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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, 1998
[ ] 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]
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 15, 1999, was $20,966,468.
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 15, 1999, the latest practicable date.
<TABLE>
<CAPTION>
Title Outstanding
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<S> <C>
Common Stock, par value $0.001 9,279,155
</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 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, 1998 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 115 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, Inc. ("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 Medical Data International, Inc., Stifel, Nicolaus &
Co. 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. Recent advances in technology requires the addition to
the orthopedic products market tissue technology image-guided surgery,
osteobiologics and diagnostic products related to osteoporosis. Based on this
expanded scope, in 1998, the worldwide market for orthopedic products produced
approximately $11.2 billion in revenue. In the United States, the orthopedic
products market represented approximately $6.5 billion in revenue in 1998. From
1992 to 1998 the average annual revenue growth rate was approximately 10%. Unit
growth accounted for approximately half of this growth; the remainder of the
growth was attributable to technology driven price increases.
Joint reconstruction products accounted for approximately $2.1 billion of the
overall orthopedic market in the U.S. in 1998 and approximately $3.8 billion
worldwide. Among the joint replacement products, hip and knee replacement
products account for approximately 95% of worldwide revenues (with
approximately $3.6 billion in
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worldwide sales in 1998) and shoulder replacement and other related products
(spinal, elbow, wrist, finger, toe, ankle and ligament prostheses) account for
approximately 5% of worldwide revenues (with approximately $190 million in
worldwide sales in 1998). The trauma, or fracture fixation, segment of the
orthopedic products market approached $750 million in 1998, representing
approximately 10% growth over 1997. The trauma product market is divided
between internal and external fixation products. In 1998, internal fixation
products accounted for about 75% of the revenues from the sale of all trauma
products.
Of particular note is the dynamic growth of both the spinal and
tissue/osteobiological market segments. It is estimated that the U.S. spinal
market exceeded $600 million in 1998 and was approaching $1 billion worldwide.
Rapid advances in technology and product design are predicted to produce growth
rates exceeding 20% per year for several years. Interbody fusion devices have
contributed greatly to this rapid growth, achieving approximately a 30% market
share since appearing on the market in 1996.
Tissue technology, osteobiologics, was estimated at approximately $500 million
in 1998. Growth potential is concentrated in bone graft substitutes and
biologically active bone morphogenic proteins (BMP) as they replace more
traditional autografts and allografts, i.e. bone bank bone, which account for
more than 75% of the procedures requiring bone graft. As with spine, growth
rates for this market segment should exceed 20% for several years.
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 58% 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, biologic 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 line
extensions to its already broad array of total joint replacement products and
by entering the revision total hip market, grow its line of trauma products,
concentrating on specialty and niche products, and enter the biologic and
spinal implant marketplace, through internal development, distribution
agreements and 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,
spinal products, biological products and line extensions 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).
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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 accounted for approximately
64% of total sales in 1998.
RECONSTRUCTIVE HIP PRODUCTS
Encore is currently marketing four internally designed hip systems. These
include the Foundation(R) Hip System, the Vitality(R) Hip Stem, the Linear(R)
Hip Stem and the Revelation(TM) Hip Stem. 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 accounted for
approximately 22% of total sales in 1998.
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 accounted for approximately 4% of total sales in 1998.
TRAUMA PRODUCTS
The acquisition of AOS in May 1996 provided Encore with an extension of its
product line into trauma products. AOS' products included the True/Flex(R)
intramedullary nails, a patented system of intramedullary nails used in
repairing bone fractures, primarily for use in correcting upper extremity
fractures. Encore has recently begun to sell intramedullary nail products in
the higher volume market for products used in correcting lower extremity
conditions. The trauma product line also includes the True/Lok(TM) external
fixation system, developed by Texas Scottish Rite Hospital. In addition, Encore
plans to expand the trauma product line by concentrating on "specialty" trauma
products. Sales of trauma products accounted for approximately 6% of total
sales in 1998.
INSTRUMENTATION
Approximately 4% of 1998 sales were the instrumentation used to implant the
above products. Virtually all of these sales were outside the United States.
SPINAL PRODUCTS
Encore entered into an exclusive distribution agreement for the United States
for products produced by Paris-based SCIENT'X. The Isolock(TM) and Isobar(TM)
systems consist of rods, plates, cortical screws, and pedicle screws used to
achieve fusion of the spine. Of particular note is the Isomorphic(TM) Lumbar
Cage System that will allow Encore to compete in the interbody fusion cage
market after completion of clinical trials. The cervical spine is addressed
with the PCB(TM) Cervical Plate System.
BIOLOGICAL PRODUCTS
Stimulan(TM) - Calcium Sulphate Bone Void Filler will provide Encore with entry
into the high margin synthetic bone graft substitute market. The seven-year
agreement with Biocomposites, Ltd. will also lead to the introduction of
several orthopedic bioresorbable products that address the repair of damaged
soft tissue in and around the joints.
MARKETING AND SALES
Encore's products are currently marketed and sold in the United States, Western
Europe and Japan. 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 total joint products are sold through
distributors, primarily PLUS Switzerland and its affiliates. In Japan, its
trauma products are sold by Century Medical, Inc. In
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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, 1998, Encore had independent sales
agents selling either reconstructive products, trauma products, or both, in 24
sales territories in 26 states of the United States. Sales agents are generally
granted a contract with a term of one to five years. Agents are typically paid
a sales commission of 20% of the gross selling price of all products sold at
list price, 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 with 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 has developed
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.
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
affiliates in Western Europe. A PLUS Switzerland affiliate, Endo PLUS K.K.,
distributed Encore's total joint products in Japan; but was terminated as of
December 31, 1998. A new distributor began distributing Encore total joint
products in Japan effective December 31, 1998. 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. In December 1998, Encore extended its trauma distribution agreement
covering Japan with Century Medical, Inc. through December 31, 2003. 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 an aggregate royalty of approximately 5%, which
is typically split among the group members. The designing and consulting
surgeons may also receive stock options. 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.
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Encore also has established relationships with consulting surgeons, who perform
various consulting services for Encore. Such services include conducting
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 may be 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 in support of the Encore 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 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 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, 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.
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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 ten exclusive
patent licenses, which protect Encore both in the United States and in several
foreign countries. Encore has seven 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 numerous unregistered trademarks, some 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.
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.
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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 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
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<PAGE> 10
amounts do not include the Company's share of applicable common area
maintenance, property taxes and public utility charges.
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
January 1, 1997 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>
1998
First Quarter $5.31 $3.94 $1.38 $0.75
Second Quarter $4.94 $3.63 $1.19 $0.75
Third Quarter $4.63 $2.13 $0.88 $0.44
Fourth Quarter $3.88 $2.19 $0.88 $0.31
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
</TABLE>
As of March 15, 1999, the Company had approximately 215 shareholders of the
Company's Common Stock of record. There are in excess of 1,050 beneficial owners
of the Company's Common Stock. As of March 15, 1999, the Company had
approximately 14 shareholders of the Company's $5 Warrants of record. There are
in excess of 325 beneficial owners of the Company's $5 Warrants. As of March 15,
1999, the Company had approximately 73 holders of the Company's $7 Warrants of
record and 80 beneficial owners.
