Exhibit 10.2
FORM OF NONSTATUTORY STOCK OPTION
AGREEMENT
This AGREEMENT (this
“Agreement”) is made as of
,
2006 by and between Encore Medical Corporation, a Delaware
corporation (the “Company”), and
[ ]
(“Optionee”) to become effective at the effective time,
as defined in Section 1.1 of the Merger Agreement (the
“Effective Time”). As a condition precedent to the
Company’s grant of the Option (as defined in Section 2 of
this Agreement) to Optionee, Optionee is executing and delivering a
counterpart of the Stockholders Agreement and thereby agrees to be
bound by the Stockholders’ Agreement.
1.
Certain Definitions
. Capitalized
terms used, but not otherwise defined, in this Agreement will have
the meanings given to such terms in the Company’s 2006 Stock
Incentive Plan (the “Plan”). As used in this
Agreement:
(a)
“Code” means the
Internal Revenue Code of 1986, as amended.
(b)
“Company” has the
meaning specified in the introductory paragraph of this Agreement;
provided , that to the extent that any class of equity
securities of a member of the Company’s controlled group
becomes publicly traded on an established securities market, the
term “Company” shall be deemed to refer to such
publicly traded entity.
(c)
“Compensation
Committee” means the Executive Compensation Committee of the
Board.
(d)
“Disability”
shall have the meaning set forth in the Optionee’s employment
agreement with the Company or, if there is no employment agreement,
it shall mean the Optionee is disabled as determined under
Section 409A(a)(2)(C) of the Code.
(e)
“EBITDA” shall
mean “Consolidated EBITDA”, as defined in that certain
Credit Agreement dated as of November 3, 2006 among Encore Medical
Finance, LLC, as Borrower, Encore Medical Holdings, LLC, Bank Of
America, N.A., as Administrative Agent, Swing Line Lender and L/C
Issuer, The Other Lenders Party Hereto, Credit Suisse Securities
(USA) LLC, as Syndication Agent, General Electric Capital
Corporation, as Documentation Agent, and Banc Of America Securities
LLC and Credit Suisse Securities (USA) LLC, as Lead Arrangers and
Book Runners.
(f)
“Effective
Time” has the meaning specified in the introductory paragraph
of this Agreement.
(g)
“Fair
Market Value” has the meaning specified in the Plan, except
as expressly set forth herein.
(h)
“First
Performance-Based Tranche” has the meaning specified in
Section 2 of this Agreement.
(i)
“Free Cash
Flow” shall mean cash flow from operations as presented in
the statement of cash flows
(x)
increased,
without duplication, by
(i)
cash payments for
interest expense on borrowed money,
(ii)
the cash tax cost
incurred with respect to interest income and
(iii)
cash flows from
discontinued operations to the extent that such amounts are not
reflected as a source of cash from operations in the statement of
cash flows, and
(y)
decreased,
without duplication, by
(iv)
uses of cash
reflected as investing activities, excluding purchases of held to
maturity securities, and excluding amounts expended on acquisitions
of businesses, assets or product lines from third
parties,
(v)
cash received for
interest income on invested cash or cash equivalents,
(vi)
the cash tax
benefit realized during the period with respect to interest expense
on borrowed money and stock based compensation,
(vii)
minority interest
expense, and
(viii)
uses of cash from
discontinued operations to the extent that such amounts are not
included as a use of cash from operations in the statement of cash
flows.
For purposes of
calculating Free Cash Flow, all amounts will be determined in
accordance with GAAP, will consider changes in outstanding checks
to be an operating cash flow and will exclude the effects of any
sources or uses of cash outside the ordinary course of business
(e.g., receivable financing).
(j)
“GAAP” shall mean
accounting principles generally accepted in the United States of
America as applicable to the Company, subject to regulation by the
Securities and Exchange Commission as in effect on the date of this
Agreement, and to the extent that alternative accounting treatments
are permissible within those accounting principles, in accordance
with the Company’s historical accounting
policies.
(k)
“Grand
Slam” shall mean Grand Slam Holdings, LLC, a Delaware limited
liability company.
