THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED AS OF DECEMBER 12,
1997 (THE "WARRANT AGREEMENT"), AMONG INTEGRATED ORTHOPAEDICS, INC., A TEXAS
CORPORATION (THE "ISSUER"), FW INTEGRATED ORTHOPAEDICS INVESTORS, L.P., AND FW
INTEGRATED ORTHOPAEDICS INVESTORS II, L.P., AS THE WARRANT AGREEMENT MAY BE
MODIFIED AND SUPPLEMENTED AND IN EFFECT FROM TIME TO TIME, AND NO TRANSFER OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL
SUCH CONDITIONS HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE WARRANT
AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL EXECUTIVE OFFICE OF
THE ISSUER. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE,
AGREES TO BE BOUND BY THE PROVISIONS OF THE WARRANT AGREEMENT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
ACCORDINGLY, SUCH SECURITIES MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED
OF EXCEPT IN COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
Number of
Stock Units: 2,500,000 Warrant No. A-2
WARRANT
to Purchase Common Stock of
INTEGRATED ORTHOPAEDICS, INC.
THIS IS TO CERTIFY THAT FW Integrated Orthopaedics Investors II, L.P., or
its registered assigns (the "Holder"), is entitled to purchase 2,500,000 Stock
Units at the Exercise Price (as defined below), in whole or in part, from time
to time from Integrated Orthopaedics, Inc., a Texas corporation (the "Issuer"),
at any time on and after July 1, 2000, but not later than 5:00 p.m., Houston
time, on the Expiration Date (as defined below), subject to the terms and
conditions hereinbelow provided. All capitalized terms unless otherwise defined
herein shall have the meanings set forth in the Warrant Agreement. "Exercise
Price" per share of Warrant Stock shall mean $8.00; provided, however, that,
upon receipt of the requisite vote of the holders of Common Stock approving the
following adjustment, the Exercise Price shall be the lesser of (i) $8.00, (ii)
the average closing sales price of the Common Stock for the twenty trading days
immediately prior to the Closing Date, (iii) the average closing sales price of
the Common Stock for the twenty trading days immediately following the Closing
Date, (iv) the average closing sales price of the Common Stock for the twenty
trading days immediately following public disclosure of the Issuer's earnings
for calendar 1998 and (v) the average closing sales price of the Common Stock
for the twenty trading days immediately following public disclosure of the
Issuer's earnings for calendar 1999. "Expiration Date" shall mean the fifth
anniversary of the date on which this Warrant first becomes exercisable for
Warrant Stock; provided, however, that the Issuer shall provide written notice
to the Holder at least ten days before the Expiration Date (but no more than 30
days before the Expiration Date) informing the Holder that this Warrant is
subject to this expiration provision; provided further that if no such notice is
provided as contemplated by the immediately preceding proviso, the Expiration
Date shall mean the date which is ten days after Holder's receipt of such
notice. The number of Stock Units that this Warrant is exercisable for may be
reduced in accordance with Schedule B hereto based on the Issuer's Revenue and
EBITDA (each as defined below) for calendar years 1998 and 1999. "Revenue"
shall mean accrual based gross clinic revenues less provisions for doubtful
accounts, contractual adjustments and amounts retained by physician groups,
which shall be audited by the Issuer's auditors in the course of their annual
audit, consistent with past practices. "EBITDA" shall mean Revenue less all
expenses except interest, taxes, depreciation and amortization. For purpose of
calculating Revenue and EBITDA herein, any Revenue or EBITDA attributable to
businesses other than the provision of professional medical services and
ancillary services by Physician Practice Groups (as defined below) shall be
excluded from such calculation. "Physician Practice Groups" are defined as (i)
physicians and groups of physicians engaged in, and professional medical
corporations and other entities employing or engaging physicians for, the
provision of medical services and that have a management or similar relationship
with the Issuer or a Subsidiary of the Issuer and (ii) physician practice
management companies acquired by the Issuer or any of its Subsidiaries. (In
connection with any acquisition consummated by the Issuer subsequent to the
Closing Date, the acquired business will be considered a Physician Practice
Group for purposes of
2
this Warrant unless the Purchasers shall object to such designation. If the
Issuer and the Purchasers are unable to agree upon a designation with respect to
an acquisition, the Board of Directors of the Issuer shall submit the issue for
resolution to a special committee consisting of independent accountants and
independent directors created by the Board of Directors of the Issuer. The
determination of the special committee shall be final and binding upon the
Issuer and Purchasers.)
