-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PDrbPglRa+v8PaZpUvV7iLKjmPZL4Kxra6hvF+P0PjqUlR7cH+/VHOVAdd6B1Ig6 60mJFiU2/H58VLwPJoN/pQ== 0001047469-98-009973.txt : 19980317 0001047469-98-009973.hdr.sgml : 19980317 ACCESSION NUMBER: 0001047469-98-009973 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMPI INC CENTRAL INDEX KEY: 0000317032 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411310335 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09387 FILM NUMBER: 98566078 BUSINESS ADDRESS: STREET 1: 1275 GREY FOX RD CITY: ST PAUL STATE: MN ZIP: 55112-6989 BUSINESS PHONE: 6126366600 MAIL ADDRESS: STREET 2: 1275 GREY FOX ROAD CITY: ST PAUL STATE: MN ZIP: 55112-6989 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ----------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-9387 ----------------- ------ Empi, Inc. (Exact name of registrant as specified in its charter) MINNESOTA 41-1310335 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 599 CARDIGAN ROAD ST. PAUL, MINNESOTA 55126 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (612) 415-9000 --------------- ----------------------- Securities registered pursuant to Section 12 (b) OF THE ACT: NONE ---- Securities registered pursuant to Section 12 (g) of the Act: NO PAR VALUE COMMON STOCK ------------------------- (Title of Class) 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 twelve 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. / / The aggregate market value of the voting stock held by non-affiliates of the registrant on March 3, 1998, was approximately $ 129,760,391. The number of shares outstanding of the registrant's class of common stock as of March 3, 1998, was 7,746,889 shares of no par value common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 29, 1998 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Empi, Inc. ("Empi" or the "Company") is one of the largest medical device companies in rehabilitative medicine in the United States. The Company is a leading supplier of electrotherapy, iontophoretic drug delivery, orthotic and incontinence treatment products to the orthopedic rehabilitation and incontinence treatment markets. Empi develops, markets and manufactures products, supported by clinical research, that continuously improve the quality of life for patients with functional disabilities, and are used in both the clinic and home setting. Empi was organized as a Minnesota corporation in October 1977. The Company's corporate headquarters are located at 599 Cardigan Road, St. Paul, Minnesota 55126, (612) 415-9000. ORTHOPEDIC REHABILITATION MARKET Currently, the Company manufacturers and markets the following orthopedic rehabilitation products: TENS (Transcutaneous Electrical Nerve Stimulation) devices for the treatment of chronic and acute pain; NMES (neuromuscular electrical stimulation) devices for restoring muscle tone and mobility; iontophoretic drug delivery systems to non-invasively deliver local anesthesia and anti-inflammatory medications through the skin; and dynamic splinting orthoses for restoring joint range of motion. In addition, the Company distributes functional active resistance orthoses for treatment of knee dysfunction, patient-administered cervical traction devices to manage chronic cervical pain and a complete line of accessories for its products. To complement its orthopedic rehabilitation products offered, the Company entered into a strategic alliance in August of 1995 with Tennessee-based Rehab Med+Equip, Inc. Under which the Company markets a catalog of rehabilitation products that meet the growing needs of its customers. The catalog includes over 200 products, such as ice packs, whirlpool baths, lumbar and cervical rolls and supports, as well as orthotics and bracing products. INCONTINENCE TREATMENT MARKET In 1992, the Company began marketing a proprietary pelvic floor stimulation (PFS) system to physical therapists, family care physicians, gynecologists, urogynecologists and urologists for the treatment of female urinary incontinence. In 1993, the Company diversified its incontinence product line by acquiring Physical Health Devices, Inc. (PHD), an electromyography (EMG) biofeedback company. Electromyography is used in incontinence treatment as a volitional method to reeducate the pelvic floor muscles. The Company's incontinence treatment product line further expanded in 1997 with the introduction of a device that combines both PFS and EMG, and in 1998 with a simplified, low cost PFS device for home use. INTERNATIONAL MARKET The Company sells its products internationally through independent dealers. With the acquisition of the Nortech division of Medtronic, inc. In November 1992, the Company gained new international marketing opportunities through independent dealer relationships in Canada, Europe, Australia and New Zealand, allowing for expanded distribution of its new products in both the orthopedic rehabilitation and incontinence treatment markets. In 1994, the Company began to focus on establishing master distributors for each business segment in key international markets. In April 1995, the Company closed its Canadian office and now markets its products through a master distributor located in Quebec, Canada. One of the major objectives for the international market for 1998 involves introducing the Company's orthotic products in Japan and the Scandinavian countries. PRODUCTS ELECTROTHERAPY TENS DEVICES: Physicians and physical therapists have treated their patients' chronic and acute pain with electrical stimulation, often referred to as "transcutaneous electrical nerve stimulation" or "TENS," for over 20 years. Although TENS may not be effective for every patient or every condition, medical professionals have accepted TENS as an effective treatment for chronic or acute pain resulting from a variety of medical conditions. 2 TENS devices are most frequently used to treat persistent orthopedic conditions such as low back pain, joint stiffness and muscle spasm. Physicians have also prescribed TENS for pain resulting from a variety of other conditions including abdominal surgery, post-operative pain, arthritis, tendonitis, phantom limb pain and childbirth. TENS devices generally reduce pain while the device is being used, as well as for a period of time following usage, but do not cure the cause of the pain. TENS devices consist of a small, portable, battery-powered electrical pulse generator which is connected via wires to electrodes placed at or near the site of the patient's pain. The devices are small enough to fit into a shirt pocket and weigh approximately 5 ounces, allowing patients to alleviate pain conveniently at home or elsewhere. The electrodes are attached to the skin with an interface layer of conductive gel. The stimulator produces low voltage pulses of electricity that can be delivered continuously or intermittently in different wave forms throughout the treatment session. Empi's premier TENS products are market leaders due to their pre-programmed features and high intensity capability. Epix VT-TM-, launched in 1997, provides additional benefits through its outcomes measurement capabilities to physicians and payors who desire objective documentation to validate the effect of TENS for any given patient. The Company's other TENS devices include: Epix XL-Registered Trademark-, Eclipse+-Registered Trademark- and Dynex-Registered Trademark- IV. Two theories have been advanced to explain the manner in which TENS alleviates pain. The "gate control theory" postulates that the electrical impulses from TENS devices block or interfere with the neurological transmission of pain signals from the site of the injury to the brain. A second theory suggests that the electrical impulses prompt the release of endogenous endorphins, the body's natural pain suppressing agents. Neither theory has conclusive support in the scientific literature. Under either theory, TENS relieves pain without the costs and risks associated with surgery or the undesirable side effects and physiological problems of prolonged drug use which can include addiction, stupor, depression, disorientation, nausea and ulcers. NMES DEVICES: Medical professionals also use electrical stimulation to activate and exercise muscles for rehabilitative purposes. "Neuromuscular electrical stimulation" or "NMES" has proven effective in producing controlled, involuntary muscle contractions which can maintain the strength and mobility of a limb or prevent deterioration of muscle tissues in patients who are unable to perform voluntary muscle contraction. Physicians have prescribed neuromuscular stimulation in a variety of circumstances intended to improve muscle tone, increase joint mobility and accelerate recovery from traumatic injury. Common conditions for which NMES therapy may be prescribed include common knee injuries, swelling, spasticity and improper gait. The Company's current NMES devices are Focus-Registered Trademark- and Respond Select-Registered Trademark-. ACCESSORIES: The Company meets the needs of its customers by supplying accessories such as electrodes, cables, conductive gel, skin care products, batteries and other accessories, which are either manufactured by Empi or purchased from other vendors for resale. The Company has exclusive rights to distribute several unique models of electrodes. Empi believes that the U.S. market for TENS, NMES and accessories exceeds $100 million. The Company expects the market to grow, in unit volume, by less than 5% per annum but anticipates experiencing continued pricing pressures which may result in flat or declining revenues. IONTOPHORETIC DRUG DELIVERY IONTOPHORESIS: Iontophoresis is a process using electric current to assist drug transfer through the skin. Iontophoretic applications include the delivery of local anesthesia and anti-inflammatory medication for joint and tissue treatment. For many applications, use of iontophoresis can be advantageous when compared to a syringe because it allows medications to be dispersed without invading the joint space. It can also avoid many of the systemic and other side effects frequently associated with oral medications or injections. The Company has developed both a proprietary iontophoresis device and patented buffered electrode capable of delivering small molecular drugs that can be ionized, such as drugs for arthritis, bursitis, tendonitis and related conditions. The system is controlled by a microprocessor and uses continuous low voltage electrical current that delivers charged drug particles through the skin's surface. The Company received FDA 510(K) clearance in July 1990 for its Dupel-Registered Trademark- iontophoresis device and in November 1991 for its buffered electrode. The Company introduced its iontophoresis system, for human use, to the marketplace in the first quarter of 1992. 3 The company estimates that the current market for human iontophoresis systems is approximately $35 million domestically, and that the market defined in sales dollars is growing at a rate of 5 to 10% per annum. Empi is continually investigating alternate uses of its technologies in new medical markets. During 1996, the Company developed and test marketed the Relion-TM- iontophoresis drug delivery system for use in the equine veterinary marketplace. Relion offers veterinarians a useful local drug delivery system for a variety of drugs used in the treatment of horses. In February of 1997, the Company launched Relion in the U.S. and international marketplaces through regional veterinary distributors. ORTHOTICS ORTHOTICS: The Advance Dynamic ROM-Registered Trademark- orthoses product line is used to correct joint range of motion limitations at the wrist, elbow, knee or ankle. The Company's Advance Dynamic ROM orthosis is based on the principle that particular connective tissue will remodel over time in response to the type and amount of physical stress it receives. The Advance Dynamic ROM orthosis addresses the permanent or plastic component of connective tissue deformation to achieve long-term range of motion improvement. It does this by gently delivering low-load stress at the joint's end-range over a prolonged period of time. The Company's Advance Dynamic ROM orthosis product line, introduced in the first quarter of 1995, consists of models for forearm supination, elbow, wrist, knee and ankle joints as well as below the knee amputee devices. Range of motion limitations, generally referred to as contractures, often result following long periods of restricted motion or when scar adhesions form following trauma. The dynamic orthoses line fits very well with the Company's focus on cost effective treatments used outside the clinic setting. The Company estimates that the current ROM orthotics market is approximately $40 million in the U.S. and that the potential sales growth rate over the next few years will range between 10 and 15% per year. Empi has entered into an agreement with Inverse Technology Corporation to market Protonics-TM-, a functional active resistance orthosis, to physicians and physical therapists. The innovative technology of Protonics-TM- addresses neuromuscular disorders in patients with knee dysfunction problems by helping to strengthen muscles, ligaments and tendons surrounding the knee joint through resistive exercise. The addition of Protonics-TM- is part of the Company's strategy to become a leader in the growing therapeutic bracing market. The Company launched Protonics-TM- nationally in the fourth quarter of 1996. The Company also has a national distribution agreement with Glacier Cross, Inc. to market Pronex-Registered Trademark-, a cervical traction device used to relieve chronic neck pain by relaxing muscle tension and spasms by mechanical separation of the cervical vertebrae. The Company sells Pronex to patients through physical therapists. INCONTINENCE TREATMENT FEMALE URINARY INCONTINENCE PRODUCTS: In 1987, the Company began a research project related to the application of its electro-therapeutic technology to the treatment of female urinary incontinence. In July 1991, the Company received FDA 510 (k) clearance for its first female pelvic floor rehabilitation system, Innova-Registered Trademark- PFS. Urinary incontinence is the involuntary loss of urine so severe as to have social, psychological or hygienic consequences. According to the 1996 Agency for Health Care Policy and Research (AHCPR) guidelines, "the U.S. spends $16 billion a year to care for people with urinary incontinence, up from $10 billion in 1990." At least 50% of the 1.5 million men and women in nursing homes suffer from incontinence. This condition is often a principal reason that families of the elderly commit them to full-time care. Current treatments for female urinary incontinence range from surgical procedures, with a three to four day hospital stay and a cost of $6,000 to $25,000, to behavioral or pharmacologic therapy. Products designed to manage the problem of urinary incontinence include appliances such as implantable stimulation devices catheters, collection devices and urethral plugs as well as disposable products such as adult diapers or briefs, padded undergarments and bed pads designed to keep urine away from the patient's skin. PFS cures as well as controls stress, urge and mixed incontinence. Stress incontinence, the most common form, is the inability of the sphincter to hold back urine when there is a sudden increased pressure on the bladder. Leakage of urine commonly occurs with activities such as coughing, sneezing, lifting and exercising. Urge incontinence occurs when the bladder is irritated and contracts spontaneously causing a sudden need to urinate. Mixed incontinence is a combination of both stress and urge incontinence. Traditionally, urge incontinence has been treated with pharmacological therapy. Many patients are intolerant of the medication's side effects. Stress incontinence is poorly treated by pharmacological treatment and therefore, in most cases, has resulted in surgical intervention. 4 Empi's urinary incontinence treatment devices, Innova PFS, InnoSense-TM- and Minnova-TM-, are composed of an externally worn, microprocessor-based neuromuscular stimulator that activates a proprietary multi-channel vaginal or rectal electrode. The devices automatically deliver timed dosages of stimulation for the treatment of stress, urge and mixed incontinence during twenty-minute treatment sessions. The treatment sessions are generally performed twice a day in the convenience and privacy of the home. In addition to PFS, InnoSense features EMG biofeedback capabilities for use in volitional reeducation of the pelvic floor muscles. The regular use of PFS can improve or cure stress, urge or mixed incontinence; published studies indicate a cure/improvement rate of 60-90%. The cost of treatment with PFS is approximately one thousand dollars or less, including physician fees. The Company believes electro-therapeutic pelvic muscle stimulation will eventually be selected as one of the first choice treatments before more invasive treatments due to its noninvasive nature, lower cost, lower risk and lack of side effects. The recent AHCPR guidelines, for the treatment of adult urinary incontinence, gives PFS a "B" strength of evidence recommendation for stress, urge and mixed incontinence. This is the same rating currently enjoyed by available surgical alternatives. While there are other pelvic muscle stimulation devices available, Innova PFS has been proven to be safe and effective based on controlled clinical studies published in peer-reviewed journals. The Company has designed an intravaginal electrode which it believes has several significant advantages over other electrodes, including the patented ComfortPulse-Registered Trademark- technology which makes the electrode more comfortable and effective during treatment. It is estimated that more than 13 million women in the United States suffer from urinary incontinence. The company believes that, for various reasons, electro-therapeutic treatment will not be appropriate for a portion of these women. The Company's initial target market includes women aged 35-65 who, when properly diagnosed, would benefit from electrical stimulation therapy. The Company estimates that at least 6 million women exist in this target market. Future growth in incontinence product sales is dependent in part on broad Medicare reimbursement. To date, Medicare coverage has been denied and establishment of a favorable national policy coverage decision remains doubtful in the foreseeable future despite the cost effectiveness of this therapy. The Company is also investigating the use of PFS for the treatment of post-prostatectomy incontinence, fecal incontinence and interstitial cystitis. Studies using Innova to treat these conditions are under review. MANUFACTURING Empi manufactures its electrotherapy and Advance ROM orthotic devices, as well as some components and related accessories, at its Clear Lake, South Dakota facility. Manufacturing activities at the Clear Lake facility include electronic and mechanical assembly, electrode fabrication and assembly, and fabric sewing processes. The Company's products are comprised of a variety of components including die cast metal parts, injection-molded plastic parts, printed circuit boards, electronic components, batteries and battery chargers, leadwires, electrodes and other components. Parts for these components are purchased from outside suppliers and are, in some instances, manufactured on a custom basis. Many of the component parts and raw materials the Company uses in its manufacturing and assembly operations are available from more than one supplier. However, several component parts and accessory products are currently purchased through a single supply source. If these components were no longer available, the Company is able to develop alternative sources for these components, avoiding any material adverse effect upon the Company's operations. CUSTOMERS, MARKETING AND SALES The Company's primary customers are patients, physical therapists and physical therapy clinics, as well as U.S. distributors and dealers and international dealers. These customers represented 60%, 33%, 4%, and 3%, respectively, of Empi's net sales for fiscal 1997. As of year end 1997, Empi had over 100 field sales representatives, selling rehabilitation products domestically on a direct basis to physicians, physical therapists and their patients. The Company currently serves nearly 80% of the 17,000 physical therapy clinics and hospital physical therapy departments nationwide. The Company also provides its customers a network for direct billing to insurance claims offices, Medicare carriers, HMOs and other managed health care programs. Empi has invested in both telemarketing and direct mail programs to contact patients who use its TENS and NMES devices to help them meet their needs in reordering accessory products. The Company utilizes direct sales programs 5 to contact home health care dealers who purchase the Company's products for resale to hospitals, clinicians and patients. Given the consolidation of provider networks and larger payor groups, which have continued to gain leverage in coverage and reimbursement decisions, the Company established a national accounts group in 1994 to address coverage and reimbursement issues and to gain preferred supplier agreements with these providers. Empi believes that the combination of its direct sales force, and patient care, clinic customer, third party billing and national account services gives the Company a distinct competitive advantage in today's marketplace. The Company sells its products internationally through independent dealers. At the end of 1997, Empi had 21 international distributors covering 16 countries, worldwide. The Company introduced the orthotic product line in Germany, Holland and Belgium in mid-1997, and plans to introduce these products to the Scandinavian countries in 1998. No individual customer accounted for 10 percent or more of total revenue for 1997, 1996 or 1995, respectively. COMPETITION ELECTROTHERAPY The Company's two strongest competitors in the electrotherapy market, who recently announced their intent to merge, are Rehabilicare, Inc. and Staodyn, Inc. The principal competitive factors in the electrotherapy marketplace are access to contracts due to managed care constraints, price, product quality and service. Empi believes its competitive advantage in the electrotherapy marketplace results from higher quality products and a strong distribution network. IONTOPHORETIC DRUG DELIVERY The Company feels its primary competitors in the iontophoretic market are IOMED, Inc., Dynatronics, Corp. and Henley Healthcare, Inc. ORTHOTICS The Company's major competitors in the orthotic market are Dynasplint Systems, Inc., the LMB division of DeRoyal Industries, Inc. and Ultraflex Systems, Inc. In the cervical traction market, the Company faces two main competitors: Saunders Group, Inc. and Lossing Orthopedic, Inc. INCONTINENCE TREATMENT Several companies are developing new treatment products designed to cure or control incontinence problems, including injectable biomaterials, improved drug therapy, other electro-therapeutic devices and muscle contraction biofeedback devices. Each of these treatment approaches is aimed at eliminating or reducing a patient's reliance on incontinence appliances or disposable diapers. Both InCare Medical Products, Inc. and Utah Medical Products, Inc. have pelvic floor stimulation devices on the market. Currently, none of these competitive devices have published placebo-controlled clinical studies to support the effectiveness of their product claims. PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT Empi's current research and development efforts are principally directed