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 December 31, 1994, 1995, 1996, 1997
and 1998 and for each of the five years in the period ended December 31, 1998
have been derived from financial statements audited by PricewaterhouseCoopers
LLP, independent accountants whose report relating to the consolidated
financial statements for the three years ended December 31, 1998 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 ENDED DECEMBER 31,
----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales $28,990 $24,440 $17,621 $13,791 $7,762
Gross margin 19,408 16,504 11,563 8,051 4,487
Income (loss) from operations 3,201 2,500 2,129 1,758 166
Income (loss) before extraordinary item
1,777 1,857 1,033 1,408 166
Net income (loss) (a) 1,777 1,259 1,033 1,408 447
Basic earnings per share 0.20 0.16 (0.04) 0.27 0.09
Shares used in computing basic earnings
per share 9,088 8,033 5,463 5,150 4,824
Diluted earnings per share 0.17 0.12 (0.04) 0.23 0.07
Shares used in computing diluted earnings
per share 10,611 10,253 5,463 6,216 5,991
BALANCE SHEET DATA
Working capital $17,954 $14,682 $10,012 $ 7,231 $3,752
Total assets 30,556 25,721 20,275 12,757 7,712
Current portion of notes payable and
long-term debt 1,265 612 2,764 293 200
Long-term debt, less current portion 5,603 3,244 6,013 4,479 1,600
Stockholders' equity 19,824 18,024 6,589 5,170 3,275
</TABLE>
(a) 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 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 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.
- 11 -
<PAGE> 12
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Sales were $28,990,000 for the year ended December 31, 1998, representing an
increase of $4,550,000 or 18.6% over the year ended December 31, 1997. In 1998,
U.S. sales and sales outside the U.S. increased 26.7% and 8.0%, respectively,
over 1997. 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., the economic environment that currently exists
in Asia is affecting sales. However, sales to the Japanese market rebounded
substantially in the fourth quarter with the addition of new distribution which
is experienced in the orthopedic market. Sales of reconstructive products
increased 20.4% to $27,373,000 in 1998, led by the Foundation(R) Total Knee,
Hip and Shoulder Systems. Trauma product sales have remained relatively flat.
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 for trauma products to increase as the
transition to an exclusive sales force is completed 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 $19,408,000 in 1998, or 66.9% of sales, as compared
to $16,504,000 or 67.5% of sales for 1997. Gross margin as a percent of sales
decreased slightly due to discounts and higher costs associated with the
initial production of the Revelation(TM) and Linear(R) Hip Systems. It is
anticipated that future production costs of the new hip systems will decrease
as volumes increase and production methods are made more efficient.
Research and development expenses increased by $23,000 or 1.4% in 1998 when
compared to the same period in 1997. Research and development activities
increased to complete the design of two new hip stems and two acetabular
systems that were released in early 1998. The Company effectively balanced the
increased activity at the beginning of the year with expenditures in the
remainder of the year to control expenses relative to sales by the end of 1998.
Current activities include a joint design effort with Norton Desmarquest Fine
Ceramics 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.
Selling, general and administrative expenses increased by $2,180,000, or 17.6%,
in 1998 when compared to the same period in 1997. This increase was due to
additional instrumentation depreciation and continual investment in the
development of the U.S. sales infrastructure, increase in commission and
royalty expenses in conjunction with the increase in sales, costs associated
with unsuccessful acquisition attempts and a charge for inventory discrepancies
at consigned locations. Going forward, consigned inventory discrepancies are
not expected to have a material impact due to improvements in the internal
control process and additional training. Due to factors such as commissions and
royalties and additional instrumentation depreciation, selling, general and
administrative expenses will continue to increase in absolute dollars as the
Company supports new product introductions and expands into new territories,
but should decrease as an overall percent of net sales. However, the Company is
expecting to manage operating expense growth relative to sales and gross margin
levels going forward.
Operating income increased 28% to $3,201,000, as compared to $2,500,000 for the
year ended December 31, 1997. 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.
Interest expense decreased by $201,000 in 1998 compared to 1997. This was
primarily related to the existence of $5 million in term debt in the first five
months of 1997, which was paid off as of the end of May 1997. In addition, the
decrease in interest expense was affected by both a higher effective interest
rate and the amortization of the related debt discount in the prior year.
Income before extraordinary item decreased slightly to $1,777,000 in 1998 from
$1,857,000 in 1997. It is important to note that the 1997 result includes a
one-time benefit of $537,000 from the reversal of a deferred tax asset
valuation allowance. Absent such one time event, income before extraordinary
item in 1997 would have been $1,320,000.
There was no extinguishment of debt expense for the year ended December
31,1998, as compared to $598,000 for the same period in 1997. During the second
quarter of 1997, the Company repaid $5 million of long term debt, plus
- 12 -
<PAGE> 13
accrued interest of $39,000. The Company had previously capitalized
approximately $476,000 of financing costs and established a debt discount of
$821,000 associated with detachable put warrants issued in accordance with the
debt. The unamortized portions of these two items were expensed in conjunction
with the repayment of the debt, resulting in an extraordinary charge to
earnings of $598,000, net of an income tax benefit of $308,000.
Net income for the year ended December 31, 1998 increased 41.1% to $1,777,000
from $1,259,000 in 1997.
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 remained strong
while Encore continued 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 was attributed primarily to the expansion
of the U.S. sales force. Continued transition from a non-exclusive to an
exclusive sales force was a major factor for the flat sales of trauma products.
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.
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 were 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.
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 ($537,000) offset by an extraordinary charge
($598,000) associated with the extinguishment of debt.
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 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
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<PAGE> 14
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
1996, 1997 and 1998 were $1,433,000, $1,180,000 and $1,590,000 respectively.
Other capital expenditures during those periods were $931,000, $978,000 and
$1,321,000, 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 $370,000 in 1998, $454,000 in 1997 and $44,000 in 1996.
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 1998, Encore
renegotiated its revolving credit facility from $10 million to $15 million with
an eligible borrowing base as of December 31, 1998 of approximately $10
million. As of December 31, 1998 the Company had drawn approximately $5
million. 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.
The Company's continued strong growth has resulted in an increase in its capital
requirements. This growth is now primarily funded by the Credit Facility and
cash generated from operations to meet its working capital needs. As of December
31, 1998 the Company had net working capital of approximately $18.0 million as
compared to approximately $14.7 million at December 31, 1997. This increase was
primarily due to the increases in inventory and accounts receivable offset by
the increase in the current portion of a payment to a related party.
During the third quarter of 1998, the Company began actively purchasing its
equity securities, both common stock and $5 Warrants, in connection with the
buyback program it announced at the beginning of 1998. This program was
initiated because Company management and the Board of Directors felt that the
Company's equity was undervalued. Through December 31, 1998, the Company has
repurchased 310,800 shares of common stock and 231,800 $5 Warrants. This
program is ongoing.
During December 1998, the Company conducted a tender offer for all of its
outstanding $7 Warrants and rights to acquire $7 Warrants. As a result of the
tender offer, 638,940 warrants and 339,443 rights were tendered and repurchased
by the Company.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue stems from the way dates are recorded and computed
in many computer systems because such programs use only the last two digits to
indicate the year. If uncorrected, these computer programs will be unable to
interpret dates beyond the year 1999, which could cause computer system failure
or other computer errors, thereby disrupting operations. The Company
understands the importance of being prepared for Y2K. The Company's objective
is to ensure an uninterrupted transition into Y2K and is progressing in a
comprehensive plan to assure the achievement of that goal. The scope of the
Year 2000 readiness effort includes (1) evaluating information technology such
as software and hardware; (2) investigating other systems or embedded
technology such as microcontrollers contained in various manufacturing and lab
equipment, environmental and safety systems, and facilities and utilities, and
(3) assessing the readiness of key third parties, including suppliers,
customers, and key financial institutions.