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(l)
“Good
Reason” shall have the meaning set forth in the
Optionee’s employment agreement with the Company or, if there
is no employment agreement, it shall mean, without an
Optionee’s consent, (i) a material reduction in the
Optionee’s compensation below the amount of compensation in
effect on the date of this Agreement, or (ii) a material reduction
in the Optionee’s duties or authority, in each case which is
not cured within thirty (30) days following the Company’s or
its subsidiary’s, as applicable, receipt of written notice
from such Optionee describing the event constituting Good
Reason.
(m)
“IRR”
shall mean the Company’s annually compounded internal rate of
return, based on (i) the Company’s independent
auditor’s appraisal of the per share value of the Company as
of each anniversary of the Closing, in the case of determining the
IRR performance goal, and (ii) on the applicable sale price in
the case of a Change in Control, assuming the Company is valued on
a going-concern basis as though it were a publicly traded company
with reasonable liquidity and without a controlling shareholder,
and taking into account all dividends, distributions and other
proceeds received by Grand Slam, but excluding any fees paid to
Blackstone pursuant to that certain Monitoring Agreement by and
between the Company and Blackstone dated November 3, 2006, or
any successor thereto, and based upon the assumption that all
shares available for or subject to award under the Plan are
outstanding shares of Company common stock.
(n)
“Merger
Agreement” means the Agreement and Plan of Merger dated
June 30, 2006 by and among Grand Slam, Grand Slam Acquisition
Corporation, a Delaware corporation, and Encore Medical
Corporation.
(o)
“Option” has the
meaning specified in Section 2 of this Agreement.
(p)
“Optionee” has
the meaning specified in the introductory paragraph of this
Agreement.
(q)
“Option
Price” has the meaning specified in Section 2 of this
Agreement.
(r)
“Option
Shares” has the meaning specified in Section 2 of this
Agreement.
(s)
“Performance
Period” shall mean the five-year period commencing January 1,
2007 and ending December 31, 2011.
(t)
“Plan” has the
meaning specified in Section 1 of this Agreement.
(u)
“Second
Performance-Based Tranche” has the meaning specified in
Section 2 of this Agreement.
(v)
“Stockholders’
Agreement” shall mean that certain Management Stockholders
Agreement between Optionee, the Company, and such other persons and
entities listed therein, dated November 3, 2006.
(w)
“Termination for
Cause” means the termination by the Company of
Optionee’s employment with the Company for
“cause” as defined in the employment agreement between
the Company and the Optionee or, if there is no employment
agreement, the termination
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by the Company of
Optionee’s employment as a result of
(A) Optionee’s willful and continued failure to
substantially perform Optionee’s duties (other than any such
failure resulting from Optionee’s Disability or any such
failure subsequent to Optionee being delivered notice of the
Company’s intent to terminate Optionee’s employment
without Cause) following written notice by the Company to Optionee
which specifically identifies such failure and Optionee not curing
such failure within thirty (30) days following receipt of such
notice (for the avoidance of doubt, unsatisfactory performance by
the Optionee of his duties shall not be deemed to be a failure to
substantially perform ) , (B) conviction of, or
a plea of nolo contendere to, (x) a felony (other
than traffic-related) under the laws of the United States or any
state thereof or any similar criminal act in a jurisdiction outside
the United States or (y) a crime involving moral turpitude that
could be injurious to the Company or its reputation, (C)
Optionee’s willful malfeasance or willful misconduct which is
materially and demonstrably injurious to the Company, or (D) any
act of fraud by Optionee in the performance of Optionee’s
duties. For purpose of the definition of Termination for Cause set
forth above, no act or failure to act shall be considered
“willful” unless done or omitted to be done by Optionee
in bad faith or without reasonable belief that Optionee’s
action was in the best interests of the Company and its affiliates.
Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Board shall be conclusively
presumed to be done, or omitted to be done, by Optionee in good
faith and in the best interests of the Company.
(x)
“Third
Performance-Based Tranche” has the meaning specified in
Section 2 of this Agreement.
2.
Grant of Stock Option
. Subject to and
upon the terms, conditions, and restrictions set forth in this
Agreement and in the Plan, the Company hereby grants to Optionee an
option (the “Option”) to purchase
shares of the
Company’s common stock (the “Option Shares”) at a
price (the “Option Price”) of
$ per share, which is the
Fair Market Value per share on the Effective Date. The Option may
be exercised from time to time in accordance with the terms of this
Agreement. Subject to adjustment as hereinafter provided,
(a) one-fourth of the Option Shares
( shares)
constitute, and may be purchased pursuant to the provisions of the
“Time-Based Tranche”, (b) one-fourth of the Option
Shares ( shares)
constitute and may be purchased pursuant to the provisions of the
First Performance-Based Tranche, (c) one-fourth of the Option
Shares ( shares)
constitute and may be purchased pursuant to the provisions of the
Second Performance-Based Tranche and (d) one-fourth of the Option
Shares ( shares)
constitute and may be purchased pursuant to the provisions of the
Third Performance-Based Tranche.
