not bearing the restrictive legend otherwise required to be
borne by a certificate evidencing such Restricted Security.
SECTION 5. Dispositions of Securities.
5.01 Dispositions of Securities.
(a) Subject to compliance with the Securities Act, applicable state
securities laws and the requirement as to placement of a legend on certificates
for Restricted Securities specified in Section 4.03, this Warrant and all rights
hereunder are transferable (subject to any restrictive legends hereon), in whole
or in part, upon surrender of this Warrant to the Issuer, together with a
written assignment of this Warrant duly executed by the Holder hereof or such
Holder's agent or attorney. Such written assignment shall be in the form of the
Assignment Form attached as Annex 2 hereto. Upon such surrender, the Issuer
shall execute and deliver a new Warrant or Warrants in the name of the assignee
or assignees and in the denominations specified in such instrument of
assignment, and the original Warrant shall promptly be canceled.
(b) The Warrant may be exchanged for other Warrants of the same series
upon presentation to the Issuer, together with a written notice specifying the
denominations in which new Warrants are to be issued, signed by the Holder
hereof. The Issuer shall execute and deliver a new Warrant or Warrants to the
Holder in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice. The Issuer shall pay all expenses, taxes (other
than Federal, state or local income taxes) and other charges payable in
connection with the preparation, issuance and delivery of the Warrants,
including any transfer or exchange thereof.
(c) The Issuer shall maintain books for the registration and transfer
of the Warrants, and shall allow each Holder to inspect such books at such
reasonable times as such Holder shall request.
SECTION 6. Adjustments.
6.01 Dividends, Distributions and Purchases.
(a) If the Issuer shall pay or distribute during any calendar quarter
any cash dividend to holders of its Common Stock in excess of 0.75% of the
market price of its Common Stock immediately prior to the declaration of such
dividend, then (at the sole option
7
<PAGE>
of the Holder) either (i) the per share Exercise Price shall be adjusted
downward by the per share amount of such dividend or (ii) the number of shares
of Warrant Stock comprising a Stock Unit shall be adjusted to be that number
determined by multiplying the number of shares of Warrant Stock comprising a
Stock Unit immediately prior to the payment of such dividend by a fraction (A)
the numerator of which shall be equal to the per share Exercise Price
immediately prior to the payment of such dividend and (B) the denominator of
which shall be equal to the per share Exercise Price as determined in clause (i)
of this Section 6.01(a);
(b) If at any time the Issuer shall pay any dividend or make any other
distribution to holders of its Common Stock of any evidence of indebtedness or
other property of any nature whatsoever (other than as provided in Sections
6.01(a), 6.02, 6.03(i)(A) and 6.04(i)(A) hereof), the Issuer shall at the same
time pay or distribute to each Holder of Warrants that are by their terms then
exercisable (whether or not such Holder exercises such Warrants) the evidence of
indebtedness or other property such Holder would have been entitled to receive
if such Holder had exercised such Warrants immediately prior to the record date
for such dividend or distribution; and
(c) If at any time the Issuer shall propose to purchase or redeem any
shares of its Common Stock owned by any of its Affiliates for cash, evidence of
indebtedness or other property of any nature whatsoever, the Issuer shall
deliver to each Holder of Warrants that are by their terms then exercisable or
shares of Warrant Stock a notice of such proposed purchase or redemption, and
each such Holder shall, at its option, have the right to require the Issuer to
at the same time purchase or redeem Warrants that are by their terms then
exercisable and shares of Warrant Stock owned by such Holder, pro-rata based on
the number of shares of such other Common Stock to be so purchased or redeemed,
on the same terms and conditions as the proposed purchase or redemption of such
other Common Stock and for the same consideration per Warrant or share of
Warrant Stock, as the case may be, as is paid to the holders of such other
Common Stock for each share of Common Stock so redeemed or purchased, minus, in
the case of Warrants, the exercise price of the Warrants to be so purchased or
redeemed.
6.02 Subdivisions and Combinations. If at any time the Issuer shall:
(a) take a record of the holders of its Common Stock for the purpose
of entitling them to receive a dividend or other distribution of Common
Stock;
(b) subdivide, split or reclassify its outstanding shares of Common
Stock into a larger number of shares of Common Stock; or
8
<PAGE>
(c) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock;
then immediately after the occurrence of any such event the number of shares of
Warrant Stock comprising a Stock Unit shall be adjusted so as to equal the
number of shares of Warrant Stock that such Holder would have been entitled to
receive if such Holder had exercised the Warrant immediately prior to the
occurrence of such event.
6.03 Issuance of Common Stock. In case at any time the Issuer (i)(A) shall
take a record of the holders of its Common Stock for the purpose of entitling
them to subscribe for or purchase shares of any class or series of Common Stock
or (B) shall otherwise sell or issue such securities and (ii) the consideration
per share of Common Stock to be paid upon such issuance or subscription is less
than the Exercise Price on such record date, then (at the sole option of the
Holder) either:
(x) the Exercise Price shall be adjusted to be that price determined
by dividing (i) an amount equal to the sum of (A) the product of (1) the
number of shares of Common Stock outstanding immediately before such
issuance, distribution, subscription or purchase and (2) the then existing
Exercise Price plus (B) the aggregate consideration, if any, received by
the Issuer upon such issuance for the total number of shares of Common
Stock to be issued, distributed, subscribed for or purchased, by (ii) the
total number of shares of Common Stock outstanding immediately after such
issuance, distribution, subscription or purchase; or
(y) the number of shares of Warrant Stock comprising a Stock Unit
shall be adjusted to be that number determined by multiplying the number of
shares of Warrant Stock comprising a Stock Unit immediately prior to such
record date by a fraction (not to be less than one) (i) the numerator of
which shall be equal to the product of (A) the number of shares of Common
Stock outstanding after giving effect to such issuance, distribution,
subscription or purchase and (B) the Exercise Price determined immediately
before such record date and (ii) the denominator of which shall be equal to
the sum of (A) the product of (1) the number of shares of Common Stock
outstanding immediately before such record date and (2) the Exercise Price
determined immediately before such record date and (B) the aggregate
consideration to be received by the Issuer for the total number of shares
of Common Stock to be issued, distributed, subscribed for or purchased.
Aggregate consideration for purposes of this Section 6.03 shall be determined as
follows: In case any shares of Common Stock shall be issued or sold for cash,
the consideration received therefor shall be deemed to be the amount payable to
the Issuer therefor, after deduction therefrom of any expenses incurred or any
underwriting commissions or concessions or
9
<PAGE>
discounts or, in the case of a private placement thereof, finders' fees or
commissions paid or allowed by the Issuer in connection therewith. In case any
shares of Common Stock shall be issued or sold for a consideration other than
cash payable to the Issuer, the consideration received therefor shall be deemed
to be the fair value of such consideration as determined by the Board, after
deduction therefrom of any expenses incurred or any underwriting commissions or
concessions or discounts paid or allowed by the Issuer in connection therewith.
In case any shares of Common Stock shall be issued in connection with any merger
of another corporation into the Issuer, the amount of consideration therefor
shall be deemed to be the fair value as determined by the Board of such portion
of the assets of such merged corporation as the Board shall determine to be
attributable to such shares of Common Stock.
6.04 Issuance of other Securities, Rights or Obligation. In case at any
time the Issuer (i)(A) shall take a record of the holders of its Common Stock
for the purpose of entitling them to subscribe for or purchase options to
purchase or rights to subscribe for Common Stock or security directly or
indirectly convertible into or exchangeable for Common Stock (or options or
rights with respect to such securities) or (B) shall otherwise issue or sell any
such options, rights or securities and (ii) the consideration per share for
which Common Stock is deliverable upon exercise of such options or rights or
conversion or exchange of such securities (determined by dividing (x) the total
amount received or receivable by the Issuer in consideration of the issuance of
or subscription for such options, rights or securities, plus the minimum
aggregate amount of premiums (if any) payable to the Issuer upon such exercise,
conversion or exchange, by (y) the total maximum number of shares of Common
Stock necessary to effect the exercise, conversion or exchange of all such
options, rights or securities) shall be less than the Exercise Price on such
record date or sale or issuance date, as the case may be, then the number of
shares of Warrant Stock comprising a Stock Unit shall be adjusted to be that
number determined by multiplying the number of shares of Warrant Stock
comprising a Stock Unit immediately prior to such date by a fraction (not to be
less than one) (i) the numerator of which shall be equal to the product of (A)
the total maximum number of shares of Common Stock outstanding after giving
effect to the assumed exercise or conversion of all such options, rights or
securities and (B) the Exercise Price determined immediately before such date
and (ii) the denominator of which shall be equal to the sum of (A) the product
of (l) the number of shares of Common Stock outstanding immediately before such
date and (2) the Exercise Price determined immediately before such date and (B)
the aggregate consideration per share (determined as set forth in subsection
(ii)(x) and (y) above) for which Common Stock is deliverable upon exercise,
conversion or exchange of such options, rights or securities; provided, however,
that this Section 6.04 shall not apply to the issuance of Excluded Securities.
Aggregate consideration for purposes of the immediately preceding clause (B)
shall be determined as follows: In case any options, rights or convertible or
exchangeable securities (or options or rights with respect thereto) shall be
issued or sold, or exercisable, convertible or exchangeable for cash, the
10
<PAGE>
consideration received therefor shall be deemed to be the amount payable to the
Issuer (determined as set forth in subsection (ii)(x) and (y) above) therefor,
after deduction therefrom of any expense incurred or any underwriting
commissions or concessions or discounts or, in the case of a private placement
thereof, finders' fees or commissions paid or allowed by the Issuer in
connection therewith. In case any such options, rights or securities shall be
issued or sold, or exercisable, convertible or exchangeable for a consideration
other than cash payable to the Issuer, the consideration received therefor
(determined as set forth in subsection (ii)(x) and (y) above) shall be deemed to
be the fair value of such consideration as determined by the Board, after
deduction therefrom of any expenses incurred or any underwriting commissions or
concessions or discounts paid or allowed by the Issuer in connection therewith.
In case any such options, rights or securities shall be issued or sold, or
excisable, convertible or exchangeable in connection with any merger of another
corporation into the Issuer, the amount of consideration therefor shall be
deemed to be the fair value as determined by the Board of such portion of the
assets of such merged corporation as the Board shall determine to be
attributable to such options, rights or securities.
6.05 Superseding Adjustment. If, at any time after any adjustment in the
number of shares of Warrant Stock comprising a Stock Unit shall have been made
on the basis of the issuance of any options or rights, or convertible or
exchangeable securities (or options or rights with respect to such securities)
pursuant to Section 6.04 hereof:
(a) the options or rights shall expire prior to exercise or the right
to convert or exchange any such securities shall terminate; or
(b) the consideration per share for which shares of Common Stock are
issuable pursuant to the terms of such options or rights or convertible or
exchangeable securities shall be increased or decreased, other than under
or by reason of provisions designed to protect against dilution;
such previous adjustment shall be rescinded and annulled. Thereupon, a
recomputation shall be made of the effect of such options or rights or
convertible or exchangeable securities with respect to shares of Common Stock on
the basis of
(A) treating the number of shares of Common Stock, if any,
theretofore actually issued or issuable pursuant to the previous
exercise, conversion or exchange of such options, rights or
securities as having been issued on the date or dates of such
exercise, conversion or exchange and for the consideration
actually received and receivable therefore, and
11
<PAGE>
(B) treating any such options, rights or securities which then remain
outstanding as having been granted or issued immediately after
the time of such increase or decrease for the consideration per
share for which shares of Common Stock are issuable upon
exercise, conversion or exchange of such options, rights or
securities.
To the extent called for by the foregoing provisions of this Section 6.05 on the
basis aforesaid, a new adjustment in the number of shares of Warrant Stock
comprising a Stock Unit shall be made, determined using the Exercise Price used
at the time of the original determination, which new adjustment shall supersede
the previous adjustment so rescinded and annulled. If the exercise, conversion
or exchange price provided for in any such option, right or security shall
decrease at any time under or by reason of provisions designed to protect
against dilution, then in the case of the delivery of shares of Common Stock
upon the exercise, conversion or exchange of any such option, right or security,
the Stock Unit purchasable upon the exercise of a Warrant shall forthwith be
adjusted in the manner which would have obtained had the adjustment made upon
issuance of such option, right or security been made upon the basis of the
issuance of (and the aggregate consideration received for) the shares of Common
Stock delivered as aforesaid.
6.06 Other Provisions Applicable to Adjustments under this Section 6. The
following provisions shall be applicable to the making of adjustments of the
number of shares of Warrant Stock comprising a Stock Unit:
(a) The sale or other disposition of any issued shares of Common Stock
owned or held by or for the account of the Issuer shall be deemed to be an
issuance thereof for purpose of this Section 6.
(b) In computing adjustments under this Section 6, fractional interest
in Common Stock shall be taken into account to the nearest one-thousandth
of a share.
(c) If the Issuer shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or
distribution or subscription or purchase rights and shall, thereafter and
before the distribution thereof, legally abandon its plan to pay or deliver
such dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the taking of such
record and any such adjustment previously made in respect thereof shall be
rescinded and annulled.
6.07 Merger, Consolidation or Disposition of Assets. If the Issuer shall
merge or consolidate with another corporation, or shall sell, transfer or
otherwise dispose of all or substantially all of its assets to another
corporation and pursuant to the terms of such merger,
12
<PAGE>
consolidation or disposition of assets, cash, shares of common stock or other
securities of the successor or acquiring corporation, or property of any nature
is to be received by or distributed to the holders of Common Stock of the
Issuer, then each Holder of Warrants that are by their terms then exercisable
shall, at such Holder's election, have the right to receive (whether or not such
Holder exercises such Warrants) the amount it would have been entitled to
receive if such Holder had exercised such Warrants immediately prior to the
occurrence of such merger, consolidation or disposition of assets, net of the
Exercise Price of such Warrants, and shall thereupon be deemed to have exercised
such Warrants. In case of any such merger, consolidation or disposition of
assets in which the foregoing election is not made, the successor or acquiring
corporation (and any affiliate thereof issuing securities) shall expressly
assume the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by the
Issuer and all of the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate (as determined by resolution of the
Board and reasonably acceptable to the Holders of a majority in interest of the
Warrants) in order to provide for adjustments of Stock Units which shall be as
nearly equivalent as practicable to the adjustments provided for in this
Section. The foregoing provisions shall similarly apply to successive mergers,
consolidations and dispositions of assets.
6.08 Other Action Affecting Common Stock. If at any time or from time to
time the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections of this Section 6 or an
action taken in the ordinary course of the Issuer's business and consistent with
past practice, then, unless in the reasonable opinion of the Board such action
will not have a material adverse effect upon the rights of the Holders of the
Warrant, the terms of the Warrant shall be adjusted in such manner and at such
time as the Board shall in good faith determine to be equitable in the
circumstances, but no such adjustment shall decrease the number of shares of
Warrant Stock comprising a Stock Unit.
6.09 Notice of Adjustments. Whenever the number of shares of Warrant Stock
comprising a Stock Unit shall be adjusted pursuant to this Agreement, the Issuer
shall forthwith obtain a certificate signed by the Issuer's chief financial
officer (or, if a majority in interest of the Holders so request after delivery
of a certificate from the chief financial officer, signed by a firm of
independent accountants of recognized national standing selected by the Issuer),
setting forth, in reasonable detail, the event requiring the adjustment and the
method by which such adjustment was calculated and specifying the number of
shares of Warrant Stock comprising a Stock Unit, after giving effect to such
adjustment or change. The Issuer shall promptly cause a signed copy of such
certificate to be delivered to each Holder. The Issuer shall keep at its office
copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by any Holder or any
prospective purchaser of Warrants designated by the registered Holder hereof.
13
<PAGE>
6.10 Notice of Certain Corporate Action. If the Issuer shall propose (i)
to pay any dividend to the holders of its Common Stock or to make any other
distribution to the holders of its Common Stock; (ii) to offer to the holders of
its Common Stock rights to subscribe for or to purchase any additional shares of
Common Stock (or options or rights with respect thereto); (iii) to effect any
reclassification of its Common Stock; (iv) to otherwise issue any Common Stock
or other securities, excluding the issuance, conversion, exercise or exchange of
Excluded Securities; (v) to effect any capital reorganization, excluding the
issuance, conversion, exercise or exchange of Excluded Securities; (vi) to
effect any consolidation, merger or sale, transfer or other disposition of all
or substantially all of its assets; or (vii) to effect the liquidation,
dissolution or winding up of the Issuer, then, in each such case, the Issuer
shall give to each Holder of Warrants a notice of such proposed action, which
shall specify the date on which a record is to be taken for the purposes of such
dividend, distribution or right offer, or the date on which such
reclassification, issuance, reorganization, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution or winding up is to take place
and the date of participation therein by the holders of Common Stock, if any
such date is to be fixed, and shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of such action
on the Common Stock, and the number of shares of Warrant Stock which will
comprise a Stock Unit after giving effect to any adjustment which will be
required as a result of such action. Such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least 20 days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least 20 days prior to the
date of the taking of such proposed action or the date of participation therein
by the holders of Common Stock, whichever shall be the earlier.
SECTION 7. Holders' Rights.
7.01 Delivery Expenses. If any Holder surrenders any certificate for
Warrants or Warrant Stock to the Issuer or a transfer agent of the Issuer for
exchange for instruments of other denominations or registered in another name or
names, the Issuer shall cause such new instruments to be issued and shall pay
the cost of delivering to such Holder from the Issuer or its transfer agent,
duly insured, the surrendered instrument and any new instruments issued in
substitution or replacement for the surrendered instrument.
7.02 Taxes. The Issuer shall pay all taxes (other than Federal, state or
local income taxes) which may be payable in connection with the execution and
delivery of this Agreement or the issuance of the Warrants and Warrant Stock
hereunder or in connection with any modification of this Agreement or the
Warrants and shall hold each Holder harmless without limitation as to time
against any and all liabilities with respect to all such taxes. The obligations
of the Issuer under this Section 7.02 shall survive any redemption,
14
<PAGE>
repurchase or acquisition of Warrants or Warrant Stock by the Issuer, any
termination of this Agreement, and any cancellation or termination of the
Warrants.
7.03 Replacement of Instruments. Upon receipt by the Issuer of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any certificate or instrument evidencing any
Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it, provided that, if the Common Stock is not at the time
publicly traded and the owner of the same is either of the Purchasers or an
institutional lender or investor, its or their own agreement of indemnity shall
be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender or cancellation thereof,
at its expense, the Issuer, at its expense, shall execute, register and deliver,
in lieu thereof, a new certificate or instrument for (or covering the purchase
of) an equal number of Warrants or Warrant Stock.
SECTION 8. Other Covenants of Issuer. The Issuer agrees with each Holder
that, so long as any of the Warrants and/or Warrant Stock shall be outstanding:
8.01 Restrictions on Performance. The Issuer shall not at any time enter
into an agreement or other instrument limiting in any manner its ability to
perform its obligations under this Agreement or the Warrants, or making such
performance or the issuance of Warrant Stock upon the exercise of any Warrant a
default under any such agreement or instrument.
8.02 Modification of Other Equity Documents. The Issuer shall not amend or
consent to any modification, supplement or waiver of any provision of any Other
Equity Documents in any manner which would have an adverse effect on the Warrant
Stock Holders, in each case without the prior written consent of the Holders of
two-thirds of the Warrant Stock issued or issuable upon exercise of the
Warrants. Without limiting the generality of the foregoing, the Issuer shall
not amend, or consent to any modification, supplement or waiver of any provision
of any Other Equity Documents in a way which would (i) restrict the
transferability of the Warrants and the Warrant Stock, (ii) restrict the
transferability of the rights of any Holder in this Agreement to any transferee
of all or a portion of such Holder's Warrants and/or Warrant Stock or (iii)
require any consent or other approval of any Person to the exercise of the
Warrants by any Holder or the issuance of Warrant Stock upon such exercise or
the admission of such Holder as a shareholder of the Issuer upon such exercise.
15
<PAGE>
SECTION 9. Miscellaneous.
9.01 Home Office Payment. Notwithstanding anything to the contrary in this
Agreement or the Warrants, so long as either of the Purchasers or any nominee
designated by either of them shall be a Holder, the Issuer shall punctually pay
all amounts which become due and payable with respect to any Warrant or Warrant
Stock to such Purchasers at the addresses registered on the books of the Issuer
maintained for such purpose, or at such other place and in such manner as such
Purchasers may designate by notice to the Issuer, without presentation or
surrender of such Warrants or the making of any notation thereon. Each
Purchaser agrees that prior to the sale, transfer or other disposition of a part
of any Warrant, it will make notation thereon of the number of shares of Warrant
Stock covered by the part of the Warrant sold, transferred or disposed, or
surrender the same in exchange for a Warrant covering the number of shares of
Warrant Stock remaining on the Warrant so surrendered. The Issuer agrees that
the provisions of this Section 9.01 shall inure to the benefit of any other
Holder registered on the books of the Issuer.
9.02 Waiver. No failure on the part of any Purchaser to exercise and no
delay in exercising, and no course of dealing with respect to, any right, power
or privilege under this Agreement or the Warrants shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement or the Warrant preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
9.03 Notices.
(a) All notices, requests and other communications provided for herein
and the Warrants (including any waivers or consents under this Agreement and the
Warrants) shall be given or made in writing,
(i) if to the Issuer:
Address for Notices:
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Attention: Chief Executive Officer
Fax No.: (713) 339-2858
16
<PAGE>
(ii) if to Purchasers or any other Person who is the registered
Holder of any Warrants or Warrant Stock, to the address for such Holder as
it appears in the stock or warrant ledger of the Issuer;
or, in the case of any Holder, at such other address as shall be designated by
such party in a notice to the Issuer; or, in the case of the Issuer, at such
other address as the Issuer may designate in a notice to the Purchasers and all
other Holders.
(b) All such notices, requests and other communications shall be: (i)
personally delivered, sent by courier guaranteeing overnight delivery or sent by
registered or certified mail, return receipt requested, postage prepaid, in each
case given or addressed as aforesaid; and (ii) effective upon-receipt.
9.04 Amendments, Etc. Except as otherwise expressly provided in this
Agreement, any provision of this Agreement may be amended or modified only by an
instrument in writing signed by the Issuer and the Holders of two-thirds of the
Warrant Stock issued or issuable upon exercise of the Warrants; provided,
however, that (a) the consent of the Holders of any Warrant Stock or Warrants
shall not be required with respect to any amendment or waiver which does not
affect the rights or benefits of such class under this Agreement and (b) no such
amendment or waiver shall, without the written consent of all Holders of such
Warrant Stock and Warrants at the time outstanding, amend this Section 9.04.
9.05 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
9.06 Survival. All representations and warranties made by the Issuer
herein or in any certificate or other instrument delivered by it or on its
behalf under this Agreement shall be considered to have been relied upon by the
Purchasers and shall survive the issuance of the Warrants or the Warrant Stock
regardless of any investigation made by or on behalf of the Purchasers. All
statements in any such certificate or other instrument so delivered shall
constitute representations and warranties by the Issuer hereunder.
9.07 Specific Performance. Damages in the event of a breach of this
Agreement by a Holder or the Issuer would be difficult, if not impossible, to
ascertain and it is therefore agreed that each Holder and the Issuer, in
addition to and without limiting any other remedy or right it may have, will
have the right to an injunction or other equitable relief in any court of
competent jurisdiction, enjoining any such breach, and enforcing specifically
the terms and provisions hereof, and each Holder and the Issuer hereby waives
any and all defenses it may have on the ground of lack of jurisdiction or
competence of the court to grant such an
17
<PAGE>
injunction or other equitable relief. The existence of this right will not
preclude the Holders or the Issuer from pursuing any other rights and remedies
at law or in equity which the Holders or the Issuer may have.
9.08 Captions. The captions and section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.
9.09 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart signature page or counterpart.
9.10 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the law of the State of Texas without giving effect to the
conflicts of law principles thereof.
9.11 Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (a) such provision will be fully
severable, (b) this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part hereof, (c) the
remaining provisions of this Agreement will remain in all force and effect and
will not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable
provision there will be added automatically as a part of this Agreement a legal,
valid and enforceable provision as similar in terms to such illegal invalid or
unenforceable provision as may be possible.
9.12 Entire Agreement. This Agreement supersedes all prior discussions and
agreements between the parties with respect to the subject matter hereof, and
together with the Warrants contains the sole and entire agreement between the
parties hereto with respect to the subject matter hereof.
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Warrant
Agreement as of the date first above written.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Ronald E. Pierce
--------------------------------------------
Name: Ronald E. Pierce
------------------------------------------
Title: President
-----------------------------------------
FW INTEGRATED ORTHOPAEDICS, L.P.
By: GROUP 31, INC.,
its General Partner
By: /s/ Scott J. Hancock
--------------------------------------
Name: Scott J. Hancock
-----------------------------------
Title: Vice President & Ass't Secretary
----------------------------------
FW INTEGRATED ORTHOPAEDICS INVESTORS II, L.P.
By: FW GROUP GENPAR, INC.,
its General Partner
By: /s/ Scott J. Hancock
--------------------------------------
Name: Scott J. Hancock
-----------------------------------
Title: Vice President & Ass't Secretary
<PAGE>
Annex 1
To
Warrant Agreement
[Form of Warrant]
THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED AS OF DECEMBER 12,
1997 (THE "WARRANT AGREEMENT"), AMONG INTEGRATED ORTHOPAEDICS, INC., A TEXAS
CORPORATION (THE "ISSUER"), FW INTEGRATED ORTHOPAEDICS INVESTORS, L.P., AND FW
INTEGRATED ORTHOPAEDICS INVESTORS II, L.P., AS THE WARRANT AGREEMENT MAY BE
MODIFIED AND SUPPLEMENTED AND IN EFFECT FROM TIME TO TIME, AND NO TRANSFER OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL
SUCH CONDITIONS HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE WARRANT
AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL EXECUTIVE OFFICE OF
THE ISSUER. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE,
AGREES TO BE BOUND BY THE PROVISIONS OF THE WARRANT AGREEMENT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
ACCORDINGLY, SUCH SECURITIES MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED
OF EXCEPT IN COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
Number of
Stock Units: _____________ Warrant No. ________
WARRANT
to Purchase Common Stock of
INTEGRATED ORTHOPAEDICS, INC.
<PAGE>
THIS IS TO CERTIFY THAT ___________________________________, or its
registered assigns (the "Holder"), is entitled to purchase ______ Stock Units at
the Exercise Price (as defined below), in whole or in part, from time to time
from Integrated Orthopaedics, Inc., a Texas corporation (the "Issuer"), at any
time on and after July 1, 2000, but not later than 5:00 p.m., Houston time, on
the Expiration Date (as defined below), subject to the terms and conditions
hereinbelow provided. All capitalized terms unless otherwise defined herein
shall have the meanings set forth in the Warrant Agreement. "Exercise Price"
per share of Warrant Stock shall mean $8.00; provided, however, that, upon
receipt of the requisite vote of the holders of Common Stock approving the
following adjustment, the Exercise Price shall be the lesser of (i) $8.00, (ii)
the average closing sales price of the Common Stock for the twenty trading days
immediately prior to the Closing Date, (iii) the average closing sales price of
the Common Stock for the twenty trading days immediately following the Closing
Date, (iv) the average closing sales price of the Common Stock for the twenty
trading days immediately following public disclosure of the Issuer's earnings
for calendar 1998 and (v) the average closing sales price of the Common Stock
for the twenty trading days immediately following public disclosure of the
Issuer's earnings for calendar 1999. "Expiration Date" shall mean the fifth
anniversary of the date on which this Warrant first becomes exercisable for
Warrant Stock; provided, however, that the Issuer shall provide written notice
to the Holder at least ten days before the Expiration Date (but no more than 30
days before the Expiration Date) informing the Holder that this Warrant is
subject to this expiration provision; provided further that if no such notice is
provided as contemplated by the immediately preceding proviso, the Expiration
Date shall mean the date which is ten days after Holder's receipt of such
notice. The number of Stock Units that this Warrant is exercisable for may be
reduced in accordance with Schedule B hereto based on the Issuer's Revenue and
EBITDA (each as defined below) for calendar years 1998 and 1999. "Revenue"
shall mean accrual based gross clinic revenues less provisions for doubtful
accounts, contractual adjustments and amounts retained by physician groups,
which shall be audited by the Issuer's auditors in the course of their annual
audit, consistent with past practices. "EBITDA" shall mean Revenue less all
expenses except interest, taxes, depreciation and amortization. For purpose of
calculating Revenue and EBITDA herein, any Revenue or EBITDA attributable to
businesses other than the provision of professional medical services and
ancillary services by Physician Practice Groups (as defined below) shall be
excluded from such calculation. "Physician Practice Groups" are defined as (i)
physicians and groups of physicians engaged in, and professional medical
corporations and other entities employing or engaging physicians for, the
provision of medical services and that have a management or similar relationship
with the Issuer or a Subsidiary of the Issuer and (ii) physician practice
management companies acquired by the Issuer or any of its Subsidiaries. (In
connection with any acquisition consummated by the Issuer subsequent to the
Closing Date, the acquired business will be considered a Physician Practice
Group for purposes of
2
<PAGE>
this Warrant unless the Purchasers shall object to such designation. If the
Issuer and the Purchasers are unable to agree upon a designation with respect to
an acquisition, the Board of Directors of the Issuer shall submit the issue for
resolution to a special committee consisting of independent accountants and
independent directors created by the Board of Directors of the Issuer. The
determination of the special committee shall be final and binding upon the
Issuer and Purchasers.)
Notwithstanding any other provision herein, upon a Change of Control (as
defined below), this Warrant shall immediately become exercisable, in whole or
in part, from time to time, at any time prior to the Expiration Date. "Change
of Control" is defined as (i) the acquisition by another person or group of
persons of 35% or more of the outstanding shares of Common Stock of the Issuer
(other than through a merger, consolidation or business combination with another
physician practice management company approved by the Purchasers), (ii) a
majority change in the Board of Directors over a twelve month period, (iii) a
merger, consolidation, or other similar transaction with another entity in which
the Issuer is not the surviving entity or in which the Issuer's shareholders do
not own a majority of the shares in the combined entity or (iv) a sale of all or
substantially all of the Issuer's assets.