The Company has identified the mission critical systems and has determined the
critical manufacturing and non-manufacturing systems are already Y2K capable, or
replacements, changes, upgrades or workarounds have been identified. The Company
expects to complete compliance tests of all vital systems in the third quarter
of 1999.
The Company's products are not affected by the Year 2000 issue.
The Company is in contact with suppliers, customers and financial institutions
to assure no interruption in the relationship between the Company and these
third parties concerning Y2K compliance issues. Highest priority is being placed
on working with suppliers that are critical to the business. The Company has
made inquiries to all third parties and has received a modest response to
initial inquiries. Follow-up activities will focus on critical suppliers and the
actions being taken to fix Year 2000 problems. Contingency plans are being
developed to address issues related to suppliers that are not considered to be
making sufficient progress in becoming Year 2000 capable in a timely manner.
These plans generally emphasize the identification of alternative suppliers that
are Y2K compliant.
The Company believes that its most likely worst case Year 2000 scenarios would
relate to problems with the systems of third parties rather than with the
Company's internal systems. It is clear that the Company has the least ability
to assess and remediate the Year 2000 problems of third parties and the Company
believes the risks are greatest with infrastructure (e.g. electricity supply,
water and sewer service), telecommunications, transportation supply chains and
critical suppliers of materials.
The Company is not in a position to identify or to avoid all possible scenarios:
however, the Company is currently assessing scenarios and taking steps to
mitigate the impacts of various scenarios if they were to occur. This
contingency planning will continue through 1999 as the Company learns more about
the preparations and vulnerabilities of third parties regarding Year 2000
issues. Due to the large number of variables involved, the Company cannot
provide an estimate of the damage it might suffer if any of these scenarios were
to occur.
The Company currently expects that the total cost of Year 2000 programs will not
exceed $300,000. Approximately $100,000 has been spent to date. The estimated
costs do not include any potential costs related to customer or other claims, or
potential amounts related to executing contingency plans, such as costs incurred
on account of an infrastructure or supplier failure. The Company has adequate
general corporate funds with which to pay for the programs' expected costs. All
expected costs are based on the current assessment of the programs and are
subject to change as the programs progress. The Company is expensing all costs,
other than capital equipment purchases, related to the assessment and
remediation of the Y2K issue as incurred. All costs are being funded through
operating cash flows and are not expected to be material to the Company's
consolidated financial condition or results of operations.
- 14 -
<PAGE> 15
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>
Report of Independent Accountants 16
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998 17
Consolidated Statements of Income for the Years Ended December 31, 1996, 1997 and 1998 18
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998 19
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 20
Consolidated Notes to Financial Statements for the Years Ended December 31, 1996, 1997 and 1998 21
</TABLE>
- 15 -
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
February 18, 1999
- 16 -
<PAGE> 17
ENCORE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1 $ 9
Accounts receivable, net of allowance for doubtful
accounts of $145 and $109, respectively 6,297 5,063
Inventories 16,176 13,359
Prepaid expenses and other current assets 609 704
-------- --------
Total current assets 23,083 19,135
Property and equipment, net 6,147 5,099
Other non-current assets 1,326 1,487
-------- --------
Total assets $ 30,556 $ 25,721
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 465 $ 312
Current portion of payable to a related party 800 300
Accounts payable and accrued expenses 3,864 3,841
-------- --------
Total current liabilities 5,129 4,453
Long-term debt, net of current portion 5,603 2,444
Payable to a related party, net of current portion -- 800
-------- --------
Total liabilities 10,732 7,697
======== ========
Stockholders' equity:
Common stock, $0.001 par value, 35,000,000 shares
authorized, respectively; 9,248,000 and 9,047,000
shares issued, respectively 9 9
Additional paid-in capital 19,267 18,546
Deferred compensation (310) (418)
Retained earnings (accumulated deficit) 1,656 (113)
Less cost of repurchased stock, warrants and rights (110,000 shares) (798) --
-------- --------
Total stockholders' equity 19,824 18,024
======== ========
Total liabilities and stockholders' equity $ 30,556 $ 25,721
======== ========
</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,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Sales $ 28,990 $ 24,440 $ 14,454
Sales to related distributors -- -- 3,167
-------- -------- --------
Total sales 28,990 24,440 17,621
======== ======== ========
Cost of sales 9,582 7,936 4,588
Cost of sales to related distributors -- -- 1,470
-------- -------- --------
Total cost of sales 9,582 7,936 6,058
======== ======== ========
Gross margin 19,408 16,504 11,563
Operating expenses:
Selling, general and administrative 14,540 12,360 8,175
Research and development 1,667 1,644 1,259
-------- -------- --------
Income from operations 3,201 2,500 2,129
Other income (expense):
Interest income -- 77 49
Interest expense (454) (655) (954)
Other expense -- (73) (47)
-------- -------- --------
Income before extraordinary item and income taxes 2,747 1,849 1,177
Provision (benefit) for income taxes 970 (8) 144
-------- -------- --------
Income before extraordinary item 1,777 1,857 1,033
Extinguishment of debt (net of tax benefit of $308) -- (598) --
-------- -------- --------
Net income $ 1,777 $ 1,259 $ 1,033
======== ======== ========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share-
Income (loss) before extraordinary item applicable
to common stock $ .20 $ .23 $ (.04)
Extinguishment of debt -- (.07) --
-------- -------- --------
Basic earnings per share $ .20 $ .16 $ (.04)
======== ======== ========
Shares used in computing basic earnings per share 9,088 8,033 5,463
======== ======== ========
Diluted earnings per share-
Income (loss) before extraordinary item applicable
to common stock $ .17 $ .18 $ (.04)
Extinguishment of debt -- (.06) --
-------- -------- --------
Diluted earnings per share $ .17 $ .12 $ (.04)
======== ======== ========
Shares used in computing basic earnings per share 10,611 10,253 5,463
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 18 -
<PAGE> 19
ENCORE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 369 $1,660 5,267 $ 6 $ 5,453
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
Amortization of deferred
compensation -- -- -- -- --
Other -- -- -- -- --
Net income -- -- -- -- --
----- ------ ----- ------ --------
BALANCE AT DECEMBER 31, 1996 652 2,935 5,627 6 6,468
----- ------ ----- ------ --------
Issuance of common stock -- -- 803 1 353
Deferred compensation -- -- -- -- 352
Amortization of deferred
compensation -- -- -- -- --
Cancellation of put
feature of warrants -- -- -- -- 996
Merger with HCAC (652) (2,935) 2,617 2 10,342
Other -- -- -- -- 35
Net income -- -- -- -- --
----- ------ ----- ------ --------
BALANCE AT DECEMBER 31, 1997 -- -- 9,047 9 18,546
----- ------ ----- ------ --------
Issuance of common stock -- -- 201 -- 342
Deferred compensation -- -- -- -- 24
Amortization of deferred
compensation -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Issuance of treasury stock -- -- -- -- 283
Tax benefit associated with
stock option disqualifying
dispositions -- -- -- -- 72
Net income -- -- -- -- --
----- ------ ----- ------ --------
BALANCE AT DECEMBER 31, 1998 -- $ -- 9,248 $ 9 $ 19,267
===== ====== ===== ====== ========
<CAPTION>
RETAINED TOTAL
EARNINGS/ STOCK-
DEFERRED (ACCUMULATED TREASURY STOCK HOLDERS'
COMP. DEFICIT) SHARES AMOUNT EQUITY
---------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ (9) $ (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 (160) -- -- -- --
Amortization of deferred
compensation 16 -- -- -- 16
Other -- (27) -- -- (27)
Net income -- 1,033 -- -- 1,033
---------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1996 (153) (2,667) -- -- 6,589
---------- -------- ----- ----- -------
Issuance of common stock -- -- 354
Deferred compensation (352) -- -- -- --
Amortization of deferred