Notwithstanding any other provision herein, upon a Change of Control (as
defined below), this Warrant shall immediately become exercisable, in whole or
in part, from time to time, at any time prior to the Expiration Date. "Change
of Control" is defined as (i) the acquisition by another person or group of
persons of 35% or more of the outstanding shares of Common Stock of the Issuer
(other than through a merger, consolidation or business combination with another
physician practice management company approved by the Purchasers), (ii) a
majority change in the Board of Directors over a twelve month period, (iii) a
merger, consolidation, or other similar transaction with another entity in which
the Issuer is not the surviving entity or in which the Issuer's shareholders do
not own a majority of the shares in the combined entity or (iv) a sale of all or
substantially all of the Issuer's assets.
The Holder may exercise this Warrant, on one or more occasions, on any
Business Day, in whole or in part, by delivering to the Issuer:
(a) a written notice of the Holder's election to exercise this Warrant,
which notice shall specify the number of Stock Units to be purchased
(the "Exercise Notice");
(b) payment of the aggregate Exercise Price for the number of Stock Units
as to which this Warrant is being exercised (payable as set forth
below); and
(c) this Warrant.
The Exercise Price shall be payable (a) in cash or by certified or official
bank check payable to the order of the Issuer or by wire transfer of immediately
available funds to the account of the Issuer or (b) by delivery of this Warrant
Certificate to the Issuer for cancellation in accordance with the following
formula: in exchange for each share of Warrant Stock issuable on exercise of
each Warrant represented by this Warrant Certificate that is being exercised,
the Holder shall receive such number of shares of Warrant Stock as is equal to
the product of (i) the number of shares of Warrant Stock issuable upon exercise
of the Warrants being exercised at such time multiplied by (ii) a fraction, the
numerator or
3
which is the fair market value per share of Warrant Stock at such time minus the
Exercise Price per share of Warrant Stock at such time, and the denominator of
which is the fair market value per share of Warrant Stock at such time. Such
Exercise Notice shall be substantially in the form of Schedule A hereto. Upon
receipt thereof, the Issuer shall, as promptly as practicable and in any event
within five Business Days thereafter, execute or cause to be executed and
deliver or cause to be delivered to the Holder a certificate or certificates
representing the aggregate number of Warrant Stock and other securities issuable
upon such exercise and any other property to which such Holder is entitled.
The certificate or certificates for Warrant Stock so delivered shall be in
such denominations as may be specified in the Exercise Notice and shall be
registered in the name of the Holder or such other name or names as shall be
designated in such Exercise Notice. Such certificate or certificates shall be
deemed to have been issued and the Holder or any other Person so designated to
be named therein shall be deemed to have become a Holder of record of Warrant
Stock, including, to the extent permitted by law, the right to vote Warrant
Stock or to consent or to receive notice as a Shareholder, as of the date on
which the last of the Exercise Notice, payment of the Exercise Price and this
Warrant is received by the Issuer as aforesaid, and all taxes required to be
paid by the Holder, if any, pursuant to the Warrant Agreement, prior to the
issuance of Warrant Stock have been paid. If this Warrant shall have been
exercised only in part, the Issuer shall, at the time of delivery of the
certificate or certificates representing Warrant Stock and other securities,
execute and deliver to the Holder a new Warrant evidencing the rights of the
Holder to purchase the unpurchased Stock Units called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant, or, at
the request of the Holder, appropriate notation may be made on this Warrant and
the same returned to the Holder.
The Issuer shall not be required to issue a fractional amount of Warrant
Stock upon exercise of this Warrant. As to any fraction of a share of Warrant
Stock which the Holder would otherwise be entitled to purchase upon such
exercise the Issuer shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the fair market value per
share of Warrant Stock on the date of exercise.
THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES
THEREOF.
4
IN WITNESS WHEREOF, the Issuer has duly executed this Warrant.
Dated: December 12, 1997
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Xxxxxx X. Xxxxxx
---------------------
Name:
-------------------
Title:
------------------
Attest:
/s/ Xxxx X. Xxxxx
-------------------
Secretary
Schedule A
to
Warrant
FORM OF EXERCISE
(To be executed by the registered Holder hereof)
The undersigned registered owner of this Warrant irrevocably [exercises
this Warrant for the purchase of _______ Stock Units of INTEGRATED ORTHOPAEDICS,
INC. and herewith makes payment therefor, all at the price and on the terms and
conditions specified in this Warrant], [exchanges this Warrant for _______ Stock
Units of INTEGRATED ORTHOPAEDICS, INC., all on the terms and conditions
specified in this Warrant,] and requests that certificates for the shares of
Warrant Stock be issued in accordance with the instructions given below, and, if
such Stock Units shall not include all of the Stock Units to which the Holder is
entitled under this Warrant, that a new Warrant of like tenor and date for the
unpurchased balance of the Stock Units issuable hereunder be delivered to the
undersigned.