The Holder may exercise this Warrant, on one or more occasions, on any
Business Day, in whole or in part, by delivering to the Issuer:
(a) a written notice of the Holder's election to exercise this Warrant,
which notice shall specify the number of Stock Units to be purchased
(the "Exercise Notice");
(b) payment of the aggregate Exercise Price for the number of Stock Units
as to which this Warrant is being exercised (payable as set forth
below); and
(c) this Warrant.
The Exercise Price shall be payable (a) in cash or by certified or official
bank check payable to the order of the Issuer or by wire transfer of immediately
available funds to the account of the Issuer or (b) by delivery of this Warrant
Certificate to the Issuer for cancellation in accordance with the following
formula: in exchange for each share of Warrant Stock issuable on exercise of
each Warrant represented by this Warrant Certificate that is being exercised,
the Holder shall receive such number of shares of Warrant Stock as is equal to
the product of (i) the number of shares of Warrant Stock issuable upon exercise
of the Warrants being exercised at such time multiplied by (ii) a fraction, the
numerator or
3
<PAGE>
which is the fair market value per share of Warrant Stock at such time minus the
Exercise Price per share of Warrant Stock at such time, and the denominator of
which is the fair market value per share of Warrant Stock at such time. Such
Exercise Notice shall be substantially in the form of Schedule A hereto. Upon
receipt thereof, the Issuer shall, as promptly as practicable and in any event
within five Business Days thereafter, execute or cause to be executed and
deliver or cause to be delivered to the Holder a certificate or certificates
representing the aggregate number of Warrant Stock and other securities issuable
upon such exercise and any other property to which such Holder is entitled.
The certificate or certificates for Warrant Stock so delivered shall be in
such denominations as may be specified in the Exercise Notice and shall be
registered in the name of the Holder or such other name or names as shall be
designated in such Exercise Notice. Such certificate or certificates shall be
deemed to have been issued and the Holder or any other Person so designated to
be named therein shall be deemed to have become a Holder of record of Warrant
Stock, including, to the extent permitted by law, the right to vote Warrant
Stock or to consent or to receive notice as a Shareholder, as of the date on
which the last of the Exercise Notice, payment of the Exercise Price and this
Warrant is received by the Issuer as aforesaid, and all taxes required to be
paid by the Holder, if any, pursuant to the Warrant Agreement, prior to the
issuance of Warrant Stock have been paid. If this Warrant shall have been
exercised only in part, the Issuer shall, at the time of delivery of the
certificate or certificates representing Warrant Stock and other securities,
execute and deliver to the Holder a new Warrant evidencing the rights of the
Holder to purchase the unpurchased Stock Units called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant, or, at
the request of the Holder, appropriate notation may be made on this Warrant and
the same returned to the Holder.
The Issuer shall not be required to issue a fractional amount of Warrant
Stock upon exercise of this Warrant. As to any fraction of a share of Warrant
Stock which the Holder would otherwise be entitled to purchase upon such
exercise the Issuer shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the fair market value per
share of Warrant Stock on the date of exercise.
THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES
THEREOF.
4
<PAGE>
IN WITNESS WHEREOF, the Issuer has duly executed this Warrant.
Dated:
INTEGRATED ORTHOPAEDICS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Attest:
__________________________________
Secretary
<PAGE>
Schedule A
to
Warrant
FORM OF EXERCISE
(To be executed by the registered Holder hereof)
The undersigned registered owner of this Warrant irrevocably [exercises
this Warrant for the purchase of _______ Stock Units of INTEGRATED ORTHOPAEDICS,
INC. and herewith makes payment therefor, all at the price and on the terms and
conditions specified in this Warrant], [exchanges this Warrant for _______ Stock
Units of INTEGRATED ORTHOPAEDICS, INC., all on the terms and conditions
specified in this Warrant,] and requests that certificates for the shares of
Warrant Stock be issued in accordance with the instructions given below, and, if
such Stock Units shall not include all of the Stock Units to which the Holder is
entitled under this Warrant, that a new Warrant of like tenor and date for the
unpurchased balance of the Stock Units issuable hereunder be delivered to the
undersigned.
Dated:__________________________
___________________________________________
(Signature of Registered Holder)
Instructions for issuance and
registration of Warrant Stock:
____________________________________
Name of Registered Holder
(please print)
Social Security or Other Identifying
Number:_____________________________
Please deliver certificate to
the following address:
____________________________________
Street
____________________________________
City, State and Zip Code
<PAGE>
Schedule B
to
Warrant
EXPIRATION SCHEDULE
The following expiration schedule is for all Warrants issued pursuant to
the Warrant Agreement. If more that one Warrant is issued pursuant thereto, the
number of Stock Units Expiring below shall be adjusted in each Warrant pro rata
among the several Warrants issued.
Actual 1998 Revenue(1) Stock Units Expiring
------------------- --------------------
$48.1 million or less none
More than $48.1 million but *
less than $51.3 million
$51.3 million or more 1,250,000
-------------------
* One Stock Unit shall expire for every $2.56 of Revenue in excess of $48.1
million, but in no event shall more than 1,250,000 Stock Units expire.
Actual 1998 EBITDA(1) Stock Units Expiring
------------------ --------------------
$7.6 million or less none
More than $7.6 million but *
less than $8.1 million
$8.1 million or more 1,250,000
-------------------
* One Stock Unit shall expire for every $0.40 of EBITDA in excess of $7.6
million, but in no event shall more than 1,250,000 Stock Units expire.
Actual 1999 Revenue(2) Stock Units Expiring
------------------- --------------------
$115.5 million or less none
More than $115.5 million but *
less than $138.7 million
<PAGE>
$138.7 million or more 1,250,000
-------------------
* One Stock Unit shall expire for every $18.56 of Revenue in excess of
$115.5 million, but in no event shall more than 1,250,000 Stock Units
expire.
Actual 1999 EBITDA(2) Stock Units Expiring
------------------ --------------------
$22.5 million or less none
More than $22.5 million but *
less than $26.9 million
$26.9 million or more 1,250,000
-------------------
* One Stock Unit shall expire for every $3.52 of EBITDA in excess of $22.5
million, but in no event shall more than 1,250,000 Stock Units expire.
- ----------------------------
(1) As determined after application of Positive Carryback or Negative Carryback
(as such terms are defined below).
(2) As determined after application of Positive Carryforward or Negative
Carryforward (as such terms are defined below).
For purposes of calculating expired Stock Units pursuant to the foregoing
tables, the following provisions shall apply:
(a) if 1998 Revenue is greater than $51.3 million or 1998 EBITDA is greater
than $8.1 million, the amount of such overage shall be carried forward (a
"Positive Carryforward") and added to 1999 Revenue or 1999 EBITDA, as the case
may be;
(b) if 1998 Revenue is less than $48.1 million or 1998 EBITDA is less than
$7.6 million, the amount of such shortfall shall be carried forward (a "Negative
Carryforward") and subtracted from 1999 Revenue or 1999 EBITDA, as the case may
be;
(c) if 1999 Revenue is greater than $138.7 million or 1999 EBITDA is
greater than $26.9 million, the amount of such overage shall be carried back (a
"Positive Carryback") and added to 1998 Revenue or 1998 EBITDA, as the case may
be; and
(d) if 1999 Revenue is less than $115.5 million or 1998 EBITDA is less than
$22.5 million, the amount of such shortfall shall be carried back (a "Negative
Carryback") and subtracted from 1998 Revenue or 1998 EBITDA, as the case may be.
Expiring Warrants for all periods pursuant to the foregoing tables may
be determined only after the Issuer's audited financial statements for the year
ended December 31, 1999 are delivered because of the impact of Positive
Carrybacks or Negative Carrybacks.
<PAGE>
Annex 2
To
Warrant Agreement
FORM OF ASSIGNMENT
(To be executed by the registered Holder hereof)
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the assignee named below all the rights of the
undesigned under this Warrant with respect to the number of shares of Warrant
Stock covered thereby set forth hereinbelow unto:
Number of Shares
Name of Assignee Address of Warrant Stock
- --------------------------------------------------------------------------------
Dated:_____________
____________________________________________
Signature of Registered Holder
____________________________________________
Name of Registered Holder
(Please Print)
Witness:
_____________________
<PAGE>
EXHIBIT 4.04
THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED AS OF DECEMBER 12,
1997 (THE "WARRANT AGREEMENT"), AMONG INTEGRATED ORTHOPAEDICS, INC., A TEXAS
CORPORATION (THE "ISSUER"), FW INTEGRATED ORTHOPAEDICS INVESTORS, L.P., AND FW
INTEGRATED ORTHOPAEDICS INVESTORS II, L.P., AS THE WARRANT AGREEMENT MAY BE
MODIFIED AND SUPPLEMENTED AND IN EFFECT FROM TIME TO TIME, AND NO TRANSFER OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL
SUCH CONDITIONS HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE WARRANT
AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL EXECUTIVE OFFICE OF
THE ISSUER. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE,
AGREES TO BE BOUND BY THE PROVISIONS OF THE WARRANT AGREEMENT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
ACCORDINGLY, SUCH SECURITIES MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED
OF EXCEPT IN COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
Number of
Stock Units: 2,500,000 Warrant No. A-1
WARRANT
to Purchase Common Stock of
INTEGRATED ORTHOPAEDICS, INC.
<PAGE>
THIS IS TO CERTIFY THAT FW Integrated Orthopaedics Investors, L.P., or its
registered assigns (the "Holder"), is entitled to purchase 2,500,000 Stock Units
at the Exercise Price (as defined below), in whole or in part, from time to time
from Integrated Orthopaedics, Inc., a Texas corporation (the "Issuer"), at any
time on and after July 1, 2000, but not later than 5:00 p.m., Houston time, on
the Expiration Date (as defined below), subject to the terms and conditions
hereinbelow provided. All capitalized terms unless otherwise defined herein
shall have the meanings set forth in the Warrant Agreement. "Exercise Price"
per share of Warrant Stock shall mean $8.00; provided, however, that, upon
receipt of the requisite vote of the holders of Common Stock approving the
following adjustment, the Exercise Price shall be the lesser of (i) $8.00, (ii)
the average closing sales price of the Common Stock for the twenty trading days
immediately prior to the Closing Date, (iii) the average closing sales price of
the Common Stock for the twenty trading days immediately following the Closing
Date, (iv) the average closing sales price of the Common Stock for the twenty
trading days immediately following public disclosure of the Issuer's earnings
for calendar 1998 and (v) the average closing sales price of the Common Stock
for the twenty trading days immediately following public disclosure of the
Issuer's earnings for calendar 1999. "Expiration Date" shall mean the fifth
anniversary of the date on which this Warrant first becomes exercisable for
Warrant Stock; provided, however, that the Issuer shall provide written notice
to the Holder at least ten days before the Expiration Date (but no more than 30
days before the Expiration Date) informing the Holder that this Warrant is
subject to this expiration provision; provided further that if no such notice is
provided as contemplated by the immediately preceding proviso, the Expiration
Date shall mean the date which is ten days after Holder's receipt of such
notice. The number of Stock Units that this Warrant is exercisable for may be
reduced in accordance with Schedule B hereto based on the Issuer's Revenue and
EBITDA (each as defined below) for calendar years 1998 and 1999. "Revenue"
shall mean accrual based gross clinic revenues less provisions for doubtful
accounts, contractual adjustments and amounts retained by physician groups,
which shall be audited by the Issuer's auditors in the course of their annual
audit, consistent with past practices. "EBITDA" shall mean Revenue less all
expenses except interest, taxes, depreciation and amortization. For purpose of
calculating Revenue and EBITDA herein, any Revenue or EBITDA attributable to
businesses other than the provision of professional medical services and
ancillary services by Physician Practice Groups (as defined below) shall be
excluded from such calculation. "Physician Practice Groups" are defined as (i)
physicians and groups of physicians engaged in, and professional medical
corporations and other entities employing or engaging physicians for, the
provision of medical services and that have a management or similar relationship
with the Issuer or a Subsidiary of the Issuer and (ii) physician practice
management companies acquired by the Issuer or any of its Subsidiaries. (In
connection with any acquisition consummated by the Issuer subsequent to the
Closing Date, the acquired business will be considered a Physician Practice
Group for purposes of
2
<PAGE>
this Warrant unless the Purchasers shall object to such designation. If the
Issuer and the Purchasers are unable to agree upon a designation with respect to
an acquisition, the Board of Directors of the Issuer shall submit the issue for
resolution to a special committee consisting of independent accountants and
independent directors created by the Board of Directors of the Issuer. The
determination of the special committee shall be final and binding upon the
Issuer and Purchasers.)
Notwithstanding any other provision herein, upon a Change of Control (as
defined below), this Warrant shall immediately become exercisable, in whole or
in part, from time to time, at any time prior to the Expiration Date. "Change
of Control" is defined as (i) the acquisition by another person or group of
persons of 35% or more of the outstanding shares of Common Stock of the Issuer
(other than through a merger, consolidation or business combination with another
physician practice management company approved by the Purchasers), (ii) a
majority change in the Board of Directors over a twelve month period, (iii) a
merger, consolidation, or other similar transaction with another entity in which
the Issuer is not the surviving entity or in which the Issuer's shareholders do
not own a majority of the shares in the combined entity or (iv) a sale of all or
substantially all of the Issuer's assets.
The Holder may exercise this Warrant, on one or more occasions, on any
Business Day, in whole or in part, by delivering to the Issuer:
(a) a written notice of the Holder's election to exercise this Warrant,
which notice shall specify the number of Stock Units to be purchased
(the "Exercise Notice");
(b) payment of the aggregate Exercise Price for the number of Stock Units
as to which this Warrant is being exercised (payable as set forth
below); and
(c) this Warrant.
The Exercise Price shall be payable (a) in cash or by certified or official
bank check payable to the order of the Issuer or by wire transfer of immediately
available funds to the account of the Issuer or (b) by delivery of this Warrant
Certificate to the Issuer for cancellation in accordance with the following
formula: in exchange for each share of Warrant Stock issuable on exercise of
each Warrant represented by this Warrant Certificate that is being exercised,
the Holder shall receive such number of shares of Warrant Stock as is equal to
the product of (i) the number of shares of Warrant Stock issuable upon exercise
of the Warrants being exercised at such time multiplied by (ii) a fraction, the
numerator or
3
<PAGE>
which is the fair market value per share of Warrant Stock at such time minus the
Exercise Price per share of Warrant Stock at such time, and the denominator of
which is the fair market value per share of Warrant Stock at such time. Such
Exercise Notice shall be substantially in the form of Schedule A hereto. Upon
receipt thereof, the Issuer shall, as promptly as practicable and in any event
within five Business Days thereafter, execute or cause to be executed and
deliver or cause to be delivered to the Holder a certificate or certificates
representing the aggregate number of Warrant Stock and other securities issuable
upon such exercise and any other property to which such Holder is entitled.
The certificate or certificates for Warrant Stock so delivered shall be in
such denominations as may be specified in the Exercise Notice and shall be
registered in the name of the Holder or such other name or names as shall be
designated in such Exercise Notice. Such certificate or certificates shall be
deemed to have been issued and the Holder or any other Person so designated to
be named therein shall be deemed to have become a Holder of record of Warrant
Stock, including, to the extent permitted by law, the right to vote Warrant
Stock or to consent or to receive notice as a Shareholder, as of the date on
which the last of the Exercise Notice, payment of the Exercise Price and this
Warrant is received by the Issuer as aforesaid, and all taxes required to be
paid by the Holder, if any, pursuant to the Warrant Agreement, prior to the
issuance of Warrant Stock have been paid. If this Warrant shall have been
exercised only in part, the Issuer shall, at the time of delivery of the
certificate or certificates representing Warrant Stock and other securities,
execute and deliver to the Holder a new Warrant evidencing the rights of the
Holder to purchase the unpurchased Stock Units called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant, or, at
the request of the Holder, appropriate notation may be made on this Warrant and
the same returned to the Holder.
The Issuer shall not be required to issue a fractional amount of Warrant
Stock upon exercise of this Warrant. As to any fraction of a share of Warrant
Stock which the Holder would otherwise be entitled to purchase upon such
exercise the Issuer shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the fair market value per
share of Warrant Stock on the date of exercise.
THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES
THEREOF.
4
<PAGE>
IN WITNESS WHEREOF, the Issuer has duly executed this Warrant.
Dated: December 12, 1997
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Ronald E. Pierce
-------------------------
Name: Ronald E. Pierce
-------------------------
Title: President
-------------------------
Attest:
/s/ Jeff R. Casey
- ----------------------
Secretary
<PAGE>
Schedule A
to
Warrant
FORM OF EXERCISE
(To be executed by the registered Holder hereof)
The undersigned registered owner of this Warrant irrevocably [exercises
this Warrant for the purchase of _______ Stock Units of INTEGRATED ORTHOPAEDICS,
INC. and herewith makes payment therefor, all at the price and on the terms and
conditions specified in this Warrant], [exchanges this Warrant for _______ Stock
Units of INTEGRATED ORTHOPAEDICS, INC., all on the terms and conditions
specified in this Warrant,] and requests that certificates for the shares of
Warrant Stock be issued in accordance with the instructions given below, and, if
such Stock Units shall not include all of the Stock Units to which the Holder is
entitled under this Warrant, that a new Warrant of like tenor and date for the
unpurchased balance of the Stock Units issuable hereunder be delivered to the
undersigned.
Dated:
-----------------
--------------------------------------------------
(Signature of Registered Holder)
Instructions for issuance and
registration of Warrant Stock:
- -----------------------------
Name of Registered Holder
(please print)
Social Security or Other Identifying
Number:
----------------------
Please deliver certificate to
the following address:
- -----------------------------
Street
- -----------------------------
City, State and Zip Code
<PAGE>
Schedule B
to
Warrant
EXPIRATION SCHEDULE
Actual 1998 Revenue(1) Stock Units Expiring
---------------------- --------------------
$48.1 million or less none
More than $48.1 million but *
less than $51.3 million
$51.3 million or more 625,000
--------------
* One Stock Unit shall expire for every $5.12 of Revenue in excess of $48.1
million, but in no event shall more than 625,000 Stock Units expire.
Actual 1998 EBITDA(1) Stock Units Expiring
--------------------- --------------------
$7.6 million or less none
More than $7.6 million but *
less than $8.1 million
$8.1 million or more 625,000
--------------
* One Stock Unit shall expire for every $0.80 of EBITDA in excess of $7.6
million, but in no event shall more than 625,000 Stock Units expire.
Actual 1999 Revenue(2) Stock Units Expiring
---------------------- --------------------
$115.5 million or less none
More than $115.5 million but *
less than $138.7 million
$138.7 million or more 625,000
--------------
* One Stock Unit shall expire for every $37.12 of Revenue in excess of
$115.5 million, but in no event shall more than 625,000 Stock Units expire.
<PAGE>
Actual 1999 EBITDA(2) Stock Units Expiring
--------------------- --------------------
$22.5 million or less none
More than $22.5 million but *
less than $26.9 million
$26.9 million or more 625,000
--------------
* One Stock Unit shall expire for every $7.04 of EBITDA in excess of $22.5
million, but in no event shall more than 625,000 Stock Units expire.
- ----------------------------
(1) As determined after application of Positive Carryback or Negative Carryback
(as such terms are defined below).
(2) As determined after application of Positive Carryforward or Negative
Carryforward (as such terms are defined below).
For purposes of calculating expired Stock Units pursuant to the foregoing
tables, the following provisions shall apply:
(a) if 1998 Revenue is greater than $51.3 million or 1998 EBITDA is greater
than $8.1 million, the amount of such overage shall be carried forward (a
"Positive Carryforward") and added to 1999 Revenue or 1999 EBITDA, as the case
may be;
(b) if 1998 Revenue is less than $48.1 million or 1998 EBITDA is less than
$7.6 million, the amount of such shortfall shall be carried forward (a "Negative
Carryforward") and subtracted from 1999 Revenue or 1999 EBITDA, as the case may
be;
(c) if 1999 Revenue is greater than $138.7 million or 1999 EBITDA is
greater than $26.9 million, the amount of such overage shall be carried back (a
"Positive Carryback") and added to 1998 Revenue or 1998 EBITDA, as the case may
be; and
(d) if 1999 Revenue is less than $115.5 million or 1998 EBITDA is less than
$22.5 million, the amount of such shortfall shall be carried back (a "Negative
Carryback") and subtracted from 1998 Revenue or 1998 EBITDA, as the case may be.
Expiring Warrants for all periods pursuant to the foregoing tables may
be determined only after the Issuer's audited financial statements for the year
ended December 31, 1999 are delivered because of the impact of Positive
Carrybacks or Negative Carrybacks.
<PAGE>
Annex 2
To
Warrant Agreement
FORM OF ASSIGNMENT
(To be executed by the registered Holder hereof)
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the assignee named below all the rights of the
undesigned under this Warrant with respect to the number of shares of Warrant
Stock covered thereby set forth hereinbelow unto:
Number of Shares
Name of Assignee Address of Warrant Stock
- -----------------------------------------------------------------------------
Dated:
-------------
-----------------------------------------------
Signature of Registered Holder
-----------------------------------------------
Name of Registered Holder
(Please Print)
Witness:
-----------
<PAGE>
THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED AS OF DECEMBER 12,
1997 (THE "WARRANT AGREEMENT"), AMONG INTEGRATED ORTHOPAEDICS, INC., A TEXAS
CORPORATION (THE "ISSUER"), FW INTEGRATED ORTHOPAEDICS INVESTORS, L.P., AND FW
INTEGRATED ORTHOPAEDICS INVESTORS II, L.P., AS THE WARRANT AGREEMENT MAY BE
MODIFIED AND SUPPLEMENTED AND IN EFFECT FROM TIME TO TIME, AND NO TRANSFER OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL
SUCH CONDITIONS HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE WARRANT
AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL EXECUTIVE OFFICE OF
THE ISSUER. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE,
AGREES TO BE BOUND BY THE PROVISIONS OF THE WARRANT AGREEMENT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
ACCORDINGLY, SUCH SECURITIES MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED
OF EXCEPT IN COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
Number of
Stock Units: 2,500,000 Warrant No. A-2
WARRANT
to Purchase Common Stock of
INTEGRATED ORTHOPAEDICS, INC.
<PAGE>
THIS IS TO CERTIFY THAT FW Integrated Orthopaedics Investors II, L.P., or
its registered assigns (the "Holder"), is entitled to purchase 2,500,000 Stock
Units at the Exercise Price (as defined below), in whole or in part, from time
to time from Integrated Orthopaedics, Inc., a Texas corporation (the "Issuer"),
at any time on and after July 1, 2000, but not later than 5:00 p.m., Houston
time, on the Expiration Date (as defined below), subject to the terms and
conditions hereinbelow provided. All capitalized terms unless otherwise defined
herein shall have the meanings set forth in the Warrant Agreement. "Exercise
Price" per share of Warrant Stock shall mean $8.00; provided, however, that,
upon receipt of the requisite vote of the holders of Common Stock approving the
following adjustment, the Exercise Price shall be the lesser of (i) $8.00, (ii)
the average closing sales price of the Common Stock for the twenty trading days
immediately prior to the Closing Date, (iii) the average closing sales price of
the Common Stock for the twenty trading days immediately following the Closing
Date, (iv) the average closing sales price of the Common Stock for the twenty
trading days immediately following public disclosure of the Issuer's earnings
for calendar 1998 and (v) the average closing sales price of the Common Stock
for the twenty trading days immediately following public disclosure of the
Issuer's earnings for calendar 1999. "Expiration Date" shall mean the fifth
anniversary of the date on which this Warrant first becomes exercisable for
Warrant Stock; provided, however, that the Issuer shall provide written notice
to the Holder at least ten days before the Expiration Date (but no more than 30
days before the Expiration Date) informing the Holder that this Warrant is
subject to this expiration provision; provided further that if no such notice is
provided as contemplated by the immediately preceding proviso, the Expiration
Date shall mean the date which is ten days after Holder's receipt of such
notice. The number of Stock Units that this Warrant is exercisable for may be
reduced in accordance with Schedule B hereto based on the Issuer's Revenue and
EBITDA (each as defined below) for calendar years 1998 and 1999. "Revenue"
shall mean accrual based gross clinic revenues less provisions for doubtful
accounts, contractual adjustments and amounts retained by physician groups,
which shall be audited by the Issuer's auditors in the course of their annual
audit, consistent with past practices. "EBITDA" shall mean Revenue less all
expenses except interest, taxes, depreciation and amortization. For purpose of
calculating Revenue and EBITDA herein, any Revenue or EBITDA attributable to
businesses other than the provision of professional medical services and
ancillary services by Physician Practice Groups (as defined below) shall be
excluded from such calculation. "Physician Practice Groups" are defined as (i)
physicians and groups of physicians engaged in, and professional medical
corporations and other entities employing or engaging physicians for, the
provision of medical services and that have a management or similar relationship
with the Issuer or a Subsidiary of the Issuer and (ii) physician practice
management companies acquired by the Issuer or any of its Subsidiaries. (In
connection with any acquisition consummated by the Issuer subsequent to the
Closing Date, the acquired business will be considered a Physician Practice
Group for purposes of
2
<PAGE>
this Warrant unless the Purchasers shall object to such designation. If the
Issuer and the Purchasers are unable to agree upon a designation with respect to
an acquisition, the Board of Directors of the Issuer shall submit the issue for
resolution to a special committee consisting of independent accountants and
independent directors created by the Board of Directors of the Issuer. The
determination of the special committee shall be final and binding upon the
Issuer and Purchasers.)
Notwithstanding any other provision herein, upon a Change of Control (as
defined below), this Warrant shall immediately become exercisable, in whole or
in part, from time to time, at any time prior to the Expiration Date. "Change
of Control" is defined as (i) the acquisition by another person or group of
persons of 35% or more of the outstanding shares of Common Stock of the Issuer
(other than through a merger, consolidation or business combination with another
physician practice management company approved by the Purchasers), (ii) a
majority change in the Board of Directors over a twelve month period, (iii) a
merger, consolidation, or other similar transaction with another entity in which
the Issuer is not the surviving entity or in which the Issuer's shareholders do
not own a majority of the shares in the combined entity or (iv) a sale of all or
substantially all of the Issuer's assets.
The Holder may exercise this Warrant, on one or more occasions, on any
Business Day, in whole or in part, by delivering to the Issuer:
(a) a written notice of the Holder's election to exercise this Warrant,
which notice shall specify the number of Stock Units to be purchased
(the "Exercise Notice");
(b) payment of the aggregate Exercise Price for the number of Stock Units
as to which this Warrant is being exercised (payable as set forth
below); and
(c) this Warrant.
The Exercise Price shall be payable (a) in cash or by certified or official
bank check payable to the order of the Issuer or by wire transfer of immediately
available funds to the account of the Issuer or (b) by delivery of this Warrant
Certificate to the Issuer for cancellation in accordance with the following
formula: in exchange for each share of Warrant Stock issuable on exercise of
each Warrant represented by this Warrant Certificate that is being exercised,
the Holder shall receive such number of shares of Warrant Stock as is equal to
the product of (i) the number of shares of Warrant Stock issuable upon exercise
of the Warrants being exercised at such time multiplied by (ii) a fraction, the
numerator or
3
<PAGE>
which is the fair market value per share of Warrant Stock at such time minus the
Exercise Price per share of Warrant Stock at such time, and the denominator of
which is the fair market value per share of Warrant Stock at such time. Such
Exercise Notice shall be substantially in the form of Schedule A hereto. Upon
receipt thereof, the Issuer shall, as promptly as practicable and in any event
within five Business Days thereafter, execute or cause to be executed and
deliver or cause to be delivered to the Holder a certificate or certificates
representing the aggregate number of Warrant Stock and other securities issuable
upon such exercise and any other property to which such Holder is entitled.
The certificate or certificates for Warrant Stock so delivered shall be in
such denominations as may be specified in the Exercise Notice and shall be
registered in the name of the Holder or such other name or names as shall be
designated in such Exercise Notice. Such certificate or certificates shall be
deemed to have been issued and the Holder or any other Person so designated to
be named therein shall be deemed to have become a Holder of record of Warrant
Stock, including, to the extent permitted by law, the right to vote Warrant
Stock or to consent or to receive notice as a Shareholder, as of the date on
which the last of the Exercise Notice, payment of the Exercise Price and this
Warrant is received by the Issuer as aforesaid, and all taxes required to be
paid by the Holder, if any, pursuant to the Warrant Agreement, prior to the
issuance of Warrant Stock have been paid. If this Warrant shall have been
exercised only in part, the Issuer shall, at the time of delivery of the
certificate or certificates representing Warrant Stock and other securities,
execute and deliver to the Holder a new Warrant evidencing the rights of the
Holder to purchase the unpurchased Stock Units called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant, or, at
the request of the Holder, appropriate notation may be made on this Warrant and
the same returned to the Holder.
The Issuer shall not be required to issue a fractional amount of Warrant
Stock upon exercise of this Warrant. As to any fraction of a share of Warrant
Stock which the Holder would otherwise be entitled to purchase upon such
exercise the Issuer shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the fair market value per
share of Warrant Stock on the date of exercise.
THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES
THEREOF.
4
<PAGE>
IN WITNESS WHEREOF, the Issuer has duly executed this Warrant.
Dated: December 12, 1997
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Ronald E. Pierce
---------------------
Name:
-------------------
Title:
------------------
Attest:
/s/ Jeff R. Casey
- -------------------
Secretary
<PAGE>
Schedule A
to
Warrant
FORM OF EXERCISE
(To be executed by the registered Holder hereof)
The undersigned registered owner of this Warrant irrevocably [exercises
this Warrant for the purchase of _______ Stock Units of INTEGRATED ORTHOPAEDICS,
INC. and herewith makes payment therefor, all at the price and on the terms and
conditions specified in this Warrant], [exchanges this Warrant for _______ Stock
Units of INTEGRATED ORTHOPAEDICS, INC., all on the terms and conditions
specified in this Warrant,] and requests that certificates for the shares of
Warrant Stock be issued in accordance with the instructions given below, and, if
such Stock Units shall not include all of the Stock Units to which the Holder is
entitled under this Warrant, that a new Warrant of like tenor and date for the
unpurchased balance of the Stock Units issuable hereunder be delivered to the
undersigned.