compensation 87 -- -- -- 87
Cancellation of put
feature of warrants -- 1,301 -- -- 2,297
Merger with HCAC -- -- -- 7,409
Other -- (6) -- -- 29
Net income -- 1,259 -- -- 1,259
---------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1997 (418) (113) -- -- 18,024
---------- -------- ----- ----- -------
Issuance of common stock -- -- -- -- 342
Deferred compensation (24) -- -- -- --
Amortization of deferred
compensation 132 -- -- -- 132
Purchase of treasury stock -- -- (366) (1,545) (1,545)
Issuance of treasury stock -- (8) 256 747 1,022
Tax benefit associated with
stock option disqualifying
dispositions -- -- -- -- 72
Net income -- 1,777 -- -- 1,777
---------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1998 $ (310) $ 1,656 (110) $(798) $19,824
========== ======== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 19 -
<PAGE> 20
ENCORE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,777 $ 1,259 $ 1,033
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,945 1,451 1,091
Loss on disposal of fixed assets 6 588 --
Deferred tax benefit -- (524) --
Amortization of debt discount -- 65 138
Other -- 13 (28)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,234) (596) (2,051)
Increase in inventories (2,817) (3,447) (4,187)
(Increase) decrease in prepaid expenses and other assets 142 (43) (629)
Increase (decrease) in accounts payable and
accrued expenses 23 1,295 287
-------- -------- --------
Net cash provided by (used in) operating activities (158) 61 (4,346)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,765) (2,007) (1,960)
Proceeds from sale of assets 12 -- --
-------- -------- --------
Net cash used in investing activities (2,753) (2,007) (1,960)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefits associated with stock options 72 -- --
Proceeds from issuance of preferred stock -- -- 1,275
Proceeds from issuance of common stock 342 7,971 412
Payments to acquire treasury stock (1,545) -- --
Proceeds from issuance of treasury stock 1,022 -- --
Payments for merger expenses -- (462) --
Payment on payable to a related party (300) (300) (200)
Proceeds from debt 3,699 1,798 4,300
Payments on debt (387) (7,524) (130)
Payment of debt issuance costs -- -- (48)
Net change in cash due to conforming fiscal year-end
of pooled company -- -- (31)
-------- -------- --------
Net cash provided by financing activities 2,903 1,483 5,578
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (8) (463) (728)
Cash and cash equivalents at beginning of year 9 472 1,200
-------- -------- --------
Cash and cash equivalents at end of year $ 1 $ 9 $ 472
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 454 $ 590 $ 816
Income taxes 625 327 13
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Noncash equity transactions $ 184 $ 459 $ --
Capital lease obligations related to equipment
leases entered into during the year 560 447 349
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 20 -
<PAGE> 21
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. 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 statements of income include 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. AOS had previously reported on a February 28
fiscal year end. As such, its accounts for the year ended February 29, 1996
were 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 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.
- 21 -
<PAGE> 22
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 NON-CURRENT ASSETS
Other non-current assets consists primarily of the non-current portion of
advanced commissions to sales representatives of $920,000 and the unamortized
portion of purchased technology agreements of $338,000. The advanced
commissions are offset against future sales commissions earned. Amortization
expense related to purchased technology totaled $113,000, $52,000 and $0 for
the years ended December 31, 1998, 1997 and 1996, respectively.
COMMON STOCK PUT WARRANTS
The common stock put warrants were issued in 1995 and 1996 and are further
described in Notes 5 and 6. 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 or limited rights 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 warrants approximate fair values.
- 22 -
<PAGE> 23
2. INVENTORIES
Inventories consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Components and raw materials $ 4,159 $ 2,711
Work in process 1,537 1,549
Finished goods 10,480 9,099
-------- --------
$ 16,176 $ 13,359
======== ========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Equipment $ 4,001 $ 3,379
Furniture and fixtures 1,757 1,367
Leasehold improvements 572 452
Surgical instrumentation devices 5,597 3,989
-------- --------
11,927 9,187
Less - accumulated depreciation and
amortization (5,780) (4,088)
-------- --------
$ 6,147 $ 5,099
======== ========
</TABLE>
Depreciation and amortization expense relating to property and equipment for
the years ended December 31, 1998, 1997 and 1996 was $1,699,000, $1,276,000 and
$990,000, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Accounts payable $ 1,197 $ 1,212
Accrued wages and related expenses 545 745
Accrued commissions 1,459 1,098
Accrued royalties 290 230
Accrued taxes 333 301
Other accrued liabilities 40 255
-------- --------
$ 3,864 $ 3,841
======== ========
</TABLE>
- 23 -
<PAGE> 24
5. 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,
1998 1997
-------- --------
<S> <C> <C>
$15,000,000 revolving credit facility from a
financial institution; interest at the lesser
of the institution's base rate or LIBOR plus
2% (7.44% at December 31, 1998), 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 2000; available borrowings at December 31,
1998 of $9,872,000, calculated as the credit
limit less total borrowings and letters of
credit of $245,000 4,883 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 800 1,100
Capital lease obligations, secured by related
equipment 1,130 958
Other long-term debt 55 --
------ ------
6,868 3,856
Less - current portion 1,265 612
------ ------
$5,603 $3,244
====== ======
</TABLE>
The debt agreement related to the revolving credit facility contains warranties
and covenants and requires 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 certain 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 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 for the year ended December 31, 1996. 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 for the year ended December 31, 1996.
In 1997, Encore repaid these 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.
- 24 -
<PAGE> 25
At December 31, 1998, 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>
1999 $ 800
2000 4,883
2001 --
2002 24
2003 31
------
$5,738
======
</TABLE>
LEASES
The Company leases building space, manufacturing facilities and equipment under
non-cancelable lease agreements which expire at various dates. At December 31,
1998, future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
YEAR ENDING DECEMBER 31,
<S> <C> <C>
1999 $ 556 $ 497
2000 401 497
2001 174 497
2002 118 560
2003 26 560
2004 and thereafter -- --
------- -------
Total minimum lease payments 1,275 $ 2,611
=======
Less - amounts representing interest 145
-------
Net minimum lease payments 1,130
Less - current portion of obligations under
capital leases 465
-------
$ 665
=======
</TABLE>
Rental expense under operating leases totaled $616,000, $471,000 and $259,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
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,
1998 1997
-------- --------
<S> <C> <C>
Equipment $ 1,409 $ 978
Furniture and fixtures 556 421
Less - accumulated amortization (633) (342)
-------- --------
$ 1,332 $ 1,057
======== ========
</TABLE>
6. 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
- 25 -
<PAGE> 26
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,
1998, the Company has 1,000,000 shares of authorized preferred stock, none of
which has been issued.
TREASURY STOCK
The Company began acquiring shares of its common stock and $5 warrants in
connection with a stock repurchase program announced in January 1998. That
program authorizes the Company to purchase up to one million common shares or
$5 warrants from time to time on the open market or pursuant to negotiated
transactions at price levels the Company deems attractive. The Company
purchased 310,800 shares of common stock in 1998 at an aggregate cost of
$937,000. The Company purchased 231,800 shares of $5 warrants in 1998 at an
aggregate cost of $170,000. The purpose of the stock and warrant repurchase
program is to help the Company achieve its long-term goal of enhancing
stockholder value. In connection with a tender offer conducted in December
1998, the Company purchased 978,383 of the total 1,673,948 total $7 warrants
and rights to acquire $7 warrants for a total consideration of $239,080.
