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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-26538
ENCORE MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 65-0572565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9800 METRIC BLVD.
AUSTIN, TEXAS 78758
(Address of principal executive offices) (Zip code)
512-832-9500
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value
$5 Warrant
$7 Warrant
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes No X
----
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The aggregate market value of the voting and non-voting common equity
held by non-affiliates of Encore Medical Corporation, computed by reference to
the last sales price of such stock as of March 16, 1998, was $19,649,012.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 16, 1998, the latest practicable date.
<TABLE>
<CAPTION>
Title Outstanding
- ----- -----------
<S> <C>
Common Stock, par value $0.001 9,091,848
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933:
PORTIONS OF THE PROXY STATEMENT TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO REGULATION 14A UNDER THE SECURITIES EXCHANGE ACT OF 1934
IN CONNECTION WITH THE COMPANY'S 1998 ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III HEREOF (TO THE EXTENT SET FORTH IN ITEMS
10, 11, 12 AND 13 OF PART III OF THIS ANNUAL REPORT ON FORM 10-K).
This annual report on Form 10-K of Encore Medical Corporation for the year
ended December 31, 1997 contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. To the extent that such statements
are not recitations of historical fact, such statements constitute
forward-looking statements which, by definition, involve risks and
uncertainties. Where, in any forward-looking statement, Encore expresses an
expectation or belief as to future results or events, such expectation or belief
is expressed in good faith and believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished.
The following are factors that could cause actual results or events to
differ materially from those anticipated, and include but are not limited to:
general economic, financial and business conditions; commodity prices; the
success and costs of advertising and promotional efforts; changes in and
compliance with governmental healthcare and other regulations; changes in tax
laws; and the costs and effects of legal proceedings.
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ITEM 1. BUSINESS
OVERVIEW
Encore Medical Corporation ("EMC") through its primary operating
subsidiary, Encore Orthopedics, Inc. ("Encore" or the "Company"), designs,
markets and distributes orthopedic products and supplies. Its products are used
primarily by orthopedic medical specialists to treat patients with
musculoskeletal conditions resulting from degenerative diseases, deformities,
traumatic events and participation in sporting events. Encore's products cover a
broad variety of orthopedic needs and include hip, knee and shoulder implants to
reconstruct damaged joints and trauma products to reconstruct bone fractures.
In April 1992, seven former executives of another orthopedic products
company joined a small original equipment manufacturer that was engaged in the
supply of orthopedic implants and related instruments. Encore thereafter began
to produce and distribute orthopedic products under its own name. The members of
Encore's management team possess over 110 years of combined experience in the
orthopedic products industry.
Encore's first product, the Foundation(R) Knee System, was introduced
in Europe in October 1992 and in the United States in February 1993, upon
Encore's receipt of United States Food and Drug Administration ("FDA") 510(k)
premarket notification approval. Encore obtained registration for the
Foundation(R) Knee System in Japan, and sales began in Japan in late 1994. Since
that time, Encore has developed and obtained regulatory approval for additional
products and product improvements and has several products awaiting receipt of
510(k) approval from the FDA. In August 1992, Encore entered into a strategic
alliance with PLUS Endoprothetik AG ("PLUS Switzerland"), which directly and
through its affiliates, provided Encore with funding for the initial phases of
its growth, the ability to sell its products in European and Japanese markets
and the ability to sell a fully developed total hip replacement system in North
America.
In May 1996, Encore acquired substantially all of the net assets and
liabilities of Applied Osteo Systems ("AOS"). AOS sold several products in the
trauma market, primarily intramedullary rods used for fracture repair. This
acquisition expanded Encore's product line into the market for trauma products,
an area in which Encore had not previously participated. Encore currently offers
knee, shoulder, hip and trauma products that are sold in countries throughout
the world.
In March, 1997, Encore entered into a reverse merger with Healthcare
Acquisition, Inc., a wholly owned subsidiary of Healthcare Acquisition Corp.
("HCAC"). Encore was the surviving company. Immediately upon completion of the
merger, HCAC changed its name to Encore Medical Corporation.
INDUSTRY BACKGROUND
Certain of the information contained in this Form 10-K, generally, and
in this section concerning the definition, size and development of the various
product markets in which Encore participates, and Encore's general expectations
concerning the development of such product markets, both domestically and
internationally, are based on estimates prepared by Encore using data from
various sources (primarily MediFacts International, MDIS Publications and
Knowledge Enterprises, as well as data from Encore's internal research), which
data Encore has no reason to believe are unreliable, and on assumptions made by
Encore, based on such data, and Encore's knowledge of the orthopedic product
industry, which Encore believes to be reasonable.
Over the last two decades, the orthopedic products market, which
consists of implants for joint replacement, spinal implants, trauma products,
certain arthroscopic, sports medicine and soft goods products, bone cement and
related products and instrumentation, has experienced significant growth in both
revenues and unit sales. In 1995, the worldwide market for orthopedic products
produced approximately $7.0 billion in revenue. In the United States, the
orthopedic products market represented approximately $3.9 billion in revenue in
1995. From 1989 to 1995, the average annual revenue growth rate was
approximately 16%. Unit growth accounted for approximately 10% of this growth;
the remainder of the growth was attributable to technology driven price
increases.
Joint reconstruction products accounted for approximately $1.5 billion
of the overall orthopedic market in
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the U.S. in 1995 and approximately $3.0 billion worldwide. Among the joint
replacement products, hip replacement products account for approximately 49% of
worldwide revenues (with approximately $1.6 billion in worldwide sales in 1995),
knee replacement products account for approximately 47% of worldwide revenues
(with approximately $1.4 billion in worldwide sales in 1995) and shoulder
replacement and other related products (spinal, elbow, wrist, finger, toe, ankle
and ligament prostheses) account for approximately 4% of worldwide revenues
(with approximately $80 million in worldwide sales in 1995). The trauma, or
fracture fixation, segment of the orthopedic products market approached $500
million in 1995, representing approximately 15% growth over 1994. The trauma
product market is divided between internal and external fixation products. In
1995, internal fixation products accounted for about 75% of the revenues from
the sale of all trauma products. The other segments of the orthopedic products
market (soft goods, cast room products, power and hand instruments, arthroscopy,
etc.) account for approximately 40% of the revenue for the total orthopedic
products market.
The international orthopedic market remains concentrated in a few
primary areas. The United States alone accounts for approximately 56% of the
worldwide market, and five countries, the United States, Germany, France, Japan
and the United Kingdom, account for approximately 80% of the worldwide market
for such products. There are, however, other markets being developed in areas
such as China, Eastern Europe, Russia and the Middle East, where there is
significant growth potential for sales of orthopedic products such as Encore
markets.
STRATEGY
Encore has established its knee, hip and shoulder total joint products
as the core of its product line. Encore's management believes that it must offer
a complete line of reconstructive total joint implant products, along with
specialty trauma and spinal products, to remain competitive in the orthopedic
products marketplace. Encore will continue to design and acquire technology to
assemble complete, high quality, competitively-priced, globally-designed product
lines and will continue to expand its network of independent sales agents for
the sale of its products in the United States and its distributor relationships
worldwide. Encore's goal is to increase its penetration in the United States and
foreign markets by introducing total joint replacement ancillary products and
specialty products, grow its line of trauma products and enter the spinal
implant marketplace, through internal development and through the acquisition of
existing products or companies. The acquisition of AOS is indicative of the type
of product and/or market coverage Encore will seek in future transactions.
Outside the United States, Encore's strategy is to expand its existing
distribution arrangements and enter into new distribution agreements in other
parts of the world. For both its United States and its international products,
Encore will continue to work with a team of experienced orthopedic surgeons to
help design and promote its products, develop clinical results, assist in
marketing the products and participate in educational programs focusing on the
products.
PRODUCTS
Encore currently designs, manufactures and markets over 5,700 separate
orthopedic reconstructive joint products, trauma products and instruments used
by surgeons to perform orthopedic surgery. Encore plans to continue to develop
or acquire new hip, knee and shoulder systems as well as new trauma products,
including line extensions, systems that address the differing preferences of
surgeons (i.e., cruciate sparing v. posterior stabilized knees or straight v.
anatomic hip stems) and new systems for new indications (i.e., primary v.
revision).
RECONSTRUCTIVE KNEE PRODUCTS
Encore currently offers the Foundation(R) Knee System in both cruciate
sparing and posterior stabilized versions, for both primary and revision
applications, all of which are designed to duplicate as closely as possible the
anatomical function of the patient's knee, thereby improving its range of motion
and stability. Encore's knee systems are used to replace the articulating
surfaces of the knee: the knee cap (patella), top of the shinbone (tibia), and
bottom of the thigh bone (femur). The knee system consists of eight different
sizes of knee components, which are made of cobalt chrome alloy, titanium alloy
and high-density polyethylene. Sales of knee products and related instruments
accounted for approximately 71% of total sales in 1997.
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RECONSTRUCTIVE HIP PRODUCTS
Encore is currently marketing four internally designed hip systems as the
initial components of the Foundation(R) Hip System. Encore began marketing in
1997 the Vitality (R) Hip Stem, which meets the needs of surgeons who believe
in a different philosophical approach than the one underpinning the Foundation
Hip System. Encore also markets the SL-PLUS Hip System in limited areas for both
primary and revision applications, a hip system designed and manufactured by
PLUS Switzerland. Encore's hip implant consists of the same basic parts as the
normal hip, including a femoral stem (thighbone) with a spherical femoral head
(ball) and an acetabular cup (socket) on which the femoral head articulates.
Sales of hip products and related instruments accounted for approximately 18% of
total sales in 1997.
RECONSTRUCTIVE SHOULDER PRODUCTS
Encore markets its own internally designed Foundation(R) Shoulder System.
Encore's shoulder implant consists of the same basic parts as the normal
shoulder, including a humeral stem with a spherical humeral head (ball) and a
glenoid component on which the humeral head articulates. Sales of shoulder
products and related instruments accounted for approximately 3% of total sales
in 1997.
TRAUMA PRODUCTS
The acquisition of AOS in May 1996 provided Encore with a complementary
extension of its product line into trauma products. AOS' products included a
patented system of intramedullary nails used in repairing bone fractures,
primarily for use in correcting upper extremity fractures and a patented
external fixation system. Encore has recently begun to sell intramedullary nail
products in the higher volume market for products used in correcting lower
extremity conditions. In addition, Encore plans to expand the trauma product
line by concentrating on "specialty" trauma products. Sales of trauma products
and related instruments accounted for approximately 8% of total sales in 1997.
MARKETING AND SALES
Encore's products are currently marketed and sold in the United States,
Western Europe and Japan. In addition, Encore expanded into Canadian
distributions as of January 1, 1998. In the United States, products are sold to
hospitals and orthopedic surgeons through a network of independent commissioned
sales agents. Outside the United States, Encore's products are sold through
distributors, primarily PLUS Switzerland and its affiliates. In addition, Encore
works closely with affiliated surgeons who use the products, assist in the
preparation of marketing materials and participate in educational and
professional activities relating to the products.
Encore strives to place its sales agents in the United States in sales
territories whose populations contain significant concentrations of individuals
over 55 years of age. As of December 31, 1997, Encore had independent sales
agents selling either reconstructive products, trauma products, or both, in 23
sales territories in 25 states of the United States. Sales agents are generally
granted a contract with a term of one to three years. Agents are typically paid
a sales commission ranging from 20% to 25% of the gross selling price of all
products sold, with the possibility of a 5% bonus on all annual sales if the
agent exceeds established sales goals. Encore's sales agents are also eligible
to receive stock options under the 1993 Distributor Stock Option Plan and the
1997 Distributor Advisory Panel Stock Option Plan. Each of Encore's sales agents
are assigned an exclusive sales territory. The sales agents may sell
non-competing lines of orthopedic products manufactured by other companies but
may not carry competing product lines. Encore provides its agents product
inventories on consignment for their use in marketing its products and for
filling customer orders. All sales agents are required to participate in
periodic product and sales training courses given by Encore at its corporate
offices in Austin, Texas as well as at other locations around the United States.
Encore's management believes that the changing orthopedic product
marketplace will require orthopedic product companies to emphasize the
value-added services provided together with products in order to be successful.
Towards that end, Encore has instituted programs to formalize training of
support personnel in both hospital and medical office environments, has included
key customers (i.e., surgeons and hospital administrators) in defining the
desired levels and types of customer service, and is upgrading its order
processing system to allow the creation of a simple and effective interface with
both hospitals, sales agents and international distributors. In addition, Encore
is developing a comprehensive distribution support system that will provide for
instrument and inventory loaners, in order to enable sales agents to service low
volume territories, and an on-line inventory control system. Encore is also
developing a dedicated field support group to provide rapid response to
technical issues.
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Encore continues to evaluate the most efficient methods of product marketing
and distribution and to assess its use of sales agents and stocking
distributors. Encore is designing its sales efforts to take into account the
fact that the customer base for its products now includes, in addition to
surgeons, hospital administrators, material management personnel, purchasing
agents and review committees. The need to sell effectively to all of these
groups will continue to grow, and Encore intends to continue to address the
evolving landscape of the orthopedic marketplace.
INTERNATIONAL SALES AND DISTRIBUTION
Encore's total joint implant products are currently sold to Encore's
strategic partner, PLUS Switzerland, and distributed by PLUS Switzerland and its
sales subsidiaries in Western Europe. A PLUS Switzerland affiliate, Endo PLUS
K.K., currently distributes Encore's total joint products in Japan. Pursuant to
Encore's distribution agreement with PLUS Switzerland, Encore distributes
certain PLUS Switzerland products in limited areas of the United States. In
addition, Encore distributes trauma products through distributors in certain
Western European countries and Japan, pursuant to arrangements originally
entered into by AOS. Encore's management is continuing to look for opportunities
to expand the international market for Encore's products and will continue its
efforts to identify international markets in which its U.S.-designed products
can obtain rapid acceptance with surgeons, hospitals and other buyer groups.
Encore's management will also continue to seek markets outside of the
Encore/PLUS Switzerland network that have sufficient profit potential, size and
market conditions.
AFFILIATED SURGEONS
A key aspect in Encore's development, marketing and sale of its products is
the use of designing and consulting surgeons. Each major product is supported by
three to five designing surgeons who assist Encore not only with the design of
the product but who also give demonstrations using the product, assist in
developing marketing materials and participate at symposia addressing both
clinical and economic aspects of the product. The designing surgeons working on
a product are compensated with a royalty of approximately 5%, which is typically
split among the group members. The designing surgeons also receive stock
options, which usually vest over a four-year period. Encore has encouraged
interaction among the surgeons with visits to designing surgeons' institutions
(e.g., viewing surgeries, training meetings and regional workshops) by
attempting to regionalize the designing surgeon groups.
Advocacy groups are being formed among U.S. and European surgeons that,
through clinical visits and information exchanges, will support conversions to
Encore designed products in Europe.
Encore also has established relationships with consulting surgeons, who
perform various consulting services for Encore. Such services include conduct of
clinical studies on various products, analysis of economic issues relating to
use of the products, establishment of protocols for use of the products and
participation at various symposia. The consulting surgeons do not receive
royalty payments but are granted stock options under the 1993 Surgeon Advisory
Stock Option Plan or the 1997 Surgeon Advisory Stock Option Plan. Consulting
surgeons are also occasionally paid consulting fees for their services to
Encore's products.
RESEARCH AND DEVELOPMENT
Encore conducts extensive research and development programs at its facility
in Austin, Texas. Such activities are focused on making improvements to existing
products and developing new products using new materials and surgical
applications.
COMPETITION
The market for orthopedic products is highly competitive and is dominated
by a number of large companies, each of which have research and development,
sales, marketing and manufacturing capabilities greater than those of Encore.
These competitors also feature a wider range of product offerings than Encore,
and many have
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the endorsement of leading orthopedic surgeons for their products.
In the last ten years, new technologies and product concepts have been
introduced into the orthopedic market at a rapid rate, often before prior
technologies and concepts have been fully integrated. Many of Encore's
competitors have entered into various agreements and joint ventures with other
companies to develop innovative products for the industry. Furthermore, most
orthopedic product companies are attempting to develop new implant surfaces to
enhance bone ingrowth and are experimenting with new materials such as
hydroxylapatite and ceramics. It is the opinion of Encore's management that this
evolution in high technology products will continue for the foreseeable future.
In addition to the race for technology, orthopedic product companies
must now devote attention to the prices of their products. Price has become
increasingly important as a competitive factor, due particularly to governmental
and third party payors' adoption of prospective payment systems. Thus, although
Encore's management believes that the design and quality of its products compare
favorably with those of its competitors, should Encore be unable to offer
products with the latest technological advances at relatively modest prices, its
ability to successfully compete with its competitors could be materially and
adversely affected. Currently, Encore competes favorably on price with most of
its competitors.
MANUFACTURING
Encore's management believes that Encore must be a low-cost
manufacturer in order to effectively compete and that its manufacturing system
must be flexible and responsive to ongoing supply demands. Encore uses both
in-house manufacturing capabilities and partnership relationships with
third-party vendors to supply products. The third-party vendors may have special
manufacturing capabilities (i.e., casting, forging, porous coating or
sterilization) or may be general suppliers of finished components. With the
exception of those vendors supplying special capabilities, the choice of
in-house or vendor supply is based on available in-house capacity, lead time
control, and cost control.
Encore's in-house capacity includes CNC machine tools (four mills,
three lathes), belting, polishing, cleaning, packaging and quality control.
Encore obtained ISO 9001 qualification and Medical Device Directive "CE"
certification in 1996. At present, the machining capacity is used to produce
about 50% of the implant units; the remainder are produced by third party
manufacturers. The primary raw materials used in the manufacture of Encore's
reconstructive products are cobalt chromium alloy, stainless steel alloys,
titanium alloy and ultra high molecular weight polyethylene. Encore has
alternate sources for all of its vendors and suppliers and believes that
adequate capacity exists at its suppliers to meet all anticipated needs.
All implants and instruments go through in-house quality control,
cleaning and packaging operations. Quality control measures begin with an
inspection of all raw materials and castings to be used. Each piece is inspected
at each step of the manufacturing process. As a final step, products pass
through a "clean room" environment designed and maintained to reduce product
exposure to particulate matter.
INTELLECTUAL PROPERTY
Encore holds one United States patent, covering a tibia base plate
design, used in connection with its Foundation(R) Knee System. It also has nine
exclusive patent licenses, which protect Encore both in the United States and in
several foreign countries. Encore has six trademarks registered in the United
States, one of which is also registered in Germany, Switzerland, Austria, China
and Japan. Encore is in the process of registering that trademark with the
European Community. Encore also depends on three unregistered trademarks, all
of which have been submitted for registration in the United States. In the
future, Encore will apply for such additional patents and trademarks as it deems
appropriate. Finally, Encore relies on non-patented proprietary know-how, trade
secrets, process and other proprietary information, which it protects through a
variety of methods, including confidentiality agreements and proprietary
information agreements.
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GOVERNMENT REGULATION
Encore's products are subject to rigorous government agency regulation
in the United States and certain other countries. In the United States, the FDA
regulates the testing, labeling, manufacturing and marketing of medical devices
to ensure that medical products distributed in the United States are safe and
effective for their intended uses. The FDA also regulates the export of medical
devices manufactured in the United States to international markets. Encore's
products are subject to such FDA regulation.
Under the Food, Drug and Cosmetic Act, as amended, medical devices are
classified into one of three classes depending on the degree of risk imparted to
patients by the medical device. Class I devices are those for which safety and
effectiveness can be assured by adherence to General Controls, which include
compliance with Good Manufacturing Practices ("GMPs"), facility and device
registrations and listings, reporting of adverse medical events, and appropriate
truthful and non-misleading labeling, advertising and promotional materials.
Some Class I devices also require premarket review and clearance by the FDA
through the 510(k) Premarket Notification process described below. Class II
devices are subject to General Controls as well as premarket demonstration of
adherence to certain performance standards or other special controls as
specified by the FDA. Premarket review and clearance by the FDA is accomplished
through the 510(k) Premarket Notification procedure. In the 510(k) Premarket
Notification procedure, the manufacturer submits appropriate information to the
FDA in a Premarket Notification submission. If the FDA determines that the
device is "substantially equivalent" to a device that was legally marketed prior
to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were
enacted, or to another similar commercially available device subsequently
cleared through the 510(k) Premarket Notification process, it will grant
clearance to commercially market the device. It generally takes from three to 12
months from the date of submission to obtain clearance of a 510(k) Premarket
Notification submission, but the process may take longer. If the FDA determines
that the device, or its "labeled" intended use, is not "substantially
equivalent," the FDA will automatically place the device into Class III.
A Class III product is a product that has a wholly new intended use or
is based on advances in technology for which the device's safety and
effectiveness cannot be assured solely by the general controls, performance
standards and special controls applied to Class I and II devices. These devices
often require formal clinical investigation studies to assess their safety and
effectiveness. A PMA from the FDA is required before the manufacturer of a Class
III product can proceed in marketing the product. The PMA process is much more
extensive than the 510(k) Premarket Notification process. In order to obtain a
PMA, Class III devices, or a particular intended use of any such device, must
generally undergo clinical trials pursuant to an application submitted by the
manufacturer for an IDE. An approved IDE exempts the manufacturer from the
otherwise applicable FDA regulations and grants approval for the conduct of
human clinical investigation in order to generate the clinical data necessary to
scientifically evaluate the safety and efficacy of the Class III device or
intended use.
When a manufacturer believes that sufficient pre-clinical and clinical
data has been generated to prove the safety and efficacy of the new device or
new intended use, it may submit a PMA application to the FDA. An FDA review of a
PMA application generally takes one to two years from the date the PMA
application is accepted for filing, but the process may take significantly
longer. In approving a PMA application, the FDA may also require some form of
post-market surveillance whereby the manufacturer follows certain patient groups
for a number of years, making periodic reports to the FDA on the clinical status
of those patients. This helps to ensure that the long-term safety and
effectiveness of the device are adequately monitored for adverse events. Most
pre-amendment devices (those marketed prior to the enactment of the Medical
Device Amendment of 1976) are, in general, exempt from such Premarket Approval
requirements, as are Class I and Class II devices.
Encore's products include both pre-amendment and post-amendment Class
I, II and III medical devices. All currently marketed devices hold the relevant
exemptions or premarket clearances or approvals, as appropriate, required under
federal medical device law.
Encore's manufacturing processes are also required to comply with GMP
regulations that cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging and shipping of
Encore's products. Further, Encore's facilities, records and manufacturing
processes are subject to periodic unscheduled inspections by the FDA or other
agencies. Failure to comply with applicable U.S. medical device regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil
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penalties, repairs, replacements, refunds, recalls or seizures of products,
total or partial suspensions of production, refusal of the FDA to grant future
pre-market clearances or approvals, withdrawals or suspensions of current
clearances or approvals and criminal prosecution. There are currently no adverse
regulatory compliance issues or actions pending with the FDA, and no FDA GMP
audits conducted at Encore's facilities have resulted in any adverse compliance
enforcement actions.
Encore is subject to regulations in many of the foreign countries in
which it sells its products, in the areas of product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to Encore's
devices and products in such countries are similar to those of the FDA. The
national health or social security organizations of certain countries require
Encore's products to be qualified before they can be marketed in those
countries. To date, Encore has not experienced any difficulty in complying with
these regulations. Encore has also implemented policies and procedures allowing
it to position itself for the changing international regulatory environment. The
ISO 9000 series of standards has been developed as an internationally recognized
set of guidelines that are aimed at ensuring the design and manufacture of
quality products. A company that passes an ISO audit and obtains ISO
registration becomes internationally recognized as well run and functioning
under a competent quality system. In certain foreign markets, it may be
necessary or advantageous to obtain ISO 9000 series certification, which is in
some ways analogous to compliance with the FDA's GMP requirements. The European
Community has promulgated rules requiring medical products to receive a CE mark
by mid-1998. A CE mark is an international symbol of adherence to certain
standards and compliance with applicable European medical device requirements.
ISO 9000 series certification is one of the prerequisites for CE marking for
most of Encore's products. ISO 9001 is the highest level of ISO certification,
covering both the quality system for manufacturing as well as the quality system
for product design control. Encore has received an ISO 9001 certification and
"CE" certification.
Encore must obtain export certificates from the FDA before it can
export certain of its products.
Certain provisions of the Social Security Act, commonly known as the
"Medicare Fraud and Abuse Statute," prohibit entities, such as Encore, from
offering, paying, soliciting or receiving any form of remuneration in return for
the referral of Medicare or state health program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase, lease
or order of items or services that are covered by Medicare or state health
programs. Violation of the Anti-Kickback Statute is a felony, punishable by
fines of up to $25,000 per violation and imprisonment of up to five years. In
addition, the federal Department of Health and Human Services may impose civil
penalties excluding violators from participation in Medicare or state health
programs. Many states have adopted similar prohibitions against payments
intended to induce referrals of Medicaid and other third party payor patients.
Federal physician self-referral legislation prohibits, subject to
certain exemptions, a physician or a member of his immediate family from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest,
or with which the physician has entered into a compensation arrangement. The
penalties for violations include a prohibition on payment by these government
programs and civil penalties of as much as $15,000 for each referral in
violation of the statute and $100,000 for participation in a "circumvention
scheme."
ITEM 2. PROPERTIES
Encore owns no real property, however, Encore leases an approximately 70,000
square foot facility in Austin, Texas for its corporate headquarters,
manufacturing facilities and warehouse for its business operations. This lease
is a 10-year lease which commenced on April 1, 1997, with the option to renew
for five years and with an option to terminate the lease after 5 years upon the
payment of the unamortized leasehold improvement costs. The Company's monthly
lease payments are approximately $35,420, for an annual lease payment of
approximately $425,040, which amounts do not include the Company's share of
applicable common area maintenance, property taxes and public utility charges.
-9-
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS
During 1997, Encore was a party to the lawsuit styled Intermedics Orthopedics,
Inc. vs. Encore Orthopedics, Inc., et al, Cause no. 96-14729, 98th Judicial
District Court of Travis County, Texas. In January 1998 this case reached a
settlement which resulted in a complete dismissal of all the parties with
prejudice. No party admitted any liability as a result of this settlement.
Encore agreed to pay Intermedics Orthopedics, Inc. a nominal amount in
connection with the settlement and to refrain from hiring any of Intermedics'
current sales agents through July 1998. As part of the settlement, all parties
fully released the other parties from all claims they may have had against the
other parties that are related to the subject matter of the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and $5 Warrants are traded on the NASDAQ National
Market System under the symbols "ENMC" and "ENMCW" respectively. The $7 Warrants
are not traded on a public market. The following tables set forth for the
periods indicated the high and low sales prices of the Company's Common Stock
and $5 Warrants as reported on the OTC Bulletin Board for the period March 13,
1996 through March 24, 1997 and on the NASDAQ National Market since March 25,
1997:
<TABLE>
<CAPTION>
COMMON SHARES $5 WARRANTS
------------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1997
First Quarter $5.75 $4.75 $1.25 $0.63
Second Quarter $5.13 $3.56 $1.25 $0.63
Third Quarter $5.13 $4.13 $1.13 $0.69
Fourth Quarter $4.94 $3.41 $1.34 $0.88
1996
First Quarter (beginning March 13, 1996) $4.50 $4.50 $1.06 $1.06
Second Quarter $4.63 $4.50 $1.06 $0.91
Third Quarter $4.84 $4.63 $1.03 $0.84
Fourth Quarter $4.88 $4.63 $1.00 $0.63
</TABLE>
As of March 16, 1998, the Company had approximately 89 shareholders of the
Company's Common Stock of record. There are in excess of 925 beneficial owners
of the Company's Common Stock. As of March 16, 1998, the Company had
approximately 10 shareholders of the Company's $5 Warrants of record. There are
in excess of 100 beneficial owners of the Company's $5 Warrants. As of March 16,
1998, the Company had approximately 100 shareholders of the Company's $7
Warrants of record and beneficiary.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected financial data with respect to the Company for
the periods indicated. The data as of March 31, 1993, for the nine months ended
December 31, 1993 and as of December 31, 1994, 1995, 1996 and 1997 and for each
of the four years in the period ended December 31, 1997 have been derived from
financial statements audited by Price Waterhouse LLP, independent accountants
whose report relating to the consolidated financial statements for the three
years ended December 31, 1997 appears in this report. The selected financial
data should be read in conjunction with the financial statements and related
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.
-10-
<PAGE> 11
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
MARCH 31, DECEMBER 31, -----------------------
(IN THOUSAND, EXCEPT PER SHARE DATA) 1993 1993(a) 1994 1995 1996 1997
---- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales $ 2,045 $ 3,295 $ 7,762 $ 13,791 $ 17,621 $ 24,440
Gross margin 870 1,647 4,487 8,051 11,563 16,504
Income (loss) from operations (2,176) (931) 166 1,758 2,129 2,500
Income (loss) before extraordinary
item (2,176) (931) 166 1,408 1,033 1,857
Net income (loss) (b) (1,706) (928) 447 1,408 1,033 1,259
Basic earnings per share (0.38) (0.21) 0.09 0.27 (0.04) 0.16
Shares used in computing basic
earnings per share 4,498 4,499 4,824 5,150 5,463 8,033
Diluted earnings per share (0.38) (0.21) 0.07 0.23 (0.04) 0.12
Shares used in computing diluted
earnings per share 4,498 4,499 5,991 6,216 5,463 10,253
BALANCE SHEET DATA
Working capital $ 2,652 $ 2,714 $ 3,752 $ 7,231 $ 10,012 $ 14,682
Total assets 4,981 5,098 7,712 12,757 20,275 25,721
Note payable and current portion of
long-term debt 100 100 200 293 2,764 612
Long-term debt, less current portion 1,800 1,800 1,600 4,479 6,013 3,244
Stockholders' equity 2,349 2,313 3,275 5,170 6,589 18,024
</TABLE>
(a) Encore converted from a March 31 fiscal year to a December 31 fiscal
year as of December 31, 1993.
(b) Due to changes in valuation in put warrants issued in 1995 and 1996,
net income (loss) applicable to common stockholders would be $1,370 in
1995 and ($236) in 1996. These warrants had this put feature eliminated
in connection with the merger with HCAC and these warrants were
exercised in 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Encore develops, manufactures, markets and sells orthopedic implant devices and
related surgical instrumentation to hospitals and stocking distributors. In the
past five years, Encore has introduced its total joint replacement and trauma
products to the marketplace and established both domestic and international
distribution. Its strategy reflects its founders' belief that it must design and
market high quality orthopedic products to a worldwide audience. Encore's past
financial results are reflective of Encore's efforts as to develop the necessary
infrastructure and relationships to make Encore a competitive participant in the
orthopedics industry.
Encore has invested in building a flexible infrastructure consisting of
experienced personnel, business and management information systems, and floor
space to provide the highest level of customer responsiveness at the lowest
possible cost. The most current technology is employed to provide the visibility
required throughout the Company to plan for and manage rapid growth.
Encore has expanded its full line of total joint implants to cover knee, hip and
shoulder applications. In addition, in May 1996, Encore acquired all of the
assets and liabilities of Applied Osteo Systems, Inc. ("AOS"), an orthopedic
company with products in the trauma implant area, in a transaction accounted for
as a pooling of interest. Encore merged with Healthcare Acquisition Corp.
("HCAC") in March 1997, which was treated as a recapitalization of Encore for
financial statement purposes. All financial information included herein reflects
these transactions. Encore has developed a network of independent sales
representatives that sell Encore's products throughout the
-11-
<PAGE> 12
United States. Encore has also established relationships with several
international stocking distributors. Encore must receive 510(k) or PMA approval
from the FDA for every product that it desires to sell in the United States and
similar regulatory approvals in other countries in which it sells it products.
Encore has received such approvals for all of its products.
Encore converted from a March 31 fiscal year-end to a December 31 fiscal
year-end as of December 31, 1993.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Sales were $24,440,000 for the year ended December 31, 1997, representing an
increase of $6,819,000 or 38.6% over the year ended December 31, 1996. In 1997
U.S. sales and sales outside the U.S. increased 56.9% and 20.4%, respectively,
over 1996. The increase in U.S. sales was fueled primarily by the growth of the
U.S. sales force in the number of sales agents and more productive sales
territories. Outside the U.S., existing distributors' growth remains strong
while Encore continues to expand into additional territories. Sales of
reconstructive products increased to $22,731,000 in 1997, led by the
Foundation(R) Total Knee, Hip and Shoulder Systems. Trauma product sales
remained relatively flat at $1,709,000 when compared to the prior year. The
increase in reconstructive products is attributed primarily to the expansion of
the U.S. sales force. Continued transition from a non-exclusive to an exclusive
sales force is a major factor for the flat sales of trauma products. The Company
anticipates sales of trauma products to increase as the transition to an
exclusive sales force is completed in 1998 and the product base is expanded.
Going forward, rapid geographical expansion and introduction of new products
will fuel additional increases in sales in both the total joint and trauma
segments of the business.
Gross margin increased to $16,504,000 in 1997, or 67.5% of sales, as compared to
$11,563,000 or 65.6% of sales for 1996. This gross margin increase resulted from
increased U.S. sales, which generate a greater gross margin than sales outside
the U.S., manufacturing efficiencies and cost controls. For the future, gross
margin should continue to improve due to reasons stated above and the increase
in volume.
Selling, general and administrative expenses increased by $4,185,000, or 51.2%,
in 1997 when compared to the same period in 1996. This increase was due to
higher commissions associated with an overall increase in sales plus a higher
percentage growth in U.S. sales (which carry higher commission rates than sales
outside the U.S.). Also, royalties increased in conjunction with the increase in
overall sales. Additionally, there were higher legal and professional expenses
due to increased patent applications, increased audit and review fees, and the
settlement of a lawsuit and the related legal fees. Finally, increased expenses
associated with a greater number of clinical support activities, higher
instrumentation depreciation, and the continual investment in the development of
the U.S. sales infrastructure and expansion of the business contributed to the
increase.
Research and development expenses increased by $385,000 or 30.6% in 1997 when
compared to the same period in 1996. Research and development activities
increased to complete the design of two new hip stems and two acetabular systems
that will be released in early 1998. A joint design effort with Norton
Desmarquest Fine Ceramics of France was initiated to develop a ceramic knee
femoral component to address the issue of polyethylene wear in the knee.
Initiation of activities that address polyethylene wear in the hip included a
FDA feasibility study for metal/metal articulation as well as FDA approval to
begin full clinical studies for metal/metal and ceramic/ceramic hips. Additional
regulatory activities included clearance of eleven 510(k) approvals from the FDA
and approval to market the Foundation(R) Hip System in Canada.
Operating income increased 17.4% to $2,500,000, as compared to $2,129,000 for
the year ended December 31, 1996. This increase was due to increased gross
margins, which was partially offset by increased operating expenses. Going
forward, operating income should increase due to leveraging fixed costs and
increased sales volume.
Net income for the year ended December 31, 1997 increased 21.9% to $1,259,000
from $1,033,000 in 1996. This increase was due to an increase in operating
income, lower interest expense, and a benefit from the reversal of the deferred
tax asset valuation allowance ($524,000) offset by an extraordinary charge
($598,000) associated with the extinguishment of debt. In the future, net income
will be favorably impacted by increased operating income, while
-12-
<PAGE> 13
being partially offset by increased federal income taxes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Sales for the year ended December 31, 1996 increased to $17,621,000 from
$13,791,000 for the year ended December 31, 1995. This reflects an increase of
27.8%. Sales of reconstructive products increased to $15,909,000 from
$12,024,000, while sales of trauma products decreased slightly to $1,712,000
from $1,767,000. The increase in reconstructive product sales resulted from
continued expansion of the sales force in more productive sales territories. The
decline in sales of trauma products resulted from the transition in sales forces
as a result of the AOS acquisition in May 1996.
The gross margin for the year ended December 31, 1996 increased to $11,563,000
from $8,051,000 for the year ended December 31, 1995. The gross margin as a
percentage of sales increased to 65.6% from 58.4%. This increase was primarily
due to increased volume, changes in the sales mix and continuing refinement of
manufacturing processes. The change in the sales mix resulted from greater U.S.
sales, which carry a higher margin than sales outside the U.S., and increased
sales of higher margin products to distributors outside the U.S., i.e., implants
which have a higher margin than instrument sales to distributors outside the
U.S.. Some of the margin improvement is offset by increased selling, general and
administrative expenses described below.
Selling, general and administrative expenses increased to $8,175,000 for the
year ended December 31, 1996 compared to $5,457,000 for the year ended December
31, 1995. Selling, general and administrative costs as a percentage of sales
increased to 46.4% from 39.6%. This increase reflects higher commission expenses
as a result of increased U.S. sales (which carry higher commission rates than
sales outside the U.S.), additional infrastructure to support new product lines,
an expanded sales distribution network in anticipation of additional sales to be
generated in the future, costs related to Encore's acquisition of AOS ($37,000),
and costs to shut down AOS' California operations ($155,000). Additionally,
there were approximately $88,000 of expenses related to acquisitions that were
not consummated successfully.
Research and development expenses increased to $1,259,000 from $836,000 for 1996
compared to 1995. Research and development expenses as a percentage of sales
increased to 7.1% from 6.1%. This reflects increased expenses, primarily
salaries to newly hired staff, in connection with developing new reconstructive
products and extensions of current product lines and development costs related
to the trauma products.
Operating income increased to $2,129,000 from $1,758,000 for 1996 compared to
1995, a 21.1% increase, due primarily to the growth in sales exceeding the
increase in operating expenses. Net income decreased to $1,033,000 from
$1,408,000 for 1996 as compared to 1995. The primary reason for the decrease in
net income as compared to the increase in operating income was the increase in
interest expense attributable to the outstanding term debt to Sirrom Capital
Corporation, which was outstanding for the full period in 1996 as opposed to
only a partial period (August to December) in 1995. Also, the amount of the
outstanding term debt increased from $3,000,000 to $5,000,000 in February 1996.
There was a significant decrease in net income applicable to common stock in
1996 as a result of a change in the valuation of common stock put warrants held
by Sirrom Capital Corporation for financial accounting purposes. These warrants
contained a put feature that allowed them to be redeemed for cash in the years
2000 and 2001 at fair market value. As such, they are reflected in the financial
statements at their current fair market value. The change in 1996 reflects the
increase in the value of the Encore common shares. While this change in value
does not affect net income, it does affect net income applicable to common stock
according to generally accepted accounting principles. This put feature was
eliminated as a condition of the merger with HCAC in March 1997.
CAPITAL EXPENDITURES
Encore has spent a significant amount of its resources over the past several
years on building a state-of-the-art, fully integrated orthopedic implant
company. These expenditures have included the investment in surgical
instrumentation, machine tools to increase manufacturing capacity, computer
hardware and software, and equipment
-13-
<PAGE> 14
required to support a growing organization. Over the last two years, Encore has
acquired machine tools primarily through capital leases. Encore has made
significant investments in surgical instrumentation as such instrumentation is
necessary to implant Encore reconstructive products. Also, the size of the sales
force and the increases in the product lines have necessitated increases in the
need for additional surgical instruments. In the United States, these
instruments are capitalized and depreciated. They are loaned to the sales force
without charge to aid in sales. Internationally, these instruments are sold to
the distributors at cost. The amounts of surgical instruments capitalized in
1995, 1996 and 1997 were $816,000, $1,433,000 and $1,180,000 respectively. Other
capital expenditures during these periods were $508,000, $931,000 and $978,000,
respectively.