Dated:
--------------
--------------------------------------------------
(Signature of Registered Holder)
Instructions for issuance and
registration of Warrant Stock:
- -----------------------------
Name of Registered Holder
(please print)
Social Security or Other Identifying
Number:
----------------------
Please deliver certificate to
the following address:
- -----------------------------
Street
- -----------------------------
City, State and Zip Code
<PAGE>
Schedule B
to
Warrant
EXPIRATION SCHEDULE
Actual 1998 Revenue(1) Stock Units Expiring
------------------- --------------------
$48.1 million or less none
More than $48.1 million but *
less than $51.3 million
$51.3 million or more 625,000
---------------------
* One Stock Unit shall expire for every $5.12 of Revenue in excess of $48.1
million, but in no event shall more than 625,000 Stock Units expire.
Actual 1998 EBITDA(1) Stock Units Expiring
------------------ --------------------
$7.6 million or less none
More than $7.6 million but *
less than $8.1 million
$8.1 million or more 625,000
--------------------
* One Stock Unit shall expire for every $0.80 of EBITDA in excess of $7.6
million, but in no event shall more than 625,000 Stock Units expire.
Actual 1999 Revenue(2) Stock Units Expiring
------------------- --------------------
$115.5 million or less none
More than $115.5 million but *
less than $138.7 million
$138.7 million or more 625,000
----------------------
* One Stock Unit shall expire for every $37.12 of Revenue in excess of
$115.5 million, but in no event shall more than 625,000 Stock Units expire.
<PAGE>
Actual 1999 EBITDA(2) Stock Units Expiring
------------------ --------------------
$22.5 million or less none
More than $22.5 million but *
less than $26.9 million
$26.9 million or more 625,000
---------------------
* One Stock Unit shall expire for every $7.04 of EBITDA in excess of $22.5
million, but in no event shall more than 625,000 Stock Units expire.
- ----------------------------
(1) As determined after application of Positive Carryback or Negative Carryback
(as such terms are defined below).
(2) As determined after application of Positive Carryforward or Negative
Carryforward (as such terms are defined below).
For purposes of calculating expired Stock Units pursuant to the foregoing
tables, the following provisions shall apply:
(a) if 1998 Revenue is greater than $51.3 million or 1998 EBITDA is greater
than $8.1 million, the amount of such overage shall be carried forward (a
"Positive Carryforward") and added to 1999 Revenue or 1999 EBITDA, as the case
may be;
(b) if 1998 Revenue is less than $48.1 million or 1998 EBITDA is less than
$7.6 million, the amount of such shortfall shall be carried forward (a "Negative
Carryforward") and subtracted from 1999 Revenue or 1999 EBITDA, as the case may
be;
(c) if 1999 Revenue is greater than $138.7 million or 1999 EBITDA is
greater than $26.9 million, the amount of such overage shall be carried back (a
"Positive Carryback") and added to 1998 Revenue or 1998 EBITDA, as the case may
be; and
(d) if 1999 Revenue is less than $115.5 million or 1998 EBITDA is less than
$22.5 million, the amount of such shortfall shall be carried back (a "Negative
Carryback") and subtracted from 1998 Revenue or 1998 EBITDA, as the case may be.
Expiring Warrants for all periods pursuant to the foregoing tables may
be determined only after the Issuer's audited financial statements for the year
ended December 31, 1999 are delivered because of the impact of Positive
Carrybacks or Negative Carrybacks.
<PAGE>
Annex 2
To
Warrant Agreement
FORM OF ASSIGNMENT
(To be executed by the registered Holder hereof)
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the assignee named below all the rights of the
undesigned under this Warrant with respect to the number of shares of Warrant
Stock covered thereby set forth hereinbelow unto:
Number of Shares
Name of Assignee Address of Warrant Stock
- --------------------------------------------------------------------------------
Dated:
-------------
--------------------------------------------------
Signature of Registered Holder
--------------------------------------------------
Name of Registered Holder
(Please Print)
Witness:
-----------
<PAGE>
NOTICE OF INDEMNIFICATION: THIS AGREEMENT CONTAINS INDEMNIFICATION PROVISIONS
IN ARTICLE VII, NOTICE OF WHICH IS HEREBY GIVEN.
SECURITIES PURCHASE AGREEMENT
DATED AS OF DECEMBER 12, 1997
BY AND AMONG
INTEGRATED ORTHOPAEDICS INVESTORS, L.P.,
INTEGRATED ORTHOPAEDICS INVESTORS II, L.P.,
INTEGRATED ORTHOPAEDICS, INC.,
FOR PURPOSES OF SECTION 6.6 AND 9.11 ONLY,
CHARTWELL CAPITAL INVESTORS, L.P.,
AND
FOR PURPOSES OF SECTION 9.11 ONLY,
JOSE E. KAUACHI, RONALD E. PIERCE,
JEFFERSON R. CASEY, CLIFFORD HINKLE,
WILLIAM F. DONOVAN, M.D., AND SHARON ANN DONOVAN
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. ISSUANCE OF SECURITIES..................................... 1
1.1. Authorization.............................................. 1
1.2. Purchase and Sale of the Securities; the Closing........... 1
ARTICLE II. REPRESENTATIONS AND WARRANTIES............................. 2
2.1. Representations and Warranties of the Company.............. 2
2.1.1. Organization and Good Standing................... 2
2.1.2. Authorization of Agreement; Binding Obligation... 2
2.1.3. Subsidiaries and Equity Investments.............. 3
2.1.4. No Restrictions Against Issuance of Securities;
Required Consents................................ 3
2.1.5. Capitalization................................... 4
2.1.6. Financial Statements............................. 5
2.1.7. Accounts Receivable.............................. 5
2.1.8. Business, Properties and Other Information....... 5
2.1.9. Absence of Undisclosed Liabilities............... 7
2.1.10. Books of Account................................. 7
2.1.11. Contracts and Commitments........................ 7
2.1.12. Liens and Encumbrances; Condition of Assets...... 9
2.1.13. Regulatory Compliance............................ 9
2.1.14. Insurance........................................ 10
2.1.15. Conduct of the Business Since the Interim Balance
Sheet Date....................................... 11
2.1.16. Employee Benefit Plans........................... 12
2.1.17. Litigation; Decrees.............................. 13
2.1.18. Compliance With Law; Permits..................... 13
2.1.19. Taxes............................................ 13
2.1.20. Real Property.................................... 14
2.1.21. Commissions or Finders Fees...................... 15
2.1.22. Certain Business Practices and Regulations;
Affiliate Transactions........................... 15
2.1.23. Compliance with American Stock Exchange Rules and
Regulations...................................... 15
2.1.24. Shareholder Proposals............................ 16
2.1.25. Disclosure....................................... 16
2.2. Representations and Warranties of the Purchasers........... 17
2.2.1. Corporate Organization........................... 17
<PAGE>
2.2.2. Authorization and Effect of Agreement............ 17
2.2.3. Purchase of Securities........................... 17
ARTICLE III. PRE-CLOSING COVENANTS............................ 17
3.1. Access to Information; Communications.......................... 17
3.2. Conduct of Business............................................ 18
3.3. Supplemental Financial Statements.............................. 20
3.4. Notification................................................... 20
3.5. Cooperation.................................................... 20
3.6. No Inconsistent Action......................................... 21
3.7. Satisfaction of Conditions..................................... 21
3.8. Confidentiality................................................ 21
3.9. Publicity...................................................... 21
3.10. Acquisition Proposals.......................................... 22
ARTICLE IV. CONDITIONS TO CLOSING............................ 22
4.1. Conditions Precedent to Obligations of the Purchasers.......... 22
4.1.1. Representations, Warranties and Covenants.............. 22
4.1.2. Certificate of Controlling Stockholders................ 22
4.1.3. Closing Documents...................................... 23
4.1.4. Governmental Consents or Approvals..................... 23
4.1.5. No Adverse Proceedings................................. 23
4.1.6. Opinions............................................... 23
4.1.7. Registration Rights Agreements......................... 23
4.1.8. Warrant Agreements and Warrants........................ 23
4.1.9. Stock Certificates..................................... 23
4.1.10. Certificate of Designation............................. 23
4.1.11. Acquisition Committee Designees........................ 24
4.1.12. Chartwell Matters...................................... 24
4.1.13. Private Placement Numbers.............................. 24
4.1.14. Reserved Shares........................................ 24
4.1.15. Payment of Fees........................................ 24
4.1.16. Amendment to By-laws................................... 24
4.1.17. Additional Listing Application......................... 24
4.1.18. Termination of Agreements.............................. 24
4.1.19. Directors.............................................. 24
<PAGE>
4.2. Conditions Precedent to Obligations of the Company............. 25
4.2.1. No Material Misrepresentation or Breach................ 25
4.2.2. Closing Documents...................................... 25
4.2.3. Governmental Consents or Approvals..................... 25
4.2.4. No Adverse Proceedings................................. 25
ARTICLE V. DOCUMENTS TO BE DELIVERED AT THE CLOSING..........25
5.1. Documents to be Delivered by the Company....................... 25
5.1.1. Certified Resolutions.................................. 25
5.1.2. Officer's Certificate.................................. 26
5.1.3. Good Standing Certificates............................. 26
5.1.4. Other Documents........................................ 26
5.2. Documents to be Delivered by the Purchasers.................... 26
5.2.1. Purchase Price......................................... 26
5.2.2. Other Documents........................................ 26
ARTICLE VI. POST-CLOSING COVENANTS.......................... 26
6.1. Acquisition Committee Designees................................ 26
6.2. Board Designees................................................ 26
6.3. Post-Closing Notifications..................................... 27
6.4. Certain Tax Matters............................................ 27
6.5. Financial Statements and Information........................... 27
6.6. Right of First Refusal......................................... 28
6.7. Reservation of Shares of Common Stock.......................... 29
6.8. Preparation of Proxy Statement; Shareholders Meeting........... 29
ARTICLE VII. SURVIVAL AND INDEMNIFICATION.................... 29
7.1. Survival of Representations, Warranties and Covenants.......... 29
7.2. Certain Definitions............................................ 30
7.3. Indemnification................................................ 30
7.4. Defense of Claims.............................................. 31
7.5. Limitation of Liability; Equitable Adjustment.................. 32
ARTICLE VIII. TERMINATION..................................... 33
8.1. Termination.................................................... 33
ARTICLE IX. MISCELLANEOUS PROVISIONS........................ 34
9.1. Specific Performance........................................... 34
9.2. Notices........................................................ 34
9.3. Expenses....................................................... 36
<PAGE>
9.4. Successors and Assigns......................................... 36
9.5. Waiver......................................................... 37
9.6. Entire Agreement............................................... 37
9.7. Amendments and Supplements..................................... 37
9.8. Rights of the Parties.......................................... 37
9.9. Brokers........................................................ 37
9.10. Further Assurances............................................. 38
9.11. Irrevocable Proxy.............................................. 38
9.12. Governing Law.................................................. 39
9.13. Severability................................................... 39
9.14. Execution in Counterparts...................................... 39
9.15. Titles and Headings............................................ 39
9.16. Certain Interpretive Matters and Definitions................... 39
<PAGE>
Defined Terms
Acquisition Committee....................................... Section 4.1.11
Acquisition Proposal........................................ Section 3.10
Agreement................................................... Introduction
Business.................................................... Recitals
Certificate of Designation.................................. Section 1.1
Closing Date................................................ Section 1.2
Code........................................................ Section 2.1.16(b)
Commission.................................................. Section 2.1.8
Common Stock................................................ Section 1.1
Company..................................................... Introduction
Direct Claim................................................ Section 7.4(d)
Employee Plans.............................................. Section 2.1.16(a)
ERISA....................................................... Section 2.1.16(a)
Exchange Act................................................ Section 2.1.8
Excluded Representations and Warranties..................... Section 7.1
First Refusal Offer......................................... Section 6.6(a)
GAAP........................................................ Section 2.1.6
Governmental Entity......................................... Section 2.1.4
Indemnifiable Losses........................................ Section 7.2
Indemnifying Party.......................................... Section 7.2
Indemnitee.................................................. Section 7.2
Indemnity Payment........................................... Section 7.2
Interim Balance Sheet Date.................................. Section 2.1.6
Interim Balance Sheet....................................... Section 2.1.6
liabilities................................................. Section 2.1.9
Liens....................................................... Section 2.1.12(a)
Offer....................................................... Section 6.6(a)
Option Holders.............................................. Section 6.6(a)
Pension Plans............................................... Section 2.1.16(a)
Permits..................................................... Section 2.1.18
Permitted Liens............................................. Section 2.1.12(a)
Physician Practice Groups................................... Section 2.1.13
Proxy Statement............................................. Section 6.8(a)
Purchaser................................................... Introduction
Record Date................................................. Section 2.1.24
Registration Rights Agreement............................... Section 4.1.7
Sale Notice................................................. Section 6.6(a)
<PAGE>
SEC Reports.................................................. Section 2.1.8
Securities................................................... Section 1.1
Securities Act............................................... Section 2.1.4
Series A Preferred Stock..................................... Section 2.1.5
Series B Preferred Stock..................................... Section 1.1
Shareholder Proposals........................................ Section 9.11
Subsidiaries................................................. Section 2.1.3
Supplemental Financial Statements............................ Section 3.3
Tax Return................................................... Section 2.1.19(e)
Tax.......................................................... Section 2.1.19(e)
Taxes........................................................ Section 2.1.19(e)
Third Party Claim............................................ Section 7.2
Transaction Documents........................................ Section 9.15(a)
Warrant Agreement............................................ Section 1.1
Warrants..................................................... Section 1.1
<PAGE>
Exhibits
- --------
Exhibit A Form of Certificate of Designation
Exhibit B Form of Warrant Agreement and Warrant
Exhibit C Form of Opinion of Willkie Farr & Gallagher
Exhibit D Form of Opinion of Hutcheson & Grundy, L.L.P.
Exhibit E Form of Registration Rights Agreement
Exhibit F Form of First Amendment to Investment Agreement
Exhibit G Form of Termination Agreement
Exhibit H Form of Amended and Restated Certificate of Designation Regarding
the Series A Preferred Stock
Exhibit I Form of Amended and Restated By-laws
Schedules
- ---------
Schedule I Purchasers and Securities
Schedule 2.1.1 Organization and Good Standing
Schedule 2.1.3 Subsidiaries and Equity Investments
Schedule 2.1.4 No Restrictions Against Issuance of Securities; Required
Consents
Schedule 2.1.5 Capitalization
Schedule 2.1.6 Financial Statements
Schedule 2.1.7 Accounts Receivable
Schedule 2.1.9 Absence of Undisclosed Liabilities
Schedule 2.1.11(a) Contracts and Commitments
Schedule 2.1.11(b) Exceptions to Contracts and Commitments
Schedule 2.1.12(a) Liens and Encumbrances; Condition of Assets
Schedule 2.1.14 Insurance
Schedule 2.1.15 Conduct of the Business Since the Interim Balance Sheet Date
Schedule 2.1.16(a) Employee Benefit Plans
Schedule 2.1.16(b) Pension Plans
Schedule 2.1.17 Litigation; Decrees
Schedule 2.1.18 Compliance With Law; Permits
Schedule 2.1.20 Real Property
Schedule 2.1.22(b) Certain Business Practices and Regulations; Affiliated
Transactions
Schedule 2.1.24 Stock Ownership Listing
Schedule 3.2 Conduct of Business
Schedule 4.1.18 Terminated Agreements
Schedule 4.1.19 Resigning Directors
<PAGE>
Schedule I
Purchaser Securities to be Purchased
- --------- --------------------------
FW Integrated Orthopaedics Investors, L.P. 125,000 shares of Series B
Preferred Stock;
Warrant to Purchase 2,500,000
Stock Units
FW Integrated Orthopaedics Investors II, L.P. 125,000 shares of Series B
Preferred Stock;
Warrant to Purchase 2,500,000
Stock Units
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
This SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of December 12, 1997, by and among FW Integrated Orthopaedics Investors,
L.P., a Texas limited partnership, FW Integrated Orthopaedics Investors II,
L.P., a Texas limited partnership (each a "Purchaser" and collectively, the
"Purchasers"), Integrated Orthopaedics, Inc., a Texas corporation (the
"Company"), for purposes of Sections 6.6 and 9.11 only, Chartwell Capital
Investors, L.P., and for purposes of Section 9.11 only, Jose E. Kauachi, Ronald
E. Pierce, Jefferson R. Casey, Clifford Hinkle, William F. Donovan, M.D. and
Sharon Ann Donovan.
RECITALS:
--------
A. The Company presently conducts the business of managing and
administering physician practice groups specializing in orthopaedics (the
"Business");
B. The Company requires additional capital in order to expand the
Business; and
C. The Purchasers desire to provide additional capital to the Company for
such purpose in accordance with the terms and subject to the conditions set
forth in this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I. ISSUANCE OF SECURITIES
1.1. Authorization. The Company has duly authorized the issuance and sale
of (a) 250,000 shares of its Series B Convertible, Non-Redeemable Preferred
Stock, par value $.01 per share (the "Series B Preferred Stock"), having an
aggregate initial liquidation preference of $25,000,000 plus accrued and unpaid
dividends thereon, and other rights as specified in the Certificate of
Designation of Rights and Preferences in the form of Exhibit A attached hereto
(the "Certificate of Designation") and (b) Contingent Warrants (the "Warrants"
and, together with the Series B Preferred Stock, the "Securities") to purchase
5,000,000 shares of Common Stock, par value $.001 per share, of the Company
("Common Stock"). The form of Warrant Agreement ("Warrant Agreement") and form
of related Warrant are attached hereto as Exhibit B.
1.2. Purchase and Sale of the Securities; the Closing. Subject to the
terms and conditions hereof, the Company hereby agrees to sell to the
Purchasers, and the Purchasers hereby agree to purchase from the Company, the
Securities in the amounts set forth on Schedule I hereto, for an aggregate
purchase price of $25,000,000. The closing of such sale
<PAGE>
and purchase shall be held at 10:00 A.M., Houston time, on December 12, 1997, or
on such other day as may be agreed by the Company and the Purchasers (the
"Closing Date"), at the offices of Weil, Gotshal & Manges LLP, 700 Louisiana,
Suite 1600, Houston, Texas 77002.
On the Closing Date, the Company will deliver to the Purchasers (a)
one or more certificates representing the shares of Series B Preferred Stock,
registered in the names of the Purchasers or in the names of one or more
nominees of the Purchasers and in any denomination as the Purchasers may specify
by timely notice to the Company (or, in the absence of such notice, one
certificate registered in the name of each Purchaser in the amounts designated
on Schedule I attached hereto) and (b) one or more executed Warrant Agreements
for each of the Purchasers or one or more of their nominees, and one or more
Warrants registered in the names of the Purchasers or in the names of one or
more such nominees of the Purchasers and in any denomination as the Purchasers
may specify by timely notice to the Company (or, in the absence of such notice,
one Warrant registered in the name of each Purchaser in the amounts designated
on Schedule I attached hereto), in each case against delivery to the Company of
immediately available funds in the amount of the purchase price of such
Securities, such delivery to be made by wire transfer to the Company's Account
No. 4159-718-626 at Wells Fargo Bank, N.A., 1000 Louisiana, Houston, Texas 77002
(ABA No. 121000248).
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties of the Company. The Company makes the
following representations and warranties to the Purchasers, each of which is
true and correct as of the date hereof and shall be true and correct as of the
Closing Date and shall be unaffected by any investigation heretofore or
hereafter made by the Purchasers.
2.1.1. Organization and Good Standing. The Company and each of the
Subsidiaries (as hereinafter defined) is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation.
The Company and each of the Subsidiaries has the requisite corporate power and
authority to own, lease or otherwise hold the assets owned, leased or otherwise
held by it and to carry on the Business as presently conducted by it. The
Company and each of the Subsidiaries is in good standing and duly qualified to
conduct business as a foreign corporation in every state of the United States in
which its ownership or lease of property or conduct of business makes such
qualification necessary. Such of the foregoing states are listed on Schedule
2.1.1.
2.1.2. Authorization of Agreement; Binding Obligation. The Company
has the requisite corporate power to execute and to deliver this Agreement and
the other
2
<PAGE>
Transaction Documents (as hereinafter defined) and to perform the transactions
contemplated hereby and thereby to be performed by it. The execution and
delivery by the Company of this Agreement and the other Transaction Documents
and the performance by it of the transactions contemplated hereby and thereby to
be performed by it have been duly authorized by all necessary corporate action
on the part of the Company. This Agreement and the other Transaction Documents
have been duly executed and delivered by duly authorized officers of the Company
and constitute valid and binding obligations of the Company enforceable against
it in accordance with terms hereof or thereof, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general and subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
2.1.3. Subsidiaries and Equity Investments. (a) Schedule 2.1.3 sets
forth (i) the name of each corporation of which the Company directly or
indirectly owns shares of capital stock having in the aggregate 50% or more of
the total combined voting power of the issued and outstanding shares of capital
stock entitled to vote generally in the election of directors of such
corporation (individually, a "Subsidiary" and collectively, the "Subsidiaries");
(ii) the name of each corporation, partnership, limited liability company, joint
venture or other entity (other than the Subsidiaries) in which the Company or
any Subsidiary has, or pursuant to any agreement has the right to acquire at any
time by any means, an equity interest or investment; (iii) in the case of each
of the Subsidiaries and such other corporations described in the foregoing
clause (ii), (A) the jurisdiction of incorporation and (B) the capitalization
thereof and the percentage of each class of voting stock owned by the Company or
by any of the Subsidiaries; and (iv) in the case of each of such unincorporated
entities, the equivalent of the information provided pursuant to the preceding
clause (iii) with regard to corporate entities.
(b) All of the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
non-assessable, have not been issued in violation of any preemptive rights, and
are owned of record and beneficially by the Company, free and clear of any Liens
(as hereinafter defined).
(c) There are no options, warrants, calls, subscriptions, conversion
or other rights, agreements or commitments obligating any Subsidiary to issue
any additional shares of capital stock or any other securities convertible into,
exchangeable for or evidencing the right to subscribe for any shares of such
capital stock.
2.1.4. No Restrictions Against Issuance of Securities; Required
Consents. Except as disclosed on Schedule 2.1.4, the execution and delivery of
this Agreement and the other Transaction Documents by the Company does not, and
the performance by the
3
<PAGE>
Company of the transactions contemplated hereby or thereby to be performed by it
will not, (a) conflict with the articles of incorporation or by-laws of the
Company or any Subsidiary, (b) conflict with, or result in any violation of, or
constitute a default (with or without notice or lapse of time, or both) under,
or give rise to a right of termination, cancellation or acceleration of any
obligation or to loss of a benefit under, any contract, permit, order, judgment
or decree to which the Company or any Subsidiary is a party or by which any of
their properties are bound, (c) constitute a violation of any law or regulation
applicable to the Company or any Subsidiary, or (d) result in the creation of
any Lien upon any of the Company's or the Subsidiaries' assets. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any nation or government, any state or other political subdivision thereof
or an entity exercising executive, legislative, judicial, regulatory or
administrative function of or pertaining to government (each a "Governmental
Entity") is required to be obtained or made by or with respect to the Company in
connection with the execution and delivery of this Agreement or any of the other
Transaction Documents by the Company or the performance by the Company of the
transactions contemplated hereby or thereby to be performed by it. Assuming the
accuracy of the Purchasers' representations and warranties contained in Section
2.2.3 hereof, the issuance and sale of the Securities are exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended (the "Securities Act").
2.1.5. Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred
stock, par value $.01 per share. As of the date hereof, the Company has, in the
aggregate, 5,510,374 shares of Common Stock (including 13,833 shares held in
treasury) and 25,226 shares of Series A Preferred Stock, par value $.01 per
share ("Series A Preferred Stock"), issued and outstanding, all of which have
been validly issued, are fully paid and non-assessable and were not issued in
violation of any preemptive rights. At the Closing, the Series B Preferred
Stock shall be validly issued, fully paid and non-assessable and shall have not
been issued in violation of any preemptive rights. As of the Closing Date,
6,550,000 shares of Common Stock will have been reserved for issuance upon
conversion of the Series B Preferred Stock and 5,000,000 shares of Common Stock
will have been reserved for issuance upon exercise of the Warrants, and when so
issued, all such shares of Common Stock will be validly issued, fully paid and
non-assessable and none of such shares of Common Stock will be issued in
violation of any preemptive rights. Except as disclosed on Schedule 2.1.5,
there are no options, warrants, calls, subscriptions, conversion or other
rights, agreements or commitments obligating the Company to issue any capital
stock of the Company or any other securities convertible into, or exchangeable,
exercisable or evidencing the right to subscribe for, capital stock of the
Company.
4
<PAGE>
2.1.6. Financial Statements. The Company has delivered to the
Purchasers true and complete copies of (a) the audited consolidated balance
sheets of the Company at December 31, 1996 and 1995 and the related statements
of income, cash flow and changes in shareholders' equity for the fiscal years
then ended, accompanied by certified opinions of the Company's auditing firm;
and (b) unaudited consolidated balance sheets of the Company at September 30,
1997 and 1996 and related statements of income, cash flow and changes in
shareholders' equity for the periods then ended, all of which have been prepared
in accordance with generally accepted accounting principles consistently applied
("GAAP") throughout the periods involved, all of which is subject to the
disclosure set forth in Section 2.1.6. Such consolidated balance sheets,
including the related notes, fairly present the financial position, assets and
liabilities (whether accrued, absolute, contingent or otherwise) of the Company
and the Subsidiaries at the dates indicated and such statements of income, cash
flow and changes in shareholders' equity fairly present the results of
operations, cash flow and changes in shareholders' equity of the Company and the
Subsidiaries for the periods indicated. The unaudited consolidated financial
statements as at and for the periods ending September 30, 1997 and 1996 contain
all adjustments, which are solely of a normal recurring nature, necessary to
present fairly the financial position and results of operations of the Company
and the Subsidiaries for the periods then ended. References in this Agreement
to the "Interim Balance Sheet" shall mean the consolidated balance sheet of the
Company as of September 30, 1997 referred to above; and references in this
Agreement to the "Interim Balance Sheet Date" shall be deemed to refer to
September 30, 1997.
2.1.7. Accounts Receivable. The accounts receivable of the Company
and the Subsidiaries as set forth on the Interim Balance Sheet or arising since
the date thereof are valid and genuine; have arisen solely out of bona fide
sales and deliveries of goods, performance of services and other business
transactions in the ordinary course of business consistent with past practice;
are not subject to valid defenses, set-offs or counterclaims; and, except as
described on Schedule 2.1.7, are collectible within 90 days after billing at the
full recorded amount thereof less, in the case of accounts receivable appearing
on the Interim Balance Sheet, the recorded allowance for collection losses on
the Interim Balance Sheet. The allowance for collection losses on the Interim
Balance Sheet has been determined in accordance with GAAP consistent with past
practice.
2.1.8. Business, Properties and Other Information. The Company is
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and has delivered to the Purchasers true and
complete copies of the following reports and proxy statements filed with the
Securities and Exchange Commission (the "Commission"):
5
<PAGE>
A. its Annual Report on Form 10-KSB for its fiscal year ended December
31, 1996, filed pursuant to Section 13(a) of the Exchange Act;
B. its Quarterly Reports on Form 10-QSB for its fiscal quarters ended
March 31, June 30, and September 30, 1997, each filed pursuant to Section
13(a) of the Exchange Act;
C. its Current Reports on Form 8-K dated November 26, 1997, October
15, 1997 and January 14, 1997 (as amended by its Current Report on Form 8-
K/A dated April 3, 1997);
D. the Proxy Statement for a Special Meeting of Stockholders, dated
February 18, 1997, filed pursuant to Section 14 of the Exchange Act; and
E. the Proxy Statement for its 1997 Annual Meeting of Stockholders,
dated April 11, 1997, filed pursuant to Section 14 of the Exchange Act.
Said reports and proxy statements comprise all materials required to be filed by
the Company with the Commission since December 31, 1996 and are collectively
called the "SEC Reports", which term shall also include on the Closing Date all
further filings which the Company may heretofore have furnished to the
Purchasers pursuant to Section 3.1.
Neither the SEC Reports listed above, this Agreement, nor any other
document, slide presentation, certificate, written statement or projection of
future economic performance furnished to the Purchasers or their representatives
by or on behalf of the Company in connection with the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained therein, in
the light of the circumstances under which they were made, not misleading;
provided that to the extent any such information therein was based upon or
constitutes an estimate or projection, the Company represents only that in
preparing such estimate or projection it acted in good faith and on a basis
which the Company reasonably believed to be reasonable based on the assumptions
set forth in the presentation materials and on a basis consistent with the
financial statements delivered pursuant to Section 2.1.6 hereof. The Company
knows of no facts not disclosed in the SEC Reports listed above or such other
documents referred to above as having been delivered to the Purchasers which
facts individually or in the aggregate have a material adverse effect on the
business, operations, assets, properties, prospects or condition (financial or
otherwise) of the Company and the Subsidiaries taken as a whole or, so far as
the Company can now foresee, could have a material adverse effect on the
business, operations, assets, properties, prospects or condition (financial or
otherwise) of the Company and the Subsidiaries taken as a whole.
6
<PAGE>
2.1.9. Absence of Undisclosed Liabilities. Neither the Company nor
any of the Subsidiaries has liabilities or obligations, either direct or
indirect, matured or unmatured or absolute, contingent or otherwise, except:
(a) those liabilities or obligations set forth on the Interim Balance
Sheet and not heretofore paid or discharged;
(b) liabilities arising in the ordinary course of business under any
agreement, contract, commitment, lease or plan specifically disclosed on the
schedules hereto or not required to be disclosed because of the term or amount
involved;
(c) those liabilities and obligations described on Schedule 2.1.9; and
(d) those liabilities or obligations incurred, consistently with past
business practice, in or as a result of the normal and ordinary course of
business since the Interim Balance Sheet Date.
For purposes of this Agreement, the term "liabilities" shall include,
without limitation, any direct or indirect indebtedness, guaranty, endorsement,
claim, loss, damage, deficiency, cost, expense, obligation or responsibility,
whether fixed or contingent, known or unknown, asserted or unasserted, choate or
inchoate, liquidated or unliquidated, secured or unsecured.
2.1.10. Books of Account. The books, records and accounts of the
Company accurately and fairly reflect, in reasonable detail, the transactions
and the assets and liabilities of the Company and the Subsidiaries and do not
contain any material inaccurate information or omit any material information
necessary in order to make such books, records and accounts, in light of the
circumstances under which they were prepared, not misleading. Neither the
Company nor any of the Subsidiaries has engaged in any transaction, maintained
any bank account or used any of the funds of the Company or the Subsidiaries
except for transactions, bank accounts and funds which have been and are
reflected in the normally maintained books and records of the Company.