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 Accounting Principles Board Opinion 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
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
Statement of Financial Accounting Standards 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,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income As reported $ 1,777 $ 1,259 $ 1,033
Pro forma 1,713 908 647
Net income (loss)
applicable to common stock As reported 1,777 1,259 (236)
Pro forma 1,713 908 (622)
Net income (loss)
applicable to common stock
per share
Basic: As reported 0.20 0.16 (0.04)
Pro forma 0.19 0.11 (0.11)
Diluted: As reported 0.17 0.12 (0.04)
Pro forma 0.16 0.09 (0.11)
</TABLE>
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
- 26 -
<PAGE> 27
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,
1998, the Company had reserved a total of 5,516,185 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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Employee options-
Dividend yield -- % -- % -- %
Expected volatility 55.0% 25.0% 30.0%
Risk-free interest rate 6.01% 6.01% 6.0%
Expected life 1-4 years 4 years 3 years
Other than employee options-
Dividend yield -- % -- % -- %
Expected volatility 55.0% 25.0% 30.0%
Risk-free interest rate 6.01% 6.01% 6.0%
Expected life 3-4 years 3-4 years 4 years
</TABLE>
- 27 -
<PAGE> 28
A summary of the status of the Company's stock option plans is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
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 2,858,808 $ 1.83 2,538,138 $ 1.46 2,170,890 $ 1.22
Granted-
At market 669,000 3.55 414,441 4.72 468,353 2.07
Above market -- -- -- -- 167,771 3.08
Exercised (184,574) 1.42 (93,771) 1.06 (185,395) 1.54
Canceled (86,122) 4.59 -- (83,481) 1.74
--------- --------- ---------
Outstanding, end of year 3,257,112 2.20 2,858,808 1.83 2,538,138 1.46
========= ========= =========
Options exercisable at year end 2,709,115 2,774,366 2,094,694 1.40
Weighted-average fair value of
options granted during the year-
At market $ 3.47 $ 1.21 $ .59
Above market -- -- .43
OTHER THAN EMPLOYEE OPTIONS
Outstanding, beginning of year 896,010 $ 4.10 732,865 $ 1.86 538,889 $ 2.19
Granted-
At market 282,500 4.07 324,583 4.32 -- --
Above market -- -- 110,000 5.00 380,679 4.62
Exercised (18,767) 2.82 (155,073) 1.38 (75,514) 1.76
Canceled (202,673) 4.76 (116,365) 4.66 (111,189) 3.11
--------- --------- ---------
Outstanding, end of year 957,070 4.10 896,010 4.10 732,865 3.35
========= ========= =========
Options exercisable at year end 544,115 218,985 279,624 1.86
Weighted-average fair value of
options granted during the year-
At market $ 3.75 $ .84 $ --
Above market -- 1.03 .42
</TABLE>
- 28 -
<PAGE> 29
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- --------------- --------- ------------ ---------- --------- ----------
(YEARS)
<S> <C> <C> <C> <C> <C>
$0.56 to $1.73 1,847,246 4.07 $1.20 1,847,246 $1.20
$2.14 to $3.95 1,201,741 4.31 2.76 680,635 2.55
$4.01 to $4.99 710,000 5.16 4.62 461,250 4.72
$5.00 or more 455,195 6.35 5.53 264,099 5.48
--------- ---------
4,214,182 3,253,230
========= =========
</TABLE>
COMMON STOCK PUT WARRANTS
As described in Note 5, 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 were 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 non-current assets. These warrants contained the same
put feature described above. In determining net income applicable to common
stock during 1995 and 1996, the annual change in the estimated redemption amount
of the common stock put warrants was required to be subtracted from or added to
net income. 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.
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 and no further adjustment to net
income applicable to common stock was required..
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. The Company conducted a tender offer for these $7 warrants and the
rights to acquire the $7 warrants in December 1998. 978,383 of the 1,673,948
total $7 warrants and rights were tendered and purchased by the Company for a
total consideration of $239,080.
OTHER HCAC TRANSACTIONS
HCAC issued 3,850,000 warrants (the "$5 warrants") in connection with a public
offering in 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. As of December
31, 1998, 231,800 of these $5 warrants had been repurchased by the Company.
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.
- 29 -
<PAGE> 30
7. SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprice and Related Information," which the Company adopted in the first
quarter of 1998. The statement supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. It
also requires disclosures about products and services, geographic areas and
major customers.
While the Company sells its products to many different markets, its management
has chosen to organize the Company by geographic areas, and as a result has
determined that it has one reportable segment. All selling and administrative
expenses, interest income, interest expense, depreciation and amortization is
recorded in the United States. In addition, all identifiable assets are located
in the United States.
During the three years ended December 31, 1998, the Company's international
sales were primarily to three foreign distributors, two of which have
individually accounted for more than 32% 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,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
United States $ 17,557 $ 13,856 $ 8,911
Europe 9,660 8,747 7,635
Asia 1,773 1,837 1,075
-------- -------- --------
$ 28,990 $ 24,440 $ 17,621
======== ======== ========
Customer A 21% 26% 29%
Customer B 12% less than 10% 14%
</TABLE>
Accounts receivable of approximately $2,284,000 from Customers A and B
represented 36% of the Company's accounts receivable at December 31, 1998.
- 30 -
<PAGE> 31
8. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Continuing operations:
Current income taxes:
Federal $ 724 $ 514 $ 131
State 82 2 13
-------- -------- --------
806 516 144
-------- -------- --------
Deferred income taxes:
Federal 173 (521) --
State (9) (3) --
-------- -------- --------
164 (8) --
-------- -------- --------
Extinguishment of debt:
Current -- (308) --
-------- -------- --------
-- (308) --
-------- -------- --------
$ 970 $ (316) $ 144
======== ======== ========
</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,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate $ 934 $ 321 $ 400
Add (deduct) the effect of --
FSC benefit (58) (68) (37)
State income taxes 48 (1) 8
Change in valuation allowance -- (537) (127)
Nondeductible expenses and other, net 85 21 12
Utilization of net operating loss carryforwards -- -- (115)
Alternative minimum taxes -- -- 3
Utilization of R&D credit (39) (52) --
-------- -------- --------
$ 970 $ (316) $ 144
======== ======== ========
</TABLE>
- 31 -
<PAGE> 32
The components of deferred income tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ -- $ 17
Research and development credit carryforwards -- 199
Minimum tax credit carryforward 143 192
Inventory and other reserves 427 367
Accrued bonuses and salaries 170 --
Other 23 64
-------- --------
Deferred tax assets 763 839
Deferred tax liability:
Depreciation (403) (315)
-------- --------
Net deferred tax asset $ 360 $ 524
======== ========
</TABLE>
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.
9. 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.