towards the development of next generation products and technologies related to the Company's orthotics, electrotherapy and iontophoretic drug delivery businesses, enhancement of existing products, and manufacturing process developments to improve product performance and costs. In 1997 research and development focused on developing next-generation incontinence systems, a new TENS device with data collection capabilities, new models for the Advance ROM and other new therapeutic braces. In fiscal 1997, 1996 and 1995, the Company's research and development expenses (including clinical studies) were $3,984,000, $3,476,000 and $3,424,000 respectively. The Company anticipates research and development to grow incrementally as a percent of sales in future years as the Company refocuses its research and development emphasis 6 on its new product lines. Expenditures on clinical research and outcomes studies are expected to grow based on increased regulatory and provider requirements. BACKLOG As of February 28, 1998, Empi did not have a material backlog situation and does not expect to experience a material backlog situation in the foreseeable future. PATENTS AND TRADEMARKS The Company currently owns numerous U.S. patents issued between 1982 and 1997. These patents cover various aspects and features of Empi's electrotherapy devices and associated electrodes, incontinence devices and associated electrodes, and range of motion orthotic devices. A number of patents and trademarks were obtained as a result of the Nortech and PHD acquisitions that cover various aspects of electrodes, stimulators and surface sEMG equipment. In addition, numerous patent applications have been filed on various aspects of electrotherapy and incontinence devices, range of motion orthoses, incontinence and iontophoresis electrodes. The initial life of each patent issued to the Company is either 14 or 17 years from the date of issue. Although the Company generally seeks patent protection when possible, it does not consider patent protection to be a significant, competitive advantage in the marketplace for electro-therapeutic devices; however, patent protection may be of significance with various aspects of the Company's incontinence electrode technology and its orthosis technology. The Company has also registered, and filed applications to register, various trademarks with the U.S. Patent and Trademark Office and appropriate offices in foreign countries. GOVERNMENT REGULATIONS AND REIMBURSEMENT GOVERNMENT REGULATIONS Medical device development, testing, manufacturing, labeling and marketing are regulated under the Federal Food, Drug and Cosmetic Act (the "ACT"), as amended, and additional regulations promulgated thereunder. These statutes and regulations require that manufacturers adhere to certain standards designed to assure product safety and effectiveness. The FDA's "Quality System" regulation establishes standards for the Company's manufacturing processes, requires maintenance of certain records and provides for unscheduled inspections of the Company facilities. Certain requirements of state, local and foreign governments must also be complied with in the manufacture and marketing of the Company's products. The Company believes its operations meet the requirements of these regulations. New medical devices require regulatory approval prior to market introduction. In the United States, new medical devices are subject to either the 510(k) Pre-Market Notification regulation or the Pre-Market Approval (PMA) regulation depending on the device's nature and intended use. International registration and approval requirements vary and are country dependent. Most regulatory approvals require submission of extensive documentation, engineering, pre-clinical testing and manufacturing information to demonstrate compliance with the pertinent regulations. In some cases, product electronics, appearance or labeling must be modified in order to comply with the foreign regulations. In addition, some products may require extensive clinical testing to obtain regulatory approval. The Company anticipates the FDA may require submission of additional clinical testing concerning iontophoretic drug delivery. In this regard, the Company is preparing the necessary clinical trial data to support the ongoing sale of its iontophoresis product, Dupel. The Company contracts with an outside certification authority to review the conformance of its quality assurance system to two recognized international quality system standards, ISO-9001 and EN 46001. Continued certification is essential for compliance with the Medical Device Directive in the European Union. The Company received this certification in 1996. 7 REIMBURSEMENT The Company receives a significant portion of its revenues from third party payors, such as Medicare, workers compensation, private insurance companies and HMOs, who pay on behalf of the patients who rent and/or purchase the Company's products. The Company maintains a large support staff that verifies third party payor coverage and obtains physicians' prescriptions prior to claim submission. When appropriate, the Company's staff obtains authorizations from third party payors and letters of medical necessity from the prescribing physicians. Delays in obtaining appropriate documentation and the time required for claims processing by the third party payors significantly impact Empi's outstanding receivables. The Company electronically bills claims to a multitude of third party payors including Medicare. Empi's dependence on third party payors exposes the Company to the risk of government regulations and unilateral payor decisions, limiting the amount of payor reimbursement and/or coverage for the Company's products. The Company anticipates a continuing dependence on third party payors with respect to new products, such as its pelvic floor stimulation devices. The process to establish reimbursement for new technology in the current medical marketplace is costly, time consuming and unpredictable. EMPLOYEES As of January 31, 1998, the Company had 527 employees. Of these, 168 were engaged in production and production support, 25 in research and development, 121 in sales and marketing, 156 in sales operations, and 57 in various administrative capacities. None of the Company's employees are represented by a labor union, and the Company believes that it has an amicable and positive working relationship with its employees. FORWARD-LOOKING STATEMENTS The Company wishes to caution investors that certain statements made in this Form 10-K, which are summarized below, are forward-looking statements that involve risk and uncertainties, and actual results may be materially different. Factors that could cause actual results to differ include, but are not limited to those identified: - - Success in achieving sales growth and improving profitability depends on the Company's ability to continue to offer new proprietary products acceptable to the marketplace, diversification of its product lines, and efficiencies in the Company's distribution, manufacturing and medical billing systems. - - Increased sales within the incontinence market depends in part on securing Medicare reimbursement and general acceptance in the marketplace that the Company's products provide preferable solutions to high-cost surgery for certain incontinence products. - - Growth within the TENS, NMES and accessories market, and the orthotics and iontophoresis markets, as well as the Company's participation in such growth, depends on general market and competitive conditions. ITEM 2. PROPERTIES On June 14, 1996, the Company and Cardigan Investments Limited Partnership entered into an office/light manufacturing lease for a 93,666 square foot building located at 599 Cardigan Road, St. Paul, Minnesota that now serves as the Company's corporate headquarters. The lease that commenced on October 11, 1996 is for ten years with two options to renew for five years each. After assuming occupancy of the Cardigan Road location, the Company vacated the other two office buildings in Fridley and Arden Hills, Minnesota. The Company owns two properties in Clear Lake, South Dakota consisting of a 24,000 square foot manufacturing facility on four acres of property and a 10,000 square foot warehouse on 1.3 acres. 8 ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Company is a party or of which any of its property is the subject other than ordinary, routine litigation incidental to the Company's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS There were no matters submitted to a vote of shareholders during the fourth quarter ended December 31, 1997. 9 EXECUTIVE OFFICERS OF THE COMPANY Each executive officer is elected to office by the Board of Directors and holds the office until his or her successor is elected and qualified. There are no family relationships among any of the Company's directors or officers. The following table sets forth information with regard to the executive officers of the Company as of March 3, 1998: PRINCIPAL OCCUPATION, BUSINESS NAME AND AGE OF OFFICER EXPERIENCE PAST FIVE YEARS - ----------------------- -------------------------- Joseph E. Laptewicz (49) President and Chief Executive officer since October 1994. Acting Chief Financial Officer from March 1997 to July 1997. Prior to joining the Company, Mr. Laptewicz was President and Chief Executive Officer of Schneider (USA), Inc., a manufacturer of products for interventional medicine and a division of Pfizer, Inc., from April 1992 to September 1994 and Executive Vice President from July 1991 to March 1992. Robert W. Clapp (48) Vice President of Manufacturing of the Company since March 1993. Mr. Clapp served in the capacity of Vice President of Manufacturing at Dacomed Corp., a medical products manufacturer and distributor, from February 1987 to March 1993. Shawn F. Featherston (44) Vice President of Sales Operations since July 1996. Mr. Featherston served as Vice President of Human Resources of the Company from January 1996 to June 1996 and Director of Human Resources from January 1993 to December 1995. Prior to joining the Company, he served as Human Resources Consulting Manager for Mcgladry and Pullen from January 1989 to December 1992. Deborah L. Jensen (41) Vice President of Regulatory Affairs, Quality Assurance and Clinical Research since April 1997. Ms. Jensen was Director of Regulatory Affairs for the Company from October 1995 to April 1997. Ms. Jensen served in the capacity of Regulatory Affairs Manager for Scimed, a division of Boston Scientific, Inc., from May 1993 to October 1995. Patrick D. Spangler (42) Vice President, Chief Financial Officer and Assistant Secretary since July 1997. Prior to joining the Company, Mr. Spangler served in various capacities at Medtronic, Inc. from March 1986 to June 1997, most recently as Director of Treasury Operations. Gary D. Sullivan (48) Executive Vice President of Sales and Marketing since May 1997. Vice President of Marketing from February 1995 to May 1997. Prior to joining the Company, Mr. Sullivan was Director of Sales and Marketing at Schneider (USA) Inc. from October 1993 to February 1995. From November 1991 to October 1993, he served as Director of Marketing for Cordis Corp., a manufacturer of medical devices. H. Philip Vierling (42) Vice President of Sales since February 1998. Vice President of Marketing from May 1997 to February 1998. Mr. Vierling was Director of Business Development for the Company from January 1995 to May 1997; Director of Marketing from May 1993 to January 1995; and Regional Sales Manager from February 1986 to May 1993. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock trades on the Nasdaq Stock Market's National Market under the symbol EMPI. High and low sale prices for each quarter of fiscal years ended December 31, 1997 and 1996 are presented below.
1997 1996 HIGH LOW HIGH LOW First. . . . . . . . . . $ 20 5/8 $ 16 3/4 $ 25 7/8 $ 16 1/4 Second . . . . . . . . . $ 18 1/2 $ 15 1/2 $ 20 1/4 $ 12 1/2 Third. . . . . . . . . . $ 24 $ 19 3/4 $ 15 1/2 $ 11 1/4 Fourth . . . . . . . . . $ 25 3/8 $ 15 $ 21 3/4 $ 14
The Company had 531 common shareholders of record at March 3, 1998. The Company has never paid a cash dividend and does not anticipate the payment of cash dividends in the foreseeable future since earnings are expected to be retained to finance the Company's growth. 11 ITEM 6. SELECTED FINANCIAL DATA SELECTED SIX-YEAR FINANCIAL DATA EMPI, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ OPERATIONS STATEMENT DATA Net sales. . . . . . . . . . . . . . . . . . $ 73,468 $ 70,630 $ 67,342 $ 61,304 $ 66,377 $ 33,355 Gross profit . . . . . . . . . . . . . . . . 54,395 52,171 49,654 45,574 49,523 25,143 Operating income . . . . . . . . . . . . . . 16,105 14,420 12,335 6,197 15,325 6,309 Net income . . . . . . . . . . . . . . . . . 10,516 9,357 8,002 3,356 9,334 4,049 Diluted earnings per share . . . . . . . . . $ 1.27 $ 1.08 $ 0.90 $ 0.39 $ 1.08 $ 0.48 Diluted weighted averages shares outstanding . . . . . . . . . . . . . . 8,258 8,660 8,899 8,611 8,660 8,438 Basic earnings per share . . . . . . . . . . $ 1.30 $ 1.11 $ 0.93 $ 0.39 $ 1.12 $ 0.51 Weighted average shares outstanding. . . . . . . . . . . . . . . 8,077 8,448 8,588 8,536 8,334 7,957 BALANCE SHEET DATA Cash and security investments . . . . . . . $ 24,500 $ 20,064 $ 21,039 $ 12,062 $ 6,981 $ 6,858 Working capital . . . . . . . . . . . . . . 50,357 43,186 44,512 35,445 30,684 22,076 Total assets . . . . . . . . . . . . . . . . 63,893 60,355 60,737 52,708 50,185 34,551 Long-term debt . . . . . . . . . . . . . . . 66 333 1,468 1,800 1,603 2,016 Shareholder's equity . . . . . . . . . . . . 58,689 53,657 53,079 45,000 41,355 27,265
QUARTERLY FINANCIAL DATA (UNAUDITED) EMPI, INC.
YEAR ENDED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH - -------------------------------------------------------------------------------- DECEMBER 31, 1997 Net sales. . . . . . . . . . $ 18,025 $ 18,444 $ 18,409 $ 18,590 Operating income . . . . . . 3,685 3,840 4,159 4,421 Net income . . . . . . . . . 2,407 2,513 2,684 2,912 Diluted earnings per share . 0.29 0.30 0.33 0.35 DECEMBER 31, 1996 Net sales. . . . . . . . . . $ 16,892 $ 16,937 $ 17,758 $ 19,043 Operating income . . . . . . 3,123 3,292 3,640 4,365 Net income . . . . . . . . . 2,237 2,173 2,392 2,555 Diluted earnings per share . 0.25 0.25 0.28 0.30
ALL SHARE AND PER SHARE DATA HAVE BEEN RESTATED TO REFLECT A 2-FOR-1 STOCK SPLIT, EFFECTIVE JUNE 1993, AND THE ADOPTION OF SFAS NO. 128. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items reflected in the financial statements as a percent of sales: PERCENT OF SALES
YEAR ENDED DECEMBER 31 1997 1996 1995 - -------------------------------------------------------------------- Net sales. . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of sales. . . . . . . . . . . . 26.0 26.1 26.3 -------------------------- Gross profit . . . . . . . . . . . . 74.0 73.9 73.7 Selling, general and administrative. 46.7 48.6 50.3 Research and development . . . . . . 5.4 4.9 5.1 -------------------------- Operating income . . . . . . . . . . 21.9 20.4 18.3 Other income, net. . . . . . . . . . 1.4 1.2 1.2 -------------------------- Income before taxes. . . . . . . . . 23.3 21.6 19.5 Income tax expense . . . . . . . . . 9.0 8.3 7.6 -------------------------- Net income . . . . . . . . . . . . . 14.3 13.3 11.9 -------------------------- --------------------------
RESULTS OF OPERATIONS SALES The Company's net sales for 1997 grew by 4 percent over the prior year from $70.6 to $73.5 million. Electrotherapy sales accounted for 65 percent of total sales or $47.9 million, a reduction of 1 percent from $48.5 million in 1996 due primarily to continued pricing pressures. Iontophoretic drug delivery product sales increased by 13 percent over the prior year, with increased volumes offset by slight decreases in prices. Orthotic product sales grew by 26 percent over 1996 levels as the Company realized synergies resulting from the marketing of Protonics-TM- and Advance Dynamic ROM-Registered Trademark- orthoses to both physical therapists and orthopedic surgeons. Lack of consistent reimbursement continued to adversely impact growth of the Company's incontinence product line as 1997 incontinence treatment product sales decreased 13 percent from a relatively small sales base in 1996. Dupel-Registered Trademark-, Protonics-TM- and Advance Dynamic ROM accounted for most of the dollar gains in 1997 sales. As of year end 1997, the Company had over 100 field sales representatives selling products domestically on a retail basis. International sales, as a percentage of total sales, were 3 percent in 1997 compared with 5 percent in 1996. The majority of international sales are generated through distribution agreements with retailers located in Germany, Canada and Spain. The Company's 1996 sales increased by 5 percent to $70.6 million from $67.3 million in 1995. Sales of the Company's electrotherapy products and related accessories increased 5 percent in 1996. The iontophoretic drug delivery product line sales increased 23 percent in 1996 compared with the year-earlier period. Sales in 1996 of the orthotic product line increased 7 percent as compared to 1995. The product line with the strongest relative sales growth was the incontinence product line with a 26 percent growth. Based on prior trends and faced with anticipated ongoing market pricing pressures and offsetting price and volume concessions within preferred supplier agreements, the Company would anticipate that future electrotherapy sales will remain flat at best. Looking forward, iontophoresis and orthotic product sales are expected to increase with most of the growth in Protonics-TM- and the Advance Dynamic ROM product line. GROSS PROFIT Due to continued manufacturing and distribution efficiencies such as new surface mount technology, offset by a shift in the product mix towards orthotic products, gross profit as a percentage of sales remained relatively flat at 13 74.0 percent in 1997, compared with 73.9 percent in 1996. Lower-margin wholesale sales were 7 percent of total sales for 1997, compared with 9 percent for the year-earlier period. Gross profit for 1996 was 73.9 percent of sales, compared with 73.7 percent for 1995. Manufacturing efficiencies were partially offset by reduced margins on iontophoretic drug delivery products given pricing pressures. Looking forward, the Company expects a slight decrease in the gross profit percentage due to a continued increase in orthotic products in the product mix and increases in prices from suppliers. Through continued emphasis on manufacturing and distribution efficiencies, the Company is working to minimize the effects of these increases. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $34.3 million, or 46.7 percent of sales, for 1997 versus $34.3 million, or 48.6 percent of sales, in 1996. Continued efficiencies realized from the consolidation of two corporate locations in 1996, offset by slight increases in incentive compensation, kept selling, general and administrative dollars constant in 1997. Selling, general and administrative expenses, stated as a percentage of sales for 1996 and 1995, were 48.6 percent and 50.3 percent, respectively. Selling, general and administrative expenses for 1996 totaled $34.3 million, compared with $33.9 million in 1995. This improvement resulted from the Company's continued expense control programs, including the consolidation of two corporate locations and reductions in incentive compensation and administrative expenses. The Company plans to increase marketing expenditures related to the new products launched in late 1997 and early 1998. Increased efficiencies in selling, general and administrative expenses are intended to substantially offset these expenditures. RESEARCH AND DEVELOPMENT Research and development expenses increased slightly to $4.0 million in 1997 from $3.5 million in 1996, or 5.4 percent of 1997 sales as compared with 4.9 percent of 1996 sales. The Company's 1997 research and development efforts were focused on designing new incontinence treatment products - InnoSense-TM- and Minnova-TM-, developing next-generation electrotherapy devices - Epix VT, and expansion of the orthotic product line as well as continued development of next-generation orthotic devices. Research and development expenses were $3.5 million and $3.4 million for 1996 and 1995, respectively. Stated as a percentage of sales, research and development expenses for 1996 were 4.9 percent, compared with 5.1 percent for 1995. The Company's research and development expenses in 1996 were spread relatively evenly among the electrotherapy, orthotic and iontophoretic drug delivery product groups with slightly higher expenditures for incontinence treatment products. The Company anticipates research and development to grow incrementally as a percent of sales in future years as the Company refocuses its research and development emphasis on its new product lines. Expenditures on clinical research and outcomes studies are expected to grow based on increased regulatory and provider requirements. OTHER INCOME AND EXPENSES Other income, comprised primarily of interest and dividend income, totaled $1.0 million in both 1997 and 1996. Interest expense for 1997 was $2,000 versus $69,000 in 1996. Additional non-recurring expenses of $54,000 were recorded in 1997 related to the Company's relocation to a new corporate facility in late 1996. Interest income was $1.0 million in 1996, compared with $798,000 in 1995. Interest expense was $69,000 in 1996 and $114,000 in 1995. The primary contributor to interest expense in 1996 and 1995 was an interest-bearing note issued to partially finance the Company's 1992 acquisition of Nortech, a division of Medtronic, Inc. In the third quarter of 1996, the Company repaid the remaining debt and retired the note. In the first quarter of 1996, the Company recorded a one-time gain in excess of $200,000 from the settlement of a trade dress infringement lawsuit, and in the fourth quarter of 1996 recorded $378,000 in non-recurring expenses relating to the Company's relocation. 14 NET INCOME Net income in 1997 improved to $10.5 million, an increase of $1.2 million, or 12 percent. Higher sales, combined with relatively flat spending and no significant one-time charges, were the main reasons for the increase in net income for 1997. As a result of higher net income and the Company's stock buyback program, 1997 diluted earnings per share increased from $1.08 to $1.27, reflecting an 18 percent increase over 1996. Diluted earnings per share in 1997 increased by approximately $.04 per share as a result of the stock buyback program. Net income in 1996 was $9.4 million, compared with $8.0 million in 1995. The improvement resulted from higher sales levels, combined with strong expense controls. Diluted earnings per share in 1996 increased to $1.08 from $.90 in 1995, an increase of 20 percent. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments were $24.5 million as of December 31, 1997, an increase of approximately $4.4 million from the year ended December 31, 1996. Due to its strong cash position, the Company continued its stock buyback program which began in 1995. During 1997, the Board of Directors authorized an additional $17.5 million to buy back and retire shares. Some of the shares repurchased under the program will be used to cover stock issuances in connection with the Company's stock option and stock purchase plans. The Company repurchased and retired 529,300 shares of common stock at a total cost of $10.5 million in 1997. During 1996, the Company repurchased and retired 778,000 warrants and shares of common stock at a total cost of $9.9 million. The Company intends to continue its stock repurchase program in 1998, given favorable market conditions, the Company's cash position and other factors. As of December 31, 1997, the Company's working capital was $50.4 million and its current ratio was 10.8 to 1.0. Cash flows generated from operations were $12.3 million in 1997, $13.9 million in 1996 and $11.5 million in 1995. Accounts receivable at December 31, 1997 increased 10 percent over December 31, 1996. The Company has continued to refine its collection efforts on receivables which allowed a reduction in 1997 in its allowance against accounts receivable by $200,000. Inventories increased approximately $700,000, or 9 percent, in 1997. The introduction of new products accounted for the majority of the increase in inventories. Expenditures for property, plant and equipment were $1.7 million in 1997, down 57 percent over 1996. After adjusting for the one-time expenditures of approximately $2.5 million in leasehold improvements and other equipment purchases related to the move to the new corporate facility, capital expenditures in 1997 were flat compared to 1996. The Company believes its cash and cash equivalents and short-term investments, together with cash flow from operations, will be sufficient to meet the Company's currently projected needs for working capital and capital requirements for the foreseeable future. A multifunctional team of internal staff is managing the Company's comprehensive Year 2000 initiative. The team's activities are designed to ensure that there is no adverse effect on the Company's core business operations and that transactions with customers, suppliers, and financial institutions are fully supported. While the Company believes there will be minimal to no impact on its internal systems, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material adverse effect on the Company. The cost of the Year 2000 initiatives is not expected to be material to the Company's results of operation or financial position. OUTLOOK The Company's strategic goals are to: (i) expand into related rehabilitation markets with new and existing technology; and (ii) broaden medical device offerings by bringing additional products to its existing markets. These objectives will be pursued through internal development efforts and strategic alliances, depending upon Company resources and the availability of opportunities, while reinforcing the Company's leadership position with physical therapists. The Company's primary ongoing financial goals are to increase its revenue growth and enhance profitability by focusing on its mission: to continuously improve the quality of life for patients with functional disabilities through the development, manufacturing and marketing of innovative, cost effective, biomedical products and services. 15 FORWARD-LOOKING STATEMENTS Certain statements made in this Management's Discussion and Analysis, which are summarized here, are forward-looking statements that involve risk and uncertainties, and actual results may be materially different. Factors that could cause actual results to differ include, but are not limited to those identified: - - The expectations that in the future electrotherapy sales will remain flat at best and iontophoresis and orthotic products sales will increase, depend on retaining reimbursement by Medicare carriers, workers' compensation programs, managed care and private insurance payors. Increased sales of incontinence products also depend on the Company's ability to obtain Medicare reimbursement approval for the Company's pelvic floor stimulation products. In addition, other general market conditions and competitive factors within the rehabilitation market, including the introduction of new products or technology by competitors, could adversely effect sales. - - The expectation of a slight decrease in the gross profit percentage depends on the actual product mix, prices from suppliers, other market conditions and actual manufacturing and distribution efficiencies. - - The expectation that the Company will increase marketing expenditures related to recently launched products depends on market acceptance and the necessary support for such products. - - The Company's intention to continue its stock repurchase program in 1998 depends on the market conditions and the Company's cash position. - - The sufficiency of the Company's cash and cash equivalents and short-term investments, together with cash flow from operations, depends on general market conditions and competitive conditions. - - The Company's products are regulated under the federal Food, Drug and Cosmetic Act, and the Company is required to secure clearance from the U.S. Food and Drug Administration (FDA) prior to marketing new products. Lack of clearance or delays in securing clearance could negatively impact sales of new products. - - If the Company is not successful in meeting the needs of patients, providers and payors in the orthopedic rehabilitation and incontinence treatment markets, its financial goals will likely not be met. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to List of Financial Statements and Financial Statement Schedule, along with such financial statements, immediately following the signature page of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 regarding the Company's directors included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 29, 1998 under the caption "Election of Directors" is incorporated herein by reference. The information required by Item 10 regarding the Company's executive officers is set forth in Part I of this report. 16 The information required by Item 10 regarding compliance with Section 16(a) of the Exchange Act included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 29, 1998 under the caption "Compliance with Section 16 (a) of the Exchange Act" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 regarding executive compensation included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 29, 1998 under the caption "Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT The information required by Item 12 regarding voting securities and principal holders thereof included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 29, 1998 under the caption "Principal Shareholders and Management Ownership" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) AND (2) -- FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated Financial Statements and Schedules, which begins on Page F-1 immediately following the signature page to this report. (3) -- EXHIBITS. (3.1) Restated Articles of Incorporation, as amended, have been filed as Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1996, and are included herein by reference pursuant to Rule 12b-32. (3.2) Bylaws together with amendment adopted June 12, 1986 have been filed as Exhibit 3.2 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1987, and are included herein by reference pursuant to Rule 12b-32. (4.1) Certificate for shares of Common Stock has been filed as Exhibit 4.1 to the Company's Registration Statement on Form S-2, Registration No. 33-42568, and is incorporated herein by reference pursuant to Rule 12b-32. (10.1) Employment agreement with Donald D. Maurer dated May 1, 1993 has been filed as Exhibit 10.3 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.2) Empi, Inc. 1987 Stock Option Plan together with forms of incentive and non-qualified option agreements has been filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1987, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.3) Amendment to Empi, Inc. 1987 Stock Option Plan has been filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.4) Amendment to Empi, Inc. 1987 Stock Option Plan dated December 22, 1992 has been filed as Exhibit 10.13 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.5) Amendment to Empi, Inc. 1987 Stock Option Plan dated February 9, 1995 has been filed as Exhibit 10.16 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by reference pursuant Rule 12b-32.* (10.6) Employment agreement with Joseph E. Laptewicz dated October 1, 1994 has been filed as Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended September 30, 1994, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.7) Lease dated June 14, 1996 between the Company and Cardigan Investments, a limited Partnership, covering office/light manufacturing space in St. Paul, Minnesota has been filed as Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended September 30, 1996, and is included herein by reference pursuant to Rule 12b-32. (10.8) Empi, Inc. 1997 Employee Stock Purchase Plan has been filed as Exhibit 10.9 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1996, and is incorporated herein by reference pursuant to Rule 12b-32.* 18 ITEM 14. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED (10.9) Empi, Inc. 1997 Stock Option Plan together with forms of incentive and non-qualified option agreements.* (10.10) Separation Agreement with Donald D. Maurer dated May 1, 1997.* (21) A list of Subsidiaries of the Company has been filed as Exhibit 21 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32. (23) Consent of Independent Auditors. (24) Power of Attorney for Joseph E. Laptewicz Jr., Patrick D. Spangler, Donald D. Maurer, Scott R. Anderson, M. Nazie Eftekhari, Kenneth F. Tempero, and Everett F. Carter. (Included on signature page of this report.) (27) Financial Data Schedule (Filed only in electronic format.) * Management contract or compensatory plan. (b) REPORTS ON FORM 8-K No Reports on Form 8-K were filed during the quarter ended December 31, 1997. (c) EXHIBITS The response to this portion of Item 14 (a) (3) is submitted as a separate section of this Report. (d) FINANCIAL STATEMENT SCHEDULE See Index to Consolidated Financial Statements and Financial Statement Schedule beginning on Page F-1 immediately following the signature page of this Report. 19 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. EMPI, INC. March 16, 1998 By /s/ Joseph E. Laptewicz, Jr. ----------------------------------- Joseph E. Laptewicz Jr., President and Chief Executive 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. (Power of Attorney) Each person whose signature appears below constitutes and appoints Joseph E. Laptewicz Jr. and Patrick D. Spangler as his/her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his/her substitute or substitutes, may lawfully do or cause to be done by virtue thereof. March 16, 1998 /s/ Joseph E. Laptewicz, Jr. ------------------------------------------------- Joseph E. Laptewicz Jr., President, Chief Executive Officer and Director (Principal Executive Officer) March 16, 1998 /s/ Patrick D. Spangler ------------------------------------------------- Patrick D. Spangler, Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial and Accounting Officer) March 16, 1998 /s/ Donald D. Maurer ------------------------------------------------- Donald D. Maurer, Chairman Emeritus March 16, 1998 /s/ Scott R. Anderson ------------------------------------------------- Scott R. Anderson, Chairman March 16, 1998 /s/ M. Nazie Eftekhari ------------------------------------------------- M. Nazie Eftekhari, Director March 16, 1998 /s/ Kenneth F. Tempero ------------------------------------------------- Kenneth F. Tempero, Director March 16, 1998 ------------------------------------------------- Harold G. Olson, Director March 16, 1998 /s/ Everett F. Carter ------------------------------------------------- Everett F. Carter, Director 20 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (a) (1) AND (2), AND ITEM 14 (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1997 EMPI, INC. ST. PAUL, MINNESOTA F-1 CONSOLIDATED FINANCIAL STATEMENTS EMPI, INC. YEARS ENDED DECEMBER 31, 1997 AND 1996 F-2 FORM 10-K -- ITEM 14 (a) (1) and (2) EMPI, INC. INDEX TO LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
1. FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditors....................................... F-4 Report of Management................................................. F-5 Consolidated Balance Sheets -- December 31, 1997 and 1996............ F-6 Consolidated Statements of Operations -- Years ended December 31, 1997, 1996 and 1995.................................................. F-7 Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1997, 1996 and 1995......................... F-8 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995......................... F-9 Notes to Consolidated Financial Statements -- December 31, 1997...... F-10 2. FINANCIAL STATEMENT SCHEDULE Schedule II -- Valuation and Qualifying Accounts..................... F-16
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-3 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Empi, Inc. We have audited the accompanying consolidated balance sheets of Empi, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audit also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Empi, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Minneapolis, Minnesota January 23, 1998 F-4 REPORT OF MANAGEMENT Management is responsible for the accompanying consolidated financial statements, which are prepared in accordance with generally accepted accounting principles. In management's opinion, the consolidated financial statements present fairly the Company's financial position, results of operations and cash flows. In addition, information and representations included in the Company's Annual Report are consistent with the financial statements. The Company maintains a system of internal accounting policies, procedures and controls intended to provide reasonable assurance, given the inherent limitations of all internal control systems, at appropriate costs, that transactions are executed in accordance with Company authorization, are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. Corporate financial management continually evaluate the adequacy and effectiveness of this system of internal accounting policies, procedures and controls, and actions are taken to correct deficiencies as they are identified. The Audit Committee of the Board of Directors is comprised solely of nonemployee directors and is responsible for overseeing and monitoring the quality of the Company's accounting and auditing practices. The Audit Committee meets regularly and on special occasions, as needed, with corporate financial management and the independent auditors to review their activities. The independent auditors have full and free access to the Audit Committee to discuss the results of their work, the adequacy of internal financial controls and the quality of financial reporting. /s/ Joseph E. Laptewicz, Jr. Joseph E. Laptewicz, Jr. President and Chief Executive Officer /s/ Patrick D. Spangler Patrick D. Spangler Vice President, Chief Financial Officer and Assistant Secretary F-5 EMPI, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1997 1996 - ------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,020 $ 2,849 Short-term investments 21,480 17,215 Accounts receivable, less allowances ($4,881 -- 1997; $5,062 -- 1996) 18,046 16,458 Inventories 8,003 7,320 Deferred income taxes 3,874 5,002 Other 1,072 707 ----------- ---------- Total current assets 55,495 49,551 Equipment and improvements: Equipment 12,558 10,995 Furniture and fixtures 1,663 1,630 Leasehold improvements 3,275 3,287 ----------- ---------- 17,496 15,912 Less accumulated depreciation and amortization 10,990 8,822 ----------- ---------- Net equipment and improvements 6,506 7,090 Other assets 1,892 3,714 ----------- ---------- Total assets $ 63,893 $ 60,355 ----------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,990 $ 2,455 Customer advances 332 514 Employee compensation 1,655 1,792 Commissions payable 526 596 Current portion of long-term debt 269 287 Income taxes ---- 386 Other 366 335 ----------- ---------- Total current liabilities 5,138 6,365 Long-term debt, less current portion 66 333 Shareholders' equity: Common stock, no par value: Authorized shares - 25,000,000 Issued and outstanding shares - 8,032,011 in 1997 and 8,219,940 in 1996 9,847 15,331 Retained earnings 48,842 38,326 ----------- ---------- Total shareholders' equity 58,689 53,657 Total liabilities and shareholders' equity $ 63,893 $ 60,355 ----------- ---------- ----------- ----------
SEE ACCOMPANYING NOTES. F-6 EMPI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - -------------------------------------------------------------------------------------- Net sales $ 73,468 $ 70,630 $ 67,342 Cost of goods sold 19,073 18,459 17,688 -------------------------------------- Gross profit 54,395 52,171 49,654 Operating expenses: Selling, general and administrative 34,306 34,275 33,895 Research and development 3,984 3,476 3,424 -------------------------------------- Total operating expenses 38,290 37,751 37,319 -------------------------------------- Income from operations 16,105 14,420 12,335 Other income, net 995 795 783 -------------------------------------- Income before income taxes 17,100 15,215 13,118 Income tax expense 6,584 5,858 5,116 -------------------------------------- Net income $ 10,516 $ 9,357 $ 8,002 -------------------------------------- -------------------------------------- Diluted net income per share $ 1.27 $ 1.08 $ 0.90 -------------------------------------- -------------------------------------- Diluted weighted average shares outstanding 8,258 8,660 8,899 -------------------------------------- -------------------------------------- Basic net income per share $ 1.30 $ 1.11 $ 0.93 -------------------------------------- -------------------------------------- Weighted average shares outstanding 8,077 8,448 8,588 -------------------------------------- --------------------------------------
SEE ACCOMPANYING NOTES. F-7 EMPI, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK RETAINED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT EARNINGS - ------------------------------------------------------------------------------------- Balance January 1, 1995 8,570,371 $ 24,033 $ 20,967 Exercise of stock options 57,025 470 - Tax benefits of stock options - 105 - Employee stock purchase plan 103,263 722 - Purchase and retirement of stock (62,000) (1,220) - Net income - - 8,002 ---------------------------------------- Balance December 31, 1995 8,668,659 24,110 28,969 Exercise of stock options 60,384 411 - Tax benefits of stock options - 311 - Employee stock purchase plan 18,897 359 - Purchase and retirement of stock (528,000) (8,160) - Purchase and retirement of warrant rights - (1,700) - Net income - - 9,357 ---------------------------------------- Balance December 31, 1996 8,219,940 15,331 38,326 Exercise of stock options 318,159 3,897 - Tax benefits of stock options - 720 - Employee stock purchase plan 23,212 354 - Purchase and retirement of stock (529,300) (10,455) - Net income - - 10,516 ---------------------------------------- Balance December 31, 1997 8,032,011 $ 9,847 $ 48,842 ---------------------------------------- ----------------------------------------
SEE ACCOMPANYING NOTES. F-8 EMPI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 10,516 $ 9,357 $ 8,002 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,648 3,506 3,512 Provision for deferred income taxes 1,128 (160) (566) Gain on sale of long-term investments - - (70) Loss on sale of equipment 5 101 56 Provision for loss on accounts receivable 2,442 2,216 2,565 Changes in operating assets and liabilities: Accounts receivable (4,030) (2,828) (1,586) Inventories (683) 949 (782) Accounts payable and accrued expenses (854) 731 145 Income taxes payable 334 63 155 Other (243) (50) 25 ---------------------------------------- Net cash provided by operating activities 12,263 13,885 11,456 INVESTING ACTIVITIES Maturities of short-term investments 21,020 17,624 3,180 Purchase of short-term investments (25,285) (19,749) (11,790) (Additions of) reductions in other assets 405 (233) (115) Purchase of equipment and improvements (1,743) (4,013) (1,785) ---------------------------------------- Net cash used in investing activities (5,603) (6,371) (10,510) FINANCING ACTIVITIES Payments on long-term debt (285) (1,524) (619) Purchase and retirement of common stock and warrant rights (10,455) (9,860) (1,220) Proceeds from exercise of common stock options 4,251 770 1,190 ---------------------------------------- Net cash used in financing activities ( 6,489) (10,614) (649) ---------------------------------------- ---------------------------------------- Net increase (decrease) in cash and cash equivalents 171 (3,100) 297 Cash and cash equivalents at beginning of year 2,849 5,949 5,652 ---------------------------------------- Cash and cash equivalents at end of year $ 3,020 $ 2,849 $ 5,949 ---------------------------------------- ----------------------------------------
SEE ACCOMPANYING NOTES. F-9 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company develops, manufactures and distributes non-invasive biomedical devices and accessories for applications in the orthopedic rehabilitation and incontinence treatment markets. The primary market for the Company's products is in the United States. The Company also does a small percentage of business in Canada, Europe and the Far East. BASIS OF PRESENTATION The consolidated financial statements include the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVESTMENTS Short-term investments, consisting of debt securities and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at cost, which approximates fair value. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. EQUIPMENT AND IMPROVEMENTS Equipment and improvements are stated on the basis of cost. Depreciation and amortization of equipment and improvements are computed on the straight-line method for book purposes (accelerated methods for income tax purposes) over estimated useful lives of 25 years for building improvements, seven to eight years for furniture and fixtures, five years for equipment, and three years for computers. OTHER ASSETS Other assets consist primarily of intangible assets including goodwill, non-compete agreements, costs paid to wholesale distributors for territorial distribution rights and patent costs. These assets are being amortized on a straight-line basis over their estimated useful lives ranging from four to seven years. Accumulated amortization was $7,201,000 and $5,887,000 at December 31, 1997 and 1996, respectively. IMPAIRMENT OF LONG-LIVED ASSETS The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. F-10 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STOCK-BASED COMPENSATION The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its plans. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," requiring dual presentation of basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average diluted shares outstanding, which includes the dilutive effect of options outstanding. SFAS No. 128 was adopted by the Company on December 31, 1997. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to SFAS No. 128 requirements. RECLASSIFICATION Certain prior year items have been reclassified to conform to current year presentation. NOTE 2. INVESTMENTS Investments consist of the following:
DECEMBER 31 1997 1996 -------------------- (IN THOUSANDS) Municipal bonds $ 11,874 $ 6,813 U. S. Government bonds 9,606 5,402 Preferred stock - 5,000 Cash equivalents 662 1,319 -------------------- $ 22,142 $ 18,534 -------------------- --------------------
Interest income included in other income was $1,031,000, $1,039,000, and $798,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 3. INVENTORIES Inventories consist of the following:
DECEMBER 31 1997 1996 -------------------- (IN THOUSANDS) Finished goods $ 5,515 $ 5,399 Work in process 556 678 Raw materials 1,932 1,243 -------------------- $ 8,003 $ 7,320 -------------------- --------------------