2.1.11. Contracts and Commitments. (a) Except as described on
Schedule 2.1.11(a), neither the Company nor any Subsidiary is a party to any
written or oral:
(i) agreement, contract or commitment for the future purchase of, or
payment for, supplies or products, or for the performance of services by a third
party involving in any one case $50,000 or more;
7
<PAGE>
(ii) agreement, contract or commitment to sell or supply products or
to perform services involving in any one case $50,000 or more;
(iii) agreement, contract or commitment continuing over a period of
more than six months from the date hereof or exceeding $50,000 in value;
(iv) employment, consulting, representative or sales agency
agreement, contract or commitment;
(v) lease under which the Company or any Subsidiary is either lessor
or lessee;
(vi) note, debenture, bond, equipment trust agreement, letter of
credit agreement, loan agreement or other contract or commitment for the
borrowing or lending of money or agreement or arrangement for a line of credit
or guarantee, pledge or undertaking of the indebtedness of any other person;
(vii) agreement, contract or commitment for any charitable or
political contribution;
(viii) commitment or agreement for any capital expenditure or leasehold
improvement in excess of $50,000;
(ix) agreement, contract or commitment limiting or restraining the
Company or any Subsidiary from engaging or competing in any manner or in any
business;
(x) agreement or arrangement with respect to the registration of
shares of Common Stock or any other securities of the Company or any Subsidiary;
(xi) license, franchise, distributorship or other agreement which
relates in whole or in part to any software, patent, trademark, trade name,
service mark or copyright or to any ideas, technical assistance or other know-
how of or used by the Company or any Subsidiary; or
(xii) material agreement, contract or commitment not made in the
ordinary course of business.
(b) Except as described on Schedule 2.1.11(b), each of the agreements,
contracts, commitments, leases, plans and other instruments, documents and
undertakings listed or required to be listed on Schedule 2.1.11(a), or not
required to be listed therein
8
<PAGE>
because of the amount or term thereof, is valid and enforceable in accordance
with its terms; the Company and the Subsidiaries are (to the extent they are a
party thereto), and to the Company's knowledge all other parties thereto are, in
compliance with the provisions thereof; the Company and the Subsidiaries are
not, and to the Company's knowledge no other party thereto is, in default in the
performance, observance or fulfillment of any obligation, covenant or condition
contained therein; and no event has occurred which with or without the giving of
notice or lapse of time, or both, would constitute a default thereunder.
Furthermore, no such agreement, contract, commitment, lease, plan or other
instrument, document or undertaking, in the reasonable opinion of the Company,
contains any contractual requirement with which there is a reasonable likelihood
the Company, any Subsidiary or any other party thereto will be unable to comply.
2.1.12. Liens and Encumbrances; Condition of Assets. (a) Except as
listed or described on Schedule 2.1.12(a), the Company and each of the
Subsidiaries has good, valid and marketable title to its assets free and clear
of all title defects or objections, mortgages, liens, claims, charges, pledges,
or other encumbrances of any nature whatsoever, including without limitation
licenses, leases, chattel or other mortgages, collateral security arrangements,
pledges, title imperfections, defect or objection liens, security interests,
conditional and installment sales agreements, charges, easements, encroachments
or restrictions, of any kind and other title or interest retention arrangements,
reservations or limitations of any nature (collectively, "Liens"), other than
(i) those reflected or reserved against in the Interim Balance Sheet and (ii)
Liens for Taxes, assessments and other governmental charges that are not due and
payable or that may thereafter be paid without penalty. (The items referred to
in the exception to the immediately preceding sentence are hereinafter referred
to as "Permitted Liens".)
(b) All of the assets of the Company and the Subsidiaries are in good
operating condition and repair, subject to normal wear and maintenance, are
usable in the regular and ordinary course of business and conform to all
applicable laws, ordinances, codes, rules and regulations, and Permits relating
to their construction, use and operation.
2.1.13. Regulatory Compliance. The Company, each of the Subsidiaries
and each physician practice group that is managed or was previously managed by
the Company or a Subsidiary (the "Physician Practice Groups") (but only with
respect to such periods in which a management relationship existed between the
Company or a Subsidiary and such Physician Practice Group) has timely filed all
reports required to be filed in connection with federal Medicare and applicable
state Medicaid programs, and all such required reports are true and complete in
all material respects; there are no claims, actions or appeals pending (and the
Company, the Subsidiaries and the Physician Practice Groups have not filed any
document, report or other instrument that would result in any claims, actions or
appeals)
9
<PAGE>
before any commission, board or agency with respect to any state or federal
Medicare or Medicaid cost reports or claims filed by the Company, the
Subsidiaries or the Physician Practice Groups, or with respect to any
disallowances by any intermediary, carrier, other insurer, commission, board or
agency in connection with any audit of any cost reports that, if adversely
determined, would have a material adverse effect on the Company and the
Subsidiaries taken as a whole; no validation review or program integrity review
related to the Company, any Subsidiary or any Physician Practice Group has been
conducted by any commission, board or agency in connection with federal Medicare
or state Medicaid programs, and no such reviews are scheduled, pending or, to
the Company's knowledge, threatened against or affecting the Company, the
Subsidiaries or the Physician Practice Groups; the Company, each of the
Subsidiaries and each of the Physician Practice Groups has timely filed all
material reports, data and other information required by any other regulatory
agency with authority to regulate the Company, any of the Subsidiaries, any of
the Physician Practice Groups or the Business in any manner; the Company, each
of the Subsidiaries and each of the Physician Practice Groups is in compliance
in all material respects with all rules, regulations and requirements of all
regulatory agencies; and the conduct of the Business by the Company, the
Subsidiaries and the Physician Management Groups does not violate 42 U.S.C. (S)
1320a-7b (commonly known as the "Anti-Kickback Statute") or 42 U.S.C. (S) 1395nn
(commonly known as the "Stark Amendments"), including all amendments thereto.
2.1.14. Insurance. The Company and each of the Subsidiaries has
insurance policies in full force and effect for such amounts as are sufficient
for material compliance with all requirements of law and of all agreements to
which the Company or any of the Subsidiaries is a party or by which any of them
is bound. Except as set forth in Schedule 2.1.14, no event relating to the
Company or the Subsidiaries has occurred that can reasonably be expected to
result in a retroactive upward adjustment in premiums under any such insurance
policies or that is likely to result in a prospective upward adjustment in such
premiums. Excluding insurance policies that have expired and been replaced in
the ordinary course of business, no insurance policy has been cancelled within
the last two years and, to the Company's knowledge, no threat has been made to
cancel any insurance policy of the Company or any Subsidiary during such period.
No event has occurred, including, without limitation, the failure by the Company
or any Subsidiary to give any notice or information or the Company or any
Subsidiary giving any inaccurate or erroneous notice or information, which
limits or impairs the rights of the Company or any Subsidiary under any such
insurance policies. The Company has provided the Purchasers with true and
complete copies of all regularly prepared loss run reports as of the date
hereof.
10
<PAGE>
2.1.15. Conduct of the Business Since the Interim Balance Sheet Date.
Except as described on Schedule 2.1.15, since the Interim Balance Sheet Date,
neither the Company nor any of the Subsidiaries has:
(a) incurred any liabilities, other than liabilities incurred in the
ordinary course of business consistent with past practice, or discharged or
satisfied any lien or encumbrance, or paid any liabilities, other than in the
ordinary course of business consistent with past practice, or failed to pay or
discharge when due any liabilities of which the failure to pay or discharge has
caused or will cause any material damage or risk of material loss to it or any
of its assets or properties;
(b) sold, encumbered, assigned or transferred any material assets or
properties;
(c) created, incurred, assumed or guaranteed any indebtedness for
money borrowed, or mortgaged, pledged or subjected any of its assets to any
mortgage, lien, pledge, security interest, conditional sales contract or other
encumbrance of any nature whatsoever, except for Permitted Liens;
(d) made or suffered any amendment or termination of any material
agreement, contract, commitment, lease or plan to which it is a party or by
which it is bound, or cancelled, modified or waived any substantial debts or
claims held by it or waived any rights of substantial value, whether or not in
the ordinary course of business;
(e) declared, set aside or paid any dividend or made or agreed to make
any other distribution or payment in respect of its capital shares or redeemed,
purchased or otherwise acquired or agreed to redeem, purchase or acquire any of
its capital shares;
(f) suffered any damage, destruction or loss, whether or not covered
by insurance, (i) materially and adversely affecting its business, operations,
assets, properties or prospects or (ii) of any item or items carried on its
books of account individually or in the aggregate at more than $50,000;
(g) made commitments or agreements for capital expenditures or capital
additions or betterments exceeding in the aggregate $100,000 except such as may
be involved in ordinary repair, maintenance or replacement of its assets;
(h) increased the salaries or other compensation of, or made any
advance (excluding advances for ordinary and necessary business expenses) or
loan to, any of its
11
<PAGE>
employees or made any increase in, or any addition to, other benefits to which
any of its employees may be entitled;
(i) changed any of the accounting principles followed by it or the
methods of applying such principles;
(j) entered into any transaction other than in the ordinary course of
business consistent with past practice; or
(k) suffered any material adverse change in its business, operations,
assets, properties, prospects or condition (financial or otherwise).
2.1.16. Employee Benefit Plans. (a) All "employee benefit plans," as
defined by Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and all other employee benefit arrangements or payroll
practices, including, without limitation, bonus plans, consulting or other
compensation agreements, incentive, equity or equity-based compensation,
deferred compensation arrangements, stock purchase, severance pay, and change in
control agreements, programs, policies or arrangements maintained by the Company
or any Subsidiary or to which the Company or any Subsidiary contributes or
contributed on behalf of its respective employees or has any liability,
contingent or otherwise (the "Employee Plans"), are listed on Schedule
2.1.16(a). Any Employee Plans which constitute "employee pension benefit plans"
as defined in Section 3(2) of ERISA (the "Pension Plans") are so designated on
Schedule 2.1.16(a). No Pension Plan is subject to Title IV of ERISA or Section
412 of the Code.
(b) Except as set forth on Schedule 2.1.16(b), (i) each Pension Plan
is qualified under Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code"), and any trust maintained pursuant thereto is exempt from federal
income taxation under Section 501 of the Code; and (ii) the Company and each of
the Subsidiaries has complied with respect to each Employee Plan in all material
respects with the reporting and disclosure requirements of ERISA and no "party
in interest" or "disqualified person" has engaged in a "prohibited transaction"
within the meaning of Section 406 of ERISA or Section 4975 of the Code.
(c) The Employee Plans have been established, maintained and operated
in all material respects in accordance with their terms and with all provisions
of ERISA, the Code and other applicable federal and state laws and regulations.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment
12
<PAGE>
becoming due to any employee or consultant (current, former or retired) of the
Company or any of the Subsidiaries, (ii) increase any benefits otherwise payable
under any Employee Plan or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
2.1.17. Litigation; Decrees. There are no judicial or administrative
actions, proceedings or investigations pending or, to the Company's knowledge,
threatened that question the validity of this Agreement or any action taken or
to be taken by the Company in connection with this Agreement. Except as listed
or described on Schedule 2.1.17, there are no (i) lawsuits, claims,
administrative or other proceedings or investigations relating to the conduct of
the Business pending or, to the Company's knowledge, threatened by, against or
affecting the Company or any affiliate thereof or (ii) judgments, orders or
decrees of any Governmental Entity binding on the Company or any Subsidiary.
2.1.18. Compliance With Law; Permits. The Company and each of the
Subsidiaries has complied with each law, judgment, order and decree of any
Governmental Entity to which the Company or the Subsidiaries or their business,
operations, assets or properties is subject and is not currently in violation of
any of the foregoing. The Company and each of the Subsidiaries owns, holds,
possesses or lawfully uses in the operation of its business all licenses,
permits, authorizations and approvals (collectively, "Permits") which are in any
manner necessary to conduct the Business as now or previously conducted or for
the ownership and use of its assets, free and clear of all Liens and in
compliance with all laws. All such Permits are listed and described on Schedule
2.1.18. Neither the Company nor any Subsidiary is in default, nor has the
Company or any Subsidiary received any notice of any claim of default, with
respect to any such Permits. All such Permits are renewable by their terms or
in the ordinary course of business without the need to comply with any special
qualification procedures or to pay any amounts other than routine filing fees.
None of such Permits will be adversely affected by consummation of the
transactions contemplated hereby. No shareholder, director, officer, employee
or former employee of the Company or any affiliates of the Company, or any other
person, firm or corporation owns or has any proprietary, financial or other
interest (direct or indirect) in any Permits which the Company or any Subsidiary
owns, possesses or uses in the operation of the Business as now or previously
conducted.
2.1.19. Taxes. (a) All Tax Returns (as defined in paragraph (e)
below) that are required to be filed on or before the Closing Date by the
Company or any of the Subsidiaries have been duly filed on a timely basis under
the statutes, rules or regulations of each applicable jurisdiction. All such
Tax Returns were complete and accurate in all material respects. All Taxes owed
by the Company or the Subsidiaries have been paid, whether or not such Taxes are
disputed. Neither the Company nor any of the Subsidiaries
13
<PAGE>
has executed or filed with the Internal Revenue Service or any other taxing
authority any agreement extending the period for filing any Tax Return.
(b) No claim for assessment or collection of Taxes has been asserted
against the Company or any of the Subsidiaries. Neither the Company nor any of
the Subsidiaries is a party to any pending action, proceeding or investigation
by any Governmental Entity for the assessment or collection of Taxes nor does
the Company have knowledge of any such threatened action, proceeding or
investigation.
(c) No waivers of statutes of limitation in respect of any Tax Returns
have been given or requested by the Company or any of the Subsidiaries nor has
the Company or any Subsidiary agreed to any extension of time with respect to a
Tax assessment or deficiency. No claim has ever been made by a Governmental
Entity in a jurisdiction where the Company or any Subsidiary does not currently
file Tax Returns that it is or may be subject to taxation by that jurisdiction
nor is the Company aware that any such assertion of jurisdiction is threatened.
No security interests have been imposed upon or asserted against any of the
assets of the Company or any of the Subsidiaries as a result of or in connection
with any failure, or alleged failure, to pay any Tax.
(d) The Company and each of the Subsidiaries has withheld and paid all
Taxes required to be withheld in connection with any amounts paid or owing to
any employee, creditor, consultant, independent contractor or other third party.
(e) For purposes of this Agreement, the terms "Tax" and "Taxes" shall
mean all federal, state, local, or foreign income, payroll, employee
withholding, unemployment insurance, social security, sales, use, service,
service use, leasing, leasing use, excise, franchise, gross receipts, value
added, alternative or add-on minimum, estimated, occupation, real and personal
property, stamp, transfer, workers' compensation, severance, windfall profits,
environmental (including taxes under Section 59A of the Code), or other tax of
the same or of a similar nature, including any interest, penalty, or addition
thereto, whether disputed or not. The term "Tax Return" means any return,
declaration, report, claim for refund, or information return or statement
relating to Taxes or any amendment thereto, and including any schedule or
attachment thereto.
2.1.20. Real Property. Neither the Company nor any of the
Subsidiaries owns any real property. Except as set forth in Schedule 2.1.20,
the Company and each of the Subsidiaries has good and valid leaseholds in all
real estate leased by it, in each case, under enforceable leases. Except as
disclosed in Schedule 2.1.20, none of such real properties is subject to any
easements, rights of way, licenses, grants, building or use restrictions,
exceptions, reservations, limitations or other impediments which materially and
14
<PAGE>
adversely affect the value thereof or which interfere with or impair the present
and continued use in the usual and normal conduct of the business of the Company
and the Subsidiaries.
2.1.21. Commissions or Finders Fees. Neither the Company nor any
person or entity acting on the behalf of the Company has agreed to pay a
commission, finder's fee or similar payment in connection with this Agreement or
any matter related hereto to any other person or entity.
2.1.22. Certain Business Practices and Regulations; Affiliate
Transactions. (a) None of the Company, the Subsidiaries or any directors,
officers, agents or employees of the Company or the Subsidiaries has (i) used
any corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds or violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
(b) Except as described on Schedule 2.1.22(b), none of the
stockholders holding 5% or more of the Common Stock or any officers or directors
of the Company or any of the Subsidiaries or any entity controlled by any of the
foregoing (i) owns, directly or indirectly, any significant interest in, or is a
director, officer, employee, consultant or agent of, any person that is a
competitor, lessor, lessee or customer of, or supplier of goods or services to,
the Business, (ii) owns, directly or indirectly, in whole or in part, any real
property, leasehold interests or other property the use of which is necessary
for the Business, (iii) has any cause of action or other suit, action or claim
whatsoever against, or owes any amount to the Company or any of the Subsidiaries
other than claims in the ordinary course of business, (iv) has sold to, or
purchased from, the Company or any of the Subsidiaries any assets or property
for aggregate consideration in excess of $25,000 since January 1, 1997, or (v)
is a party to any contract or participates in any arrangement, written or oral,
pursuant to which the Business provides services of any nature to any such
individual or entity, except to such individual in his capacity as an employee
of the Company or any of the Subsidiaries.
2.1.23. Compliance with American Stock Exchange Rules and
Regulations. The Company has complied in all material respects with all rules
and regulations of the American Stock Exchange since the date the Common Stock
was originally approved for trading thereon. The execution and delivery of this
Agreement and the other Transaction Documents by the Company does not, and the
performance by the Company of the transactions contemplated hereby or thereby to
be performed by it will not, conflict with, result in any violation of, or
constitute a default under any such rules and regulations. No event has
occurred or, to the knowledge of the Company, is reasonably likely to occur
which
15
<PAGE>
could result in the Common Stock being delisted from such exchange or the
Company being subject to any material fine or sanction imposed by such exchange.
2.1.24. Shareholder Proposals. (a) The record date to vote on the
Shareholder Proposals (as hereinafter defined) has been duly fixed to be
December 17, 1997 (the "Record Date") by all necessary action of the Board of
Directors. As of the date hereof, the shareholders of the Company listed on
Schedule 2.1.24 are the record holders of the number of shares of Common Stock
or Series A Preferred Stock, as the case may be, set forth opposite their names
on such schedule. Such shareholders are entitled to vote all such shares in
connection with the Shareholder Proposals. Such shares represent more than 50%
of the issued and outstanding Common Stock and other securities of the Company
having voting rights as of the date hereof (and will represent more than 50% of
the issued and outstanding Common Stock and other securities of the Company
having voting rights as of the Record Date) and are sufficient in number to
approve the Shareholder Proposals even if all other shares of Common Stock and
other securities having voting rights issued and outstanding as of the date
hereof vote against the Shareholder Proposals.
(b) The Board of Directors of the Company, at a meeting duly called
and held, has by the vote of those directors present (who constituted 100% of
the directors then in office) (i) determined that the Shareholder Proposals are
fair to and in the best interests of the shareholders of the Company and has
approved the same and (ii) resolved to recommend that the holders of the shares
of Common Stock and Series A Preferred Stock approve the Shareholder Proposals.
2.1.25. Disclosure. No representation or warranty by the Company
contained in this Agreement or any of the other Transaction Documents, and no
statement contained in any document, list, schedule, certificate or other
instrument furnished or to be furnished by or on behalf of the Company or any
affiliate thereof to the Purchasers or any of its representatives in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was or will be made, in
order to make the statements herein or therein not misleading or necessary in
order fully and fairly to provide the information required to be provided in any
such document, list, schedule, certificate or other instrument. The Company has
not failed to disclose to the Purchasers in any of the schedules required to be
furnished hereunder or otherwise any fact which could reasonably be determined
to have a material adverse effect on the business, operations, assets,
properties, prospects or condition (financial or otherwise) of the Company and
the Subsidiaries taken as a whole, or which is otherwise material to the Company
and the Subsidiaries taken as a whole.
16
<PAGE>
2.2. Representations and Warranties of the Purchasers. Each Purchaser,
severally and not jointly, as to itself, makes the following representations and
warranties to the Company, each of which is true and correct as of the date
hereof and shall be true and correct as of the Closing Date and shall be
unaffected by any investigation heretofore or hereafter made by the Company.
2.2.1. Corporate Organization. Such Purchaser is a limited
partnership duly formed and validly existing under the laws of the State of
Texas and has the requisite partnership power and authority to own, lease or
otherwise hold its properties and assets and to carry on its business as
presently conducted.
2.2.2. Authorization and Effect of Agreement. Such Purchaser has the
requisite partnership power to execute and deliver this Agreement and to
consummate the transactions contemplated hereby to be consummated by it. The
execution and delivery by such Purchaser of this Agreement and the consummation
by it of the transactions contemplated hereby to be consummated by it have been
duly authorized by all necessary partnership action on the part of such
Purchaser. This Agreement has been duly executed and delivered by such
Purchaser and constitutes a valid and binding obligation of such Purchaser,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights in general
and subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
2.2.3. Purchase of Securities. Such Purchaser is acquiring the
Securities set forth opposite its name on Schedule I attached hereto on the
Closing Date without a present view to the distribution thereof. Such Purchaser
is an "accredited investor" within the meaning of Rule 501(a) of Regulation D
promulgated by the Commission under the Securities Act.
ARTICLE III. PRE-CLOSING COVENANTS
3.1. Access to Information; Communications. (a) Prior to the Closing,
upon reasonable notice from the Purchasers to the Company, the Company will
afford to the officers, attorneys, accountants or other authorized
representatives of the Purchasers reasonable access during normal business hours
to the employees, assets, facilities and books and records of the Company and
the Subsidiaries so as to afford the Purchasers full opportunity to make such
review, examination and investigation of the Company and the Subsidiaries as the
Purchasers may desire to make. The Purchasers will be permitted to make
extracts from or to make copies of such books and records as may be reasonably
17
<PAGE>
necessary in connection therewith. Prior to the Closing, the Company will
promptly furnish or cause to be furnished to the Purchasers such financial and
operating data and other information as the Purchasers may reasonably request.
(b) Prior to the Closing, the Company shall promptly provide the
Purchasers with copies of all financial statements sent or made available by the
Company or the Subsidiaries to their equity or other security holders, all
regular and periodic reports and proxy statements, and all registration
statements and prospectuses, if any, filed by the Company or the Subsidiaries
with any securities exchange or with the Commission.
(c) Prior to the Closing, the Company shall promptly provide the
Purchasers with copies of all press releases and other statements made available
generally by the Company or any of the Subsidiaries to the public relating to
financial matters or to other material developments in the business of the
Company and the Subsidiaries.
(d) Prior to the Closing, promptly after receipt thereof, the Company
shall provide the Purchasers with copies of each management letter submitted to
the Company or the Subsidiaries by independent public accountants in connection
with any annual, interim or special audit made by them of the books of the
Company or the Subsidiaries.
3.2. Conduct of Business. Except as set forth on Schedule 3.2, as
contemplated herein or as otherwise consented to by the Purchasers in writing,
during the period from the date of this Agreement and continuing until the
Closing Date, the Company will, and will cause its affiliates to:
(a) use their respective best efforts to (i) carry on the Business in
the usual, regular and ordinary course as presently conducted and
consistent with past practice, (ii) keep the Business intact, (iii) keep
available the services of the present employees of the Business, and (iv)
use best efforts to maintain the goodwill associated with the Business,
including but not limited to preserving the relationships of customers,
suppliers and others having business dealings with the Business;
(b) not sell, lease or dispose of, or make any contract for the sale,
lease or disposition of, or subject to Lien, any material assets of the
Company or the Subsidiaries;
(c) not intentionally incur any liability or obligation (absolute,
accrued, contingent or otherwise) or assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other person, other than in the ordinary course of business;
18
<PAGE>
(d) not split, combine or reclassify any shares of capital stock of
the Company or any Subsidiary, declare, pay or set aside for payment any
dividend or other distribution in respect of capital stock of the Company
or any Subsidiary, or directly or indirectly redeem, purchase or otherwise
acquire any shares of capital stock or other securities of the Company or
any Subsidiary;
(e) not issue, sell, pledge, dispose of, encumber or deliver (whether
through the issuance or granting of any options, warrants, commitments,
subscriptions, rights to purchase or otherwise) any stock of any class of
the Company or any Subsidiary or any securities convertible into or
exercisable or exchangeable for shares of stock of any class of the Company
or any Subsidiary (other than issuance of Certificates in replacement of
lost Certificates);
(f) not amend or modify the Certificate or Articles of Incorporation
or By-laws of the Company or the Subsidiaries;
(g) not amend or terminate any contract or other agreement, other than
in the ordinary course of business consistent with past practices;
(h) not make any change in financial or tax accounting methods,
principles or practices unless required by GAAP or applicable law;
(i) not extend credit in the sale of services, collection of
receivables or otherwise, other than in the ordinary course of business
consistent with past practices;
(j) not fail to maintain its books, accounts and records in the usual,
regular and ordinary manner on a basis consistent with prior years;
(k) not grant to any employee any increase in compensation or in
severance or termination pay, grant any severance or termination pay, or
enter into any employment agreement with any employee, except as may be
required under employment or termination agreements in effect on the date
of this Agreement;
(l) not enter into any agreement which includes an aggregate payment
or commitment on the part of either party of more than $50,000;
(m) not adopt or amend any Employee Plan or collective bargaining
agreements, except as required by law;
19
<PAGE>
(n) maintain in full force and effect all insurance described in
Schedule 2.1.14; and
(o) not take or omit to take any action as a result of which any
representation or warranty of the Company in Article II would be rendered
untrue or incorrect if such representation or warranty were made
immediately following the taking or failure to take such action.
3.3. Supplemental Financial Statements. Within thirty (30) days of the
end of each month, the Company shall deliver to the Purchasers unaudited
consolidated statements of income and cash flow and a consolidated balance sheet
of the Company for the month then ended (collectively, the "Supplemental
Financial Statements"). The Supplemental Financial Statements shall be
certified by the Chief Financial Officer of the Company. Such certification
shall state that: (a) the Supplemental Financial Statements were prepared in
accordance with GAAP and practices consistent with those followed in the
preparation of the financial statements delivered pursuant to Section 2.1.6
hereof; and (b) no material adjustments of such Supplemental Financial
Statements are required for a fair presentation of the financial condition and
results of operations of the Company and its Subsidiaries for the period covered
by such statements.
3.4. Notification. (a) The Company shall notify the Purchasers, and the
Purchasers shall notify the Company, of any litigation, arbitration or
administrative proceeding pending or, to its or their knowledge, threatened
against the Company or the Purchasers, as the case may be, which challenges the
transactions contemplated hereby.
(b) The Company will provide prompt written notice to the Purchasers
of any change in any of the information contained in its representations and
warranties made in Article II hereof or any Schedules referred to herein or
attached hereto and shall promptly furnish any information which the Purchasers
may reasonably request in relation to such change; provided, however, that such
notice shall not operate to cure any breach of the representations and
warranties made in Article II hereof or any Schedules referred to herein or
attached hereto.
3.5. Cooperation. The Purchasers and the Company shall cooperate fully
with each other in taking any actions, including actions to obtain the required
consent of any Governmental Entity or any third party, necessary or helpful to
accomplish the transactions contemplated by this Agreement; provided, however,
that no party shall be required to take any action which would have a material
adverse effect upon it or any affiliate.
20
<PAGE>
3.6. No Inconsistent Action. Neither the Purchasers nor the Company shall
take any action which is materially inconsistent with its obligations under this
Agreement.
3.7. Satisfaction of Conditions. Without limiting the generality or
effect of any provision of Article IV, prior to the Closing, each of the parties
will use reasonable efforts with due diligence and in good faith to satisfy
promptly all conditions required hereby to be satisfied by such party in order
to expedite the consummation of the transactions contemplated hereby.
3.8. Confidentiality. The Purchasers and the Company shall each keep
confidential all information obtained by it with respect to the others in
connection with this Agreement and the negotiations preceding this Agreement,
and will use such information solely in connection with the transactions
contemplated by this Agreement, and if the transactions contemplated hereby are
not consummated, each shall return to the others, without retaining a copy
thereof, any schedules, documents or other written information obtained from the
others in connection with this Agreement and the transactions contemplated
hereby; provided, however, that if the transactions contemplated hereby are
consummated, the Purchasers shall be entitled to use such information concerning
the Company in any lawful manner. Notwithstanding the foregoing, neither the
Purchasers nor the Company shall be required to keep confidential or return any
information which (a) is known or available through other lawful sources not
bound by a confidentiality agreement with the disclosing party, (b) is or
becomes publicly known through no fault of the receiving party or its agents,
(c) is required to be disclosed pursuant to an order or request of a judicial
authority or Governmental Entity (provided the disclosing party is given
reasonable prior notice), (d) is developed by the receiving party independently
of the disclosure by the disclosing party or (e) is required to be disclosed in
connection with any dispute or legal proceeding arising under or in connection
with this Agreement or any of the other Transaction Documents.
3.9. Publicity. Prior to the Closing, none of the parties will issue or
cause the publication of any press release or other public announcement with
respect to this Agreement or the transactions contemplated hereby without the
prior consent of the other parties, which consent will not be unreasonably
withheld; provided, however, that nothing herein will prohibit any party from
issuing or causing publication of any such press release or public announcement
to the extent that such party determines such action to be required by law or
the rules of any national stock exchange applicable to it or its affiliates, in
which event the party making such determination will, if practicable in the
circumstances, use reasonable efforts to allow the other parties reasonable time
to comment on such release or announcement in advance of its issuance.
21
<PAGE>
3.10. Acquisition Proposals. From and after the date of this Agreement
until the Closing Date, the Company shall not, and shall not authorize or permit
any officer, director or employee of, or any investment banker, attorney,
accountant or other representative retained by, the Company or any of the
Subsidiaries to, solicit, initiate or encourage submission of any proposal or
offer (including by way of furnishing information) from any person which
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal.
As used in this Agreement, "Acquisition Proposal" shall mean any proposal for a
merger or other business combination involving the Company or any of the
Subsidiaries or any proposal or offer to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of, the Company or
any of the Subsidiaries.
