EXHIBIT 10.50

EXPLANATORY NOTE TO THIS EXHIBIT

The representations and warranties included in this Securities Purchase
Agreement were made by the Company and OEP AC Holdings, LLC to each other. These
representations and warranties were made as of specific dates, only for purposes
of this Securities Purchase Agreement and for the benefit of the
parties thereto. These representations and warranties were subject to important
exceptions and limitations agreed upon by the parties, including being qualified
by confidential disclosures, made for the purposes of allocating contractual
risk between the parties rather than establishing these matters as facts, and
were made subject to a contractual standard of materiality that may be different
from the standard generally applicable under federal securities laws. This
Securities Purchase Agreement is filed with the Company’s annual report only to
provide investors with information regarding its terms and conditions, and not
to provide any other factual information regarding the Company or its business.
Moreover, information concerning the subject matter of the representations and
warranties may have changed, and may continue to change, after the date of this
Securities Purchase Agreement, and such subsequent information may or may not be
fully reflected in the Company’s public reports. Accordingly, investors should
not rely on the representations and warranties contained in this Securities
Purchase Agreement or any description thereof as characterizations of the actual
state of facts or condition of the Company, its subsidiaries or affiliates. The
information in this Securities Purchase Agreement should be considered together
with the Company’s public reports filed with the SEC.

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EXECUTION VERSION

ARTHROCARE CORPORATION

SECURITIES PURCHASE AGREEMENT

August 14, 2009

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TABLE OF CONTENTS

 

               Page 1.    PURCHASE AND SALE OF STOCK    1    1.1.    Sale and
Issuance of Series A Preferred Stock    1    1.2.    Closing    2 2.   
REPRESENTATIONS AND WARRANTIES OF THE COMPANY    2    2.1.    Organization, Good
Standing and Qualification    2    2.2.    Financial Statements    3    2.3.   
Authorization; Enforceable Agreement    4    2.4.    Indebtedness    5    2.5.
   Litigation    5    2.6.    Title    5    2.7.    Taxes    5    2.8.   
Subsidiaries    6    2.9.    Governmental Consents    6    2.10.    Permits and
Licenses    6    2.11.    Employee Benefits    7    2.12.    Valid Issuance of
Shares and Common Stock    7    2.13.    Capitalization    7    2.14.   
Investment Company Act    9    2.15.    Agreements    9    2.16.    Compliance
with Other Instruments    9    2.17.    Environmental Matters    10    2.18.   
Compliance with Laws    10    2.19.    Registration Rights; Voting Rights    11
   2.20.    Reports    11    2.21.    No Restriction on Ability to Pay Dividends
   11    2.22.    Intellectual Property    12    2.23.    Insurance    13   
2.24.    Brokers and Finders    13

 

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TABLE OF CONTENTS

(continued)

 

               Page 3.   

REPRESENTATIONS AND WARRANTIES OF THE INVESTOR

   13    3.1.    Private Placement    13    3.2.    Organization    15    3.3.
   Power and Authority    15    3.4.    Authorization; Enforceability    15   
3.5.    No Default or Violation    16    3.6.    Financial Capability    16 4.
   CONDITIONS TO THE INVESTOR’S OBLIGATIONS AT CLOSING    16    4.1.   
Representations and Warranties    16    4.2.    Performance    17    4.3.   
Compliance Certificate    17    4.4.    Certificate of Designations    17   
4.5.    Antitrust    17    4.6.    Ancillary Agreements    17    4.7.    Opinion
of Company Counsel    17    4.8.    Board of Directors    17    4.9.   
Nominating Committee    17    4.10.    Payment of Expenses    17 5.   
CONDITIONS TO THE COMPANY’S OBLIGATIONS AT CLOSING    18    5.1.   
Representations and Warranties    18    5.2.    Performance    18    5.3.   
Antitrust    18 6.    COVENANTS    18    6.1.    Efforts    18    6.2.   
Antitrust    18    6.3.    Negative Covenants Prior to Closing    19    6.4.   
Use of Proceeds    19    6.5.    Reservation of Common Stock; Issuance of Shares
of Common Stock    20    6.6.    Transfer Taxes    20    6.7.    Listing of
Shares    20

 

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TABLE OF CONTENTS

(continued)

 

               Page    6.8.    Pre-Closing Access; Ongoing Investigations    20
   6.9.    Information Rights/Management Rights    21    6.10.    Distributions
   22    6.11.    CEO Appointment    22 7.    PREEMPTIVE RIGHTS    22    7.1.   
Certain Definitions    22    7.2.    Preemptive Right    23 8.    VOTING    24
   8.1.    Voting Agreement as to Certain Matters    24    8.2.    Ability to
Vote on All Other Matters    24    8.3.    No Successors in Interest    24   
8.4.    Termination of Voting Agreement    24 9.    RESTRICTIONS ON TRANSFER   
25 10.    STANDSTILL    25 11.    BOARD MATTERS    27    11.1.    Definitions   
27    11.2.    Committees    27    11.3.    Board Nomination    27    11.4.   
Board Size    28    11.5.    Vacancies    28    11.6.    Notice of Step-Down of
Board Representation    28    11.7.    Rights of Preferred Directors    29 12.
   TERMINATION    29    12.1.    Termination of Agreement Prior to Closing    29
   12.2.    Effect of Termination Prior to Closing    29 13.    INDEMNIFICATION
   29 14.    PUBLICITY    30 15.    MISCELLANEOUS    31    15.1.    Governing
Law    31    15.2.    Submission to Jurisdiction; Venue; Waiver of Trial by Jury
   31