As a growing organization, Encore has devoted significant capital resources to
expanding and improving its management information systems through additions of
hardware and software. The expenditures for these computer improvements were
approximately $454,000 in 1997 and $44,000 in 1996. From its inception Encore
has been aware of the "Year 2000" problem and has required that all of its
systems address this issue. Therefore, the Year 2000 transition should not have
a material adverse impact on future results.
Encore relocated its facilities in January, 1997, thus requiring expenditures
for leasehold improvements and furniture and fixtures. These expenditures were
approximately $700,000. Encore's relocation resulted in the unification of its
manufacturing and administrative functions and provides Encore the space it
needs to meet its objectives over the forseeable future.
LIQUIDITY
Over the past three years, Encore's working capital requirements have increased.
The increases have been in the areas of inventory and accounts receivable as
sales and product base have expanded. During 1997, Encore increased the amounts
available to it under its credit facilities by entering into a $10,000,000
revolving credit facility with Wells Fargo Bank, N.A., which is secured by a
lien on all of Encore's assets (the "Credit Facility"). The interest being
charged is a floating prime rate or Encore has the option of locking in a fixed
amount for 30, 60 or 90 days at LIBOR plus 2%. At December 31, 1997, prime
equaled 8.5% while a 60 day lock at LIBOR plus 2% equaled 7.91%. As of December
31, 1997, Encore had drawn $1.8 million on its Credit Facility with an eligible
borrowing base of $9.7 million. Of this $1.8 million, $1.7 million was fixed at
the lower rate while the remainder was at prime. This Credit Facility matures on
May 31, 1999.
A distinguishing feature of the Credit Facility is that Encore's cash management
services are intermingled with it. Encore's bank accounts sweep, on a daily
basis, funds to either reduce or increase the loan balance, as needed, and
invests any excess funds if the loan balance equals zero, in a money market
account. As such, the outstanding loan balance is adjusted daily based on the
net amount of cash receipts versus cash outlays, while the cash balance at Wells
Fargo remains at zero as long as Encore is a net borrower. This sweep feature
has the effect of minimizing interest cost, and automatically investing any
excess funds.
Cash was provided by operating activities for 1997. In prior years, cash flow
from operating activities was a primary use of cash. The increase in working
capital, primarily inventory, continues to have a negative impact on cash flow
from operating activities. The amounts of inventory increase in 1995, 1996, and
1997 were $2,560,000, $4,187,000, and $3,447,000, respectively. This build up of
inventory was required to support the increase in product lines, the growing
sales network, and the growth in overall sales that Encore has sustained over
the past several years and anticipates in 1998.
The increases in inventory in 1996 and 1997 were due to the introduction of
several new products, and the increase in the number of sales territories in
which Encore's products are or will be sold. Additionally, as sales increase,
accounts receivable will increase.
Encore believes that through the combination of the cash generated from sales
and its credit facilities, the cash available to meet its needs will be
sufficient over at least the next twelve months. Thereafter or sooner, in the
event that Encore consummates an acquisition, it will require
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<PAGE> 15
additional funds. It is also anticipated as Encore grows and performs, increased
credit facilities will be available until such time that the outstanding $5
warrants are exercised.
FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 which represent
Encore's expectations or beliefs concerning future events, including, but not
limited to, statements regarding growth in sales of Encore's products, profit
margins and the sufficiency of Encore's cash flow for its future liquidity and
capital resource needs. These forward looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements. These factors include, without
limitation, the effect of competitive pricing, Encore's dependence on the
ability of its third-party manufacturers to produce components on a basis which
is cost-effective to Encore, market acceptance of Encore's products and effects
of government regulation. Results actually achieved may differ materially from
expected results included in these statements as a result of these or other
factors.
ITEM 7A. MARKET RISK DISCLOSURE
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 16
Balance Sheets as of December 31, 1996 and December 31, 1997 17
Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 18
Statement of Changes in Shareholders' Equity for Years Ended
December 31, 1995, 1996 and 1997 19
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 21
Notes to Financial Statements for the Years Ended December 31, 1995, 1996 and 1997 22
</TABLE>
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<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
January 30, 1998
To the Board of Directors and
Stockholders of Encore Medical Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Encore Medical Corporation and its subsidiary at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
-16-
<PAGE> 17
ENCORE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9 $ 472
Accounts receivable, net of allowance for doubtful
Accounts of $109 and $91, respectively 5,063 4,467
Inventories 13,359 9,912
Prepaid expenses and other current assets 704 537
-------- --------
Total current assets 19,135 15,388
Property and equipment, net 5,099 3,931
Other noncurrent assets 1,487 956
-------- --------
Total assets $ 25,721 $ 20,275
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 312 $ 2,464
Current portion of payable to a related party 300 300
Accounts payable and accrued expenses 3,841 2,612
-------- --------
Total current liabilities 4,453 5,376
Long-term debt, net of current portion 2,444 4,913
Payable to a related party, net of current portion 800 1,100
-------- --------
Total liabilities 7,697 11,389
-------- --------
Common stock put warrants -- 2,297
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 and 5,000,000
shares authorized, respectively; 0 and 652,000 shares issued
and outstanding, respectively -- 2,935
Common stock, $0.001 par value, 35,000,000 and 15,000,000 shares
Authorized, respectively; 9,047,000 and 5,627,000 shares issued
and outstanding, respectively 9 6
Additional paid-in capital 18,546 6,468
Deferred compensation (418) (153)
Accumulated deficit (113) (2,667)
-------- --------
Total stockholders' equity 18,024 6,589
-------- --------
Total liabilities and stockholders' equity $ 25,721 $ 20,275
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 18
ENCORE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales $ 24,440 $ 14,454 $ 10,878
Sales to related distributors -- 3,167 2,913
-------- -------- --------
Total sales 24,440 17,621 13,791
-------- -------- --------
Cost of sales 7,936 4,588 4,208
Cost of sales to related distributors -- 1,470 1,532
-------- -------- --------
Total cost of sales 7,936 6,058 5,740
-------- -------- --------
Gross margin 16,504 11,563 8,051
Operating expenses:
Selling, general and administrative 12,360 8,175 5,457
Research and development 1,644 1,259 836
-------- -------- --------
Income from operations 2,500 2,129 1,758
Interest income 77 49 86
Interest expense (655) (954) (280)
Other expense (73) (47) (105)
-------- -------- --------
Income before extraordinary item and income taxes 1,849 1,177 1,459
Income tax provision (benefit) (8) 144 51
-------- -------- --------
Income before extraordinary item 1,857 1,033 1,408
Extinguishment of debt (net of tax benefit of $308) (598) -- --
-------- -------- --------
Net income $ 1,259 $ 1,033 $ 1,408
======== ======== ========
RECONCILIATION OF NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK:
Income before extraordinary item $ 1,857 $ 1,033 $ 1,408
Preferred stock dividends -- (3) (3)
Change in redemption amount of put warrants -- (1,266) (35)
-------- -------- --------
Income (loss) before extraordinary item applicable 1,857 (236) 1,370
to common stock
Extinguishment of debt (598) -- --
-------- -------- --------
Net income (loss) applicable to common stock $ 1,259 $ (236) $ 1,370
======== ======== ========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share-
Income (loss) before extraordinary item applicable
to common stock $ .23 $ (.04) $ .27
Extinguishment of debt (.07) -- --
-------- -------- --------
Basic earnings per share $ .16 $ (.04) $ .27
======== ======== ========
Shares used in computing basic earnings per share 8,033 5,463 5,150
======== ======== ========
Diluted earnings per share-
Income (loss) before extraordinary item applicable
to common stock $ .18 $ (.04) $ .27
Extinguishment of debt (.06) -- --
-------- -------- --------
Diluted earnings per share $ .12 $ (.04) $ .23
======== ======== ========
Shares used in computing diluted earnings per share 10,253 5,463 6,216
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 19
ENCORE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMP.
---------- ---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 560 $ 2,520 4,942 $ 6 $ 5,122 $ --
Issuance of common stock -- -- 359 -- 298 --
Collections on note receivable
from stockholder -- -- -- -- -- --
Redemption of preferred stock (191) (860) -- -- -- --
Change in redemption amount
of put warrants -- -- -- -- -- --
Deferred compensation -- -- -- -- 41 (41)
Amortization of deferred
compensation -- -- -- -- -- 32
Other -- -- (34) -- (8) --
Net income -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Balance at December 31, 1995 369 1,660 5,267 6 5,453 (9)
Issuance of preferred stock 283 1,275 -- -- -- --
Issuance of common stock -- -- 281 -- 412 --
Change in redemption amount
of put warrants -- -- -- -- -- --
Stock dividends of pooled
company -- -- 79 -- 443 --
Adjustment to conform year end
of pooled company -- -- -- -- -- --
Deferred compensation -- -- -- -- 160 (160)
Amortization of deferred
compensation -- -- -- -- -- 16
Other -- -- -- -- -- --
Net income -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Balance at December 31, 1996 652 $ 2,935 5,627 $ 6 $ 6,468 $ (153)
------- ------- ------- ------- ------- -------
<CAPTION>
TOTAL
STOCKHOLDER STOCK-
NOTE ACCUMULATED HOLDERS'
RECEIVABLE DEFICIT EQUITY
----------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994 $(1,060) $(3,313) $ 3,275
Issuance of common stock -- -- 298
Collections on note receivable
from stockholder 200 -- 200
Redemption of preferred stock 860 -- --
Change in redemption amount
of put warrants -- (35) (35)
Deferred compensation -- -- --
Amortization of deferred
compensation -- -- 32
Other -- -- (8)
Net income -- 1,408 1,408
------- ------- -------
Balance at December 31, 1995 -- (1,940) 5,170
Issuance of preferred stock -- -- 1,275
Issuance of common stock -- -- 412
Change in redemption amount
of put warrants -- (1,266) (1,266)
Stock dividends of pooled
company -- (443) --
Adjustment to conform year end
of pooled company -- (24) (24)
Deferred compensation -- -- --
Amortization of deferred
compensation -- -- 16
Other -- (27) (27)
Net income -- 1,033 1,033
------- ------- -------
Balance at December 31, 1996 $ -- $(2,667) $ 6,589
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-19-
<PAGE> 20
ENCORE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER STOCK-
-------------------- ------------------- PAID-IN DEFERRED NOTE ACCUMULATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMP. RECEIVABLE DEFICIT EQUITY
-------- -------- -------- -------- -------- -------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 652 $ 2,935 5,627 $ 6 $ 6,468 $ (153) $ -- $ (2,667) $ 6,589
Issuance of common stock -- -- 803 1 353 -- -- -- 354
Deferred compensation -- -- -- -- 352 (352) -- -- --
Amortization of deferred
compensation -- -- -- -- -- 87 -- -- 87
Cancellation of put feature of
warrants -- -- -- -- 996 -- -- 1,301 2,297
Merger with HCAC (652) (2,935) 2,617 2 10,342 -- -- -- 7,410
Other -- -- -- -- 35 -- -- (6) 28
Net income -- -- -- -- -- -- -- 1,259 1,259
---- ------- ------- -------- ------- ----- ------ -------- -------
Balance at December 31, 1997 -- $ -- 9,047 $ 9 $18,546 $(418) $ -- $ (113) $18,024
==== ======= ======= ======== ======= ===== ====== ======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-20-
<PAGE> 21
ENCORE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,259 $ 1,033 $ 1,408
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,451 1,091 562
Loss on extinguishment of debt 588 -- --
Deferred tax benefit (524) --
Amortization of debt discount 65 138 30
Other 13 (28) 24
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (596) (2,051) 246
Increase in inventories (3,447) (4,187) (2,560)
Increase in prepaid expenses and other assets (43) (629) (324)
Increase (decrease) in accounts payable and
accrued expenses 1,295 287 (312)
-------- -------- --------
Net cash provided by (used in) operating activities 61 (4,346) (926)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,007) (1,960) (1,324)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collections on stockholder note receivable -- -- 200
Proceeds from issuance of preferred stock -- 1,275 --
Proceeds from issuance of common stock 7,971 412 298
Payments for merger expenses (462) -- --
Payment on payable to a related party (300) (200) (200)
Proceeds from debt 1,798 4,300 3,000
Payments on debt (7,524) (130) (78)
Payment of debt issuance costs -- (48) (348)
Net change in cash due to conforming fiscal year-end
of pooled company -- (31) --
-------- -------- --------
Net cash provided by financing activities 1,483 5,578 2,872
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (463) (728) 622
Cash and cash equivalents at beginning of year 472 1,200 578
-------- -------- --------
Cash and cash equivalents at end of year $ 9 $ 472 $ 1,200
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 590 $ 816 $ 250
Income taxes 327 13 20
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Offset receivable to exercise stock options $ 13 $ -- $ --
Cashless exercise of warrants 241 -- --
Capital lease obligations related to equipment
leases entered into during the year 447 349 599
Issuance of stock to purchase technology 205 -- --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-21-
<PAGE> 22
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Encore Medical Corporation (the "Company"), a Delaware corporation,
through its primary operating subsidiary, Encore Orthopedics, Inc.
("Encore"), designs, manufactures, markets and sells products for the
orthopedic implant industry primarily in the United States, Europe and
Asia.
The Company's products are subject to regulation by the Food and Drug
Administration ("FDA") with respect to their sale in the United
States, and the Company must obtain FDA authorization to market each
of its products before they can be sold in the United States.
Additionally, the Company is subject to similar regulations in many of
the international countries in which it sells products.
BASIS OF PRESENTATION
In November 1996, Encore and Healthcare Acquisition, Inc., a
wholly-owned subsidiary of Healthcare Acquisition Corp. ("HCAC"), a
publicly traded, specified purpose acquisition company, executed a
definitive agreement and plan of merger (the "Merger Agreement").
Effective March 25, 1997, the merger was completed and HCAC's name was
changed to Encore Medical Corporation.
The merger was effected by HCAC issuing 0.8884 HCAC common shares and
0.13326 HCAC warrants with an exercise price of $7.00 ("HCAC $7
warrants") for each common share of Encore and 1.11049 HCAC common
shares and 0.16657 HCAC $7.00 warrants for each preferred share of
Encore in accordance with the exchange ratio set forth in the Merger
Agreement. In addition, outstanding options and warrants to purchase
common stock of Encore were exchanged for options and warrants to
purchase HCAC common stock and HCAC $7.00 warrants based on the
exchange ratio discussed above.
For financial reporting and accounting purposes, the merger was
accounted for as a recapitalization of Encore, with the issuance of
shares by Encore for the assets of HCAC, these assets consisting
primarily of cash. As such, Encore is considered the predecessor
company, and the accompanying consolidated balance sheet at December
31, 1996 is that of Encore and does not include the accounts of HCAC.
The capital accounts of Encore for all periods presented, including
all share information presented in the notes to consolidated financial
statements, have been reflected on an equivalent share basis to give
effect to the exchange ratios discussed above. The accompanying
consolidated statement of income for the year ended December 31, 1997
includes the results of operations of HCAC from the effective date of
the merger (March 25, 1997) through the end of the period. HCAC did
not have significant operations prior to the merger, therefore pro
forma presentation of combined results of operations for periods
presented is not considered meaningful and has been omitted.
In May 1996, Encore acquired the net assets of Applied Osteo Systems,
Inc. ("AOS") in exchange for 1,160,315 shares of Encore's common
stock. This acquisition has been accounted for as a pooling of
interests and, accordingly, the accompanying financial statements have
been restated for all periods to include the accounts of AOS. See
Note 2. AOS had previously reported on a February 28 fiscal year end.
As such, its accounts for the year ended February 29, 1996 have been
combined with the accounts of the Company for the year ended December
31, 1995. The duplication of the AOS results of operations for the
two months ended February 29, 1996 has been reflected as an adjustment
to the accumulated deficit. Sales and net income of AOS for this
two-month period were approximately $256,000 and $24,000,
respectively.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting
-22-
<PAGE> 23
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash consists of deposits with financial institutions. The Company
considers all highly liquid investments with original maturities of
less than three months to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets
which range from three to seven years. Leasehold improvements and
assets subject to capital lease are amortized using the straight- line
method over the terms of the leases or lives of the assets, if
shorter. Maintenance and repairs are expensed as incurred.
OTHER NONCURRENT ASSETS
Other noncurrent assets consists primarily of the noncurrent portion
of advanced commissions to sales representatives of $665,000 and the
unamortized portion of purchased technology agreements of $451,000.
The advanced commissions are offset against future sales commissions
earned. Amortization expense related to purchased technology totaled
$52,000, $0 and $0 for the years ended December 31, 1997, 1996 and
1995, respectively.
COMMON STOCK PUT WARRANTS
The common stock put warrants were issued in 1995 and 1996 and are
further described in Notes 6 and 7. Changes in the estimate of the
redemption amount from the date of issuance have been recognized on a
prospective basis as a charge to the accumulated deficit. These
warrants were exercised in 1997.
REVENUE RECOGNITION
The Company's products are sold through a network of sales
representatives and distributors. Revenues from sales made by
representatives, who are paid commissions upon the ultimate sale of
the products, are recorded at the time the product is utilized in a
surgical procedure. Revenues from sales to distributors are recorded
when the product is shipped to the distributor. The distributors, who
sell the products to other customers, take title to the products and
have no right of return.
RESEARCH AND DEVELOPMENT
Research and development expenses relate primarily to the
technological development and enhancement of reconstructive and trauma
devices. Research and development costs are charged to expense as
incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." This statement establishes new
standards for computing and presenting earnings per share ("EPS") and
requires restatement of all prior-period EPS data.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, trade accounts receivable and payable,
long-term debt and the common stock put
-23-
<PAGE> 24
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
warrants approximate fair values.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information," both of
which will be effective for the Company's 1998 fiscal year. SFAS No.
130 will require companies to present certain items as separate
components of stockholders' equity. SFAS No. 131 will require
companies to report certain financial and descriptive information
about their reportable operating segments. Management does not
believe that the effect of implementing these standards will
materially impact the Company's financial statements.
2. AOS ACQUISITION
As described in Note 1, the Company acquired the net assets of AOS in
May 1996 in exchange for 1,160,315 shares of Encore's common stock.
AOS designed, marketed and sold trauma-related orthopedic products in
the United States, Europe and Asia. The acquisition has been
accounted for as a pooling of interests and, accordingly, the
accompanying financial statements have been restated for all periods
to include the accounts of AOS.
Sales and net income of the separate companies for the period
preceding the acquisition were as follows (in thousands):
<TABLE>
<CAPTION>
ENCORE AOS TOTAL
------- ------- -------
<S> <C> <C> <C>
Year ended December 31, 1995
Sales $12,024 $ 1,767 $13,791
Net income 1,196 212 1,408
</TABLE>
3. INVENTORIES
Inventories consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
Components and raw materials $ 2,711 $ 1,563
Work in process 1,549 985
Finished goods 9,099 7,364
------- -------
$13,359 $ 9,912
======= =======
</TABLE>
-24-
<PAGE> 25
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
Equipment $ 3,379 $ 3,081
Furniture and fixtures 1,367 772
Leasehold improvements 452 341
Surgical instrumentation devices 3,989 2,835
------- -------
9,187 7,029
Less - accumulated depreciation and amortization (4,088) (3,098)
------- -------
$ 5,099 $ 3,931
======= =======
</TABLE>
Depreciation and amortization expense relating to property and
equipment for the years ended December 31, 1997, 1996 and 1995 was
$1,276,000, $990,000 and $527,000, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------ ------
<S> <C> <C>
Accounts payable $1,212 $1,139
Accrued wages and related expenses 745 310
Accrued commissions 1,098 465
Accrued royalties 230 212
Accrued taxes 301 334
Other accrued liabilities 255 152
------ ------
$3,841 $2,612
====== ======
</TABLE>
-25-
<PAGE> 26
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Long-term debt (including capital lease obligations and a payable to a
related party) consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
Note payable to a corporation; interest at 13.5% per annum, payable
monthly; secured by all assets of Encore, subordinated to a first lien on $ -- $ 3,000
accounts receivable, inventory and surgical instrumentation; principal due in
July 2000
Note payable to a corporation; interest at 13% per annum, payable monthly;
secured by all assets of Encore, subordinated to a first lien on accounts
receivable, inventory and surgical instrumentation; principal due in February
2001
-- 2,000
Less - unamortized discount on the above notes -- (653)
------- -------
Notes payable, net -- 4,347
$5,000,000 revolving credit facility from a financial institution; interest at
institution's base rate, plus 1% (9.25% at December 31, 1996), payable monthly; secured
by all accounts receivable, inventory and surgical instrumentation of Encore; commitment
fee of 0.25% of unused balance, payable quarterly; due July 1997; available borrowings
at December 31, 1997 of $0 -- 2,300
$10,000,000 revolving credit facility from a financial institution; interest
at the lesser of the institution's base rate or LIBOR, plus 2% (7.91% at
December 31, 1997), payable monthly; secured by all assets of Encore and
guaranteed by the Company; commitment fee of 0.25% of unused balance,
payable monthly; due May 1999; available borrowings at December 31, 1997 of
$7,876,000, calculated as the credit limit less total borrowings and
letters of credit of $326,000 1,798 --
Non-interest bearing, unsecured payable to a related party, principal
payable through March 1999 or due in full upon certain other
corporate transactions 1,100 1,400
Capital lease obligations, secured by related equipment 958 730
------- -------
3,856 8,777
Less - current portion 612 2,764
------- -------
$ 3,244 $ 6,013
======= =======
</TABLE>
The debt agreement related to the revolving credit facility contains
warranties and covenants and require maintenance of certain financial
ratios. Default on any warranty or covenant could affect the ability
to borrow under the agreement and, if not waived or corrected, could
accelerate the maturity of any borrowings outstanding under the
applicable agreement.
In connection with negotiating the notes payable to a corporation,
Encore issued warrants in 1995 and 1996 to purchase 465,601 shares of
Encore's common stock at $0.01 per share. The warrants
-26-
<PAGE> 27
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
were immediately exercisable and expired five years from the date of
issuance. Encore valued the warrants at $821,000 and reflected such
amount as a discount to the related debt. Such discount was
amortized using the effective interest method over the term of the
related debt and amounted to $138,000 and $30,000 for the years ended
December 31, 1996 and 1995, respectively. Encore also capitalized
approximately $476,000 of financing costs incurred to obtain the debt.
Such amount was amortized using the straight-line method over the term
of the related debt and amounted to $85,000 and $29,000 for the years
ended December 31, 1996 and 1995, respectively.
In 1997, Encore repaid the notes payable to a corporation. The
remaining debt discount and capitalized financing costs were written
off in conjunction with this early extinguishment of debt resulting in
an extraordinary charge of $598,000, net of the related tax benefit of
$308,000.
At December 31, 1997, the aggregate amount of annual principal
maturities of long-term debt (excluding capital lease obligations) is
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1998 $ 300
1999 2,598
2000 --
2001 --
2002 --
------
$2,898
======
</TABLE>
LEASES
The Company leases building space, manufacturing facilities and
equipment under noncancelable lease agreements which expire at various
dates. At December 31, 1997, future minimum lease payments are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
YEAR ENDING DECEMBER 31,
<S> <C> <C>
1998 $ 402 $ 492
1999 406 475
2000 256 433
2001 48 427
2002 4 473
2003 and thereafter -- 2,076
------- ------
Total minimum lease payments 1,116 $4,376
======
Less - amounts representing interest (158)
-------
Net minimum lease payments 958
Less - current portion of obligations under capital leases 312
-------
$ 646
=======
</TABLE>
Rental expense under operating leases totaled $471,000, $259,000 and
$196,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
-27-
<PAGE> 28
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Leased equipment and furniture and fixtures under capital leases,
included in property and equipment in the accompanying financial
statements, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
Equipment $ 978 $ 952
Furniture and fixtures 421 --
Less - accumulated amortization (342) (168)
------- -------
$ 1,057 $ 784
======= =======
</TABLE>
7. CAPITAL STOCK
PREFERRED STOCK
Preferred stock may be issued at the discretion of the Board of
Directors (the "Board") of the Company with such designation, rights
and preferences as the Board may determine from time to time. The
preferred stock may have dividend, liquidation, conversion, voting or
other rights which may be more expansive than the rights of the
holders of the common stock. At December 31, 1997, the Company has
1,000,000 shares of authorized preferred stock, none of which has been
issued.
STOCK OPTION PLANS
The Company has six stock option plans. All options granted under the
plans are exercisable for common stock in the Company as described
below. The Company applies APB No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for grants under
the stock option plans, except for grants made to individuals other
than employees (as defined in APB No. 25) for services provided to the
Company. The Company has recorded deferred compensation for the fair
value of grants made to individuals other than employees and is
amortizing such amount to income over the vesting period for the
options.
Had compensation cost for all stock option grants been determined
based on their fair value at the grant dates consistent with the
method prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income As reported $ 1,259 $ 1,033 $ 1,408
Pro forma 908 647 1,186
Net income (loss)
applicable to common stock As reported 1,259 (236) 1,370
Pro forma 908 (622) 1,148
Net income (loss) applicable
to common stock per share
Basic: As reported 0.16 (0.04) 0.27
Pro forma 0.11 (0.11) 0.22
Diluted: As reported 0.12 (0.04) 0.23
Pro forma 0.09 (0.11) 0.18
</TABLE>
-28-
<PAGE> 29
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The 1992 Stock Option Plan provides for the grant of both incentive
and non-qualified stock options to directors, employees and certain
other persons affiliated with Encore. The 1993 Distributor Stock
Option Plan provides for the grant of stock options to those who are
sales representatives and distributors of Encore's products, and the
1993 Surgeon Advisory Panel Stock Option Plan provides for the grant
of stock options to those who are serving as members of Encore's
surgeon advisory panel. The 1996 Incentive Option Plan provides for
the grant of a variety of equity related awards, including, but not
limited to, incentive stock options, non-qualified stock options,
stock appreciation rights and restricted stock, to key employees of
the Company and its subsidiaries. The 1997 Distributor Advisory Panel
Stock Option Plan provides for the grant of stock options to those who
are sales representatives and distributors of the Company's and its
subsidiaries' products. The 1997 Surgeon Advisory Panel Stock Option
Plan provides for the grant of stock options to those who are serving
as members of the Company's or its subsidiaries' surgeon advisory
panel. The stock options granted under each of these plans are
granted at or in excess of fair market value on the date of grant,
vest ratably over a predefined period, and generally expire no more
than 10 years from the date of grant. At December 31, 1997, the
Company had reserved a total of 5,708,817 shares of common stock for
the plans.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Employee options-
Dividend yield - % - % - %
Expected volatility 25.0% 30.0% - %
Risk-free interest rate 6.01% 6.0% 5.39%
Expected life 4 years 3 years 4 years
Other than employee options-
Dividend yield - % - % - %
Expected volatility 25.0% 30.0% - %
Risk-free interest rate 6.01% 6.0% 5.51%
Expected life 3-4 years 4 years 5 years
</TABLE>
-29-
<PAGE> 30
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock option plans is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
EMPLOYEE OPTIONS
Outstanding, beginning of year 2,538,138 $ 1.46 2,170,890 $ 1.22 1,123,382 $ 1.00
Granted-
At market 414,441 4.72 468,353 2.07 1,113,621 1.58
Above market -- 167,771 3.08 270,904 1.70
Exercised (93,771) 1.06 (185,395) 1.54 (444) 0.56
Canceled -- (83,481) 1.74 (336,573) 2.13
--------- --------- ---------
Outstanding, end of year end 2,858,808 1.83 2,538,138 1.46 2,170,890 1.22
========= ========= =========
Options exercisable at year 2,774,366 2,094,694 1.40 1,401,313 1.18
Weighted-average fair value of
options granted during the
year-
At market $ 1.21 $ .59 $ .30
Above market -- .43 .20
OTHER THAN EMPLOYEE OPTIONS
Outstanding, beginning of year 732,865 $ 1.86 538,889 $ 2.19 159,912 $ 1.88
Granted-
At market 314,583 4.32 -- -- 176,125 1.58
Above market 110,000 5.00 380,679 4.62 218,399 2.88
Exercised (155,073) 1.38 (75,514) 1.76 -- --
Canceled (116,366) 4.66 (111,189) 3.11 (15,547) 1.58
--------- --------- ---------
Outstanding, end of year 886,009 4.10 732,865 3.35 538,889 2.19
========= ========= =========
Options exercisable at year end 218,985 279,624 1.86 307,164 1.71
Weighted-average fair value
of options granted during the
year-
At market $ .84 $ -- $ .37
Above market 1.03 .42 .09
</TABLE>
-30-
<PAGE> 31
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE (YEARS) PRICE NUMBER PRICE
--------------- ------ ------------ ----- --------- -----
<S> <C> <C> <C> <C> <C>
$0.56 to $1.73 2,010,278 5.06 $1.21 2,001,394 $1.21
$2.14 to $3.92 706,872 7.30 2.47 601,095 2.38
$4.00 to $4.99 458,500 4.72 4.68 300,000 4.75
$5.00 or more 569,167 1.78 5.49 90,862 5.63
--------- ---------
3,744,817 2,993,351
========= =========
</TABLE>
COMMON STOCK PUT WARRANTS
As described in Note 6, Encore issued warrants in 1995 and 1996 to
purchase a total of 465,601 shares of Encore's common stock at $0.01
per share. The warrants could be put to Encore for cash for a period
of 30 days prior to their expiration. The amount payable by Encore
would be based on the per share fair market value of the common stock
at the date the warrants when put to Encore. In addition, Encore
issued warrants in 1995 and 1996 to purchase a total of 98,110 shares
of Encore's common stock at $0.01 per share for professional services
rendered in connection with obtaining long-term financing. Encore
valued these warrants at $175,000 and recorded such amount as a
deferred debt issuance cost within other noncurrent assets. These
warrants contained the same put feature described above.
In connection with the merger with HCAC described in Note 1, the
holders of these warrants agreed to cancel the put feature.
Subsequent to the merger, all of these warrants were exercised in
1997.
Changes in the estimate of the redemption amount of the common stock
put warrants were based on independent professional appraisals and
estimates made by management. The following summarizes the change in
the estimated redemption amount through December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1994 $ --
Issuance of warrants 455
Change during 1995 35
-------
Balance at December 31, 1995 490
Issuance of warrants 541
Change during 1996 1,266
-------
Balance at December 31, 1996 2,297
Cancellation of put feature (2,297)
-------
Balance at December 31, 1997 $ --
=======
</TABLE>
HCAC $7 WARRANTS
As discussed in Note 1, HCAC $7 warrants were issued for each common
and preferred share of Encore in connection with the merger. These
warrants are convertible into one share of common stock for each
warrant and expire on March 25, 2001.
OTHER HCAC TRANSACTIONS
HCAC issued 3,850,000 warrants (the "$5 warrants") in connection with
a public offering in
-31-
<PAGE> 32
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 1996. These warrants have an exercise price of $5.00 per share
and are convertible into one share of common stock for each warrant.
These warrants expire on March 8, 2003, but are callable by the
Company for $0.01 per warrant at such time as the common shares of the
Company have traded at a price of $8.50 per share for 20 consecutive
trading days.
Additionally, in connection with the public offering, HCAC issued
150,000 options to the underwriters of the offering. These options
allow the holder to receive one share of common stock and two $5
warrants for each option. These options have an exercise price of
$6.60. The options and the $5 warrants connected with the options
expire on March 8, 2001.
8. INTERNATIONAL SALES AND SIGNIFICANT CUSTOMERS
During the years ended December 31, 1997, 1996 and 1995, the Company's
international sales were primarily to three foreign distributors, two
of which have individually accounted for more than 10% of total
Company sales during such periods. Following are the Company's
international sales by geographic area (in thousands) and the
percentage of total Company sales generated by two of the
distributors:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Europe $ 8,704 $ 7,635 $ 6,635
Asia 1,837 1,075 1,338
------- ------- -------
$10,541 $ 8,710 $ 7,973
======= ======= =======
Customer A 26% 29% 33%
Customer B Less than 10% 14% 15%
</TABLE>
Accounts receivable of approximately $2,702,000 from Customers A and B
represented 51% of the Company's accounts receivable at December 31,
1997.
-32-
<PAGE> 33
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES
The (benefit) provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Continuing operations:
Current income taxes:
Federal $ 514 $ 131 $ 34
State 2 13 17
----- ----- -----
516 144 51
----- ----- -----
Deferred income taxes:
Federal (521) -- --
State (3) -- --
----- ----- -----
(8) -- --
----- ----- -----
Extinguishment of debt:
Current (308) -- --
----- ----- -----
(308) -- --
----- ----- -----
$(316) $ 144 $ 51
===== ===== =====
</TABLE>
The difference in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes
result from the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Tax at statutory rate $ 321 $ 400 $ 496
Add (deduct) the effect of --
FSC benefit (68) (37) --
State income taxes (1) 8 11
Change in valuation allowance (537) (127) (107)
Nondeductible expenses and other, net 21 12 11
Utilization of net operating loss carryforwards -- (115) (390)
Alternative minimum taxes -- 3 30
Utilization of R&D credit (52) -- --
----- ----- -----
$(316) $ 144 $ 51
===== ===== =====
</TABLE>
-33-
<PAGE> 34
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The components of deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----- -----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 17 $ 71
Purchased technology -- 35
Research and development credit carryforwards 199 161
Minimum tax credit carryforward 192 43
Inventory and other reserves 367 291
Other 64 100
----- -----
Deferred tax assets 839 701
Deferred tax liability:
Depreciation (315) (164)
----- -----
Net deferred tax asset 524 537
Valuation allowance -- (537)
----- -----
$ 524 $ --
===== =====
</TABLE>
The Company's net operating loss and research and development credit
carryforwards of approximately $49,500 and $198,700 expire by 2008 and
2012, respectively.
Prior to 1997, the Company placed a valuation allowance against its
otherwise recognizable net deferred tax assets due to uncertainties
regarding the realization of these assets. During 1997, management
determined that it was more likely than not that the benefits of such
deferred tax assets would be realized and, therefore, eliminated the
valuation allowance of $537,000.
10. EARNINGS PER SHARE
Earnings per share have been calculated in accordance with the
provisions of SFAS No. 128. All prior years' earnings per share data
have been restated to reflect the provisions of SFAS No. 128. The
implementation of the standard has resulted in the presentation of a
basic EPS calculation in the consolidated financial statements as well
as a diluted EPS calculation. Basic EPS is computed by dividing net
income (loss) applicable to common stockholders by the weighted
average number of common shares outstanding during each period.
Diluted EPS is computed by dividing net income (loss) applicable to
common stockholders by the weighted average number of common shares
and common share equivalents outstanding (if dilutive), during each
period. The number of common share equivalents outstanding is
computed using the treasury stock method.
-34-
<PAGE> 35
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Following is a reconciliation of the basic and diluted per share
computations (dollars in thousands, except for per share amounts):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) from continuing operations $ 1,857 $ 1,033 $ 1,408
Less: Preferred stock dividends -- (3) (3)
Change in redemption amount of put warrants -- (1,266) (35)
----------- ----------- -----------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
(BASIC) $ 1,857 $ (236) $ 1,370
=========== =========== ===========
Effect of dilutive securities:
Convertible preferred stock -- -- 3
Put warrants -- -- 35
----------- ----------- -----------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
(DILUTED) $ 1,857 $ (236) $ 1,408
=========== =========== ===========
SHARES USED IN COMPUTING BASIC EARNINGS PER SHARE 8,032,887 5,463,156 5,150,491
Stock options 1,821,436 -- 537,888
Put warrants 248,250 -- 128,511
Convertible preferred stock 149,991 -- 399,557
----------- ----------- -----------
SHARES USED IN COMPUTING DILUTED EARNINGS PER SHARE 10,252,564 5,463,156 6,216,447
=========== =========== ===========
EARNINGS (LOSS) PER SHARE
Basic $ 0.23 $ (0.04) $ 0.27
=========== =========== ===========
Diluted $ 0.18 $ (0.04) $ 0.23
=========== =========== ===========
</TABLE>
Due to the Company's loss applicable to common stock in 1996, a
calculation of EPS assuming dilution is not required.
Options and warrants to purchase 997,667 and 5,842,072 shares of
common stock, respectively, were outstanding at December 31, 1997 but
were not included in the computation of diluted EPS because their
exercise price was greater than the average market price of the common
shares.
11. RELATED PARTY TRANSACTIONS
Certain of the Company's international sales are made to two
distributors which are owned in part by an individual and two
companies controlled by the same individuals who have an aggregate
ownership interest in the Company of approximately 10%. In addition,
prior to 1997, this individual was a member of the Board of Directors
of the Company. As a result, sales and cost of sales to these related
distributors are separately reflected in the accompanying financial
statements for 1996 and 1995.
Effective April 1, 1992, a stockholder of the Company sold certain
intellectual property, including trade secrets, manufacturing
processes, instrumentation, technical knowledge and patent rights for
a knee device to the Company for $2,000,000. The Company contracted
to pay annually the greater of an amount equal to 1.08% of the total
gross sales related to sales of any knee systems incorporating
material elements of this knee device (not to exceed $2,000,000) or
certain fixed payments (without interest) through March 31, 1999. The
Company recorded the related asset at the stockholder's basis $0 and
reflected $2,000,000 in long-term debt. The excess of consideration
paid over the stockholder's basis was charged to stockholders' equity.
See Note 6.
-35-
<PAGE> 36
ENCORE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Additionally, the Company rented manufacturing facilities from certain
of its stockholders. The lease commenced on April 1, 1992 and expired
on March 31, 1997. Rental expense was $8,600 per month for the
facilities. See Note 6.
12. COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, the Company had entered into purchase
commitments for inventory, capital acquisitions and other services
totaling $2,178,000 in the ordinary course of business.
The Company is, from time to time, subject to claims and suits for
damages arising in the normal course of business. The Company
maintains insurance which management believes would cover most claims.
13. EMPLOYEE BENEFIT PLANS
The Company has a qualified defined contribution plan which allows for
voluntary pre-tax contributions by the employees. The Company pays
all general and administrative expenses of the plan and may make
contributions to the plan. The Company made matching contributions of
$221,000, $158,000 and $48,000 to the plan in 1997, 1996 and 1995,
respectively, based on 100%, 100% and 50%, respectively, of the first
6% of employee contributions. The Company's 1995 matching
contribution was made by the issuance of 29,892 shares of the
Company's common stock.
14. SUBSEQUENT EVENT
In January 1998, the Company's Board of Directors authorized the
Company to purchase up to 1,000,000 shares of the Company's
outstanding common stock and/or $5 warrants as market conditions
dictate.