NOTE 4. BORROWINGS Long-term borrowings consist of:
DECEMBER 31 1997 1996 ------------------ (IN THOUSANDS) Notes payable $ 335 $ 620 Less current maturities 269 287 ------------------ $ 66 $ 333 ------------------ ------------------
F-11 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Notes payable at December 31, 1997 and 1996 consists entirely of debt issued in conjunction with dealer acquisitions and non-compete agreements. Annual maturities of long-term debt are: 1998--$269,000 and 1999--$66,000. Total interest paid for the years ended December 31, 1997, 1996 and 1995 was $2,000, $79,000 and $121,000, respectively. Interest expense included in other income (expense) was $2,000, $69,000 and $114,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 5. INCOME TAXES At December 31, 1997, the Company has a net operating loss carryforward of $861,000 for income tax purposes, resulting from the Company's 1993 acquisition of Physical Health Devices, Inc., which will expire in the year 2007. The Company's ability to utilize the net operating loss carryforward will be subject to Internal Revenue Code Section 382 limitations. For financial reporting purposes, at December 31, 1996, a valuation allowance of $332,000 had been recognized to offset the deferred tax asset related to the carryforward. In the second quarter of 1997, the Company determined that recognition of the deferred tax asset was probable and reversed the valuation allowance, reducing the goodwill related to the acquisition of Physical Health Devices, Inc. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
1997 1996 ----------------------- (IN THOUSANDS) Deferred tax assets: Allowance for doubtful accounts $ 2,053 $ 3,716 Amortization of non-compete agreement 805 592 Accrued expenses 316 234 Inventory 300 257 Other 675 747 ---------------------- Total deferred tax assets 4,149 5,546 Deferred tax liabilities (275) (165) ---------------------- Net deferred tax assets 3,874 5,381 Valuation allowance for deferred tax assets - (379) ---------------------- $ 3,874 $ 5,002 ---------------------- ----------------------
1997 1996 1995 --------------------------------------- (IN THOUSANDS) Current: Federal $ 4,834 $ 5,040 $ 4,811 State 622 978 871 Deferred: Federal 999 (118) (504) State 129 (42) (62) -------------------------------------- $ 6,584 $ 5,858 $ 5,116 -------------------------------------- --------------------------------------
Reconciliation of the statutory federal income tax rate to the Company's effective tax rate follows:
1997 1996 1995 ------------------------------------ Statutory rate 34.0% 34.0% 34.0% Increase resulting from: State taxes, net of federal tax benefit 4.0 4.0 4.0 Amortization of goodwill - 0.5 1.0 Other 0.5 - - ------------------------------------ Effective rate 38.5% 38.5% 39.0% ------------------------------------ ------------------------------------
F-12 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Total income taxes paid during the years ended December 31, 1997, 1996 and 1995 were $4,845,000, $5,876,000 and $5,469,000, respectively. NOTE 6. STOCK PLANS The Company has a qualified and nonqualified stock option plan for officers, key employees and nonemployee directors. The options are granted at fair market value and are exercisable over periods up to 10 years from grant date in various increments. Shares reserved in the Company's 1987 and 1997 Stock Option Plans for issuance upon the exercise of warrants and options were 1,187,281 at December 31, 1997. Option activity in the stock option plans is summarized as follows:
QUALIFIED NON-QUALIFIED WEIGHTED OPTION OPTION AVERAGE EXERCISE SHARES SHARES PRICE ---------------------------------------------- Balance January 1, 1995 393,820 304,757 $ 12.52 Granted 77,015 31,568 8.73 Canceled/expired (16,700) (2,500) 21.21 Exercised (42,025) (15,000) 9.42 --------------------------- Balance December 31, 1995 412,110 318,825 11.97 --------------------------- Granted 77,104 26,846 21.36 Canceled/expired (96,013) (30,806) 15.13 Exercised (44,479) (15,905) 6.82 --------------------------- Balance December 31, 1996 348,722 298,960 13.34 --------------------------- Granted 67,182 46,400 17.85 Canceled/expired (52,655) (8,106) 17.51 Exercised (184,906) (133,253) 12.25 --------------------------- Balance December 31, 1997 178,343 204,001 $ 14.93 --------------------------- ---------------------------
As of December 31, 1997 there were 150,450 options outstanding with exercise prices between $7.50 and $8.75, 135,344 options outstanding with exercise prices between $9.88 and $17.88, and 96,550 options outstanding with exercise prices between $19.25 and $28.00. At December 31, 1997 outstanding options had a weighted average remaining contractual life of 7 years. The number of options exercisable as of December 31, 1997, 1996 and 1995 were 76,055, 213,725 and 158,000, respectively, at weighted average exercise prices of $12.96, $13.30 and $14.27. The Company also has an Employee Stock Purchase Plan. The Plan enables employees to contribute up to 10 percent of their compensation toward the purchase of the Company's common stock at 85 percent of market value. At December 31, 1997, 276,788 shares are reserved for future employee purchases of stock under the Plan. The fair value of stock options used to compute pro forma net income and earnings per share disclosures, as prescribed by SFAS No. 123, is the estimated present value at grant date using a Black-Scholes option-pricing model with the following weighted average assumptions for 1997, 1996 and 1995: dividend yield of 0%; expected volatility of 61.36%; a risk free interest rate of 5.66% and an expected holding period of 3.79 years. The weighted average fair value of options granted during the years ended December 31, 1997, 1996 and 1995 was $8.86, $10.47 and $4.48, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-13 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) If the Company had elected to recognize compensation cost for the stock option plan and employee stock purchase plan based on the fair value at the grant dates for awards under those plans, consistent with the method prescribed by SFAS 123, net income and earnings per share would have been changed to the pro forma amounts indicated below:
1997 1996 1995 ----------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income: As reported $ 10,516 $ 9,357 $ 8,002 Pro forma 9,933 9,051 7,613 Diluted earnings per share: As reported $ 1.27 $ 1.08 $ 0.90 Pro forma 1.20 1.05 0.86 Basic earnings per share: As reported $ 1.30 $ 1.08 $ 0.93 Pro forma 1.23 1.05 0.89
Note: The pro forma effect on net income for 1997, 1996 and 1995 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. NOTE 7. CAPITAL STOCK The Company purchased and retired 529,300 shares of common stock for $10.5 million and 528,000 shares of common stock for $8.2 million in 1997 and 1996, respectively. In 1996, the Company purchased and retired 250,000 warrant rights for $1.7 million which were originally issued in conjunction with the 1992 acquisition of the Nortech division of Medtronic, Inc. NOTE 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Net income $ 10,516 $ 9,357 $ 8,002 Denominator for earnings per share: Weighted average shares; denominator for basic earnings per share 8,077 8,448 8,588 Effect of dilutive securities: Employee and nonemployee stock options 181 212 311 ----------------------------------------- Dilutive common shares; denominator for diluted earnings per share 8,258 8,660 8,899 ----------------------------------------- ----------------------------------------- Basic earnings per share $ 1.30 $ 1.11 $ 0.93 ----------------------------------------- ----------------------------------------- Diluted earnings per share $ 1.27 $ 1.08 $ 0.90 ----------------------------------------- -----------------------------------------
NOTE 9. LEASES The Company leases office space under noncancelable operating leases. These leases expire on various dates through 2006. Future minimum payments under all lease arrangements subsequent to 1997 are: 1998--$567,000, 1999--$564,000, 2000--$564,000, 2001--$564,000, 2002--$564,000, and thereafter--$2,142,000. Rent expense for the years ended December 31, 1997, 1996 and 1995 was $576,000, $660,000 and $526,000, respectively. F-14 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. RETIREMENT PLAN The Company has a Retirement Profit Sharing and Savings Plan under Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer up to 15% of their income on a pre-tax basis through contributions to the Plan. For every dollar the employee contributes up to 6% of their income, the Company will contribute $.50. In 1997, 1996 and 1995, the Company's matching contribution was $444,000, $404,000 and $421,000, respectively. F-15 EMPI, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E - --------------------------------------------------------------------------------------------------------------------------------- Additions --------- (1) (2) Charged to Other Beginning Of Charged to Costs Accounts -- Deductions - Balance at End Description Period and Expenses Describe Describe of Period - --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997: Allowance for doubtful accounts $ 5,062 $ 2,442 $ -0- $ 2,623 $ 4,881 Inventory reserve 2,769 128 -0- 289 2,608 -------- -------- -------- -------- ------- Total $ 7,831 $ 2,570 $ -0- $ 2,912 $ 7,489 -------- -------- -------- -------- ------- -------- -------- -------- -------- ------- Year ended December 31, 1996: Allowance for doubtful accounts $ 5,966 $ 2,416 $ -0- $ 3,320 $ 5,062 Inventory reserve 2,757 766 -0- 754 2,769 -------- -------- -------- -------- ------- Total $ 8,723 $ 3,182 $ -0- $ 4,074 $ 7,831 -------- -------- -------- -------- ------- -------- -------- -------- -------- ------- Year ended December 31, 1995: Allowance for doubtful accounts $ 7,684 $ 2,565 $ -0- $ 4,283 $ 5,966 Inventory reserve $ 2,490 875 -0- 608 2,757 -------- -------- -------- -------- ------- Total $ 10,174 $ 3,440 $ -0- $ 4,891 $ 8,723 -------- -------- -------- -------- ------- -------- -------- -------- -------- -------
(1) Provisions for write-off of uncollectable receivables and inventory adjustments. (2) Represents write-offs of doubtful accounts, net of recoveries, and write-offs and disposals of inventory. F-16 EX-10.9 2 EXHIBIT 10.9 EXHIBIT 10.9 - 1997 STOCK OPTION PLAN EXHIBIT A SECTION 1. DEFINITIONS As used herein, the following terms shall have the meanings indicated below: (a) "Committee" shall mean a Committee of two or more directors who shall be appointed by and serve at the pleasure of the Board. As long as the Company's securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, then, to the extent necessary for compliance with Rule 16b-3, or any successor provision, each of the members of the Committee shall be a "Non-Employee Director." For purposes of this Section 1(a), "Non-Employee Director" shall have the same meaning as set forth in Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (b) The "Company" shall mean Empi, Inc., a Minnesota corporation. (c) "Fair Market Value" as of any day shall mean (i) if such stock is reported by the NASDAQ National Market or NASDAQ SmallCap Market or is listed upon an established stock exchange or exchanges, the reported closing price of such stock by the NASDAQ National Market or NASDAQ SmallCap Market or on such stock exchange or exchanges on such date or, if no sale of such stock shall have occurred on such date, on the next preceding day on which there was a sale of stock; (ii) if such stock is not so reported by the NASDAQ National Market or NASDAQ SmallCap Market or listed upon an established stock exchange, the average of the closing "bid" and "asked" prices quoted by the National Quotation Bureau, Inc. (or any comparable reporting service) on such date or, if there are no quoted "bid" and "asked" prices on such date, on the next preceding date for which there are such quotes; or (iii) if such stock is not publicly traded as of such date, the per share value as determined by the Board, or the Committee, in its sole discretion by applying principles of valuation with respect to the Company's Common Stock. (d) "Incumbent Director" means a Non-Employee Director who is serving as a member of the Board of Directors of the Company as of the effective date of the Plan. (e) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as amended from time to time. (f) "New Director" means a Non-Employee Director who becomes a member of the Board of Directors of the Company on or after the effective date of the Plan. (g) "Non-Employee Director" shall mean members of the Board who are not employees of the Company or any Subsidiary. (h) "Option Stock" shall mean Common Stock of the Company (subject to adjustment as described in Section 13) reserved for options pursuant to this Plan. (i) The "Optionee" means an employee of the Company or any Subsidiary to whom an incentive stock option has been granted pursuant to Section 9; a consultant or advisor to or director (including a Non-Employee Director), employee or officer of the Company or any Subsidiary to whom a nonqualified stock option has been granted pursuant to Section 10; and a Non-Employee Director to whom a nonqualified stock option has been granted pursuant to Section 11. (j) "Parent" shall mean any corporation which owns, directly or indirectly in an unbroken chain, fifty percent (50%) or more of the total voting power of the Company's outstanding stock. E-1 (k) The "Plan" means the Empi, Inc. 1997 Stock Option Plan, as amended hereafter from time to time, including the form of Option Agreements as they may be modified by the Board from time to time. (l) A "Subsidiary" shall mean any corporation of which fifty percent (50%) or more of the total voting power of outstanding stock is owned, directly or indirectly in an unbroken chain, by the Company. SECTION 2. PURPOSE The purpose of the Plan is to promote the success of the Company and its Subsidiaries by facilitating the retention of competent personnel and by furnishing incentive to officers, directors, employees, consultants, and advisors upon whose efforts the success of the Company and its Subsidiaries will depend to a large degree. It is the intention of the Company to carry out the Plan through the granting of stock options which will qualify as "incentive stock options" under the provisions of Section 422 of the Internal Revenue Code, or any successor provision, pursuant to Section 9 of this Plan, and through the granting of "nonqualified stock options" pursuant to Section 10 of this Plan. Adoption of this Plan shall be and is expressly subject to the condition of approval by the shareholders of the Company within twelve (12) months before or after the adoption of the Plan by the Board of Directors. Any incentive stock options granted after adoption of the Plan by the Board of Directors shall be treated as nonqualified stock options if shareholder approval is not obtained within such twelve-month period. SECTION 3. EFFECTIVE DATE OF PLAN The Plan shall be effective as of the date of adoption by the Board of Directors, subject to approval by the shareholders of the Company as required in Section 2. SECTION 4. ADMINISTRATION The Plan shall be administered by the Board of Directors of the Company (hereinafter referred to as the "Board") or by a Committee which may be appointed by the Board from time to time (collectively referred to as the "Administrator"). The Administrator shall have all of the powers vested in it under the provisions of the Plan, including but not limited to exclusive authority (where applicable and within the limitations described in the Plan) to determine, in its sole discretion, whether an incentive stock option or nonqualified stock option shall be granted, the individuals to whom, and the time or times at which, options shall be granted, the number of shares subject to each option and the option price and terms and conditions of each option. The Administrator shall have full power and authority to administer and interpret the Plan, to make and amend rules, regulations and guidelines for administering the Plan, to prescribe the form and conditions of the respective stock option agreements (which may vary from Optionee to Optionee) evidencing each option and to make all other determinations necessary or advisable for the administration of the Plan. The Administrator's interpretation of the Plan, and all actions taken and determinations made by the Administrator pursuant to the power vested in it hereunder, shall be conclusive and binding on all parties concerned. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith in connection with the administration of the Plan. In the event the Board appoints a Committee as provided hereunder, any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote of the Committee members or pursuant to the written resolution of all Committee members. E-2 SECTION 5. PARTICIPANTS The Administrator shall from time to time, at its discretion and without approval of the shareholders, designate those employees, officers, directors (including Non-Employee Directors), consultants, and advisors of the Company or of any Subsidiary to whom nonqualified stock options shall be granted pursuant to Section 9 of the Plan; provided, however, that consultants or advisors shall not be eligible to receive stock options hereunder unless such consultant or advisor renders bona fide services to the Company or Subsidiary and such services are not in connection with the offer or sale of securities in a capital raising transaction; and provided, further, that Non-Employee Directors shall be granted nonqualified stock options pursuant to Section 11 of the Plan without any further action by the Administrator. The Administrator shall, from time to time, at its discretion and without approval of the shareholders, designate those employees of the Company or any Subsidiary to whom incentive stock options shall be granted under this Plan. The Administrator may grant additional incentive stock options or nonqualified stock options under this Plan to some or all participants then holding options or may grant options solely or partially to new participants. In designating participants, the Administrator shall also determine the number of shares to be optioned to each such participant. The Board may from time to time designate individuals as being ineligible to participate in the Plan. SECTION 6. STOCK The Stock to be optioned under this Plan shall consist of authorized but unissued shares of Option Stock. Five Hundred Thousand (500,000) shares of Option Stock shall be reserved and available for options under the Plan; provided, however, that the total number of shares of Option Stock reserved for options under this Plan shall be subject to adjustment as provided in Section 13 of the Plan. In the event that any outstanding option under the Plan for any reason expires or is terminated prior to the exercise thereof, the shares of Option Stock allocable to the unexercised portion of such option shall continue to be reserved for options under the Plan and may be optioned hereunder. SECTION 7. DURATION OF PLAN Incentive stock options may be granted pursuant to the Plan from time to time during a period of ten (10) years from the effective date as defined in Section 3. Nonqualified stock options may be granted pursuant to the Plan from time to time after the effective date of the Plan and until the Plan is discontinued or terminated by the Board. Any incentive stock option granted during such ten-year period and any nonqualified stock option granted prior to the termination of the Plan by the Board shall remain in full force and effect until the expiration of the option as specified in the written stock option agreement and shall remain subject to the terms and conditions of this Plan. SECTION 8. PAYMENT Optionees may pay for shares upon exercise of options granted pursuant to this Plan with cash, personal check, certified check, Common Stock of the Company valued at such Stock's then Fair Market Value, or such other form of payment as may be authorized by the Administrator. The Administrator may, in its sole discretion, limit the forms of payment available to the Optionee and may exercise such discretion any time prior to the termination of the option granted to the Optionee or upon any exercise of the option by the Optionee. With respect to payment in the form of Common Stock of the Company, the Administrator may require advance approval or adopt such rules as it deems necessary to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable. E-3 SECTION 9. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS Each incentive stock option granted pursuant to this Section 9 shall be evidenced by a written stock option agreement (the "Option Agreement"). The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Optionee to Optionee; provided, however, that each Optionee and each Option Agreement shall comply with and be subject to the following terms and conditions: (a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state the total number of shares covered by the incentive stock option. To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, the option price per share shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock per share on the date the Administrator grants the option; provided, however, that if an Optionee owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its Parent or any Subsidiary, the option price per share of an incentive stock option granted to such Optionee shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock per share on the date of the grant of the option. The Administrator shall have full authority and discretion in establishing the option price and shall be fully protected in so doing. (b) TERM AND EXERCISABILITY OF INCENTIVE STOCK OPTION. The term during which any incentive stock option granted under the Plan may be exercised shall be established in each case by the Administrator. To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, in no event shall any incentive stock option be exercisable during a term of more than ten (10) years after the date on which it is granted; provided, however, that if an Optionee owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or any Subsidiary, the incentive stock option granted to such Optionee shall be exercisable during a term of not more than five (5) years after the date on which it is granted. The Option Agreement shall state when the incentive stock option becomes exercisable and shall also state the maximum term during which the option may be exercised. In the event an incentive stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the Option Agreement. The Administrator may accelerate the exercisability of any incentive stock option granted hereunder which is not immediately exercisable as of the date of grant. (c) OTHER PROVISIONS. The Option Agreement authorized under this Section 9 shall contain such other provisions as the Administrator shall deem advisable. Any such Option Agreement shall contain such limitations and restrictions upon the exercise of the option as shall be necessary to ensure that such option will be considered an "incentive stock option" as defined in Section 422 of the Internal Revenue Code or to conform to any change therein. SECTION 10. TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS Each nonqualified stock option granted pursuant to this Section 10 shall be evidenced by a written Option Agreement. The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Optionee to Optionee; provided, however, that each Optionee and each Option Agreement shall comply with and be subject to the following terms and conditions: (a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state the total number of shares covered by the nonqualified stock option. Unless otherwise determined by the Administrator, the option price per share shall be one hundred percent (100%) of the Fair Market Value of the Common Stock per share on the date the Administrator grants the option; provided, however, that the option E-4 price may not be less than eighty-five percent (85%) of the Fair Market Value of the Common Stock per share on the date of grant. (b) TERM AND EXERCISABILITY OF NONQUALIFIED STOCK OPTION. The term during which any nonqualified stock option granted under the Plan may be exercised shall be established in each case by the Administrator. The Option Agreement shall state when the nonqualified stock option becomes exercisable and shall also state the maximum term during which the option may be exercised. In the event a nonqualified stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the stock option agreement. The Administrator may accelerate the exercisability of any nonqualified stock option granted hereunder which is not immediately exercisable as of the date of grant. (c) WITHHOLDING. The Company or its Subsidiary shall be entitled to withhold and deduct from future wages of the Optionee all legally required amounts necessary to satisfy any and all withholding and employment-related taxes attributable to the Optionee's exercise of a nonqualified stock option. In the event the Optionee is required under the Option Agreement to pay the Company, or make arrangements satisfactory to the Company respecting payment of, such withholding and employment-related taxes, the Administrator may, in its discretion and pursuant to such rules as it may adopt, permit the Optionee to satisfy such obligation, in whole or in part, by electing to have the Company withhold shares of Common Stock otherwise issuable to the Optionee as a result of the option's exercise equal to the amount required to be withheld for tax purposes. Any stock elected to be withheld shall be valued at its Fair Market Value, as of the date the amount of tax to be withheld is determined under applicable tax law. The Optionee's election to have shares withheld for this purpose shall be made on or before the date the option is exercised or, if later, the date that the amount of tax to be withheld is determined under applicable tax law. Such election shall be approved by the Administrator and otherwise comply with such rules as the Administrator may adopt to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable. (d) OTHER PROVISIONS. The Option Agreement authorized under this Section 10 shall contain such other provisions as the Administrator shall deem advisable. SECTION 11. NONQUALIFIED STOCK OPTIONS FOR NON-EMPLOYEE DIRECTORS (a) GRANT OF NONQUALIFIED STOCK OPTIONS. All grants of nonqualified stock options to Non-Employee Directors under this Section 11 shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (1) The Administrator shall not have any discretion to select the Non-Employee Directors that shall be eligible for nonqualified stock options or to determine the number of shares of Common Stock to be subject to such options, the option price per share or the date of grant. (2) INITIAL GRANTS. Each New Director shall be granted a nonqualified stock option to purchase 5,000 shares of Common Stock on the date that the New Director first becomes elected to the Board of Directors of the Company. (3) ANNUAL GRANTS. a. Each Incumbent Director shall be granted a nonqualified stock option to purchase 500 shares of Common Stock on the date of the annual meeting of the shareholders of the Company immediately following the effective date of the Plan, and on the date of each annual meeting of the shareholders thereafter, so long as the Incumbent Director continues to serve on the Board. E-5 b. Each New Director shall be granted a nonqualified stock option to purchase 500 shares of Common Stock on the date of the annual meeting coincident with or immediately following the third anniversary of the date that the New Director was elected to the Board of Directors and on the date of each annual meeting thereafter, so long as the New Director continues to serve on the Board. (b) OPTION PRICE. The option price per share for all nonqualified stock options granted pursuant to Sections 11(a) above shall be one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the date the nonqualified stock option is granted. (c) DURATION AND EXERCISE OF OPTIONS. (1) DURATION OF OPTIONS. Except as otherwise provided in this Plan, the period during which any nonqualified stock option granted to Non-Employee Directors under this Section 11 may be exercised shall be seven (7) years after the date that the option is granted. (2) EXERCISABILITY OF NONQUALIFIED STOCK OPTIONS. a. In no event shall any nonqualified stock options granted to Non-Employee Directors be exercisable prior to the date that this Plan is approved by the shareholders of the Company. If shareholder approval of the Plan is not obtained within twelve (12) months following its adoption by the Board, any nonqualified stock options previously granted to Non-Employee Directors shall be revoked. b. All nonqualified stock options granted to Non-Employee Directors pursuant to Section 11(a)(2) shall become exercisable to the extent of twenty-five percent (25%) of the shares subject to the nonqualified stock option on each of the four succeeding anniversaries of the date that the option is granted. If the Non-Employee Director does not purchase in any year the full number of shares which the Non-Employee Director is entitled to purchase in that year, the Non-Employee Director shall be entitled to purchase in any subsequent year such previously unpurchased shares, subject to the expiration of such nonqualified stock option as specified in Section 11(c)(1) above. c. All nonqualified stock options granted to Non-Employee Directors pursuant to Section 11(a)(3) shall become fully exercisable on the first anniversary of the date that the option is granted. If the Non-Employee Director does not purchase in any year the full number of shares which the Non-Employee Director is entitled to purchase in that year, the Non-Employee Director shall be entitled to purchase in any subsequent year such previously unpurchased shares, subject to the expiration of such nonqualified stock option as specified in Section 11(c)(1) above. (d) PAYMENT OF OPTION PRICE. Upon the exercise of any nonqualified stock option granted to a Non-Employee Director pursuant to this Section 11, the purchase price for such shares of Common Stock subject to such option shall be paid in cash or certified check, unless the Administrator, in its sole discretion and subject to any applicable rules or regulations it may adopt, allows such payment to be made, in whole or in part, by the transfer from the Non-Employee Director to the Company of previously acquired shares of Common Stock. Any Common Stock so transferred shall be valued at its Fair Market Value on the day immediately preceding the effective exercise of the nonqualified stock option. For purposes of this Section 11(d), "previously acquired shares of Common Stock" shall include shares of Common Stock that are already owned by the Non-Employee Director at the time of exercise. E-6 (e) RIGHTS AS A SHAREHOLDER. The Non-Employee Director shall have no rights as a shareholder with respect to any shares of Common Stock subject to a nonqualified stock option until the Non-Employee Director becomes the holder of record of such shares. Except as provided in Section 13, no adjustments shall be made for dividends or other cash distributions or for other rights that have a record date preceding the date the Non-Employee Director becomes the holder of record of such shares of Stock. (f) TERMINATION OF STATUS AS A DIRECTOR. In the event that a Non-Employee Director's membership on the Board terminates, the following provisions shall apply: (1) If the Non-Employee Director's membership on the Board terminates for any reason other than the Non-Employee Director's retirement, death or disability, the Non-Employee Director shall be entitled to exercise any nonqualified stock option granted to such Non-Employee Director pursuant to this Section 11 to the extent such option was exercisable as of the date of such termination for a period of three (3) months following the date of such termination unless the Option, by its terms, expires before the end of such three-month period. To the extent that the nonqualified stock option is not exercisable as of the date the Non-Employee Director's membership on the Board terminates for any reason other than retirement, death or disability, or to the extent the Non-Employee Director does not exercise such Option within the period specified in this Section 11(f)(1), all rights of the Non-Employee Director under such Option shall be forfeited. (2) If the Non-Employee Director's membership on the Board terminates because of disability, the Non-Employee Director shall be entitled to exercise any nonqualified stock option to the extent such option was exercisable as of the date such Non-Employee Director's membership on the Board is terminated by reason of disability for a period of twelve (12) months following the date of such termination unless the option, by its terms, expires before the end of such twelve-month period. To the extent that such Option was not exercisable as of the date the Non-Employee Director's membership on the Board terminates because of disability, or if the Non-Employee Director does not exercise the nonqualified stock option within the twelve-month period specified in this Section 11(f)(2), all rights of the Non-Employee Director under the option shall be forfeited. For purposes of this Section 11(f)(2), "disability" shall mean a mental or physical condition of the Non-Employee Director, resulting from illness, injury or disease which, as determined by the Board, causes the Non-Employee director to resign from the Board and is reasonably expected to be of long and indefinite duration or result in death. (3) If the Non-Employee Director's membership on the Board terminates because of retirement, any nonqualified stock option granted to the Non-Employee Director pursuant to this Section 11 shall become immediately exercisable to the extent of one hundred percent (100%) of the shares subject to the nonqualified stock option and shall terminate on the date such option will, by its terms, expire. To the extent the Non-Employee Director does not exercise such option within the period specified in this Section 11(f)(3), all rights of the Non-Employee Director under such option shall be forfeited. For purposes of this Section 11(f)(3) "retirement" shall mean termination of the Non-Employee Director's membership on the Board after reaching age 60 and completing a minimum of five (5) years of service on the Board. (4) If the Non-Employee Director dies (i) while a member of the Board, (ii) within the three (3) months following the termination of the Non-Employee Director's membership on the Board in the case of Section 11(f)(1) above, (iii) within the twelve (12) months following the termination of the Non-Employee Director's membership on the Board in the case of Section 11(f)(2) above, or (iv) at any time after the Non-Employee Director's retirement from the Board in the case of Section 11(f)(3) above, any nonqualified stock option granted to such Non-Employee Director shall become immediately exercisable in full and may be exercised by the Non-Employee Director's estate or any person who acquired the right to exercise any nonqualified stock option granted to such Non-Employee Director pursuant to this Section 11 by bequest or inheritance until the date such Option expires as specified in Section 11(c)(1) above. E-7 SECTION 12. TRANSFER OF OPTION No incentive stock option shall be transferable, in whole or in part, by the Optionee other than by will or by the laws of descent and distribution and, during the Optionee's lifetime, the option may be exercised only by the Optionee. If the Optionee shall attempt any transfer of any incentive stock option granted under the Plan during the Optionee's lifetime, such transfer shall be void and the incentive stock option, to the extent not fully exercised, shall terminate. The Administrator may, in its sole discretion, permit the Optionee to transfer any or all nonqualified stock options to any member of the Optionee's "immediate family" as such term is defined in Rule 16a-1(e) promulgated under the Securities Exchange Act of 1934, or any successor provision, or to one or more trusts whose beneficiaries are members of such Optionee's "immediate family" or partnerships in which such family members are the only partners; provided, however, that the Optionee receives no consideration for the transfer and such transferred nonqualified stock option shall continue to be subject to the same terms and conditions as were applicable to such nonqualified stock option immediately prior to its transfer. SECTION 13. RECAPITALIZATION, SALE, MERGER, EXCHANGE OR LIQUIDATION In the event of an increase or decrease in the number of shares of Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company, the number of shares of Option Stock reserved under Section 6 hereof and the number of shares of Option Stock covered by each outstanding option and the price per share thereof shall be adjusted by the Board to reflect such change. Additional shares which may be credited pursuant to such adjustment shall be subject to the same restrictions as are applicable to the shares with respect to which the adjustment relates. Unless otherwise provided in the stock option agreement, in the event of an acquisition of the Company through the sale of substantially all of the Company's assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization, reclassification, extraordinary dividend, divestiture or liquidation of the Company (collectively referred to as a "transaction"), all outstanding options shall become immediately exercisable, whether or not such options had become exercisable prior to the transaction; provided, however, that if the acquiring party seeks to have the transaction accounted for on a "pooling of interests" basis and, in the opinion of the Company's independent certified public accountants, accelerating the exercisability of such options would preclude a pooling of interests under generally accepted accounting principles, the exercisability of such options shall not accelerate. In addition to the foregoing, or in the event a pooling of interests transaction precludes the acceleration of the exercisability of outstanding options, the Board may provide for one or more of the following: (a) the complete termination of this Plan and cancellation of outstanding options not exercised prior to a date specified by the Board (which date shall give Optionees a reasonable period of time in which to exercise the options prior to the effectiveness of such transaction); (b) that Optionees holding outstanding incentive or nonqualified options shall receive, with respect to each share of Option Stock subject to such options, as of the effective date of any such transaction, cash in an amount equal to the excess of the Fair Market Value of such Option Stock on the date immediately E-8 preceding the effective date of such transaction over the option price per share of such options; provided that the Board may, in lieu of such cash payment, distribute to such Optionees shares of stock of the Company or shares of stock of any corporation succeeding the Company by reason of such transaction, such shares having a value equal to the cash payment herein; or (c) the continuance of the Plan with respect to the exercise of options which were outstanding as of the date of adoption by the Board of such plan for such transaction and provide to Optionees holding such options the right to exercise their respective options as to an equivalent number of shares of stock of the corporation succeeding the Company by reason of such transaction. The Board may restrict the rights of or the applicability of this Section 13 to the extent necessary to comply with Section 16(b) of the Securities Exchange Act of 1934, the Internal Revenue Code or any other applicable law or regulation. The grant of an option pursuant to the Plan shall not limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, exchange or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 14. SECURITIES LAW COMPLIANCE No shares of Common Stock shall be issued pursuant to the Plan unless and until there has been compliance, in the opinion of Company's counsel, with all applicable legal requirements, including without limitation, those relating to securities laws and stock exchange listing requirements. As a condition to the issuance of Option Stock to Optionee, the Administrator may require Optionee to (i) represent that the shares of Option Stock are being acquired for investment and not resale and to make such other representations as the Administrator shall deem necessary or appropriate to qualify the issuance of the shares as exempt from the Securities Act of 1933 and any other applicable securities laws, and (ii) represent that Optionee shall not dispose of the shares of Option Stock in violation of the Securities Act of 1933 or any other applicable securities laws. As a further condition to the grant of any incentive or nonqualified stock option or the issuance of Option Stock to Optionee, Optionee agrees to the following: (a) In the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee will not, for a period not to exceed 180 days from the prospectus, sell or contract to sell or grant an option to buy or otherwise dispose of any incentive or nonqualified stock option granted to Optionee pursuant to the Plan or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s). (b) In the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any states securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of any incentive or nonqualified stock option and the date on which such option must be exercised, provided that the Company gives Optionee prior written notice of such acceleration, and (ii) to cancel any options or portions thereof which Optionee does not exercise prior to or contemporaneously with such public offering. (c) In the event of a transaction (as defined in Section 13 of the Plan) which is treated as a "pooling of interests" under generally accepted accounting principles, Optionee will comply with Rule 145 of the Securities Act of 1933 and any other restrictions imposed under other applicable legal or accounting principles if Optionee is an "affiliate" (as defined in such applicable legal and accounting principles) at the time of the transaction, and Optionee will execute any documents necessary to ensure compliance with such rules. E-9 The Company reserves the right to place a legend on any stock certificate issued upon exercise of an option granted pursuant to the Plan to assure compliance with this Section 14. SECTION 15. RIGHTS AS A SHAREHOLDER An Optionee (or the Optionee's successor or successors) shall have no rights as a shareholder with respect to any shares covered by an option until the date of the issuance of a stock certificate evidencing such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is actually issued (except as otherwise provided in Section 13 of the Plan). SECTION 16. AMENDMENT OF THE PLAN The Board may from time to time, insofar as permitted by law, suspend or discontinue the Plan or revise or amend it in any respect; provided, however, that no such revision or amendment, except as is authorized in Section 13, shall impair the terms and conditions of any option which is outstanding on the date of such revision or amendment to the material detriment of the Optionee without the consent of the Optionee. Notwithstanding the foregoing, no such revision or amendment shall (i) materially increase the number of shares subject to the Plan except as provided in Section 13 hereof, (ii) change the designation of the class of employees eligible to receive options, (iii) decrease the price at which options may be granted, or (iv) materially increase the benefits accruing to Optionees under the Plan without the approval of the shareholders of the Company if such approval is required for compliance with the requirements of any applicable law or regulation. Furthermore, the Plan may not, without the approval of the shareholders, be amended in any manner that will cause incentive stock options to fail to meet the requirements of Section 422 of the Internal Revenue Code. SECTION 17. NO OBLIGATION TO EXERCISE OPTION The granting of an option shall impose no obligation upon the Optionee to exercise such option. Further, the granting of an option hereunder shall not impose upon the Company or any Subsidiary any obligation to retain the Optionee in its employ for any period. E-10 EXHIBIT B NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made as of the ______ day of ___________, 19___, by and between Empi, Inc., a Minnesota corporation (the "Company"), and ______________ (the "Optionee"); WITNESSETH WHEREAS, the Optionee on the date hereof is a non-employee director of the Company or a Subsidiary of the Company; WHEREAS, the Company's Board of Directors has adopted a stock option plan providing for the grant of nonqualified stock options known as the "Empi, Inc. 1997 Stock Option Plan" (hereinafter referred to as the "Plan"); WHEREAS, Section 11 of the Plan provides for the automatic and non-discretionary grant of nonqualified stock options to a non-employee director of the Company (referred to under the Plan as "Outside Directors") at the time such Outside Director first becomes elected to the Board of directors of the Company and on the date of each annual meeting of the shareholders thereafter, so long as such Outside Director continues to serve on the Board of Directors; WHEREAS, Optionee has qualified for the grant of a nonqualified stock option in accordance with Section 11 of the Plan; and WHEREAS, Optionee and the Company desire to enter into this Agreement to set forth the terms of such nonqualified stock option, consistent with the requirements of Section 11 of the Plan; NOW THEREFORE, in consideration of the promises and the mutual covenants herein contained, the Company and the Optionee hereby agree as follows: 1. GRANT OF OPTION. In accordance with Section 11 of the Plan, the Optionee is hereby granted, on the date of this Agreement, the option to purchase _________(____) shares of Common Stock of the Company (the "Option Stock) subject to the terms and conditions herein contained, and subject only to adjustment in such number of shares as provided in Section 13 of the Plan. 2. OPTION PRICE. During the term of this option, the purchase price for the shares of Option Stock granted herein is $____________ per share (one hundred percent (100%) of the fair market value of a share of common stock as of the date of grant), subject only to adjustment of such price as provided in Section 13 of the Plan. 3. TERM OF OPTION. The term during which this option may be exercised expires at the close of business on _________________, 19___ (seven (7) years after the date of grant), unless terminated earlier under the provisions of Paragraphs 10, 11 or 12 below. If the Optionee does not purchase in any option year the full number of shares which the Optionee is entitled to purchase that year, the Optionee may purchase in any subsequent option year such previously unpurchased shares in addition to those the Optionee is otherwise entitled to purchase. If this option has been granted prior to approval of the Plan by the Company's shareholders, this option shall not be exercisable until such approval is obtained. This option shall be exercisable on the following date for the following number of shares: VESTING DATE NUMBER OF SHARES ______ 4. PERSONAL EXERCISE BY OPTIONEE. This option shall, during the lifetime of the Optionee, be exercisable only by said Optionee and shall not be transferable by the Optionee, in whole or in part, other than by will or by the laws of descent and distribution. E-11 5. MANNER OF EXERCISE a. GENERAL. The Option may be exercised only by Optionee (or other proper party in the event of death or incapacity), subject to the conditions of the Plan and subject to such other administrative rules as the Administrator may deem advisable, by delivering within the option period written notice of exercise to the Company at its principal office. The notice shall state the number of shares as to which the Option is being exercised and shall be accompanied by payment in full of the option price for all shares designated in the notice. The exercise of the Option shall be deemed effective upon receipt of such notice by the Company and upon payment that complies with the terms of the Plan and this Agreement. The Option may be exercised with respect to any number or all of the shares as to which it can then be exercised and, if partially exercised, may be exercised as to the unexercised shares any number of times during the option period as provided herein. b. FORM OF PAYMENT. Subject to the approval of the Administrator, payment of the option price by Optionee shall be in the form of cash, personal check, certified check or previously acquired shares of Common Stock of the Company, or any combination thereof. Any stock so tendered as part of such payment shall be valued at its Fair Market Value as provided in the Plan. For purposes of this Agreement, "previously acquired shares of Common Stock" shall include shares of Common Stock that are already owned by Optionee at the time of exercise. c. STOCK TRANSFER RECORDS. As soon as practicable after the effective exercise of all or any part of the Option, Optionee shall be recorded on the stock transfer books of the Company as the owner of the shares purchased, and the Company shall deliver to Optionee one or more duly issued stock certificates evidencing such ownership. All requisite original issue or transfer documentary stamp taxes shall be paid by the Company. 6. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a shareholder with respect to any shares of Common Stock covered by this option until the date of the issuance of a stock certificate for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 13 of the Plan. 7. STOCK OPTION PLAN. The option evidenced by this Agreement is granted pursuant to the Plan, a copy of which Plan is attached hereto or has been made available to the Optionee and is hereby made a part of this Agreement. This Agreement is subject to and in all respects limited and conditioned as provided in the Plan, including, without limitation, the provisions of Section 11 of the Plan. The Plan governs this option and the Optionee, and in the event of any question as to the construction of this Agreement or of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides. 8. WITHHOLDING TAXES. In order to permit the Company to receive a tax deduction in connection with the exercise of this option, the Optionee agrees that as a condition to any exercise of this option, the Optionee will also pay to the Company, or make arrangements satisfactory to the Company regarding payment of, any federal, state, local or other taxes required by law to be withheld with respect to the option's exercise. 9. INVESTMENT PURPOSE. The Company requires, as a condition to the grant and exercise of this option, that any stock acquired pursuant to this option be acquired for only investment if, in the opinion of counsel for the Company, such is required or deemed advisable under securities laws or any other applicable law, regulation or rule or any government or governmental agency. In this regard, if requested by the Company, the Optionee, prior to the acquisition of any shares pursuant to this option, shall execute an investment letter to the effect that the Optionee is acquiring shares pursuant to the option for investment purposes only and not with the intention of making any distribution of such shares and will not dispose of the shares in violation of the applicable federal and state securities laws. 10. TERMINATION OF STATUS AS A DIRECTOR. If the Optionee's membership on the Board of Directors terminates for any reason (including resignation or removal), other than because of death, disability or retirement (described below), this option shall terminate on the earlier of: (i) the close of business on the three-month anniversary of the date the Optionee ceased to be a director, and (ii) this option's originally stated expiration date. In such period following such termination of Optionee's directorship, the Optionee shall be entitled to exercise the option to the extent such option was exercisable as of the date of such termination. To the extent that the option is not exercisable as of the date the Optionee's membership on the Board terminates, or to the extent the Optionee does E-12 not exercise the Option within such three month period, all rights of the Optionee under the Option shall be forfeited. 11. DEATH OF OPTIONEE. If the Optionee dies (i) while a member of the Board, (ii) within the three (3) month period following the termination of the Optionee's membership on the Board as provided under Paragraph 10 above, or (iii) within the twelve (12) month period following the termination of the Optionee's membership on the Board due to disability as provided under Paragraph 12 below, this option shall become immediately exercisable in full and may be exercised only by the person or persons to whom the Optionee's rights under this option shall have passed by the Optionee's will or by the laws of descent and distribution until the date such Option expires as specified in Paragraph 3 above. 12. DISABILITY. If the Optionee's membership on the Board of Directors terminates because of disability, this option shall terminate on the earlier of: (i) the close of business on the twelve-month anniversary of the date the Optionee ceased to be a director due to disability, and (ii) this option's originally stated expiration date. In such period following such termination of Optionee's directorship due to disability, the Optionee shall be entitled to exercise the option to the extent such option was exercisable as of the date of such termination. To the extent that the option is not exercisable as of the date the Optionee's membership on the Board terminates due to disability, or to the extent the Optionee does not exercise the Option within such twelve month period, all rights of the Optionee under the Option shall be forfeited. For purposes of this Paragraph 12, "disability" shall mean a mental or physical condition of the Optionee, resulting from illness, injury or disease which, as determined by the Board, causes the Optionee to resign from the Board and is reasonably expected to be of long and indefinite duration or result in death. 13. RETIREMENT. If the Optionee's membership on the Board terminates because of retirement, this Option shall immediately become exercisable to the extent of 100% of the aggregate number of shares specified in Paragraph 1 above and shall terminate on the expiration date of this Option stated in Paragraph 3 above. If Optionee does not exercise the Option within the time specified in this Paragraph 13, all rights of Optionee under this Option shall be forfeited. For purposes of this Paragraph 13, "retirement" shall mean termination of employment with the Company of Subsidiary after reaching age sixty (60) and completing a minimum of five (5) years of service with the Company or Subsidiary. 14. RECAPITALIZATIONS, SALES, MERGERS, EXCHANGES, CONSOLIDATIONS, LIQUIDATION. In the event of a stock dividend or stock split, the number of shares of Option Stock and option exercise price shall be adjusted as provided in Section 13 of the Plan. Similarly, in the event of a sale, merger, exchange, consolidation or liquidation of the Company, this option shall be adjusted as provided in Section 13 of the Plan. 15. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the benefit of the Company and its successors and assigns and the Optionee and any successor or successors of the Optionee permitted by Paragraph 4 above. 16. MISCELLANEOUS. a. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee hereby agrees that for a period not to exceed 180 days from the prospectus, Optionee will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s). b. BLUE SKY LIMITATION. Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives Optionee 15 days' prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan which is not exercised prior to or contemporaneously with such public offering. Notice shall be deemed given when delivered personally or when E-13 deposited in the United States mail, first class postage prepaid and addressed to Optionee at the address of Optionee on file with the Company. c. STOCK LEGEND. The Administrator may require that the certificates for any shares of Common Stock purchased by Optionee (or, in the case of death, Optionee's successors) shall bear an appropriate legend to reflect the restrictions of Paragraph 16(a) and 16(b) of this Agreement. d. ARBITRATION. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or any attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Ramsey County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing part, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Ramsey County, Minnesota. E-14 EXHIBIT C NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made effective as of this ______ day of ______________, 19___, by and between Empi, Inc., a Minnesota corporation (the "Company"), and _________________________ ("Optionee"). W I T N E S S E T H: WHEREAS, Optionee on the date hereof is a key employee, officer, consultant, nonemployee director or advisor of the Company or one of its Subsidiaries; and WHEREAS, the Company wishes to grant a nonqualified stock option to Optionee to purchase shares of the Company's Common Stock pursuant to the Company's 1997 Stock Option Plan (the "Plan"); and WHEREAS, the Administrator has authorized the grant of a nonqualified stock option to Optionee and has determined that, as of the effective date of this Agreement, the fair market value of the Company's Common Stock is $________ per share; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows: 1. GRANT OF OPTION. The Company hereby grants to Optionee on the date set forth above (the "Date of Grant"), the right and option (the "Option") to purchase all or portions of an aggregate of _______________________________ ( ) shares of Common Stock at a per share price of $_____________ on the terms and conditions set forth herein, and subject to adjustment pursuant to Section 13 of the Plan. This Option is a nonqualified stock option and will not be treated as an incentive stock option, as defined under Section 422, or any successor provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder. 2. DURATION AND EXERCISABILITY. a. The term during which this Option may be exercised shall terminate on __________________________, ________, except as otherwise provided in Paragraphs 2(b) through 2(e) below. This Option shall become exercisable according to the following schedule: Percentage/Number Vesting Date of Shares ------------ -------------- Once the Option becomes exercisable to the extent of one hundred percent (100%) of the aggregate number of shares specified in Paragraph 1, Optionee may continue to exercise this Option under the terms and conditions of this Agreement until the termination of the Option as provided herein. If Optionee does not purchase upon an exercise of this Option the full number of shares which Optionee is then entitled to purchase, Optionee may purchase upon any subsequent exercise prior to this Option's termination such previously unpurchased shares in addition to those Optionee is otherwise entitled to purchase. b. TERMINATION OF RELATIONSHIP (OTHER THAN CHANGE OF CONTROL, DEATH OR RETIREMENT). If Optionee ceases to be an employee, consultant, nonemployee director or an advisor of the Company or any Subsidiary for any reason other than because of a "change of control transaction" as described in Paragraph 2(c) or because of retirement or death, this Option shall completely terminate on the earlier of (i) the close of business on the one-month anniversary date of the termination of all such relationships, and (ii) the expiration date of this Option stated in Paragraph 2(a) above. In such period following such termination, this Option shall be exercisable only to the extent the Option was exercisable on the vesting date immediately preceding the date on which all of Optionee's relationships with the Company or Subsidiary have terminated, but had not previously been exercised. To the extent this Option was not exercisable upon the termination of such relationship, or if Optionee does not exercise the Option within the time specified in this Paragraph 2(b), all rights of Optionee under this Option shall be forfeited. E-15 c. CHANGE OF CONTROL. If Optionee ceases to be an employee, consultant, nonemployee director or advisor of the Company or any Subsidiary because of a "change of control transaction," this Option shall completely terminate on the earlier of (i) the close of business on the one-month anniversary date of the termination of all such relationships, and (ii) the expiration date of this Option stated in Paragraph 2 above; provided, however, that if such transaction is treated as a "pooling of interests" under generally accepted accounting principles, and Optionee is an "affiliate" of the Company or Subsidiary under applicable legal and accounting principles, this Option shall completely terminate on the later of (A) the close of business on the one-month anniversary date of such termination of employment or (B) the close of business on the date that is sixty (60) days after the date on which affiliates are no longer restricted from selling, transferring or otherwise disposing of the shares of stock received in the change of control transaction. In such period following such termination, this Option shall be fully exercisable unless the acceleration of the exercisability of this Option has been prevented as provided in Section 13 of the Plan, in which case this Option shall be exercisable only to the extent the Option was exercisable on the vesting date immediately preceding the date on which all of Optionee's relationships with the Company or Subsidiary have terminated, but had not previously been exercised. To the extent this Option was not exercisable upon such termination of such relationships, or if Optionee does not exercise the Option within the time specified in this Paragraph 2(c), all rights of Optionee under this Option shall be forfeited. For purposes of this Paragraph 2(c), a "change of control transaction" means an acquisition of the Company through the sale of substantially all of the Company's assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization, reclassification, extraordinary dividend, divestiture or liquidation of the Company. d. DEATH. In the event of Optionee's death, this Option shall terminate on the earlier of (i) the close of business on the six-month anniversary date of the date of Optionee's death, and (ii) the expiration date of this Option stated in Paragraph 2(a) above. In such period following Optionee's death, this Option may be exercised by the person or persons to whom Optionee's rights under this Option shall have passed by Optionee's will or by the laws of descent and distribution only to the extent the Option was exercisable on the vesting date immediately preceding the date of Optionee's death. If such person or persons fail to exercise this Option within the time specified in this Paragraph 2(d), all rights under this Option shall be forfeited. e. RETIREMENT. If Optionee's employment with the Company or any Subsidiary terminates because of retirement, this Option shall immediately become exercisable to the extent of 100% of the aggregate number of shares specified in Paragraph 1 above and shall terminate on the expiration date of this Option stated in Paragraph 2(a) above. If Optionee does not exercise the Option within the time specified in this Paragraph 2(e) all rights of Optionee under this Option shall be forfeited. For purposes of this Paragraph 2(e) "retirement" shall mean termination of employment with the Company or Subsidiary after reaching age fifty-five (55) and completing a minimum of ten (10) years of service with the Company or Subsidiary. Notwithstanding the foregoing, if, during the period that this Option remains exercisable, Optionee directly or indirectly, engages in (whether as an employee, consultant, proprietor, partner, director or otherwise), has any ownership interest in, or participates in the financing, operation, management or control of any firm, corporation or business that engages in or intends to engage in business that is in direct competition with the Company's principal business as defined and discussed in the documents filed by the Company with the Securities Exchange Commission (collectively referred to as "competitive activity"), this Option shall immediately terminate on the date on which Optionee first engages in such competitive activity or, if earlier, on the expiration date of this Option stated in Paragraph 2(a) above, and all rights of Optionee under this Option shall be immediately forfeited. 3. MANNER OF EXERCISE. a. GENERAL. The Option may be exercised only by Optionee (or other proper party in the event of death or incapacity), subject to the conditions of the Plan and subject to such other administrative rules as the Administrator may deem advisable, by delivering within the option period written notice of exercise to the Company at its principal office. The notice shall state the number of shares as to which the Option is being exercised and shall be accompanied by payment in full of the option price for all shares designated in the notice. The exercise of the Option shall be deemed effective upon receipt of such notice by the Company and upon payment that complies with the terms of the Plan and this Agreement. The Option may be exercised with respect to any number or all of the shares as to which it can then be exercised and, if partially exercised, may be exercised as to the unexercised shares any number of times during the option period as provided herein. E-16 b. FORM OF PAYMENT. Subject to the approval of the Administrator, payment of the option price by Optionee shall be in the form of cash, personal check, certified check or previously acquired shares of Common Stock of the Company, or any combination thereof. Any stock so tendered as part of such payment shall be valued at its Fair Market Value as provided in the Plan. For purposes of this Agreement, "previously acquired shares of Common Stock" shall include shares of Common Stock that are already owned by Optionee at the time of exercise. c. STOCK TRANSFER RECORDS. As soon as practicable after the effective exercise of all or any part of the Option, Optionee shall be recorded on the stock transfer books of the Company as the owner of the shares purchased, and the Company shall deliver to Optionee one or more duly issued stock certificates evidencing such ownership. All requisite original issue or transfer documentary stamp taxes shall be paid by the Company. 4. MISCELLANEOUS. a. RIGHTS AS SHAREHOLDER. This Agreement shall not confer on Optionee any right with respect to the continuance of any relationship with the Company or any of its Subsidiaries, nor will it interfere in any way with the right of the Company to terminate any such relationship. Optionee shall have no rights as a shareholder with respect to shares subject to this Option until such shares have been issued to Optionee upon exercise of this Option. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 13 of the Plan. b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held, until such time that such Common Stock is registered and freely tradable under applicable state and federal securities laws, for Optionee's own account without a view to any further distribution thereof and that such shares will be not transferred or disposed of except in compliance with applicable state and federal securities laws. c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and subject to Section 13 of the Plan, certain changes in the number or character of the Common Stock of the Company (through sale, merger, consolidation, exchange, reorganization, divestiture (including a spin-off), liquidation, recapitalization, stock split, stock dividend or otherwise) shall result in an adjustment, reduction or enlargement, as appropriate, in Optionee's rights with respect to any unexercised portion of the Option (i.e., Optionee shall have such "anti-dilution" rights under the Option with respect to such events, but shall not have "preemptive" rights). d. SHARES RESERVED. The Company shall at all times during the option period reserve and keep available such number of shares as will be sufficient to satisfy the requirements of this Agreement. e. WITHHOLDING TAXES. In order to permit the Company to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, income or other taxes are withheld from any amounts payable by the Company to Optionee. If the Company is unable to withhold such federal and state taxes, for whatever reason, Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal or state law. Optionee may, subject to the approval and discretion of the Administrator or such administrative rules it may deem advisable, elect to have all or a portion of such tax withholding obligations satisfied by delivering shares of the Company's Common Stock having a fair market value equal to such obligations. f. NONTRANSFERABILITY. During the lifetime of Optionee, the accrued Option shall be exercisable only by Optionee or by the Optionee's guardian or other legal representative, and shall not be assignable or transferable by Optionee, in whole or in part, other than by will or by the laws of descent and distribution. g. 1997 STOCK OPTION PLAN. The Option evidenced by this Agreement is granted pursuant to the Plan, a copy of which Plan has been made available to Optionee and is hereby incorporated into this Agreement. This Agreement is subject to and in all respects limited and conditioned as provided in the Plan. The Plan governs this Option and, in the event of any questions as to the construction of this Agreement or in the event of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides. E-17 h. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee hereby agrees that for a period not to exceed 180 days from the prospectus, Optionee will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s). i. BLUE SKY LIMITATION. Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives Optionee 15 days' prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan which is not exercised prior to or contemporaneously with such public offering. Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to Optionee at the address of Optionee on file with the Company. j. ACCOUNTING COMPLIANCE. Optionee agrees that, in the event a "change of control transaction" (as defined in Paragraph 2(c) above) is treated as a "pooling of interests" under generally accepted accounting principles and Optionee is an "affiliate" of the Company or any Subsidiary (as defined in applicable legal and accounting principles) at the time of such change of control transaction, Optionee will comply with all requirements of Rule 145 of the Securities Act of 1933, as amended, and the requirements of such other legal or accounting principles, and will execute any documents necessary to ensure such compliance. k. STOCK LEGEND. The Administrator may require that the certificates for any shares of Common Stock purchased by Optionee (or, in the case of death, Optionee's successors) shall bear an appropriate legend to reflect the restrictions of Paragraph 4(b), 4(h), 4(i) and 4(j) of this Agreement. l. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the benefit of the Company and its successors and assigns and Optionee and any successor or successors of Optionee permitted by Paragraph 2 or Paragraph 4(f) above. m. ARBITRATION. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Ramsey County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Ramsey County, Minnesota. E-18 EXHIBIT D INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, MADE EFFECTIVE AS OF THIS ____ day of _____________, 19____, by and between Empi, Inc., a Minnesota corporation (the "Company"), and ___________________ ("Optionee"). W I T N E S S E T H: WHEREAS, Optionee on the date hereof is a key employee or officer of the Company or one of its Subsidiaries; and WHEREAS, the Company wishes to grant an incentive stock option to Optionee to purchase shares of the Company's Common Stock pursuant to the Company's 1997 Stock Option Plan (the "Plan"); and WHEREAS, the Administrator of the Plan has authorized the grant of an incentive stock option to Optionee and has determined that, as of the effective date of this Agreement, the fair market value of the Company's Common Stock is $_____ per share; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows: 1. GRANT OF OPTION. The Company hereby grants to Optionee on the date set forth above (the "Date of Grant"), the right and option (the "Option") to purchase all or portions of an aggregate of ________________________________ (____) shares of Common Stock at a per share price of $________ on the terms and conditions set forth herein, and subject to adjustment pursuant to Section 13 of the Plan. Except as otherwise provided in Paragraphs 2(b) and 2(c), this Option is intended to be an incentive stock option within the meaning of Section 422, or any successor provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder. 2. DURATION AND EXERCISABILITY. a. The term during which this Option may be exercised shall terminate on _____________________, ________, except as otherwise provided in Paragraphs 2(b) through 2(e) below. This Option shall become exercisable according to the following schedule: Percentage/Number Vesting Date of Shares --------------- -------------- Once the Option becomes exercisable to the extent of one hundred percent (100%) of the aggregate number of shares specified in Paragraph 1, Optionee may continue to exercise this Option under the terms and conditions of this Agreement until the termination of the Option as provided herein. If Optionee does not purchase upon an exercise of this Option the full number of shares which Optionee is then entitled to purchase, Optionee may purchase upon any subsequent exercise prior to this Option's termination such previously unpurchased shares in addition to those Optionee is otherwise entitled to purchase. b. TERMINATION OF EMPLOYMENT (OTHER THAN CHANGE OF CONTROL, RETIREMENT OR DEATH). If Optionee's employment with the Company or any Subsidiary is terminated for any reason other than because of a "change of control transaction" as described in Paragraph 2(c) or because of retirement or death, this Option shall completely terminate on the earlier of (i) the close of business on the one-month anniversary date of such termination of employment, and (ii) the expiration date of this Option stated in Paragraph 2 above. Notwithstanding the foregoing, if, upon such termination of employment, Optionee continues to serve as a consultant, advisor or nonemployee director of the Company or Subsidiary, this Option shall terminate on the earlier of (i) the close of business on the one-month anniversary date of the termination of all of Optionee's relationships with the Company or Subsidiary, and (ii) the expiration date of this Option stated in Paragraph E-19 2(a) above, and the Option shall not, upon Optionee's termination of employment, be treated as an incentive stock option within the meaning of Code Section 422.] In such period following the termination of Optionee's employment, this Option shall be exercisable only to the extent the Option was exercisable on the vesting date immediately preceding such termination of employment, but had not previously been exercised. To the extent this Option was not exercisable upon such termination of employment, or if Optionee does not exercise the Option within the time specified in this Paragraph 2(b), all rights of Optionee under this Option shall be forfeited. c. CHANGE OF CONTROL. If Optionee's employment with the Company or any Subsidiary is terminated because of a "change of control transaction," this Option shall completely terminate on the earlier of (i) the close of business on the one-month anniversary date of such termination of employment, and (ii) the expiration date of this Option stated in Paragraph 2 above; provided, however, that if (x) such transaction is treated as a "pooling of interests" under generally accepted accounting principles, and (y) Optionee is an "affiliate" of the Company or Subsidiary under applicable legal and accounting principles, this Option shall completely terminate on the later of (A) the close of business on the one-month anniversary date of such termination of employment or (B) the close of business on the date that is sixty (60) days after the date on which affiliates are no longer restricted from selling, transferring or otherwise disposing of the shares of stock received in the change of control transaction. Notwithstanding the foregoing, if, upon such termination of employment, Optionee continues to serve as a consultant, advisor or nonemployee director of the Company or Subsidiary, this Option shall terminate on the later of (X) the close of business on the ONE-month anniversary date of the termination of all of Optionee's relationships with the Company or Subsidiary and (Y) the close of business on the date that is sixty (60) days after the date on which affiliates are no longer restricted from selling, transferring or otherwise disposing of the shares of stock received in the change of control transaction. In addition, this Option shall not, upon Optionee's termination of employment, be treated as an incentive stock option within the meaning of Code Section 422. In such period following the termination of Optionee's employment, this Option shall be fully exercisable unless the acceleration of the exercisability of this Option has been prevented as provided in Section 13 of the Plan, in which case this Option shall be exercisable only to the extent the Option was exercisable on the vesting date immediately preceding such termination of employment, but had not previously been exercised. To the extent this Option was not exercisable upon such termination of employment, or if Optionee does not exercise the Option within the time specified in this Paragraph 2(c), all rights of Optionee under this Option shall be forfeited. For purposes of this Paragraph 2(c), a "change of control transaction" means an acquisition of the Company through the sale of substantially all of the Company's assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization, reclassification, extraordinary dividend, divestiture (including a spin-off) or liquidation of the Company. d. DEATH. In the event of Optionee's death, this Option shall terminate on the earlier of (i) the close of business on the six-month anniversary date of the date of Optionee's death, and (ii) the expiration date of this Option stated in Paragraph 2(a) above. In such period following Optionee's death, this Option shall be exercisable by the person or persons to whom Optionee's rights under this Option shall have passed by Optionee's will or by the laws of descent and distribution only to the extent the Option was exercisable on the vesting date immediately preceding the date of Optionee's death. If such person or persons do not exercise this Option within the time specified in this Paragraph 2(d), all rights under this Option shall be forfeited. e. RETIREMENT. If Optionee's employment with the Company or any Subsidiary terminates because of retirement, this Option shall immediately become exercisable to the extent of 100% of the aggregate number of shares specified in Paragraph 1 above and shall terminate on the expiration date of this Option stated in Paragraph 2(a) above; provided, however, that if Optionee exercises this Option on a date that is after the three-month anniversary of Optionee's retirement, this Option shall not be treated as an incentive stock option within the meaning of Code Section 422. If Optionee does not exercise the Option within the time specified in this Paragraph 2(e), all rights of Optionee under this Option shall be forfeited. For purposes of this Paragraph 2(e), "retirement" shall mean termination of employment with the Company or Subsidiary after reaching age fifty-five (55) and completing a minimum of ten (10) years of service with the Company or Subsidiary. Notwithstanding the foregoing, if, during the period that this Option remains exercisable, Optionee directly or indirectly, engages in (whether as an employee, consultant, proprietor, partner, director or otherwise), has any ownership interest in, or participates in the financing, operation, management or control of any E-20 firm, corporation or business that engages in or intends to engage in business that is in direct competition with the Company's principal business as defined and discussed in the documents filed by the Company with the Securities Exchange Commission (collectively referred to as "competitive activity"), this Option shall immediately terminate on the date on which Optionee first engages in such competitive activity or, if earlier, on the expiration date of this Option stated in Paragraph 2(a) above, and all rights of Optionee under this Option shall be immediately forfeited. 3. MANNER OF EXERCISE. a. GENERAL. The Option may be exercised only by Optionee (or other proper party in the event of death or incapacity), subject to the conditions of the Plan and subject to such other administrative rules as the Administrator may deem advisable, by delivering within the Option Period written notice of exercise to the Company at its principal office. The notice shall state the number of shares as to which the Option is being exercised and shall be accompanied by payment in full of the Option price for all shares designated in the notice. The exercise of the Option shall be deemed effective upon receipt of such notice by the Company and upon payment that complies with the terms of the Plan and this Agreement. The Option may be exercised with respect to any number or all of the shares as to which it can then be exercised and, if partially exercised, may be so exercised as to the unexercised shares any number of times during the Option period as provided herein. b. FORM OF PAYMENT. Subject to approval by the Administrator, payment of the Option price by Optionee shall be in the form of cash, personal check, certified check or previously acquired shares of Common Stock of the Company, or any combination thereof. Any stock so tendered as part of such payment shall be valued at its Fair Market Value as provided in the Plan. For purposes of this Agreement, "previously acquired shares of Common Stock" shall include shares of Common Stock that are already owned by Optionee at the time of exercise. c. STOCK TRANSFER RECORDS. As soon as practicable after the effective exercise of all or any part of the Option, Optionee shall be recorded on the stock transfer books of the Company as the owner of the shares purchased, and the Company shall deliver to Optionee one or more duly issued stock certificates evidencing such ownership. All requisite original issue or transfer documentary stamp taxes shall be paid by the Company. 4. MISCELLANEOUS. a. EMPLOYMENT; RIGHTS AS SHAREHOLDER. This Agreement shall not confer on Optionee any right with respect to continuance of employment by the Company or any of its Subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment. Optionee shall have no rights as a shareholder with respect to shares subject to this Option until such shares have been issued to Optionee upon exercise of this Option. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 13 of the Plan. b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held, until such time that such Common Stock is registered and freely tradable under applicable state and federal securities laws, for Optionee's own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will be not transferred or disposed of except in compliance with applicable state and federal securities laws. c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and subject to Section 13 of the Plan, certain changes in the number or character of the Common Stock of the Company (through sale, merger, consolidation, exchange, reorganization, divestiture (including a spin-off), liquidation, recapitalization, stock split, stock dividend or otherwise) shall result in an adjustment, reduction or enlargement, as appropriate, in Optionee's rights with respect to any unexercised portion of the Option (I.E., Optionee shall have such "anti-dilution" rights under the Option with respect to such events, but shall not have "preemptive" rights). d. SHARES RESERVED. The Company shall at all times during the option period reserve and keep available such number of shares as will be sufficient to satisfy the requirements of this Agreement. e. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION. In the event of a disqualifying disposition of the shares acquired through the exercise of this Option, Optionee hereby agrees to inform the Company E-21 of such disposition. Upon notice of a disqualifying disposition, the Company may take such action as it deems appropriate to insure that, if necessary to comply with all applicable federal or state income tax laws or regulations, all applicable federal and state payroll, income or other taxes are withheld from any amounts payable by the Company to Optionee. If the Company is unable to withhold such federal and state taxes, for whatever reason, Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal or state law. Optionee may, subject to the approval and discretion of the Administrator or such administrative rules it may deem advisable, elect to have all or a portion of such tax withholding obligations satisfied by delivering shares of the Company's Common Stock having a fair market value equal to such obligations. f. NONTRANSFERABILITY. During the lifetime of Optionee, the accrued Option shall be exercisable only by Optionee or by the Optionee's guardian or other legal representative, and shall not be assignable or transferable by Optionee, in whole or in part, other than by will or by the laws of descent and distribution. g. 1997 STOCK OPTION PLAN. The Option evidenced by this Agreement is granted pursuant to the Plan, a copy of which Plan has been made available to Optionee and is hereby incorporated into this Agreement. This Agreement is subject to and in all respects limited and conditioned as provided in the Plan. The Plan governs this Option and, in the event of any questions as to the construction of this Agreement or in the event of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides. h. LOCKUP PERIOD LIMITATION. Optionee agrees that in the event the Company advises Optionee that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Optionee hereby agrees that for a period not to exceed 180 days from the prospectus, Optionee will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s). i. BLUE SKY LIMITATION. Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives Optionee 15 days' prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan which is not exercised prior to or contemporaneously with such public offering. Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to Optionee at the address of Optionee on file with the Company. j. ACCOUNTING COMPLIANCE. Optionee agrees that, in the event a "change of control transaction" (as defined in Paragraph 4(g) above) is treated as a "pooling of interests" under generally accepted accounting principles and Optionee is an "affiliate" of the Company or any Subsidiary (as defined in applicable legal and accounting principles) at the time of such change of control transaction, Optionee will comply with all requirements of Rule 145 of the Securities Act of 1933, as amended, and the requirements of such other legal or accounting principles, and will execute any documents necessary to ensure such compliance. k. STOCK LEGEND. The Administrator may require that the certificates for any shares of Common Stock purchased by Optionee (or, in the case of death, Optionee's successors) bear an appropriate legend to reflect the restrictions of Paragraphs 4(b), 4(h), 4(i) and 4(j) of this Agreement. l. SCOPE OF AGREEMENT. This Agreement shall bind and inure to the benefit of the Company and its successors and assigns and Optionee and any successor or successors of Optionee permitted by Paragraph 2 or Paragraph 4(f) above. m. ARBITRATION. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Ramsey County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this E-22 Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Ramsey County, Minnesota. E-23 EX-10.10 3 EXHIBIT 10.10 EXHIBIT 10.10 - SEPARATION AGREEMENT WITH DONALD D. MAURER EXHIBIT A SEPARATION AGREEMENT This Agreement (the "Agreement) is hereby entered into by and between EMPI, INC. (the "Company") and DONALD D. MAURER ("Executive") effective as of May 1, 1997. RECITALS Donald D. Maurer is the founder and current Chairman of the Board and Chief Scientific Officer of the Company. On May 1, 1993, the Company and Executive signed an Employment Agreement with a five-year term under which Executive was to serve as the Company's Chairman of the Board and as an officer of the Company. The Board of Directors of the Company is deeply appreciative of the leadership and many contributions of Executive, without which the Company would not be the success it is today. The Board of Directors believes, however, that from a corporate governance viewpoint, it is in the best interests of the Company to effect an early termination of Executive's Employment Agreement and to affirm a plan of succession. Accordingly, the Company has terminated this Employment Agreement and in consideration of Executive's covenants hereunder and Executive's agreement to release of claims set forth herein, the Company has made provision for Executive to remain as a non-officer employee of the Company through April 30, 1998, and for certain payments and other benefits to be paid to Executive. AGREEMENT Now therefore for good and valuable consideration, the parties agree as follows: 1. COMPANY. Company, as used herein, means Empi, Inc., its successors and assigns, its subsidiaries, and its present and former directors, officers, shareholders, employees and agents, whether in their individual or official capacities. 2. EXECUTIVE. Executive, as used herein, means Donald D. Maurer and anyone who has or obtains legal rights or claims through him. 3. RESIGNATIONS. Effective as of the Company's 1997 Annual Meeting of Shareholders, Executive will resign as Chief Scientific Officer of the Company. Effective as of the date of the Company's 1998 Annual Meeting of Shareholders, Executive will resign as Chairman of the Board of the Company and assume the honorary position of Chairman Emeritus until his term as a director of the Company expires in 1999. Effective as of the Company's 1999 Annual Meeting of Shareholders, Executive will resign as a director of the Company. 4. EMPLOYMENT AND DUTIES. a. TERM AND DUTIES. From the date of the Company's Annual Meeting through April 30, 1998, Executive will serve as the Company's Director of Research, reporting to Joseph Laptewicz, the Company's Chief Executive Officer ("CEO"). Executive will perform such functions and duties as agreed upon by the CEO and himself. b. TIME COMMITMENT. The Company recognizes this one-year employment period to be a time of transition and desires to facilitate Executive's pursuit of other interests. Accordingly, Executive will be on a full-time work schedule for a maximum of three months, an 80% work schedule during the second three months, a E-24 60% work schedule during the third three months and a 40% work schedule during the last three months. c. COMPENSATION PAYMENTS. Executive will be paid at his current salary throughout the one-year Employment Period and he will continue to receive his regular automobile and cellular telephone allowance during this period. Executive in his discretion may determine when to take the salary payments, in equal installments or in one or two lump sum payments as he determines in his discretion. For 1997, Executive will continue to participate in the Company's incentive bonus plans and will be eligible for stock options granted under the Company's Incentive Plan in accordance with the Employment Agreement between Executive and the Company dated May 1, 1993 (the "Employment Agreement"). The 1997 bonus payment, if any, will be paid to Executive concurrently with the payment of bonuses to the other participants in the Incentive Plan. All stock options granted to Executive, if any, will be 100% vested upon grant. All other benefits currently provided to Executive will continue until May 1, 1998. Benefits after May 1, 1998 will be as set forth in Section 5 of this Agreement. d. STOCK OPTIONS. All stock options currently held by Executive will be deemed to be immediately exercisable in accordance with Section 6(a)(iii) of his Employment Agreement. All such stock options will be exercisable until May 30, 1998 in compliance with the Company's stock option plan. e. OTHER BENEFITS. Accrued vacation pay, if any, will be paid in accordance with the Company's vacation pay policies for retiring employees. Executive will continue to participate in the Company's 401(k) Plan until April 30, 1998. Executive's 401(k) benefits as of April 30, 1998 will be allocated in accordance with the Plan terms. 