 

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TABLE OF CONTENTS

(continued)

 

               Page    15.3.    Survival    31    15.4.    Enforcement of
Agreement    32    15.5.    Successors and Assigns    32    15.6.    No Third
Party Beneficiaries    32    15.7.    No Personal Liability of Directors,
Officers, Owners, Etc.    33    15.8.    Entire Agreement    33    15.9.   
Notices, Etc.    33    15.10.    Delays or Omissions    34    15.11.    Expenses
   34    15.12.    Amendments and Waivers    34    15.13.    Counterparts    35
   15.14.    Severability    35    15.15.    Permitted Activities    35   
15.16.    Titles and Subtitles    35

 

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TABLE OF CONTENTS

(continued)

SCHEDULES AND EXHIBITS

 

Schedule A    Schedule of Investors Exhibit A    Form of Certificate of
Designations Exhibit B    Form of Registration Rights Agreement Exhibit C   
Definitions Exhibit D    Form of Opinion of Latham & Watkins LLP Exhibit E   
Form of Press Release Exhibit 2.5    Litigation

 

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SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”) is made as of the 14th day
of August, 2009, between ARTHROCARE CORPORATION, a Delaware corporation (the
“Company”), and OEP AC HOLDINGS, LLC, a Delaware limited liability company (the
“Investor”; the Investor together with any assignee or transferee of the Series
A Preferred Stock (as defined below) in accordance with the terms hereof, the
“Holders”).

W I T N E S S E T H:

WHEREAS, the Company wants to sell, and the Investor wants to buy, shares of the
Company’s Series A Preferred Stock, on the terms and conditions contained
herein;

WHEREAS, in connection with such sale and purchase, the Company is willing to
make certain representations and warranties and to agree to observe certain
covenants set forth herein for the benefit of the Investor, and the Investor
will rely on such representations, warranties and covenants as a material
inducement to its purchase of the Series A Preferred Stock;

WHEREAS, in connection with such sale and purchase, the Investor is willing to
make certain representations and warranties and to agree to observe certain
covenants set forth herein for the benefit of the Company, and the Company will
rely on such representations, warranties and covenants as a material inducement
to its sale of the Series A Preferred Stock; and

WHEREAS, in connection with such sale and purchase, the Company is willing to
grant certain preemptive rights as set forth herein and the Investor will rely
on such rights as a material inducement to the purchase of the Series A
Preferred Stock.

NOW THEREFORE, in consideration of the premises and of the respective
representations, warranties, covenants and conditions contained herein, the
parties hereto agree as follows:

1. Purchase and Sale of Stock.

1.1. Sale and Issuance of Series A Preferred Stock.

(a) The Company shall adopt and file with the Secretary of State of the State of
Delaware on or before the Closing (as defined below in Section 1.2) the
Certificate of Designations of the Series A Preferred Stock (as defined below)
in the form attached hereto as Exhibit A (the “Certificate of Designations”).

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(b) Subject to the terms and conditions of this Agreement, the Investor agrees
to purchase at the Closing, and the Company agrees to sell and issue to the
Investor at the Closing, that number of shares of the Company’s Series A 3.00%
Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred
Stock”), set forth opposite the Investor’s name on Schedule A hereto, at a
purchase price of $1,000.00 per share. The shares of Series A Preferred Stock to
be issued and sold by the Company to the Investor pursuant to this Agreement are
collectively referred to herein as the “Shares.” The Series A Preferred Stock
and the Shares will have the rights, preferences, privileges and restrictions
set forth in the Certificate of Designations.

1.2. Closing. The consummation of the purchase and sale of the Shares and other
transactions contemplated hereby (the “Closing”) shall take place at the offices
of Latham & Watkins LLP, 233 South Wacker Drive, Chicago, Illinois, at 10:00
a.m. Chicago time, as promptly as practicable (but no more than three
(3) business days) following the first date on which all conditions set forth in
Sections 4 and 5 hereof have been satisfied or waived (other than those
conditions that by their nature are to be satisfied by actions taken at the
Closing), or at such other time and place as the Company and the Investor shall
mutually agree. At the Closing, the Company shall deliver to the Investor a
certificate or certificates representing that number of Shares to be sold to the
Investor pursuant to Section 1.1(b) of this Agreement against payment of the
purchase price therefor by wire transfer of immediately available funds. At the
Closing, the Investor and the Company shall execute and deliver the Registration
Rights Agreement of even date herewith between the Company and the Investor, the
form of which is attached hereto as Exhibit B (the “Registration Rights
Agreement”).

2. Representations and Warranties of the Company. The Company hereby represents
and warrants to the Investor as of the date hereof that, except (x) as otherwise
disclosed or incorporated by reference in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2007 (the “2007 Form 10-K”) or its
other reports and forms filed with or furnished to the Securities and Exchange
Commission (the “Commission”) under Sections 12, 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) after
December 31, 2007 (excluding disclosures of risks included in any
forward-looking statement disclaimers or other statements that are similarly
nonspecific and are predictive and forward-looking in nature) and before the
date of this Agreement (all such reports covered by this clause
(x) collectively, the “SEC Reports”), (y) as set forth in the disclosure letter
dated as of the date hereof provided to the Investor separately, specifically
identifying the relevant subparagraph(s) hereof (provided, that disclosure in
any subparagraph of such disclosure letter shall apply to any other section or
subparagraph hereof to the extent it is reasonably apparent on its face that
such disclosure is relevant to such other section or subparagraph of this
Agreement) or (z) as set forth on Exhibit 2.5 hereto (certain capitalized terms
used but not otherwise defined in this Agreement have the respective meanings
set forth in Exhibit C hereto):

2.1. Organization, Good Standing and Qualification. Each of the Company and its
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the state of its incorporation; has all corporate power and authority to
own its properties and conduct its business as presently conducted; and is duly
qualified to do business and in good standing in each and

 

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every state in the United States of America where its business requires such
qualification, except where such failure to be in good standing, have such
corporate power and authority or qualify would not reasonably be expected to
have a Material Adverse Effect. True and accurate copies of the Company’s
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws, each as amended and in effect as of the date hereof, have been made
available to the Investor.