-36-
<PAGE> 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported on the Form 8-K's filed as of May 1, 1997, the Company dismissed
its principal accountant, Richard A. Eisner & Company, L.L.P., and engaged
Price Waterhouse, LLP. Price Waterhouse, LLP has been the principal accountant
for Encore Orthopedics, Inc. since April 1, 1992. There was no adverse option
or a disclaimer of opinion, nor was the opinion qualified or modified as to
uncertainty, audit scope or accounting principle in the principal accountant's
report on the financial statements for the company for either of the past two
years. The decision to change accountants was approved by the Board of
Directors. There were no disagreements with the former accountant on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure during the Company's two most recent fiscal years.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" contained
in the Company's definitive Proxy Statement to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 for its 1998 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the sub-captions "Directors Continuing in
Office" and "Executive Compensation" contained in the Company's Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Stock Ownership" contained in the
Company's Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the sub-caption "Certain Transactions" contained
in the Company's Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed
under Item 8.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
2 Agreement and Plan of Merger dated as of November 12, 1996, by and among Healthcare Acquisition Corp.
("HCAC"), Healthcare Acquisition, Inc. and Encore Orthopedics, Inc., as amended by an Amendment dated
February 14, 1997.(3)
3.1 Certificate of Incorporation of Healthcare Acquisition Corp.(1)
3.2 Amendment to the Certificate of Incorporation of HCAC.(3)
</TABLE>
-37-
<PAGE> 38
<TABLE>
<S> <C>
3.3 Bylaws of HCAC. (1)
4.1 Form of HCAC Common Stock Certificate. (2)
4.2 Form of Certificate for HCAC $5.00 Warrant. (2)
4.3 Form of Unit Purchase Option granted to GKN Securities Corp. and Gaines, Berland Inc. (2)
4.4 Warrant Agreement between Continental Stock Transfer and Trust Company and HCAC with respect to the HCAC
$5.00 Warrants. (1)
4.5 Form of Encore Medical Corporation $7.00 Warrant. (3)
4.6 Warrant Agreement, by and between Encore Medical Corporation and Continental Stock Transfer and Trust
Company with respect to the HCAC $7.00 Warrants. (3)
4.7 Form of Encore Medical Corporation Common Stock Certificates
10.1 Investment Management Trust Agreement between IBJ Schroder Bank & Trust Company and HCAC. (1).
10.2 Stock Escrow Agreement between Continental Stock Transfer and Trust Company and HCAC. (1)
10.3 Letter Agreement between GKN Securities Corp. and each of the initial stockholders of HCAC. (1)
10.4 Encore Medical Corporation 1996 Incentive Stock Plan (3)
10.5 Employment Agreement between Encore and Nick Cindrich, dated August 26, 1994.
10.6 Severance Agreement between Encore and Nick Cindrich, dated September 27, 1995, as amended on March 18,
1997.
10.7 Employment Agreement between Encore and Craig L. Smith, dated August 26, 1994.
10.8 Severance Agreement between Encore and Craig L. Smith, dated September 19, 1995, as amended on March 18,
1997.
10.9 Employment Agreement between Encore and Jim Abraham, dated August 17, 1995.
10.10 Severance Agreement between Encore and Jim Abraham, dated September 19, 1995, as amended on March 18, 1997.
10.11 Employment Agreement between Encore and Ken Ludwig, Jr., dated August 26, 1994.
10.12 Severance Agreement between Encore and Ken Ludwig, Jr., dated September 19, 1995, as amended on March 18,
1997.
10.13 Employment Agreement between Encore and August Faske, dated August 26, 1994.
10.14 Severance Agreement between Encore and August Faske, dated September 20, 1995, as amended on March 18,
1997.
10.15 Employment Agreement between Encore and Harry L. Zimmerman, dated August 26, 1994.
10.16 Severance Agreement between Encore and Harry L. Zimmerman, dated September 19, 1995, as amended on March
18, 1997.
</TABLE>
-38-
<PAGE> 39
<TABLE>
<S> <C>
10.17 Employment Agreement between Encore and J.D. Webb, Jr., dated August 26, 1994.
10.18 Severance Agreement between Encore and J.D. Webb, Jr., dated September 19, 1995, as amended on March 18,
1997.
16 Letter from Richard A. Eisner & Company, L.L.P. dated May 20, 1998. (4)
21 Schedule of Subsidiaries of Encore Medical Corporation.
27 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to Amendment No. 1 to HCAC's Registration
Statement on Form S-1 (33-92854) filed with the SEC on July 14,
1995
(2) Filed as an exhibit to Amendment No. 2 to HCAC's Registration
Statement on Form S-1 (33-92854) filed with the SEC on February 20,
1996
(3) Filed as an exhibit to HCAC's Registration Statement on Form S-4
(333-22053) filed with the SEC on February 19, 1997.
-39-
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ENCORE MEDICAL CORPORATION
3/24/98 By: /s/ NICK CINDRICH
- --------- ----------------------------------------
Date Nick Cindrich, Chairman of the Board
and Chief Executive Officer
3/24/98 By: /s/ AUGUST FASKE
- --------- ----------------------------------------
Date August Faske, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
3/25/98 By: /s/ JAY M. HAFT
- --------- ----------------------------------------
Date Jay M. Haft, Director
3/30/98 By: /s/ JOEL KANTER
- --------- ----------------------------------------
Date Joel Kanter, Director
3/26/98 By: /s/ LAMAR LASTER
- --------- ----------------------------------------
Date LaMar Laster, Director
3/26/98 By: /s/ RICHARD RELYEA
- --------- ----------------------------------------
Date Richard Relyea, Director
3/26/98 By: /s/ DENNIS ENRIGHT
- --------- ----------------------------------------
Date Dennis Enright, Director
3/24/98 By: /s/ RICHARD MARTIN
- --------- ----------------------------------------
Date Richard Martin, Director
3/24/98 By: /s/ CRAIG L. SMITH
- --------- ----------------------------------------
Date Craig L. Smith, Director
3/27/98 By: /s/ JOHN ABELES
- --------- ----------------------------------------
Date John Abeles, Director
3/24/98 By: /s/ KENNETH DAVIDSON
- --------- ----------------------------------------
Date Kenneth Davidson, Director
-40-
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
2 Agreement and Plan of Merger dated as of November 12, 1996, by and among Healthcare Acquisition Corp.
("HCAC"), Healthcare Acquisition, Inc. and Encore Orthopedics, Inc., as amended by an Amendment dated
February 14, 1997. (3)
3.1 Certificate of Incorporation of Healthcare Acquisition Corp. (1)
3.2 Amendment to the Certificate of Incorporation of HCAC. (3)
</TABLE>
<PAGE> 42
<TABLE>
<S> <C>
3.3 Bylaws of HCAC. (1)
4.1 Form of HCAC Common Stock Certificate. (2)
4.2 Form of Certificate for HCAC $5.00 Warrant. (2)
4.3 Form of Unit Purchase Option granted to GKN Securities Corp. and Gaines, Berland Inc. (2)
4.4 Warrant Agreement between Continental Stock Transfer and Trust Company and HCAC with respect to the HCAC
$5.00 Warrants. (1)
4.5 Form of Encore Medical Corporation $7.00 Warrant. (3)
4.6 Warrant Agreement, by and between Encore Medical Corporation and Continental Stock Transfer and Trust
Company with respect to the HCAC $7.00 Warrants. (3)
4.7 Form of Encore Medical Corporation Common Stock Certificates
10.1 Investment Management Trust Agreement between IBJ Schroder Bank & Trust Company and HCAC. (1).
10.2 Stock Escrow Agreement between Continental Stock Transfer and Trust Company and HCAC. (1)
10.3 Letter Agreement between GKN Securities Corp. and each of the initial stockholders of HCAC. (1)
10.4 Encore Medical Corporation 1996 Incentive Stock Plan (3)
10.5 Employment Agreement between Encore and Nick Cindrich, dated August 26, 1994.
10.6 Severance Agreement between Encore and Nick Cindrich, dated September 27, 1995, as amended on March 18,
1997.
10.7 Employment Agreement between Encore and Craig L. Smith, dated August 26, 1994.
10.8 Severance Agreement between Encore and Craig L. Smith, dated September 19, 1995, as amended on March 18,
1997.
10.9 Employment Agreement between Encore and Jim Abraham, dated August 17, 1995.
10.10 Severance Agreement between Encore and Jim Abraham, dated September 19, 1995, as amended on March 18, 1997.
10.11 Employment Agreement between Encore and Ken Ludwig, Jr., dated August 26, 1994.
10.12 Severance Agreement between Encore and Ken Ludwig, Jr., dated September 19, 1995, as amended on March 18,
1997.
10.13 Employment Agreement between Encore and August Faske, dated August 26, 1994.
10.14 Severance Agreement between Encore and August Faske, dated September 20, 1995, as amended on March 18,
1997.
10.15 Employment Agreement between Encore and Harry L. Zimmerman, dated August 26, 1994.
10.16 Severance Agreement between Encore and Harry L. Zimmerman, dated September 19, 1995, as amended on March
18, 1997.
</TABLE>
<PAGE> 43
<TABLE>
<S> <C>
10.17 Employment Agreement between Encore and J.D. Webb, Jr., dated August 26, 1994.
10.18 Severance Agreement between Encore and J.D. Webb, Jr., dated September 19, 1995, as amended on March 18,
1997.
16 Letter from Richard A. Eisner & Company, L.L.P. dated May 20, 1998. (4)
21 Schedule of Subsidiaries of Encore Medical Corporation.
27 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to Amendment No. 1 to HCAC's Registration
Statement on Form S-1 (33-92854) filed with the SEC on July 14,
1995
(2) Filed as an exhibit to Amendment No. 2 to HCAC's Registration
Statement on Form S-1 (33-92854) filed with the SEC on February 20,
1996
(3) Filed as an exhibit to HCAC's Registration Statement on Form S-4
(333-22053) filed with the SEC on February 19, 1997.
(4) Filed as an exhibit to Company Form 8-K filed with the SEC on May
30, 1997.
<PAGE> 1
EXHIBIT 4.7
<TABLE>
<S> <C> <C>
COMMON STOCK COMMON STOCK
NUMBER ENCORE MEDICAL CORPORATION SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 29256E 10 9
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF PAR VALUE $.001 PER SHARE
- ---------------------------------------------- ENCORE MEDICAL CORPORATION ------------------------------------------------------
(herein called the "Corporation"), transferable only on the books of the Corporation by the holder hereof in person or by duly
authorized attorney upon the surrender of this Certificate properly endorsed or assigned for transfer. This Certificate is not
valid until countersigned by the Transfer Agent and registered by the Agent.
CERTIFICATE OF STOCK
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly appointed officers.
Dated:
/s/ HARRY L. ZIMMERMAN /s/ NICK CINDRICH
SECRETARY [SEAL] CHIEF EXECUTIVE OFFICER
By
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT
(Jersey City, New Jersey) AND REGISTRAR
</TABLE>
<PAGE> 2
ENCORE MEDICAL CORPORATION
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act __________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list
For value received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
* * * * *
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________________,
Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated:________________
X _______________________________________
X _______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
SIGNATURE GUARANTEED: _______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION.
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO B.F.C. RULE 17Ad-16.
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 26th day of August, 1994, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation (the "Company"), and NICK CINDRICH (the "Employee");
Whereas, Employee has heretofore entered into an Employment Agreement
with the Company and both the Company and the Employee desire to amend and
restate in its entirety such Employment Agreement.
Now, therefore, in consideration of the mutual promises contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Employee agree
as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment Term. The Company hereby employs the Employee for a
primary term commencing on the date set forth above and, subject to earlier
termination as provided in Section 1.5 hereof, ending five (5) years from such
date (the "Employment Term"). Employee agrees to accept such employment and to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
1.2 Duties. The Employee shall serve in the capacity as Chief
Executive Officer of the Company, or in such other capacity as the Company may
in its sole discretion direct, and shall report to, and be subject to the
general direction and control of, the officers and directors of the Company. It
is further understood and agreed that any modification in or expansion of
Employee's duties hereunder shall not, unless specifically agreed in writing by
Company, result in any modification in, increase or decrease of Employee's
compensation referred to in Section 1.4 hereof.
1.3 Extent of Service. The Employee shall devote his full time,
attention, and energy to the business of the Company and, except as may be
specifically permitted by the Company and approved by either the Chief Executive
Officer or the Board of Directors of the Company, shall not be engaged in any
other business activity while in the employ of the Company.
1.4 Compensation
1.4.1 Salary. The Company shall pay to the Employee a base
salary at a rate of not less than One Hundred Forty Thousand Dollars ($140,000)
per year, or at such greater rate as the Chief Executive Officer of the Company
shall from time to time determine (the "Base Salary"). The Base Salary shall be
subject to review on no less than an annual basis, beginning January 1, 1995
or, at the Company's discretion, such earlier date as the Company may
designate. Such salary is to be payable in installments in accordance with the
payroll policies of the Company in effect from time to time during the
Employment Term.
<PAGE> 2
1.4.2 Other Benefits. The Employee shall be entitled to such
vacation days, sick days, insurance and other fringe benefit programs (including
pension, profit-sharing, and stock plans, if any) as are established for other
executive employees of the Company, on the same basis as such other executive
employees are entitled thereto, it being understood that the establishment,
termination, or change of any such program shall be at the instance of the
Company, in exercise of its sole discretion, from time to time, and any such
termination or change in any such program shall not affect this Agreement.
1.5 Termination.
1.5.1 Termination by Employee. At any time after one (1) year
from the commencement of the Employment Term, Employee may terminate this
Agreement on thirty (30) days' prior written notice.
1.5.2 Termination by Company. Prior to the end of the
Employment Term, the Company may upon ten (10) days' prior written notice
discharge the Employee with or without cause at its sole option without any
further liability hereunder to the Employee or his estate. Provided, however, in
the event such termination was without cause, the Company shall be required to
pay the Employee, at the time of his discharge, for one (1) year's Base Salary,
in addition to any accrued, but unpaid Base Salary . The Employee will have no
further liability hereunder to the Company except pursuant to Article II and
Section 3.2 hereof. For purposes of this Agreement, a "discharge for cause"
shall mean a discharge resulting from Employee having (i) committed any act
involving moral turpitude, dishonesty, or fraud that, in the good faith opinion
of Company, causes a material harm to Company, (ii) failed or refused to follow
legal and reasonable policies or directives established and previously given to
Employee in writing by Company, (iii) willfully failed to attend to his duties
after ten (10) days prior written notice of failure to so act, (iv) committed
acts amounting to gross negligence or willful misconduct to the material
detriment of Company, or (v) otherwise materially breached any of the terms or
provisions of this Agreement after ten (10) days prior written notice of such
material breach and failure to cure such breach. Employee shall be deemed to
have been discharged for cause upon delivery to Employee of a "Notice of
Termination" stating the "Date of Termination" and specifying the particulars of
the conduct justifying discharge for cause. Furthermore, if the Employee is
terminated without cause, then the Company agrees, if requested by Employee for
the sole purpose of exercising any vested options that Employee has the right to
exercise, to loan to the Employee an amount equal to (i) the full exercise price
of all vested options that the Employee has the right to exercise less (ii) the
par value of such shares as are to be exercised. The terms of the loan shall be
that it shall be (a) secured by the stock to be purchased, (b) be otherwise
non-recourse to the Employee, (c) bear interest at the prime rate of interest as
published from time to time in The Wall Street Journal, and (d) be fully due and
payable, principal and interest, two (2) years from the date of termination.
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ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that his services to be
rendered hereunder are of a special and unusual character which have a unique
value to Company, the loss of which cannot adequately be compensated by damages
in an action at law. In view of the unique value to Company of the services of
Employee for which Company has contracted hereunder, and because of the
confidential information to be obtained by or disclosed to Employee, and as a
material inducement to Company to enter into this Agreement, and to pay to
Employee the compensation referred to in Section 1.4 hereof, Employee covenants
and agrees that during Employee's employment hereunder and for a period of one
(1) year after he ceases to be employed by Company, Employee shall not (a)
directly or indirectly, solicit business from, divert business from, or attempt
to convert to other methods of using the same or similar products or services as
provided by Company, any client, account or location of Company with which
Employee has had any contact as a result of his employment by Company hereunder;
(b) engage in or carry on, directly or indirectly, either for himself, as a
member of a partnership, or as a stockholder (except as limited partner or
stockholder of less than one percent (1%) of the issued and outstanding limited
partnership interests or stock of a publicly held partnership or corporation
whose gross assets exceed $l,000,000), as an investor, lender, guarantor,
landlord, manager, officer, or director of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), or as an employee,
agent, associate, broker, or consultant of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), any business that
competes with any operations of the Company within an one hundred (100)-mile
radius of any geographic area where Company is actually engaged in business, or
maintains sales or service representatives or employees; or (c) directly or
indirectly, solicit for employment or employ any employee of Company. Employee
may elect, by providing written notice to the Company, to shorten the term of
this non-compete to six (6) months, provided, however, in that event, the
Company's obligation to pay severance pay to the Employee pursuant to Section
1.5.2 shall be reduced to an amount equal to six (6) months base pay.
2.2 Disclosures of Information. The Employee acknowledges that in the
course of his employment by the Company, he will receive certain trade secrets,
programs, methods of operation, financial information, lists of customers, and
other confidential information and knowledge concerning the businesses of the
Company (hereinafter collectively referred to as "Information") that the Company
desires to protect. As a material inducement to Company to enter into this
Agreement, and to pay to Employee the compensation referred to in Section 1.4
hereof, Employee covenants and agrees that he shall not, at any time during or
following the term of his employment hereunder, directly or indirectly, divulge
or disclose, for any purpose whatsoever, any of such Information which has been
obtained by or disclosed to him as a result of his employment by Company. The
Employee further agrees that he will at no time use the Information in competing
with the Company. Upon termination of this Agreement, the Employee shall
surrender to the Company all lists, books, financial information, records,
literature, products, papers, documents, writings, and other property produced
by him or coming into his possession by or through his employment relating to
the Information, and the Employee agrees that all such materials will at all
times remain the property of the Company. In the event of a breach or
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threatened breach by Employee of any of the provisions of this Article II,
Company, in addition to and not in limitation of any other rights, remedies or
damages available to Company at law or in equity, shall be entitled to a
permanent injunction in order to prevent or to restrain any such breach by
Employee, or by Employee's partners, agents, representatives, servants,
employers, employees and/or any and all persons directly or indirectly acting
for or with him.
2.3 Accounting for Profits. Employee covenants and agrees that if he
shall violate any of his covenants or agreements under Article II hereof,
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remunerations or benefits which Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies to which
Company is or may be entitled at law or in equity or under this Agreement.
2.4 Reasonableness of Restrictions.
2.4.1 Employee has carefully read and considered the
provisions of Article II hereof and, having done so, agrees that the
restrictions set forth in such Article (including, but not limited to, the time
period of restriction and the geographical areas of restriction set forth in
Article II hereof) are fair and reasonable and are reasonably required for the
protection of the interest of Company, its officers, directors and other
employees.
2.4.2 In the event that, notwithstanding the foregoing, any of
the provisions of Article II hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event that any provision of Article II relating to
time period and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, said time period and/or areas of restriction
shall be deemed to become and thereafter be the maximum time period and/or areas
which such court deems reasonable and enforceable.
ARTICLE 3
EMPLOYEE INVENTIONS
3.1 Employee Inventions. Employee shall promptly disclose to the
Company or its designee any and all ideas, inventions, works of authorship
(including, but not limited to computer programs, software and documentation),
improvements, discoveries, developments, or innovations (hereinafter referred to
as "said inventions"), whether patentable or unpatentable, copyrightable or
uncopyrightable, made, developed, worked on, or conceived by Employee, either
solely or jointly with others, whether or not reduced to drawings, written
description, documentation, models, or other tangible form: (a) during the
Employment Term that relate to, or arise out of, any developments, services,
research, or products of, or pertain to the business of, the Company and (b) for
a period of six (6) months after termination of the Employment Term, said
inventions that relate to, or arise out of, any developments, services,
research, or products that Employee has been concerned with during the term of
his employment.
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3.2 Assignment. Employee hereby assigns and agrees to assign to the
Company, its successors and assigns, Employee's entire right, title, and
interest in and to any of said inventions. All of said inventions shall
forthwith and without further consideration become and be the exclusive property
of the Company, it successors and assigns.
3.3 Cooperation. Employee shall, without further compensation, do all
lawful things, including, but not limited to, maintaining invention records that
shall be the property of the Company, rendering assistance, giving of evidence
and testimony, and executing necessary documents, as requested, to enable the
Company to file and obtain patents in the United States and foreign countries on
any of said inventions, as well as to protect the Company's interest in any of
said inventions.
ARTICLE 4
MISCELLANEOUS
4.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date mailed, postage
prepaid, by certified mail, return receipt requested, or telegraphed or telexed
and confirmed if addressed to the respective parties as follows: (a) if to the
Employee to the address set forth below, and (b) if to the Company to Encore
Orthopedics, Inc., 8920 Business Park Drive, Suite 380, Austin, Texas 78759
ATTENTION: President. Either party hereto may designate a different address by
providing written notice of such new address to the other party hereto.
4.2 Specific Performance. The Employee acknowledges that a remedy at
law for any breach or attempted breach of Section 1.3 and Article II of this
Agreement will be inadequate, and agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or any other equitable relief. In the event the Company brings legal
action to enforce its rights hereunder, the Employee shall pay all of the
Company's court costs and legal fees and expenses arising out of such action if
the Company prevails in such action.
4.3 Severability. Whenever 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 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.
4.4 Assignment. This Agreement may not be assigned by the Employee.
Neither the Employee nor his spouse shall have any right to commute, encumber,
or otherwise dispose of any right to receive payments hereunder, it being the
intention of the parties that such payments and the rights thereto are
nonassignable and nontransferable. This Agreement is only assignable by the
Company to a parent, subsidiary, successor or other affiliate of the Company.
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4.5 Binding Effect. Subject to the provisions of Section 4.4 of this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, the Employee's heirs and personal representatives, and the
successors and assigns of the Company.
4.6 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
4.7 Entire Agreement; Amendment. This Agreement contains the entire
understanding between the parties, and there are no agreements or understandings
among the parties except as set forth herein. The Employee represents and
warrants to the Company that at the time of execution of this Agreement he is
not a party to any other employment agreement. Employee further represents and
warrants that he neither has any proprietary information of any other business
nor is he providing any other business' proprietary information to the Company.
No alteration or modification of this Agreement shall be valid except by
subsequent written instrument executed by the parties hereto. No waiver by
either party of any breach by the other party of any provision or condition of
this Agreement in one circumstance shall be deemed a waiver of such provision or
condition in any other circumstances or be deemed a waiver of any other
provision or condition. The section and paragraph headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
COMPANY:
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG L. SMITH
--------------------------------
Craig L. Smith, President
EMPLOYEE:
/s/ NICK CINDRICH
------------------------------------
NICK CINDRICH
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EXHIBIT 10.6
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 27th day of
November, 1995, by and between ENCORE(R) ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 8900 Shoal Creek Boulevard,
Building 300, Austin, Texas 78757, (the "COMPANY"), and NICK CINDRICH, an
individual resident at #6 Candleleaf Court, Austin, Texas 78734 (the "EMPLOYEE"
or the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Chief
Executive Officer pursuant to an employment agreement dated August 26, 1994
(such employment agreement as it may be amended or supplemented from time to
time and any successor agreement being referred to as the "EMPLOYMENT
AGREEMENT"); and
WHEREAS, the Board of Directors of the Company (the "BOARD") has
approved the Company entering into severance agreements with key executives of
the Company; and
WHEREAS, the Employee is a key executive of the Company and has been
selected by the Board of Directors of the Company to be offered a severance
agreement; and
WHEREAS, the Board believes that if the Company should receive or
learn of any proposal from a third person concerning a possible business
combination with the Company, or an acquisition of equity securities or a
substantial portion of the assets of the Company, it is important that the
Company should be able to rely upon the Executive to continue in his position
and that the Board and should be able to receive and rely upon his advice as to
the best interests of the Company and its shareholders, without concern that
the Executive might be distracted by any personal uncertainties and risks
created by such a proposal; and
WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposal, to advise management and the Board whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board may determine to be appropriate;
and
WHEREAS, the Company wishes to be assured that it will have the
continued dedication of the Executive and the availability of his advice and
counsel despite the possibility, threat or occurrence of a bid to take over
control of the Company; and
WHEREAS, the Company wishes to induce the Executive to remain in the
employment of the Company under such circumstances; and
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
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NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall have the same meaning as "discharge for
cause" as defined in Section 1.5.2 of the Employment Agreement as well
as include the repeated violation by the Executive of his obligations
under this Agreement which are demonstrably willful and deliberate on
the part of the Executive and which are not redeemed in a reasonable
period of time after receipt of written notice from the Company.
(b) "CHANGE IN CONTROL" means any of the following
events:
(i) the acquisition by any person, including a
"group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership of shares of
capital stock or other voting securities of the Company that
have thirty-three and one third percent (33 1/3%) or more of
either (A) the then outstanding shares of the Company's common
stock or (B) the combined voting power of the Company's then
outstanding voting securities that are entitled to vote
generally for the election of the Board;
(ii) the sale or other disposition by the Company
to an unrelated third party of all or substantially all of the
Company's assets;
(iii) the consummation of a reorganization, merger,
or consolidation involving the Company if as a result of such
transaction persons who were shareholders of the Company
immediately before the reorganization, merger or consolidation
do not immediately thereafter own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the reorganized,
merged or consolidated Company that are entitled to vote
generally for the election of the board of such entity; or
(iv) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board.
(c) "DISABILITY" means the total and permanent inability
of the Executive due to illness, accident or other physical or mental
incapacity to perform the usual duties of his employment under the
Employment Agreement for a substantially continuous period of one
hundred eighty (180) days, as determined by a physician selected by
the Company and acceptable to the Executive or the Executive's legal
representative (which agreement as to acceptability will not be
unreasonably withheld).
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(d) "GOOD REASON" means any of the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities
contemplated by the Employment Agreement, or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action that
is not taken in bad faith and that is remedied by the Company
promptly after receipt of notice thereof from the Executive;
(ii) the reduction in the overall level of the
Executive's compensation or benefits;
(iii) the Company's requiring the Executive to be
based at any office or location other than the Company's
executive offices in the Austin, Texas SMSA, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any significant increase in the travel
requirements of the Executive's position; for the purposes of
this clause (iv) a "significant" increase would include any
circumstances under which the Executive is or will be
required, during any six-month period, to spend more than
twice the number of nights away from home as were necessary
during the previous six-month period; or
(v) an inability on the part of the Executive to
carry out the duties of his position in good faith as a result
of a major disagreement between the Executive and other
executives of the Company who have been appointed after a
Change of Control concerning strategic or policy issues
affecting the Company or its business as a whole.
(e) "INCUMBENT BOARD" means those individuals who are
members of the Board on the date of this Agreement and any person who
subsequently becomes a member of the Board and whose election, or
whose nomination for election by the Company shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board.
2. TERMINATION PAYMENTS.
(a) Termination of employment. If any Change of Control
of the Company occurs after the date of this Agreement and
subsequently, on or before the third anniversary of such Change of
Control, the Executive's employment by the Company or its successor in
interest is terminated
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(i) by the Company or its successor in interest
for any reason other than (A) for Cause, or (B) because of the
Executive's death or Disability, or
(ii) by the Executive for Good Reason,
(a "TERMINATION EVENT") then the Executive will be entitled to
receive, and the Company will pay or provide, the benefits set forth
in subsection (b) below.
(b) Severance benefits. Upon the occurrence of a
Termination Event described in subsection (a) above then, in addition
to the performance of its obligations under the Employment Agreement
but in the case of amounts payable under clauses (i) and (ii) without
duplication of any similar payments then due and payable under the
Employment Agreement:
(i) The Company will pay to the Executive within
thirty (30) days after the Termination Event an amount equal
to the sum of:
(A) his highest full base annual salary
in effect within one (1) year of the
Termination Event, plus
(B) the amount of any bonus, payable in
cash only notwithstanding the terms
of any bonus plan, with respect to
any year that has then ended which
was or would have accrued to the
Executive under any bonus plan then
in effect but which has not yet been
paid to him, plus
(C) an amount, payable in cash only
notwithstanding the terms of any
bonus plan, equal to the product of
(aa) the average of the bonus paid
or payable to the Executive for the
two preceding years (whether same
was paid in cash or its equivalent
value) multiplied by (bb) a fraction
of which the numerator is the number
of weeks that have elapsed in the
then current year through the date
of termination and the denominator
is 52, plus
(D) an amount equal to the product of
(aa) the number of unused vacation
days accrued by the Executive
through the date of termination
multiplied by (bb) a fraction the
numerator of which is the
Executive's highest base salary in
effect within one (1) year of the
Termination Event and the
denominator of which is 250;
(ii) The Company will contribute in cash to any
retirement or saving plan in which the Executive is
participating, within thirty (30) days after the date of
termination, the maximum amount which the Company is permitted
to contribute
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based on the payments made pursuant to paragraph (i) above
and, at the Executive's election, will buy back the stock held
by the Executive in any such plan at its then fair market
value, depositing said value in cash into said plan;
(iii) The Company will pay in cash to the Executive
within thirty (30) days after the date of termination a
severance payment in an amount equal to the sum of
(A) three hundred percent (300%) of his
full base annual salary at the
highest rate in effect within one
(1) year of the Termination Event,
plus
(B) three hundred percent (300%) of the
average bonus paid or payable to him
for the two (2) preceding years
(whether same was paid in cash or
its equivalent value);
provided that if the amount payable by the Company to the
Executive under this clause (iii), without regard to any other
payments or benefits payable to the Executive under this
Agreement or the Employment Agreement, would constitute an
"excess parachute payment" for the purposes of Sections 280G
and 4999 of the Internal Revenue Code then the amount payable
by the Company under this Section 2b as a severance benefit
will be "grossed up" by the amount necessary in order to
reimburse Executive for any taxes due as a result of such an
"excess parachute payment" as per section 6 hereof.
(iv) The Company will amend or revise all stock
option plans and restricted stock awards to which the
Executive is a party, or grant appropriate waivers of any
restrictions contained in such plans and awards, so as to
remove all restrictions upon the exercise by the Executive of
such options or upon the ability of the Executive to sell any
shares of stock that are subject to any such options or
awards. As part of such amendments or revisions, the Company
will accelerate the vesting period for Executive to an
immediate one hundred (100%) and shall allow the Executive the
option to exercise his options or stock awards either within
ninety (90) days of his effective termination date and such
option remain as an incentive stock option or before the
termination of the original option or stock award period and
have such options be converted automatically into
non-qualified stock options for purposes of the Internal
Revenue Code.
(v) The Company will prepay in full if at all
possible, and if not possible, ensure to the satisfaction of
Executive maintenance in full force and effect for the benefit
of the Executive and his spouse and dependents (if covered
prior to the date of termination) in each case for a period
from the date of termination until the later of the death of
the Executive or his spouse, during their period of their
eligibility, all employee life, health, accident, disability,
medical and other employee welfare benefits plans provided by
the Company in which the Executive or his
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spouse or his dependents are participating at the time of the
Executive's termination under the same terms and conditions as
then in effect; provided, that if the Executive's or his
spouse's or his dependents continued participation is not
permitted under the general terms of such plans, the Company
shall arrange to provide substantially similar benefits;
(vi) The Company will maintain for the benefit of
the Executive such policy of liability insurance, providing
protection to him as an officer, director, agent or employee
of the Company or its subsidiaries, as may from time to time
be purchased by the Company for officers and directors
generally as authorized by or in furtherance of the
indemnification provisions contained in the Company's bylaws.
Neither the insurance nor the Executive's right to
indemnification thereunder may be canceled by the Company
without his permission for a period of five years following
the date of termination under this Agreement; provided,
however, that the Company may obtain a substitute insurance
policy as long as the rights of indemnity to the Executive are
at least equivalent to the most favorable rights provided
under the policy in effect immediately prior to the date of
termination.
(b) The Executive shall have no duty to mitigate, whether
by seeking other employment or otherwise, any loss or damage suffered
by him as a result of any failure by the Company to make any payment,
or provide any benefit, to him under this Section 2.
3. AGREEMENTS OF EXECUTIVE.
The Executive covenants and agrees as follows:
(a) Provision of services when Change of Control is
threatened. If any person begins a tender or exchange offer for
voting securities of the Company, or circulates a proxy to
shareholders of the Company or takes any other action for the purposes
of effecting a Change of Control of the Company, then notwithstanding
the terms of the Employment Agreement or any other agreement between
the Executive and the Company the Executive will not voluntarily leave
the employment of the Company and will render the services
contemplated in the recitals to this Agreement until either (i) such
person has abandoned or terminated his efforts to effect a Change of
Control or (ii) three months have elapsed since the date on which a
Change of Control has occurred.
(b) Noncompetition. Without limiting the terms of any
similar provision in the Employment Agreement or any other agreement
between the Executive and the Company, if the Executive's employment
with the Company is terminated under any circumstances that entitle
the Executive to receive the payments and other benefits provided in
Section 2, then for a period of one year (or six (6) months should
Executive make the election in the last sentence of Section 2.1 of the
Employment Agreement) from the Termination Event the Executive will
not:
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(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
(ii) act as an agent, broker or distributor for,
or as an adviser or consultant to,
(iii) be employed in any senior managerial or
executive position by any corporation, partnership, limited
liability company or other business organization in which he
has responsibility for,
any business (regardless of the form in which such business is
conducted) which is engaged, or which he reasonably expects to become
engaged, in the business of designing, manufacturing, distributing or
selling artificial joints and limbs and other orthopedic implant
devices in the United States; provided that the ownership by the
Executive of not more than two percent (2%) of the shares of any
publicly traded corporation or twenty percent (20%) of a privately
held company shall not constitute a violation of this subsection (b).
(c) Publications by Executive. Without limiting the
terms of any similar provision in the Employment Agreement or any
other agreement between the Executive and the Company, if the
Executive's employment with the Company is terminated under any
circumstances that entitle the Executive to receive the payments and
other benefits provided in Section 2, then
(i) the Executive will refrain from making any
disparaging comments about the Company or any of its
affiliates, and
(ii) for a period of one (1) year from the
Termination Event the Executive will not without the prior
written permission of the Company write or publish, or assist
in the writing or publication of, any books, articles or other
materials that would adversely affect the interests of the
Company or its affiliates.
(d) Remedies. The Executive acknowledges that any
violation of this Section may cause irreparable harm to the Company,
and that damages are not an adequate remedy, and the Executive
therefore agrees that the Company shall be entitled to an injunction
by any appropriate court in the appropriate jurisdiction, enjoining,
prohibiting and restraining the Executive from the continuance of any
such violation, in addition to any monetary damages which might occur
by reason of the violation of this Agreement.
(e) Independent. The covenants set forth in the
foregoing subsections (a), (b), (c), and (d) shall be deemed and shall
be construed as separate and independent covenants, and should any
part or provision of such covenants be held invalid, void or
unenforceable by any court of competent jurisdiction, such invalidity,
voidness, or unenforceability shall in no way render invalid, void, or
unenforceable any other part or provision thereof or any
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<PAGE> 8
separate covenant not declared invalid, void, or unenforceable. This
Agreement shall in that case be construed as if the void, invalid or
unenforceable provisions were omitted.
4. NOTICE OF TERMINATION.
Any termination of the Executive's employment by the Company or its
successor in interest or by the Executive shall be communicated by a written
notice of termination to the other party, and shall specify the provision of
this Agreement relied upon and shall set forth in reasonable detail the
circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered
if by the Executive or thirty (30) days after the date of the notice of
termination if given by the Company. All applicable benefits to Executive
hereunder shall be triggered if said notice of termination is given within the
three (3)-year period specified in Section 2(a) hereof.
5. LITIGATION EXPENSES.
The Company shall pay reasonable legal fees and expenses incurred by
the Executive as a result of his seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at his
request as such fees and expenses are incurred.
6. EXCESS PARACHUTE PAYMENTS.
(a) If any federal excise tax is imposed under Section
4999 of the Internal Revenue Code of 1986, as amended (an "EXCISE
TAX") on the Executive with respect to any payments or benefits
provided under Section 2, the Company hereby agrees, subject to the
exceptions and limitations set forth below, to pay the Executive such
additional amount (the "ADDITIONAL AMOUNT") as is necessary to cause
the Executive to realize the same net amount after the imposition of
all federal income tax, estate tax and Excise Tax imposed on payments
and benefits under Section 2 (and on such Additional Amount payable
under this Section 6) that he would have realized had such federal
income tax, estate tax, and Excise Tax not been imposed upon him with
respect to such payments and benefits under Section 2 and this Section
6; provided, however, that no such Additional Amount shall be due with
respect to
(i) any penalties, interest, or similar charges,
if any, assessed with respect to or arising out of any income
tax, estate tax, or Excise Tax due unless the Company delays
the payment contemplated herein to the Executive or
(ii) any income tax or estate tax which would be
owing by the Executive in the absence of the imposition of the
Excise Tax.
(b) The Company shall have the right to contest, but the
Executive shall have no duty to contest, the assessment of any such
taxes, but in any event, the Executive agrees to cooperate in any
contest the Company chooses to make provided the Company shall pay the
costs of any such contest.
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<PAGE> 9
7. ASSIGNMENT; SUCCESSORS IN INTEREST.
(a) General. Except with the prior written consent of
the Executive,
(i) no assignment by operation of law or
otherwise by the Company of any of its rights and obligations
under this Agreement may be made other than to an entity in
common control with or a successor to all or a substantial
portion of the business of the Company (but then only if such
entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this
Agreement);
(ii) no transfer by operation of law or otherwise
by the Company of all or a substantial part of its business or
assets shall be made unless the obligations and liabilities of
the Company under this Agreement are assumed in connection
with such transfer either by operation of law or by specific
assumption executed by the transferee and delivered to the
Executive; and
(iii) in any such event the Company shall remain
liable for the performance of all of its obligations under
this Agreement (which liability shall be a primary obligation
for full and prompt performance rather than a secondary
guarantee of collectibility of damages).
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to his heirs,
devisees, legatees or beneficiaries or except with the prior written
consent of the Company, no assignment or transfer by operation of law
or otherwise may be made by the Executive of any of his rights under
this Agreement.
(b) Binding Nature. This Agreement shall be binding upon
the parties to this Agreement and their respective legal
representatives, heirs, devisees, legatees, beneficiaries and
successors and assigns; shall inure to the benefit of the parties to
this Agreement and their respective permitted legal representatives,
heirs, devisees, legatees, beneficiaries and other permitted
successors and assigns (and to or for the benefit of no other person
or entity, whether an employee or otherwise, whatsoever); and any
reference to a party to this Agreement shall also be a reference to a
permitted successor or assign.