ARTICLE IV. CONDITIONS TO CLOSING
4.1. Conditions Precedent to Obligations of the Purchasers. The
obligations of the Purchasers under this Agreement to consummate the
transactions contemplated hereby will be subject to the satisfaction, at or
prior to Closing, of all of the following conditions, any one or more of which
may be waived at the option of the Purchasers:
4.1.1. Representations, Warranties and Covenants.
(a) All representations and warranties of the Company made in this
Agreement or in any Exhibit, Schedule or document delivered pursuant hereto
that are qualified with respect to materiality shall be true and complete
in all respects as of the date hereof and on and as of the Closing Date and
such representations and warranties that are not so qualified shall be true
and complete on the date hereof and, in all material respects, on and as of
the Closing Date, without regard to any schedule updates furnished by the
Company after the date hereof.
(b) All of the terms, covenants and conditions to be complied with
and performed by the Company on or prior to the Closing Date shall have
been complied with or performed.
(c) The Purchasers shall have received a certificate, dated as of the
Closing Date, executed by the Chief Executive Officer and the Chief
Financial Officer of the Company, certifying in such detail as the
Purchasers may reasonably request that the conditions specified in Sections
4.1.1(a) and (b) hereof have been fulfilled.
4.1.2. Certificate of Controlling Stockholders. The Purchasers shall
have received a certificate of William F. Donovan, M.D. and Jose E. Kauachi
certifying that, to
22
<PAGE>
the best knowledge of such persons, none of the SEC Reports contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading.
4.1.3. Closing Documents. The Company shall have delivered to the
Purchasers the documents identified in Section 5.1.
4.1.4. Governmental Consents or Approvals. Each of the governmental
and other approvals, consents or waivers listed or required to be listed on
Schedule 2.1.4 shall have been obtained.
4.1.5. No Adverse Proceedings. No suit, action, claim or
governmental proceeding shall be pending against, and no order, decree or
judgment of any court, agency or Governmental Entity shall have been rendered
against, any party hereto which would render it unlawful, as of the Closing
Date, to effect the transactions contemplated by this Agreement in accordance
with its terms.
4.1.6. Opinions. The Purchasers shall have received a written
opinion of Willkie Farr & Gallagher, special counsel to the Company in
connection with the transactions contemplated hereby, and a written opinion of
Hutcheson & Grundy, L.L.P., special Texas counsel to the Company, in
substantially the forms attached hereto as Exhibits C and D, respectively.
4.1.7. Registration Rights Agreements. A Registration Rights
Agreement, substantially in the form of Exhibit E attached hereto (the
"Registration Rights Agreement"), shall have been duly executed and delivered,
shall be in full force and effect and no term or condition thereof shall have
been amended, modified or waived.
4.1.8. Warrant Agreements and Warrants. The Warrant Agreements and
Warrants shall have been duly executed and delivered by the Company in
accordance with Section 1.2.
4.1.9. Stock Certificates. Stock certificates representing the
shares of Series B Preferred Stock shall have been duly executed and delivered
in accordance with Section 1.2.
4.1.10. Certificate of Designation. The Certificate of Designation
shall have been duly filed with, and accepted by, the Secretary of State of the
State of Texas.
23
<PAGE>
4.1.11. Acquisition Committee Designees. Two designees of the
Purchasers shall have been appointed to the Acquisition Committee of the Board
of Directors of the Company (the "Acquisition Committee"), effective as of the
Closing Date.
4.1.12. Chartwell Matters. The First Amendment to Investment
Agreement and the Termination Agreement, substantially in the forms attached
hereto as Exhibit F and G, respectively, shall have been duly executed and
delivered, shall be in full force and effect and no term or condition thereof
shall have been amended, modified or waived; and the Amendment and Restatement
of Certificate of Designation and Determination of Rights and Preferences of
Cumulative Convertible Preferred Stock, Series A, of the Company in the form
attached hereto as Exhibit H shall have been duly filed with, and accepted by,
the Secretary of State of the State of Texas.
4.1.13. Private Placement Numbers. The Series B Preferred Stock and
the Warrants shall have been assigned private placement numbers by Standard &
Poor's Corporation.
4.1.14. Reserved Shares. The Company shall have reserved an adequate
number of shares of Common Stock for issuance upon conversion of the Series B
Preferred Stock and the exercise of the Warrants.
4.1.15. Payment of Fees. The Company shall have paid the fees and
disbursements of special counsel to the Purchasers as contemplated in Section
9.3.
4.1.16. Amendment to By-laws. The By-laws of the Company shall have
been amended and restated in the form attached hereto as Exhibit I.
4.1.17. Additional Listing Application. The Company shall have filed
an Additional Listing Application, including all applicable fees, with the
American Stock Exchange with respect to all of the shares of Common Stock
issuable upon conversion of the Series B Preferred Stock and exercise of the
Warrants.
4.1.18. Termination of Agreements. The Company shall have terminated
each of the agreements set forth on Schedule 4.1.18 on terms reasonably
acceptable to the Purchasers.
4.1.19. Directors. The number of directors constituting the Board of
Directors of the Company shall have been increased to eight and the director
listed on Schedule 4.1.19 shall have resigned from the Board of Directors of the
Company effective as of the Closing Date.
24
<PAGE>
4.2. Conditions Precedent to Obligations of the Company. The obligations
of the Company under this Agreement to consummate the transactions contemplated
hereby will be subject to the satisfaction, at or prior to the Closing, of all
of the following conditions, any one or more of which may be waived at the
option of the Company:
4.2.1. No Material Misrepresentation or Breach.
(a) All representations and warranties of the Purchasers made in this
Agreement or in any Exhibit, Schedule or document delivered pursuant
hereto, shall be true and complete in all material respects as of the date
hereof and on and as of the Closing Date.
(b) All of the terms, covenants and conditions to be complied with
and performed by the Purchasers on or prior to the Closing Date shall have
been complied with or performed.
4.2.2. Closing Documents. The Purchasers shall have delivered to the
Company the documents identified in Section 5.2.
4.2.3. Governmental Consents or Approvals. Each of the governmental
and other approvals, consents or waivers listed on Schedule 2.1.4 shall have
been obtained.
4.2.4. No Adverse Proceedings. No suit, action, claim or
governmental proceeding shall be pending against, and no order, decree or
judgment of any court, agency or other Governmental Entity shall have been
rendered against, any party hereto which would render it unlawful, as of the
Closing Date, to effect the transactions contemplated by this Agreement in
accordance with its terms.
ARTICLE V. DOCUMENTS TO BE DELIVERED AT THE CLOSING
5.1. Documents to be Delivered by the Company. At the Closing, the
Company will deliver to the Purchasers the following:
5.1.1. Certified Resolutions. Certified resolutions of the Board of
Directors of the Company (a) approving the execution and delivery of this
Agreement and each of the other documents delivered by the Company pursuant
hereto and authorizing the consummation of the transactions contemplated hereby
and thereby and (b) authorizing the establishment of the Acquisition Committee.
25
<PAGE>
5.1.2. Officer's Certificate. A certificate, dated the Closing Date,
executed on behalf of the Company in the form described in Section 4.1.1.
5.1.3. Good Standing Certificates. Governmental certificates showing
that the Company and the Subsidiaries are duly incorporated and in good standing
in the state of its incorporation and in good standing in each state listed on
Schedule 2.1.1 certified as of a date not more than five (5) days before the
Closing Date.
5.1.4. Other Documents. Such additional information and materials as
the Purchasers shall reasonably request.
5.2. Documents to be Delivered by the Purchasers. At the Closing, the
Purchasers will deliver to the Company:
5.2.1. Purchase Price. Evidence of wire transfers in the aggregate
amount of $25,000,000.
5.2.2. Other Documents. Such additional information and materials as
the Company shall reasonably request.
ARTICLE VI. POST-CLOSING COVENANTS
6.1. Acquisition Committee Designees. At all times in which shares of
Series B Preferred Stock shall be issued and outstanding, the holders of a
majority of such issued and outstanding shares shall be entitled to designate
two members to the Acquisition Committee and the total number of persons
constituting such Committee shall be three (including the two designees of the
holders of the Series B Preferred Stock). Such rights to designate Acquisition
Committee members shall survive the conversion of the Series B Preferred Stock
and shall inure to the benefit of the Purchasers until such time that the
Purchasers and their affiliates own less than 50% of the Common Stock initially
issuable upon conversion of the Series B Preferred Stock. For so long as shares
of Series B Preferred Stock are issued and outstanding or the Purchasers or
their affiliates own more than 50% of the shares of Common Stock initially
issuable upon conversion of the Series B Preferred Stock, the Company shall not
dissolve the Acquisition Committee or increase the size of the Acquisition
Committee to more than three.
6.2. Board Designees. In accordance with the Certificate of Designation,
the holders of the Series B Preferred Stock shall be entitled to one vote for
each share of Series B Preferred Stock held by such holders on a record date set
to hold a meeting at which the
26
<PAGE>
holders of Series B Preferred Stock shall be entitled to elect, as a class,
three directors to the Board of Directors of the Company (or a majority of the
directors in the event of a breach by the Company of any of the financial
covenants set forth in the Certificate of Designation). Such rights to
designate board members shall survive the conversion of the Series B Preferred
Stock and shall inure to the benefit of the Purchasers until such time that the
Purchasers and their affiliates own less than 50% of the Common Stock initially
issuable upon conversion of the Series B Preferred Stock. For so long as shares
of Series B Preferred Stock are issued and outstanding or the Purchasers or
their affiliates own more than 50% of the shares of Common Stock initially
issuable upon conversion of the Series B Preferred Stock, the Company shall not
increase the size of the Board of Directors to more than eight.
6.3. Post-Closing Notifications. The Purchasers and the Company will, and
each will cause their respective affiliates to, comply with any post-Closing
notification or other requirements, to the extent then applicable to such party,
of any antitrust, trade competition, investment or control, export or other law
of any Governmental Entity having jurisdiction over the Purchasers or the
Company.
6.4. Certain Tax Matters. All sales, use, transfer, stamp, conveyance,
value added or other similar taxes, duties, excises or governmental charges
imposed by any taxing jurisdiction, domestic or foreign, and all recording or
filing fees, notarial fees and other similar costs of Closing with respect to
the issuance of the Securities or otherwise on account of this Agreement or the
transactions contemplated hereby will be borne by the Company. The Company will
indemnify the Purchasers against any liability, direct or indirect, for any
Taxes imposed on the Purchasers with respect to the issuance of the Securities.
6.5. Financial Statements and Information. The Company will promptly
furnish to the Purchasers and any other subsequent holders of the Securities,
for so long as the Purchasers or such other subsequent holders shall hold any of
the Securities, in duplicate:
(a) copies of all financial statements sent or made available by the
Company or its subsidiaries to its equity or other security holders, all regular
and periodic reports and proxy statements, and all registration statements and
prospectuses, if any, filed by the Company or its subsidiaries with any
securities exchange or with the Commission;
(b) copies of all press releases and other statements made available
generally by the Company or its subsidiaries to the public relating to financial
matters or to other material developments in the business of the Company and its
subsidiaries; and
27
<PAGE>
(c) copies of each management letter submitted to the Company or its
subsidiaries by independent public accountants in connection with any annual,
interim or special audit made by them of the books of the Company or its
subsidiaries.
6.6. Right of First Refusal. (a) If, at any time after the date hereof
until the fifth anniversary hereof, the Company proposes to issue (an "Offer")
shares of Common Stock or other equity securities of the Company, other than (i)
pursuant to a proposed underwritten public offering of Common Stock by the
Company or (ii) on terms no less favorable to the Company than could be obtained
from a non-affiliated third party, the Company shall, not less than 45 days
prior to the anticipated closing of such sale or transfer, give written notice
(the "Sale Notice") to the holders of the Series B Preferred Stock and the
holders of the Series A Preferred Stock (together, the "Option Holders") of such
proposed sale or transfer. The Sale Notice shall (i) specify the proposed
purchaser thereof, the number of shares to be issued, the amount and type of
consideration to be received therefor, and the other material terms on which the
Company proposes to issue the Common Stock or other equity securities, (ii)
contain an offer by the Company to sell to the Option Holders all of such shares
of Common Stock or other equity securities on the same terms as the Offer (the
"First Refusal Offer"), and (iii) indicate the appraised value of any non-cash
consideration proposed to be paid in the Offer; provided, that, if any non-cash
consideration is to be received by the Company pursuant to the Offer, the Option
Holders shall have the right to pay in cash the appraised value of such non-cash
consideration. Any appraisal or valuation required pursuant to this Section
shall be prepared by a nationally-recognized independent appraiser mutually
acceptable to the Company and the Option Holders and shall be submitted in
writing and addressed to the Company and the Option Holders.
(b) The Option Holders must notify the Company in writing within 15
days following receipt of the Sale Notice if they desire to accept the First
Refusal Offer. The Option Holders who desire to accept the First Refusal Offer
may purchase all or a portion of the shares of Common Stock or other equity
securities of the Company in such proportions as they may mutually agree or, in
the absence of such an agreement, in proportion to the number of shares of fully
diluted Common Stock owned by each such Option Holder who wishes to participate
in the purchase of such shares pursuant to the First Refusal Offer.
(c) Unless all the shares of Common Stock or other equity securities
of the Company proposed to be issued in the Sale Notice are to be acquired by
the Option Holders, the Company may transfer all such shares covered by the Sale
Notice or the portion not acquired by the Option Holders, as the case may be, to
the proposed third party transferee in accordance with the terms of the Offer
set forth in the Sale Notice; provided that such sale and issuance must occur no
later than 120 days after the date of the Sale Notice. If the First Refusal
Offers are accepted in a manner such that all or a portion of shares of Common
28
<PAGE>
Stock or other equity securities of the Company covered by the Sale Notice are
to be purchased by the Option Holders, the Company shall issue all or such
portion of such shares of Common Stock or other equity securities, as the case
may be, free of all Liens, to the respective purchasers thereof against delivery
by the accepting Option Holders of immediately available funds payable to the
Company within 20 days after the date such offer is accepted; provided, that if
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, is
applicable to the exercise of any First Refusal Offer, such date shall be
extended to the date which is three days after the date the applicable waiting
period expires or is terminated.
6.7. Reservation of Shares of Common Stock. At all times in which shares
of Series B Preferred Stock or Warrants remain outstanding, the Company shall
cause an adequate number of shares of Common Stock to be reserved for issuance
upon conversion of the outstanding shares of Series B Preferred Stock and
exercise of the outstanding Warrants.
6.8. Preparation of Proxy Statement; Shareholders Meeting.
(a) As soon as practicable following the Closing Date, but in no
event more than 20 days after the Closing Date, the Company shall prepare and
file with the Commission a proxy statement (or information statement if
permitted by law and the rules and regulations of the American Stock Exchange)
with respect to the solicitation of votes for the Shareholder Proposals (the
"Proxy Statement"). The Company shall promptly respond to all Commission
comments with respect to the Proxy Statement and cause the Proxy Statement to be
mailed to the Company's shareholders at the earliest practicable date. The
Proxy Statement shall contain, among other things, a recommendation by the Board
of Directors of the Company in favor of the Shareholder Proposals.
(b) The Company shall, as soon as practicable after the Closing Date,
duly call, give notice of, convene and hold a special meeting of the
shareholders of the Company for the purpose of approving the Shareholder
Proposals. At such meeting of shareholders, the Company shall use its best
efforts to obtain the favorable vote of its shareholders.
(c) The Company shall not, and shall immediately instruct its
Transfer Agent in writing not to, authorize any issuance of Common Stock or
other securities of the Company having voting rights until the day immediately
following the Record Date.
ARTICLE VII. SURVIVAL AND INDEMNIFICATION
7.1. Survival of Representations, Warranties and Covenants. (a) The
representations and warranties of the Company and of the Purchasers contained in
this
29
<PAGE>
Agreement shall survive the Closing for a period of three years thereafter,
except for the representations and warranties contained in Sections 2.1.5,
2.1.13, 2.1.16, 2.1.19 and 2.1.24 (the "Excluded Representations and
Warranties"), which shall survive indefinitely, and shall in no way be affected
(i) by any investigation of the subject matter thereof made by or on behalf of
the Company or the Purchasers, as the case may be, or (ii) by any notice
delivered pursuant to Section 3.4. Any claim for an Indemnifiable Loss (as
hereafter defined) asserted within such period of survival as herein provided
will be timely made for purposes hereof.
(b) Unless a specified period is set forth in this Agreement (in
which event such specified period will control), the covenants in this Agreement
shall survive the Closing and remain in effect indefinitely.
7.2. Certain Definitions. For purposes of this Agreement, (i) "Indemnity
Payment" means any amount of Indemnifiable Losses required to be paid pursuant
to this Agreement, (ii) "Indemnitee" means any person or entity entitled to
indemnification under this Agreement, (iii) "Indemnifying Party" means any
person or entity required to provide indemnification under this Agreement, (iv)
"Indemnifiable Losses" means any and all damages, losses, liabilities,
obligations, costs and expenses, and any and all claims, demands or suits (by
any person or entity, including without limitation any Governmental Entity),
including without limitation the costs and expenses of any and all actions,
suits, proceedings, demands, assessments, judgments, settlements and compromises
relating thereto and including reasonable attorneys' fees and expenses in
connection therewith, and (v) "Third Party Claim" means any claim, action or
proceeding made or brought by any person or entity who or which is not a party
to this Agreement or an affiliate of a party to this Agreement.
7.3. Indemnification. (a) The Company agrees to indemnify, defend and
hold harmless the Purchasers and their affiliates and their respective
directors, officers, partners, employees, agents and representatives from and
against any and all Indemnifiable Losses, subject to the limitations and
equitable adjustments set forth Section 7.5 hereof, to the extent relating to,
resulting from or arising out of:
(i) any breach of representation or warranty of the Company
under the terms of this Agreement and any certificate or other document
delivered pursuant hereto; and
(ii) the Company's business relationship with Physicare,
L.L.P., Northshore Orthopedics Assoc., Occupational Medicine Associates of
Houston, P.A. and William F. Donovan, M.D. and the termination of such
relationships; and
30
<PAGE>
(iii) any breach or nonfulfillment of any agreement or
covenant of the Company under the terms of this Agreement.
(b) The Purchasers, severally and not jointly, agree to indemnify,
defend and hold harmless the Company and its affiliates and their respective
directors, officers, partners, employees, agents, and representatives from and
against any and all Indemnifiable Losses, subject to the limitations set forth
Section 7.5 hereof, to the extent relating to, resulting from and arising out
of:
(i) any breach of representation or warranty by such Purchaser
under the terms of this Agreement and any certificate or other document
delivered pursuant hereto; and
(ii) any breach or nonfulfillment of any agreement or covenant
of such Purchaser under the terms of this Agreement.
7.4. Defense of Claims. (a) If any Indemnitee receives notice of
assertion or commencement of any Third Party Claim against such Indemnitee with
respect to which an Indemnifying Party is obligated to provide indemnification
under this Agreement, the Indemnitee will give such Indemnifying Party
reasonably prompt written notice thereof, but in any event not later than 30
calendar days after receipt of such notice of such Third Party Claim. Such
notice will describe the Third Party Claim in reasonable detail, will include
copies of all material written evidence thereof and will indicate the estimated
amount, if reasonably practicable, of the Indemnifiable Loss that has been or
may be sustained by the Indemnitee. The Indemnifying Party will have the right
to participate in, or, by giving written notice to the Indemnitee, to assume,
the defense of any Third Party Claim at such Indemnifying Party's own expense
and by such Indemnifying Party's own counsel (reasonably satisfactory to the
Indemnitee), and the Indemnitee will cooperate in good faith in such defense.
(b) If, within ten calendar days after giving notice of a Third Party
Claim to an Indemnifying Party pursuant to Section 7.4(a), an Indemnitee
receives written notice from the Indemnifying Party that the Indemnifying Party
has elected to assume the defense of such Third Party Claim as provided in the
last sentence of Section 7.4(a), the Indemnifying Party will not be liable for
any legal expenses subsequently incurred by the Indemnitee in connection with
the defense thereof; provided, however, that if the Indemnifying Party fails to
take reasonable steps necessary to defend diligently such Third Party Claim
within ten calendar days after receiving written notice from the Indemnitee that
the Indemnitee believes the Indemnifying Party has failed to take such steps or
if the Indemnifying Party has not undertaken fully to indemnify the Indemnitee
in respect of all Indemnifiable Losses relating
31
<PAGE>
to the matter, the Indemnitee may assume its own defense, and the Indemnifying
Party will be liable for all reasonable costs or expenses paid or incurred in
connection therewith. Without the prior written consent of the Indemnitee, the
Indemnifying Party will not enter into any settlement of any Third Party Claim
which would lead to liability or create any financial or other obligation on the
part of the Indemnitee for which the Indemnitee is not entitled to
indemnification hereunder. If a firm offer is made to settle a Third Party
Claim without leading to liability or the creation of a financial or other
obligation on the part of the Indemnitee for which the Indemnitee is not
entitled to indemnification hereunder and the Indemnifying Party desires to
accept and agree to such offer, the Indemnifying Party will give written notice
to the Indemnitee to that effect. If the Indemnitee fails to consent to such
firm offer within ten calendar days after its receipt of such notice, the
Indemnitee may continue to contest or defend such Third Party Claim and, in such
event, the maximum liability of the Indemnifying Party as to such Third Party
Claim will not exceed the amount of such settlement offer, plus costs and
expenses paid or incurred by the Indemnitee through the end of such ten calendar
day period.
(c) A failure to give timely notice or to include any specified
information in any notice as provided in Sections 7.4(a) or 7.4(b) will not
affect the rights or obligations of any party hereunder except and only to the
extent that, as a result of such failure, any party which was entitled to
receive such notice was deprived of its right to recover any payment under its
applicable insurance coverage or was otherwise damaged as a result of such
failure.
(d) The Indemnifying Party will have a period of 30 calendar days
within which to respond in writing to any claim by an Indemnitee on account of
an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct
Claim"). If the Indemnifying Party does not so respond within such 30 calendar
day period, the Indemnifying Party will be deemed to have rejected such claim,
in which event the Indemnitee will be free to pursue such remedies as may be
available to the Indemnitee on the terms and subject to the provisions of this
Article VII.
7.5. Limitation of Liability; Equitable Adjustment. (a) Notwithstanding
any other provision hereof, no Indemnitee will be entitled to make a claim
against an Indemnifying Party in respect of any breach of a representation or
warranty under Section 7.3(a)(i) or 7.3(b)(i) unless and until the aggregate
amount of claims in respect of breaches of representations and warranties
asserted for Indemnifiable Losses under Section 7.3(a)(i) or 7.3(b)(i), as
applicable, exceeds $250,000, in which event the Indemnitee will be entitled to
make a claim against the Indemnifying Party for only those Indemnifiable Losses
in excess of $250,000; provided, however, that in the event a single breach or
series of related breaches results in Indemnifiable Losses in excess of $250,000
then the Indemnitee will be entitled to
32
<PAGE>
make a claim against the Indemnifying Party to the extent of the full amount of
the Indemnifiable Losses.
(b) Notwithstanding any other provision hereof, the aggregate amount
of any Indemnifiable Losses recoverable under this Agreement in respect of any
breach of a representation or warranty under Section 7.3(a)(i) or 7.3(b)(i),
excluding the Excluded Representations and Warranties, shall be limited to an
amount equal to the sum of (i) $25,000,000, (ii) an amount equal to an internal
rate of return of 20% on $25,000,000 for the period beginning on the date hereof
and ending on the date of the payment of the Indemnifiable Losses triggering the
provisions of this Section 7.5(b) and (iii) any reasonable legal fees and
expenses incurred by such Indemnitee.
(c) Notwithstanding any other provision hereof, any Indemnifiable
Losses incurred by the Purchasers or their affiliates shall be equitably
adjusted so that the payment of any damages or the taking of any other actions
by the Company to satisfy such Indemnifiable Losses shall not adversely affect
the Purchasers or their affiliates, through their ownership of the Securities or
the Common Stock issuable upon conversion or exercise thereof or otherwise.
ARTICLE VIII. TERMINATION
8.1. Termination. Notwithstanding anything contained in this Agreement to
the contrary, this Agreement may be terminated at any time prior to the Closing,
(a) by the mutual written consent of the Purchasers and the Company, or (b) if
the party seeking to terminate is not then in material default or breach of this
Agreement:
(i) by either the Purchasers or the Company if the Closing shall not
have occurred on or before December 31, 1997;
(ii) by either the Purchasers or the Company if there shall have been
entered a final, nonappealable order or injunction of any Governmental
Entity restraining or prohibiting the consummation of the transactions
contemplated hereby or any material part thereof; or
(iii) by either the Purchasers or the Company if the other party is
in material breach of any representation, warranty, covenant or agreement
herein contained and such breach shall not be cured within twenty (20) days
of the date of notice of default served by the party claiming such material
default.
33
<PAGE>
In no event shall termination of this Agreement relieve any party of any
liability for breaches of this Agreement prior to the date of termination.
ARTICLE IX. MISCELLANEOUS PROVISIONS
9.1. Specific Performance. The parties recognize that if the Company
refuses to perform under the provisions of this Agreement, monetary damages
alone will not be adequate to compensate the Purchasers for their injury. The
Purchasers shall therefore be entitled, in addition to any other remedies that
may be available, to obtain specific performance of the terms of this Agreement.
If any action is brought by the Purchasers to enforce this Agreement, the
Company shall waive the defense that there is an adequate remedy at law. In the
event of a default by the Company which results in the filing of a lawsuit for
damages, specific performances, or other remedies, the Purchasers shall be
entitled to reimbursement by the Company of reasonable legal fees and expenses
incurred by the Purchasers.
9.2. Notices. All notices and other communications required or permitted
hereunder will be in writing and (i) delivered personally, (ii) sent by
telefacsimile, (iii) delivered by a nationally recognized overnight courier
service, or (iv) sent by registered or certified mail, postage prepaid, as
follows:
(a) If to the Company, to:
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Facsimile No.: (713) 339-2858
Attention: Chief Executive Officer
with a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Facsimile No.: (212) 821-8111
Attention: Bruce R. Kraus
34
<PAGE>
(b) If to the Purchasers, to:
FW Integrated Orthopaedics Investors, L.P.
FW Integrated Orthopaedics Investors II, L.P.
201 Main Street
Fort Worth, Texas 76102
Facsimile No.: (817) 338-2064
Attention: Ray Pinson
Robert Cotham
with a copy to each of:
Oak Hill Partners
65 E. 55th Street
32nd Floor
New York, NY 10022
Facsimile No.: (212) 754-5685
Attention: John R. Monsky
Arbor Investors
2460 Sand Hill Road
Suite 300
Menlo Park, California 94025
Facsimile No.: (650) 234-0525
Attention: Scott J. Hancock
Weil, Gotshal & Manges LLP
100 Crescent Court
Suite 1300
Dallas, Texas 75201
Facsimile No.: (214) 746-7777
Attention: David A. Spuria
Craig W. Adas
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Section 9.2 will (x) if delivered
personally or by overnight courier service, be deemed given upon delivery; (y)
if delivered by telefacsimile or similar facsimile transmission, be deemed given
when electronically confirmed; and (z) if sent by registered or certified mail,
be deemed given when received. Any party from time to time may change its
address for the purpose of notices to that party by giving a similar notice
35
<PAGE>
specifying a new address, but no such notice will be deemed to have been given
until it is actually received by the party sought to be charged with the
contents thereof.
9.3. Expenses. At the Closing, the Company agrees to pay all reasonable
expenses incident to the transactions contemplated hereby (including all
document production costs and other expenses, the fees and disbursements of
Weil, Gotshal & Manges LLP, McDermott, Will & Emery and Purchasers' accounting
advisors for their services with relation to such transactions, the expenses of
obtaining private placement numbers for the Securities and all out-of-pocket
expenses in connection with the shipping to and from the Purchasers' office or
the office of Purchasers' nominees of the Securities and upon any exchange or
substitution pursuant to the provisions of this Agreement or the other
Transaction Documents), and to reimburse the Purchasers for any reasonable out-
of-pocket expenses in connection therewith. The Company also agrees to pay all
reasonable expenses incurred by the Purchasers (including reasonable counsel and
financial adviser fees) in connection with the enforcement of this Agreement or
the other Transaction Documents, responding to any subpoena or other legal
process or information investigative demand issued in connection with this
Agreement or the transactions contemplated hereby or by reason of any holder's
having acquired any of the Securities, including without limitation costs and
expenses incurred in any bankruptcy case, and in connection with any amendment
or requested amendment of, or waiver or consent or requested waiver or consent
under or with respect to, this Agreement or any of the other Transaction
Documents, whether or not the same shall become effective (it being understood
and agreed that only one such special counsel for all holders of the Securities
and one local counsel for such holders in each applicable jurisdiction shall be
entitled to reimbursement hereunder). The obligations of the Company under this
Section shall survive the payment of or other performance under any of the
Transaction Documents.
In furtherance of the foregoing, on the Closing Date the Company will
pay or cause to be paid the fees and disbursements of special counsel to the
Purchasers, which shall be reflected in the statement of such special counsel to
be submitted to the Company on or prior to the Closing Date. The Company will
also pay, promptly upon receipt of supplemental statements therefor, additional
fees, if any, and disbursements of such special counsel in connection with the
transactions hereby contemplated (including disbursements unposted as of the
Closing Date).
9.4. Successors and Assigns. This Agreement will be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but will not be assignable or delegable by the Company.
Nothing in this Agreement is intended to limit the ability of the Purchasers to
sell or to transfer any or all of the Securities (and the rights relating
thereto) following the Closing Date.
36
<PAGE>
9.5. Waiver. The Purchasers and the Company by written notice to the
others may (a) extend the time for performance of any of the obligations of the
others under this Agreement, (b) waive any inaccuracies in the representations
or warranties of the others contained in this Agreement or in any document
delivered in connection herewith, (c) waive compliance with any of the
conditions or covenants of the others contained in this Agreement, or (d) waive
or modify performance of any of the obligations of the others under this
Agreement; provided, however, that no such party may, without the prior written
consent of the other parties, make or grant such extension of time, waiver of
inaccuracies or compliance or waiver or modification of performance with respect
to its (or any of its affiliates) representations, warranties, conditions or
covenants hereunder. Except as provided in the immediately preceding sentence,
no action taken pursuant to this Agreement will be deemed to constitute a waiver
of compliance with any representations, warranties, conditions or covenants
contained in this Agreement and will not operate or be construed as a waiver of
any subsequent breach, whether of a similar or dissimilar nature.