2.2. Financial Statements.

(a) The Company has delivered to the Investor drafts of the following, each
dated July 25, 2009: (i) restated unaudited consolidated balance sheet of the
Company and its Subsidiaries as of December 31, 2006, and the related
consolidated statements of operations and cash flows for the year ended
December 31, 2006; (ii) restated unaudited consolidated balance sheet of the
Company and its Subsidiaries as of December 31, 2007, and the related
consolidated statements of operations and cash flows for the year ended
December 31, 2007; (iii) the unaudited consolidated balance sheet of the Company
and its Subsidiaries as of December 31, 2008, and the related consolidated
statements of operations and cash flows for the year ended December 31, 2008;
and (iv) the unaudited consolidated balance sheet of the Company and its
Subsidiaries as of June 30, 2009 (the “Latest Draft Balance Sheet”), and the
related consolidated statements of operations and cash flows for the six months
ended June 30, 2009 ((i), (ii), (iii) and (iv), the “Draft Financial
Statements”). The Draft Financial Statements present such information and
reflect those adjustments that the Company believes in good faith, based on its
current understanding, to be necessary for the Draft Financial Statements to be
in compliance with Generally Accepted Accounting Principles; provided, however,
that (A) the Company’s management has not completed its review of the Draft
Financial Statements, which have also not been reviewed by the Audit Committee
of the Board nor have they been audited by the Company’s independent registered
public accounting firm or reviewed by the Staff of the Commission, and (B) as a
result of any such audit or review, additional material adjustments may be
identified.

(b) The Company and its Subsidiaries do not have any liabilities or obligations
(accrued, absolute, contingent or otherwise), other than liabilities or
obligations (i) reflected on or reserved against in the Latest Draft Balance
Sheet, (ii) that may be identified in notes, which have not yet been prepared,
to the Latest Draft Balance Sheet, (iii) that may be identified in the audit and
review described in the proviso to Section 2.2(a), (iv) incurred since June 30,
2009 and that do not exceed $1,000,000, or (v) unreserved tax liabilities not
required to have a FIN 48 reserve, and any liabilities incurred in connection
with the restatement or the investigations or legal proceedings, and including
professional fees and expenses associated therewith.

(c) The Company has no disagreements with its outside independent public
accountants which has had or would reasonably be expected to have a Material
Adverse Effect.

 

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2.3. Authorization; Enforceable Agreement.

(a) All corporate action on the part of the Company and its stockholders
necessary for the authorization, execution, and delivery of this Agreement and
the Registration Rights Agreement by the Company, the performance of all
obligations of the Company hereunder and thereunder, and the authorization,
issuance (or reservation for issuance), sale, and delivery of the Shares being
sold hereunder (and the shares of Series A Preferred Stock issuable in respect
of dividends thereon from time to time in accordance with the terms of the
Certificate of Designations) and the Common Stock issuable upon conversion of
the Shares has been taken, and this Agreement and the Registration Rights
Agreement, when executed and delivered by the Company, assuming due
authorization, execution and delivery by the Investor, constitutes and will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, subject to: (i) laws limiting the
availability of specific performance, injunctive relief, and other equitable
remedies; (ii) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect generally relating to or affecting
creditors’ rights generally; and (iii) limitations on the enforceability of the
indemnification provisions contained in the Registration Rights Agreement (the
“Enforceability Exceptions”). The sale of the Shares is not, and the subsequent
conversion of the Shares into Common Stock will not be, subject to any
preemptive rights or rights of first offer.

(b) On or prior to the date hereof, the Company’s Board of Directors (the
“Board”) has duly adopted resolutions (i) evidencing its determination that the
transactions contemplated hereby are in the best interests of the Company and
its stockholders, and (ii) authorizing the Transaction Committee (the
“Committee”) to take the following actions, and the Committee has duly adopted
resolutions taking the following actions on behalf of the Board: (A) approving
this Agreement, the Registration Rights Agreement and the transactions
contemplated hereby and thereby, and (B) adopting the Certificate of
Designations; and, as of the date hereof, such resolutions have not been
rescinded, modified or withdrawn in any way. The Committee, as authorized by the
Board, has taken all necessary action to approve the Investor becoming an
“interested stockholder,” such that as a result of the transactions contemplated
hereby, including the issuance of shares of Common Stock upon conversion of the
Shares, the Investor shall not be prohibited or restricted from entering into or
consummating a “business combination” with the Company (in each case, as such
term is used in Section 203 of the Delaware General Corporation Law (the
“DGCL”)) without obtaining any stockholder vote otherwise required by
Section 203 of the DGCL. True and complete copies of all resolutions of the
Board and the Committee reflecting such actions have been previously provided to
the Investor. Other than the provisions set forth in the Certificate of
Designations, no provision of the Amended and Restated Certificate of
Incorporation or the Amended and Restated Bylaws of the Company would, directly
or indirectly, restrict or impair the ability of the Investor to vote, or
otherwise to exercise the rights of a stockholder with respect to, the Shares
(or any shares of Common Stock issuable upon conversion of the Shares) or any
other shares of the Company that may be acquired or controlled by the Investor.