8. MISCELLANEOUS.
(a) This Agreement may not be varied, altered, or changed
except by instrument in writing executed by the parties hereto. The
failure of any party to this Agreement at any time or times to require
performance of any provision of this Agreement shall in no manner
affect the right to enforce the same. No waiver by any party to this
Agreement of any provision (or of a breach of any provision) of this
Agreement, whether by conduct or otherwise, in any one or more
instances shall be deemed or construed either
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<PAGE> 10
as a further or continuing waiver of any such provision or breach or
as a waiver of any other provision (or of a breach of any other
provision) of this Agreement.
(b) Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid but
if any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality or enforceability of any such provisions in every
other respect and of the remaining provisions of this Agreement shall
not be impaired.
(c) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Texas (without giving
effect to any choice of law provisions) and enforceable in a court of
competent jurisdiction in Travis County, Texas.
(d) This Agreement and any benefits accruing to Executive
hereunder shall be supplemental and additional to any and all benefits
accruing to Executive pursuant to the Employment Agreement and any and
all Stock Option or Stock Award Plans applicable to Executive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set his
hand as of the date and year first written above.
COMPANY
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG L. SMITH
-----------------------------
Craig L. Smith, President
EXECUTIVE
/s/ NICK CINDRICH
----------------------------------
NICK CINDRICH
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<PAGE> 11
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this
17th day of March, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and NICK CINDRICH, an individual resident at #6
Candleleaf, Austin, Texas 78738 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance
Agreement dated November 27, 1995 (the "Agreement") which provided, inter alia,
for certain payments to be made in the event that certain events occurred with
respect to the Employee's employment relationship with the Company;
WHEREAS, the Employee and the Company desire that there be certain
changes made with respect to the Agreement as a result of the Company's pending
merger with Healthcare Acquisition, Inc., a Texas corporation ("Acquisition"),
a wholly owned subsidiary of Healthcare Acquisition Corp., a Delaware
corporation ("HCAC"); and
WHEREAS, the Company and the Employee want to memorialize in this
Amendment their agreements regarding such changes to the Agreement.
NOW THEREFORE, in consideration of the premises and other mutual
promises and covenants contained in this Amendment and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties, intending legally to be bound, agree as follows:
1. In the event that the Company completes its merger with
Acquisition (the "Merger") then, and only then, shall the following changes be
made in the Agreement, such changes to take effect on that date which is two
(2) years from the effective date of the Merger:
(a) the provisions of Section 2(b) (iii) shall be amended
so that the language "three hundred percent (300%)" shall read "one
hundred percent (100%)" in each place where such language appears in
that Section;
(b) the provisions of Section 2(b) (v) shall be amended
to provide that the insurance coverage to be provided to Employee,
Employee's spouse and to Employee's dependents (if covered prior to
the date of termination) under such provision shall be for coverage
from a period from the date of the termination until five (5) years
after the date of termination; and
(c) the provisions of Section 2(b) (vi) shall be amended
to provide that the liability insurance to be provided under such
provision shall be provided for the benefit of the Employee for a
period of five (5) years from the date of the termination of the
Employee's relationship with the Company.
<PAGE> 12
2. Except as specifically changed by the Amendment, all other
terms and provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set its
hand as of the date and year first written above.
ENCORE:
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG SMITH
----------------------------
Craig Smith, President
EMPLOYEE:
/s/ NICK CINDRICH
---------------------------------
NICK CINDRICH
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<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 26th day of August, 1994, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation (the "Company"), and CRAIG L. SMITH (the "Employee");
Whereas, Employee has heretofore entered into an Employment Agreement
with the Company and both the Company and the Employee desire to amend and
restate in its entirety such Employment Agreement.
Now, therefore, in consideration of the mutual promises contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Employee agree
as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment Term. The Company hereby employs the Employee for a
primary term commencing on the date set forth above and, subject to earlier
termination as provided in Section 1.5 hereof, ending five (5) years from such
date (the "Employment Term"). Employee agrees to accept such employment and to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
1.2 Duties. The Employee shall serve in the capacity as President of
the Company, or in such other capacity as the Company may in its sole
discretion direct, and shall report to, and be subject to the general direction
and control of, the officers and directors of the Company. It is further
understood and agreed that any modification in or expansion of Employee's
duties hereunder shall not, unless specifically agreed in writing by Company,
result in any modification in, increase or decrease of Employee's compensation
referred to in Section 1.4 hereof.
1.3 Extent of Service. The Employee shall devote his full time,
attention, and energy to the business of the Company and, except as may be
specifically permitted by the Company and approved by either the Chief Executive
Officer or the Board of Directors of the Company, shall not be engaged in any
other business activity while in the employ of the Company.
1.4 Compensation
1.4.1 Salary. The Company shall pay to the Employee a base
salary at a rate of not less than One Hundred Thirty Thousand Dollars
($130,000) per year, or at such greater rate as the Chief Executive Officer of
the Company shall from time to time determine (the "Base Salary"). The Base
Salary shall be subject to review on no less than an annual basis, beginning
January 1, 1995 or, at the Company's discretion, such earlier date as the
Company may designate. Such salary is to be payable in installments in
accordance with the payroll policies of the Company in effect from time to time
during the Employment Term.
<PAGE> 2
1.4.2 Other Benefits. The Employee shall be entitled to such
vacation days, sick days, insurance and other fringe benefit programs (including
pension, profit-sharing, and stock plans, if any) as are established for other
executive employees of the Company, on the same basis as such other executive
employees are entitled thereto, it being understood that the establishment,
termination, or change of any such program shall be at the instance of the
Company, in exercise of its sole discretion, from time to time, and any such
termination or change in any such program shall not affect this Agreement.
1.5 Termination.
1.5.1 Termination by Employee. At any time after one (1) year
from the commencement of the Employment Term, Employee may terminate this
Agreement on thirty (30) days' prior written notice.
1.5.2 Termination by Company. Prior to the end of the
Employment Term, the Company may upon ten (10) days' prior written notice
discharge the Employee with or without cause at its sole option without any
further liability hereunder to the Employee or his estate. Provided, however, in
the event such termination was without cause, the Company shall be required to
pay the Employee, at the time of his discharge, for one (1) year's Base Salary,
in addition to any accrued, but unpaid Base Salary . The Employee will have no
further liability hereunder to the Company except pursuant to Article II and
Section 3.2 hereof. For purposes of this Agreement, a "discharge for cause"
shall mean a discharge resulting from Employee having (i) committed any act
involving moral turpitude, dishonesty, or fraud that, in the good faith opinion
of Company, causes a material harm to Company, (ii) failed or refused to follow
legal and reasonable policies or directives established and previously given to
Employee in writing by Company, (iii) willfully failed to attend to his duties
after ten (10) days prior written notice of failure to so act, (iv) committed
acts amounting to gross negligence or willful misconduct to the material
detriment of Company, or (v) otherwise materially breached any of the terms or
provisions of this Agreement after ten (10) days prior written notice of such
material breach and failure to cure such breach. Employee shall be deemed to
have been discharged for cause upon delivery to Employee of a "Notice of
Termination" stating the "Date of Termination" and specifying the particulars of
the conduct justifying discharge for cause. Furthermore, if the Employee is
terminated without cause, then the Company agrees, if requested by Employee for
the sole purpose of exercising any vested options that Employee has the right to
exercise, to loan to the Employee an amount equal to (i) the full exercise price
of all vested options that the Employee has the right to exercise less (ii) the
par value of such shares as are to be exercised. The terms of the loan shall be
that it shall be (a) secured by the stock to be purchased, (b) be otherwise
non-recourse to the Employee, (c) bear interest at the prime rate of interest as
published from time to time in The Wall Street Journal, and (d) be fully due and
payable, principal and interest, two (2) years from the date of termination.
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<PAGE> 3
ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that his services to be
rendered hereunder are of a special and unusual character which have a unique
value to Company, the loss of which cannot adequately be compensated by damages
in an action at law. In view of the unique value to Company of the services of
Employee for which Company has contracted hereunder, and because of the
confidential information to be obtained by or disclosed to Employee, and as a
material inducement to Company to enter into this Agreement, and to pay to
Employee the compensation referred to in Section 1.4 hereof, Employee covenants
and agrees that during Employee's employment hereunder and for a period of one
(1) year after he ceases to be employed by Company, Employee shall not (a)
directly or indirectly, solicit business from, divert business from, or attempt
to convert to other methods of using the same or similar products or services as
provided by Company, any client, account or location of Company with which
Employee has had any contact as a result of his employment by Company hereunder;
(b) engage in or carry on, directly or indirectly, either for himself, as a
member of a partnership, or as a stockholder (except as limited partner or
stockholder of less than one percent (1%) of the issued and outstanding limited
partnership interests or stock of a publicly held partnership or corporation
whose gross assets exceed $l,000,000), as an investor, lender, guarantor,
landlord, manager, officer, or director of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), or as an employee,
agent, associate, broker, or consultant of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), any business that
competes with any operations of the Company within an one hundred (100)-mile
radius of any geographic area where Company is actually engaged in business, or
maintains sales or service representatives or employees; or (c) directly or
indirectly, solicit for employment or employ any employee of Company. Employee
may elect, by providing written notice to the Company, to shorten the term of
this non-compete to six (6) months, provided, however, in that event, the
Company's obligation to pay severance pay to the Employee pursuant to Section
1.5.2 shall be reduced to an amount equal to six (6) months base pay.
2.2 Disclosures of Information. The Employee acknowledges that in the
course of his employment by the Company, he will receive certain trade secrets,
programs, methods of operation, financial information, lists of customers, and
other confidential information and knowledge concerning the businesses of the
Company (hereinafter collectively referred to as "Information") that the Company
desires to protect. As a material inducement to Company to enter into this
Agreement, and to pay to Employee the compensation referred to in Section 1.4
hereof, Employee covenants and agrees that he shall not, at any time during or
following the term of his employment hereunder, directly or indirectly, divulge
or disclose, for any purpose whatsoever, any of such Information which has been
obtained by or disclosed to him as a result of his employment by Company. The
Employee further agrees that he will at no time use the Information in competing
with the Company. Upon termination of this Agreement, the Employee shall
surrender to the Company all lists, books, financial information, records,
literature, products, papers, documents, writings, and other property produced
by him or coming into his possession by or through his employment relating to
the Information, and the Employee agrees that all such materials will at all
times remain the property of the Company. In the event of a breach or
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<PAGE> 4
threatened breach by Employee of any of the provisions of this Article II,
Company, in addition to and not in limitation of any other rights, remedies or
damages available to Company at law or in equity, shall be entitled to a
permanent injunction in order to prevent or to restrain any such breach by
Employee, or by Employee's partners, agents, representatives, servants,
employers, employees and/or any and all persons directly or indirectly acting
for or with him.
2.3 Accounting for Profits. Employee covenants and agrees that if he
shall violate any of his covenants or agreements under Article II hereof,
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remunerations or benefits which Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies to which
Company is or may be entitled at law or in equity or under this Agreement.
2.4 Reasonableness of Restrictions.
2.4.1 Employee has carefully read and considered the
provisions of Article II hereof and, having done so, agrees that the
restrictions set forth in such Article (including, but not limited to, the time
period of restriction and the geographical areas of restriction set forth in
Article II hereof) are fair and reasonable and are reasonably required for the
protection of the interest of Company, its officers, directors and other
employees.
2.4.2 In the event that, notwithstanding the foregoing, any of
the provisions of Article II hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event that any provision of Article II relating to
time period and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, said time period and/or areas of restriction
shall be deemed to become and thereafter be the maximum time period and/or areas
which such court deems reasonable and enforceable.
ARTICLE 3
EMPLOYEE INVENTIONS
3.1 Employee Inventions. Employee shall promptly disclose to the
Company or its designee any and all ideas, inventions, works of authorship
(including, but not limited to computer programs, software and documentation),
improvements, discoveries, developments, or innovations (hereinafter referred to
as "said inventions"), whether patentable or unpatentable, copyrightable or
uncopyrightable, made, developed, worked on, or conceived by Employee, either
solely or jointly with others, whether or not reduced to drawings, written
description, documentation, models, or other tangible form: (a) during the
Employment Term that relate to, or arise out of, any developments, services,
research, or products of, or pertain to the business of, the Company and (b) for
a period of six (6) months after termination of the Employment Term, said
inventions that relate to, or arise out of, any developments, services,
research, or products that Employee has been concerned with during the term of
his employment.
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<PAGE> 5
3.2 Assignment. Employee hereby assigns and agrees to assign to the
Company, its successors and assigns, Employee's entire right, title, and
interest in and to any of said inventions. All of said inventions shall
forthwith and without further consideration become and be the exclusive property
of the Company, it successors and assigns.
3.3 Cooperation. Employee shall, without further compensation, do all
lawful things, including, but not limited to, maintaining invention records that
shall be the property of the Company, rendering assistance, giving of evidence
and testimony, and executing necessary documents, as requested, to enable the
Company to file and obtain patents in the United States and foreign countries on
any of said inventions, as well as to protect the Company's interest in any of
said inventions.
ARTICLE 4
MISCELLANEOUS
4.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date mailed, postage
prepaid, by certified mail, return receipt requested, or telegraphed or telexed
and confirmed if addressed to the respective parties as follows: (a) if to the
Employee to the address set forth below, and (b) if to the Company to Encore
Orthopedics, Inc., 8920 Business Park Drive, Suite 380, Austin, Texas 78759
ATTENTION: President. Either party hereto may designate a different address by
providing written notice of such new address to the other party hereto.
4.2 Specific Performance. The Employee acknowledges that a remedy at
law for any breach or attempted breach of Section 1.3 and Article II of this
Agreement will be inadequate, and agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or any other equitable relief. In the event the Company brings legal
action to enforce its rights hereunder, the Employee shall pay all of the
Company's court costs and legal fees and expenses arising out of such action if
the Company prevails in such action.
4.3 Severability. Whenever 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 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.
4.4 Assignment. This Agreement may not be assigned by the Employee.
Neither the Employee nor his spouse shall have any right to commute, encumber,
or otherwise dispose of any right to receive payments hereunder, it being the
intention of the parties that such payments and the rights thereto are
nonassignable and nontransferable. This Agreement is only assignable by the
Company to a parent, subsidiary, successor or other affiliate of the Company.
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<PAGE> 6
4.5 Binding Effect. Subject to the provisions of Section 4.4 of this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, the Employee's heirs and personal representatives, and the
successors and assigns of the Company.
4.6 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
4.7 Entire Agreement; Amendment. This Agreement contains the entire
understanding between the parties, and there are no agreements or understandings
among the parties except as set forth herein. The Employee represents and
warrants to the Company that at the time of execution of this Agreement he is
not a party to any other employment agreement. Employee further represents and
warrants that he neither has any proprietary information of any other business
nor is he providing any other business' proprietary information to the Company.
No alteration or modification of this Agreement shall be valid except by
subsequent written instrument executed by the parties hereto. No waiver by
either party of any breach by the other party of any provision or condition of
this Agreement in one circumstance shall be deemed a waiver of such provision or
condition in any other circumstances or be deemed a waiver of any other
provision or condition. The section and paragraph headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
COMPANY:
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
--------------------------------
Nick Cindrich
Chief Executive Officer
EMPLOYEE:
/s/ CRAIG L. SMITH
------------------------------------
Craig L. Smith
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<PAGE> 1
EXHIBIT 10.8
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 19th day of
September, 1995, by and between ENCORE(R) ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 8920 Business Park Drive,
Suite 380, Austin, Texas 78759, (the "COMPANY"), and CRAIG L. SMITH, an
individual resident at 5904 Ivy Hills, Austin, Texas 78759 (the "EMPLOYEE" or
the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its President
pursuant to an employment agreement dated August 26, 1994 (such employment
agreement as it may be amended or supplemented from time to time and any
successor agreement being referred to as the "EMPLOYMENT AGREEMENT"); and
WHEREAS, the Board of Directors of the Company (the "BOARD") has
approved the Chief Executive Officer of the Company entering into severance
agreements with key executives of the Company; and
WHEREAS, the Employee is a key executive of the Company and has been
selected by the Chief Executive Officer of the Company to be offered a
severance agreement; and
WHEREAS, the Board believes that if the Company should receive or
learn of any proposal from a third person concerning a possible business
combination with the Company, or an acquisition of equity securities or a
substantial portion of the assets of the Company, it is important that the
Company should be able to rely upon the Executive to continue in his position
and that the Board and the Chief Executive Officer should be able to receive
and rely upon his advice as to the best interests of the Company and its
shareholders, without concern that the Executive might be distracted by any
personal uncertainties and risks created by such a proposal; and
WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposal, to advise management and the Board whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board may determine to be appropriate;
and
WHEREAS, the Company wishes to be assured that it will have the
continued dedication of the Executive and the availability of his advice and
counsel despite the possibility, threat or occurrence of a bid to take over
control of the Company; and
WHEREAS, the Company wishes to induce the Executive to remain in the
employment of the Company under such circumstances; and
<PAGE> 2
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall have the same meaning as "discharge for
cause" as defined in Section 1.5.2 of the Employment Agreement as well
as include the repeated violation by the Executive of his obligations
under this Agreement which are demonstrably willful and deliberate on
the part of the Executive and which are not redeemed in a reasonable
period of time after receipt of written notice from the Company.
(b) "CHANGE IN CONTROL" means any of the following
events:
(i) the acquisition by any person, including a
"group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership of shares of
capital stock or other voting securities of the Company that
have thirty-three and one third percent (33 1/3%) or more of
either (A) the then outstanding shares of the Company's common
stock or (B) the combined voting power of the Company's then
outstanding voting securities that are entitled to vote
generally for the election of the Board;
(ii) the sale or other disposition by the Company
to an unrelated third party of all or substantially all of the
Company's assets;
(iii) the consummation of a reorganization, merger,
or consolidation involving the Company if as a result of such
transaction persons who were shareholders of the Company
immediately before the reorganization, merger or consolidation
do not immediately thereafter own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the reorganized,
merged or consolidated Company that are entitled to vote
generally for the election of the board of such entity; or
(iv) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board.
(c) "DISABILITY" means the total and permanent inability
of the Executive due to illness, accident or other physical or mental
incapacity to perform the usual duties of his employment under the
Employment Agreement for a substantially continuous period of one
hundred eighty (180) days, as determined by a physician selected by
the Company and
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<PAGE> 3
acceptable to the Executive or the Executive's legal representative
(which agreement as to acceptability will not be unreasonably
withheld).
(d) "GOOD REASON" means any of the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities
contemplated by the Employment Agreement, or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action that
is not taken in bad faith and that is remedied by the Company
promptly after receipt of notice thereof from the Executive;
(ii) the reduction in the overall level of the
Executive's compensation or benefits;
(iii) the Company's requiring the Executive to be
based at any office or location other than the Company's
executive offices in the Austin, Texas SMSA, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any significant increase in the travel
requirements of the Executive's position; for the purposes of
this clause (iv) a "significant" increase would include any
circumstances under which the Executive is or will be
required, during any six-month period, to spend more than
twice the number of nights away from home as were necessary
during the previous six-month period; or
(v) an inability on the part of the Executive to
carry out the duties of his position in good faith as a result
of a major disagreement between the Executive and other
executives of the Company who have been appointed after a
Change of Control concerning strategic or policy issues
affecting the Company or its business as a whole.
(e) "INCUMBENT BOARD" means those individuals who are
members of the Board on the date of this Agreement and any person who
subsequently becomes a member of the Board and whose election, or
whose nomination for election by the Company shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board.
2. TERMINATION PAYMENTS.
(a) Termination of employment. If any Change of Control
of the Company occurs after the date of this Agreement and
subsequently, on or before the third
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anniversary of such Change of Control, the Executive's employment by
the Company or its successor in interest is terminated
(i) by the Company or its successor in interest
for any reason other than (A) for Cause, or (B) because of the
Executive's death or Disability, or
(ii) by the Executive for Good Reason,
(a "TERMINATION EVENT") then the Executive will be entitled to
receive, and the Company will pay or provide, the benefits set forth
in subsection (b) below.
(b) Severance benefits. Upon the occurrence of a
Termination Event described in subsection (a) above then, in addition
to the performance of its obligations under the Employment Agreement
but in the case of amounts payable under clauses (i) and (ii) without
duplication of any similar payments then due and payable under the
Employment Agreement:
(i) The Company will pay to the Executive within
thirty (30) days after the Termination Event an amount equal
to the sum of:
(A) his highest full base annual salary
in effect within one (1) year of the
Termination Event, plus
(B) the amount of any bonus, payable in
cash only notwithstanding the terms
of any bonus plan, with respect to
any year that has then ended which
was or would have accrued to the
Executive under any bonus plan then
in effect but which has not yet been
paid to him, plus
(C) an amount, payable in cash only
notwithstanding the terms of any
bonus plan, equal to the product of
(aa) the average of the bonus paid
or payable to the Executive for the
two preceding years (whether same
was paid in cash or its equivalent
value) multiplied by (bb) a fraction
of which the numerator is the number
of weeks that have elapsed in the
then current year through the date
of termination and the denominator
is 52, plus
(D) an amount equal to the product of
(aa) the number of unused vacation
days accrued by the Executive
through the date of termination
multiplied by (bb) a fraction the
numerator of which is the
Executive's highest base salary in
effect within one (1) year of the
Termination Event and the
denominator of which is 250;
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<PAGE> 5
(ii) The Company will contribute in cash to any
retirement or saving plan in which the Executive is
participating, within thirty (30) days after the date of
termination, the maximum amount which the Company is permitted
to contribute based on the payments made pursuant to paragraph
(i) above and, at the Executive's election, will buy back the
stock held by the Executive in any such plan at its then fair
market value, depositing said value in cash into said plan;
(iii) The Company will pay in cash to the Executive
within thirty (30) days after the date of termination a
severance payment in an amount equal to the sum of
(A) three hundred percent (300%) of his
full base annual salary at the
highest rate in effect within one
(1) year of the Termination Event,
plus
(B) three hundred percent (300%) of the
average bonus paid or payable to him
for the two (2) preceding years
(whether same was paid in cash or
its equivalent value);
provided that if the amount payable by the Company to the
Executive under this clause (iii), without regard to any other
payments or benefits payable to the Executive under this
Agreement or the Employment Agreement, would constitute an
"excess parachute payment" for the purposes of Sections 280G
and 4999 of the Internal Revenue Code then the amount payable
by the Company under this Section 2b as a severance benefit
will be "grossed up" by the amount necessary in order to
reimburse Executive for any taxes due as a result of such an
"excess parachute payment" as per section 6 hereof.
(iv) The Company will amend or revise all stock
option plans and restricted stock awards to which the
Executive is a party, or grant appropriate waivers of any
restrictions contained in such plans and awards, so as to
remove all restrictions upon the exercise by the Executive of
such options or upon the ability of the Executive to sell any
shares of stock that are subject to any such options or
awards. As part of such amendments or revisions, the Company
will accelerate the vesting period for Executive to an
immediate one hundred (100%) and shall allow the Executive the
option to exercise his options or stock awards either within
ninety (90) days of his effective termination date and such
option remain as an incentive stock option or before the
termination of the original option or stock award period and
have such options be converted automatically into
non-qualified stock options for purposes of the Internal
Revenue Code.
(v) The Company will prepay in full if at all
possible, and if not possible, ensure to the satisfaction of
Executive maintenance in full force and effect for the benefit
of the Executive and his spouse and dependents (if covered
prior to the date of termination) in each case for a period
from the date of termination until
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the later of the death of the Executive or his spouse, during
their period of their eligibility, all employee life, health,
accident, disability, medical and other employee welfare
benefits plans provided by the Company in which the Executive
or his spouse or his dependents are participating at the time
of the Executive's termination under the same terms and
conditions as then in effect; provided, that if the
Executive's or his spouse's or his dependents continued
participation is not permitted under the general terms of such
plans, the Company shall arrange to provide substantially
similar benefits;
(vi) The Company will maintain for the benefit of
the Executive such policy of liability insurance, providing
protection to him as an officer, director, agent or employee
of the Company or its subsidiaries, as may from time to time
be purchased by the Company for officers and directors
generally as authorized by or in furtherance of the
indemnification provisions contained in the Company's bylaws.
Neither the insurance nor the Executive's right to
indemnification thereunder may be canceled by the Company
without his permission for a period of five years following
the date of termination under this Agreement; provided,
however, that the Company may obtain a substitute insurance
policy as long as the rights of indemnity to the Executive are
at least equivalent to the most favorable rights provided
under the policy in effect immediately prior to the date of
termination.
(b) The Executive shall have no duty to mitigate, whether
by seeking other employment or otherwise, any loss or damage suffered
by him as a result of any failure by the Company to make any payment,
or provide any benefit, to him under this Section 2.
3. AGREEMENTS OF EXECUTIVE.
The Executive covenants and agrees as follows:
(a) Provision of services when Change of Control is
threatened. If any person begins a tender or exchange offer for
voting securities of the Company, or circulates a proxy to
shareholders of the Company or takes any other action for the purposes
of effecting a Change of Control of the Company, then notwithstanding
the terms of the Employment Agreement or any other agreement between
the Executive and the Company the Executive will not voluntarily leave
the employment of the Company and will render the services
contemplated in the recitals to this Agreement until either (i) such
person has abandoned or terminated his efforts to effect a Change of
Control or (ii) three months have elapsed since the date on which a
Change of Control has occurred.
(b) Noncompetition. Without limiting the terms of any
similar provision in the Employment Agreement or any other agreement
between the Executive and the Company, if the Executive's employment
with the Company is terminated under any circumstances that entitle
the Executive to receive the payments and other benefits provided in
Section 2, then for a period of one year (or six (6) months should
Executive make the election in the
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<PAGE> 7
last sentence of Section 2.1 of the Employment Agreement) from the
Termination Event the Executive will not:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
(ii) act as an agent, broker or distributor for,
or as an adviser or consultant to,
(iii) be employed in any senior managerial or
executive position by any corporation, partnership, limited
liability company or other business organization in which he
has responsibility for,
any business (regardless of the form in which such business is
conducted) which is engaged, or which he reasonably expects to become
engaged, in the business of designing, manufacturing, distributing or
selling artificial joints and limbs and other orthopedic implant
devices in the United States; provided that the ownership by the
Executive of not more than two percent (2%) of the shares of any
publicly traded corporation or twenty percent (20%) of a privately
held company shall not constitute a violation of this subsection (b).
(c) Publications by Executive. Without limiting the
terms of any similar provision in the Employment Agreement or any
other agreement between the Executive and the Company, if the
Executive's employment with the Company is terminated under any
circumstances that entitle the Executive to receive the payments and
other benefits provided in Section 2, then
(i) the Executive will refrain from making any
disparaging comments about the Company or any of its
affiliates, and
(ii) for a period of one (1) year from the
Termination Event the Executive will not without the prior
written permission of the Company write or publish, or assist
in the writing or publication of, any books, articles or other
materials that would adversely affect the interests of the
Company or its affiliates.
(d) Remedies. The Executive acknowledges that any
violation of this Section may cause irreparable harm to the Company,
and that damages are not an adequate remedy, and the Executive
therefore agrees that the Company shall be entitled to an injunction
by any appropriate court in the appropriate jurisdiction, enjoining,
prohibiting and restraining the Executive from the continuance of any
such violation, in addition to any monetary damages which might occur
by reason of the violation of this Agreement.
(e) Independent. The covenants set forth in the
foregoing subsections (a), (b), (c), and (d) shall be deemed and shall
be construed as separate and independent covenants, and should any
part or provision of such covenants be held invalid, void or
unenforceable
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<PAGE> 8
by any court of competent jurisdiction, such invalidity, voidness, or
unenforceability shall in no way render invalid, void, or
unenforceable any other part or provision thereof or any separate
covenant not declared invalid, void, or unenforceable. This Agreement
shall in that case be construed as if the void, invalid or
unenforceable provisions were omitted.
4. NOTICE OF TERMINATION.
Any termination of the Executive's employment by the Company or its
successor in interest or by the Executive shall be communicated by a written
notice of termination to the other party, and shall specify the provision of
this Agreement relied upon and shall set forth in reasonable detail the
circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered
if by the Executive or thirty (30) days after the date of the notice of
termination if given by the Company. All applicable benefits to Executive
hereunder shall be triggered if said notice of termination is given within the
three (3)-year period specified in Section 2(a) hereof.
5. LITIGATION EXPENSES.
The Company shall pay reasonable legal fees and expenses incurred by
the Executive as a result of his seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at his
request as such fees and expenses are incurred.
6. EXCESS PARACHUTE PAYMENTS.
(a) If any federal excise tax is imposed under Section
4999 of the Internal Revenue Code of 1986, as amended (an "EXCISE
TAX") on the Executive with respect to any payments or benefits
provided under Section 2, the Company hereby agrees, subject to the
exceptions and limitations set forth below, to pay the Executive such
additional amount (the "ADDITIONAL AMOUNT") as is necessary to cause
the Executive to realize the same net amount after the imposition of
all federal income tax, estate tax and Excise Tax imposed on payments
and benefits under Section 2 (and on such Additional Amount payable
under this Section 6) that he would have realized had such federal
income tax, estate tax, and Excise Tax not been imposed upon him with
respect to such payments and benefits under Section 2 and this Section
6; provided, however, that no such Additional Amount shall be due with
respect to
(i) any penalties, interest, or similar charges,
if any, assessed with respect to or arising out of any income
tax, estate tax, or Excise Tax due unless the Company delays
the payment contemplated herein to the Executive or
(ii) any income tax or estate tax which would be
owing by the Executive in the absence of the imposition of the
Excise Tax.
(b) The Company shall have the right to contest, but the
Executive shall have no duty to contest, the assessment of any such
taxes, but in any event, the Executive
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<PAGE> 9
agrees to cooperate in any contest the Company chooses to make
provided the Company shall pay the costs of any such contest.
7. ASSIGNMENT; SUCCESSORS IN INTEREST.
(a) General. Except with the prior written consent of
the Executive,
(i) no assignment by operation of law or
otherwise by the Company of any of its rights and obligations
under this Agreement may be made other than to an entity in
common control with or a successor to all or a substantial
portion of the business of the Company (but then only if such
entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this
Agreement);
(ii) no transfer by operation of law or otherwise
by the Company of all or a substantial part of its business or
assets shall be made unless the obligations and liabilities of
the Company under this Agreement are assumed in connection
with such transfer either by operation of law or by specific
assumption executed by the transferee and delivered to the
Executive; and
(iii) in any such event the Company shall remain
liable for the performance of all of its obligations under
this Agreement (which liability shall be a primary obligation
for full and prompt performance rather than a secondary
guarantee of collectibility of damages).
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to his heirs,
devisees, legatees or beneficiaries or except with the prior written
consent of the Company, no assignment or transfer by operation of law
or otherwise may be made by the Executive of any of his rights under
this Agreement.
(b) Binding Nature. This Agreement shall be binding upon
the parties to this Agreement and their respective legal
representatives, heirs, devisees, legatees, beneficiaries and
successors and assigns; shall inure to the benefit of the parties to
this Agreement and their respective permitted legal representatives,
heirs, devisees, legatees, beneficiaries and other permitted
successors and assigns (and to or for the benefit of no other person
or entity, whether an employee or otherwise, whatsoever); and any
reference to a party to this Agreement shall also be a reference to a
permitted successor or assign.
8. MISCELLANEOUS.
(a) This Agreement may not be varied, altered, or changed
except by instrument in writing executed by the parties hereto. The
failure of any party to this Agreement at any time or times to require
performance of any provision of this Agreement shall in no manner
affect the right to enforce the same. No waiver by any party to this
Agreement of any provision (or of a breach of any provision) of this
Agreement, whether
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<PAGE> 10
by conduct or otherwise, in any one or more instances shall be deemed
or construed either as a further or continuing waiver of any such
provision or breach or as a waiver of any other provision (or of a
breach of any other provision) of this Agreement.
(b) Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid but
if any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality or enforceability of any such provisions in every
other respect and of the remaining provisions of this Agreement shall
not be impaired.
(c) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Texas (without giving
effect to any choice of law provisions) and enforceable in a court of
competent jurisdiction in Travis County, Texas.
(d) This Agreement and any benefits accruing to Executive
hereunder shall be supplemental and additional to any and all benefits
accruing to Executive pursuant to the Employment Agreement and any and
all Stock Option or Stock Award Plans applicable to Executive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set his
hand as of the date and year first written above.
COMPANY
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
-------------------------------
Nick Cindrich, Chief Executive
Officer
EXECUTIVE
/s/ CRAIG L. SMITH
-----------------------------------
CRAIG L. SMITH
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<PAGE> 11
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this
18th day of March, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and CRAIG SMITH, an individual resident at 5904 Ivy
Hills Dr., Austin, Texas 78759 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance
Agreement dated September 19, 1995 (the "Agreement") which provided, inter
alia, for certain payments to be made in the event that certain events occurred
with respect to the Employee's employment relationship with the Company;
WHEREAS, the Employee and the Company desire that there be certain
changes made with respect to the Agreement as a result of the Company's pending
merger with Healthcare Acquisition, Inc., a Texas corporation ("Acquisition"),
a wholly owned subsidiary of Healthcare Acquisition Corp., a Delaware
corporation ("HCAC"); and
WHEREAS, the Company and the Employee want to memorialize in this
Amendment their agreements regarding such changes to the Agreement.
NOW THEREFORE, in consideration of the premises and other mutual
promises and covenants contained in this Amendment and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties, intending legally to be bound, agree as follows:
1. In the event that the Company completes its merger with
Acquisition (the "Merger") then, and only then, shall the following changes be
made in the Agreement, such changes to take effect on that date which is two
(2) years from the effective date of the Merger:
(a) the provisions of Section 2(b) (iii) shall be amended
so that the language "three hundred percent (300%)" shall read "one
hundred percent (100%)" in each place where such language appears in
that Section;
(b) the provisions of Section 2(b) (v) shall be amended
to provide that the insurance coverage to be provided to Employee,
Employee's spouse and to Employee's dependents (if covered prior to
the date of termination) under such provision shall be for coverage
from a period from the date of the termination until five (5) years
after the date of termination; and
(c) the provisions of Section 2(b) (vi) shall be amended
to provide that the liability insurance to be provided under such
provision shall be provided for the benefit of the Employee for a
period of five (5) years from the date of the termination of the
Employee's relationship with the Company.
<PAGE> 12
2. Except as specifically changed by the Amendment, all other
terms and provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set its
hand as of the date and year first written above.
ENCORE:
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
----------------------------
Nick Cindrich, CEO
EMPLOYEE:
/s/ CRAIG SMITH
----------------------------
CRAIG SMITH
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<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 17th day of August, 1995, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation (the "Company"), and JAMES P. ABRAHAM (the "Employee");
In consideration of the mutual promises contained herein, and of other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Employee agree as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment Term. The Company hereby employs the Employee for
a primary term commencing on the date set forth above and, subject to earlier
termination as provided in Section 1.5 hereof, ending five (5) years from such
date (the "Employment Term"). Employee agrees to accept such employment and to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
1.2 Duties. The Employee shall serve in the capacity as Vice
President of Sales of the Company, or in such other capacity as the Company may
in its sole discretion direct, and shall report to, and be subject to the
general direction and control of, the President of the Company. It is further
understood and agreed that any modification in or expansion of Employee's
duties hereunder shall not, unless specifically agreed in writing by Company,
result in any modification in, increase or decrease of Employee's compensation
referred to in Section 1.4 hereof.
1.3 Extent of Service. The Employee shall devote his full time,
attention, and energy to the business of the Company and, except as may be
specifically permitted by the Company and approved by either the President or
the Board of Directors of the Company, shall not be engaged in any other
business activity while in the employ of the Company.
1.4 Compensation
1.4.1 Salary. The Company shall pay to the Employee a base
salary at a rate of not less than One Hundred Thirty Thousand Dollars
($130,000) per year, or at such greater rate as the President of the Company
shall from time to time determine (the "Base Salary"). The Base Salary shall
be subject to review on no less than an annual basis, beginning September 1,
1998. Such salary is to be payable in installments in accordance with the
payroll policies of the Company in effect from time to time during the
Employment Term.
1.4.2 Other Benefits. The Employee shall be entitled to
such vacation days, sick days, insurance and other fringe benefit programs
(including pension, profit-sharing, and stock plans, if any) as are established
for all other employees of the Company, on the same basis as such other
employees are entitled thereto, it being understood that the establishment,
termination, or change of any such program shall be at the instance of the
Company, in exercise of its sole discretion, from time to time, and any such
termination or change in any such program shall not affect this Agreement.
<PAGE> 2
1.4.3 Stock Options. Employee shall be granted an option to
purchase one hundred twenty-five thousand (125,000) shares of common stock of
the Company at the price of One and 40/100 Dollars ($1.40) per share, subject
to such vesting and other requirements as are set forth in the 1992 Stock
Option Plan of the Company and as are established by the Board of Directors of
the Company and the Stock Option Committee of the Board of Directors of the
Company.
1.4.4 Incentive Compensation Program. For the period
beginning with the commencement of this Agreement and ending on December 31,
1998, Employee shall be eligible to receive, as incentive compensation, an
amount equal to one percent (1%) of the Company's net sales of Company products
from "new business". For purposes of this provision, "new business" shall mean
and refer to sales of Company products generated in the United States by
representatives or distributors of the Company's products who were not
representatives or distributors of the Company's products as of the date of
this Agreement. "Net sales" shall mean and refer to the total amounts invoiced
to, and collected from, customers from sales of Company products, excluding
shipping costs, taxes, excise fees, finance costs, late fees, insurance, any
documentation charges and any discounts given to, or charged to, a customer,
and net of all sales commissions and royalties paid on such sales. The
compensation payable under this provision shall be payable quarterly, in
arrears. In the event that the amount paid to Employee in any calendar year
under this provision is greater than what would be otherwise due Employee under
the Employee Bonus Plan applicable to all other employees of the Company for
the same calendar year, then Employee shall not be eligible for payment under
the Employee Bonus Plan. In the event that the amount paid to Employee in any
calendar year under this provision is less than what would be otherwise due
Employee under the Employee Bonus Plan applicable to all other employees of the
Company for such calendar year, then Employee shall be paid, at such time as
payments to all other employees are made under the Employee Bonus Plan, the
difference between the amount due under the Employee Bonus Plan and the amount
paid pursuant to this provision.
1.5 Termination.
1.5.1 Termination by Employee. At any time after one (1)
year from the commencement of the Employment Term, Employee may terminate this
Agreement on thirty (30) days' prior written notice.
1.5.2 Termination by Company. Prior to the end of the
Employment Term, the Company may upon ten (10) days' prior written notice
discharge the Employee with or without cause at its sole option without any
further liability hereunder to the Employee or his estate; provided, however,
in the event such termination was without cause, the Company shall be required
to pay the Employee, at the time of his discharge, for one (1) year's Base
Salary, in addition to any accrued, but unpaid Base Salary. The Employee will
have no further liability hereunder to the Company except pursuant to Article 2
and Section 3.2 hereof. For purposes of this Agreement, a "discharge for
cause" shall mean a discharge resulting from Employee having (i) committed any
act involving moral turpitude, dishonesty, or fraud that, in the good faith
opinion of Company, causes a material harm to Company, (ii) failed or refused
to follow legal and reasonable policies or directives established and
previously given to Employee in writing by
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<PAGE> 3
Company, (iii) willfully failed to attend to his duties after ten (10) days
prior written notice of failure to so act, (iv) committed acts amounting to
gross negligence or willful misconduct to the material detriment of Company, or
(v) otherwise materially breached any of the terms or provisions of this
Agreement after ten (10) days prior written notice of such material breach and
failure to cure such breach. Employee shall be deemed to have been discharged
for cause upon delivery to Employee of a "Notice of Termination" stating the
"Date of Termination" and specifying the particulars of the conduct justifying
discharge for cause.
ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that his services to
be rendered hereunder are of a special and unusual character which have a
unique value to Company, the loss of which cannot adequately be compensated by
damages in an action at law. In view of the unique value to Company of the
services of Employee for which Company has contracted hereunder, and because of
the confidential information to be obtained by or disclosed to Employee, and as
a material inducement to Company to enter into this Agreement, and to pay to
Employee the compensation referred to in Section 1.4 hereof, Employee covenants
and agrees that during Employee's employment hereunder and for a period of one
(1) year after he ceases to be employed by Company, Employee shall not (a)
directly or indirectly, solicit business from, divert business from, or attempt
to convert to other methods of using the same or similar products or services
as provided by Company, any client, account or location of Company with which
Employee has had any contact as a result of his employment by Company
hereunder; (b) engage in or carry on, directly or indirectly, either for
himself, as a member of a partnership, or as a stockholder (except as limited
partner or stockholder of less than one percent (1%) of the issued and
outstanding limited partnership interests or stock of a publicly held
partnership or corporation whose gross assets exceed $l,000,000), as an
investor, lender, guarantor, landlord, manager, officer, or director of any
person, partnership, corporation, or other entity (other than the Company or
its subsidiaries), or as an employee, agent, associate, broker, or consultant
of any person, partnership, corporation, or other entity (other than the
Company or its subsidiaries), any business (or segment of a business if such
business operates in more than one segment of the orthopedic industry) that
competes with any operations of the Company, as they exist at the time of
Employee's termination, within an one hundred (100)-mile radius of any
geographic area where Company is actually engaged in business, or maintains
sales or service representatives or employees; or (c) directly or indirectly,
solicit for employment or employ any employee of Company. In the event this
Agreement is terminated by the Company without cause, Employee may elect, by
providing written notice to the Company, to shorten the term of this
non-compete to six (6) months, provided, however, in that event, the Company's
obligation to pay severance pay to the Employee pursuant to Section 1.5.2 shall
be reduced to an amount equal to six (6) months base pay.
2.2 Disclosures of Information. The Employee acknowledges that in
the course of his employment by the Company, he will receive certain trade
secrets, programs, methods of operation, financial information, lists of
customers, and other confidential information and knowledge concerning the
businesses of the Company (hereinafter collectively referred to as
"Information") that the Company desires to protect. As a material inducement
to Company to enter into this Agreement, and to pay to Employee the
compensation referred to in Section 1.4
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hereof, Employee covenants and agrees that he shall not, at any time during or
following the term of his employment hereunder, directly or indirectly, divulge
or disclose, for any purpose whatsoever, any of such Information which has been
obtained by or disclosed to him as a result of his employment by Company. The
Employee further agrees that he will at no time use the Information in
competing with the Company. Upon termination of this Agreement, the Employee
shall surrender to the Company all lists, books, financial information,
records, literature, products, papers, documents, writings, and other property
produced by him or coming into his possession by or through his employment
relating to the Information, and the Employee agrees that all such materials
will at all times remain the property of the Company. In the event of a breach
or threatened breach by Employee of any of the provisions of this Article 2,
Company, in addition to and not in limitation of any other rights, remedies or
damages available to Company at law or in equity, shall be entitled to a
permanent injunction in order to prevent or to restrain any such breach by
Employee, or by Employee's partners, agents, representatives, servants,
employers, employees and/or any and all persons directly or indirectly acting
for or with him.
2.3 Accounting for Profits. Employee covenants and agrees that if
he shall violate any of his covenants or agreements under Article 2 hereof,
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remunerations or benefits which Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies to which
Company is or may be entitled at law or in equity or under this Agreement.
2.4 Reasonableness of Restrictions.
2.4.1 Employee has carefully read and considered the
provisions of Article 2 hereof and, having done so, agrees that the
restrictions set forth in such Article (including, but not limited to, the time
period of restriction and the geographical areas of restriction set forth in
Article 2 hereof) are fair and reasonable and are reasonably required for the
protection of the interest of Company, its officers, directors and other
employees.
2.4.2 In the event that, notwithstanding the foregoing, any
of the provisions of Article 2 hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event that any provision of Article 2 relating
to time period and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, said time period and/or areas of restriction
shall be deemed to become and thereafter be the maximum time period and/or
areas which such court deems reasonable and enforceable.
ARTICLE 3
EMPLOYEE INVENTIONS
3.1 Employee Inventions. Employee shall promptly disclose to the
Company or its designee any and all ideas, inventions, works of authorship
(including, but not limited to computer programs, software and documentation),
improvements, discoveries, developments, or innovations (hereinafter referred
to as "said inventions"), whether patentable or unpatentable,
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<PAGE> 5
copyrightable or uncopyrightable, made, developed, worked on, or conceived by
Employee, either solely or jointly with others, whether or not reduced to
drawings, written description, documentation, models, or other tangible form:
(a) during the Employment Term that relate to, or arise out of, any
developments, services, research, or products of, or pertain to the business
of, the Company and (b) for a period of six (6) months after termination of the
Employment Term, said inventions that relate to, or arise out of, any
developments, services, research, or products that Employee has been concerned
with during the term of his employment.
3.2 Assignment. Employee hereby assigns and agrees to assign to
the Company, its successors and assigns, Employee's entire right, title, and
interest in and to any of said inventions. All of said inventions shall
forthwith and without further consideration become and be the exclusive
property of the Company, it successors and assigns.
3.3 Cooperation. Employee shall, without further compensation, do
all lawful things, including, but not limited to, maintaining invention records
that shall be the property of the Company, rendering assistance, giving of
evidence and testimony, and executing necessary documents, as requested, to
enable the Company to file and obtain patents in the United States and foreign
countries on any of said inventions, as well as to protect the Company's
interest in any of said inventions.
ARTICLE 4
MISCELLANEOUS
4.1 Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be deemed to
have been delivered on the date personally delivered or on the date mailed,
postage prepaid, by certified mail, return receipt requested, or telegraphed or
telexed and confirmed if addressed to the respective parties as follows: (a) if
to the Employee to the address set forth below, and (b) if to the Company to
Encore Orthopedics, Inc., 8920 Business Park Drive, Suite 380, Austin, Texas
78759 ATTENTION: President. Either party hereto may designate a different
address by providing written notice of such new address to the other party
hereto.
4.2 Specific Performance. The Employee acknowledges that a remedy
at law for any breach or attempted breach of Section 1.3 and Article 2 of this
Agreement will be inadequate, and agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such injunctive or any other equitable relief. In the event the Company brings
legal action to enforce its rights hereunder, the Employee shall pay all of the
Company's court costs and legal fees and expenses arising out of such action if
the Company prevails in such action.
4.3 Severability. Whenever 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 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.
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4.4 Assignment. This Agreement may not be assigned by the
Employee. Neither the Employee nor his spouse shall have any right to commute,
encumber, or otherwise dispose of any right to receive payments hereunder, it
being the intention of the parties that such payments and the rights thereto
are nonassignable and nontransferable. This Agreement is only assignable by
the Company to a parent, subsidiary, successor or other affiliate of the
Company.
4.5 Binding Effect. Subject to the provisions of Section 4.4 of
this Agreement, this Agreement shall be binding upon and inure to the benefit
of the parties hereto, the Employee's heirs and personal representatives, and
the successors and assigns of the Company.
4.6 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
4.7 Entire Agreement; Amendment. This Agreement contains the
entire understanding between the parties, and there are no agreements or
understandings among the parties except as set forth herein. The Employee
represents and warrants to the Company that at the time of execution of this
Agreement he is not a party to any other employment agreement. Employee
further represents and warrants that he neither has any proprietary information
of any other business nor is he providing any other business' proprietary
information to the Company. No alteration or modification of this Agreement
shall be valid except by subsequent written instrument executed by the parties
hereto. No waiver by either party of any breach by the other party of any
provision or condition of this Agreement in one circumstance shall be deemed a
waiver of such provision or condition in any other circumstances or be deemed a
waiver of any other provision or condition. The section and paragraph headings
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
COMPANY:
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG L. SMITH
----------------------------
Craig L. Smith, President
EMPLOYEE:
/s/ JAMES P. ABRAHAM
---------------------------------
JAMES P. ABRAHAM
14819 Calaveras
Austin, Texas 78717
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<PAGE> 1
EXHIBIT 10.10
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 19th day of
September, 1995, by and between ENCOR(R) ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 8920 Business Park Drive,
Suite 380, Austin, Texas 78759, (the "COMPANY"), and JAMES P. ABRAHAM, an
individual resident at 14819 Calaveras, Austin, Texas 78717 (the "EMPLOYEE" or
the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Vice President
- - Sales pursuant to an employment agreement dated August 17, 1995 (such
employment agreement as it may be amended or supplemented from time to time and
any successor agreement being referred to as the "EMPLOYMENT AGREEMENT"); and
WHEREAS, the Board of Directors of the Company (the "BOARD") has
approved the Chief Executive Officer of the Company entering into severance
agreements with key executives of the Company; and
WHEREAS, the Employee is a key executive of the Company and has been
selected by the Chief Executive Officer of the Company to be offered a
severance agreement; and
WHEREAS, the Board believes that if the Company should receive or
learn of any proposal from a third person concerning a possible business
combination with the Company, or an acquisition of equity securities or a
substantial portion of the assets of the Company, it is important that the
Company should be able to rely upon the Executive to continue in his position
and that the Board and the Chief Executive Officer should be able to receive
and rely upon his advice as to the best interests of the Company and its
shareholders, without concern that the Executive might be distracted by any
personal uncertainties and risks created by such a proposal; and
WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposal, to advise management and the Board whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board may determine to be appropriate;
and
WHEREAS, the Company wishes to be assured that it will have the
continued dedication of the Executive and the availability of his advice and
counsel despite the possibility, threat or occurrence of a bid to take over
control of the Company; and
WHEREAS, the Company wishes to induce the Executive to remain in the
employment of the Company under such circumstances; and
<PAGE> 2
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall have the same meaning as "discharge for
cause" as defined in Section 1.5.2 of the Employment Agreement as well
as include the repeated violation by the Executive of his obligations
under this Agreement which are demonstrably willful and deliberate on
the part of the Executive and which are not redeemed in a reasonable
period of time after receipt of written notice from the Company.
(b) "CHANGE IN CONTROL" means any of the following
events:
(i) the acquisition by any person, including a
"group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership of shares of
capital stock or other voting securities of the Company that
have thirty-three and one third percent (33 1/3%) or more of
either (A) the then outstanding shares of the Company's common
stock or (B) the combined voting power of the Company's then
outstanding voting securities that are entitled to vote
generally for the election of the Board;
(ii) the sale or other disposition by the Company
to an unrelated third party of all or substantially all of the
Company's assets;
(iii) the consummation of a reorganization, merger,
or consolidation involving the Company if as a result of such
transaction persons who were shareholders of the Company
immediately before the reorganization, merger or consolidation
do not immediately thereafter own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the reorganized,
merged or consolidated Company that are entitled to vote
generally for the election of the board of such entity; or
(iv) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board.
(c) "DISABILITY" means the total and permanent inability
of the Executive due to illness, accident or other physical or mental
incapacity to perform the usual duties of his employment under the
Employment Agreement for a substantially continuous period of one
hundred eighty (180) days, as determined by a physician selected by
the Company and
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<PAGE> 3
acceptable to the Executive or the Executive's legal representative
(which agreement as to acceptability will not be unreasonably
withheld).
(d) "GOOD REASON" means any of the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities
contemplated by the Employment Agreement, or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action that
is not taken in bad faith and that is remedied by the Company
promptly after receipt of notice thereof from the Executive;
(ii) the reduction in the overall level of the
Executive's compensation or benefits;
(iii) the Company's requiring the Executive to be
based at any office or location other than the Company's
executive offices in the Austin, Texas SMSA, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any significant increase in the travel
requirements of the Executive's position; for the purposes of
this clause (iv) a "significant" increase would include any
circumstances under which the Executive is or will be
required, during any six-month period, to spend more than
twice the number of nights away from home as were necessary
during the previous six-month period; or
(v) an inability on the part of the Executive to
carry out the duties of his position in good faith as a result
of a major disagreement between the Executive and other
executives of the Company who have been appointed after a
Change of Control concerning strategic or policy issues
affecting the Company or its business as a whole.
(e) "INCUMBENT BOARD" means those individuals who are
members of the Board on the date of this Agreement and any person who
subsequently becomes a member of the Board and whose election, or
whose nomination for election by the Company shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board.
2. TERMINATION PAYMENTS.
(a) Termination of employment. If any Change of Control
of the Company occurs after the date of this Agreement and
subsequently, on or before the third
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<PAGE> 4
anniversary of such Change of Control, the Executive's employment by
the Company or its successor in interest is terminated
(i) by the Company or its successor in interest
for any reason other than (A) for Cause, or (B) because of the
Executive's death or Disability, or
(ii) by the Executive for Good Reason,
(a "TERMINATION EVENT") then the Executive will be entitled to
receive, and the Company will pay or provide, the benefits set forth
in subsection (b) below.
(b) Severance benefits. Upon the occurrence of a
Termination Event described in subsection (a) above then, in addition
to the performance of its obligations under the Employment Agreement
but in the case of amounts payable under clauses (i) and (ii) without
duplication of any similar payments then due and payable under the
Employment Agreement:
(i) The Company will pay to the Executive within
thirty (30) days after the Termination Event an amount equal
to the sum of:
(A) his highest full base annual salary
in effect within one (1) year of the
Termination Event, plus
(B) the amount of any bonus, payable in
cash only notwithstanding the terms
of any bonus plan, with respect to
any year that has then ended which
was or would have accrued to the
Executive under any bonus plan then
in effect but which has not yet been
paid to him, plus
(C) an amount, payable in cash only
notwithstanding the terms of any
bonus plan, equal to the product of
(aa) the average of the bonus paid
or payable to the Executive for the
two preceding years (whether same
was paid in cash or its equivalent
value) multiplied by (bb) a fraction
of which the numerator is the number
of weeks that have elapsed in the
then current year through the date
of termination and the denominator
is 52, plus
(D) an amount equal to the product of
(aa) the number of unused vacation
days accrued by the Executive
through the date of termination
multiplied by (bb) a fraction the
numerator of which is the
Executive's highest base salary in
effect within one (1) year of the
Termination Event and the
denominator of which is 250;
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<PAGE> 5
(ii) The Company will contribute in cash to any
retirement or saving plan in which the Executive is
participating, within thirty (30) days after the date of
termination, the maximum amount which the Company is permitted
to contribute based on the payments made pursuant to paragraph
(i) above and, at the Executive's election, will buy back the
stock held by the Executive in any such plan at its then fair
market value, depositing said value in cash into said plan;
(iii) The Company will pay in cash to the Executive
within thirty (30) days after the date of termination a
severance payment in an amount equal to the sum of
(A) three hundred percent (300%) of his
full base annual salary at the
highest rate in effect within one
(1) year of the Termination Event,
plus
(B) three hundred percent (300%) of the
average bonus paid or payable to him
for the two (2) preceding years
(whether same was paid in cash or
its equivalent value);
provided that if the amount payable by the Company to the
Executive under this clause (iii), without regard to any other
payments or benefits payable to the Executive under this
Agreement or the Employment Agreement, would constitute an
"excess parachute payment" for the purposes of Sections 280G
and 4999 of the Internal Revenue Code then the amount payable
by the Company under this Section 2b as a severance benefit
will be "grossed up" by the amount necessary in order to
reimburse Executive for any taxes due as a result of such an
"excess parachute payment" as per section 6 hereof.
(iv) The Company will amend or revise all stock
option plans and restricted stock awards to which the
Executive is a party, or grant appropriate waivers of any
restrictions contained in such plans and awards, so as to
remove all restrictions upon the exercise by the Executive of
such options or upon the ability of the Executive to sell any
shares of stock that are subject to any such options or
awards. As part of such amendments or revisions, the Company
will accelerate the vesting period for Executive to an
immediate one hundred (100%) and shall allow the Executive the
option to exercise his options or stock awards either within
ninety (90) days of his effective termination date and such
option remain as an incentive stock option or before the
termination of the original option or stock award period and
have such options be converted automatically into
non-qualified stock options for purposes of the Internal
Revenue Code.
(v) The Company will prepay in full if at all
possible, and if not possible, ensure to the satisfaction of
Executive maintenance in full force and effect for the benefit
of the Executive and his spouse and dependents (if covered
prior to the date of termination) in each case for a period
from the date of termination until
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<PAGE> 6
the later of the death of the Executive or his spouse, during
their period of their eligibility, all employee life, health,
accident, disability, medical and other employee welfare
benefits plans provided by the Company in which the Executive
or his spouse or his dependents are participating at the time
of the Executive's termination under the same terms and
conditions as then in effect; provided, that if the
Executive's or his spouse's or his dependents continued
participation is not permitted under the general terms of such
plans, the Company shall arrange to provide substantially
similar benefits;
(vi) The Company will maintain for the benefit of
the Executive such policy of liability insurance, providing
protection to him as an officer, director, agent or employee
of the Company or its subsidiaries, as may from time to time
be purchased by the Company for officers and directors
generally as authorized by or in furtherance of the
indemnification provisions contained in the Company's bylaws.
Neither the insurance nor the Executive's right to
indemnification thereunder may be canceled by the Company
without his permission for a period of five years following
the date of termination under this Agreement; provided,
however, that the Company may obtain a substitute insurance
policy as long as the rights of indemnity to the Executive are
at least equivalent to the most favorable rights provided
under the policy in effect immediately prior to the date of
termination.
(b) The Executive shall have no duty to mitigate, whether
by seeking other employment or otherwise, any loss or damage suffered
by him as a result of any failure by the Company to make any payment,
or provide any benefit, to him under this Section 2.
3. AGREEMENTS OF EXECUTIVE.
The Executive covenants and agrees as follows:
(a) Provision of services when Change of Control is
threatened. If any person begins a tender or exchange offer for
voting securities of the Company, or circulates a proxy to
shareholders of the Company or takes any other action for the purposes
of effecting a Change of Control of the Company, then notwithstanding
the terms of the Employment Agreement or any other agreement between
the Executive and the Company the Executive will not voluntarily leave
the employment of the Company and will render the services
contemplated in the recitals to this Agreement until either (i) such
person has abandoned or terminated his efforts to effect a Change of
Control or (ii) three months have elapsed since the date on which a
Change of Control has occurred.
(b) Noncompetition. Without limiting the terms of any
similar provision in the Employment Agreement or any other agreement
between the Executive and the Company, if the Executive's employment
with the Company is terminated under any circumstances that entitle
the Executive to receive the payments and other benefits provided in
Section 2, then for a period of one year (or six (6) months should
Executive make the election in the
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<PAGE> 7
last sentence of Section 2.1 of the Employment Agreement) from the
Termination Event the Executive will not:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
(ii) act as an agent, broker or distributor for,
or as an adviser or consultant to,
(iii) be employed in any senior managerial or
executive position by any corporation, partnership, limited
liability company or other business organization in which he
has responsibility for,
any business (regardless of the form in which such business is
conducted) which is engaged, or which he reasonably expects to become
engaged, in the business of designing, manufacturing, distributing or
selling artificial joints and limbs and other orthopedic implant
devices in the United States; provided that the ownership by the
Executive of not more than two percent (2%) of the shares of any
publicly traded corporation or twenty percent (20%) of a privately
held company shall not constitute a violation of this subsection (b).
(c) Publications by Executive. Without limiting the
terms of any similar provision in the Employment Agreement or any
other agreement between the Executive and the Company, if the
Executive's employment with the Company is terminated under any
circumstances that entitle the Executive to receive the payments and
other benefits provided in Section 2, then
(i) the Executive will refrain from making any
disparaging comments about the Company or any of its
affiliates, and
(ii) for a period of one (1) year from the
Termination Event the Executive will not without the prior
written permission of the Company write or publish, or assist
in the writing or publication of, any books, articles or other
materials that would adversely affect the interests of the
Company or its affiliates.
(d) Remedies. The Executive acknowledges that any
violation of this Section may cause irreparable harm to the Company,
and that damages are not an adequate remedy, and the Executive
therefore agrees that the Company shall be entitled to an injunction
by any appropriate court in the appropriate jurisdiction, enjoining,
prohibiting and restraining the Executive from the continuance of any
such violation, in addition to any monetary damages which might occur
by reason of the violation of this Agreement.
(e) Independent. The covenants set forth in the
foregoing subsections (a), (b), (c), and (d) shall be deemed and shall
be construed as separate and independent covenants, and should any
part or provision of such covenants be held invalid, void or
unenforceable
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<PAGE> 8
by any court of competent jurisdiction, such invalidity, voidness, or
unenforceability shall in no way render invalid, void, or
unenforceable any other part or provision thereof or any separate
covenant not declared invalid, void, or unenforceable. This Agreement
shall in that case be construed as if the void, invalid or
unenforceable provisions were omitted.
4. NOTICE OF TERMINATION.
Any termination of the Executive's employment by the Company or its
successor in interest or by the Executive shall be communicated by a written
notice of termination to the other party, and shall specify the provision of
this Agreement relied upon and shall set forth in reasonable detail the
circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered
if by the Executive or thirty (30) days after the date of the notice of
termination if given by the Company. All applicable benefits to Executive
hereunder shall be triggered if said notice of termination is given within the
three (3)-year period specified in Section 2(a) hereof.
5. LITIGATION EXPENSES.
The Company shall pay reasonable legal fees and expenses incurred by
the Executive as a result of his seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at his
request as such fees and expenses are incurred.
6. EXCESS PARACHUTE PAYMENTS.
(a) If any federal excise tax is imposed under Section
4999 of the Internal Revenue Code of 1986, as amended (an "EXCISE
TAX") on the Executive with respect to any payments or benefits
provided under Section 2, the Company hereby agrees, subject to the
exceptions and limitations set forth below, to pay the Executive such
additional amount (the "ADDITIONAL AMOUNT") as is necessary to cause
the Executive to realize the same net amount after the imposition of
all federal income tax, estate tax and Excise Tax imposed on payments
and benefits under Section 2 (and on such Additional Amount payable
under this Section 6) that he would have realized had such federal
income tax, estate tax, and Excise Tax not been imposed upon him with
respect to such payments and benefits under Section 2 and this Section
6; provided, however, that no such Additional Amount shall be due with
respect to
(i) any penalties, interest, or similar charges,
if any, assessed with respect to or arising out of any income
tax, estate tax, or Excise Tax due unless the Company delays
the payment contemplated herein to the Executive or
(ii) any income tax or estate tax which would be
owing by the Executive in the absence of the imposition of the
Excise Tax.
(b) The Company shall have the right to contest, but the
Executive shall have no duty to contest, the assessment of any such
taxes, but in any event, the Executive
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<PAGE> 9
agrees to cooperate in any contest the Company chooses to make
provided the Company shall pay the costs of any such contest.
7. ASSIGNMENT; SUCCESSORS IN INTEREST.
(a) General. Except with the prior written consent of
the Executive,
(i) no assignment by operation of law or
otherwise by the Company of any of its rights and obligations
under this Agreement may be made other than to an entity in
common control with or a successor to all or a substantial
portion of the business of the Company (but then only if such
entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this
Agreement);
(ii) no transfer by operation of law or otherwise
by the Company of all or a substantial part of its business or
assets shall be made unless the obligations and liabilities of
the Company under this Agreement are assumed in connection
with such transfer either by operation of law or by specific
assumption executed by the transferee and delivered to the
Executive; and
(iii) in any such event the Company shall remain
liable for the performance of all of its obligations under
this Agreement (which liability shall be a primary obligation
for full and prompt performance rather than a secondary
guarantee of collectibility of damages).
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to his heirs,
devisees, legatees or beneficiaries or except with the prior written
consent of the Company, no assignment or transfer by operation of law
or otherwise may be made by the Executive of any of his rights under
this Agreement.
(b) Binding Nature. This Agreement shall be binding upon
the parties to this Agreement and their respective legal
representatives, heirs, devisees, legatees, beneficiaries and
successors and assigns; shall inure to the benefit of the parties to
this Agreement and their respective permitted legal representatives,
heirs, devisees, legatees, beneficiaries and other permitted
successors and assigns (and to or for the benefit of no other person
or entity, whether an employee or otherwise, whatsoever); and any
reference to a party to this Agreement shall also be a reference to a
permitted successor or assign.
8. MISCELLANEOUS.
(a) This Agreement may not be varied, altered, or changed
except by instrument in writing executed by the parties hereto. The
failure of any party to this Agreement at any time or times to require
performance of any provision of this Agreement shall in no manner
affect the right to enforce the same. No waiver by any party to this
Agreement of any provision (or of a breach of any provision) of this
Agreement, whether
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by conduct or otherwise, in any one or more instances shall be deemed
or construed either as a further or continuing waiver of any such
provision or breach or as a waiver of any other provision (or of a
breach of any other provision) of this Agreement.
(b) Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid but
if any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality or enforceability of any such provisions in every
other respect and of the remaining provisions of this Agreement shall
not be impaired.
(c) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Texas (without giving
effect to any choice of law provisions) and enforceable in a court of
competent jurisdiction in Travis County, Texas.
(d) This Agreement and any benefits accruing to Executive
hereunder shall be supplemental and additional to any and all benefits
accruing to Executive pursuant to the Employment Agreement and any and
all Stock Option or Stock Award Plans applicable to Executive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set his
hand as of the date and year first written above.
COMPANY
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
--------------------------------
Nick Cindrich, Chief Executive
Officer
EXECUTIVE
/s/ JAMES ABRAHAM
------------------------------------
JAMES ABRAHAM
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<PAGE> 11
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this
18th day of March, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and JAMES ABRAHAM, an individual resident at 14819
Calaveras Dr., Austin, Texas 78717 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance
Agreement dated September 19, 1995 (the "Agreement") which provided, inter
alia, for certain payments to be made in the event that certain events occurred
with respect to the Employee's employment relationship with the Company;
WHEREAS, the Employee and the Company desire that there be certain
changes made with respect to the Agreement as a result of the Company's pending
merger with Healthcare Acquisition, Inc., a Texas corporation ("Acquisition"),
a wholly owned subsidiary of Healthcare Acquisition Corp., a Delaware
corporation ("HCAC"); and
WHEREAS, the Company and the Employee want to memorialize in this
Amendment their agreements regarding such changes to the Agreement.
NOW THEREFORE, in consideration of the premises and other mutual
promises and covenants contained in this Amendment and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties, intending legally to be bound, agree as follows:
1. In the event that the Company completes its merger with
Acquisition (the "Merger") then, and only then, shall the following changes be
made in the Agreement, such changes to take effect on that date which is two
(2) years from the effective date of the Merger:
(a) the provisions of Section 2(b) (iii) shall be amended
so that the language "three hundred percent (300%)" shall read "one
hundred percent (100%)" in each place where such language appears in
that Section;
(b) the provisions of Section 2(b) (v) shall be amended
to provide that the insurance coverage to be provided to Employee,
Employee's spouse and to Employee's dependents (if covered prior to
the date of termination) under such provision shall be for coverage
from a period from the date of the termination until five (5) years
after the date of termination; and
(c) the provisions of Section 2(b) (vi) shall be amended
to provide that the liability insurance to be provided under such
provision shall be provided for the benefit of the Employee for a
period of five (5) years from the date of the termination of the
Employee's relationship with the Company.
<PAGE> 12
2. Except as specifically changed by the Amendment, all other
terms and provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set its
hand as of the date and year first written above.
ENCORE:
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
------------------------------
Nick Cindrich, CEO
EMPLOYEE:
/s/ JAMES ABRAHAM
-----------------------------------
JAMES ABRAHAM
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 26th day of August, 1994, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation (the "Company"), and KENNETH W. LUDWIG, JR. (the "Employee");
Whereas, Employee has heretofore entered into an Employment Agreement
with the Company and both the Company and the Employee desire to amend and
restate in its entirety such Employment Agreement.
Now, therefore, in consideration of the mutual promises contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Employee agree
as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment Term. The Company hereby employs the Employee for a
primary term commencing on the date set forth above and, subject to earlier
termination as provided in Section 1.5 hereof, ending five (5) years from such
date (the "Employment Term"). Employee agrees to accept such employment and to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
1.2 Duties. The Employee shall serve in the capacity as Vice President
- - Sales and Marketing of the Company, or in such other capacity as the Company
may in its sole discretion direct, and shall report to, and be subject to the
general direction and control of, the officers and directors of the Company. It
is further understood and agreed that any modification in or expansion of
Employee's duties hereunder shall not, unless specifically agreed in writing by
Company, result in any modification in, increase or decrease of Employee's
compensation referred to in Section 1.4 hereof.
1.3 Extent of Service. The Employee shall devote his full time,
attention, and energy to the business of the Company and, except as may be
specifically permitted by the Company and approved by either the Chief Executive
Officer or the Board of Directors of the Company, shall not be engaged in any
other business activity while in the employ of the Company.
1.4 Compensation
1.4.1 Salary. The Company shall pay to the Employee a base
salary at a rate of not less than One Hundred Five Thousand Dollars ($105,000)
per year, or at such greater rate as the Chief Executive Officer of the Company
shall from time to time determine (the "Base Salary"). The Base Salary shall be
subject to review on no less than an annual basis, beginning January 1, 1995
or, at the Company's discretion, such earlier date as the Company may
designate. Such salary is to be payable in installments in accordance with the
payroll policies of the Company in effect from time to time during the
Employment Term.
<PAGE> 2
1.4.2 Other Benefits. The Employee shall be entitled to such
vacation days, sick days, insurance and other fringe benefit programs (including
pension, profit-sharing, and stock plans, if any) as are established for other
executive employees of the Company, on the same basis as such other executive
employees are entitled thereto, it being understood that the establishment,
termination, or change of any such program shall be at the instance of the
Company, in exercise of its sole discretion, from time to time, and any such
termination or change in any such program shall not affect this Agreement.
1.5 Termination.
1.5.1 Termination by Employee. At any time after one (1) year
from the commencement of the Employment Term, Employee may terminate this
Agreement on thirty (30) days' prior written notice.
1.5.2 Termination by Company. Prior to the end of the
Employment Term, the Company may upon ten (10) days' prior written notice
discharge the Employee with or without cause at its sole option without any
further liability hereunder to the Employee or his estate. Provided, however, in
the event such termination was without cause, the Company shall be required to
pay the Employee, at the time of his discharge, for one (1) year's Base Salary,
in addition to any accrued, but unpaid Base Salary . The Employee will have no
further liability hereunder to the Company except pursuant to Article II and
Section 3.2 hereof. For purposes of this Agreement, a "discharge for cause"
shall mean a discharge resulting from Employee having (i) committed any act
involving moral turpitude, dishonesty, or fraud that, in the good faith opinion
of Company, causes a material harm to Company, (ii) failed or refused to follow
legal and reasonable policies or directives established and previously given to
Employee in writing by Company, (iii) willfully failed to attend to his duties
after ten (10) days prior written notice of failure to so act, (iv) committed
acts amounting to gross negligence or willful misconduct to the material
detriment of Company, or (v) otherwise materially breached any of the terms or
provisions of this Agreement after ten (10) days prior written notice of such
material breach and failure to cure such breach. Employee shall be deemed to
have been discharged for cause upon delivery to Employee of a "Notice of
Termination" stating the "Date of Termination" and specifying the particulars of
the conduct justifying discharge for cause. Furthermore, if the Employee is
terminated without cause, then the Company agrees, if requested by Employee for
the sole purpose of exercising any vested options that Employee has the right to
exercise, to loan to the Employee an amount equal to (i) the full exercise price
of all vested options that the Employee has the right to exercise less (ii) the
par value of such shares as are to be exercised. The terms of the loan shall be
that it shall be (a) secured by the stock to be purchased, (b) be otherwise
non-recourse to the Employee, (c) bear interest at the prime rate of interest as
published from time to time in The Wall Street Journal, and (d) be fully due and
payable, principal and interest, two (2) years from the date of termination.
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<PAGE> 3
ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that his services to be
rendered hereunder are of a special and unusual character which have a unique
value to Company, the loss of which cannot adequately be compensated by damages
in an action at law. In view of the unique value to Company of the services of
Employee for which Company has contracted hereunder, and because of the
confidential information to be obtained by or disclosed to Employee, and as a
material inducement to Company to enter into this Agreement, and to pay to
Employee the compensation referred to in Section 1.4 hereof, Employee covenants
and agrees that during Employee's employment hereunder and for a period of one
(1) year after he ceases to be employed by Company, Employee shall not (a)
directly or indirectly, solicit business from, divert business from, or attempt
to convert to other methods of using the same or similar products or services as
provided by Company, any client, account or location of Company with which
Employee has had any contact as a result of his employment by Company hereunder;
(b) engage in or carry on, directly or indirectly, either for himself, as a
member of a partnership, or as a stockholder (except as limited partner or
stockholder of less than one percent (1%) of the issued and outstanding limited
partnership interests or stock of a publicly held partnership or corporation
whose gross assets exceed $l,000,000), as an investor, lender, guarantor,
landlord, manager, officer, or director of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), or as an employee,
agent, associate, broker, or consultant of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), any business that
competes with any operations of the Company within an one hundred (100)-mile
radius of any geographic area where Company is actually engaged in business, or
maintains sales or service representatives or employees; or (c) directly or
indirectly, solicit for employment or employ any employee of Company. Employee
may elect, by providing written notice to the Company, to shorten the term of
this non-compete to six (6) months, provided, however, in that event, the
Company's obligation to pay severance pay to the Employee pursuant to Section
1.5.2 shall be reduced to an amount equal to six (6) months base pay.
2.2 Disclosures of Information. The Employee acknowledges that in the
course of his employment by the Company, he will receive certain trade secrets,
programs, methods of operation, financial information, lists of customers, and
other confidential information and knowledge concerning the businesses of the
Company (hereinafter collectively referred to as "Information") that the Company
desires to protect. As a material inducement to Company to enter into this
Agreement, and to pay to Employee the compensation referred to in Section 1.4
hereof, Employee covenants and agrees that he shall not, at any time during or
following the term of his employment hereunder, directly or indirectly, divulge
or disclose, for any purpose whatsoever, any of such Information which has been
obtained by or disclosed to him as a result of his employment by Company. The
Employee further agrees that he will at no time use the Information in competing
with the Company. Upon termination of this Agreement, the Employee shall
surrender to the Company all lists, books, financial information, records,
literature, products, papers, documents, writings, and other property produced
by him or coming into his possession by or through his employment relating to
the Information, and the Employee agrees that all such materials will at all
times remain the property of the Company. In the event of a breach or
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<PAGE> 4
threatened breach by Employee of any of the provisions of this Article II,
Company, in addition to and not in limitation of any other rights, remedies or
damages available to Company at law or in equity, shall be entitled to a
permanent injunction in order to prevent or to restrain any such breach by
Employee, or by Employee's partners, agents, representatives, servants,
employers, employees and/or any and all persons directly or indirectly acting
for or with him.
2.3 Accounting for Profits. Employee covenants and agrees that if he
shall violate any of his covenants or agreements under Article II hereof,
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remunerations or benefits which Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies to which
Company is or may be entitled at law or in equity or under this Agreement.
2.4 Reasonableness of Restrictions.
2.4.1 Employee has carefully read and considered the
provisions of Article II hereof and, having done so, agrees that the
restrictions set forth in such Article (including, but not limited to, the time
period of restriction and the geographical areas of restriction set forth in
Article II hereof) are fair and reasonable and are reasonably required for the
protection of the interest of Company, its officers, directors and other
employees.
2.4.2 In the event that, notwithstanding the foregoing, any of
the provisions of Article II hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event that any provision of Article II relating to
time period and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, said time period and/or areas of restriction
shall be deemed to become and thereafter be the maximum time period and/or areas
which such court deems reasonable and enforceable.
ARTICLE 3
EMPLOYEE INVENTIONS
3.1 Employee Inventions. Employee shall promptly disclose to the
Company or its designee any and all ideas, inventions, works of authorship
(including, but not limited to computer programs, software and documentation),
improvements, discoveries, developments, or innovations (hereinafter referred to
as "said inventions"), whether patentable or unpatentable, copyrightable or
uncopyrightable, made, developed, worked on, or conceived by Employee, either
solely or jointly with others, whether or not reduced to drawings, written
description, documentation, models, or other tangible form: (a) during the
Employment Term that relate to, or arise out of, any developments, services,
research, or products of, or pertain to the business of, the Company and (b) for
a period of six (6) months after termination of the Employment Term, said
inventions that relate to, or arise out of, any developments, services,
research, or products that Employee has been concerned with during the term of
his employment.
-4-
<PAGE> 5
3.2 Assignment. Employee hereby assigns and agrees to assign to the
Company, its successors and assigns, Employee's entire right, title, and
interest in and to any of said inventions. All of said inventions shall
forthwith and without further consideration become and be the exclusive property
of the Company, it successors and assigns.
3.3 Cooperation. Employee shall, without further compensation, do all
lawful things, including, but not limited to, maintaining invention records that
shall be the property of the Company, rendering assistance, giving of evidence
and testimony, and executing necessary documents, as requested, to enable the
Company to file and obtain patents in the United States and foreign countries on
any of said inventions, as well as to protect the Company's interest in any of
said inventions.
ARTICLE 4
MISCELLANEOUS
4.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date mailed, postage
prepaid, by certified mail, return receipt requested, or telegraphed or telexed
and confirmed if addressed to the respective parties as follows: (a) if to the
Employee to the address set forth below, and (b) if to the Company to Encore
Orthopedics, Inc., 8920 Business Park Drive, Suite 380, Austin, Texas 78759
ATTENTION: President. Either party hereto may designate a different address by
providing written notice of such new address to the other party hereto.
4.2 Specific Performance. The Employee acknowledges that a remedy at
law for any breach or attempted breach of Section 1.3 and Article II of this
Agreement will be inadequate, and agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or any other equitable relief. In the event the Company brings legal
action to enforce its rights hereunder, the Employee shall pay all of the
Company's court costs and legal fees and expenses arising out of such action if
the Company prevails in such action.
4.3 Severability. Whenever 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 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.
4.4 Assignment. This Agreement may not be assigned by the Employee.
Neither the Employee nor his spouse shall have any right to commute, encumber,
or otherwise dispose of any right to receive payments hereunder, it being the
intention of the parties that such payments and the rights thereto are
nonassignable and nontransferable. This Agreement is only assignable by the
Company to a parent, subsidiary, successor or other affiliate of the Company.