- 32 -
<PAGE> 33
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,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) from continuing operations $ 1,777 $ 1,857 $ 1,033
Less: Preferred stock dividends
-- -- (3)
Change in redemption amount of put warrants -- -- (1,266)
------------ ------------ ------------
Income (loss) applicable to common
stockholders (basic) 1,777 1,857 (236)
============ ============ ============
Effect of dilutive securities:
Convertible preferred stock -- -- --
Put warrants -- -- --
------------ ------------ ------------
Income (loss) applicable to common
stockholders (diluted) $ 1,777 $ 1,857 $ (236)
------------ ------------ ------------
Shares used in computing basic earnings per share 9,088,294 8,032,887 5,463,156
Stock options 1,522,396 1,821,436 --
Put warrants -- 248,250 --
Convertible preferred stock -- 149,991 --
------------ ------------ ------------
Shares used in computing diluted earnings per share 10,610,690 10,252,564 5,463,156
============ ============ ============
Earnings (loss) per share
Basic $ 0.20 $ 0.23 $ (0.04)
============ ============ ============
Diluted $ 0.17 $ 0.18 $ (0.04)
============ ============ ============
</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 1,605,198 and 4,631,965 shares of common
stock, respectively, were outstanding at December 31, 1998 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.
10. 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 some of 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.
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.
- 33 -
<PAGE> 34
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.
11. COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company had entered into purchase commitments for
inventory, capital acquisitions and other services totaling $1,193,000 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.
12. 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 $276,000, $221,000 and $158,000 to
the plan in 1998, 1997 and 1996, respectively, based on 100%, 100% and 100%,
respectively, of the first 6% of employee contributions.
- 34 -
<PAGE> 35
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 had been the principal accountant
for Encore Orthopedics, Inc. since April 1, 1992. There was no adverse opinion
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 caption "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 1999 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:
Exhibit
No. Description
- ------- -----------
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)
- 35 -
<PAGE> 36
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 (5)
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. (5)
10.6 Severance Agreement between Encore and Nick Cindrich, dated
September 27, 1995, as amended on March 18, 1997. (5)
10.7 Employment Agreement between Encore and Craig L. Smith, dated August
26, 1994. (5)
10.8 Severance Agreement between Encore and Craig L. Smith, dated
September 19, 1995, as amended on March 18, 1997. (5)
10.9 [intentional omitted]
10.10 [intentional omitted]
10.11 Employment Agreement between Encore and Ken Ludwig, Jr., dated
August 26, 1994. (5)
10.12 Severance Agreement between Encore and Ken Ludwig, Jr., dated
September 19, 1995, as amended on March 18, 1997. (5)
10.13 Employment Agreement between Encore and August Faske, dated August
26, 1994. (5)
10.14 Severance Agreement between Encore and August Faske, dated September
20, 1995, as amended on March 18, 1997. (5)
10.15 Employment Agreement between Encore and Harry L. Zimmerman, dated
August 26, 1994. (5)
10.16 Severance Agreement between Encore and Harry L. Zimmerman, dated
September 19, 1995, as amended on March 18, 1997. (5)
- 36 -
<PAGE> 37
10.17 Employment Agreement between Encore and J.D. Webb, Jr., dated August
26, 1994. (5)
10.18 Severance Agreement between Encore and J.D. Webb, Jr., dated
September 19, 1995, as amended on March 18, 1997. (5)
10.19 Employment Agreement between Encore and Greg Kaseeska, dated March
1, 1998.
10.20 Severance Agreement between Encore and Greg Kaseeska, dated March 1,
1998.
10.21 Employment Agreement between Encore and Kathy Weiderkehr, dated
April 1, 1997.
10.22 Severance Agreement between Encore and Kathy Weiderkehr, dated April
1, 1997.
10.23 Employment Agreement between Encore and Robert Buckley, dated
December 1, 1998.
10.24 Severance Agreement between Encore and Robert Buckley dated December
1, 1998.
10.25 Employment Agreement between Encore and Jean-Paul Burtin, dated
December 1, 1998.
10.26 Severance Agreement between Encore and Jean-Paul Burtin, dated
December 1, 1998.
10.27 Second Amendment to Severance Agreement between Encore and Nick
Cindrich dated December 31, 1998.
10.28 Second Amendment to Severance Agreement between Encore and Craig
Smith dated December 31, 1998.
10.29 Second Amendment to Severance Agreement between Encore and August
Faske dated December 31, 1998.
10.30 Second Amendment to Severance Agreement between Encore and Harry L.
Zimmerman dated December 31, 1998.
10.31 Second Amendment to Severance Agreement between Encore and Kenneth
Ludwig, Jr. dated December 31, 1998.
10.32 Second Amendment to Severance Agreement between Encore and J.D.
Webb, Jr. dated December 31, 1998.
10.33 Amendment to Severance Agreement between Encore and Greg Kaseeska
dated December 31, 1998.
10.34 Amendment to Severance Agreement between Encore and Kathy Weiderkehr
dated December 31, 1998.
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
- 37 -
<PAGE> 38
(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.
(5) Filed as an exhibit to Company Form 10-K filed with the SEC on March
30, 1998.
- 38 -
<PAGE> 39
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
3/22/99 By: /s/ NICK CINDRICH
- ----------------- --------------------------------------
Date Nick Cindrich, Chairman of the Board
and Chief Executive Officer
3/22/99 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.
3/19/99 By: /s/ JAY M. HAFT
- ----------------- --------------------------------------
Date Jay M. Haft, Director
3/22/99 By: /s/ JOEL KANTER
- ----------------- --------------------------------------
Date Joel Kanter, Director
3/22/99 By: /s/ LAMAR LASTER
- ----------------- --------------------------------------
Date LaMar Laster, Director
3/22/99 By: /s/ DENNIS ENRIGHT
- ----------------- --------------------------------------
Date Dennis Enright, Director
3/22/99 By: /s/ CRAIG L. SMITH
- ----------------- --------------------------------------
Date Craig L. Smith, Director
3/18/99 By: /s/ JOHN ABELES
- ----------------- --------------------------------------
Date John Abeles, Director
3/22/99 By: /s/ KENNETH DAVIDSON
- ----------------- --------------------------------------
Date Kenneth Davidson, Director
3/22/99 Bu: /s/ RICHARD MARTIN
- ----------------- --------------------------------------
Date Richard Martin, Director
- 39 -
<PAGE> 40
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)
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 (5)
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. (5)
10.6 Severance Agreement between Encore and Nick Cindrich, dated
September 27, 1995, as amended on March 18, 1997. (5)
10.7 Employment Agreement between Encore and Craig L. Smith, dated August
26, 1994. (5)
10.8 Severance Agreement between Encore and Craig L. Smith, dated
September 19, 1995, as amended on March 18, 1997. (5)
10.9 [intentional omitted]
10.10 [intentional omitted]
10.11 Employment Agreement between Encore and Ken Ludwig, Jr., dated
August 26, 1994. (5)
10.12 Severance Agreement between Encore and Ken Ludwig, Jr., dated
September 19, 1995, as amended on March 18, 1997. (5)
10.13 Employment Agreement between Encore and August Faske, dated August
26, 1994. (5)
10.14 Severance Agreement between Encore and August Faske, dated September
20, 1995, as amended on March 18, 1997. (5)
10.15 Employment Agreement between Encore and Harry L. Zimmerman, dated
August 26, 1994. (5)
10.16 Severance Agreement between Encore and Harry L. Zimmerman, dated
September 19, 1995, as amended on March 18, 1997. (5)
</TABLE>
<PAGE> 41
<TABLE>
<S> <C>
10.17 Employment Agreement between Encore and J.D. Webb, Jr., dated August
26, 1994. (5)
10.18 Severance Agreement between Encore and J.D. Webb, Jr., dated
September 19, 1995, as amended on March 18, 1997. (5)
10.19 Employment Agreement between Encore and Greg Kaseeska, dated March
1, 1998.
10.20 Severance Agreement between Encore and Greg Kaseeska, dated March 1,
1998.