 

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(c) The execution, delivery and performance of this Agreement will not cause to
be applicable to the Company any “fair price,” “moratorium,” “control share
acquisition” or other similar anti-takeover statute or regulation enacted under
the DGCL, or, to the Company’s Knowledge, any other Law.

2.4. Indebtedness. Neither the Company nor any of its Subsidiaries will be, at
the time of the Closing after giving effect to the terms of this Agreement
(including, without limitation, the application of the use of proceeds as
provided in Section 6.4), in default in the payment of any material Indebtedness
or in default under any agreement relating to its material Indebtedness or under
any mortgage, deed of trust, security agreement or lease to which it is a party.

2.5. Litigation. Except as set forth on Section 2.5 of the disclosure letter or
Exhibit 2.5 hereto, there is no action, suit, proceeding or investigation
pending or, to the Knowledge of the Company, overtly threatened against, nor any
outstanding judgment, order or decree against, the Company or any of its
Subsidiaries before or by any Governmental Authority or arbitral body which
individually or in the aggregate have had, or if adversely determined, would
reasonably be expected to have, a Material Adverse Effect. With respect to each
of the Governmental Authority proceedings and/or investigations set forth on
Exhibit 2.5 hereto, to the Company’s Knowledge, the Company has cooperated to
date and continues to cooperate in all material respects with all orders,
subpoenas (grand jury or otherwise) and other requests (including requests for
the production of documents) of any such Governmental Authority; provided,
however, that the Company has not waived attorney-client privilege and
work-product privilege. Except as set forth on Exhibit 2.5 hereto, to the
Company’s Knowledge, the Company and its Subsidiaries do not currently engage in
the primary conduct that is the subject of an investigation by the Department of
Justice. Neither the Company nor any of its Subsidiaries is in default with
respect to any judgment, order or decree of any Governmental Authority in a
materially adverse manner. The Company is not a party or subject to, and none of
its assets is bound by, the provisions of any material order, writ, injunction,
judgment, or decree of any court or government agency or instrumentality. There
is no material action, suit, or proceeding by the Company currently pending or
that the Company intends to initiate.

2.6. Title. Each of the Company and its Subsidiaries has good and marketable
title to its Property that is real property and good and valid title to all of
its other Property, free and clear of all Liens (except for Incidental Liens and
Liens in connection with the Credit Agreement, which Liens shall be released at
Closing), except as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect or a material adverse effect on the
ability of the Company and its Subsidiaries, taken as a whole, to conduct their
businesses in the ordinary course of business consistent with past practices.

2.7. Taxes. Except as set forth on Section 2.7 of the disclosure letter, each of
the Company and its Subsidiaries has (a) timely filed all Tax Returns required
to have been filed (including any validly obtained extensions), and all such Tax
Returns were correct and complete in all material respects and were prepared in
substantial compliance with all applicable Laws, (b) timely paid all Taxes due
and payable except for those which are being contested in good faith by
appropriate proceedings and in respect of which adequate

 

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reserves with respect thereto are maintained in accordance with Generally
Accepted Accounting Principles and (c) complied, in all respects, with all
applicable Laws relating to the withholding of Taxes and has timely collected or
withheld and paid over to the proper Governmental Authority all amounts required
to be so collected or withheld and paid over. Except as set forth on Section 2.7
of the disclosure letter, none of the Company or its Subsidiaries is the subject
of any current, pending or threatened action, suit, proceeding, investigation,
audit, claim or assessment with regard to any Taxes, and there are no Liens for
Taxes (other than Incidental Liens) upon the assets of the Company or its
Subsidiaries.

2.8. Subsidiaries. As of the date hereof, the Company has no Subsidiaries other
than those listed in Section 2.8 of the disclosure letter. The Company owns,
directly or indirectly, all of the issued and outstanding shares of capital
stock of or all other equity interests in each of the Company Subsidiaries, free
and clear of any Liens (except for Liens in connection with the Credit
Agreement, which Liens shall be released at Closing) and all of such shares or
equity interests are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights.

2.9. Governmental Consents. No consent, approval, order, or authorization of, or
registration, qualification, declaration, or filing with, any federal, state, or
local governmental authority on the part of the Company is required in
connection with the offer, sale, or issuance of the Shares (and the Common Stock
issuable upon conversion of the Shares) or the consummation of any other
transaction contemplated hereby, except for the following: (a) the filing of the
Certificate of Designations in the office of the Secretary of State of the State
of Delaware, which will be filed by the Company prior to the Closing; (b) the
compliance with other applicable state securities laws, which compliance will
have occurred within the appropriate time periods therefor; (c) the compliance
with the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements
Acts of 1976, as amended (the “HSR Act”); and (d) the filing with the Commission
of such reports under the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated by this Agreement. Assuming
that the representations of the Investor set forth in Section 3 below are true
and correct, the offer, sale, and issuance of the Shares in conformity with the
terms of this Agreement are exempt from the registration requirements of
Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), and
all applicable state securities laws, and neither the Company nor any authorized
agent acting on its behalf will take any action hereafter that would cause the
loss of such exemptions.