5. CONSULTANT. a. TERM AND DUTIES. From May 1, 1998 through April 30, 2001, Executive shall serve as a consultant to the Company and shall perform such duties as are agreed upon by the CEO and Executive. b. TIME COMMITMENT. Executive agrees to provide consulting services up to a maximum of 40 days during each twelve (12) month period and such additional time as is agreeable to Executive. Executive will perform such services at such locations as the Company may reasonably request, but it is understood that without Executive's consent he will not be required to provide services for more than five consecutive days. c. COMPENSATION. For the first year as a consultant, Executive will continue to receive compensation equal to his salary in effect immediately prior to beginning his consultancy. In the second and third years, Executive will be paid $36,000 per year. Executive in his discretion may determine when to take the salary payments, in equal installments or in one or two lump sum payments. For any consulting time in excess of 40 days, Executive will be paid the sum of $1,200 per day or per partial day. d. BENEFITS. After May 1, 1998, Executive will receive no further benefits from the Company except the following insurance benefits. After May 1, 1998, the Company guarantees to provide Executive and his eligible family members health insurance coverage until the earliest date he becomes eligible for Medicare, either through the continuation of present Company health coverage or through the purchase of an individual health insurance plan providing reasonably comparable benefits. The costs of such health coverage will be assumed by the Company and the Company will pay to Executive on an annual ("grossed up") basis an amount to cover any tax costs if such insurance payments are taxable income to him. The Company and Executive will comply with COBRA requirements as applicable. The Company will continue to pay Ernst & Young for providing tax services to Executive in the years 1997, 1998, 1999 and 2000. E-25 e. TERMINATION. Executive may terminate his consulting arrangement with the Company at any time upon written notice to the Company. The Company may not terminate the consulting arrangement with Executive except for "Cause." Cause shall be defined as termination of the Executive because of: (1) gross misconduct, dishonesty or disloyalty; (2) willful and material breach of this Agreement by Executive; or (3) conviction or entry of a plea of guilty or nolo contendere to any felony or gross misdemeanor or the entry of any final civil judgment in connection with any allegation of fraud, misrepresentation, misappropriation or any other intentional tort or statutory violation. 6. INVENTIONS. a. DEFINITIONS. For purpose of this Agreement: (i) "Invention" means by invention, enhancement, alteration, modification improvement, discovery, new idea, formula, process, design, trade secret or other useful technical writing, whether or not copyrightable or patentable, relating to the existing or reasonably foreseeable business of the Company. (ii) "Proprietary Information" means any information that is not generally known and relates to the Company's existing or reasonably foreseeable business which is not readily disclosed by inspection of the Company's products and has been expressly or implicitly protected by the Company from unrestricted use by persons not associated with the Company, including trade secrets and Inventions. Proprietary Information includes, but is not limited to, information contained in or relating to the Company's product designs, tolerances, manufacturing methods, processes, techniques, treatment or chemical composition of material, plant layout, tooling, marketing plans or proposals, and customer information. b. DISCLOSURE AND ASSIGNMENT. Executive agrees to promptly disclose to the Company in writing complete information concerning all Inventions and Proprietary Information made, generated, discovered, developed, conceived, perfected or first reduced to practice by Executive alone or in conjunction with others, during or after working hours, while employed by the Company that: (i) Relate to any subject matter pertaining to Executive's employment or consultancy; (ii) Relate to or is directly or indirectly connected with the business, products, projects or Proprietary Information of the Company; or (iii) Involve the use of any time, material or facility of the Company. Executive hereby acknowledges that all said Inventions and Proprietary Information shall be "work made for hire" as defined in 17 U.S.C. Section 101 (1976), as amended, and as such, shall be the exclusive property of the Company. Executive hereby assigns to the Company all his right, title and interest in such Inventions and Proprietary Information, except as otherwise specifically agreed by the Company in writing. c. NONDISCLOSURE OF PROPRIETARY INFORMATION. Unless authorized in writing by an Officer or General Counsel for the Company, Executive will not divulge or use any of the Proprietary Information for his own or another's benefit, either during his employment or afterwards, nor will Executive accept any employment which would, by the nature of the position, inherently involve the use or disclosure by him of Proprietary Information. E-26 d. LIMITATION OF SECTION 6(B). The provisions of Section 6(b) shall not apply to any Invention meeting all of the following conditions: (i) Such Invention was developed entirely on Executive's own time; (ii) Such Invention was made without the use of any of the Company's equipment, supplies, facility or trade secret information; (iii) Such Invention does not relate (1) directly to the business of the Company or (2) to the Company's actual or demonstrably anticipated research and development; and (iv) Such Invention does not result from any work performed by Executive for the Company. e. ASSISTANCE OF EXECUTIVE. Executive agrees, at the Company's expense, to give the Company all assistance it reasonably requires to perfect, protect, and use its rights to Inventions and Confidential Information. In particular, but without limitation, Executive agrees to sign all documents, do all things, and supply all information that the Company may deem necessary or desirable to (i) transfer or record the transfer of Executive's entire right, title, and interest in Inventions and Proprietary Information; and (ii) enable the Company to obtain patent, copyright, or trademark protection for Inventions anywhere in the world. f. CONTINUING OBLIGATIONS AFTER TERMINATION OF EMPLOYMENT. The obligations of this Section 6 shall continue beyond the termination of Executive's employment with respect to Inventions conceived or made by Executive during the period of Executive's employment with the Company and shall be binding upon Executive's assigns, executors, administrators, and to other legal representatives. In the event Executive is called upon to render assistance to the Company pursuant to Section 6(c) after termination of Executive's employment or consultancy with the Company, the Company shall pay Executive reasonable compensation for the assistance rendered and shall call upon Executive for assistance at such reasonable times so as not to interfere with Executive's new employment or business. For purposes of this Agreement, any Invention or discovery relating to the business of the Company upon which Executive files a patent application within one (1) year after termination of Executive's employment or consultant relationship with the Company shall be presumed to have been made while Executive was employed by the Company or for which he provided services as a consultant, subject to proof to the contrary by good faith, written and duly corroborated records establishing that such Invention or discovery was conceived and made by Executive following termination of employment. g. RECORDS. Executive shall keep complete, accurate and authentic accounts, notes, data and records of all Inventions in manner and form requested by the Company. Such accounts, notes, data and records shall be the property of the Company, and upon its request Executive shall promptly surrender the same to the Company. 7. AGREEMENT NOT TO COMPETE. a. RESTRICTIVE COVENANT. Executive agrees that until May 1, 2001, he shall not, directly or indirectly, engage in competition with the Company in any capacity (e.g., as an advisor, principal, agent, partner, officer, director, stockholder or employee) as follows: 1) For as long as Executive serves on the Company's Board of Directors, Executive will not compete with the Company in any way with the business of the Company currently being conducted by the Company or which business the Company intends to conduct as evidenced by a E-27 business plan communicated to Executive and approved by the Board of Directors. 2) During the period in which Executive serves as a consultant to the Company, Executive will not compete in any way with the business of the Company or which the Company intends to conduct if information about its intended business plans was made known to Executive in his capacity as a director of or a consultant to the Company. The Company agrees that Executive will not be precluded from serving as an employee or consultant to a person or company interested in implantable medical devices or any other devices which the Company is not then manufacturing, marketing or developing and are not included in a business plan which has been communicated to Executive as a device which the Company intends to manufacture, market or develop. If Executive is unsure about the application of this Restrictive Covenant to his service as an employee or consultant to another organization or his ownership in another organization, he may request a waiver from the Company's Corporate Governance Committee. If a waiver is granted, it will be binding upon the Company and the Executive will be free to work for or consult with the party named in the request. If a waiver is not granted, Executive will not be precluded from testing the validity of this Restrictive Covenant in a court of law. b. EQUITABLE REMEDIES. The payments to be made to Executive through May 1, 2001 as set forth in this Agreement are in part in consideration for Executive's agreement not to compete. If Executive violates his agreement not to compete, the Company shall have the right to terminate his payments and seek injunctive relief prohibiting Executive from competing against the Company. c. GEOGRAPHIC EXTENT OF COVENANT. The obligations of Executive not to compete shall apply to the entire United States. d. NON-SOLICITATION. Executive further agrees that through May 1, 2001, he will not solicit or encourage employees of the Company to terminate their employment with the Company or in any way interfere or attempt to interfere with the Company's relationship with any current or potential customers of Empi. e. CONSTRUCTION OF AGREEMENT NOT TO COMPETE. To the extent any provision of this Section 7 shall be invalid or unenforceable, it shall be considered deleted herefrom and the remainder of such provision and this Section 7 shall be unaffected and shall continue in full force and effect. In furtherance to and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Section 7 be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which are validly and enforceably covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Section 7 be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its expressed terms) possible under applicable laws. 8. RELEASES. Executive agrees that, on or before May 1, 1998, he will execute a separate written "Release of Claims" which the Company will provide and which will in substantial part provide as follows: a. RELEASE OF CLAIMS. Executive will release, agree not to sue, and forever discharge Empi, Inc., its subsidiaries, successors and assigns, insurers, and affiliated and predecessor companies, their successors and assigns, their insurers, and the present and former owners, officers, directors, employees, shareholders, consultants, and agents of any of them, whether in their individual or official capacities, and the current and former trustees or administrators of any pension or other benefit plan applicable to the employees or former employees of Empi, Inc., in their official and individual E-28 capacities, from all claims and demands whatsoever, whether known or unknown, in law or equity, Executive ever had, now have, or shall have up to and through the date of his signing this Release of Claims, including, but not limited to, any claims arising by statute, in tort or contract, arising out of or in connection with my employment by Empi, Inc., the termination of that employment, or otherwise. This release includes, without limiting the generality of the foregoing, any claims Executive has or may have for wages, commissions, penalties, vacation pay or other benefit, defamation, or improper discharge (based on contract, at common law or under any federal, state or local statute or ordinance prohibiting discrimination in employment, particularly discrimination based on race, sex, national origin, age, color, creed, religion, marital status, disability, or sexual orientation, including but not limited to the Minnesota Human Rights Act, Minn. Stat. Section 363.01 ET SEQ., Title VII of the Civil Rights Act of 1964 as amended, 42 U.S.C. Section 2000e ET SEQ., and the Age Discrimination in Employment Act, 29 U.S.C. Section 621 ET SEQ.), or attorney's fees or costs. b. NOTIFICATION OF RIGHTS. Executive is hereby notified of his right to rescind the Release of Claims with regard to claims arising under the Minnesota Human Rights Act, Minnesota Statutes Chapter 363, within 15 days after Executive signs this Release of Claims. In order to be effective, the rescission must be in writing and delivered to Joseph E. Laptewicz, Empi, Inc., 599 Cardigan Road, St. Paul, Minnesota 55126-3965 by hand or mail. If delivered by mail, the rescission must be postmarked within the required period, properly addressed to Joseph E. Laptewicz as set forth above, and sent by certified mail, return receipt requested. c. FULL RELEASE. Executive will have read the above Release of Claims and understand it as a full and final release of all claims he may have against Empi, Inc. and the other entities and individuals covered by this Release of Claims. He shall agree that he has had an opportunity to consult with an attorney and that Executive will enter into this Release of Claims knowingly and voluntarily. 9. CORPORATE INFORMATION. Executive agrees that he will not remove any proprietary corporate information from the Company's offices, including the office he occupied. The determination of what information is proprietary will be in the discretion of the Company. Subject to the foregoing, corporate information shall include, but not be limited to, sales plans, customer information, employee information, business correspondence and any other information which is related to Empi, Inc. or its subsidiaries or their businesses. All personal property of the Executive, property which is not owned by or is not proprietary or confidential to the Company, will be returned to Executive. 10. ASSIGNMENT. The obligations of Executive under this Agreement may not be assigned by Executive. However, in the event of Executive's mental or physical disability, incapacitation or death, all remaining payments shall continue to be made to Executive's spouse, or in the event of the death of the Executive's spouse, the payments will be made to Executive's estate. As defined in this Section 10, payments shall include, but not be limited to, Executive's salary through April 1998, bonus payments for 1997 and consulting payments through April 2001. Unexercised option rights may be exercised by Executive's estate through May 1998. In the event of Executive's death, the Company will provide health insurance benefits to Executive's wife through the earliest date when Executive would have been eligible for Medicare. The Company's rights and obligations under this Agreement will inure to the benefit and be binding upon the Company's successors and assignees. In the event that the Company is acquired, merged or reorganized, Executive may choose to continue consulting with the Company, but he will have no obligation to do so. If he chooses to consult with the Company after its acquisition, merger or reorganization, it will be on terms agreed upon with the Company's new owners. Whether or not Executive chooses to enter in a new consulting agreement with the new owners, the Company will honor its payment obligations under Section 5 above. 11. SEVERABILITY. If a court rules that any part of this Agreement is not enforceable, that part may be modified by the court to make it enforceable. The parties expressly agree that the restrictions contained in Sections 4, 6 and 7 are reasonable and should be enforced to the maximum extent and scope possible. E-29 12. DUE AUTHORIZATION. The Board of Directors of the Company has approved this Agreement and authorized Kenneth Tempero to execute the Agreement on behalf of the Board of Directors and the Company. 13. GOVERNING LAW. Any disputes arising under this Agreement shall be governed by the laws of the State of Minnesota. 14. FULL AGREEMENT. This Agreement contains the full agreement of the parties and may not be modified, altered, or changed in any way except by written agreement signed by both parties. Except as expressly stated in this Agreement, the parties agree that this Agreement supersedes and terminates any and all oral and written prior agreements and understandings between the parties. EMPI, INC. Dated: May 12, 1997 By /s/ Kenneth Tempero ----------------------- ------------------------------------------ Kenneth Tempero, on behalf of the Board of Directors of Empi, Inc. Dated: May 12, 1997 /s/ Donald D. Maurer ----------------------- --------------------------------------------- Donald D. Maurer E-30 EXHIBIT B AMENDMENT TO SEPARATION AGREEMENT This Amendment to Separation Agreement (the "Amendment"), made and entered into by and between EMPI, INC. (the "Company") and DONALD D. MAURER ("Executive") effective as of October 14, 1997, amends the Separation Agreement entered into between the Company and Executive effective as of May 1, 1997 (the "Separation Agreement"). RECITALS Executive has been employed with the Company since May 1, 1997 pursuant to the terms and conditions set forth in the Separation Agreement. Executive and the Company now desire to amend certain terms and conditions of the Separation Agreement and to set forth those amendments in writing. AGREEMENT NOW, THEREFORE, in consideration of the mutual agreements contained herein, the parties agree as follows: 1. Paragraph 3, the second sentence, of the Separation Agreement (Resignations) is deleted in its entirety and replaced by the following sentence: Effective as of October 14, 1997 Executive will resign as Chairman of the Board of Directors of the Company and assume the honorary position of Chairman Emeritus of the Board until his term as a director of the Company expires in 1999. This position is honorary only and as Chairman Emeritus, Executive will not serve as a legal representative of the Company. As Chairman Emeritus, Executive will serve at the discretion of the Board of Directors. 2. Paragraph 4.a. of the Separation Agreement (Term and Duties) is deleted in its entirety and replaced by the following paragraph: a. TERM AND DUTIES. Effective as of October 14, 1997, through April 30, 1998, Executive will serve as a Senior Adviser to the Company, reporting to Joseph Laptewicz, the Company's Chief Executive Officer ("CEO"). Executive will perform only such functions and duties as reasonably agreed upon by the CEO and Executive. 3. Paragraph 4.b. of the Separation Agreement (Time Commitment) is deleted in its entirety and replaced by the following paragraph: b. TIME COMMITMENT. Effective as of October 14, 1997 through April 30, 1998, Executive will maintain a work schedule sufficient to perform only those functions and duties reasonably agreed upon by the CEO and Executive pursuant to Paragraph 4.a. above. It is understood that Executive will perform his work duties on the Company's premises only if expressly requested by the CEO. 4. Paragraph 6.b. of the Separation Agreement (Disclosure and Assignment) is clarified by inserting the phrase "or under contract as a consultant" immediately after the phrase "while employed". 5. Paragraph 6.c. of the Separation Agreement (Nondisclosure of Proprietary Information) is clarified by inserting the phrase "or consultant relationship" immediately after the phrase "nor will Executive accept any employment". 6. Paragraph 6.f., the heading and first sentence, of the Separation Agreement (Continuing Obligations after Termination of Employment) are deleted in their entirety and replaced by the following heading and sentence: E-31 CONTINUING OBLIGATIONS AFTER TERMINATION OF EMPLOYMENT AND CONSULTANT RELATIONSHIP. The obligations of this Section 6 shall continue beyond the termination of Executive's employment and consultant relationship with respect to Inventions conceived or made by Executive during the period of Executive's employment and/or consultant relationship with the Company and shall be binding upon Executive's assigns, executors, administrators, and to other legal representatives. 7. Notwithstanding the amendments set forth above in Paragraphs 4, 5 and 6 of this Amendment, the Company and Executive do not desire to change the spirit and the intentions of the parties as they were expressed in Paragraph 6 of the aforesaid Separation Agreement. The parties hereby reaffirm in "plain English" that they understand Executive is required to disclose and assign to the Company any invention or discovery which he made during his employment or consultancy if: (i) the invention is related to the Company's business or its actual or demonstrably anticipated research and development; or (ii) the invention was made with the use of the Company's proprietary information or any of its resources. Those inventions or discoveries made during this period which are not related to the Company's business and which were not made with the use of the Company's proprietary information or resources are the sole property of Executive and need not be disclosed or assigned to the Company. 8. Paragraph 8.b., the first sentence, of the Separation Agreement (Notification of Rights) is deleted in its entirety and replaced by the following sentence: Executive is hereby notified of his right to rescind the Release of Claims with regard to claims arising under the Minnesota Human Rights Act, Minnesota Statutes Chapter 363, within 15 calendar days of his signing this Release of Claims, and with regard to his rights under the federal Age Discrimination in Employment Act, 29 U.S.C. Section 621 ET SEQ., within 7 calendar days of his signing this Release of Claims, rescission periods to run concurrently. 9. Paragraph 8.c., of the Separation Agreement (Full Release) is amended by adding the following sentence immediately after the current second sentence: Executive also shall agree that the Company informed him that he has not less than 21 days from his receipt of the Release of Claims to consider whether the terms are acceptable to him and that, by his signature to the Release of Claims, he acknowledges that he has had the benefit of the 21-day period. 10. Except as specifically provided herein, all other terms of the Separation Agreement remain unchanged and are hereby reaffirmed by the Company and Executive. IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written. EMPI, INC. Dated: October 20, 1997 By /s/ Kenneth Tempero -------------------- ------------------------------- Kenneth Tempero, on behalf of the Board of Directors of Empi, Inc. Dated: October 24, 1997 /s/ Donald D. Maurer -------------------- ------------------------------- Donald D. Maurer E-32 EX-23 4 EXHIBIT 23 EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Form S-8, Registration Statement Nos. 33-28177, 33-42510, 33-49614, 33-49616, 333-02199, 333-18549 and 333-27249 dated May 4, 1989, August 23, 1991, July 10, 1992, July 10, 1992, April 3, 1996, December 23, 1996 and May 16,1997, respectively, and in Registration Statement No. 33-57780 on Form S-3 dated February 3, 1993, of our report dated January 23, 1998, with respect to the consolidated financial statements and schedule of Empi, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Minneapolis, Minnesota March 12, 1998 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,020 21,480 22,927 4,881 8,003 55,495 17,496 10,990 63,893 5,138 0 0 0 9,847 48,842 58,689 73,468 73,468 19,073 19,073 38,290 2,442 2 17,100 6,584 10,516 0 0 0 10,516 1.30 1.27
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