10.21 Employment Agreement between Encore and Kathy Weiderkehr, dated
April 1, 1997.
10.22 Severance Agreement between Encore and Kathy Weiderkehr, dated April
1, 1997.
10.23 Employment Agreement between Encore and Robert Buckley, dated
December 1, 1998.
10.24 Severance Agreement between Encore and Robert Buckley dated December
1, 1998.
10.25 Employment Agreement between Encore and Jean-Paul Burtin, dated
December 1, 1998.
10.26 Severance Agreement between Encore and Jean-Paul Burtin, dated
December 1, 1998.
10.27 Second Amendment to Severance Agreement between Encore and Nick
Cindrich dated December 31, 1998.
10.28 Second Amendment to Severance Agreement between Encore and Craig
Smith dated December 31, 1998.
10.29 Second Amendment to Severance Agreement between Encore and August
Faske dated December 31, 1998.
10.30 Second Amendment to Severance Agreement between Encore and Harry L.
Zimmerman dated December 31, 1998.
10.31 Second Amendment to Severance Agreement between Encore and Kenneth
Ludwig, Jr. dated December 31, 1998.
10.32 Second Amendment to Severance Agreement between Encore and J.D.
Webb, Jr. dated December 31, 1998.
10.33 Amendment to Severance Agreement between Encore and Greg Kaseeska
dated December 31, 1998.
10.34 Amendment to Severance Agreement between Encore and Kathy Weiderkehr
dated December 31, 1998.
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>
<PAGE> 42
(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.
(5) Filed as an exhibit to Company Form 10-K filed with the SEC on March
30, 1998.
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 1st day of March, 1998, by and between ENCORE ORTHOPEDICS, INC., a Delaware
corporation (the "Company"), and GREG KASEESKA (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 August 31, 1999 (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- Operations 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 Ninety Thousand Dollars ($90,000) 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 January 1, 1999. 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 executive 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
<PAGE> 2
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 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 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.
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
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<PAGE> 3
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
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
- 3 -
<PAGE> 4
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, 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
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<PAGE> 5
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., 9800 Metric Blvd., Austin, Texas 78758 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.
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
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<PAGE> 6
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/ GREG KASESSKA
------------------------------------
GREG KASESSKA
8102 Cantura Mills
81Converse,Texas 78109
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<PAGE> 1
EXHIBIT 10.20
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 1st day of
March, 1998, by and between ENCORE(R) ORTHOPEDICS, INC., a Delaware corporation,
with its principal office located at 9800 Metric Blvd., Austin, Texas 78758,
(the "COMPANY"), and GREG KASEESKA, an individual resident at 8102 Cantura
Mills, Converse, Texas 78109 (the "EMPLOYEE" or the "EXECUTIVE").
WHEREAS, the Employee is employed by the Company as its Vice President
- - Operations pursuant to an employment agreement dated March 1, 1998 (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 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:
<PAGE> 3
(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 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,
<PAGE> 4
(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 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
<PAGE> 5
(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 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
<PAGE> 6
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.
(c) Effective on March 25, 1999, the following changes be made
in the foregoing provisions of the Agreement:
(i) 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;
(ii) 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
(iii) 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.
(d) 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.
<PAGE> 7
(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:
(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.
<PAGE> 8
(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 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.
<PAGE> 9
(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.
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
<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/ GREG KASEESKA
-----------------------------
GREG KASEESKA
<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement") made and effective as of the 1st day
of April, 1997, by and between ENCORE ORTHOPEDICS, INC., a Texas corporation
(the "Company"), and KATHY WIEDERKEHR (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 August 26, 1999 (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 Director -
Human Resources 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 her 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 Seventy Thousand Dollars ($70,000) 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 an annual basis, beginning January 1, 1998 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.
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
<PAGE> 2
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 her estate, other than, in the event such
termination was without cause, the Company shall be required to pay the
Employee, at the time of her 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, cause 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 her 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 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.
ARTICLE 2
NON-COMPETITION AND DISCLOSURE OF INFORMATION
2.1 Non-competition. Employee acknowledges that her 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
-2-
<PAGE> 3
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 she 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 her
employment by Company hereunder; (b) engage in or carry on, directly or
indirectly, either for herself, 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 Salary.
2.2 Disclosures of Information. The Employee acknowledges that in the
course of her employment by the Company, she 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 she shall
not, at any time during or following the term of her employment hereunder,
directly or indirectly, divulge or disclose, for any purpose whatsoever, any of
such Information which has been obtained by or disclosed to her as a result of
her employment by Company. The Employee further agrees that she 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 her or coming into her possession by
or through her employment or 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 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 her.
2.3 Accounting for Profits. Employee covenants and agrees that if she
shall violate any of her covenants or agreements under Article II hereof,
Company shall be entitled to an
-3-
<PAGE> 4
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
her 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
-4-
<PAGE> 5
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., 9800 Metric Blvd., Austin, Texas 78758 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 her 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.
-5-
<PAGE> 6
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 she is not a party to any other employment agreement. Employee
further represents and warrants that she neither has any proprietary
information of any other business nor is she 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/ KATHY WIEDERKEHR
----------------------------------------
KATHY WIEDERKEHR
11501 Cherry Hearst
Austin, Texas 78750
-6-
<PAGE> 1
EXHIBIT 10.22
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 1st day of
April, 1997, by and between ENCORE(R) ORTHOPEDICS, INC., a Texas corporation,
with its principal office located at 9800 Metric Blvd., Austin, Texas 78758,
(the "COMPANY"), and KATHY WIEDERKEHR, an individual resident at 11501 Cherry
Hearst, Austin, Texas 78750 (the "EMPLOYEE" or the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Director -
Human Resources pursuant to an employment agreement dated April 1, 1997 (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 her position
and that the Board and the Chief Executive Officer should be able to receive
and rely upon her 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 her 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 her 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 her 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
-2-
<PAGE> 3
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 her 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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<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) her 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
her, 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 her 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 her 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 her options or stock awards either
within ninety (90) days of her 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 her 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 her 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 her spouse or her 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 her spouse's or her 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 her 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 her 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.
(c) The Executive shall have no duty to mitigate, whether by
seeking other employment or otherwise, any loss or damage suffered by
her as a result of any failure by the Company to make any payment, or
provide any benefit, to her under this Section 2.
(d) Effective as of March 25, 1999:
(i) 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;
(ii) 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
(iii) 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> 7
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:
(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
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<PAGE> 8
(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 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 her seeking to obtain or enforce any right or
benefit provided by this Agreement, promptly and from time to time, at her
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
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<PAGE> 9
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 her 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.
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).
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<PAGE> 10
Except for any transfer or assignment of rights under this Agreement,
in whole or in part, upon the death of the Executive to her 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 her 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 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.
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<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has hereunto set her
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/ KATHY WIEDERKEHR
---------------------------------
KATHY WIEDERKEHR
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<PAGE> 1
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 1st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware corporation (the "Company"), and ROBERT R. BUCKLEY, JR. (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 August 31, 1999 (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
- - North American 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 Twenty Thousand Dollars
($120,000) 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 January 1, 1999.
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 executive 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
1.5 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 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.
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
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<PAGE> 3
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 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
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<PAGE> 4
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, 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.
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<PAGE> 5
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., 9800 Metric Blvd., Austin, Texas 78758 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.
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
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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/ ROBERT R. BUCKLEY, JR.
---------------------------------------
ROBERT R. BUCKLEY, JR.