2.10. Permits and Licenses. The Company and each of its Subsidiaries possess all
permits and licenses of Governmental Authorities that are required to conduct
its business, except for such permits or licenses the absence of which would
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of the Company and its Subsidiaries, taken as a
whole, to conduct their businesses in the ordinary course of business consistent
with past practices.

 

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2.11. Employee Benefits.

(a) The Company and each ERISA Affiliate are in compliance in all material
respects with the provisions of ERISA and the Code applicable to the Plans. Each
Plan has been maintained, operated and administered at all times, and in all
material respects, in accordance with its terms. No Plan is now or at any time
has been subject to Part 3, Subtitle B of Title I of ERISA or Title IV of ERISA.
Neither the Company nor any ERISA Affiliate, has ever been required to
contribute to, or incurred any withdrawal liability, within the meaning of
Section 4201 of ERISA to any multiemployer pension plan, within the meaning of
Section 3(37) of ERISA nor does the Company or any ERISA Affiliate have any
potential withdrawal liability arising from a transaction described in
Section 4204 of ERISA.

(b) The consummation of the transaction contemplated by this Agreement will not,
directly or indirectly (including, without limitation, as a result of any
termination of employment or service at any time prior to or following the
Closing) (i) entitle any officer, employee, consultant or director to any
payment or benefit (including without limitation, enhanced vesting with respect
to equity, severance pay, change in control benefit, or similar compensation) or
any increase in compensation, (ii) entitle any employee or independent
contractor to terminate any plan, agreement or arrangement without cause, or
result in the vesting or acceleration of any benefits under any Plan,
(iii) result in any material increase in benefits payable under any Plan,
including without limitation, any increase in the amount of severance
potentially payable under such Plan, or (iv) result in any payment or benefit
which is or may be made by, from or with respect to any Plan, to any officer,
employee, former employee, director or agent of the Company or any ERISA
Affiliate, either alone or in conjunction with any other payment, event or
occurrence, that will or could properly be characterized as an “excess parachute
payment” under section 280G of the Code.

2.12. Valid Issuance of Shares and Common Stock. The Shares being purchased by
the Investor hereunder, when issued, sold, and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions under this Agreement and under applicable
state and federal securities laws. The Common Stock issuable upon conversion of
the Shares purchased under this Agreement has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Certificate of
Designations, will be duly and validly issued, fully paid, and nonassessable and
will be free of restrictions on transfer other than restrictions on transfer
under this Agreement and the Registration Rights Agreement and under applicable
state and federal securities laws.

2.13. Capitalization.

(a) The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, par value $0.001 per share (“Common Stock”) and 5,000,000 shares
of Preferred Stock, par value $0.001 per share (“Preferred Stock”). As of the
close of business on July 31, 2009 (the “Capitalization Date”), there were
26,796,424 shares of Common Stock issued and outstanding and no shares of
Preferred Stock issued and outstanding. As of the Capitalization Date, the
Company has reserved an aggregate of 3,550,000

 

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shares of Common Stock for issuance to directors, employees and consultants
pursuant to the Company’s Second Amended and Restated Nonstatutory Option Plan
(the “Nonstatutory Plan”), under which (i) 2,713,993 shares have been issued and
are reflected in the currently outstanding Common Stock, (ii) options to
purchase 777,928 shares are presently outstanding and (iii) 58,079 shares remain
available for future grant. As of the Capitalization Date, the Company has
reserved an aggregate of 3,700,000 shares of Common Stock for issuance to
directors, employees and consultants pursuant to the Company’s Amended and
Restated 2003 Incentive Stock Plan (the “2003 Plan”), under which (A) 391,638
shares have been issued and are reflected in the currently outstanding Common
Stock, (B) options to purchase 716,071 shares are presently outstanding and
(C) 2,592,291 shares remain available for future grant. As of the Capitalization
Date, the Company has reserved an aggregate of 450,000 shares of Common Stock
for purchase by employees and consultants pursuant to the Company’s Amended and
Restated 1996 Employee Stock Purchase Plan (the “1996 Plan”), under which
(x) 392,712 shares have been purchased and are reflected in the currently
outstanding Common Stock, (y) no options to purchase shares are presently
outstanding and (z) 57,288 shares remain available for future purchase. As of
the Capitalization Date, the Company has no remaining shares of Common Stock
reserved for issuance to directors pursuant to the Company’s 1995 Director
Option Plan (the “1995 Plan”), under which options to purchase 415,000 shares
are presently outstanding and no shares remain available for future grant. As of
the Capitalization Date, the Company has no remaining shares of Common Stock
reserved for issuance to directors, employees and consultants pursuant to the
Company’s 1993 Stock Plan (the “1993 Plan”) under which options to purchase
59,147 shares are presently outstanding and no shares remain available for
future grant. Since the Capitalization Date, the Company has not issued any
shares of Preferred Stock. Since the Capitalization Date, the Company has not
issued any shares of Common Stock except pursuant to the valid exercise of
options issued or other purchase rights granted pursuant to the above plans
outstanding on the Capitalization Date. All issued and outstanding shares have
been duly authorized and validly issued and are fully paid and nonassessable and
have been issued in compliance with state and federal securities laws. Other
than those granted pursuant to the above plans, (I) there are no options,
warrants, calls, rights, convertible securities, commitments or agreements
(which, for purposes of this Agreement, shall be deemed to include “phantom”
stock or other commitments that provide any right to receive value or benefits
similar to capital stock or other similar rights) of any character to which the
Company is a party or by which the Company is bound obligating the Company to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or obligating the Company to grant, extend or enter into
any such option, warrant, call, right, commitment or agreement, (II) there are
no outstanding contractual obligations of the Company or any other Person to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company, and (III) there are no outstanding securities of any kind convertible
into or exchangeable or exercisable for the capital stock of the Company. There
are no statutory or contractual preemptive rights or rights of first offer or
refusal or similar rights with respect to any shares of capital stock of the
Company, and there are no declared and unpaid dividends or distributions on any
shares of capital stock of the Company.