9.6. Entire Agreement. This Agreement (including the Schedules and
Exhibits hereto) supersedes any other agreement, whether written or oral, that
may have been made or entered into by any party or any of their respective
affiliates (or by any director, officer or representative thereof) relating to
the matters contemplated hereby. This Agreement (together with the Exhibits and
Schedules hereto) constitutes the entire agreement by and among the parties
hereto and there are no agreements or commitments by or among such parties or
their affiliates except as expressly set forth herein.
9.7. Amendments and Supplements. This Agreement may be amended or
supplemented at any time by additional written agreements signed by the parties
hereto.
9.8. Rights of the Parties. Except as provided in Articles I and VII or
in Sections 9.3 and 9.4, nothing expressed or implied in this Agreement is
intended or will be construed to confer upon or give any person or entity other
than the parties hereto and their respective affiliates any rights or remedies
under or by reason of this Agreement or any transaction contemplated hereby.
9.9. Brokers. The Purchasers hereby agree to indemnify and hold harmless
the Company, and the Company hereby agrees to indemnify and hold harmless the
Purchasers, against any liability, claim, loss, damage or expense incurred by
the Purchasers or by the Company, as the case may be, relating to any fees or
commissions owed to any broker, finder, or financial advisor as a result of
actions taken by the other in connection with this Agreement or the transactions
contemplated hereby. Any indemnification payment by the Company required by
this Section shall be equitably adjusted so that the payment of such
37
<PAGE>
amount shall not adversely affect the Purchasers, through their ownership of the
Securities or the Common Stock issuable upon conversion or exercise thereof or
otherwise.
9.10. Further Assurances. From time to time, as and when requested by any
party, the other parties will execute and deliver, or cause to be executed and
delivered, all such documents and instruments as may be reasonably necessary to
consummate the transactions contemplated by this Agreement.
9.11. Irrevocable Proxy. Each of Chartwell Capital Investors, L.P., Jose
E. Kauachi, Ronald E. Pierce, Jefferson R. Casey, Clifford Hinkle, William F.
Donovan, M.D. and Sharon Ann Donovan (the "Grantors") agrees to vote all of its,
his or her capital stock of the Company and to take all other necessary actions
within such Grantor's control (including, without limitation, (i) attending all
meetings in person or by proxy for purposes of obtaining a quorum and for
purposes of voting and (ii) executing all written consents in lieu of any
meeting) to approve the adjustment to the Conversion Price (as defined in the
Certificate of Designation) of the Series B Preferred Stock set forth in Section
10.3 of the Certificate of Designation and the adjustment to the Exercise Price
(as defined in the Warrants) of the Warrants set forth in the first paragraph of
the Warrants and to approve any other matter which may be necessary to provide
the Purchasers with the benefits to which they are entitled under this Agreement
or the other Transaction Documents (the "Shareholder Proposals"). In order to
secure the Grantor's obligation to vote as shareholders for the approval of the
Shareholder Proposals, each Grantor hereby appoints Scott J. Hancock and Mark A.
Wolfson as his, her or its true and lawful proxy and attorney-in-fact, with full
power of substitution, to vote all of the Grantor's capital stock of the Company
for the purpose of approving the Shareholder Proposals and to take all such
other actions as are necessary to enforce the rights of the Purchasers under
this Section 9.11. The irrevocable proxy granted hereunder may be exercised at
any time any Grantor fails to comply with the provisions of this Section 9.11.
The proxies and powers granted by each Grantor pursuant to this Section 9.11 are
coupled with an interest and are given to secure the performance of the
Grantors' obligations to the Purchasers under this Section 9.11. Such proxies
and powers shall be effective until the date which is 365 days after the date
hereof; provided, however, that such proxies and powers shall terminate earlier
if both (A) the Shareholder Proposals are approved by a majority of the
shareholders of the Company entitled to vote thereon and (B) the Additional
Listing Application with the American Stock Exchange with respect to all of the
shares of Common Stock issuable upon conversion of the Series B Preferred Stock
and exercise of the Warrants has been approved by the American Stock Exchange.
At any time in which the irrevocable proxy granted pursuant to this Section 9.11
shall be in effect, (x) the Grantors shall not sell, pledge, dispose of or
otherwise encumber any shares of capital stock of the Company owned,
beneficially or of record, by such Grantors (except that the Grantors may
transfer or sell shares of capital stock of the Company if the transferee
unconditionally agrees with the
38
<PAGE>
Company in writing to be bound by the terms of this Section 9.11 prior to
effecting such transfer or sale) and (y) such proxy shall survive the death,
incompetency and disability of each Grantor.
9.12. Governing Law. This Agreement, including without limitation, the
interpretation, construction and validity hereof, shall be governed by the laws
of the State of Texas, without regard to conflict of law principles thereof.
9.13. Severability. The parties agree that if one or more provisions
contained in this Agreement shall be deemed or held to be invalid, illegal or
unenforceable in any respect under any applicable law, this Agreement shall be
construed with the invalid, illegal or unenforceable provision deleted, and the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected or impaired thereby.
9.14. Execution in Counterparts. This Agreement may be executed in two or
more counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same agreement.
9.15. Titles and Headings. Titles and headings to sections herein are
inserted for convenience of reference only, and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement.
9.16. Certain Interpretive Matters and Definitions. (a) Unless the
context otherwise requires, (i) "Transaction Documents" mean, collectively, this
Agreement, the Warrant Agreements, the Warrants, the Certificate of Designation
and the Registration Rights Agreement, (ii) all references to Sections, Articles
or Schedules are to Sections, Articles or Schedules of or to this Agreement,
(iii) each term defined in this Agreement has the meaning assigned to it, (iv)
each accounting term not otherwise defined in this Agreement has the meaning
assigned to it in accordance with GAAP, (v) "or" is disjunctive but not
necessarily exclusive, (vi) words in the singular include the plural and vice
versa, and (vii) the terms "affiliate" and "subsidiary" have the meanings given
to them in Rule 12b-2 of Regulation 12B under the Exchange Act. All references
to "$" or dollar amounts will be to lawful currency of the United States of
America.
(b) No provision of this Agreement will be interpreted in favor of, or
against, either of the parties hereto by reason of the extent to which either
such party or its counsel participated in the drafting thereof or by reason of
the extent to which any such provision is inconsistent with any prior draft
hereof or thereof.
39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Ronald E. Pierce
--------------------------------
Name: Ronald E. Pierce
------------------------------
Title: President
-----------------------------
FW INTEGRATED ORTHOPAEDICS INVESTORS, L.P.
By: GROUP 31, INC.,
its General Partner
By: /s/ Scott J. Hancock
----------------------------
Name: Scott J. Hancock
--------------------------
Title: Vice President
-------------------------
FW INTEGRATED ORTHOPAEDICS INVESTORS II, L.P.
By: FW GROUP GENPAR, INC.,
its General Partner
By: /s/ Scott J. Hancock
----------------------------
Name: Scott J. Hancock
--------------------------
Title: Vice President
-------------------------
40
<PAGE>
ACCEPTED AND AGREED FOR PURPOSES
OF SECTIONS 6.6 and 9.11 HEREOF
CHARTWELL CAPITAL INVESTORS, L.P.
By: CHARTWELL CAPITAL PARTNERS, L.P.,
its General Partner
By: CHARTWELL PARTNERS, L.P.,
its General Partner
By: CHARTWELL, INC.,
its General Partner
By: /s/ Robert L. Stein
------------------------
Name: Robert L. Stein
------------------------
Title: Chairman
------------------------
ACCEPTED AND AGREED FOR PURPOSES
OF SECTION 9.11 HEREOF
/s/ Jose E. Kauachi
--------------------------------------
Jose E. Kauachi
/s/ Ronald E. Pierce
--------------------------------------
Ronald E. Pierce
/s/ Jefferson R. Casey
--------------------------------------
Jefferson R. Casey
/s/ Clifford Hinkle
--------------------------------------
Clifford Hinkle
/s/ William F. Donovan
--------------------------------------
William F. Donovan
/s/ Sharon Ann Donovan
--------------------------------------
Sharon Ann Donovan
41
<PAGE>
NOTICE OF INDEMNIFICATION: THIS AGREEMENT CONTAINS INDEMNIFICATION PROVISIONS IN
SECTION 8, NOTICE OF WHICH IS HEREBY GIVEN.
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of December 12, 1997, by
Integrated Orthopaedics, Inc., a Texas corporation (the "Company"), for the
benefit of FW Integrated Orthopaedics Investors, L.P., a Texas limited
partnership, and FW Integrated Orthopaedics Investors II, L.P., a Texas limited
Partnership (each a "Purchaser" and collectively, the "Purchasers"), and their
Permitted Transferees.
W I T N E S S E T H:
WHEREAS, the Company and the Purchasers (and for limited purposes,
Chartwell Capital Investors, L.P.) have entered into a Securities Purchase
Agreement, dated as of December 12, 1997 (the "Securities Purchase Agreement"),
pursuant to which the Purchasers have agreed to purchase, and the Company has
agreed to sell, 250,000 shares of Series B Convertible, Non-Redeemable Preferred
Stock, par value $.01 per share, of the Company (the "Series B Preferred") and
contingent warrants ("Warrants" and together with the Series B Preferred, the
"Securities") to acquire shares of common stock, par value $.001 per share, of
the Company ("Common Stock"), all in accordance with the terms and subject to
the conditions set forth in the Securities Purchase Agreement; and
WHEREAS, in order to induce the Purchasers to accept the unregistered
securities of the Company, the Company has agreed to provide registration rights
with respect to the Common Stock issuable upon conversion of the Series B
Preferred and upon exercise of the Warrants and with respect to any other Common
Stock hereafter acquired by the Purchasers.
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, it is agreed as follows:
1. Definitions. Unless otherwise defined herein, the following terms
shall have the following respective meanings (such meanings being equally
applicable to both the singular and plural form of the terms defined):
"Agreement" shall mean this Registration Rights Agreement, including
all amendments, modifications and supplements, and any exhibits or schedules to
any of the foregoing, and shall refer to this Agreement as the same may be in
effect at the time such reference becomes operative.
<PAGE>
"Business Day" shall mean any day other than a Saturday, a Sunday, or
other day on which banking institutions in the City of Houston, Texas shall be
permitted or required by law or executive order to be closed.
"Closing Date" shall mean the date on which the Securities shall be
issued by the Company to the Purchasers in accordance with the Securities
Purchase Agreement.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act and other federal
securities laws.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Form S-3" shall mean such form under the Securities Act as is in
effect on the date hereof or any successor registration form under the
Securities Act subsequently adopted by the Commission that permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the Commission.
"Holders" shall mean the Purchasers and each Permitted Transferee.
"NASD" shall mean the National Association of Securities Dealers,
Inc., or any successor corporation thereto.
"Permitted Transferee" shall mean a transferee or assignee of
Securities or Registrable Securities, which were transferred or assigned
pursuant to Section 10 hereof.
"Registrable Securities" shall mean (i) shares of Common Stock owned
by a Holder, whether acquired on the date hereof or hereafter acquired, and any
other securities issued or issuable with respect to such Registrable Securities
by way of dividend or stock split or in connection with any combination of
shares of Common Stock, recapitalization, exchange, merger, consolidation or
reorganization and (ii) the Warrants and the Series B Preferred (for purposes of
a Demand Registration (as defined in Section 2)); provided, that any Registrable
Security shall cease to be a Registrable Security when (a) a registration
statement covering such Registrable Security has been declared effective by the
Commission and it has been disposed of pursuant to such effective registration
statement, (b) it is sold under circumstances in which all of the applicable
conditions of Rule 144 (or any similar provisions then in force) under the
Securities Act are met or (c)(i) it has been otherwise transferred, (ii) the
Company has delivered a new certificate or other evidence of ownership for it
not bearing a legend restricting further transfer and (iii) it may be resold
without subsequent registration under the Securities Act.
2
<PAGE>
"Requesting Holders" shall mean any Holders requesting registration of
its or their Registrable Securities in accordance with the terms of this
Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect from time to time.
2. Demand Registration.
(a) Request for Registration. (i) Subject to Section 5 hereof, at any
time following the Closing Date, the Holders holding a majority of the then
outstanding Registrable Securities (on an "as converted" and "as exercised"
basis) may make a written request of the Company (a "Demand Request") for
registration under the Securities Act (a "Demand Registration") of all or part
of its or their Registrable Securities.
The Demand Request shall specify the number of shares of Registrable
Securities proposed to be sold by the Requesting Holders making such Demand
Request. Subject to Section 4(b), the Company shall file the Demand
Registration as soon as practicable and in any event within 60 days after
receiving the Demand Request (the "Required Filing Date") and shall use its best
efforts to cause the same to be declared effective by the Commission as promptly
as practicable after such filing; provided, that the Company need effect only
three Demand Registrations pursuant to this Section 2.
(b) Effective Registration. A registration shall not count as a
Demand Registration until it has been declared effective by the Commission
(unless the Requesting Holders withdraw all their Registrable Securities, in
which case such demand shall count as a Demand Registration unless (i) the
Requesting Holders pay all registration expenses (excluding the cost of Company
personnel) in connection with such withdrawn registration, (ii) the Holders have
learned of a material adverse change in the condition, business or prospects of
the Company not known to the Holders at the time of their Demand Request or
(iii) the amount of Registrable Securities proposed to be included in such
Demand Registration by the Requesting Holders is reduced by more than 50%
pursuant to Section 2(d)); provided that if, after the registration has become
effective, an offering of Registrable Securities pursuant to such registration
is interfered with by any stop order, injunction or other order or requirement
of the Commission or other governmental agency or court, such registration shall
be deemed not to have been declared effective.
(c) Selection of Underwriters. The offering of Registrable Securities
pursuant to a Demand Registration shall be in the form of a "firm commitment"
underwritten offering (or a "best efforts" underwritten offering upon the
written consent of the Requesting Holders). The Requesting Holders holding a
majority of the shares of Registrable Securities to be registered in a Demand
Registration shall select the managing underwriter or underwriters
3
<PAGE>
to be used in connection with the offering; provided that such selections shall
be subject to the reasonable consent of the Company.
(d) Priority on Demand Registrations. No securities to be sold for
the account of any person (including the Company) other than a Requesting Holder
shall be included in a Demand Registration unless the managing underwriter or
underwriters shall advise the Requesting Holders in writing that the inclusion
of such securities will not materially and adversely affect the price or success
of the offering (a "Material Adverse Effect"). Furthermore, in the event the
managing underwriter or underwriters shall advise the Requesting Holders that
even after exclusion of all securities of other persons (including the Company)
pursuant to the immediately preceding sentence, the amount of Registrable
Securities proposed to be included in such Demand Registration by Requesting
Holders is sufficiently large to cause a Material Adverse Effect, the
Registrable Securities of Requesting Holders to be included in such Demand
Registration shall be allocated pro rata among the Requesting Holders on the
basis of the number of shares of Common Stock requested to be included in such
registration by each such Requesting Holder.
(e) Rights of Non-Requesting Holders. Upon receipt of any Demand
Request, the Company shall promptly (but in any event within ten Business Days)
give written notice of such proposed Demand Registration to all other Holders
who shall have the right, exercisable by written notice to the Company within 20
Business Days of their receipt of the Company's notice, to elect to include in
such Demand Registration such portion of their Registrable Securities as they
may request on the same terms as the Requesting Holders who delivered the
initial Demand Request. All Holders requesting to have their Registrable
Securities included in a Demand Registration in accordance with the preceding
sentence shall be considered "Requesting Holders" for purposes of this
Agreement.
3. Piggy-Back Registration.
(a) Notice by Company. Subject to the provisions of this Agreement,
if the Company at any time proposes to file on its behalf and/or on behalf of
any of its equity holders a registration statement under the Securities Act on
any form (other than a registration statement (i) pursuant to Sections 2 or 4 or
(ii) on Form S-8 or any successor form for securities to be offered to employees
of the Company pursuant to any employee benefit plan), the Company will give
written notice to all Holders, at least 30 days before the initial filing with
the Commission of such registration statement, which notice shall set forth the
intended method of disposition of the securities proposed to be registered by
the Company. Subject to this Agreement, the notice shall offer to include in
such filing the aggregate amount of Registrable Securities as such Holders may
request.
(b) Procedure. Each Holder desiring to have such Registrable
Securities registered under this Section 3 shall so advise the Company, in
writing, within 20 Business
4
<PAGE>
Days after the date of receipt of such offer from the Company, setting forth the
amount of Registrable Securities for which registration is requested by such
Holder. The Company shall thereupon include in such filing the amount of such
Registrable Securities for which registration is so requested, subject to the
next two sentences, and shall use best efforts to effect registration under the
Securities Act of such Registrable Securities. If the managing underwriter of a
proposed public offering shall advise the Company in writing that, in its
opinion, including all the Registrable Securities requested to be included in
such registration would cause a Material Adverse Effect, then in such event the
securities to be included in such offering shall be allocated first to the
Company or the holder initiating such request for registration, as appropriate,
and then, to the extent that any additional securities can, in the opinion of
such managing underwriter or underwriters, be sold without any such Material
Adverse Effect, pro rata among the Holders of Registrable Securities and other
holders requesting their securities of the Company to be registered pursuant to
similar piggy-back registration rights on the basis of the number of shares of
Registrable Securities requested to be included in such registration of each
Holder and the number of shares of other securities requested to be included in
such registration of each other holder having similar piggy-back registration
rights. If the managing underwriter of a proposed public offering shall advise
the Company in writing that, in its opinion, the distribution of any of the
Registrable Securities requested to be included in the registration concurrently
with the securities being registered by the Company or such other equity holder
would materially and adversely affect the distribution of such securities by the
Company or such other equity holder, then the Holders shall have no right to
have any of their securities included in such registration. The Company may
discontinue registration of any of its securities which are not Registrable
Securities (and, in connection with any piggy-back registration described in
this Section 3, its securities which are Registrable Securities) at any time
prior to the effective date of the registration statement relating thereto.
(c) Unlimited Rights. Each Holder shall be entitled to the
registration rights set forth in this Section 3 for so long as such Holder owns
Registrable Securities, regardless of the number of times such Holder is offered
or has exercised such rights.
4. Shelf Registration.
(a) Request for Registration. At any time following the Closing Date,
the Holders holding a majority of the then outstanding Registrable Securities
(on an "as converted" and "as exercised" basis) may make a written request of
the Company (a "Shelf Request") for registration on Form S-3 (a "Shelf
Registration") of all or part of its or their Registrable Securities; provided,
that the Company is eligible to use Form S-3.
The Shelf Request shall specify the number of shares of Registrable
Securities proposed to be sold by the Requesting Holders making such Shelf
Request. The Company shall file the Shelf Registration as soon as practicable
and in any event within 60 days after
5
<PAGE>
receiving the Shelf Request and shall use its best efforts to cause the same to
be declared effective by the Commission as promptly as practicable after such
filing. Each Holder shall be entitled to the registration rights set forth in
this Section 4 for so long as such Holder owns Registrable Securities,
regardless of the number of times such Holder is offered or has exercised such
rights.
(b) Selection of Underwriters. If the Requesting Holders holding a
majority of the shares of Registrable Securities to be registered in such Shelf
Registration shall elect to distribute such securities pursuant to an
underwritten offering, such Holders shall select the managing underwriter or
underwrites to be used in connection with the Shelf Registration; provided that
such selections shall be subject to the reasonable consent of the Company. The
Company shall not be obligated to effect an underwritten Shelf Registration
unless the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities, if any, at an aggregate price to the
public greater than $5,000,000.
(c) Priority on Shelf Registrations. No securities to be sold for the
account of any person (including the Company) other than a Requesting Holder
shall be included in a Shelf Registration unless the managing underwriter or
underwriters shall advise the Requesting Holders in writing that the inclusion
of such securities will not have a Material Adverse Effect. Furthermore, in the
event the managing underwriter or underwriters shall advise the Requesting
Holders that even after exclusion of all securities of other persons pursuant to
the immediately preceding sentence, the amount of Registrable Securities
proposed to be included in such Shelf Registration by Requesting Holders is
sufficiently large to cause a Material Adverse Effect, the Registrable
Securities of Requesting Holders to be included in such Shelf Registration shall
be allocated pro rata among the Requesting Holders on the basis of the number of
shares of Common Stock requested to be included in such registration by each
such Requesting Holder. For purposes of this Section 4(c), in the event that a
Shelf Registration is not underwritten, such determinations relating to the
inclusion of securities in such Shelf Registration shall be made in good faith
by the Requesting Holders holding a majority of the shares of Registrable
Securities to be registered in such Shelf Registration.
(d) Rights of Non-Requesting Holders. Upon receipt of any Shelf
Request, the Company shall promptly (but in any event within ten Business Days)
give written notice of such proposed Shelf Registration to all other Holders who
shall have the right, exercisable by written notice to the Company within 20
Business Days of their receipt of the Company's notice, to elect to include in
such Shelf Registration such portion of their Registrable Securities as they may
request on the same terms as the Requesting Holders who delivered the initial
Shelf Request.
6
<PAGE>
5. Holdback Provisions and Other Limitations.
(a) Restrictions on Public Sale. Each Holder participating in a
registration pursuant to Section 2 agrees not to effect any public sale or
distribution of the class of securities being registered or of any securities
convertible into or exchangeable or exercisable for such securities, during the
14 days prior to, and during the 90 days after, the effective date of a
registration statement filed pursuant hereto except as part of such
registration, if and to the extent requested by the managing underwriter or
underwriters in the case of an underwritten public offering; provided, that all
executive officers and directors of the Company then holding Common Stock (or
securities convertible into or exchangeable or exercisable for Common Stock)
enter into similar agreements.
(b) Deferral of Filing. The Company may defer the filing (but not the
preparation) of a registration statement required by Sections 2 or 4 until a
date not later than 60 days after the Required Filing Date if (i) at the time
the Company receives the Demand Request, the Company or its subsidiaries are
engaged in confidential negotiations or other confidential business activities,
disclosure of which would be required in such registration statement (but would
not be required if such registration statement were not filed), and the Board of
Directors of the Company determines in good faith that such disclosure would be
materially detrimental to the Company and its stockholders, or (ii) the Company
had received, prior to receiving the Demand Request, a separate written demand
request from a different person or group of persons having contractual rights
(whether exercisable alone or in connection with other rights) to require the
Company to file a registration statement (a "preferred request") and is
proceeding with reasonable diligence to comply with the preferred request, or
(iii) prior to receiving the Demand Request, the Board of Directors had formally
determined to effect a registered underwritten public offering of the Company's
equity securities for the Company's account and the Company had taken
substantial steps (including, but not limited to, selecting and entering into a
letter of intent with the managing underwriter for such offering) and is
proceeding with reasonable diligence to effect such offering. A deferral of the
filing of a registration statement pursuant to this Section 5(b) shall be
lifted, and the requested registration statement shall be filed forthwith, if,
in the case of a deferral pursuant to clause (i) of the preceding sentence, the
negotiations or other activities are disclosed or terminated, or, in the case of
a deferral pursuant to clause (ii) of the preceding sentence, the preferred
request is withdrawn or effected, or in the case of a deferral pursuant to
clause (iii) of the preceding sentence, the proposed registration for the
Company's account is abandoned. In order to defer the filing of a registration
statement pursuant to this Section 5(b), the Company shall promptly, upon
determining to seek such deferral, deliver to each Requesting Holder a
certificate signed by an executive officer of the Company stating that the
Company is deferring such filing pursuant to this Section 5(b) and the basis
therefor in reasonable detail; provided, that the Company may not utilize this
right more than [twice] in any 12-month period. Within 20 Business Days after
receiving such certificate, the Holders of a majority of the Registrable
Securities held by the Requesting Holders and for which
7
<PAGE>
registration was previously requested may withdraw such request by giving notice
to the Company; if withdrawn, the Demand Request or the Shelf Request shall be
deemed not to have been made for all purposes of this Agreement.
6. Registration Procedures.
(a) Action of the Company. If the Company is required by the
provisions of Sections 2, 3 or 4 hereof to use best efforts to effect the
registration of any of its securities under the Securities Act, the Company
shall, as expeditiously as possible:
(1) prepare and file with the Commission a registration
statement with respect to such securities and use best efforts to cause
such registration statement to become and remain effective for a period of
time required for the disposition of such securities by the Holders
thereof, but not to exceed 12 months; provided, that such 12-month period
shall be extended for a period of time equal to the period the Holder(s)
refrain(s) from selling any securities included in such registration at the
request of the Company or an underwriter of such securities;
(2) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by
such registration statement until the earlier of such time as all of such
securities have been disposed of in a public offering or the expiration of
12 months;
(3) furnish to such selling Holders such number of copies of a
summary prospectus or other prospectus, including a preliminary prospectus,
in conformity with the requirements of the Securities Act, and such other
documents, as such selling Holders may reasonably request;
(4) use best efforts to register or qualify the securities
covered by such registration statement under such other securities or blue
sky laws of such jurisdictions within the United States and Puerto Rico as
each Holder of such securities shall request, and do such other reasonable
acts and things as may be required of it to enable such Holder to
consummate the disposition in such jurisdiction of the securities covered
by such registration statement;
(5) furnish, at the request of any Holder requesting
registration of such Registrable Securities pursuant to Sections 2, 3 or 4
hereof, on the date that such Registrable Securities are delivered to the
underwriters for sale pursuant to such registration or, if such Registrable
Securities are not being sold through underwriters,
8
<PAGE>
on the date that the registration statement with respect to such
Registrable Securities becomes effective, (i) an opinion, dated as of such
date, of the independent counsel representing the Company for the purposes
of such registration, addressed to the underwriters, if any, and if such
Registrable Securities are not being sold through underwriters, then to the
Holders making such request, in a customary form and covering matters of
the type customarily covered in such legal opinions; and (ii) a comfort
letter dated as of such date, from the independent certified public
accountants of the Company addressed to the underwriters, if any, and if
such Registrable Securities are not being sold through underwriters, then
to the Holders making such request and, if such accountants refuse to
deliver such letter to such Holders, then to the Company, in a customary
form and covering matters of the type customarily covered by such comfort
letters. Such opinion of counsel shall additionally cover such other legal
matters regarding the registration in respect of which such opinion is
being given as the Holders holding a majority of the Registrable Securities
being so registered may reasonably request. Such letter from the
independent certified public accountants shall additionally cover such
other financial matters (including information as to the period ending not
more than five Business Days prior to the date of such letter) regarding
the registration in respect of which such letter is being given as the
Holders holding a majority of the Registrable Securities being so
registered may reasonably request;
(6) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
Registrable Securities;
(7) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
(8) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable, but not later than
16 months after the effective date of the registration statement, an
earnings statement covering the period of at least 12 months beginning with
the first full month after the effective date of such registration
statement, which earnings statement shall satisfy the requirements of
Section 11(a) of the Securities Act; and
9
<PAGE>
(9) cause all Registrable Securities registered pursuant
hereunder to be listed on each securities exchange or automated quotation
system on which similar securities issued by the Company are then listed.
(b) Information to be Provided by Holders. It shall be a condition
precedent to the obligation of the Company to take any action pursuant to this
Agreement in respect of the Registrable Securities that are to be registered at
the request of any Holder of the Registrable Securities that such Holder shall
furnish to the Company such information regarding the securities held by such
Holder and the intended method of disposition thereof as the Company shall
reasonably request and as shall be required in connection with the action taken
by the Company.
7. Expenses. All expenses incurred in complying with this Agreement,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD and the American Stock Exchange),
printing expenses, fees and disbursements of counsel for the Company, fees and
disbursements of one counsel for all selling Holders of Registrable Securities,
expenses of any special audits incident to or required by any such registration
and expenses of complying with the securities or blue sky laws of any
jurisdictions pursuant to Section 6(d), shall be paid by the Company except that
the Company shall not be liable for any discounts or commissions to any
underwriter in respect of the securities sold by such Holder.
8. Indemnification and Contribution.
(a) Indemnification by Company. In the event of any registration of
Registrable Securities under the Securities Act pursuant to this Agreement, the
Company shall indemnify and hold harmless the Holder of such Registrable
Securities, its officers, directors, partners, legal counsel, each other person
(including each underwriter) who participated in the offering of such
Registrable Securities and each other person, if any, who controls such Holder
or such participating person within the meaning of the Securities Act, against
any expenses, losses, claims, damages or liabilities, joint or several, to which
such Holder, officer, director, partner, legal counsel, or any such
participating person or controlling person may become subject under the
Securities Act or any other statute or at common law, insofar as such expenses,
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any alleged untrue statement of any material fact
contained, on the effective date thereof, in any registration statement under
which such securities were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, (ii) any alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading or
(iii) any violation by the Company of the Securities Act or any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration, and
shall reimburse such Holder, officer, director,
10
<PAGE>
partner, legal counsel or such participating person or controlling person for
any legal or any other expenses reasonably incurred by such Holder, officer,
director, partner, legal counsel or such participating person or controlling
person in connection with investigating and defending or settling any such
expense, loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue statement
or omission made in such registration statement, preliminary prospectus,
prospectus or amendment or supplement in reliance upon and in conformity with
information furnished in writing to the Company by such Holder. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Holder or such participating person or controlling person, and
shall survive the transfer of such securities by such Holder.
(b) Indemnification by Holders. Each Holder, by acceptance of the
Registrable Securities, agrees to indemnify and hold harmless the Company, its
directors and officers and each other person, if any, who controls the Company
within the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several, to which the Company or any such director or
officer or any such person may become subject under the Securities Act or any
other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
information provided in writing to the Company by such Holder and contained in
(or omitted from, as the case may be), on the effective date of, any
registration statement under which securities were registered under the
Securities Act at the request of such Holder, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto;
provided, however, in no event shall any Holder be liable for an amount in
excess of the net proceeds received from all Registrable Securities offered and
sold by such Holder pursuant to such registration statement.