3.
Term of Option
. The term of the
Option shall commence at the Effective Time and, unless earlier
terminated in accordance with Section 7 hereof, shall expire ten
(10) years from the Effective Time.
4.
Right to Exercise
. Unless
terminated as hereinafter provided, the Option shall become
exercisable only as follows:
(a)
The Option shall
become exercisable with respect to 20% of the Time-Based Tranche
( shares) on the first
anniversary of the Effective Time and an additional 1/60 of the
Time-Based Tranche on each monthly anniversary thereafter if
Optionee
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remains in the continuous
employ of the Company, any Subsidiary or Affiliate as of each such
date.
(b)
The Optionee may
earn the right to exercise the option to purchase 20% of the First
Performance-Based Tranche (
shares) on each December 31 of the Performance Period,
provided , that (i) Optionee shall have remained in
the continuous employ of the Company, any Subsidiary or Affiliate
as of each such date, and (ii) the Company shall have achieved
certain specified annual performance targets for both EBITDA and
Free Cash Flow, as such terms are defined herein, and as such
targets are attached hereto as Attachment A. Except as set forth in
Section 4(e), below, any shares included in the First
Performance-Based Tranche as to which Optionee does not earn the
right to exercise the related Option Shares shall thereupon expire
and terminate; provided , however , that
notwithstanding anything in this sentence to the contrary, Options
under the First Performance-Based Tranche may also vest and become
exercisable on a “catch-up” basis, such that in any
subsequent fiscal year during the Performance Period if (i) the
cumulative actual performance for prior years for the First
Performance-Based Tranche equals or exceeds cumulative annual
performance targets for the First Performance-Based Tranche for
such years, and (ii) the relevant performance targets were achieved
in at least fifty percent of the completed years within the
Performance Period, then all prior First Performance-Based Tranche
Options to which such performance targets applied and which did not
previously vest shall also vest and become exercisable.
(c)
The Optionee may
earn the right to exercise the option to purchase 20% of the Second
Performance-Based Tranche
( shares) on each
December 31 during the Performance Period, provided ,
that (i) the Optionee shall have remained in the continuous
employ of the Company, any Subsidiary or Affiliate as of each such
date, and (ii) the Company shall have achieved certain specified
annual performance targets for both EBITDA and Free Cash Flow, as
such terms are defined herein, and as such targets are attached
hereto as Attachment B. Except as set forth in
Section 4(e), below, any shares included in the Second
Performance-Based Tranche as to which Optionee does not earn the
right to exercise the related Option Shares shall thereupon expire
and terminate; provided , however , that
notwithstanding anything in this sentence to the contrary, Options
under the Second Performance-Based Tranche may also vest and become
exercisable on a “catch-up” basis, such that in any
subsequent fiscal year if (i) the cumulative actual performance for
prior years for the Second Performance-Based Tranche equals or
exceeds cumulative annual performance targets for the Second
Performance-Based Tranche for such years, and (ii) the relevant
performance targets were achieved in at least fifty percent of the
completed years within the Performance Period, then all prior
Second Performance-Based Tranche Options to which such performance
targets applied and which did not previously vest shall also vest
and become exercisable.
(d)
The Optionee may
earn the right to exercise the option to purchase 20% of the Third
Performance-Based Tranche
( shares) on each
December 31 during the Performance Period, provided ,
that (i) the Optionee shall have remained in the continuous
employ of the Company, any Subsidiary or Affiliate as of each such
date, and (ii) the Company shall have achieved specified annual
performance targets for IRR, as such term is defined herein, and as
such targets are attached hereto as Attachment C. Except as set
forth in Section 4(e), below, any shares included in the Third
Performance-Based Tranche as to which Optionee does not earn the
right to exercise the related Option shares shall thereupon expire
and terminate;
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provided
, however
, the Options represented by the Third Performance-Based Tranche
may also vest and become exercis
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