 

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(b) Each Share initially will be convertible into 66.667 shares of Common Stock
per $1,000 of accrued liquidation preference of the Series A Preferred Stock,
subject to anti-dilution adjustments, all as set forth in the Certificate of
Designations. The Company will reserve that number of shares of Common Stock
sufficient for issuance upon conversion of the Series A Preferred Stock being
issued and sold pursuant to this Agreement. The respective rights, preferences,
privileges, and restrictions of the Preferred Stock and the Common Stock are as
stated in the Certificate of Designations and the Company’s Amended and Restated
Certificate of Incorporation.

2.14. Investment Company Act. Neither the Company nor any of its Subsidiaries is
an investment company within the meaning of the Investment Company Act of 1940,
as amended, or, directly or indirectly, controlled by or acting on behalf of any
Person which is an investment company, within the meaning of said Act.

2.15. Agreements.

(a) Section 2.15 of the disclosure letter presents a complete and correct list
of (i) all credit agreements for borrowed money, indentures and capitalized
leases, (ii) each letter of credit and guaranty for which the liability or
potential liability of the Company and its Subsidiaries on a consolidated basis
is in excess of $250,000, and (iii) all other material instruments in effect as
of the date hereof providing for, evidencing, securing or otherwise relating to
any Indebtedness for borrowed money of the Company or any of its Subsidiaries.
The Company shall, upon request by the Investor, deliver to the Investor a
complete and correct copy of all such credit agreements, indentures, capitalized
leases, letters of credit, guarantees and other instruments or leases described
in Section 2.15 of the disclosure letter, including any modifications or
supplements thereto.

(b) The Company has previously disclosed in the SEC Reports or otherwise
provided to the Investor true, correct and complete copies of each contract or
agreement which is a “material contract” within the meaning of Item 601(b)(10)
of Regulation S-K to be performed in whole or in part after the date of this
Agreement (each, a “Company Significant Agreement”). Except as disclosed on
Section 2.15(b) of the disclosure letter and as would not reasonably be expected
to have a Material Adverse Effect: (i) each of the Company Significant
Agreements is valid and binding on the Company and its Subsidiaries, as
applicable, and in full force and effect; (ii) the Company and each of its
Subsidiaries, as applicable, are in compliance with and have performed all
obligations required to be performed by them to date under each Company
Significant Agreement; and (iii) as of the date hereof, neither the Company nor
any of its Subsidiaries has received notice of any material violation or default
(or any condition which with the passage of time or the giving of notice or both
would cause such a violation of or a default) by any party under any Company
Significant Agreement nor, to the Company’s Knowledge, has such notice been
threatened.

2.16. Compliance with Other Instruments. The Company is not in violation or
default of any provision of its Amended and Restated Certificate of
Incorporation or Amended and Restated Bylaws, each as amended and in effect as
of the Closing. The execution, delivery, and performance of and compliance with
this Agreement and the Registration Rights Agreement and the issuance

 

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and sale of the Shares, the issuance of the PIK Dividends pursuant to Section 4
of the Certificate of Designations, and the conversion of the Shares into shares
of Common Stock will not (a) conflict with or violate any provision of the
Company’s Amended and Restated Certificate of Incorporation (including the
Certificate of Designations) or Amended and Restated Bylaws, (b) conflict with
or violate any applicable Law (which conflict or violation would be material to
the Company and its Subsidiaries taken as a whole) or any applicable judgment,
order or decree of any Governmental Authority, or (c) conflict with or result in
any breach of, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give rise to any right to
termination, acceleration or cancellation under any Company Significant Contract
or result in the creation of any material mortgage, pledge, lien, encumbrance,
or charge upon any of the properties or assets of the Company, or the
suspension, revocation, impairment or forfeiture of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations, or any of its assets or properties.

2.17. Environmental Matters. No activity of the Company or any of its
Subsidiaries requires any Environmental Permit which has not been obtained and
which is not now in full force and effect, except to the extent failure to have
any such Environmental Permit would not reasonably be expected to have a
Material Adverse Effect. The Company and its Subsidiaries are and have been in
compliance with all applicable Requirements of Environmental Law and
Environmental Permits including applicable limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in any applicable Requirement of Environmental Law or
Environmental Permit, except where failure to be in such compliance would not
reasonably be expected to have a Material Adverse Effect. The Company and its
Subsidiaries (i) including with respect to their Property are not subject to any
(A) Environmental Claims or (B) Environmental Liabilities, which would
reasonably be expected to have a Material Adverse Effect, and (ii) have not
received individually or collectively any written or express notice of any
violation, alleged violation of or liability under any Requirements of
Environmental Law or Environmental Permit or any Environmental Claim in
connection with their respective Property which would reasonably be expected to
have a Material Adverse Effect. To the Knowledge of the Company, the present and
future liability (including any Environmental Liability and any other damage to
Persons or property, including natural resources damages), if any, of the
Company and with respect to the Property of any of the Company or any of its
Subsidiaries which is reasonably expected to arise in connection with
Requirements of Environmental Law, Environmental Permits and other environmental
matters will not have a Material Adverse Effect on the Company and its
Subsidiaries on a consolidated basis.