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<PAGE> 6
4.5 Binding Effect. Subject to the provisions of Section 4.4 of this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, the Employee's heirs and personal representatives, and the
successors and assigns of the Company.
4.6 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
4.7 Entire Agreement; Amendment. This Agreement contains the entire
understanding between the parties, and there are no agreements or understandings
among the parties except as set forth herein. The Employee represents and
warrants to the Company that at the time of execution of this Agreement he is
not a party to any other employment agreement. Employee further represents and
warrants that he neither has any proprietary information of any other business
nor is he providing any other business' proprietary information to the Company.
No alteration or modification of this Agreement shall be valid except by
subsequent written instrument executed by the parties hereto. No waiver by
either party of any breach by the other party of any provision or condition of
this Agreement in one circumstance shall be deemed a waiver of such provision or
condition in any other circumstances or be deemed a waiver of any other
provision or condition. The section and paragraph headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
COMPANY:
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG L. SMITH
--------------------------------
Craig L. Smith, President
EMPLOYEE:
/s/ KENNETH W. LUDWIG, JR.
------------------------------------
KENNETH W. LUDWIG, JR.
-6-
<PAGE> 1
EXHIBIT 10.12
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 19th day of
September, 1995, by and between ENCORE(R) ORTHOPEDICS INC., a Texas
corporation, with its principal office located at 8920 Business Park Drive,
Suite 380, Austin, Texas 78759, (the "COMPANY"), and KENNETH LUDWIG, an
individual resident at P.O. Box 141638, Austin, Texas 78714 (the "EMPLOYEE" or
the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Vice President
- - Marketing pursuant to an employment agreement dated August 26, 1994 (such
employment agreement as it may be amended or supplemented from time to time and
any successor agreement being referred to as the "EMPLOYMENT AGREEMENT"); and
WHEREAS, the Board of Directors of the Company (the "BOARD") has
approved the Chief Executive Officer of the Company entering into severance
agreements with key executives of the Company; and
WHEREAS, the Employee is a key executive of the Company and has been
selected by the Chief Executive Officer of the Company to be offered a
severance agreement; and
WHEREAS, the Board believes that if the Company should receive or
learn of any proposal from a third person concerning a possible business
combination with the Company, or an acquisition of equity securities or a
substantial portion of the assets of the Company, it is important that the
Company should be able to rely upon the Executive to continue in his position
and that the Board and the Chief Executive Officer should be able to receive
and rely upon his advice as to the best interests of the Company and its
shareholders, without concern that the Executive might be distracted by any
personal uncertainties and risks created by such a proposal; and
WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposal, to advise management and the Board whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board may determine to be appropriate;
and
WHEREAS, the Company wishes to be assured that it will have the
continued dedication of the Executive and the availability of his advice and
counsel despite the possibility, threat or occurrence of a bid to take over
control of the Company; and
WHEREAS, the Company wishes to induce the Executive to remain in the
employment of the Company under such circumstances; and
<PAGE> 2
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall have the same meaning as "discharge for
cause" as defined in Section 1.5.2 of the Employment Agreement as well
as include the repeated violation by the Executive of his obligations
under this Agreement which are demonstrably willful and deliberate on
the part of the Executive and which are not redeemed in a reasonable
period of time after receipt of written notice from the Company.
(b) "CHANGE IN CONTROL" means any of the following
events:
(i) the acquisition by any person, including a
"group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership of shares of
capital stock or other voting securities of the Company that
have thirty-three and one third percent (33 1/3%) or more of
either (A) the then outstanding shares of the Company's common
stock or (B) the combined voting power of the Company's then
outstanding voting securities that are entitled to vote
generally for the election of the Board;
(ii) the sale or other disposition by the Company
to an unrelated third party of all or substantially all of the
Company's assets;
(iii) the consummation of a reorganization, merger,
or consolidation involving the Company if as a result of such
transaction persons who were shareholders of the Company
immediately before the reorganization, merger or consolidation
do not immediately thereafter own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the reorganized,
merged or consolidated Company that are entitled to vote
generally for the election of the board of such entity; or
(iv) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board.
(c) "DISABILITY" means the total and permanent inability
of the Executive due to illness, accident or other physical or mental
incapacity to perform the usual duties of his employment under the
Employment Agreement for a substantially continuous period of one
hundred eighty (180) days, as determined by a physician selected by
the Company and
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<PAGE> 3
acceptable to the Executive or the Executive's legal representative
(which agreement as to acceptability will not be unreasonably
withheld).
(d) "GOOD REASON" means any of the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities
contemplated by the Employment Agreement, or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action that
is not taken in bad faith and that is remedied by the Company
promptly after receipt of notice thereof from the Executive;
(ii) the reduction in the overall level of the
Executive's compensation or benefits;
(iii) the Company's requiring the Executive to be
based at any office or location other than the Company's
executive offices in the Austin, Texas SMSA, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any significant increase in the travel
requirements of the Executive's position; for the purposes of
this clause (iv) a "significant" increase would include any
circumstances under which the Executive is or will be
required, during any six-month period, to spend more than
twice the number of nights away from home as were necessary
during the previous six-month period; or
(v) an inability on the part of the Executive to
carry out the duties of his position in good faith as a result
of a major disagreement between the Executive and other
executives of the Company who have been appointed after a
Change of Control concerning strategic or policy issues
affecting the Company or its business as a whole.
(e) "INCUMBENT BOARD" means those individuals who are
members of the Board on the date of this Agreement and any person who
subsequently becomes a member of the Board and whose election, or
whose nomination for election by the Company shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board.
2. TERMINATION PAYMENTS.
(a) Termination of employment. If any Change of Control
of the Company occurs after the date of this Agreement and
subsequently, on or before the third
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<PAGE> 4
anniversary of such Change of Control, the Executive's employment by
the Company or its successor in interest is terminated
(i) by the Company or its successor in interest
for any reason other than (A) for Cause, or (B) because of the
Executive's death or Disability, or
(ii) by the Executive for Good Reason,
(a "TERMINATION EVENT") then the Executive will be entitled to
receive, and the Company will pay or provide, the benefits set forth
in subsection (b) below.
(b) Severance benefits. Upon the occurrence of a
Termination Event described in subsection (a) above then, in addition
to the performance of its obligations under the Employment Agreement
but in the case of amounts payable under clauses (i) and (ii) without
duplication of any similar payments then due and payable under the
Employment Agreement:
(i) The Company will pay to the Executive within
thirty (30) days after the Termination Event an amount equal
to the sum of:
(A) his highest full base annual salary
in effect within one (1) year of the
Termination Event, plus
(B) the amount of any bonus, payable in
cash only notwithstanding the terms
of any bonus plan, with respect to
any year that has then ended which
was or would have accrued to the
Executive under any bonus plan then
in effect but which has not yet been
paid to him, plus
(C) an amount, payable in cash only
notwithstanding the terms of any
bonus plan, equal to the product of
(aa) the average of the bonus paid
or payable to the Executive for the
two preceding years (whether same
was paid in cash or its equivalent
value) multiplied by (bb) a fraction
of which the numerator is the number
of weeks that have elapsed in the
then current year through the date
of termination and the denominator
is 52, plus
(D) an amount equal to the product of
(aa) the number of unused vacation
days accrued by the Executive
through the date of termination
multiplied by (bb) a fraction the
numerator of which is the
Executive's highest base salary in
effect within one (1) year of the
Termination Event and the
denominator of which is 250;
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<PAGE> 5
(ii) The Company will contribute in cash to any
retirement or saving plan in which the Executive is
participating, within thirty (30) days after the date of
termination, the maximum amount which the Company is permitted
to contribute based on the payments made pursuant to paragraph
(i) above and, at the Executive's election, will buy back the
stock held by the Executive in any such plan at its then fair
market value, depositing said value in cash into said plan;
(iii) The Company will pay in cash to the Executive
within thirty (30) days after the date of termination a
severance payment in an amount equal to the sum of
(A) three hundred percent (300%) of his
full base annual salary at the
highest rate in effect within one
(1) year of the Termination Event,
plus
(B) three hundred percent (300%) of the
average bonus paid or payable to him
for the two (2) preceding years
(whether same was paid in cash or
its equivalent value);
provided that if the amount payable by the Company to the
Executive under this clause (iii), without regard to any other
payments or benefits payable to the Executive under this
Agreement or the Employment Agreement, would constitute an
"excess parachute payment" for the purposes of Sections 280G
and 4999 of the Internal Revenue Code then the amount payable
by the Company under this Section 2b as a severance benefit
will be "grossed up" by the amount necessary in order to
reimburse Executive for any taxes due as a result of such an
"excess parachute payment" as per section 6 hereof.
(iv) The Company will amend or revise all stock
option plans and restricted stock awards to which the
Executive is a party, or grant appropriate waivers of any
restrictions contained in such plans and awards, so as to
remove all restrictions upon the exercise by the Executive of
such options or upon the ability of the Executive to sell any
shares of stock that are subject to any such options or
awards. As part of such amendments or revisions, the Company
will accelerate the vesting period for Executive to an
immediate one hundred (100%) and shall allow the Executive the
option to exercise his options or stock awards either within
ninety (90) days of his effective termination date and such
option remain as an incentive stock option or before the
termination of the original option or stock award period and
have such options be converted automatically into
non-qualified stock options for purposes of the Internal
Revenue Code.
(v) The Company will prepay in full if at all
possible, and if not possible, ensure to the satisfaction of
Executive maintenance in full force and effect for the benefit
of the Executive and his spouse and dependents (if covered
prior to the date of termination) in each case for a period
from the date of termination until
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<PAGE> 6
the later of the death of the Executive or his spouse, during
their period of their eligibility, all employee life, health,
accident, disability, medical and other employee welfare
benefits plans provided by the Company in which the Executive
or his spouse or his dependents are participating at the time
of the Executive's termination under the same terms and
conditions as then in effect; provided, that if the
Executive's or his spouse's or his dependents continued
participation is not permitted under the general terms of such
plans, the Company shall arrange to provide substantially
similar benefits;
(vi) The Company will maintain for the benefit of
the Executive such policy of liability insurance, providing
protection to him as an officer, director, agent or employee
of the Company or its subsidiaries, as may from time to time
be purchased by the Company for officers and directors
generally as authorized by or in furtherance of the
indemnification provisions contained in the Company's bylaws.
Neither the insurance nor the Executive's right to
indemnification thereunder may be canceled by the Company
without his permission for a period of five years following
the date of termination under this Agreement; provided,
however, that the Company may obtain a substitute insurance
policy as long as the rights of indemnity to the Executive are
at least equivalent to the most favorable rights provided
under the policy in effect immediately prior to the date of
termination.
(b) The Executive shall have no duty to mitigate, whether
by seeking other employment or otherwise, any loss or damage suffered
by him as a result of any failure by the Company to make any payment,
or provide any benefit, to him under this Section 2.
3. AGREEMENTS OF EXECUTIVE.
The Executive covenants and agrees as follows:
(a) Provision of services when Change of Control is
threatened. If any person begins a tender or exchange offer for
voting securities of the Company, or circulates a proxy to
shareholders of the Company or takes any other action for the purposes
of effecting a Change of Control of the Company, then notwithstanding
the terms of the Employment Agreement or any other agreement between
the Executive and the Company the Executive will not voluntarily leave
the employment of the Company and will render the services
contemplated in the recitals to this Agreement until either (i) such
person has abandoned or terminated his efforts to effect a Change of
Control or (ii) three months have elapsed since the date on which a
Change of Control has occurred.
(b) Noncompetition. Without limiting the terms of any
similar provision in the Employment Agreement or any other agreement
between the Executive and the Company, if the Executive's employment
with the Company is terminated under any circumstances that entitle
the Executive to receive the payments and other benefits provided in
Section 2, then for a period of one year (or six (6) months should
Executive make the election in
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<PAGE> 7
the last sentence of Section 2.1 of the Employment Agreement) from the
Termination Event the Executive will not:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
(ii) act as an agent, broker or distributor for,
or as an adviser or consultant to,
(iii) be employed in any senior managerial or
executive position by any corporation, partnership, limited
liability company or other business organization in which he
has responsibility for,
any business (regardless of the form in which such business is
conducted) which is engaged, or which he reasonably expects to become
engaged, in the business of designing, manufacturing, distributing or
selling artificial joints and limbs and other orthopedic implant
devices in the United States; provided that the ownership by the
Executive of not more than two percent (2%) of the shares of any
publicly traded corporation or twenty percent (20%) of a privately
held company shall not constitute a violation of this subsection (b).
(c) Publications by Executive. Without limiting the
terms of any similar provision in the Employment Agreement or any
other agreement between the Executive and the Company, if the
Executive's employment with the Company is terminated under any
circumstances that entitle the Executive to receive the payments and
other benefits provided in Section 2, then
(i) the Executive will refrain from making any
disparaging comments about the Company or any of its
affiliates, and
(ii) for a period of one (1) year from the
Termination Event the Executive will not without the prior
written permission of the Company write or publish, or assist
in the writing or publication of, any books, articles or other
materials that would adversely affect the interests of the
Company or its affiliates.
(d) Remedies. The Executive acknowledges that any
violation of this Section may cause irreparable harm to the Company,
and that damages are not an adequate remedy, and the Executive
therefore agrees that the Company shall be entitled to an injunction
by any appropriate court in the appropriate jurisdiction, enjoining,
prohibiting and restraining the Executive from the continuance of any
such violation, in addition to any monetary damages which might occur
by reason of the violation of this Agreement.
(e) Independent. The covenants set forth in the
foregoing subsections (a), (b), (c), and (d) shall be deemed and shall
be construed as separate and independent covenants, and should any
part or provision of such covenants be held invalid, void or
unenforceable
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<PAGE> 8
by any court of competent jurisdiction, such invalidity, voidness, or
unenforceability shall in no way render invalid, void, or
unenforceable any other part or provision thereof or any separate
covenant not declared invalid, void, or unenforceable. This Agreement
shall in that case be construed as if the void, invalid or
unenforceable provisions were omitted.
4. NOTICE OF TERMINATION.
Any termination of the Executive's employment by the Company or its
successor in interest or by the Executive shall be communicated by a written
notice of termination to the other party, and shall specify the provision of
this Agreement relied upon and shall set forth in reasonable detail the
circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered
if by the Executive or thirty (30) days after the date of the notice of
termination if given by the Company. All applicable benefits to Executive
hereunder shall be triggered if said notice of termination is given within the
three (3)-year period specified in Section 2(a) hereof.
5. LITIGATION EXPENSES.
The Company shall pay reasonable legal fees and expenses incurred by
the Executive as a result of his seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at his
request as such fees and expenses are incurred.
6. EXCESS PARACHUTE PAYMENTS.
(a) If any federal excise tax is imposed under Section
4999 of the Internal Revenue Code of 1986, as amended (an "EXCISE
TAX") on the Executive with respect to any payments or benefits
provided under Section 2, the Company hereby agrees, subject to the
exceptions and limitations set forth below, to pay the Executive such
additional amount (the "ADDITIONAL AMOUNT") as is necessary to cause
the Executive to realize the same net amount after the imposition of
all federal income tax, estate tax and Excise Tax imposed on payments
and benefits under Section 2 (and on such Additional Amount payable
under this Section 6) that he would have realized had such federal
income tax, estate tax, and Excise Tax not been imposed upon him with
respect to such payments and benefits under Section 2 and this Section
6; provided, however, that no such Additional Amount shall be due with
respect to
(i) any penalties, interest, or similar charges,
if any, assessed with respect to or arising out of any income
tax, estate tax, or Excise Tax due unless the Company delays
the payment contemplated herein to the Executive or
(ii) any income tax or estate tax which would be
owing by the Executive in the absence of the imposition of the
Excise Tax.
(b) The Company shall have the right to contest, but the
Executive shall have no duty to contest, the assessment of any such
taxes, but in any event, the Executive
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<PAGE> 9
agrees to cooperate in any contest the Company chooses to make
provided the Company shall pay the costs of any such contest.
7. ASSIGNMENT; SUCCESSORS IN INTEREST.
(a) General. Except with the prior written consent of
the Executive,
(i) no assignment by operation of law or
otherwise by the Company of any of its rights and obligations
under this Agreement may be made other than to an entity in
common control with or a successor to all or a substantial
portion of the business of the Company (but then only if such
entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this
Agreement);
(ii) no transfer by operation of law or otherwise
by the Company of all or a substantial part of its business or
assets shall be made unless the obligations and liabilities of
the Company under this Agreement are assumed in connection
with such transfer either by operation of law or by specific
assumption executed by the transferee and delivered to the
Executive; and
(iii) in any such event the Company shall remain
liable for the performance of all of its obligations under
this Agreement (which liability shall be a primary obligation
for full and prompt performance rather than a secondary
guarantee of collectibility of damages).
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to his heirs,
devisees, legatees or beneficiaries or except with the prior written
consent of the Company, no assignment or transfer by operation of law
or otherwise may be made by the Executive of any of his rights under
this Agreement.
(b) Binding Nature. This Agreement shall be binding upon
the parties to this Agreement and their respective legal
representatives, heirs, devisees, legatees, beneficiaries and
successors and assigns; shall inure to the benefit of the parties to
this Agreement and their respective permitted legal representatives,
heirs, devisees, legatees, beneficiaries and other permitted
successors and assigns (and to or for the benefit of no other person
or entity, whether an employee or otherwise, whatsoever); and any
reference to a party to this Agreement shall also be a reference to a
permitted successor or assign.
8. MISCELLANEOUS.
(a) This Agreement may not be varied, altered, or changed
except by instrument in writing executed by the parties hereto. The
failure of any party to this Agreement at any time or times to require
performance of any provision of this Agreement shall in no manner
affect the right to enforce the same. No waiver by any party to this
Agreement of any provision (or of a breach of any provision) of this
Agreement, whether
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<PAGE> 10
by conduct or otherwise, in any one or more instances shall be deemed
or construed either as a further or continuing waiver of any such
provision or breach or as a waiver of any other provision (or of a
breach of any other provision) of this Agreement.
(b) Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid but
if any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality or enforceability of any such provisions in every
other respect and of the remaining provisions of this Agreement shall
not be impaired.
(c) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Texas (without giving
effect to any choice of law provisions) and enforceable in a court of
competent jurisdiction in Travis County, Texas.
(d) This Agreement and any benefits accruing to Executive
hereunder shall be supplemental and additional to any and all benefits
accruing to Executive pursuant to the Employment Agreement and any and
all Stock Option or Stock Award Plans applicable to Executive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set his
hand as of the date and year first written above.
COMPANY
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
-------------------------------
Nick Cindrich, Chief Executive
Officer
EXECUTIVE
/s/ KENNETH LUDWIG
------------------------------------
KENNETH LUDWIG
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<PAGE> 11
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this
18th day of March, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and KENNETH LUDWIG, JR., an individual resident at
396 Sunrise Terrace, Cedar Park, Texas 78613 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance
Agreement dated September 19, 1995 (the "Agreement") which provided, inter
alia, for certain payments to be made in the event that certain events occurred
with respect to the Employee's employment relationship with the Company;
WHEREAS, the Employee and the Company desire that there be certain
changes made with respect to the Agreement as a result of the Company's pending
merger with Healthcare Acquisition, Inc., a Texas corporation ("Acquisition"),
a wholly owned subsidiary of Healthcare Acquisition Corp., a Delaware
corporation ("HCAC"); and
WHEREAS, the Company and the Employee want to memorialize in this
Amendment their agreements regarding such changes to the Agreement.
NOW THEREFORE, in consideration of the premises and other mutual
promises and covenants contained in this Amendment and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties, intending legally to be bound, agree as follows:
1. In the event that the Company completes its merger with
Acquisition (the "Merger") then, and only then, shall the following changes be
made in the Agreement, such changes to take effect on that date which is two
(2) years from the effective date of the Merger:
(a) the provisions of Section 2(b) (iii) shall be amended
so that the language "three hundred percent (300%)" shall read "one
hundred percent (100%)" in each place where such language appears in
that Section;
(b) the provisions of Section 2(b) (v) shall be amended
to provide that the insurance coverage to be provided to Employee,
Employee's spouse and to Employee's dependents (if covered prior to
the date of termination) under such provision shall be for coverage
from a period from the date of the termination until five (5) years
after the date of termination; and
(c) the provisions of Section 2(b) (vi) shall be amended
to provide that the liability insurance to be provided under such
provision shall be provided for the benefit of the Employee for a
period of five (5) years from the date of the termination of the
Employee's relationship with the Company.
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<PAGE> 12
2. Except as specifically changed by the Amendment, all other
terms and provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set its
hand as of the date and year first written above.
ENCORE:
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
----------------------------
Nick Cindrich, CEO
EMPLOYEE:
/s/ KENNETH LUDWIG, JR.
---------------------------------
KENNETH LUDWIG, JR.
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<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 26th day of August, 1994, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation (the "Company"), and AUGUST FASKE (the "Employee");
Whereas, Employee has heretofore entered into an Employment Agreement
with the Company and both the Company and the Employee desire to amend and
restate in its entirety such Employment Agreement.
Now, therefore, in consideration of the mutual promises contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Employee agree
as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment Term. The Company hereby employs the Employee for a
primary term commencing on the date set forth above and, subject to earlier
termination as provided in Section 1.5 hereof, ending five (5) years from such
date (the "Employment Term"). Employee agrees to accept such employment and to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
1.2 Duties. The Employee shall serve in the capacity as Vice President
- - Finance and Chief Financial Officer of the Company, or in such other capacity
as the Company may in its sole discretion direct, and shall report to, and be
subject to the general direction and control of, the officers and directors of
the Company. It is further understood and agreed that any modification in or
expansion of Employee's duties hereunder shall not, unless specifically agreed
in writing by Company, result in any modification in, increase or decrease of
Employee's compensation referred to in Section 1.4 hereof.
1.3 Extent of Service. The Employee shall devote his full time,
attention, and energy to the business of the Company and, except as may be
specifically permitted by the Company and approved by either the Chief Executive
Officer or the Board of Directors of the Company, shall not be engaged in any
other business activity while in the employ of the Company.
1.4 Compensation
1.4.1 Salary. The Company shall pay to the Employee a base
salary at a rate of not less than One Hundred Thousand Dollars ($100,000) per
year, or at such greater rate as the Chief Executive Officer of the Company
shall from time to time determine (the "Base Salary"). The Base Salary shall be
subject to review on no less than an annual basis, beginning January 1, 1995 or,
at the Company's discretion, such earlier date as the Company may designate.
Such salary is to be payable in installments in accordance with the payroll
policies of the Company in effect from time to time during the Employment Term.
<PAGE> 2
1.4.2 Other Benefits. The Employee shall be entitled to such
vacation days, sick days, insurance and other fringe benefit programs (including
pension, profit-sharing, and stock plans, if any) as are established for other
executive employees of the Company, on the same basis as such other executive
employees are entitled thereto, it being understood that the establishment,
termination, or change of any such program shall be at the instance of the
Company, in exercise of its sole discretion, from time to time, and any such
termination or change in any such program shall not affect this Agreement.
1.5 Termination.
1.5.1 Termination by Employee. At any time after one (1) year
from the commencement of the Employment Term, Employee may terminate this
Agreement on thirty (30) days' prior written notice.
1.5.2 Termination by Company. Prior to the end of the
Employment Term, the Company may upon ten (10) days' prior written notice
discharge the Employee with or without cause at its sole option without any
further liability hereunder to the Employee or his estate. Provided, however, in
the event such termination was without cause, the Company shall be required to
pay the Employee, at the time of his discharge, for one (1) year's Base Salary,
in addition to any accrued, but unpaid Base Salary . The Employee will have no
further liability hereunder to the Company except pursuant to Article II and
Section 3.2 hereof. For purposes of this Agreement, a "discharge for cause"
shall mean a discharge resulting from Employee having (i) committed any act
involving moral turpitude, dishonesty, or fraud that, in the good faith opinion
of Company, causes a material harm to Company, (ii) failed or refused to follow
legal and reasonable policies or directives established and previously given to
Employee in writing by Company, (iii) willfully failed to attend to his duties
after ten (10) days prior written notice of failure to so act, (iv) committed
acts amounting to gross negligence or willful misconduct to the material
detriment of Company, or (v) otherwise materially breached any of the terms or
provisions of this Agreement after ten (10) days prior written notice of such
material breach and failure to cure such breach. Employee shall be deemed to
have been discharged for cause upon delivery to Employee of a "Notice of
Termination" stating the "Date of Termination" and specifying the particulars of
the conduct justifying discharge for cause. Furthermore, if the Employee is
terminated without cause, then the Company agrees, if requested by Employee for
the sole purpose of exercising any vested options that Employee has the right to
exercise, to loan to the Employee an amount equal to (i) the full exercise price
of all vested options that the Employee has the right to exercise less (ii) the
par value of such shares as are to be exercised. The terms of the loan shall be
that it shall be (a) secured by the stock to be purchased, (b) be otherwise
non-recourse to the Employee, (c) bear interest at the prime rate of interest as
published from time to time in The Wall Street Journal, and (d) be fully due and
payable, principal and interest, two (2) years from the date of termination.
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<PAGE> 3
ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that his services to be
rendered hereunder are of a special and unusual character which have a unique
value to Company, the loss of which cannot adequately be compensated by damages
in an action at law. In view of the unique value to Company of the services of
Employee for which Company has contracted hereunder, and because of the
confidential information to be obtained by or disclosed to Employee, and as a
material inducement to Company to enter into this Agreement, and to pay to
Employee the compensation referred to in Section 1.4 hereof, Employee covenants
and agrees that during Employee's employment hereunder and for a period of one
(1) year after he ceases to be employed by Company, Employee shall not (a)
directly or indirectly, solicit business from, divert business from, or attempt
to convert to other methods of using the same or similar products or services as
provided by Company, any client, account or location of Company with which
Employee has had any contact as a result of his employment by Company hereunder;
(b) engage in or carry on, directly or indirectly, either for himself, as a
member of a partnership, or as a stockholder (except as limited partner or
stockholder of less than one percent (1%) of the issued and outstanding limited
partnership interests or stock of a publicly held partnership or corporation
whose gross assets exceed $l,000,000), as an investor, lender, guarantor,
landlord, manager, officer, or director of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), or as an employee,
agent, associate, broker, or consultant of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), any business that
competes with any operations of the Company within an one hundred (100)-mile
radius of any geographic area where Company is actually engaged in business, or
maintains sales or service representatives or employees; or (c) directly or
indirectly, solicit for employment or employ any employee of Company. Employee
may elect, by providing written notice to the Company, to shorten the term of
this non-compete to six (6) months, provided, however, in that event, the
Company's obligation to pay severance pay to the Employee pursuant to Section
1.5.2 shall be reduced to an amount equal to six (6) months base pay.
2.2 Disclosures of Information. The Employee acknowledges that in the
course of his employment by the Company, he will receive certain trade secrets,
programs, methods of operation, financial information, lists of customers, and
other confidential information and knowledge concerning the businesses of the
Company (hereinafter collectively referred to as "Information") that the Company
desires to protect. As a material inducement to Company to enter into this
Agreement, and to pay to Employee the compensation referred to in Section 1.4
hereof, Employee covenants and agrees that he shall not, at any time during or
following the term of his employment hereunder, directly or indirectly, divulge
or disclose, for any purpose whatsoever, any of such Information which has been
obtained by or disclosed to him as a result of his employment by Company. The
Employee further agrees that he will at no time use the Information in competing
with the Company. Upon termination of this Agreement, the Employee shall
surrender to the Company all lists, books, financial information, records,
literature, products, papers, documents, writings, and other property produced
by him or coming into his possession by or through his employment relating to
the Information, and the Employee agrees that all such materials will at all
times remain the property of the Company. In the event of a breach or
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<PAGE> 4
threatened breach by Employee of any of the provisions of this Article II,
Company, in addition to and not in limitation of any other rights, remedies or
damages available to Company at law or in equity, shall be entitled to a
permanent injunction in order to prevent or to restrain any such breach by
Employee, or by Employee's partners, agents, representatives, servants,
employers, employees and/or any and all persons directly or indirectly acting
for or with him.
2.3 Accounting for Profits. Employee covenants and agrees that if he
shall violate any of his covenants or agreements under Article II hereof,
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remunerations or benefits which Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies to which
Company is or may be entitled at law or in equity or under this Agreement.
2.4 Reasonableness of Restrictions.
2.4.1 Employee has carefully read and considered the
provisions of Article II hereof and, having done so, agrees that the
restrictions set forth in such Article (including, but not limited to, the time
period of restriction and the geographical areas of restriction set forth in
Article II hereof) are fair and reasonable and are reasonably required for the
protection of the interest of Company, its officers, directors and other
employees.
2.4.2 In the event that, notwithstanding the foregoing, any of
the provisions of Article II hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event that any provision of Article II relating to
time period and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, said time period and/or areas of restriction
shall be deemed to become and thereafter be the maximum time period and/or areas
which such court deems reasonable and enforceable.
ARTICLE 3
EMPLOYEE INVENTIONS
3.1 Employee Inventions. Employee shall promptly disclose to the
Company or its designee any and all ideas, inventions, works of authorship
(including, but not limited to computer programs, software and documentation),
improvements, discoveries, developments, or innovations (hereinafter referred to
as "said inventions"), whether patentable or unpatentable, copyrightable or
uncopyrightable, made, developed, worked on, or conceived by Employee, either
solely or jointly with others, whether or not reduced to drawings, written
description, documentation, models, or other tangible form: (a) during the
Employment Term that relate to, or arise out of, any developments, services,
research, or products of, or pertain to the business of, the Company and (b) for
a period of six (6) months after termination of the Employment Term, said
inventions that relate to, or arise out of, any developments, services,
research, or products that Employee has been concerned with during the term of
his employment.
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<PAGE> 5
3.2 Assignment. Employee hereby assigns and agrees to assign to the
Company, its successors and assigns, Employee's entire right, title, and
interest in and to any of said inventions. All of said inventions shall
forthwith and without further consideration become and be the exclusive property
of the Company, it successors and assigns.
3.3 Cooperation. Employee shall, without further compensation, do all
lawful things, including, but not limited to, maintaining invention records that
shall be the property of the Company, rendering assistance, giving of evidence
and testimony, and executing necessary documents, as requested, to enable the
Company to file and obtain patents in the United States and foreign countries on
any of said inventions, as well as to protect the Company's interest in any of
said inventions.
ARTICLE 4
MISCELLANEOUS
4.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date mailed, postage
prepaid, by certified mail, return receipt requested, or telegraphed or telexed
and confirmed if addressed to the respective parties as follows: (a) if to the
Employee to the address set forth below, and (b) if to the Company to Encore
Orthopedics, Inc., 8920 Business Park Drive, Suite 380, Austin, Texas 78759
ATTENTION: President. Either party hereto may designate a different address by
providing written notice of such new address to the other party hereto.
4.2 Specific Performance. The Employee acknowledges that a remedy at
law for any breach or attempted breach of Section 1.3 and Article II of this
Agreement will be inadequate, and agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or any other equitable relief. In the event the Company brings legal
action to enforce its rights hereunder, the Employee shall pay all of the
Company's court costs and legal fees and expenses arising out of such action if
the Company prevails in such action.
4.3 Severability. Whenever 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 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.
4.4 Assignment. This Agreement may not be assigned by the Employee.
Neither the Employee nor his spouse shall have any right to commute, encumber,
or otherwise dispose of any right to receive payments hereunder, it being the
intention of the parties that such payments and the rights thereto are
nonassignable and nontransferable. This Agreement is only assignable by the
Company to a parent, subsidiary, successor or other affiliate of the Company.
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<PAGE> 6
4.5 Binding Effect. Subject to the provisions of Section 4.4 of this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, the Employee's heirs and personal representatives, and the
successors and assigns of the Company.
4.6 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
4.7 Entire Agreement; Amendment. This Agreement contains the entire
understanding between the parties, and there are no agreements or understandings
among the parties except as set forth herein. The Employee represents and
warrants to the Company that at the time of execution of this Agreement he is
not a party to any other employment agreement. Employee further represents and
warrants that he neither has any proprietary information of any other business
nor is he providing any other business' proprietary information to the Company.
No alteration or modification of this Agreement shall be valid except by
subsequent written instrument executed by the parties hereto. No waiver by
either party of any breach by the other party of any provision or condition of
this Agreement in one circumstance shall be deemed a waiver of such provision or
condition in any other circumstances or be deemed a waiver of any other
provision or condition. The section and paragraph headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
COMPANY:
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG L. SMITH
--------------------------------
Craig L. Smith, President
EMPLOYEE:
/s/ AUGUST FASKE
------------------------------------
AUGUST FASKE
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EXHIBIT 10.14
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 20th day of
September, 1995, by and between ENCORE(R) ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 8920 Business Park Drive,
Suite 380, Austin, Texas 78759, (the "COMPANY"), and AUGUST FASKE, an
individual resident at 10103 Grand Oak, Austin, Texas 78750 (the "EMPLOYEE" or
the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Vice President
- - Finance, Chief Financial Officer pursuant to an employment agreement dated
August 26, 1994 (such employment agreement as it may be amended or supplemented
from time to time and any successor agreement being referred to as the
"EMPLOYMENT AGREEMENT"); and
WHEREAS, the Board of Directors of the Company (the "BOARD") has
approved the Chief Executive Officer of the Company entering into severance
agreements with key executives of the Company; and
WHEREAS, the Employee is a key executive of the Company and has been
selected by the Chief Executive Officer of the Company to be offered a
severance agreement; and
WHEREAS, the Board believes that if the Company should receive or
learn of any proposal from a third person concerning a possible business
combination with the Company, or an acquisition of equity securities or a
substantial portion of the assets of the Company, it is important that the
Company should be able to rely upon the Executive to continue in his position
and that the Board and the Chief Executive Officer should be able to receive
and rely upon his advice as to the best interests of the Company and its
shareholders, without concern that the Executive might be distracted by any
personal uncertainties and risks created by such a proposal; and
WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposal, to advise management and the Board whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board may determine to be appropriate;
and
WHEREAS, the Company wishes to be assured that it will have the
continued dedication of the Executive and the availability of his advice and
counsel despite the possibility, threat or occurrence of a bid to take over
control of the Company; and
WHEREAS, the Company wishes to induce the Executive to remain in the
employment of the Company under such circumstances; and
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WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall have the same meaning as "discharge for
cause" as defined in Section 1.5.2 of the Employment Agreement as well
as include the repeated violation by the Executive of his obligations
under this Agreement which are demonstrably willful and deliberate on
the part of the Executive and which are not redeemed in a reasonable
period of time after receipt of written notice from the Company.
(b) "CHANGE IN CONTROL" means any of the following
events:
(i) the acquisition by any person, including a
"group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership of shares of
capital stock or other voting securities of the Company that
have thirty-three and one third percent (33 1/3%) or more of
either (A) the then outstanding shares of the Company's common
stock or (B) the combined voting power of the Company's then
outstanding voting securities that are entitled to vote
generally for the election of the Board;
(ii) the sale or other disposition by the Company
to an unrelated third party of all or substantially all of the
Company's assets;
(iii) the consummation of a reorganization, merger,
or consolidation involving the Company if as a result of such
transaction persons who were shareholders of the Company
immediately before the reorganization, merger or consolidation
do not immediately thereafter own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the reorganized,
merged or consolidated Company that are entitled to vote
generally for the election of the board of such entity; or
(iv) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board.
(c) "DISABILITY" means the total and permanent inability
of the Executive due to illness, accident or other physical or mental
incapacity to perform the usual duties of his employment under the
Employment Agreement for a substantially continuous period of one
hundred eighty (180) days, as determined by a physician selected by
the Company and
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acceptable to the Executive or the Executive's legal representative
(which agreement as to acceptability will not be unreasonably
withheld).
(d) "GOOD REASON" means any of the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities
contemplated by the Employment Agreement, or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action that
is not taken in bad faith and that is remedied by the Company
promptly after receipt of notice thereof from the Executive;
(ii) the reduction in the overall level of the
Executive's compensation or benefits;
(iii) the Company's requiring the Executive to be
based at any office or location other than the Company's
executive offices in the Austin, Texas SMSA, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any significant increase in the travel
requirements of the Executive's position; for the purposes of
this clause (iv) a "significant" increase would include any
circumstances under which the Executive is or will be
required, during any six-month period, to spend more than
twice the number of nights away from home as were necessary
during the previous six-month period; or
(v) an inability on the part of the Executive to
carry out the duties of his position in good faith as a result
of a major disagreement between the Executive and other
executives of the Company who have been appointed after a
Change of Control concerning strategic or policy issues
affecting the Company or its business as a whole.
(e) "INCUMBENT BOARD" means those individuals who are
members of the Board on the date of this Agreement and any person who
subsequently becomes a member of the Board and whose election, or
whose nomination for election by the Company shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board.
2. TERMINATION PAYMENTS.
(a) Termination of employment. If any Change of Control
of the Company occurs after the date of this Agreement and
subsequently, on or before the third
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anniversary of such Change of Control, the Executive's employment by
the Company or its successor in interest is terminated
(i) by the Company or its successor in interest
for any reason other than (A) for Cause, or (B) because of the
Executive's death or Disability, or
(ii) by the Executive for Good Reason,
(a "TERMINATION EVENT") then the Executive will be entitled to
receive, and the Company will pay or provide, the benefits set forth
in subsection (b) below.
(b) Severance benefits. Upon the occurrence of a
Termination Event described in subsection (a) above then, in addition
to the performance of its obligations under the Employment Agreement
but in the case of amounts payable under clauses (i) and (ii) without
duplication of any similar payments then due and payable under the
Employment Agreement:
(i) The Company will pay to the Executive within
thirty (30) days after the Termination Event an amount equal
to the sum of:
(A) his highest full base annual salary
in effect within one (1) year of the
Termination Event, plus
(B) the amount of any bonus, payable in
cash only notwithstanding the terms
of any bonus plan, with respect to
any year that has then ended which
was or would have accrued to the
Executive under any bonus plan then
in effect but which has not yet been
paid to him, plus
(C) an amount, payable in cash only
notwithstanding the terms of any
bonus plan, equal to the product of
(aa) the average of the bonus paid
or payable to the Executive for the
two preceding years (whether same
was paid in cash or its equivalent
value) multiplied by (bb) a fraction
of which the numerator is the number
of weeks that have elapsed in the
then current year through the date
of termination and the denominator
is 52, plus
(D) an amount equal to the product of
(aa) the number of unused vacation
days accrued by the Executive
through the date of termination
multiplied by (bb) a fraction the
numerator of which is the
Executive's highest base salary in
effect within one (1) year of the
Termination Event and the
denominator of which is 250;
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(ii) The Company will contribute in cash to any
retirement or saving plan in which the Executive is
participating, within thirty (30) days after the date of
termination, the maximum amount which the Company is permitted
to contribute based on the payments made pursuant to paragraph
(i) above and, at the Executive's election, will buy back the
stock held by the Executive in any such plan at its then fair
market value, depositing said value in cash into said plan;
(iii) The Company will pay in cash to the Executive
within thirty (30) days after the date of termination a
severance payment in an amount equal to the sum of
(A) three hundred percent (300%) of his
full base annual salary at the
highest rate in effect within one
(1) year of the Termination Event,
plus
(B) three hundred percent (300%) of the
average bonus paid or payable to him
for the two (2) preceding years
(whether same was paid in cash or
its equivalent value);
provided that if the amount payable by the Company to the
Executive under this clause (iii), without regard to any other
payments or benefits payable to the Executive under this
Agreement or the Employment Agreement, would constitute an
"excess parachute payment" for the purposes of Sections 280G
and 4999 of the Internal Revenue Code then the amount payable
by the Company under this Section 2b as a severance benefit
will be "grossed up" by the amount necessary in order to
reimburse Executive for any taxes due as a result of such an
"excess parachute payment" as per section 6 hereof.