(c) Contribution. If the indemnification provided for in this Section
8 from the indemnifying party is unavailable to an indemnified party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such indemnifying
party or indemnified parties, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such action;
provided, however, in no event shall any Holder
11
<PAGE>
be required to contribute any amount in excess of the net proceeds received from
all Registrable Securities offered and sold by such Holder pursuant to such
registration statement.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(d) Notice and Defense of Claims. Whenever a claim shall arise for
indemnification under this Section 8, the indemnified party shall promptly
notify the indemnifying party of such claim and, when known, the facts
constituting the basis for such claim. In the event of any such claim for
indemnification resulting from or in connection with a claim or legal proceeding
by a third party, the indemnifying party may, at its sole expense, assume the
defense thereof. If an indemnifying party assumes the defense of any such claim
or legal proceeding, the indemnifying party shall be entitled to select counsel
reasonably acceptable to the indemnified party and take all steps necessary in
the defense thereof; provided, however, that no settlement shall be made without
the prior written consent of the indemnified party, which shall not be
unreasonably withheld (it being understood that the indemnified party may not
withhold consent to any settlement involving only a monetary payment where the
indemnifying party is ready, willing and able to pay such amount); and, provided
further, that the indemnified party may, at its own expense, participate in any
such proceeding with the counsel of its choice. If the indemnifying party does
not assume the defense of any such claim or litigation in accordance with the
terms hereof, the indemnified party may defend against such claim or litigation
in such manner as it may deem appropriate, including, but not limited to,
settling such claim or litigation (after giving notice of the same to the
indemnifying party) on such terms as the indemnified party may deem appropriate,
and the indemnifying party will promptly indemnify the indemnified party in
accordance with the provisions of this Section 8.
9. Public Information. The Company covenants and agrees that for so long
as the Common Stock shall be registered under Section 12(b) or 12(g) of the
Exchange Act or the Company shall be subject to the reporting requirements of
Section 15(d) of the Exchange Act, at any time when any Holder so entitled
desires to make sales of any Registrable Securities in reliance on Rule 144
under the Securities Act either (i) there will be available adequate current
public information with respect to the Company as required by Rule 144, or (ii)
if such information is not available the Company will use its best efforts to
make such information available without delay. Without limiting the foregoing,
the Company covenants and agrees that for so long as the Common Stock shall be
registered under Section 12(b) or 12(g) of the Exchange Act or the Company shall
be subject to the reporting requirements of Section 15(d) of the Exchange Act,
it will timely file with the Commission all reports required to be filed
12
<PAGE>
under Sections 13 and 15(d) of the Exchange Act and will promptly furnish to any
Holder so requesting a written statement that the Company has complied with all
such reporting requirements.
10. Transfer or Assignment of Registration Rights. If any person shall
acquire Securities or Registrable Securities from any Holder, in any manner,
whether by operation of law or otherwise, such person shall be entitled to
receive the rights granted to a Holder under this Agreement, including the
rights to cause the Company to register the Registrable Securities; provided
that, (i) the Company is given written notice at the time of or within a
reasonable time after said transfer or assignment, stating the name and address
of the transferee or assignee and identifying the securities with respect to
which such rights are being transferred or assigned and (ii) the transferee or
assignee of such rights assumes the obligations of a Holder under this
Agreement.
11. Miscellaneous.
(a) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departure from the provisions hereof may not be given
unless the Company has obtained the written consent of Holders of at least a
majority of the Registrable Securities (on an "as converted" and "as exercised"
basis) then outstanding.
(b) Notice Generally. Any notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder to be made pursuant to
the provisions of this Agreement will be in writing and (i) delivered
personally, (ii) sent by telefacsimile, (iii) delivered by a nationally
recognized overnight courier service, or (iv) sent by registered or certified
mail, postage prepaid, as follows:
(1) If to any Holder, at its last known address appearing on
the books of the Company maintained for such purpose.
With a copy to
Weil, Gotshal & Manges LLP
100 Crescent Court
Suite 1300
Dallas, Texas 75201
Attention: David A. Spuria
Telecopy Number: (214) 746-7777
13
<PAGE>
(2) If to the Company, at
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Attention: Chief Executive Officer
Telecopy Number: (713) 339-2858
With a copy to
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Facsimile No.: (212) 821-8111
Attention: Bruce R. Kraus
Every notice, demand, request, consent, approval, declaration, delivery or other
communication required or permitted under this Agreement that is addressed as
provided in this Section 11(b) will (x) if delivered personally or by overnight
courier service, be deemed given upon delivery; (y) if delivered by
telefacsimile or similar facsimile transmission, be deemed given when
electronically confirmed; and (z) if sent by registered or certified mail, be
deemed given when received. Any party from time to time may change its address
for the purpose of notices to that party by giving a similar notice specifying a
new address, but no such notice will be deemed to have been given until it is
actually received by the party sought to be charged with the contents thereof.
(c) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the parties hereto, and their respective successors and
assigns including any person to whom the Securities or any Registrable
Securities are transferred in accordance with their terms and the terms of any
agreement relating thereto.
(d) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(e) Governing Law. This Agreement shall be governed by the laws of
the State of Texas, without regard to the provisions thereof relating to
conflict of laws.
(f) Severability. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such
14
<PAGE>
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Agreement.
(g) Entire Agreement. This Agreement represents the complete
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to the subject matter hereof.
(h) No Inconsistent Agreement. The Company shall not on or after the
date of this Agreement enter into any agreement with respect to its securities
which is inconsistent with the rights granted to the Holders of Registrable
Securities pursuant to this Agreement.
[Remainder of page left blank intentionally]
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Ronald E. Pierce
------------------------------
Name: Ronald E. Pierce
Title: President
Accepted and Acknowledged by:
FW INTEGRATED ORTHOPAEDICS INVESTORS, L.P.
By: GROUP 31, INC.,
its General Partner
By: /s/ Scott J. Hancock
--------------------------
Name: Scott J. Hancock
Title: Vice President
FW INTEGRATED ORTHOPAEDICS INVESTORS II, L.P.
By: FW GROUP GENPAR, INC.,
its General Partner
By: /s/ Scott J. Hancock
--------------------------
Name: Scott J. Hancock
Title: Vice President
16
<PAGE>
PHYSICARE
TERMINATION AGREEMENT
<PAGE>
Table of Contents
Page
----
ARTICLE I. - INTERPRETATIONS AND DEFINITIONS 2
Section 1.1 Interpretations................................ 2
ARTICLE II. - IOI OPERATIONS DOCUMENTS 2
Section 2.1 MTA............................................ 2
Section 2.2 PhysiCare MSA.................................. 3
Section 2.3 CSA............................................ 3
Section 2.4 Equipment Lease Agreement...................... 3
Section 2.5 Real Property Lease............................ 3
Section 2.6 OMA MSA........................................ 3
Section 2.7 OMA Assignment, IOI Houston Assumption and OMA
Promissory Note................................ 4
Section 2.8 Directorships.................................. 4
ARTICLE III. - OTHER AGREEMENTS 4
Section 3.1 PhysiCare and Amended Promissory Note.......... 4
Section 3.2 Payment of the Amended Note.................... 5
Section 3.3 Guaranty....................................... 5
Section 3.4 Accounting, Post-Closing Adjustment............ 5
Section 3.5 Lock-Box, Cash Reconciliation and Audit Rights. 5
Section 3.6 Tail Insurance................................. 7
Section 3.7 Litigation Settlement.......................... 7
Section 3.8 PhysiCare Bank Accounts........................ 7
Section 3.9 Formal Review of PhysiCare Billing Practices... 7
Section 3.10 Diligent Pursuit of Accounts Receivable........ 8
ARTICLE IV. - REPRESENTATIONS AND WARRANTIES 8
Section 4.1 Representations and Warranties of Donovan Group 8
Section 4.2 Representations and Warranties of IOI Group.... 10
ARTICLE V. - INDEMNIFICATION 11
Section 5.1 Donovan Group's Indemnity...................... 11
Section 5.2 IOI Group's Indemnity.......................... 12
Section 5.3 Conditions of Indemnification.................. 12
Section 5.4 Remedies Not Exclusive......................... 13
Section 5.5 Miscellaneous.................................. 13
<PAGE>
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT ("Agreement") is made and entered into as
of November 30, 1997 (the "Closing"), by and among:
. Integrated Orthopaedics, Inc. ("IOI")
. IOI Management Services of Houston, Inc. ("IOI Houston") (IOI and
IOI Houston are sometimes collectively referred to as "IOI
Group"), on the one hand, and
. PhysiCare, L.L.P. ("PhysiCare")
. William F. Donovan, M.D. ("Physician")
. Northshore Orthopedics Assoc. ("Northshore")
. Occupational Medicine Associates of Houston, P.A. ("OMA")
(PhysiCare, Physician, OMA and Northshore are sometimes
collectively referred to as "Donovan Group"), on the other hand.
RECITALS
WHEREAS, Physician is sole shareholder of OMA and Northshore; and
WHEREAS, IOI is the sole stockholder of IOI Houston; and
WHEREAS, on May 11, 1995 but effective as of March 1, 1995 (the "Closing
Date"), IOI Group and Donovan Group entered into a series of transactions
restructuring the relationship between Donovan Group and the IOI Group; and
WHEREAS, IOI was previously known as DRCA Medical Corporation and IOI
Houston was previously known as DRCA Houston Clinics, Inc.; and
WHEREAS, in connection with the said restructure, some or all of the
parties constituting the IOI Group and some or all of the parties constituting
the Donovan Group entered into those certain agreements listed on Exhibit A
attached hereto;
WHEREAS, Physician is a director of IOI and of all IOI subsidiaries;
WHEREAS, Physician now wishes to resign from all directorships held by
Physician in IOI or any IOI subsidiary; and
WHEREAS, Parties mutually agree that it is in the best interest of all
parties to terminate the relationships between IOI Group and Donovan Group
except as contemplated hereby.
1
<PAGE>
AGREEMENTS
NOW THEREFORE, in consideration of the covenants and agreements,
representations and warranties hereinafter set forth, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I.
INTERPRETATIONS AND DEFINITIONS
Section 1.1 Interpretations. For purposes of this Agreement, unless the
context otherwise is stated or is required for consistent interpretation of this
Agreement, the following terms shall have the effect stated thereafter:
A. "IOI Group" when used with respect to a covenant or agreement or
representation or warranty given by IOI Group shall mean that IOI and IOI
Houston shall have joint and several liability with respect to any such
covenant or agreement; and when used with respect to any waiver or release
or forbearance given by or agreed to by IOI Group shall mean that each of
IOI and IOI Houston independently give such release or waiver or
forbearance; and when used with respect to receiving any benefit or right
by the IOI Group shall mean that the benefit or right shall flow to IOI and
IOI Houston and be enforceable by either party without the necessity of the
joinder of the other in such enforcement action.
B. "Donovan Group" when used with respect to a covenant or agreement
or representation or warranty given by Donovan Group shall mean that
PhysiCare, Physician, OMA and Northshore shall have joint and several
liability with respect to any such covenant or agreement and when used with
respect to any waiver or release or forbearance given by or agreed to by
the Donovan Group shall mean that each of PhysiCare, Physician, OMA and
Northshore independently give such release or waiver or forbearance and
when used with respect to receiving any benefit or right by the Donovan
Group shall mean that the benefit or right shall flow to PhysiCare,
Physician, OMA and Northshore and be enforceable by any of such parties
without the necessity of the joinder of the others in such enforcement
action.
ARTICLE II.
IOI OPERATIONS DOCUMENTS
Section 2.1 MTA.
A. The Donovan Group and the IOI Group hereby agree that Article II
and Article III of the MTA (as defined on Exhibit A) is terminated and of
no further force and effect and further the Donovan Group and the IOI Group
hereby release each other from any liability or obligation to the other
under the terms of Article II and Article III of the MTA, provided,
however, that this termination and release does not terminate or release
2
<PAGE>
either the Donovan Group or the IOI Group from any of their respective
obligations under the Transaction Agreements, as defined in the MTA, and
the other Agreements described in Article I of the MTA.
B. Physician and Northshore, respectively, hereby waive and release
their rights under the MTA to cause a termination under Section 2.1 of the
MTA.
Section 2.2 PhysiCare MSA.
A. Pursuant to the terms and provisions of Section 6.2-3 of the
PhysiCare MSA (as defined on Exhibit A), IOI Houston and PhysiCare hereby
terminate and cancel the PhysiCare MSA, and IOI Houston and PhysiCare each
release the other from any liabilities and obligations thereunder, provided
however, the termination of the PhysiCare MSA shall not release either
party from its obligations (other than noncompetition provisions) and
liabilities under Section 4.7, Section 5.1, Section 5.2, Section 5.3,
Section 5.4, Section 5.5 and Section 6.3 of the PhysiCare MSA.
B. Upon termination of the PhysiCare MSA, PhysiCare shall, upon ten
(10) days notice from IOI Houston, cause PhysiCare's general partner
Northshore to return to IOI Houston any property or equipment owned or
leased by IOI Houston that is in use at Northshore pursuant to the
PhysiCare MSA.
Section 2.3 CSA. Pursuant to the terms and provisions of Section 5.2A of
the CSA (as defined on Exhibit A), IOI Houston and Northshore hereby terminate
and cancel the CSA, provided, however, the termination of the CSA shall not
release either party from its obligations and liabilities under Section 2.6,
Section 3.5, Section 4.6 and Section 5.3 of the CSA. IOI Houston and Northshore
hereby covenant and agree that upon termination of the CSA, the accounts
receivable that are the subject to the CSA shall be the property of Northshore.
Section 2.4 Equipment Lease Agreement. IOI Houston and Northshore mutually
agree to terminate that certain Lease Agreement (as defined on Exhibit A) that
commenced March 1, 1995, and IOI Houston agrees to cause the return of all
equipment leased pursuant thereto to Northshore. The parties agree that no
continuing obligation under this Lease Agreement shall survive the Closing.
Section 2.5 Real Property Lease. Physician and IOI Houston acknowledge that
certain Lease Agreement (as defined on Exhibit A) effective March 1, 1995 for
the lease of a 4,000 square-foot building and the property at 12445 East
Freeway, Houston, Texas, has terminated and that neither party has any further
obligation thereunder.
Section 2.6 OMA MSA.
A. OMA and IOI Houston hereby agree to mutually terminate and cancel
the OMA MSA (as defined on Exhibit A), and OMA and IOI Houston each release
the other
3
<PAGE>
from any liabilities and obligations thereunder, provided however, the
termination of the OMA MSA shall not release either party from its
obligations and liabilities under Section 4.02, Section 4.03, Section 4.05,
and Section 7.04 of the OMA MSA.
B. IOI and IOI Houston mutually agree that the termination of the OMA
MSA will not cause a termination of that certain Administrative Services
Agreement by and between IOI and IOI Houston first executed March 30, 1994,
but first effective August 1, 1993 and most recently amended for the eighth
time, effective March 31, 1997, and IOI and IOI Houston hereby waive the
provisions of Article V, paragraph C, section 1 of such Administrative
Services Agreement.
Section 2.7 OMA Assignment, IOI Houston Assumption and OMA Promissory
Note. Concurrently herewith, OMA and IOI Houston are executing and delivering
each to the other a Bill of Sale, Assignment and Assumption of Assets Agreement,
a form of which is attached hereto as Exhibit B, whereby those certain Assets of
OMA described therein are being transferred and assigned by OMA to IOI Houston
and IOI Houston is assuming those certain liabilities and obligations of OMA
described therein. As a part of the transaction with OMA, and in consideration
for the sale of assets from OMA to IOI Houston, IOI Houston is forgiving certain
indebtedness equal to the amount of the fair market value of the accounts
receivable and other assets conveyed by OMA to IOI Houston. In connection with
such forgiveness of indebtedness, IOI Houston will deliver to OMA the OMA
Promissory Note listed on Exhibit C attached hereto and which will be marked
"Paid,"at the time of the post-closing adjustment and settlement. In addition,
IOI Houston will then concurrently execute a UCC-3 Termination Statement
terminating the UCC-1 Financing Statement listed as Exhibit D attached hereto.
Section 2.8 Directorships. Pursuant to the Bylaws of IOI, IOI Houston, IOI
Management Services of Louisiana, Inc., and IOI Management Services of
Connecticut, Inc. ("Board Entities"), Physician, effective upon his execution of
this written Agreement, does hereby resign from the Board of Directors of each
of the Board Entities. In addition, Donovan agrees to execute and deliver to IOI
director resignations addressed to each of the Board Entities.
ARTICLE III.
OTHER AGREEMENTS
Section 3.1 PhysiCare and Amended Promissory Note. IOI Houston is
delivering to PhysiCare an Amended Note designated as Exhibit E with Northshore
and Physician as the comakers and IOI Houston as the Payee and which will have
an unpaid balance as of the date of this Agreement equal to that amount shown on
Exhibit E, which amount will be finally determined pursuant to the provisions
hereof for the post-closing adjustment as provided in Section 3.5 herein.
4
<PAGE>
Section 3.2 Payment of the Amended Note.
a. Concurrently herewith, Northshore is acquiring certain accounts
receivables (listed in Schedule A of that certain Bill of Sale Assignment &
Assumption of Assets of even date herewith from PhysiCare to Northshore) from
PhysiCare (included within the assets being acquired) (the "Northshore
Receivables") in partial consideration of the assumption of certain liabilities
of PhysiCare to IOI Houston.
b. As detailed in Section 3.5, Northshore agrees that it will
immediately pay to IOI Houston, for application by IOI Houston as a payment on
the Amended Note, an amount equal to 50% of the Northshore Receivables collected
by Northshore.
Section 3.3 Guaranty. Concurrently herewith, IOI Houston is delivering to
the Donovan Group those certain Guaranty Agreements listed on Schedule 3.3 dated
July 1, 1997 that the Donovan Group executed and delivered to the Wells Fargo
Bank on behalf of IOI which Guaranty Agreements have been released by the Wells
Fargo Bank.
Section 3.4 Accounting, Post-Closing Adjustment IOI Houston agrees that it
shall within 45 days after the date of this Agreement prepare and furnish to the
Donovan Group balance sheets and income statements for OMA and PhysiCare for the
eleven months ending November 30, 1997, prepared in accordance with generally
accepted accounting principles, including an updated Schedule showing the assets
and liabilities being conveyed to and assumed by Northshore and being conveyed
to and assumed by IOI Houston (the "Accounting"). Such Accounting shall also
show the agreed value of the assets and liabilities transferred to IOI Houston
pursuant to this transaction and any agreed to adjustments thereto and will show
the net amount of monies owed by the Donovan Group to IOI Houston (the "Net
Balance"). Within five (5) business days after the Accounting is delivered to
the Donovan Group, the Donovan Group may raise any objections to the Accounting.
If any objections are raised, IOI Houston and the Donovan Group shall enter into
good faith negotiations to resolve the dispute. If good faith negotiations fail
to resolve such dispute within thirty (30) days, the parties agree to binding
arbitration by the Price Waterhouse accounting firm. If no objection is raised,
or if the parties agree, then the Accounting shall be deemed acceptable, and all
schedules and Exhibits that are attached to the documents executed at Closing,
including the Schedules of assets conveyed and liabilities assumed shall be
amended to reflect the Accounting results.
Section 3.5 Lock-Box, Cash Reconciliation and Audit Rights
A. As accounts receivable billed out with the PhysiCare lock-box
account P.O. Box number are paid into that lock-box account, IOI Houston
will segregate out those receivables that are Northshore's receivables and
those receivables that are the IOI Group's receivables. IOI will accumulate
all of the supporting paperwork that relate to all of the receivables,
whether they are Donovan Group or IOI Group receivables. On each Tuesday of
every week after Closing, a Northshore billing representative will meet
with an IOI
5
<PAGE>
Houston representative, and the two of them will agree upon the amount of
the PhysiCare receivables that is due to Northshore.
The Donovan Group, through the Northshore billing representative, has an
affirmative duty under this Section to deliver to IOI Houston each Tuesday
copies of checks representing refunds that have been paid the previous week
by Northshore in connection with services rendered by Northshore and Dr.
Checkles through PhysiCare from March 1, 1995 through the effective date of
this Agreement (the "Refunds"). Northshore, through the Northshore billing
representative, has an affirmative duty to present to IOI Houston each
Tuesday copies of checks representing payment, or other adequate evidence
of payment by Northshore, of any Assumed Liabilities (as defined in the
above-referenced Bill of Sale, Assignment & Assumption of Assets) (the
"Assumed Liability Payments").
By the close of business of the Friday following each Tuesday meeting, IOI
Houston will deliver a check to Northshore representing a portion of the
Collections (as such term is defined below) in an amount equal to the sum
of 1. and 2(a) below, as calculated on the preceding Tuesday. Upon
execution of a written statement acknowledging the amount of each of 1. and
2(a) below, IOI Houston will deliver to the Northshore representative the
supporting documents related to 1. and 2(a) below. The term "Collections"
shall be deemed to refer to payments received on the accounts receivable
purchased by Northshore from PhysiCare pursuant to the above-referenced
Bill of Sale, Assignment & Assumption of Assets. The term "Net Collections"
shall be deemed to refer to Collections minus both Refunds and the amounts
of checks returned for insufficient funds. Net Collections will be divided
as follows:
1. Fifty percent (50%) of Net Collections received the
preceding week shall be paid to Northshore; and
2. The remaining fifty percent (50%) of Net Collections
received the preceding week shall be paid as follows:
(a) an amount equal to the Assumed Liability Payments
shall be reimbursed to Northshore; provided, however, that if
said amount exceeds the remaining fifty percent (50%) of Net
Collections received the preceding week, said excess shall be
added to the amount to be reimbursed to Northshore pursuant to
this subsection (a) the following week; and
(b) the balance shall be either:
(i) paid to IOI Houston and applied by IOI Houston
as a payment on the Amended Note; or
(ii) at such time as the Amended Note is paid in
full, paid to IOI Houston as a service fee.
6
<PAGE>
B. IOI Houston shall have audit rights at Northshore, at IOI
Houston's expense, including but not limited to the right to audit cash
receipts and bank statements of Northshore, until the later to occur of (1)
the date on which all accounts receivable purchased from PhysiCare by
Northshore have been collected, or (2) the date on which the Amended Note
is paid in full.
Section 3.6 Tail Insurance. Donovan Group covenants and agrees to obtain
all tail insurance required in those certain agreements listed in Exhibit A.
Donovan Group shall present evidence of such tail insurance in the amounts
requested by IOI Group to IOI Group as of the Closing. The cost of such tail
insurance shall be borne by PhysiCare.
Section 3.7 Litigation Settlement. IOI Group covenants and agrees to assume
the costs of any settlement of the lawsuits of Donovan Group described on
Schedule 3.7, and IOI Group hereby indemnifies Donovan Group for the costs of
same.
Section 3.8 PhysiCare Bank Accounts. Donovan Group covenants and agrees to
take no action with regard to the funds in any of the PhysiCare Bank Accounts
listed on Schedule 3.8, including changing any signature authorities granted
thereon and any banking instructions connected thereto. Additionally, Physician
covenants and agrees to deliver to the PhysiCare Bank a letter of instruction in
the form attached hereto as Exhibit F.
Section 3.9 Formal Review of PhysiCare Billing Practices.
A. Donovan Group covenants and agrees to undertake, through a
qualified independent advisor engaged by legal counsel for such purpose, a
formal review of the billing practices of PhysiCare, as related to services
rendered at the offices of Northshore, during the period from March 1, 1995
to the date of this Agreement.
B. Donovan Group further covenants and agrees to complete the review
within thirty (30) days of the date of this Agreement, and to provide an
executed copy of an engagement letter by and between legal counsel and a
qualified independent advisor prior to the date of this Agreement.
C. Within ten (10) days after completion of the review, Donovan Group
shall submit a written report, certified by PhysiCare and Physician, to IOI
Group, that indicates, based on the review of the qualified independent
advisor (i) that no amounts are required to be paid to Medicare, Medicaid
or other payors or (ii) the amount required to be paid to each of Medicare,
Medicaid or other payors and the identity of such payors.
D. Northshore and Physician jointly and severally covenant and agree
that any amounts required to be paid as identified in the report referenced
in this Section 3.9 shall be paid immediately to Medicare, Medicaid or
other payors, as the case may be, together with any applicable interest or
penalties.
7
<PAGE>
Section 3.10 Diligent Pursuit of Accounts Receivable. Donovan Group
covenants and agrees to diligently and in good faith pursue the collection of
all receivables purchased from PhysiCare by Northshore pursuant to the Bill of
Sale, Assignment & Assumption of Assets of even date herewith.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties of Donovan Group. As of the date
hereof Donovan Group hereby represents and warrants to IOI Group the following.
These representations and warranties are intended to induce the IOI Group to
enter into and consummate this Agreement. They are deemed material and shall
survive the Closing.
A. Capacity. Each member of the Donovan Group is duly qualified and
licensed under all applicable laws, regulations, ordinances, and orders of
governmental authorities to own the properties and conduct their business
in the place and in the manner now conducted. Attached hereto as Exhibit G,
Exhibit H and Exhibit I are the PhysiCare registration statement, the OMA
Certificate of Good Standing and the Northshore Certificate of Good
Standing, respectively.
B. Consents; Absence of Conflicts With Other Agreements, Etc. The
execution, delivery, and performance of this Agreement by Donovan Group and
the consummation of the transactions contemplated herein by Donovan Group:
1. do not require any approval, consent of, or filing with any person
or entity not a party hereto;
2. will neither conflict with nor result in any breach or
contravention of, nor permit the acceleration of the maturity of,
or the creation of any lien under, any indenture, mortgage,
agreement, lease, contract, instrument, or understanding to which
Donovan Group is a party or by which any member of the Donovan
Group is bound, except as expressly provided herein to the
contrary;
3. will not violate any judgment, decree, order, writ, or injunction
of any court or governmental authority to which any member of the
Donovan Group may be subject;
4. will not violate any provision of the applicable articles of
incorporation, by-law, partnership agreement, or any other
document or agreement relating to the formation or operation of
any member of the Donovan Group;
5. have been authorized by all appropriate boards or shareholders or
partners and are and will constitute the valid and legally binding
obligation of the
8
<PAGE>
Donovan Group, enforceable in accordance with the terms of this
Agreement.
C. Financial Statements. IOI Group has prepared the unaudited interim
financial statements of PhysiCare and OMA dated October 31, 1997, set forth
in Schedule 4.1C attached hereto. Such unaudited interim financial
statements, herein collectively referred to as the "Financial Statements,"
have been prepared by IOI Houston in accordance with accrual basis
accounting throughout the periods indicated. Since October 31, 1997 (the
"Balance Sheet Date"), there have occurred no material changes in the
financial condition or business of Donovan Group, other than in the
ordinary course of business, except as otherwise disclosed in Schedule
4.1C. For purposes of this Schedule 4.1C, material shall be any amount in
excess of Five Thousand Dollars ($5,000.00).
D. No Undisclosed Liabilities. Specifically related to services
delivered at Northshore, except as set forth in Schedule 4.1D, neither OMA
or PhysiCare is subject to any material liability or obligation of any
nature whatsoever which relates to OMA or PhysiCare for services delivered
at Northshore, whether absolute, contingent or otherwise or whether due or
to become due, which is not shown or reflected on the Financial Statements.
For purposes of this Section 4.1D, material shall be any amount in excess
of Five Thousand Dollars ($5,000.00).
E. Regulatory Compliance. Specifically related to services delivered
at Northshore, Donovan Group is in compliance with all applicable rules,
regulations, and requirements of all federal, state, and local commissions,
boards, bureaus, and agencies having jurisdiction over Donovan Group and
their assets and business including, without limitation, the United States
Department of Health and Human Services, the Texas State Board of Medical
Examiners and the Texas Department of Health of the State of Texas and
Donovan Group has timely filed all reports, data, and other information
required to be filed with such commissions, boards, bureaus, and agencies.
F. Medical Contracts. Schedule 4.1F contains a listing of those
contracts currently held by the Donovan Group which are to be assigned or
otherwise transferred to either Northshore or IOI Houston or terminated, as
described on Schedule 4.1F. Donovan Group represents and warrants that it
will use its best efforts to obtain the necessary consent from all third
parties required to give consent to the Donovan Group to assign the
contracts described on Schedule 4.1F.
G. Litigation or Proceedings. Donovan Group has not received notice
of any claims, actions, suits, proceedings or investigations pending
against Donovan Group, other than as listed on Schedule 4.1G, and no
incidents known to Donovan Group have occurred upon which one could be
based or threatened against, or affecting Donovan Group, at law or in
equity, or before or by any federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or
instrumentality wherever located.
9
<PAGE>
H. Hazardous Materials. Specifically related to services delivered at
Northshore, to Donovan Group's actual knowledge, no Hazardous Materials (as
hereinafter defined) have been incorporated, used, generated, manufactured,
stored, or disposed of in, on, under, or about the premises (the
"Premises") or transferred to or from the Premises, except for Hazardous
Substance brought, kept or used in the operation of the Premises in
commercial quantities and qualities similar to those quantities and
qualities usually kept in or about similar buildings by others in the same
business and which are used and kept in compliance with applicable public
health, safety and environmental laws, and there are no claims, litigation,
administrative or other proceedings, whether actual or, to Donovan Group's
actual knowledge, threatened, or judgments or orders, relating to the use,
generation, manufacture, storage or disposal of any Hazardous Materials on,
under or about the Premises. As used in this Agreement, the term "Hazardous
Materials" shall mean any flammable, explosives, radioactive materials,
hazardous waste, toxic substances or related materials, including, without
limitation, asbestos, PCBs and substances defined as "hazardous
substances," "hazardous materials" or "toxic substances" in the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C. (S) 9601, et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. (S) 1801, et seq.; and the Resources
Conservation and Recovery Act, 42 U.S.C. Sec. 6901, et seq.
I. Full Disclosure. This Agreement and Schedules hereto and all other
documents and information furnished to IOI Group, its representatives in
connection with IOI Group's due diligence investigation pursuant hereto do
not and will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made and to be
made not misleading in any material respect. Copies of all documents and
material information furnished pursuant to this Agreement to IOI Group are
complete, true, and correct in all material respects.
Section 4.2 Representations and Warranties of IOI Group. As of the date
hereof IOI Group hereby represents and warrants to Donovan Group the following.
These representations and warranties are intended to induce the Donovan Group to
enter into and consummate this Agreement. They are deemed material and shall
survive the Closing.
A. Capacity. Each member of the IOI Group is duly qualified, and
licensed under all applicable laws, regulations, ordinances, and orders of
governmental authorities to own the properties and conduct their business
in the place and in the manner now conducted. Attached hereto as Exhibit J
and Exhibit K are the IOI Certificates of Good Standing and the IOI Houston
Certificate of Good Standing, respectively.