2.18. Compliance with Laws. Except with respect to Laws regarding Taxes, which
are addressed in Section 2.7, neither the Company nor any of its Subsidiaries is
in violation of any applicable federal, foreign, state, local or other law,
statute, regulation, rule, ordinance, code, convention, directive, order,
judgment or other legal requirement of any Governmental Authority (collectively,
“Laws”), except (i) in connection with matters currently under investigation by
the Department of Justice or the Commission, or (ii) where such violation would
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect or a

 

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material adverse effect on the ability of the Company and its Subsidiaries,
taken as a whole, to conduct their businesses in the ordinary course of business
consistent with past practices. Except with respect to Laws regarding Taxes,
which are addressed in Section 2.7, neither the Company nor any of its
Subsidiaries is being investigated with respect to, or been threatened to be
charged with or given notice of any violation of, any applicable Law, except
(i) as may be determined in connection with matters currently under
investigation by the Department of Justice or the Commission, or (ii) as would
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect or a material adverse effect on the ability of the Company and
its Subsidiaries, taken as a whole, to conduct their businesses in the ordinary
course of business consistent with past practices.

2.19. Registration Rights; Voting Rights. Except as provided in the Registration
Rights Agreement, (i) the Company has not granted or agreed to grant, and is not
under any obligation to provide, any rights to register under the Securities Act
any of its presently outstanding securities or any of its securities that may be
issued subsequently, and (ii) to the Company’s Knowledge, no stockholder of the
Company has entered into any agreement with respect to the voting of equity
securities of the Company.

2.20. Reports.

(a) The Company (i) is designing and implementing disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are
reasonably designed to ensure that material information relating to the Company,
including its consolidated Subsidiaries, is made known to the individuals
responsible for the preparation of the Company’s filings with the Commission and
other public disclosure documents, and (ii) is working with the Company’s
outside auditors and the audit committee of the Board to address (A) any
significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that are reasonably likely to adversely affect the Company’s
ability to record, process, summarize and report financial information and,
(B) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company’s internal controls over
financial reporting.

(b) The Company is implementing an effective compliance and ethics program,
which ensures that the Company exercises due diligence to prevent and detect
criminal conduct and promotes an organizational culture that encourages ethical
conduct and a commitment to compliance with the Law.

2.21. No Restriction on Ability to Pay Dividends. Upon compliance with
Section 6.4(a), the Company will not be a party to any contract, agreement,
arrangement or other understanding, oral or written, express or implied, and is
not subject to any provision in its Amended and Restated Certificate of
Incorporation or Amended and Restated Bylaws or other governing documents or
resolutions of the Board, that could restrict, limit, prohibit or prevent the
Company’s ability to pay dividends on the Shares in the amounts contemplated by
the Certificate of Designations.

 

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2.22. Intellectual Property. Except as set forth on Section 2.22 of the
disclosure letter:

(a) The Company IPR, together with the Intellectual Property Rights licensed to
the Company and/or each of its Subsidiaries, constitute all of the Intellectual
Property Rights necessary to conduct and operate the respective businesses of
the Company and its Subsidiaries in all material respects as currently
conducted.

(b) Neither the Company nor any of its Subsidiaries has received any written
notice alleging that any Company IPR is invalid or unenforceable other than any
such written notices that have resulted in or arose as part of litigation or
arbitration which has been settled or finally adjudicated, or challenging the
Company’s or its Subsidiaries’ ownership of or right to use any Intellectual
Property Rights. Each of the registrations and recordations of Patents and
Trademarks included in the Company IPR is held and/or recorded in the name of
the Company and/or its Subsidiaries, is valid and in full force, enforceable,
has been duly applied for and registered, and all past or outstanding
maintenance obligations have been satisfied.

(c) To the Knowledge of the Company, the products and services and the business
of the Company and each of its Subsidiaries as currently conducted do not
infringe, misappropriate or violate the Intellectual Property Rights of any
third party. Neither the Company nor any of its Subsidiaries has received any
written notice alleging that the Company or any of its Subsidiaries is
infringing, misappropriating or violating the Intellectual Property Rights of
such third party other than any such written notices that have resulted in or
arose as part of litigation or arbitration which has been settled or finally
adjudicated.

(d) The Company and each of its Subsidiaries has taken reasonable and
appropriate steps to protect and maintain all Company IPR, including to preserve
the confidentiality of any Trade Secrets. To the Knowledge of the Company, any
disclosure by the Company or any of its Subsidiaries of Trade Secrets to any
third party has been pursuant to the terms of a written agreement with such
Person or is otherwise lawful. The Company and each of its Subsidiaries has in
place appropriate written internal information security policies, which are
published to employees and enforced in all material respects, and which include
guidelines for the use, processing, confidentiality and security of customer,
employee and other confidential data.

(e) No third party has or is infringing on, misappropriating or otherwise
violating any Company IPR so as to cause a Material Adverse Effect. The Company
and/or any of its Subsidiaries has not sent any written notice to or asserted or
threatened in writing any action or claim against any Person involving or
relating to any Company IPR.

 

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2.23. Insurance.