4201 Greystone
Austin, Texas 78731
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<PAGE> 1
EXHIBIT 10.24
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 1st day of
December, 1998, by and between ENCORE(R) ORTHOPEDICS, INC., a Delaware
corporation, with its principal office located at 9800 Metric Boulevard, Austin,
Texas 78758, (the "COMPANY"), and ROBERT R. BUCKLEY, JR., an individual resident
at 4021 Greystone, Austin, Texas 78731 (the "EMPLOYEE" or the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Vice President
- - North American Sales pursuant to an employment agreement dated December 1,
1998 (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
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
<PAGE> 2
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 acceptable to the Executive or the Executive's legal
representative (which agreement as to acceptability will not be
unreasonably withheld).
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<PAGE> 3
(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 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
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<PAGE> 4
(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 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;
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<PAGE> 5
(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 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
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<PAGE> 6
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:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
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<PAGE> 7
(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 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.
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<PAGE> 8
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 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.
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(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, Chief Executive Officer
------------------------------------------
EXECUTIVE
/s/ ROBERT R. BUCKLEY, JR.
----------------------------------------------
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EXHIBIT 10.25
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and effective as of
the 1st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware corporation (the "Company"), and JEAN-PAUL BURTIN (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 August 31, 1999 (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
- - International 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 Twenty Thousand Dollars ($120,000)
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 January 1, 1999. 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 executive 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
<PAGE> 2
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 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 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.
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
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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
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
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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, 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
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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., 9800 Metric Blvd., Austin, Texas 78758 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.
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
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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/ JEAN-PAUL BURTIN
----------------------------------------------
JEAN-PAUL BURTIN
6205 Mercedes Bend
Austin, Texas 78759
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EXHIBIT 10.26
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "AGREEMENT"), is made this 1st day of
December, 1998, by and between ENCORE(R) ORTHOPEDICS, INC., a Delaware
corporation, with its principal office located at 9800 Metric Boulevard, Austin,
Texas 78758, (the "COMPANY"), and JEAN-PAUL BURTIN, an individual resident at
6205 Mercedes Bend, Austin, Texas 78759 (the "EMPLOYEE" or the "EXECUTIVE").
WITNESSETH
WHEREAS, the Employee is employed by the Company as its Vice President
- - International Sales pursuant to an employment agreement dated December 1, 1998
(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
WHEREAS, the Executive is willing to give the Company such assurances
and to enter into the other covenants contained in this Agreement; and
<PAGE> 2
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 acceptable to the Executive or the Executive's legal
representative (which agreement as to acceptability will not be
unreasonably withheld).
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(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 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
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(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 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;
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<PAGE> 5
(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 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
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<PAGE> 6
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:
(i) have any interest in, whether as proprietor,
officer, director or otherwise (but excluding an interest by
way of employment only),
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<PAGE> 7
(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 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.
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<PAGE> 8
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 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.
-9-
<PAGE> 10
(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/ JEAN-PAUL BURTIN
------------------------------------------------
JEAN-PAUL BURTIN
-10-
<PAGE> 1
EXHIBIT 10.27
SECOND AMENDMENT TO SEVERANCE AGREEMENT
THIS SECOND AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made
this 31st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware 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, as amended (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; 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. The changes contemplated by the Amendment to Severance Agreement dated
March 18, 1997 shall not take effect as of March 25, 1999 and shall have no
further force and effect.
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 Amendment 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
<PAGE> 1
EXHIBIT 10.28
SECOND AMENDMENT TO SEVERANCE AGREEMENT
THIS SECOND AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made
this 31st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware 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, as amended (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; 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. The changes contemplated by the Amendment to Severance Agreement dated
March 18, 1997 shall not take effect as of March 25, 1999 and shall have no
further force and effect.
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 Amendment 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
<PAGE> 1
EXHIBIT 10.29
SECOND AMENDMENT TO SEVERANCE AGREEMENT
THIS SECOND AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made
this 31st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware 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, as amended (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; 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. The changes contemplated by the Amendment to Severance Agreement dated
March 18, 1997 shall not take effect as of March 25, 1999 and shall have no
further force and effect.
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 Amendment 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
<PAGE> 1
EXHIBIT 10.30
SECOND AMENDMENT TO SEVERANCE AGREEMENT
THIS SECOND AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made
this 31st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware 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, as amended (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; 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. The changes contemplated by the Amendment to Severance Agreement dated
March 18, 1997 shall not take effect as of March 25, 1999 and shall have no
further force and effect.
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 Amendment 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 10.31
SECOND AMENDMENT TO SEVERANCE AGREEMENT
THIS SECOND AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made
this 31st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware 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, as amended (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 ; 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. The changes contemplated by the Amendment to Severance Agreement dated
March 18, 1997 shall not take effect as of March 25, 1999 and shall have no
further force and effect.
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 Amendment 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.
<PAGE> 1
EXHIBIT 10.32
SECOND AMENDMENT TO SEVERANCE AGREEMENT
THIS SECOND AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made
this 31st day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a
Delaware 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, as amended (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; 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. The changes contemplated by the Amendment to Severance Agreement dated
March 18, 1997 shall not take effect as of March 25, 1999 and shall have no
further force and effect.
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 Amendment 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.
<PAGE> 1
EXHIBIT 10.33
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this 31st
day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a Delaware
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and GREG KASEESKA, an individual resident at 8102
Cantura Mills, Converse, Texas 78109 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance Agreement
dated March 1, 1998 (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; 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. Section 2(c) of the Agreement shall be deleted and shall have no further
force and effect.
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 Amendment 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, Chief Executive Officer
EMPLOYEE:
/s/ GREG KASEESKA
-----------------------------------------
GREG KASEESKA
<PAGE> 1
EXHIBIT 10.34
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is made this 31st
day of December, 1998, by and between ENCORE ORTHOPEDICS, INC., a Delaware
corporation, with its principal office located at 9800 Metric Blvd., Austin,
Texas 78758 (the "Company") and KATHY WIEDERKEHR, an individual resident at
11501 Cherry Hearst, Austin, Texas 78750 (the "Employee").
WHEREAS, the Employee and the Company entered into a Severance Agreement
dated April 1, 1997 (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; 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. Section 2(c) of the Agreement shall be deleted and shall have no further
force and effect.
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 Amendment 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, Chief Executive Officer
EMPLOYEE:
/s/ KATHY WIEDERKEHR
-----------------------------------------
KATHY WIEDERKEHR
<PAGE> 1
EXHIBIT 21
SCHEDULE OF SUBSIDIARIES OF ENCORE MEDICAL CORPORATION
Encore Orthopedics, Inc., a Delaware corporation
Encore Orthopedics FSC Limited, a Jamaican corporation
- 40 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 6,442
<ALLOWANCES> 145
<INVENTORY> 16,176
<CURRENT-ASSETS> 23,083
<PP&E> 11,927
<DEPRECIATION> 5,780
<TOTAL-ASSETS> 30,556
<CURRENT-LIABILITIES> 5,129
<BONDS> 5,603
0
0
<COMMON> 9
<OTHER-SE> 19,815
<TOTAL-LIABILITY-AND-EQUITY> 30,556
<SALES> 28,990
<TOTAL-REVENUES> 28,990
<CGS> 9,582
<TOTAL-COSTS> 9,582
<OTHER-EXPENSES> 16,207
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454
<INCOME-PRETAX> 2,747
<INCOME-TAX> 970
<INCOME-CONTINUING> 1,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,777
<EPS-PRIMARY> .20
<EPS-DILUTED> .17
</TABLE>