(iv) The Company will amend or revise all stock
option plans and restricted stock awards to which the
Executive is a party, or grant appropriate waivers of any
restrictions contained in such plans and awards, so as to
remove all restrictions upon the exercise by the Executive of
such options or upon the ability of the Executive to sell any
shares of stock that are subject to any such options or
awards. As part of such amendments or revisions, the Company
will accelerate the vesting period for Executive to an
immediate one hundred (100%) and shall allow the Executive the
option to exercise his options or stock awards either within
ninety (90) days of his effective termination date and such
option remain as an incentive stock option or before the
termination of the original option or stock award period and
have such options be converted automatically into
non-qualified stock options for purposes of the Internal
Revenue Code.
(v) The Company will prepay in full if at all
possible, and if not possible, ensure to the satisfaction of
Executive maintenance in full force and effect for the benefit
of the Executive and his spouse and dependents (if covered
prior to the date of termination) in each case for a period
from the date of termination until
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the later of the death of the Executive or his spouse, during
their period of their eligibility, all employee life, health,
accident, disability, medical and other employee welfare
benefits plans provided by the Company in which the Executive
or his spouse or his dependents are participating at the time
of the Executive's termination under the same terms and
conditions as then in effect; provided, that if the
Executive's or his spouse's or his dependents continued
participation is not permitted under the general terms of such
plans, the Company shall arrange to provide substantially
similar benefits;
(vi) The Company will maintain for the benefit of
the Executive such policy of liability insurance, providing
protection to him as an officer, director, agent or employee
of the Company or its subsidiaries, as may from time to time
be purchased by the Company for officers and directors
generally as authorized by or in furtherance of the
indemnification provisions contained in the Company's bylaws.
Neither the insurance nor the Executive's right to
indemnification thereunder may be canceled by the Company
without his permission for a period of five years following
the date of termination under this Agreement; provided,
however, that the Company may obtain a substitute insurance
policy as long as the rights of indemnity to the Executive are
at least equivalent to the most favorable rights provided
under the policy in effect immediately prior to the date of
termination.
(b) The Executive shall have no duty to mitigate, whether
by seeking other employment or otherwise, any loss or damage suffered
by him as a result of any failure by the Company to make any payment,
or provide any benefit, to him under this Section 2.
3. AGREEMENTS OF EXECUTIVE.
The Executive covenants and agrees as follows:
(a) Provision of services when Change of Control is
threatened. If any person begins a tender or exchange offer for
voting securities of the Company, or circulates a proxy to
shareholders of the Company or takes any other action for the purposes
of effecting a Change of Control of the Company, then notwithstanding
the terms of the Employment Agreement or any other agreement between
the Executive and the Company the Executive will not voluntarily leave
the employment of the Company and will render the services
contemplated in the recitals to this Agreement until either (i) such
person has abandoned or terminated his efforts to effect a Change of
Control or (ii) three months have elapsed since the date on which a
Change of Control has occurred.
(b) Noncompetition. Without limiting the terms of any
similar provision in the Employment Agreement or any other agreement
between the Executive and the Company, if the Executive's employment
with the Company is terminated under any circumstances that entitle
the Executive to receive the payments and other benefits provided in
Section 2, then for a period of one year (or six (6) months should
Executive make the election in the
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last sentence of Section 2.1 of the Employment Agreement) from the
Termination Event the Executive will not:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
(ii) act as an agent, broker or distributor for,
or as an adviser or consultant to,
(iii) be employed in any senior managerial or
executive position by any corporation, partnership, limited
liability company or other business organization in which he
has responsibility for,
any business (regardless of the form in which such business is
conducted) which is engaged, or which he reasonably expects to become
engaged, in the business of designing, manufacturing, distributing or
selling artificial joints and limbs and other orthopedic implant
devices in the United States; provided that the ownership by the
Executive of not more than two percent (2%) of the shares of any
publicly traded corporation or twenty percent (20%) of a privately
held company shall not constitute a violation of this subsection (b).
(c) Publications by Executive. Without limiting the
terms of any similar provision in the Employment Agreement or any
other agreement between the Executive and the Company, if the
Executive's employment with the Company is terminated under any
circumstances that entitle the Executive to receive the payments and
other benefits provided in Section 2, then
(i) the Executive will refrain from making any
disparaging comments about the Company or any of its
affiliates, and
(ii) for a period of one (1) year from the
Termination Event the Executive will not without the prior
written permission of the Company write or publish, or assist
in the writing or publication of, any books, articles or other
materials that would adversely affect the interests of the
Company or its affiliates.
(d) Remedies. The Executive acknowledges that any
violation of this Section may cause irreparable harm to the Company,
and that damages are not an adequate remedy, and the Executive
therefore agrees that the Company shall be entitled to an injunction
by any appropriate court in the appropriate jurisdiction, enjoining,
prohibiting and restraining the Executive from the continuance of any
such violation, in addition to any monetary damages which might occur
by reason of the violation of this Agreement.
(e) Independent. The covenants set forth in the
foregoing subsections (a), (b), (c), and (d) shall be deemed and shall
be construed as separate and independent covenants, and should any
part or provision of such covenants be held invalid, void or
unenforceable
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by any court of competent jurisdiction, such invalidity, voidness, or
unenforceability shall in no way render invalid, void, or
unenforceable any other part or provision thereof or any separate
covenant not declared invalid, void, or unenforceable. This Agreement
shall in that case be construed as if the void, invalid or
unenforceable provisions were omitted.
4. NOTICE OF TERMINATION.
Any termination of the Executive's employment by the Company or its
successor in interest or by the Executive shall be communicated by a written
notice of termination to the other party, and shall specify the provision of
this Agreement relied upon and shall set forth in reasonable detail the
circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered
if by the Executive or thirty (30) days after the date of the notice of
termination if given by the Company. All applicable benefits to Executive
hereunder shall be triggered if said notice of termination is given within the
three (3)-year period specified in Section 2(a) hereof.
5. LITIGATION EXPENSES.
The Company shall pay reasonable legal fees and expenses incurred by
the Executive as a result of his seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at his
request as such fees and expenses are incurred.
6. EXCESS PARACHUTE PAYMENTS.
(a) If any federal excise tax is imposed under Section
4999 of the Internal Revenue Code of 1986, as amended (an "EXCISE
TAX") on the Executive with respect to any payments or benefits
provided under Section 2, the Company hereby agrees, subject to the
exceptions and limitations set forth below, to pay the Executive such
additional amount (the "ADDITIONAL AMOUNT") as is necessary to cause
the Executive to realize the same net amount after the imposition of
all federal income tax, estate tax and Excise Tax imposed on payments
and benefits under Section 2 (and on such Additional Amount payable
under this Section 6) that he would have realized had such federal
income tax, estate tax, and Excise Tax not been imposed upon him with
respect to such payments and benefits under Section 2 and this Section
6; provided, however, that no such Additional Amount shall be due with
respect to
(i) any penalties, interest, or similar charges,
if any, assessed with respect to or arising out of any income
tax, estate tax, or Excise Tax due unless the Company delays
the payment contemplated herein to the Executive or
(ii) any income tax or estate tax which would be
owing by the Executive in the absence of the imposition of the
Excise Tax.
(b) The Company shall have the right to contest, but the
Executive shall have no duty to contest, the assessment of any such
taxes, but in any event, the Executive
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agrees to cooperate in any contest the Company chooses to make
provided the Company shall pay the costs of any such contest.
7. ASSIGNMENT; SUCCESSORS IN INTEREST.
(a) General. Except with the prior written consent of
the Executive,
(i) no assignment by operation of law or
otherwise by the Company of any of its rights and obligations
under this Agreement may be made other than to an entity in
common control with or a successor to all or a substantial
portion of the business of the Company (but then only if such
entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this
Agreement);
(ii) no transfer by operation of law or otherwise
by the Company of all or a substantial part of its business or
assets shall be made unless the obligations and liabilities of
the Company under this Agreement are assumed in connection
with such transfer either by operation of law or by specific
assumption executed by the transferee and delivered to the
Executive; and
(iii) in any such event the Company shall remain
liable for the performance of all of its obligations under
this Agreement (which liability shall be a primary obligation
for full and prompt performance rather than a secondary
guarantee of collectibility of damages).
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to his heirs,
devisees, legatees or beneficiaries or except with the prior written
consent of the Company, no assignment or transfer by operation of law
or otherwise may be made by the Executive of any of his rights under
this Agreement.
(b) Binding Nature. This Agreement shall be binding upon
the parties to this Agreement and their respective legal
representatives, heirs, devisees, legatees, beneficiaries and
successors and assigns; shall inure to the benefit of the parties to
this Agreement and their respective permitted legal representatives,
heirs, devisees, legatees, beneficiaries and other permitted
successors and assigns (and to or for the benefit of no other person
or entity, whether an employee or otherwise, whatsoever); and any
reference to a party to this Agreement shall also be a reference to a
permitted successor or assign.
8. MISCELLANEOUS.
(a) This Agreement may not be varied, altered, or changed
except by instrument in writing executed by the parties hereto. The
failure of any party to this Agreement at any time or times to require
performance of any provision of this Agreement shall in no manner
affect the right to enforce the same. No waiver by any party to this
Agreement of any provision (or of a breach of any provision) of this
Agreement, whether
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by conduct or otherwise, in any one or more instances shall be deemed
or construed either as a further or continuing waiver of any such
provision or breach or as a waiver of any other provision (or of a
breach of any other provision) of this Agreement.
(b) Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid but
if any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality or enforceability of any such provisions in every
other respect and of the remaining provisions of this Agreement shall
not be impaired.
(c) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Texas (without giving
effect to any choice of law provisions) and enforceable in a court of
competent jurisdiction in Travis County, Texas.
(d) This Agreement and any benefits accruing to Executive
hereunder shall be supplemental and additional to any and all benefits
accruing to Executive pursuant to the Employment Agreement and any and
all Stock Option or Stock Award Plans applicable to Executive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set his
hand as of the date and year first written above.
COMPANY
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
----------------------------
Nick Cindrich, Chief Executive
Officer
EXECUTIVE
/s/ AUGUST FASKE
----------------------------
AUGUST FASKE
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AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this
18th day of March, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and AUGUST FASKE, an individual resident at 10103
Grand Oak Dr., Austin, Texas 78750 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance
Agreement dated September 20, 1995 (the "Agreement") which provided, inter
alia, for certain payments to be made in the event that certain events occurred
with respect to the Employee's employment relationship with the Company;
WHEREAS, the Employee and the Company desire that there be certain
changes made with respect to the Agreement as a result of the Company's pending
merger with Healthcare Acquisition, Inc., a Texas corporation ("Acquisition"),
a wholly owned subsidiary of Healthcare Acquisition Corp., a Delaware
corporation ("HCAC"); and
WHEREAS, the Company and the Employee want to memorialize in this
Amendment their agreements regarding such changes to the Agreement.
NOW THEREFORE, in consideration of the premises and other mutual
promises and covenants contained in this Amendment and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties, intending legally to be bound, agree as follows:
1. In the event that the Company completes its merger with
Acquisition (the "Merger") then, and only then, shall the following changes be
made in the Agreement, such changes to take effect on that date which is two
(2) years from the effective date of the Merger:
(a) the provisions of Section 2(b) (iii) shall be amended
so that the language "three hundred percent (300%)" shall read "one
hundred percent (100%)" in each place where such language appears in
that Section;
(b) the provisions of Section 2(b) (v) shall be amended
to provide that the insurance coverage to be provided to Employee,
Employee's spouse and to Employee's dependents (if covered prior to
the date of termination) under such provision shall be for coverage
from a period from the date of the termination until five (5) years
after the date of termination; and
(c) the provisions of Section 2(b) (vi) shall be amended
to provide that the liability insurance to be provided under such
provision shall be provided for the benefit of the Employee for a
period of five (5) years from the date of the termination of the
Employee's relationship with the Company.
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2. Except as specifically changed by the Amendment, all other
terms and provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set its
hand as of the date and year first written above.
ENCORE:
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
----------------------------
Nick Cindrich, CEO
EMPLOYEE:
/s/ AUGUST FASKE
---------------------------------
AUGUST FASKE
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EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 26th day of August, 1994, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation (the "Company"), and HARRY L. ZIMMERMAN (the "Employee");
Whereas, Employee has heretofore entered into an Employment Agreement
with the Company and both the Company and the Employee desire to amend and
restate in its entirety such Employment Agreement.
Now, therefore, in consideration of the mutual promises contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Employee agree
as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment Term. The Company hereby employs the Employee for a
primary term commencing on the date set forth above and, subject to earlier
termination as provided in Section 1.5 hereof, ending five (5) years from such
date (the "Employment Term"). Employee agrees to accept such employment and to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
1.2 Duties. The Employee shall serve in the capacity as Vice President
- - General Counsel of the Company, or in such other capacity as the Company may
in its sole discretion direct, and shall report to, and be subject to the
general direction and control of, the officers and directors of the Company. It
is further understood and agreed that any modification in or expansion of
Employee's duties hereunder shall not, unless specifically agreed in writing by
Company, result in any modification in, increase or decrease of Employee's
compensation referred to in Section 1.4 hereof.
1.3 Extent of Service. The Employee shall devote his full time,
attention, and energy to the business of the Company and, except as may be
specifically permitted by the Company and approved by either the Chief Executive
Officer or the Board of Directors of the Company, shall not be engaged in any
other business activity while in the employ of the Company.
1.4 Compensation
1.4.1 Salary. The Company shall pay to the Employee a base
salary at a rate of not less than One Hundred Thousand Dollars ($100,000) per
year, or at such greater rate as the Chief Executive Officer of the Company
shall from time to time determine (the "Base Salary"). The Base Salary shall be
subject to review on no less than an annual basis, beginning January 1, 1995 or,
at the Company's discretion, such earlier date as the Company may designate.
Such salary is to be payable in installments in accordance with the payroll
policies of the Company in effect from time to time during the Employment Term.
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1.4.2 Other Benefits. The Employee shall be entitled to such
vacation days, sick days, insurance and other fringe benefit programs (including
pension, profit-sharing, and stock plans, if any) as are established for other
executive employees of the Company, on the same basis as such other executive
employees are entitled thereto, it being understood that the establishment,
termination, or change of any such program shall be at the instance of the
Company, in exercise of its sole discretion, from time to time, and any such
termination or change in any such program shall not affect this Agreement.
1.5 Termination.
1.5.1 Termination by Employee. At any time after one (1) year
from the commencement of the Employment Term, Employee may terminate this
Agreement on thirty (30) days' prior written notice.
1.5.2 Termination by Company. Prior to the end of the
Employment Term, the Company may upon ten (10) days' prior written notice
discharge the Employee with or without cause at its sole option without any
further liability hereunder to the Employee or his estate. Provided, however, in
the event such termination was without cause, the Company shall be required to
pay the Employee, at the time of his discharge, for one (1) year's Base Salary,
in addition to any accrued, but unpaid Base Salary . The Employee will have no
further liability hereunder to the Company except pursuant to Article II and
Section 3.2 hereof. For purposes of this Agreement, a "discharge for cause"
shall mean a discharge resulting from Employee having (i) committed any act
involving moral turpitude, dishonesty, or fraud that, in the good faith opinion
of Company, causes a material harm to Company, (ii) failed or refused to follow
legal and reasonable policies or directives established and previously given to
Employee in writing by Company, (iii) willfully failed to attend to his duties
after ten (10) days prior written notice of failure to so act, (iv) committed
acts amounting to gross negligence or willful misconduct to the material
detriment of Company, or (v) otherwise materially breached any of the terms or
provisions of this Agreement after ten (10) days prior written notice of such
material breach and failure to cure such breach. Employee shall be deemed to
have been discharged for cause upon delivery to Employee of a "Notice of
Termination" stating the "Date of Termination" and specifying the particulars of
the conduct justifying discharge for cause. Furthermore, if the Employee is
terminated without cause, then the Company agrees, if requested by Employee for
the sole purpose of exercising any vested options that Employee has the right to
exercise, to loan to the Employee an amount equal to (i) the full exercise price
of all vested options that the Employee has the right to exercise less (ii) the
par value of such shares as are to be exercised. The terms of the loan shall be
that it shall be (a) secured by the stock to be purchased, (b) be otherwise
non-recourse to the Employee, (c) bear interest at the prime rate of interest as
published from time to time in The Wall Street Journal, and (d) be fully due and
payable, principal and interest, two (2) years from the date of termination.
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ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that his services to be
rendered hereunder are of a special and unusual character which have a unique
value to Company, the loss of which cannot adequately be compensated by damages
in an action at law. In view of the unique value to Company of the services of
Employee for which Company has contracted hereunder, and because of the
confidential information to be obtained by or disclosed to Employee, and as a
material inducement to Company to enter into this Agreement, and to pay to
Employee the compensation referred to in Section 1.4 hereof, Employee covenants
and agrees that during Employee's employment hereunder and for a period of one
(1) year after he ceases to be employed by Company, Employee shall not (a)
directly or indirectly, solicit business from, divert business from, or attempt
to convert to other methods of using the same or similar products or services as
provided by Company, any client, account or location of Company with which
Employee has had any contact as a result of his employment by Company hereunder;
(b) engage in or carry on, directly or indirectly, either for himself, as a
member of a partnership, or as a stockholder (except as limited partner or
stockholder of less than one percent (1%) of the issued and outstanding limited
partnership interests or stock of a publicly held partnership or corporation
whose gross assets exceed $l,000,000), as an investor, lender, guarantor,
landlord, manager, officer, or director of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), or as an employee,
agent, associate, broker, or consultant of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), any business that
competes with any operations of the Company within an one hundred (100)-mile
radius of any geographic area where Company is actually engaged in business, or
maintains sales or service representatives or employees; or (c) directly or
indirectly, solicit for employment or employ any employee of Company. Employee
may elect, by providing written notice to the Company, to shorten the term of
this non-compete to six (6) months, provided, however, in that event, the
Company's obligation to pay severance pay to the Employee pursuant to Section
1.5.2 shall be reduced to an amount equal to six (6) months base pay.
2.2 Disclosures of Information. The Employee acknowledges that in the
course of his employment by the Company, he will receive certain trade secrets,
programs, methods of operation, financial information, lists of customers, and
other confidential information and knowledge concerning the businesses of the
Company (hereinafter collectively referred to as "Information") that the Company
desires to protect. As a material inducement to Company to enter into this
Agreement, and to pay to Employee the compensation referred to in Section 1.4
hereof, Employee covenants and agrees that he shall not, at any time during or
following the term of his employment hereunder, directly or indirectly, divulge
or disclose, for any purpose whatsoever, any of such Information which has been
obtained by or disclosed to him as a result of his employment by Company. The
Employee further agrees that he will at no time use the Information in competing
with the Company. Upon termination of this Agreement, the Employee shall
surrender to the Company all lists, books, financial information, records,
literature, products, papers, documents, writings, and other property produced
by him or coming into his possession by or through his employment relating to
the Information, and the Employee agrees that all such materials will at all
times remain the property of the Company. In the event of a breach or
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threatened breach by Employee of any of the provisions of this Article II,
Company, in addition to and not in limitation of any other rights, remedies or
damages available to Company at law or in equity, shall be entitled to a
permanent injunction in order to prevent or to restrain any such breach by
Employee, or by Employee's partners, agents, representatives, servants,
employers, employees and/or any and all persons directly or indirectly acting
for or with him.
2.3 Accounting for Profits. Employee covenants and agrees that if he
shall violate any of his covenants or agreements under Article II hereof,
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remunerations or benefits which Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies to which
Company is or may be entitled at law or in equity or under this Agreement.
2.4 Reasonableness of Restrictions.
2.4.1 Employee has carefully read and considered the
provisions of Article II hereof and, having done so, agrees that the
restrictions set forth in such Article (including, but not limited to, the time
period of restriction and the geographical areas of restriction set forth in
Article II hereof) are fair and reasonable and are reasonably required for the
protection of the interest of Company, its officers, directors and other
employees.
2.4.2 In the event that, notwithstanding the foregoing, any of
the provisions of Article II hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event that any provision of Article II relating to
time period and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, said time period and/or areas of restriction
shall be deemed to become and thereafter be the maximum time period and/or areas
which such court deems reasonable and enforceable.
ARTICLE 3
EMPLOYEE INVENTIONS
3.1 Employee Inventions. Employee shall promptly disclose to the
Company or its designee any and all ideas, inventions, works of authorship
(including, but not limited to computer programs, software and documentation),
improvements, discoveries, developments, or innovations (hereinafter referred to
as "said inventions"), whether patentable or unpatentable, copyrightable or
uncopyrightable, made, developed, worked on, or conceived by Employee, either
solely or jointly with others, whether or not reduced to drawings, written
description, documentation, models, or other tangible form: (a) during the
Employment Term that relate to, or arise out of, any developments, services,
research, or products of, or pertain to the business of, the Company and (b) for
a period of six (6) months after termination of the Employment Term, said
inventions that relate to, or arise out of, any developments, services,
research, or products that Employee has been concerned with during the term of
his employment.
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<PAGE> 5
3.2 Assignment. Employee hereby assigns and agrees to assign to the
Company, its successors and assigns, Employee's entire right, title, and
interest in and to any of said inventions. All of said inventions shall
forthwith and without further consideration become and be the exclusive property
of the Company, it successors and assigns.
3.3 Cooperation. Employee shall, without further compensation, do all
lawful things, including, but not limited to, maintaining invention records that
shall be the property of the Company, rendering assistance, giving of evidence
and testimony, and executing necessary documents, as requested, to enable the
Company to file and obtain patents in the United States and foreign countries on
any of said inventions, as well as to protect the Company's interest in any of
said inventions.
ARTICLE 4
MISCELLANEOUS
4.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date mailed, postage
prepaid, by certified mail, return receipt requested, or telegraphed or telexed
and confirmed if addressed to the respective parties as follows: (a) if to the
Employee to the address set forth below, and (b) if to the Company to Encore
Orthopedics, Inc., 8920 Business Park Drive, Suite 380, Austin, Texas 78759
ATTENTION: President. Either party hereto may designate a different address by
providing written notice of such new address to the other party hereto.
4.2 Specific Performance. The Employee acknowledges that a remedy at
law for any breach or attempted breach of Section 1.3 and Article II of this
Agreement will be inadequate, and agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or any other equitable relief. In the event the Company brings legal
action to enforce its rights hereunder, the Employee shall pay all of the
Company's court costs and legal fees and expenses arising out of such action if
the Company prevails in such action.
4.3 Severability. Whenever 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 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.
4.4 Assignment. This Agreement may not be assigned by the Employee.
Neither the Employee nor his spouse shall have any right to commute, encumber,
or otherwise dispose of any right to receive payments hereunder, it being the
intention of the parties that such payments and the rights thereto are
nonassignable and nontransferable. This Agreement is only assignable by the
Company to a parent, subsidiary, successor or other affiliate of the Company.
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4.5 Binding Effect. Subject to the provisions of Section 4.4 of this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, the Employee's heirs and personal representatives, and the
successors and assigns of the Company.
4.6 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
4.7 Entire Agreement; Amendment. This Agreement contains the entire
understanding between the parties, and there are no agreements or understandings
among the parties except as set forth herein. The Employee represents and
warrants to the Company that at the time of execution of this Agreement he is
not a party to any other employment agreement. Employee further represents and
warrants that he neither has any proprietary information of any other business
nor is he providing any other business' proprietary information to the Company.
No alteration or modification of this Agreement shall be valid except by
subsequent written instrument executed by the parties hereto. No waiver by
either party of any breach by the other party of any provision or condition of
this Agreement in one circumstance shall be deemed a waiver of such provision or
condition in any other circumstances or be deemed a waiver of any other
provision or condition. The section and paragraph headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
COMPANY:
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG L. SMITH
--------------------------------
Craig L. Smith, President
EMPLOYEE:
/s/ HARRY L. ZIMMERMAN
------------------------------------
HARRY L. ZIMMERMAN
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<PAGE> 1
EXHIBIT 10.16
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 19th day of
September, 1995, by and between ENCORE(R) ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 8920 Business Park Drive,
Suite 380, Austin, Texas 78759, (the "COMPANY"), and HARRY L. ZIMMERMAN, an
individual resident at 2628 Barton Hills Drive, Austin, Texas 78704 (the
"EMPLOYEE" or the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Vice President
- - General Counsel pursuant to an employment agreement dated August 26, 1994
(such employment agreement as it may be amended or supplemented from time to
time and any successor agreement being referred to as the "EMPLOYMENT
AGREEMENT"); and
WHEREAS, the Board of Directors of the Company (the "BOARD") has
approved the Chief Executive Officer of the Company entering into severance
agreements with key executives of the Company; and
WHEREAS, the Employee is a key executive of the Company and has been
selected by the Chief Executive Officer of the Company to be offered a severance
agreement; and
WHEREAS, the Board believes that if the Company should receive or learn
of any proposal from a third person concerning a possible business combination
with the Company, or an acquisition of equity securities or a substantial
portion of the assets of the Company, it is important that the Company should be
able to rely upon the Executive to continue in his position and that the Board
and the Chief Executive Officer should be able to receive and rely upon his
advice as to the best interests of the Company and its shareholders, without
concern that the Executive might be distracted by any personal uncertainties and
risks created by such a proposal; and
WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposal, to advise management and the Board whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board may determine to be appropriate; and
WHEREAS, the Company wishes to be assured that it will have the
continued dedication of the Executive and the availability of his advice and
counsel despite the possibility, threat or occurrence of a bid to take over
control of the Company; and
WHEREAS, the Company wishes to induce the Executive to remain in the
employment of the Company under such circumstances; and
<PAGE> 2
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall have the same meaning as "discharge for
cause" as defined in Section 1.5.2 of the Employment Agreement as well
as include the repeated violation by the Executive of his obligations
under this Agreement which are demonstrably willful and deliberate on
the part of the Executive and which are not redeemed in a reasonable
period of time after receipt of written notice from the Company.
(b) "CHANGE IN CONTROL" means any of the following events:
(i) the acquisition by any person, including a
"group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership of shares of
capital stock or other voting securities of the Company that
have thirty-three and one third percent (33 1/3%) or more of
either (A) the then outstanding shares of the Company's common
stock or (B) the combined voting power of the Company's then
outstanding voting securities that are entitled to vote
generally for the election of the Board;
(ii) the sale or other disposition by the Company to
an unrelated third party of all or substantially all of the
Company's assets;
(iii) the consummation of a reorganization, merger,
or consolidation involving the Company if as a result of such
transaction persons who were shareholders of the Company
immediately before the reorganization, merger or consolidation
do not immediately thereafter own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the reorganized,
merged or consolidated Company that are entitled to vote
generally for the election of the board of such entity; or
(iv) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board.
(d) "DISABILITY" means the total and permanent inability of
the Executive due to illness, accident or other physical or mental
incapacity to perform the usual duties of his employment under the
Employment Agreement for a substantially continuous period of one
hundred eighty (180) days, as determined by a physician selected by the
Company and
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acceptable to the Executive or the Executive's legal representative
(which agreement as to acceptability will not be unreasonably
withheld).
(e) "GOOD REASON" means any of the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities
contemplated by the Employment Agreement, or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action that
is not taken in bad faith and that is remedied by the Company
promptly after receipt of notice thereof from the Executive;
(ii) the reduction in the overall level of the
Executive's compensation or benefits;
(iii) the Company's requiring the Executive to be
based at any office or location other than the Company's
executive offices in the Austin, Texas SMSA, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any significant increase in the travel
requirements of the Executive's position; for the purposes of
this clause (iv) a "significant" increase would include any
circumstances under which the Executive is or will be
required, during any six-month period, to spend more than
twice the number of nights away from home as were necessary
during the previous six-month period; or
(v) an inability on the part of the Executive to
carry out the duties of his position in good faith as a result
of a major disagreement between the Executive and other
executives of the Company who have been appointed after a
Change of Control concerning strategic or policy issues
affecting the Company or its business as a whole.
(f) "INCUMBENT BOARD" means those individuals who are members
of the Board on the date of this Agreement and any person who
subsequently becomes a member of the Board and whose election, or whose
nomination for election by the Company shareholders, was approved by a
vote of at least a majority of the directors then comprising the
Incumbent Board.
2. TERMINATION PAYMENTS.
(a) Termination of employment. If any Change of Control of the
Company occurs after the date of this Agreement and subsequently, on or
before the third
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anniversary of such Change of Control, the Executive's employment by
the Company or its successor in interest is terminated
(i) by the Company or its successor in interest for
any reason other than (A) for Cause, or (B) because of the
Executive's death or Disability, or
(ii) by the Executive for Good Reason,
(a "TERMINATION EVENT") then the Executive will be entitled to receive,
and the Company will pay or provide, the benefits set forth in
subsection (b) below.
(b) Severance benefits. Upon the occurrence of a Termination
Event described in subsection (a) above then, in addition to the
performance of its obligations under the Employment Agreement but in
the case of amounts payable under clauses (i) and (ii) without
duplication of any similar payments then due and payable under the
Employment Agreement:
(i) The Company will pay to the Executive within
thirty (30) days after the Termination Event an amount equal
to the sum of:
(A) his highest full base annual salary
in effect within one (1) year of the
Termination Event, plus
(B) the amount of any bonus, payable in
cash only notwithstanding the terms
of any bonus plan, with respect to
any year that has then ended which
was or would have accrued to the
Executive under any bonus plan then
in effect but which has not yet been
paid to him, plus
(C) an amount, payable in cash only
notwithstanding the terms of any
bonus plan, equal to the product of
(aa) the average of the bonus paid
or payable to the Executive for the
two preceding years (whether same
was paid in cash or its equivalent
value) multiplied by (bb) a fraction
of which the numerator is the number
of weeks that have elapsed in the
then current year through the date
of termination and the denominator
is 52, plus
(D) an amount equal to the product of
(aa) the number of unused vacation
days accrued by the Executive
through the date of termination
multiplied by (bb) a fraction the
numerator of which is the
Executive's highest base salary in
effect within one (1) year of the
Termination Event and the
denominator of which is 250;
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(ii) The Company will contribute in cash to any
retirement or saving plan in which the Executive is
participating, within thirty (30) days after the date of
termination, the maximum amount which the Company is permitted
to contribute based on the payments made pursuant to paragraph
(i) above and, at the Executive's election, will buy back the
stock held by the Executive in any such plan at its then fair
market value, depositing said value in cash into said plan;
(iii) The Company will pay in cash to the Executive
within thirty (30) days after the date of termination a
severance payment in an amount equal to the sum of
(A) three hundred percent (300%) of his
full base annual salary at the
highest rate in effect within one
(1) year of the Termination Event,
plus
(B) three hundred percent (300%) of the
average bonus paid or payable to him
for the two (2) preceding years
(whether same was paid in cash or
its equivalent value);
provided that if the amount payable by the Company to the
Executive under this clause (iii), without regard to any other
payments or benefits payable to the Executive under this
Agreement or the Employment Agreement, would constitute an
"excess parachute payment" for the purposes of Sections 280G
and 4999 of the Internal Revenue Code then the amount payable
by the Company under this Section 2b as a severance benefit
will be "grossed up" by the amount necessary in order to
reimburse Executive for any taxes due as a result of such an
"excess parachute payment" as per section 6 hereof.
(iv) The Company will amend or revise all stock
option plans and restricted stock awards to which the
Executive is a party, or grant appropriate waivers of any
restrictions contained in such plans and awards, so as to
remove all restrictions upon the exercise by the Executive of
such options or upon the ability of the Executive to sell any
shares of stock that are subject to any such options or
awards. As part of such amendments or revisions, the Company
will accelerate the vesting period for Executive to an
immediate one hundred (100%) and shall allow the Executive the
option to exercise his options or stock awards either within
ninety (90) days of his effective termination date and such
option remain as an incentive stock option or before the
termination of the original option or stock award period and
have such options be converted automatically into
non-qualified stock options for purposes of the Internal
Revenue Code.
(v) The Company will prepay in full if at all
possible, and if not possible, ensure to the satisfaction of
Executive maintenance in full force and effect for the benefit
of the Executive and his spouse and dependents (if covered
prior to the date of termination) in each case for a period
from the date of termination until
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<PAGE> 6
the later of the death of the Executive or his spouse, during
their period of their eligibility, all employee life, health,
accident, disability, medical and other employee welfare
benefits plans provided by the Company in which the Executive
or his spouse or his dependents are participating at the time
of the Executive's termination under the same terms and
conditions as then in effect; provided, that if the
Executive's or his spouse's or his dependents continued
participation is not permitted under the general terms of such
plans, the Company shall arrange to provide substantially
similar benefits;
(vi) The Company will maintain for the benefit of the
Executive such policy of liability insurance, providing
protection to him as an officer, director, agent or employee
of the Company or its subsidiaries, as may from time to time
be purchased by the Company for officers and directors
generally as authorized by or in furtherance of the
indemnification provisions contained in the Company's bylaws.
Neither the insurance nor the Executive's right to
indemnification thereunder may be canceled by the Company
without his permission for a period of five years following
the date of termination under this Agreement; provided,
however, that the Company may obtain a substitute insurance
policy as long as the rights of indemnity to the Executive are
at least equivalent to the most favorable rights provided
under the policy in effect immediately prior to the date of
termination.
(b) The Executive shall have no duty to mitigate, whether by
seeking other employment or otherwise, any loss or damage suffered by
him as a result of any failure by the Company to make any payment, or
provide any benefit, to him under this Section 2.
3. AGREEMENTS OF EXECUTIVE.
The Executive covenants and agrees as follows:
(a) Provision of services when Change of Control is
threatened. If any person begins a tender or exchange offer for voting
securities of the Company, or circulates a proxy to shareholders of the
Company or takes any other action for the purposes of effecting a
Change of Control of the Company, then notwithstanding the terms of the
Employment Agreement or any other agreement between the Executive and
the Company the Executive will not voluntarily leave the employment of
the Company and will render the services contemplated in the recitals
to this Agreement until either (i) such person has abandoned or
terminated his efforts to effect a Change of Control or (ii) three
months have elapsed since the date on which a Change of Control has
occurred.
(b) Noncompetition. Without limiting the terms of any similar
provision in the Employment Agreement or any other agreement between
the Executive and the Company, if the Executive's employment with the
Company is terminated under any circumstances that entitle the
Executive to receive the payments and other benefits provided in
Section 2, then for a period of one year (or six (6) months should
Executive make the election in the
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<PAGE> 7
last sentence of Section 2.1 of the Employment Agreement) from the
Termination Event the Executive will not:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
(ii) act as an agent, broker or distributor for, or
as an adviser or consultant to,
(iii) be employed in any senior managerial or
executive position by any corporation, partnership, limited
liability company or other business organization in which he
has responsibility for,
any business (regardless of the form in which such business is
conducted) which is engaged, or which he reasonably expects to become
engaged, in the business of designing, manufacturing, distributing or
selling artificial joints and limbs and other orthopedic implant
devices in the United States; provided that the ownership by the
Executive of not more than two percent (2%) of the shares of any
publicly traded corporation or twenty percent (20%) of a privately held
company shall not constitute a violation of this subsection (b).
(c) Publications by Executive. Without limiting the terms of
any similar provision in the Employment Agreement or any other
agreement between the Executive and the Company, if the Executive's
employment with the Company is terminated under any circumstances that
entitle the Executive to receive the payments and other benefits
provided in Section 2, then
(i) the Executive will refrain from making any
disparaging comments about the Company or any of its
affiliates, and
(ii) for a period of one (1) year from the
Termination Event the Executive will not without the prior
written permission of the Company write or publish, or assist
in the writing or publication of, any books, articles or other
materials that would adversely affect the interests of the
Company or its affiliates.
(d) Remedies. The Executive acknowledges that any violation of
this Section may cause irreparable harm to the Company, and that
damages are not an adequate remedy, and the Executive therefore agrees
that the Company shall be entitled to an injunction by any appropriate
court in the appropriate jurisdiction, enjoining, prohibiting and
restraining the Executive from the continuance of any such violation,
in addition to any monetary damages which might occur by reason of the
violation of this Agreement.
(e) Independent. The covenants set forth in the foregoing
subsections (a), (b), (c), and (d) shall be deemed and shall be
construed as separate and independent covenants, and should any part or
provision of such covenants be held invalid, void or unenforceable
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<PAGE> 8
by any court of competent jurisdiction, such invalidity, voidness, or
unenforceability shall in no way render invalid, void, or unenforceable
any other part or provision thereof or any separate covenant not
declared invalid, void, or unenforceable. This Agreement shall in that
case be construed as if the void, invalid or unenforceable provisions
were omitted.
4. NOTICE OF TERMINATION.
Any termination of the Executive's employment by the Company or its
successor in interest or by the Executive shall be communicated by a written
notice of termination to the other party, and shall specify the provision of
this Agreement relied upon and shall set forth in reasonable detail the
circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered if
by the Executive or thirty (30) days after the date of the notice of termination
if given by the Company. All applicable benefits to Executive hereunder shall be
triggered if said notice of termination is given within the three (3)-year
period specified in Section 2(a) hereof.
5. LITIGATION EXPENSES.
The Company shall pay reasonable legal fees and expenses incurred by
the Executive as a result of his seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at his
request as such fees and expenses are incurred.
6. EXCESS PARACHUTE PAYMENTS.
(a) If any federal excise tax is imposed under Section 4999 of
the Internal Revenue Code of 1986, as amended (an "EXCISE TAX") on the
Executive with respect to any payments or benefits provided under
Section 2, the Company hereby agrees, subject to the exceptions and
limitations set forth below, to pay the Executive such additional
amount (the "ADDITIONAL AMOUNT") as is necessary to cause the Executive
to realize the same net amount after the imposition of all federal
income tax, estate tax and Excise Tax imposed on payments and benefits
under Section 2 (and on such Additional Amount payable under this
Section 6) that he would have realized had such federal income tax,
estate tax, and Excise Tax not been imposed upon him with respect to
such payments and benefits under Section 2 and this Section 6;
provided, however, that no such Additional Amount shall be due with
respect to
(i) any penalties, interest, or similar charges, if
any, assessed with respect to or arising out of any income
tax, estate tax, or Excise Tax due unless the Company delays
the payment contemplated herein to the Executive or
(ii) any income tax or estate tax which would be
owing by the Executive in the absence of the imposition of the
Excise Tax.