B. Consents; Absence of Conflicts With Other Agreements, Etc. The
execution, delivery, and performance of this Agreement by IOI Group and the
consummation of the transactions contemplated herein by IOI Group:
10
<PAGE>
1. do not require any approval, consent of, or filing with any
person or entity not a party hereto;
2. will neither with nor result in any breach or contravention of,
nor permit the acceleration of the maturity of, or the creation
of any lien under, any indenture, mortgage, agreement, lease,
contract, instrument, or understanding to which IOI Group is a
party or by which any member of the IOI Group is bound, except as
expressly provided herein to the contrary;
3. will not violate any judgment, decree, order, writ, or injunction
of any court or governmental authority to which any member of the
IOI Group may be subject; and
4. are and will constitute the valid and legally binding obligation
of the IOI Group, enforceable in accordance with the terms of
this Agreement, except as enforceability may be restricted,
limited, or delayed by applicable bankruptcy or other laws
affecting creditors' rights generally and except as
enforceability may be subject to general principles of equity.
C. Medical Contracts. IOI Group represents and warrants that it will
use its best efforts to assist Donovan Group in obtaining all necessary
consents from all third parties required to consent to the assignment of
the contracts listed in Schedule 4.1F.
ARTICLE V.
INDEMNIFICATION
Section 5.1 Donovan Group's Indemnity. Subject to the terms and conditions
of this Article V, and except for those costs specifically assumed by IOI Group
in Section 3.7 herein, Donovan Group agrees to indemnify, defend and hold IOI
Group and its officers, directors, agents, attorneys and affiliates harmless
from and against all losses, claims, obligations, demands, assessments,
penalties, liability, costs, damages, reasonable attorneys' fees and expenses
(collectively, "Damages"), asserted against or incurred by IOI Group or against
IOI or IOI Houston, separately, by reason of, arising out of or resulting from
any of the following:
A. A breach by Donovan Group of any representation, warranty or
covenant contained herein or in any agreement executed pursuant hereto;
B. Any malpractice claim relating to medical services delivered by
Donovan Group, and all general liability claims arising out of or relating
to occurrences of any nature relating to the Donovan Group (except OMA)
prior to the Closing, whether any such claims are asserted prior to or
after the Closing;
11
<PAGE>
C. Any failure by Donovan Group to pay the retained liabilities in
Section 3 of the Bill of Sale, Assignment and Assumption of Assets
Agreement by and between PhysiCare and IOI Houston, the form of which is
attached hereto as Exhibit L.
D. Any undisclosed liability or claim which is made against any
member of the Donovan Group (except OMA).
E. Without limiting A. through D. above, the billing and claims
practices, inclusive of all payors, of PhysiCare, related to service
rendered at the offices of Northshore and Physician during the period
beginning March 1, 1995 and ending the date hereof.
Section 5.2 IOI Group's Indemnity. Subject to the terms and conditions of
this Article V, IOI Group hereby agrees to indemnify, defend and hold Donovan
Group and its officers, directors, agents, attorneys and affiliates harmless
from and against all Damages asserted against or incurred by Donovan Group by
reason of or resulting from (a) breach by IOI Group of any representation,
warranty or covenant contained herein or in any agreement executed pursuant
hereto, (b) the failure of IOI Group to pay, perform and discharge any of the
Assumed Liabilities in the Bill of Sale, Assignment and Assumption of Assets
Agreement by and between PhysiCare and IOI Houston, the form of which is
attached hereto as Exhibit L or (c) any matter relating to the operations of
OMA.
Section 5.3 Conditions of Indemnification. The respective obligations and
liabilities of Donovan Group and IOI Group (the "indemnifying party") to the
other (the "party to be indemnified") under Sections 5.1 and 5.2, respectively,
hereof with respect to claims resulting from the assertion of liability by third
parties shall be subject to the following terms and conditions:
A. Within 20 days (or such earlier time as might be required to avoid
prejudicing the indemnifying party's position) after receipt of notice of
commencement of any action evidenced by service of process or other legal
pleading, or with reasonable promptness after the assertion in writing of
any claim by a third party, the party to be indemnified shall give the
indemnifying party written notice thereof together with a copy of such
claim, process or other legal pleading, and the indemnifying party shall
have the right to undertake the defense thereof by representatives of its
own choosing and at its own expense; provided, however, that the party to
be indemnified may participate in the defense with counsel of its own
choice and at its own expense.
B. In the event that the indemnifying party, by the 30th day after
receipt of notice of any such claim (or, if earlier, by the 10th day
preceding the day on which an answer or other pleading must be served in
order to prevent judgment by default in favor of the person asserting such
claim), does not elect to defend against such claim, the party to be
indemnified will (upon further notice to the indemnifying party) have the
right to undertake the defense, compromise or settlement of such claim on
behalf of and for the
12
<PAGE>
account and risk of the indemnifying party and at the indemnifying party's
expense, subject to the right of the indemnifying party to assume the
defense of such claims at any time prior to settlement, compromise or final
determination thereof.
C. Anything in this Section 5.3 to the contrary notwithstanding, the
indemnifying party shall not settle any claim without the consent of the
party to be indemnified unless such settlement involves only the payment of
money and the claimant provides to the party to be indemnified a release
from all liability in respect of such claim. If the settlement of the claim
involves more than the payment of money, the indemnifying party shall not
settle the claim without the prior consent of the party to be indemnified.
D. The party to be indemnified and the indemnifying party will each
cooperate with all reasonable requests of the other.
Section 5.4 Remedies Not Exclusive. The remedies provided in this Article V
shall not be exclusive of any other rights or remedies available by one party
against the other, either at law or in equity.
Section 5.5 Miscellaneous.
A. Amendment. This Agreement may be amended, modified or supplemented
only by an instrument in writing executed by the party against which
enforcement of the amendment, modification or supplement is sought.
B. Assignment. Neither this Agreement nor any right created hereby
shall be assignable by any party hereto, except by IOI to a wholly-owned
subsidiary of IOI.
C. Notice. Any notice or communication must be in writing and given
by depositing the same in the United States mail, addressed to the party to
be notified, postage prepaid and registered or certified with return
receipt requested, or by delivering the same in person. Such notice shall
be deemed received on the date on which it is hand-delivered or on the
third business day following the date on which it is so mailed. For
purposes of notice, the addresses of the parties shall be:
If to Donovan Group: William F. Donovan, M.D.
P.O. Box 24247
Houston, Texas 77229-4247
13
<PAGE>
If to IOI Group: Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, TX 77057
with a copy to: Jenkens & Gilchrist,
A Professional Corporation
1100 Louisiana, Suite 1800
Houston, Texas 77002
Attn: Lawrence L. Foust, Esq.
Any party may change its address for notice by written notice given to the other
parties.
D. Confidentiality. The parties shall keep this Agreement and its
terms confidential, but any party may make such disclosures after the
Closing as it reasonably considers are required by law, but each party will
notify the other parties in advance of any such disclosure. In the event
that the transactions contemplated by this Agreement are not consummated
for any reason whatsoever, the parties hereto agree not to disclose or use
any confidential information they may have concerning the affairs of the
other parties, except for information which is required by law to be
disclosed. Confidential information includes, but is not limited to:
customer lists and files, prices and costs, business and financial records,
surveys, reports, plans, proposals, financial information, information
relating to personnel contracts, stock ownership, liabilities and
litigation. Should the transactions contemplated hereby not be consummated,
nothing contained in this Section 5.5D shall be construed to prohibit the
parties hereto from operating a business in competition with each other.
E. Entire Agreement. This Agreement and the exhibits hereto supersede
all prior agreements and understandings relating to the subject matter
hereof, except that the obligations of any party under any agreement
executed pursuant to this Agreement shall not be affected by this Section
5.5E.
F. Costs, Expenses and Legal Fees. Whether or not the transactions
contemplated hereby are consummated, IOI Group shall (a) bear its own costs
and expenses (including accounting and attorneys' fees) of preparation,
negotiation and consummation of this Agreement and the related transactions
contemplated hereby ("Transaction Costs") and (b) shall reimburse Donovan
Group for up to a maximum of ten thousand dollars ($10,000) of its
Transaction Costs. Donovan Group shall pay all of its Transaction Costs in
excess of $10,000.
G. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
14
<PAGE>
affected by the illegal, invalid or unenforceable provision or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as part of this
Agreement, a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable.
H. Specific Performance. Donovan Group acknowledges that a refusal by
Donovan Group to consummate the transactions contemplated hereby, or a
breach by Donovan Group of the provisions of this Agreement, will cause
irrevocable harm to IOI Group, for which there may be no adequate remedy at
law and for which the ascertainment of damages would be difficult.
Therefore, IOI Group shall be entitled, in addition to, and without having
to prove the inadequacy of, other remedies at law, to specific performance
of this Agreement, as well as injunctive relief (without being required to
post bond or other security).
I. Survival of Representations, Warranties and Covenants.
Notwithstanding any investigation by any party thereto, the
representations, warranties, covenants, and other agreements contained
herein shall survive the Closing for a period (such period being referred
to as the "Survival Period") ending on the later of the expiration of sixty
calendar months following the month in which the Closing shall occur, or
the expiration of any statute of limitations for any claims that relate to
the services delivered by Donovan Group prior to the Closing. All
statements contained in any certificate, exhibit or other instrument
delivered by or on behalf of Donovan Group or IOI Group pursuant to this
Agreement shall be deemed to have been representations and warranties by
Donovan Group or IOI Group, as the case may be, and shall survive the
Closing and any investigation made by any party hereto or on its behalf for
a period expiring upon completion of the Survival Period; provided,
however, that all such representations and warranties shall survive for all
claims which are asserted on or before the expiration of the Survival
Period.
J. Governing Law. This Agreement and the rights and obligations of
the parties hereto shall be governed, construed and enforced in accordance
with the laws of the State of Texas.
K. Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
L. Counterparts; Facsimile Execution. This Agreement may be executed
in counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same instrument. A telecopy or
facsimile transmission of a signed counterpart of this Agreement shall be
sufficient to bind the party or parties whose signature(s) appear(s)
thereon.
15
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have hereunto duly executed
this Agreement as of the date first written above.
IOI GROUP:
INTEGRATED ORTHOPAEDICS, INC.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
IOI MANAGEMENT SERVICES OF HOUSTON, INC.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
DONOVAN GROUP:
PHYSICARE, L.L.P.
By: Occupational Medicine Associates of Houston,
P.A., Managing Partner of PhysiCare, L.L.P.
By:___________________________________
Name: William F. Donovan, M.D.
Title: President
NORTHSHORE ORTHOPEDICS ASSOC.
By:_________________________________________
Name: William F. Donovan, M.D.
Title: President
16
<PAGE>
OCCUPATIONAL MEDICINE ASSOCIATES
OF HOUSTON, P.A.
By:_________________________________________
Name: William F. Donovan, M.D.
Title: President
____________________________________________
WILLIAM F. DONOVAN, M.D.,
Individually
17
<PAGE>
EXHIBIT A
OPERATIONS DOCUMENTS
. Master Transaction Agreement ("MTA"), dated the Closing Date, by and
among the IOI Group and the Donovan Group.
. Management Services Agreement, dated the Closing Date, by and between
IOI Houston and PhysiCare, as amended by that certain Amendment to
Management Services Agreement, dated as of April 30, 1995, effective
May 1, 1995, by and between IOI Houston and PhysiCare and as further
amended by that certain Amendment to Management Services Agreement,
dated as of October 30, 1995, effective November 1, 1995, entered into
between IOI Houston and PhysiCare (the Management Services Agreement
as amended by the two referenced amendments is referred to herein as
the "PhysiCare MSA").
. Equipment Lease Agreement ("Equipment Lease"), dated the Closing Date,
by and among Northshore and IOI Houston.
. Collection Services Agreement (the "CSA"), dated as of the Closing
Date, by and among Northshore and IOI Houston.
. Real Property Lease (the "Lease"), dated as of the Closing Date, by
and among Physician and IOI Houston.
. Management Services Agreement, effective August 1, 1993, by and
between IOI Houston and OMA, as amended by that certain Amendment to
Management Services Agreement, dated as of July 29, 1994, but
effective August 1, 1993, by and between IOI Houston and OMA (the
Management Services Agreement as amended is referred to herein as the
"OMA MSA").
<PAGE>
EXHIBIT B
Bill of Sale, Assignment & Assumption of Assets
<PAGE>
EXHIBIT C
OMA Promissory Note
<PAGE>
EXHIBIT D
UCC-3 Termination Statement Terminating UCC-1 Financing Statement
<PAGE>
EXHIBIT E
Amended Note
<PAGE>
EXHIBIT F
Letter of Instruction
<PAGE>
EXHIBIT G
PhysiCare Registration
<PAGE>
EXHIBIT H
OMA Certificate of Good Standing
<PAGE>
EXHIBIT I
Northshore Certificate of Good Standing
<PAGE>
EXHIBIT J
IOI Certificate of Good Standing
<PAGE>
EXHIBIT K
IOI Houston Certificate of Good Standing
<PAGE>
EXHIBIT L
Bill of Sale, Assignment & Assumption of Assets
by and between PhysiCare and IOI Houston
<PAGE>
SCHEDULE 3.3
Guarantee Agreements
1. PhysiCare Guaranty to Wells Fargo Bank to guarantee any and all indebtedness
of Integrated Orthopaedics, Inc. dated July 1, 1997.
2. OMA Guaranty to Wells Fargo Bank to guarantee any and all indebtedness of
Integrated Orthopaedics, Inc. dated July 1, 1997.
3. DRCA Houston Clinics, Inc. to Wells Fargo Bank to guarantee any and all
indebtedness of Integrated Orthopaedics, Inc. dated July 1, 1997.
<PAGE>
SCHEDULE 3.7
Donovan Group Litigation Assumed by IOI
<PAGE>
SCHEDULE 3.8
List of PhysiCare Bank Accounts
<PAGE>
SCHEDULE 4.1C
Unaudited Interim Financial Statements of PhysiCare and OMA
<PAGE>
SCHEDULE 4.1D
Undisclosed Liabilities
<PAGE>
SCHEDULE 4.1F
Medical Contracts
<PAGE>
SCHEDULE 4.1G
Litigation or Proceedings
<PAGE>
DONOVAN
TERMINATION AGREEMENT
<PAGE>
Table of Contents
Page
ARTICLE I. INTERPRETATIONS AND DEFINITIONS............................. 1
Section 1.1 Interpretations................................ 1
ARTICLE II. DONOVAN GROUP OPERATIONS DOCUMENTS.......................... 2
Section 2.1 Northshore Assignment and Assumption........... 2
Section 2.2 OMA Medical Director Agreement................. 2
Section 2.3 PhysiCare Medical Director Agreement........... 2
Section 2.4 OMA Contract for Services...................... 2
Section 2.5 Northshore Contract for Services............... 3
Section 2.6 Tail Insurance................................. 3
ARTICLE III. REPRESENTATIONS AND WARRANTIES.............................. 3
Section 3.1 Representations and Warranties of Donovan Group 3
ARTICLE IV. INDEMNIFICATION.............................................. 4
Section 4.1 Donovan Group's Indemnity...................... 4
Section 4.2 Conditions of Indemnification.................. 5
Section 4.3 Remedies Not Exclusive......................... 5
Section 4.4 Miscellaneous.................................. 5
<PAGE>
DONOVAN TERMINATION AGREEMENT
DONOVAN TERMINATION AGREEMENT ("Agreement") is made and entered into
as of December 12, 1997 (the "Closing"), by and among:
. PhysiCare, L.L.P. ("PhysiCare")
. William F. Donovan, M.D. ("Physician")
. Northshore Orthopedics Assoc. ("Northshore")
. Occupational Medicine Associates of Houston, P.A. ("OMA")
(PhysiCare, Physician, OMA and Northshore are sometimes
collectively referred to as "Donovan Group")
RECITALS
WHEREAS, Physician is sole shareholder of OMA and Northshore; and
WHEREAS, OMA and Northshore are the general partners of PhysiCare; and
WHEREAS, on May 11, 1995 but effective as of March 1, 1995 (the
"Closing Date") Donovan Group entered into a series of transactions
restructuring the relationships of the Donovan Group; and
WHEREAS, in connection with a restructuring the Donovan Group now wish
to terminate those certain agreements listed on Exhibit A attached hereto;
WHEREAS, the parties mutually agree that it is in the best interest
of all parties to terminate such agreements and responsibilities except as
contemplated hereby.
AGREEMENTS
NOW THEREFORE, in consideration of the covenants and agreements,
representations and warranties hereinafter set forth, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I.
INTERPRETATIONS AND DEFINITIONS
Section 1.1 Interpretations. For purposes of this Agreement, unless
the context otherwise is stated or is required for consistent interpretation of
this Agreement, the following terms shall have the effect stated thereafter:
1
<PAGE>
A. "Donovan Group" when used with respect to a covenant or
agreement or representation or warranty given by Donovan Group shall
mean that PhysiCare, Physician, OMA and Northshore shall have joint
and several liability with respect to any such covenant or agreement
and when used with respect to any waiver or release or forbearance
given by or agreed to by the Donovan Group shall mean that each of
PhysiCare, Physician, OMA and Northshore independently give such
release or waiver or forbearance and when used with respect to
receiving any benefit or right by the Donovan Group shall mean that
the benefit or right shall flow to PhysiCare, Physician, OMA and
Northshore and be enforceable by any of such parties without the
necessity of the joinder of the others in such enforcement action.
ARTICLE II.
DONOVAN GROUP OPERATIONS DOCUMENTS
Section 2.1 Northshore Assignment and Assumption. Concurrently
herewith, PhysiCare is executing and delivering to Northshore a Bill of Sale,
Assignment & Assumption of Assets, a form of which is attached hereto as Exhibit
B whereby those certain Assets of PhysiCare described therein are being
transferred and assigned by PhysiCare to Northshore and Northshore is assuming
those certain liabilities and obligations of PhysiCare described therein,
Northshore is assuming certain indebtedness of PhysiCare, as described therein,
and Northshore is assuming those certain employment and other contractual
agreements of PhysiCare, as described therein.
Section 2.2 OMA Medical Director Agreement. In connection with the
proposed dissolution of OMA, Physician and OMA mutually agree to terminate and
cancel the OMA Medical Director Agreement, and OMA and Physician each release
the other from any liabilities and obligations thereunder, except, provided
however, the termination of the OMA Medical Director Agreement shall not release
either party from its obligations and liabilities under Section 5.3, and Section
6 of the OMA Medical Director Agreement.
Section 2.3 PhysiCare Medical Director Agreement. Physician and
PhysiCare hereby agree to mutually terminate and cancel the PhysiCare Medical
Director Agreement, and Physician and PhysiCare each release the other from any
liabilities and obligations thereunder, except, provided however, the
termination of the PhysiCare Medical Director Agreement shall not release either
party from its obligations and liabilities under Section 3.5 (assumed by
PhysiCare), and Section 9 of the PhysiCare Medical Director Agreement.
Section 2.4 OMA Contract for Services. In connection with the
proposed dissolution of OMA, OMA and PhysiCare mutually agree to terminate and
cancel the OMA Contract for Services, and OMA and PhysiCare each release the
other from any liabilities and obligations thereunder, except, provided,
however, the termination of the OMA Contract for Services shall not release
either party from its obligations and liabilities under Section 7 (assumed by
PhysiCare) and Section 11 (subject to the provisions of Article IV of this
Agreement) of the OMA Contract for Services.
2
<PAGE>
Section 2.5 Northshore Contract for Services. PhysiCare and
Northshore mutually agree to terminate and cancel the Northshore Contract for
Services, and PhysiCare and Northshore each release the other from any
liabilities and obligations thereunder, except, provided, however, the
termination of the Northshore Contract for Services shall not release either
party from its obligations and liabilities under Section 7 (assumed by
PhysiCare) and Section 11 (subject to the provisions of Article IV of this
Agreement) of the Northshore Contract for Services.
Section 2.6 Tail Insurance. Donovan Group covenants and agrees to
obtain all tail insurance required in those certain agreements listed in Exhibit
A. Donovan Group shall present evidence of such tail insurance at the Closing.
The cost of such tail insurance shall be borne by PhysiCare.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of Donovan Group. As of
the date hereof Donovan Group hereby represents and warrants the following.
They are deemed material and shall survive the Closing.
A. Capacity. Each member of the Donovan Group is duly qualified,
and licensed under all applicable laws, regulations, ordinances, and
orders of governmental authorities to own the properties and conduct
their business in the place and in the manner now conducted.
B. Consents; Absence of Conflicts With Other Agreements, Etc. The
execution, delivery, and performance of this Agreement by Donovan
Group and the consummation of the transactions contemplated herein by
Donovan Group:
1. do not require any approval, consent of, or filing with any
person or entity not a party hereto;
2. will neither conflict with nor result in any breach or
contravention of, nor permit the acceleration of the maturity
of, or the creation of any lien under, any indenture,
mortgage, agreement, lease, contract, instrument, or
understanding to which Donovan Group is a party or by which
any member of the Donovan Group is bound, except as expressly
provided herein to the contrary;
3. will not violate any judgment, decree, order, writ, or
injunction of any court or governmental authority to which
any member of the Donovan Group may be subject;
3
<PAGE>
4. will not violate any provision of the applicable articles of
incorporation, by-law, partnership agreement, or any other
document or agreement relating to the formation or operation
of any member of the Donovan Group;
5. have been authorized by all appropriate boards or
shareholders or partners and are and will constitute the
valid and legally binding obligation of the Donovan Group,
enforceable in accordance with the terms of this Agreement.
C. Full Disclosure. This Agreement and Schedules hereto and all
other documents and information furnished by Donovan Group or its
representatives do not and will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements made and to be made not misleading in any material respect.
Copies of all documents and material information furnished pursuant to
this Agreement are complete, true, and correct in all material
respects.
ARTICLE IV.
INDEMNIFICATION
Section 4.1 Donovan Group's Indemnity. Subject to the terms and
conditions of this Article IV, Donovan Group agrees to indemnify, defend and
hold Integrated Orthopaedics, Inc. and IOI Management Services of Houston, Inc.
("IOI Group") and their officers, directors, agents, attorneys and affiliates
harmless from and against all losses, claims, obligations, demands, assessments,
penalties, liability, costs, damages, reasonable attorneys' fees and expenses
(collectively, "Damages"), asserted against or incurred by IOI Group or against
either member of IOI Group separately, by reason of or resulting from any of the
following:
A. A breach by Donovan Group of any representation, warranty or
covenant contained herein or in any agreement executed pursuant
hereto;
B. Any malpractice claim relating to medical services delivered
by Donovan Group, and all general liability claims arising out of or
relating to occurrences of any nature relating to the Donovan Group
(except OMA) prior to the Closing, whether any such claims are
asserted prior to or after the Closing;
C. Any failure by Donovan Group to pay any of the Assumed
Liabilities described in the Bill of Sale, Assignment and Assumption
of Assets Agreement in Exhibit B.
D. Any undisclosed liability or claim which is made against any
member of the Donovan Group (except OMA).
E. Without limiting A. through D. above, the billing and claims
practices, inclusive of all payors, of PhysiCare, related to service
rendered at the offices of
4
<PAGE>
Northshore and Physician during the period beginning March 1, 1995
and ending the date hereof.
Section 4.2 Conditions of Indemnification. The respective
obligations and liabilities of Donovan Group (the "indemnifying party") to IOI
Group (the "party to be indemnified") under Sections 4.1 and 4.2, respectively,
hereof with respect to claims resulting from the assertion of liability by third
parties shall be subject to the following terms and conditions:
A. Within 20 days (or such earlier time as might be required to
avoid prejudicing the indemnifying party's position) after receipt of
notice of commencement of any action evidenced by service of process
or other legal pleading, or with reasonable promptness after the
assertion in writing of any claim by a third party, the party to be
indemnified shall give the indemnifying party written notice thereof
together with a copy of such claim, process or other legal pleading,
and the indemnifying party shall have the right to undertake the
defense thereof by representatives of its own choosing and at its own
expense; provided, however, that the party to be indemnified may
participate in the defense with counsel of its own choice and at its
own expense.
B. In the event that the indemnifying party, by the 30th day
after receipt of notice of any such claim (or, if earlier, by the 10th
day preceding the day on which an answer or other pleading must be
served in order to prevent judgment by default in favor of the person
asserting such claim), does not elect to defend against such claim,
the party to be indemnified will (upon further notice to the
indemnifying party) have the right to undertake the defense,
compromise or settlement of such claim on behalf of and for the
account and risk of the indemnifying party and at the indemnifying
party's expense, subject to the right of the indemnifying party to
assume the defense of such claims at any time prior to settlement,
compromise or final determination thereof.
C. Anything in this Section 4.3 to the contrary notwithstanding,
the indemnifying party shall not settle any claim without the consent
of the party to be indemnified unless such settlement involves only
the payment of money and the claimant provides to the party to be
indemnified a release from all liability in respect of such claim. If
the settlement of the claim involves more than the payment of money,
the indemnifying party shall not settle the claim without the prior
consent of the party to be indemnified.
D. The party to be indemnified and the indemnifying party will
each cooperate with all reasonable requests of the other.
Section 4.3 Remedies Not Exclusive. The remedies provided in this
Article IV shall not be exclusive of any other rights or remedies available by
one party against the other, either at law or in equity.
5
<PAGE>
Section 4.4 Miscellaneous.
A. Amendment. This Agreement may be amended, modified or supplemented
only by an instrument in writing executed by the party against which enforcement
of the amendment, modification or supplement is sought.
B. Assignment. Neither this Agreement nor any right created hereby
shall be assignable by any party hereto, except by IOI to a wholly-owned
subsidiary of IOI.
C. Notice. Any notice or communication must be in writing and given by
depositing the same in the United States mail, addressed to the party to be
notified, postage prepaid and registered or certified with return receipt
requested, or by delivering the same in person. Such notice shall be deemed
received on the date on which it is hand-delivered or on the third business day
following the date on which it is so mailed. For purposes of notice, the
addresses of the parties shall be:
If to Donovan Group: William F. Donovan, M.D.
----------------------------
----------------------------
If to IOI Group: Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, TX 77057
with a copy to: Jenkens & Gilchrist,
A Professional Corporation
1100 Louisiana, Suite 1800
Houston, Texas 77002
Attn: Larry L. Foust, Esq.
Any party may change its address for notice by written notice given to
the other parties.
D. Confidentiality. The parties shall keep this Agreement and its
terms confidential, but any party may make such disclosures after the Closing as
it reasonably considers are required by law, but each party will notify the
other parties in advance of any such disclosure. In the event that the
transactions contemplated by this Agreement are not consummated for any reason
whatsoever, the parties hereto agree not to disclose or use any confidential
information they may have concerning the affairs of the other parties, except
for information which is required by law to be disclosed. Confidential
information includes, but is not limited to: customer lists and files, prices
and costs, business and financial records, surveys, reports, plans, proposals,
financial information, information relating to personnel contracts, stock
ownership, liabilities and litigation. Should the transactions contemplated
hereby not be consummated, nothing contained in this Section
6
<PAGE>
4.5D shall be construed to prohibit the parties hereto from operating a business
in competition with each other.
E. Entire Agreement. This Agreement and the exhibits hereto supersede
all prior agreements and understandings relating to the subject matter hereof,
except that the obligations of any party under any agreement executed pursuant
to this Agreement shall not be affected by this Section 4.5E.
F. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part hereof; and the remaining provisions hereof
shall remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom. Furthermore, in
lieu of such illegal, invalid or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
G. Specific Performance. Donovan Group acknowledges that a refusal by
Donovan Group to consummate the transactions contemplated hereby, or a breach by
Donovan Group of the provisions of this Agreement, will cause irrevocable harm
to IOI Group, for which there may be no adequate remedy at law and for which the
ascertainment of damages would be difficult. Therefore, IOI Group shall be
entitled, in addition to, and without having to prove the inadequacy of, other
remedies at law, to specific performance of this Agreement, as well as
injunctive relief (without being required to post bond or other security).
H. Survival of Representations, Warranties and Covenants.
Notwithstanding any investigation by any party thereto, the representations,
warranties, covenants, and other agreements contained herein shall survive the
Closing for a period (such period being referred to as the "Survival Period")
ending on the expiration of sixty calendar months following the month in which
the Closing shall occur, and all statements contained in any certificate,
exhibit or other instrument delivered by or on behalf of Donovan Group or IOI
Group pursuant to this Agreement shall be deemed to have been representations
and warranties by Donovan Group or IOI Group, as the case may be, and shall
survive the Closing and any investigation made by any party hereto or on its
behalf for a period expiring upon completion of the Survival Period; provided,
however, that all such representations and warranties shall survive for all
claims which are asserted on or before the expiration of the Survival Period.
I. Governing Law. This Agreement and the rights and obligations of
the parties hereto shall be governed, construed and enforced in accordance with
the laws of the State of Texas.
7
<PAGE>
J. Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
K. Counterparts; Facsimile Execution. This Agreement may be executed
in counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument. A telecopy or facsimile
transmission of a signed counterpart of this Agreement shall be sufficient to
bind the party or parties whose signature(s) appear(s) thereon.
IN WITNESS WHEREOF, the undersigned parties have hereunto duly
executed this Agreement as of the date first written above.
DONOVAN GROUP:
PHYSICARE, L.L.P.
By: /s/ William F. Donovan
------------------------------------------
Name: William F. Donovan, M.D.
Title: President of Occupational Medicine
Associates of Houston, P.A.,
Managing Partner of PhysiCare,
L.L.P.
NORTHSHORE ORTHOPEDICS ASSOC.
By: /s/ William F. Donovan
------------------------------------------
Name: William F. Donovan, M.D.
Title: President
OCCUPATIONAL MEDICINE ASSOCIATES OF
HOUSTON, P.A.
By: /s/ William F. Donovan
-------------------------------------------
Name: William F. Donovan, M.D.
Title: President
8
<PAGE>
EXHIBIT A
OPERATIONS DOCUMENTS
. Medical Director Agreement, executed March 29, 1994, but effective
August 1, 1993, as amended by that certain First Amendment to the
Medical Director Agreement, dated July 29, 1994, but effective August
1, 1993, by and between OMA and Physician (the "OMA Medical Director
Agreement").
. Professional Services Agreement Medical Director, executed April 15,
1997, by and between PhysiCare and Physician (the "PhysiCare Medical
Director Agreement").
. Contract for Services, executed May 11, 1995, by and between OMA and
PhysiCare (the "OMA Contract for Services").
. Contract for Services, executed May 11, 1995, by and between
Northshore, Physician and PhysiCare (the "Northshore Contract for
Services").
<PAGE>
SCHEDULE B
Bill of Sale, Assignment & Assumption of Assets