Dated:
--------------
--------------------------------------------------
(Signature of Registered Holder)
Instructions for issuance and
registration of Warrant Stock:
-----------------------------
Name of Registered Holder
(please print)
Social Security or Other Identifying
Number:
----------------------
Please deliver certificate to
the following address:
-----------------------------
Xxxxxx
-----------------------------
Xxxx, Xxxxx and Zip Code
Schedule B
to
Warrant
EXPIRATION SCHEDULE
Actual 1998 Revenue(1) Stock Units Expiring
------------------- --------------------
$48.1 million or less none
More than $48.1 million but *
less than $51.3 million
$51.3 million or more 625,000
---------------------
* One Stock Unit shall expire for every $5.12 of Revenue in excess of $48.1
million, but in no event shall more than 625,000 Stock Units expire.
Actual 1998 EBITDA(1) Stock Units Expiring
------------------ --------------------
$7.6 million or less none
More than $7.6 million but *
less than $8.1 million
$8.1 million or more 625,000
--------------------
* One Stock Unit shall expire for every $0.80 of EBITDA in excess of $7.6
million, but in no event shall more than 625,000 Stock Units expire.
Actual 1999 Revenue(2) Stock Units Expiring
------------------- --------------------
$115.5 million or less none
More than $115.5 million but *
less than $138.7 million
$138.7 million or more 625,000
----------------------
* One Stock Unit shall expire for every $37.12 of Revenue in excess of
$115.5 million, but in no event shall more than 625,000 Stock Units expire.
Actual 1999 EBITDA(2) Stock Units Expiring
------------------ --------------------
$22.5 million or less none
More than $22.5 million but *
less than $26.9 million
$26.9 million or more 625,000
---------------------
* One Stock Unit shall expire for every $7.04 of EBITDA in excess of $22.5
million, but in no event shall more than 625,000 Stock Units expire.
----------------------------
(1) As determined after application of Positive Carryback or Negative Carryback
(as such terms are defined below).
(2) As determined after application of Positive Carryforward or Negative
Carryforward (as such terms are defined below).
For purposes of calculating expired Stock Units pursuant to the foregoing
tables, the following provisions shall apply:
(a) if 1998 Revenue is greater than $51.3 million or 1998 EBITDA is greater
than $8.1 million, the amount of such overage shall be carried forward (a
"Positive Carryforward") and added to 1999 Revenue or 1999 EBITDA, as the case
may be;
(b) if 1998 Revenue is less than $48.1 million or 1998 EBITDA is less than
$7.6 million, the amount of such shortfall shall be carried forward (a "Negative
Carryforward") and subtracted from 1999 Revenue or 1999 EBITDA, as the case may
be;
(c) if 1999 Revenue is greater than $138.7 million or 1999 EBITDA is
greater than $26.9 million, the amount of such overage shall be carried back (a
"Positive Carryback") and added to 1998 Revenue or 1998 EBITDA, as the case may
be; and
(d) if 1999 Revenue is less than $115.5 million or 1998 EBITDA is less than
$22.5 million, the amount of such shortfall shall be carried back (a "Negative
Carryback") and subtracted from 1998 Revenue or 1998 EBITDA, as the case may be.
Expiring Warrants for all periods pursuant to the foregoing tables may
be determined only after the Issuer's audited financial statements for the year
ended December 31, 1999 are delivered because of the impact of Positive
Carrybacks or Negative Carrybacks.
Annex 2
To
Warrant Agreement
FORM OF ASSIGNMENT
(To be executed by the registered Holder hereof)
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the assignee named below all the rights of the
undesigned under this Warrant with respect to the number of shares of Warrant
Stock covered thereby set forth hereinbelow unto:
Number of Shares
Name of Assignee Address of Warrant Stock
--------------------------------------------------------------------------------
Dated:
-------------
--------------------------------------------------
Signature of Registered Holder
--------------------------------------------------
Name of Registered Holder
(Please Print)
Witness:
-----------