(b) The Company shall have the right to contest, but the
Executive shall have no duty to contest, the assessment of any such
taxes, but in any event, the Executive
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<PAGE> 9
agrees to cooperate in any contest the Company chooses to make provided
the Company shall pay the costs of any such contest.
7. ASSIGNMENT; SUCCESSORS IN INTEREST.
(a) General. Except with the prior written consent of the
Executive,
(i) no assignment by operation of law or otherwise by
the Company of any of its rights and obligations under this
Agreement may be made other than to an entity in common
control with or a successor to all or a substantial portion of
the business of the Company (but then only if such entity
assumes by operation of law or by specific assumption executed
by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this
Agreement);
(ii) no transfer by operation of law or otherwise by
the Company of all or a substantial part of its business or
assets shall be made unless the obligations and liabilities of
the Company under this Agreement are assumed in connection
with such transfer either by operation of law or by specific
assumption executed by the transferee and delivered to the
Executive; and
(iii) in any such event the Company shall remain
liable for the performance of all of its obligations under
this Agreement (which liability shall be a primary obligation
for full and prompt performance rather than a secondary
guarantee of collectibility of damages).
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to his heirs,
devisees, legatees or beneficiaries or except with the prior written
consent of the Company, no assignment or transfer by operation of law
or otherwise may be made by the Executive of any of his rights under
this Agreement.
(b) Binding Nature. This Agreement shall be binding upon the
parties to this Agreement and their respective legal representatives,
heirs, devisees, legatees, beneficiaries and successors and assigns;
shall inure to the benefit of the parties to this Agreement and their
respective permitted legal representatives, heirs, devisees, legatees,
beneficiaries and other permitted successors and assigns (and to or for
the benefit of no other person or entity, whether an employee or
otherwise, whatsoever); and any reference to a party to this Agreement
shall also be a reference to a permitted successor or assign.
8. MISCELLANEOUS.
(a) This Agreement may not be varied, altered, or changed
except by instrument in writing executed by the parties hereto. The
failure of any party to this Agreement at any time or times to require
performance of any provision of this Agreement shall in no manner
affect the right to enforce the same. No waiver by any party to this
Agreement of any provision (or of a breach of any provision) of this
Agreement, whether
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<PAGE> 10
by conduct or otherwise, in any one or more instances shall be deemed
or construed either as a further or continuing waiver of any such
provision or breach or as a waiver of any other provision (or of a
breach of any other provision) of this Agreement.
(b) Wherever possible each provision of this Agreement shall
be interpreted in such manner as to be effective and valid but if any
one or more of the provisions of this Agreement shall be invalid,
illegal or unenforceable in any respect for any reason, the validity,
legality or enforceability of any such provisions in every other
respect and of the remaining provisions of this Agreement shall not be
impaired.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Texas (without giving effect
to any choice of law provisions) and enforceable in a court of
competent jurisdiction in Travis County, Texas.
(d) This Agreement and any benefits accruing to Executive
hereunder shall be supplemental and additional to any and all benefits
accruing to Executive pursuant to the Employment Agreement and any and
all Stock Option or Stock Award Plans applicable to Executive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set his
hand as of the date and year first written above.
COMPANY
ENCORE ORTHOPEDICS, INC.
By: /s/ Nick Cindrich
---------------------------------------------------
Nick Cindrich, Chief Executive Officer
EXECUTIVE
/s/ HARRY L. ZIMMERMAN
-----------------------------
HARRY L. ZIMMERMAN
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<PAGE> 11
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this
17th day of March, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and HARRY L. ZIMMERMAN, an individual resident at
2628 Barton Hills Drive, Austin, Texas 78704 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance
Agreement dated September 19, 1995 (the "Agreement") which provided, inter alia,
for certain payments to be made in the event that certain events occurred with
respect to the Employee's employment relationship with the Company;
WHEREAS, the Employee and the Company desire that there be certain
changes made with respect to the Agreement as a result of the Company's pending
merger with Healthcare Acquisition, Inc., a Texas corporation ("Acquisition"), a
wholly owned subsidiary of Healthcare Acquisition Corp., a Delaware corporation
("HCAC"); and
WHEREAS, the Company and the Employee want to memorialize in this
Amendment their agreements regarding such changes to the Agreement.
NOW THEREFORE, in consideration of the premises and other mutual
promises and covenants contained in this Amendment and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties, intending legally to be bound, agree as follows:
1. In the event that the Company completes its merger with Acquisition
(the "Merger") then, and only then, shall the following changes be made in the
Agreement, such changes to take effect on that date which is two (2) years from
the effective date of the Merger:
(a) the provisions of Section 2(b) (iii) shall be amended so
that the language "three hundred percent (300%)" shall read "one
hundred percent (100%)" in each place where such language appears in
that Section;
(b) the provisions of Section 2(b) (v) shall be amended to
provide that the insurance coverage to be provided to Employee,
Employee's spouse and to Employee's dependents (if covered prior to the
date of termination) under such provision shall be for coverage from a
period from the date of the termination until five (5) years after the
date of termination; and
(c) the provisions of Section 2(b) (vi) shall be amended to
provide that the liability insurance to be provided under such
provision shall be provided for the benefit of the Employee for a
period of five (5) years from the date of the termination of the
Employee's relationship with the Company.
<PAGE> 12
2. Except as specifically changed by the Amendment, all other terms and
provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set its
hand as of the date and year first written above.
ENCORE:
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
-----------------------------------
Nick Cindrich, CEO
EMPLOYEE:
/s/ HARRY L. ZIMMERMAN
-----------------------------------
HARRY L. ZIMMERMAN
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 26th day of August, 1994, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation (the "Company"), and JOHN D. WEBB, JR. (the "Employee");
Whereas, Employee has heretofore entered into an Employment Agreement
with the Company and both the Company and the Employee desire to amend and
restate in its entirety such Employment Agreement.
Now, therefore, in consideration of the mutual promises contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Employee agree
as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employment Term. The Company hereby employs the Employee for a
primary term commencing on the date set forth above and, subject to earlier
termination as provided in Section 1.5 hereof, ending five (5) years from such
date (the "Employment Term"). Employee agrees to accept such employment and to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
1.2 Duties. The Employee shall serve in the capacity as Vice President
- - Research and Development of the Company, or in such other capacity as the
Company may in its sole discretion direct, and shall report to, and be subject
to the general direction and control of, the officers and directors of the
Company. It is further understood and agreed that any modification in or
expansion of Employee's duties hereunder shall not, unless specifically agreed
in writing by Company, result in any modification in, increase or decrease of
Employee's compensation referred to in Section 1.4 hereof.
1.3 Extent of Service. The Employee shall devote his full time,
attention, and energy to the business of the Company and, except as may be
specifically permitted by the Company and approved by either the Chief Executive
Officer or the Board of Directors of the Company, shall not be engaged in any
other business activity while in the employ of the Company.
1.4 Compensation
1.4.1 Salary. The Company shall pay to the Employee a base
salary at a rate of not less than Eighty-five Thousand Eight Hundred Thousand
Dollars ($85,800) per year, or at such greater rate as the Chief Executive
Officer of the Company shall from time to time determine (the "Base Salary").
The Base Salary shall be subject to review on no less than an annual basis,
beginning January 1, 1995 or, at the Company's discretion, such earlier date as
the Company may designate. Such salary is to be payable in installments in
accordance with the payroll policies of the Company in effect from time to time
during the Employment Term.
<PAGE> 2
1.4.2 Other Benefits. The Employee shall be entitled to such
vacation days, sick days, insurance and other fringe benefit programs (including
pension, profit-sharing, and stock plans, if any) as are established for other
executive employees of the Company, on the same basis as such other executive
employees are entitled thereto, it being understood that the establishment,
termination, or change of any such program shall be at the instance of the
Company, in exercise of its sole discretion, from time to time, and any such
termination or change in any such program shall not affect this Agreement.
1.5 Termination.
1.5.1 Termination by Employee. At any time after one (1) year
from the commencement of the Employment Term, Employee may terminate this
Agreement on thirty (30) days' prior written notice.
1.5.2 Termination by Company. Prior to the end of the
Employment Term, the Company may upon ten (10) days' prior written notice
discharge the Employee with or without cause at its sole option without any
further liability hereunder to the Employee or his estate. Provided, however, in
the event such termination was without cause, the Company shall be required to
pay the Employee, at the time of his discharge, for one (1) year's Base Salary,
in addition to any accrued, but unpaid Base Salary . The Employee will have no
further liability hereunder to the Company except pursuant to Article II and
Section 3.2 hereof. For purposes of this Agreement, a "discharge for cause"
shall mean a discharge resulting from Employee having (i) committed any act
involving moral turpitude, dishonesty, or fraud that, in the good faith opinion
of Company, causes a material harm to Company, (ii) failed or refused to follow
legal and reasonable policies or directives established and previously given to
Employee in writing by Company, (iii) willfully failed to attend to his duties
after ten (10) days prior written notice of failure to so act, (iv) committed
acts amounting to gross negligence or willful misconduct to the material
detriment of Company, or (v) otherwise materially breached any of the terms or
provisions of this Agreement after ten (10) days prior written notice of such
material breach and failure to cure such breach. Employee shall be deemed to
have been discharged for cause upon delivery to Employee of a "Notice of
Termination" stating the "Date of Termination" and specifying the particulars of
the conduct justifying discharge for cause. Furthermore, if the Employee is
terminated without cause, then the Company agrees, if requested by Employee for
the sole purpose of exercising any vested options that Employee has the right to
exercise, to loan to the Employee an amount equal to (i) the full exercise price
of all vested options that the Employee has the right to exercise less (ii) the
par value of such shares as are to be exercised. The terms of the loan shall be
that it shall be (a) secured by the stock to be purchased, (b) be otherwise
non-recourse to the Employee, (c) bear interest at the prime rate of interest as
published from time to time in The Wall Street Journal, and (d) be fully due and
payable, principal and interest, two (2) years from the date of termination.
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<PAGE> 3
ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that his services to be
rendered hereunder are of a special and unusual character which have a unique
value to Company, the loss of which cannot adequately be compensated by damages
in an action at law. In view of the unique value to Company of the services of
Employee for which Company has contracted hereunder, and because of the
confidential information to be obtained by or disclosed to Employee, and as a
material inducement to Company to enter into this Agreement, and to pay to
Employee the compensation referred to in Section 1.4 hereof, Employee covenants
and agrees that during Employee's employment hereunder and for a period of one
(1) year after he ceases to be employed by Company, Employee shall not (a)
directly or indirectly, solicit business from, divert business from, or attempt
to convert to other methods of using the same or similar products or services as
provided by Company, any client, account or location of Company with which
Employee has had any contact as a result of his employment by Company hereunder;
(b) engage in or carry on, directly or indirectly, either for himself, as a
member of a partnership, or as a stockholder (except as limited partner or
stockholder of less than one percent (1%) of the issued and outstanding limited
partnership interests or stock of a publicly held partnership or corporation
whose gross assets exceed $l,000,000), as an investor, lender, guarantor,
landlord, manager, officer, or director of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), or as an employee,
agent, associate, broker, or consultant of any person, partnership, corporation,
or other entity (other than the Company or its subsidiaries), any business that
competes with any operations of the Company within an one hundred (100)-mile
radius of any geographic area where Company is actually engaged in business, or
maintains sales or service representatives or employees; or (c) directly or
indirectly, solicit for employment or employ any employee of Company. Employee
may elect, by providing written notice to the Company, to shorten the term of
this non-compete to six (6) months, provided, however, in that event, the
Company's obligation to pay severance pay to the Employee pursuant to Section
1.5.2 shall be reduced to an amount equal to six (6) months base pay.
2.2 Disclosures of Information. The Employee acknowledges that in the
course of his employment by the Company, he will receive certain trade secrets,
programs, methods of operation, financial information, lists of customers, and
other confidential information and knowledge concerning the businesses of the
Company (hereinafter collectively referred to as "Information") that the Company
desires to protect. As a material inducement to Company to enter into this
Agreement, and to pay to Employee the compensation referred to in Section 1.4
hereof, Employee covenants and agrees that he shall not, at any time during or
following the term of his employment hereunder, directly or indirectly, divulge
or disclose, for any purpose whatsoever, any of such Information which has been
obtained by or disclosed to him as a result of his employment by Company. The
Employee further agrees that he will at no time use the Information in competing
with the Company. Upon termination of this Agreement, the Employee shall
surrender to the Company all lists, books, financial information, records,
literature, products, papers, documents, writings, and other property produced
by him or coming into his possession by or through his employment relating to
the Information, and the Employee agrees that all such materials will at all
times remain the property of the Company. In the event of a breach or
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<PAGE> 4
threatened breach by Employee of any of the provisions of this Article II,
Company, in addition to and not in limitation of any other rights, remedies or
damages available to Company at law or in equity, shall be entitled to a
permanent injunction in order to prevent or to restrain any such breach by
Employee, or by Employee's partners, agents, representatives, servants,
employers, employees and/or any and all persons directly or indirectly acting
for or with him.
2.3 Accounting for Profits. Employee covenants and agrees that if he
shall violate any of his covenants or agreements under Article II hereof,
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remunerations or benefits which Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies to which
Company is or may be entitled at law or in equity or under this Agreement.
2.4 Reasonableness of Restrictions.
2.4.1 Employee has carefully read and considered the
provisions of Article II hereof and, having done so, agrees that the
restrictions set forth in such Article (including, but not limited to, the time
period of restriction and the geographical areas of restriction set forth in
Article II hereof) are fair and reasonable and are reasonably required for the
protection of the interest of Company, its officers, directors and other
employees.
2.4.2 In the event that, notwithstanding the foregoing, any of
the provisions of Article II hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event that any provision of Article II relating to
time period and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, said time period and/or areas of restriction
shall be deemed to become and thereafter be the maximum time period and/or areas
which such court deems reasonable and enforceable.
ARTICLE 3
EMPLOYEE INVENTIONS
3.1 Employee Inventions. Employee shall promptly disclose to the
Company or its designee any and all ideas, inventions, works of authorship
(including, but not limited to computer programs, software and documentation),
improvements, discoveries, developments, or innovations (hereinafter referred to
as "said inventions"), whether patentable or unpatentable, copyrightable or
uncopyrightable, made, developed, worked on, or conceived by Employee, either
solely or jointly with others, whether or not reduced to drawings, written
description, documentation, models, or other tangible form: (a) during the
Employment Term that relate to, or arise out of, any developments, services,
research, or products of, or pertain to the business of, the Company and (b) for
a period of six (6) months after termination of the Employment Term, said
inventions that relate to, or arise out of, any developments, services,
research, or products that Employee has been concerned with during the term of
his employment.
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<PAGE> 5
3.2 Assignment. Employee hereby assigns and agrees to assign to the
Company, its successors and assigns, Employee's entire right, title, and
interest in and to any of said inventions. All of said inventions shall
forthwith and without further consideration become and be the exclusive property
of the Company, it successors and assigns.
3.3 Cooperation. Employee shall, without further compensation, do all
lawful things, including, but not limited to, maintaining invention records that
shall be the property of the Company, rendering assistance, giving of evidence
and testimony, and executing necessary documents, as requested, to enable the
Company to file and obtain patents in the United States and foreign countries on
any of said inventions, as well as to protect the Company's interest in any of
said inventions.
ARTICLE 4
MISCELLANEOUS
4.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date mailed, postage
prepaid, by certified mail, return receipt requested, or telegraphed or telexed
and confirmed if addressed to the respective parties as follows: (a) if to the
Employee to the address set forth below, and (b) if to the Company to Encore
Orthopedics, Inc., 8920 Business Park Drive, Suite 380, Austin, Texas 78759
ATTENTION: President. Either party hereto may designate a different address by
providing written notice of such new address to the other party hereto.
4.2 Specific Performance. The Employee acknowledges that a remedy at
law for any breach or attempted breach of Section 1.3 and Article II of this
Agreement will be inadequate, and agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or any other equitable relief. In the event the Company brings legal
action to enforce its rights hereunder, the Employee shall pay all of the
Company's court costs and legal fees and expenses arising out of such action if
the Company prevails in such action.
4.3 Severability. Whenever 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 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.
4.4 Assignment. This Agreement may not be assigned by the Employee.
Neither the Employee nor his spouse shall have any right to commute, encumber,
or otherwise dispose of any right to receive payments hereunder, it being the
intention of the parties that such payments and the rights thereto are
nonassignable and nontransferable. This Agreement is only assignable by the
Company to a parent, subsidiary, successor or other affiliate of the Company.
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<PAGE> 6
4.5 Binding Effect. Subject to the provisions of Section 4.4 of this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, the Employee's heirs and personal representatives, and the
successors and assigns of the Company.
4.6 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of Texas.
4.7 Entire Agreement; Amendment. This Agreement contains the entire
understanding between the parties, and there are no agreements or understandings
among the parties except as set forth herein. The Employee represents and
warrants to the Company that at the time of execution of this Agreement he is
not a party to any other employment agreement. Employee further represents and
warrants that he neither has any proprietary information of any other business
nor is he providing any other business' proprietary information to the Company.
No alteration or modification of this Agreement shall be valid except by
subsequent written instrument executed by the parties hereto. No waiver by
either party of any breach by the other party of any provision or condition of
this Agreement in one circumstance shall be deemed a waiver of such provision or
condition in any other circumstances or be deemed a waiver of any other
provision or condition. The section and paragraph headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
COMPANY:
ENCORE ORTHOPEDICS, INC.
By: /s/ CRAIG L. SMITH
--------------------------------
Craig L. Smith, President
EMPLOYEE:
/s/ JOHN D. WEBB, JR.
------------------------------------
JOHN D. WEBB, JR.
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<PAGE> 1
EXHIBIT 10.18
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 19th day of
September, 1995, by and between ENCORE(R) ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 8920 Business Park Drive,
Suite 380, Austin, Texas 78759, (the "COMPANY"), and J.D. WEBB, JR., an
individual resident at 1001 Oakwood Blvd., Round Rock, Texas 78681 (the
"EMPLOYEE" or the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Vice President
- - Research and Development pursuant to an employment agreement dated August 26,
1994 (such employment agreement as it may be amended or supplemented from time
to time and any successor agreement being referred to as the "EMPLOYMENT
AGREEMENT"); and
WHEREAS, the Board of Directors of the Company (the "BOARD") has
approved the Chief Executive Officer of the Company entering into severance
agreements with key executives of the Company; and
WHEREAS, the Employee is a key executive of the Company and has been
selected by the Chief Executive Officer of the Company to be offered a
severance agreement; and
WHEREAS, the Board believes that if the Company should receive or
learn of any proposal from a third person concerning a possible business
combination with the Company, or an acquisition of equity securities or a
substantial portion of the assets of the Company, it is important that the
Company should be able to rely upon the Executive to continue in his position
and that the Board and the Chief Executive Officer should be able to receive
and rely upon his advice as to the best interests of the Company and its
shareholders, without concern that the Executive might be distracted by any
personal uncertainties and risks created by such a proposal; and
WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposal, to advise management and the Board whether such
proposals would be in the best interests of the Company and its shareholders,
and to take such other actions as the Board may determine to be appropriate;
and
WHEREAS, the Company wishes to be assured that it will have the
continued dedication of the Executive and the availability of his advice and
counsel despite the possibility, threat or occurrence of a bid to take over
control of the Company; and
WHEREAS, the Company wishes to induce the Executive to remain in the
employment of the Company under such circumstances; and
<PAGE> 2
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants contained in this Agreement, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall have the same meaning as "discharge for
cause" as defined in Section 1.5.2 of the Employment Agreement as well
as include the repeated violation by the Executive of his obligations
under this Agreement which are demonstrably willful and deliberate on
the part of the Executive and which are not redeemed in a reasonable
period of time after receipt of written notice from the Company.
(b) "CHANGE IN CONTROL" means any of the following
events:
(i) the acquisition by any person, including a
"group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership of shares of
capital stock or other voting securities of the Company that
have thirty-three and one third percent (33 1/3%) or more of
either (A) the then outstanding shares of the Company's common
stock or (B) the combined voting power of the Company's then
outstanding voting securities that are entitled to vote
generally for the election of the Board;
(ii) the sale or other disposition by the Company
to an unrelated third party of all or substantially all of the
Company's assets;
(iii) the consummation of a reorganization, merger,
or consolidation involving the Company if as a result of such
transaction persons who were shareholders of the Company
immediately before the reorganization, merger or consolidation
do not immediately thereafter own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the reorganized,
merged or consolidated Company that are entitled to vote
generally for the election of the board of such entity; or
(iv) the failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the Board.
(c) "DISABILITY" means the total and permanent inability
of the Executive due to illness, accident or other physical or mental
incapacity to perform the usual duties of his employment under the
Employment Agreement for a substantially continuous period of one
hundred eighty (180) days, as determined by a physician selected by
the Company and
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<PAGE> 3
acceptable to the Executive or the Executive's legal representative
(which agreement as to acceptability will not be unreasonably
withheld).
(d) "GOOD REASON" means any of the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities
contemplated by the Employment Agreement, or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action that
is not taken in bad faith and that is remedied by the Company
promptly after receipt of notice thereof from the Executive;
(ii) the reduction in the overall level of the
Executive's compensation or benefits;
(iii) the Company's requiring the Executive to be
based at any office or location other than the Company's
executive offices in the Austin, Texas SMSA, except for travel
reasonably required in the performance of the Executive's
responsibilities;
(iv) any significant increase in the travel
requirements of the Executive's position; for the purposes of
this clause (iv) a "significant" increase would include any
circumstances under which the Executive is or will be
required, during any six-month period, to spend more than
twice the number of nights away from home as were necessary
during the previous six-month period; or
(v) an inability on the part of the Executive to
carry out the duties of his position in good faith as a result
of a major disagreement between the Executive and other
executives of the Company who have been appointed after a
Change of Control concerning strategic or policy issues
affecting the Company or its business as a whole.
(e) "INCUMBENT BOARD" means those individuals who are
members of the Board on the date of this Agreement and any person who
subsequently becomes a member of the Board and whose election, or
whose nomination for election by the Company shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board.
2. TERMINATION PAYMENTS.
(a) Termination of employment. If any Change of Control
of the Company occurs after the date of this Agreement and
subsequently, on or before the third
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<PAGE> 4
anniversary of such Change of Control, the Executive's employment by
the Company or its successor in interest is terminated
(i) by the Company or its successor in interest
for any reason other than (A) for Cause, or (B) because of the
Executive's death or Disability, or
(ii) by the Executive for Good Reason,
(a "TERMINATION EVENT") then the Executive will be entitled to
receive, and the Company will pay or provide, the benefits set forth
in subsection (b) below.
(b) Severance benefits. Upon the occurrence of a
Termination Event described in subsection (a) above then, in addition
to the performance of its obligations under the Employment Agreement
but in the case of amounts payable under clauses (i) and (ii) without
duplication of any similar payments then due and payable under the
Employment Agreement:
(i) The Company will pay to the Executive within
thirty (30) days after the Termination Event an amount equal
to the sum of:
(A) his highest full base annual salary
in effect within one (1) year of the
Termination Event, plus
(B) the amount of any bonus, payable in
cash only notwithstanding the terms
of any bonus plan, with respect to
any year that has then ended which
was or would have accrued to the
Executive under any bonus plan then
in effect but which has not yet been
paid to him, plus
(C) an amount, payable in cash only
notwithstanding the terms of any
bonus plan, equal to the product of
(aa) the average of the bonus paid
or payable to the Executive for the
two preceding years (whether same
was paid in cash or its equivalent
value) multiplied by (bb) a fraction
of which the numerator is the number
of weeks that have elapsed in the
then current year through the date
of termination and the denominator
is 52, plus
(D) an amount equal to the product of
(aa) the number of unused vacation
days accrued by the Executive
through the date of termination
multiplied by (bb) a fraction the
numerator of which is the
Executive's highest base salary in
effect within one (1) year of the
Termination Event and the
denominator of which is 250;
-4-
<PAGE> 5
(ii) The Company will contribute in cash to any
retirement or saving plan in which the Executive is
participating, within thirty (30) days after the date of
termination, the maximum amount which the Company is permitted
to contribute based on the payments made pursuant to paragraph
(i) above and, at the Executive's election, will buy back the
stock held by the Executive in any such plan at its then fair
market value, depositing said value in cash into said plan;
(iii) The Company will pay in cash to the Executive
within thirty (30) days after the date of termination a
severance payment in an amount equal to the sum of
(A) three hundred percent (300%) of his
full base annual salary at the
highest rate in effect within one
(1) year of the Termination Event,
plus
(B) three hundred percent (300%) of the
average bonus paid or payable to him
for the two (2) preceding years
(whether same was paid in cash or
its equivalent value);
provided that if the amount payable by the Company to the
Executive under this clause (iii), without regard to any other
payments or benefits payable to the Executive under this
Agreement or the Employment Agreement, would constitute an
"excess parachute payment" for the purposes of Sections 280G
and 4999 of the Internal Revenue Code then the amount payable
by the Company under this Section 2b as a severance benefit
will be "grossed up" by the amount necessary in order to
reimburse Executive for any taxes due as a result of such an
"excess parachute payment" as per section 6 hereof.
(iv) The Company will amend or revise all stock
option plans and restricted stock awards to which the
Executive is a party, or grant appropriate waivers of any
restrictions contained in such plans and awards, so as to
remove all restrictions upon the exercise by the Executive of
such options or upon the ability of the Executive to sell any
shares of stock that are subject to any such options or
awards. As part of such amendments or revisions, the Company
will accelerate the vesting period for Executive to an
immediate one hundred (100%) and shall allow the Executive the
option to exercise his options or stock awards either within
ninety (90) days of his effective termination date and such
option remain as an incentive stock option or before the
termination of the original option or stock award period and
have such options be converted automatically into
non-qualified stock options for purposes of the Internal
Revenue Code.
(v) The Company will prepay in full if at all
possible, and if not possible, ensure to the satisfaction of
Executive maintenance in full force and effect for the benefit
of the Executive and his spouse and dependents (if covered
prior to the date of termination) in each case for a period
from the date of termination until
-5-
<PAGE> 6
the later of the death of the Executive or his spouse, during
their period of their eligibility, all employee life, health,
accident, disability, medical and other employee welfare
benefits plans provided by the Company in which the Executive
or his spouse or his dependents are participating at the time
of the Executive's termination under the same terms and
conditions as then in effect; provided, that if the
Executive's or his spouse's or his dependents continued
participation is not permitted under the general terms of such
plans, the Company shall arrange to provide substantially
similar benefits;
(vi) The Company will maintain for the benefit of
the Executive such policy of liability insurance, providing
protection to him as an officer, director, agent or employee
of the Company or its subsidiaries, as may from time to time
be purchased by the Company for officers and directors
generally as authorized by or in furtherance of the
indemnification provisions contained in the Company's bylaws.
Neither the insurance nor the Executive's right to
indemnification thereunder may be canceled by the Company
without his permission for a period of five years following
the date of termination under this Agreement; provided,
however, that the Company may obtain a substitute insurance
policy as long as the rights of indemnity to the Executive are
at least equivalent to the most favorable rights provided
under the policy in effect immediately prior to the date of
termination.
(b) The Executive shall have no duty to mitigate, whether
by seeking other employment or otherwise, any loss or damage suffered
by him as a result of any failure by the Company to make any payment,
or provide any benefit, to him under this Section 2.
3. AGREEMENTS OF EXECUTIVE.
The Executive covenants and agrees as follows:
(a) Provision of services when Change of Control is
threatened. If any person begins a tender or exchange offer for
voting securities of the Company, or circulates a proxy to
shareholders of the Company or takes any other action for the purposes
of effecting a Change of Control of the Company, then notwithstanding
the terms of the Employment Agreement or any other agreement between
the Executive and the Company the Executive will not voluntarily leave
the employment of the Company and will render the services
contemplated in the recitals to this Agreement until either (i) such
person has abandoned or terminated his efforts to effect a Change of
Control or (ii) three months have elapsed since the date on which a
Change of Control has occurred.
(b) Noncompetition. Without limiting the terms of any
similar provision in the Employment Agreement or any other agreement
between the Executive and the Company, if the Executive's employment
with the Company is terminated under any circumstances that entitle
the Executive to receive the payments and other benefits provided in
Section 2, then for a period of one year (or six (6) months should
Executive make the election in the
-6-
<PAGE> 7
last sentence of Section 2.1 of the Employment Agreement) from the
Termination Event the Executive will not:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
(ii) act as an agent, broker or distributor for,
or as an adviser or consultant to,
(iii) be employed in any senior managerial or
executive position by any corporation, partnership, limited
liability company or other business organization in which he
has responsibility for,
any business (regardless of the form in which such business is
conducted) which is engaged, or which he reasonably expects to become
engaged, in the business of designing, manufacturing, distributing or
selling artificial joints and limbs and other orthopedic implant
devices in the United States; provided that the ownership by the
Executive of not more than two percent (2%) of the shares of any
publicly traded corporation or twenty percent (20%) of a privately
held company shall not constitute a violation of this subsection (b).
(c) Publications by Executive. Without limiting the
terms of any similar provision in the Employment Agreement or any
other agreement between the Executive and the Company, if the
Executive's employment with the Company is terminated under any
circumstances that entitle the Executive to receive the payments and
other benefits provided in Section 2, then
(i) the Executive will refrain from making any
disparaging comments about the Company or any of its
affiliates, and
(ii) for a period of one (1) year from the
Termination Event the Executive will not without the prior
written permission of the Company write or publish, or assist
in the writing or publication of, any books, articles or other
materials that would adversely affect the interests of the
Company or its affiliates.
(d) Remedies. The Executive acknowledges that any
violation of this Section may cause irreparable harm to the Company,
and that damages are not an adequate remedy, and the Executive
therefore agrees that the Company shall be entitled to an injunction
by any appropriate court in the appropriate jurisdiction, enjoining,
prohibiting and restraining the Executive from the continuance of any
such violation, in addition to any monetary damages which might occur
by reason of the violation of this Agreement.
(e) Independent. The covenants set forth in the
foregoing subsections (a), (b), (c), and (d) shall be deemed and shall
be construed as separate and independent covenants, and should any
part or provision of such covenants be held invalid, void or
unenforceable
-7-
<PAGE> 8
by any court of competent jurisdiction, such invalidity, voidness, or
unenforceability shall in no way render invalid, void, or
unenforceable any other part or provision thereof or any separate
covenant not declared invalid, void, or unenforceable. This Agreement
shall in that case be construed as if the void, invalid or
unenforceable provisions were omitted.
4. NOTICE OF TERMINATION.
Any termination of the Executive's employment by the Company or its
successor in interest or by the Executive shall be communicated by a written
notice of termination to the other party, and shall specify the provision of
this Agreement relied upon and shall set forth in reasonable detail the
circumstances claimed to provide a basis for termination. The date of
termination shall be the date on which the notice of termination is delivered
if by the Executive or thirty (30) days after the date of the notice of
termination if given by the Company. All applicable benefits to Executive
hereunder shall be triggered if said notice of termination is given within the
three (3)-year period specified in Section 2(a) hereof.
5. LITIGATION EXPENSES.
The Company shall pay reasonable legal fees and expenses incurred by
the Executive as a result of his seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at his
request as such fees and expenses are incurred.
6. EXCESS PARACHUTE PAYMENTS.
(a) If any federal excise tax is imposed under Section
4999 of the Internal Revenue Code of 1986, as amended (an "EXCISE
TAX") on the Executive with respect to any payments or benefits
provided under Section 2, the Company hereby agrees, subject to the
exceptions and limitations set forth below, to pay the Executive such
additional amount (the "ADDITIONAL AMOUNT") as is necessary to cause
the Executive to realize the same net amount after the imposition of
all federal income tax, estate tax and Excise Tax imposed on payments
and benefits under Section 2 (and on such Additional Amount payable
under this Section 6) that he would have realized had such federal
income tax, estate tax, and Excise Tax not been imposed upon him with
respect to such payments and benefits under Section 2 and this Section
6; provided, however, that no such Additional Amount shall be due with
respect to
(i) any penalties, interest, or similar charges,
if any, assessed with respect to or arising out of any income
tax, estate tax, or Excise Tax due unless the Company delays
the payment contemplated herein to the Executive or
(ii) any income tax or estate tax which would be
owing by the Executive in the absence of the imposition of the
Excise Tax.
(b) The Company shall have the right to contest, but the
Executive shall have no duty to contest, the assessment of any such
taxes, but in any event, the Executive
-8-
<PAGE> 9
agrees to cooperate in any contest the Company chooses to make
provided the Company shall pay the costs of any such contest.
7. ASSIGNMENT; SUCCESSORS IN INTEREST.
(a) General. Except with the prior written consent of
the Executive,
(i) no assignment by operation of law or
otherwise by the Company of any of its rights and obligations
under this Agreement may be made other than to an entity in
common control with or a successor to all or a substantial
portion of the business of the Company (but then only if such
entity assumes by operation of law or by specific assumption
executed by the transferee and delivered to the Executive all
obligations and liabilities of the Company under this
Agreement);
(ii) no transfer by operation of law or otherwise
by the Company of all or a substantial part of its business or
assets shall be made unless the obligations and liabilities of
the Company under this Agreement are assumed in connection
with such transfer either by operation of law or by specific
assumption executed by the transferee and delivered to the
Executive; and
(iii) in any such event the Company shall remain
liable for the performance of all of its obligations under
this Agreement (which liability shall be a primary obligation
for full and prompt performance rather than a secondary
guarantee of collectibility of damages).
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to his heirs,
devisees, legatees or beneficiaries or except with the prior written
consent of the Company, no assignment or transfer by operation of law
or otherwise may be made by the Executive of any of his rights under
this Agreement.
(b) Binding Nature. This Agreement shall be binding upon
the parties to this Agreement and their respective legal
representatives, heirs, devisees, legatees, beneficiaries and
successors and assigns; shall inure to the benefit of the parties to
this Agreement and their respective permitted legal representatives,
heirs, devisees, legatees, beneficiaries and other permitted
successors and assigns (and to or for the benefit of no other person
or entity, whether an employee or otherwise, whatsoever); and any
reference to a party to this Agreement shall also be a reference to a
permitted successor or assign.
8. MISCELLANEOUS.
(a) This Agreement may not be varied, altered, or changed
except by instrument in writing executed by the parties hereto. The
failure of any party to this Agreement at any time or times to require
performance of any provision of this Agreement shall in no manner
affect the right to enforce the same. No waiver by any party to this
Agreement of any provision (or of a breach of any provision) of this
Agreement, whether
-9-
<PAGE> 10
by conduct or otherwise, in any one or more instances shall be deemed
or construed either as a further or continuing waiver of any such
provision or breach or as a waiver of any other provision (or of a
breach of any other provision) of this Agreement.
(b) Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid but
if any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality or enforceability of any such provisions in every
other respect and of the remaining provisions of this Agreement shall
not be impaired.
(c) This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Texas (without giving
effect to any choice of law provisions) and enforceable in a court of
competent jurisdiction in Travis County, Texas.
(d) This Agreement and any benefits accruing to Executive
hereunder shall be supplemental and additional to any and all benefits
accruing to Executive pursuant to the Employment Agreement and any and
all Stock Option or Stock Award Plans applicable to Executive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set his
hand as of the date and year first written above.
COMPANY
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
-------------------------------
Nick Cindrich, Chief Executive
Officer
EXECUTIVE
/s/ J.D. WEBB, JR.
-----------------------------------
J.D. WEBB, JR.
-10-
<PAGE> 11
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this
18th day of March, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and J. D. WEBB, JR., an individual resident at 1001
Oakwood Blvd., Round Rock, Texas 78681 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance
Agreement dated September 19, 1995 (the "Agreement") which provided, inter
alia, for certain payments to be made in the event that certain events occurred
with respect to the Employee's employment relationship with the Company;
WHEREAS, the Employee and the Company desire that there be certain
changes made with respect to the Agreement as a result of the Company's pending
merger with Healthcare Acquisition, Inc., a Texas corporation ("Acquisition"),
a wholly owned subsidiary of Healthcare Acquisition Corp., a Delaware
corporation ("HCAC"); and
WHEREAS, the Company and the Employee want to memorialize in this
Amendment their agreements regarding such changes to the Agreement.
NOW THEREFORE, in consideration of the premises and other mutual
promises and covenants contained in this Amendment and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties, intending legally to be bound, agree as follows:
1. In the event that the Company completes its merger with
Acquisition (the "Merger") then, and only then, shall the following changes be
made in the Agreement, such changes to take effect on that date which is two
(2) years from the effective date of the Merger:
(a) the provisions of Section 2(b) (iii) shall be amended
so that the language "three hundred percent (300%)" shall read "one
hundred percent (100%)" in each place where such language appears in
that Section;
(b) the provisions of Section 2(b) (v) shall be amended
to provide that the insurance coverage to be provided to Employee,
Employee's spouse and to Employee's dependents (if covered prior to
the date of termination) under such provision shall be for coverage
from a period from the date of the termination until five (5) years
after the date of termination; and
(c) the provisions of Section 2(b) (vi) shall be amended
to provide that the liability insurance to be provided under such
provision shall be provided for the benefit of the Employee for a
period of five (5) years from the date of the termination of the
Employee's relationship with the Company.
-1-
<PAGE> 12
2. Except as specifically changed by the Amendment, all other
terms and provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set its
hand as of the date and year first written above.
ENCORE:
ENCORE ORTHOPEDICS, INC.
By: /s/ NICK CINDRICH
---------------------------
Nick Cindrich, CEO
EMPLOYEE:
/s/ J.D. WEBB, JR.
-------------------------------
J.D. WEBB, JR.
-2-
<PAGE> 1
EXHIBIT 21
SCHEDULE OF SUBSIDIARIES OF ENCORE MEDICAL CORPORATION
Encore Orthopedics, Inc. a Delaware corporation
Encore Orthopedics FSC Limited, a Jamaican corporation
-41-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 5,063
<ALLOWANCES> 0
<INVENTORY> 13,359
<CURRENT-ASSETS> 19,135
<PP&E> 9,187
<DEPRECIATION> 4,088
<TOTAL-ASSETS> 25,721
<CURRENT-LIABILITIES> 4,453
<BONDS> 3,244
0
0
<COMMON> 9
<OTHER-SE> 18,015
<TOTAL-LIABILITY-AND-EQUITY> 25,721
<SALES> 24,440
<TOTAL-REVENUES> 24,440
<CGS> 7,936
<TOTAL-COSTS> 7,936
<OTHER-EXPENSES> 14,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 655
<INCOME-PRETAX> 1,849
<INCOME-TAX> (8)
<INCOME-CONTINUING> 1,857
<DISCONTINUED> 0
<EXTRAORDINARY> (598)
<CHANGES> 0
<NET-INCOME> 1,259
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.12
</TABLE>
