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FORM OF NONSTATUTORY STOCK OPTION AGREEMENT

Stock Option Agreement

FORM OF NONSTATUTORY STOCK OPTION AGREEMENT | Document Parties: ENCORE MEDICAL GP, INC. You are currently viewing:
This Stock Option Agreement involves

ENCORE MEDICAL GP, INC.

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Title: FORM OF NONSTATUTORY STOCK OPTION AGREEMENT
Governing Law: Delaware     Date: 4/18/2007

FORM OF NONSTATUTORY STOCK OPTION AGREEMENT, Parties: encore medical gp  inc.
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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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