(a) Except as would not, individually or in the aggregate, have a Material
Adverse Effect, (i) the assets, properties and businesses of the Company are
subject to reasonable and customary policies relative to other participants in
the medical device industry, (ii) all material insurance policies of the Company
and its Subsidiaries are in full force and effect (except for policies that have
expired in accordance with their terms in the ordinary course), (iii) neither
the Company nor any of its Subsidiaries is in breach or default thereunder and
(iv) no notice of cancellation or termination has been received with respect to
any such policy.

(b) To the Knowledge of the Company, the Company’s directors’ and officers’
liability insurance policy will provide coverage for defense expenses incurred,
and is expected to provide coverage for some or all of its costs of settlement
and judgment, up to the policy limit of such policy, with respect to the matters
set forth on Section 2.23 of the disclosure letter, subject to any applicable
deductible or retention.

2.24. Brokers and Finders. Except for Goldman Sachs & Co., neither the Company
nor any of its Subsidiaries nor any of their respective officers or directors
has employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder’s fees, and no broker or
finder has acted directly or indirectly for the Company or any of its
Subsidiaries in connection with this Agreement or the transactions contemplated
hereby.

3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants as of the date hereof as follows:

3.1. Private Placement.

(a) The Investor is (i) an “accredited investor” within the meaning of Rule 501
of Regulation D promulgated under the Securities Act; (ii) aware that the sale
of the Shares (collectively, including the Common Stock issuable upon conversion
of the Shares, the “Securities”) to it is being made in reliance on a private
placement exemption from registration under the Securities Act and
(iii) acquiring the Securities for its own account.

(b) The Investor understands and agrees that the Securities are being offered in
a transaction not involving any public offering within the meaning of the
Securities Act, that such Securities have not been and, except as contemplated
by the Registration Rights Agreement, will not be registered under the
Securities Act and that such Securities may be offered, resold, pledged or
otherwise transferred only (i) in a transaction not involving a public offering,
(ii) pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available), (iii) pursuant to an effective
registration statement under the Securities Act, or (iv) to the Company or one
of its subsidiaries, in each of cases (i) through (iv) in accordance with any
applicable securities laws of any State of the United States, and that it will
notify any subsequent purchaser of Securities from it of the resale restrictions
referred to above, as applicable.

 

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(c) The Investor understands that, unless sold pursuant to a registration
statement that has been declared effective under the Securities Act or in
compliance with Rule 144 thereunder, the Company may require that the Securities
will bear a legend or other restriction substantially to the following effect
(it being agreed that if the Securities are not certificated, other appropriate
restrictions shall be implemented to give effect to the following):

“THE SECURITIES EVIDENCED HEREBY WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE
HOLDER OF SUCH SECURITIES AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH
SECURITIES MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN
A TRANSACTION NOT INVOLVING A PUBLIC OFFERING, (II) PURSUANT TO ANY OTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (III) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (IV) TO THE COMPANY OR ANY OF
ITS SUBSIDIARIES, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER
WILL NOTIFY ANY SUBSEQUENT PURCHASER OF SUCH SECURITIES FROM IT OF THE RESALE
RESTRICTIONS REFERRED TO IN (A) ABOVE. SUCH SECURITIES MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH THE TERMS OF THE SECURITIES PURCHASE AGREEMENT, DATED AS OF
AUGUST 14, 2009, BETWEEN ARTHROCARE CORPORATION AND THE INVESTOR IDENTIFIED
THEREIN.”

(d) The Investor:

(i) is able to fend for itself in the transactions contemplated hereby;

(ii) has such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of its prospective investment in
the Securities; and

 

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(iii) has the ability to bear the economic risks of its prospective investment
and can afford the complete loss of such investment.

(e) The Investor acknowledges that (i) the Company is in the process of
restating its historical financial statements, including the Draft Financial
Statements, (ii) the Company is under investigation by the Department of Justice
(through the U.S. Attorney’s offices in Florida and North Carolina) and the
Commission, (iii) it has conducted its own investigation of the Company and the
terms of the Securities, (iv) it has had access to the Company’s public filings
with the Commission and to such financial and other information as it deems
necessary to make its decision to purchase the Securities, and (v) has been
offered the opportunity to conduct such review and analysis of the business,
assets, condition, operations and prospects of the Company and its Subsidiaries
and to ask questions of the Company and received answers thereto, each as it
deemed necessary in connection with the decision to purchase the Securities. The
Investor further acknowledges that it has had such opportunity to consult with
its own counsel, financial and tax advisors and other professional advisers as
it believes is sufficient for purposes of the purchase of the Securities. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investor to
rely thereon.

(f) The Investor understands that the Company will rely upon the truth and
accuracy of the foregoing representations, acknowledgements and agreements.

(g) Except for the representations and warranties contained in Section 2 of this
Agreement, the Investor acknowledges that neither the Company nor any Person on
behalf of the Company makes, and the Investor has not relied upon, any other
express or implied representation or warranty with respect to (i) the Company or
any of its Subsidiaries or (ii) any other information provided to the Investor
in connection with the transactions contemplated by this Agreement.

3.2. Organization. The Investor is duly organized and is validly existing as a
limited liability company under the laws of the State of Delaware.

3.3. Power and Authority. The Investor has full right, power, authority and
capacity to enter into this Agreement and the Registration Rights Agreement and
to consummate the transactions contemplated hereby and thereby and has taken all
necessary action to authorize the execution, delivery and performance hereof and
thereof.

3.4. Authorization; Enforceability.

(a) The execution, delivery and performance of this Agreement has been duly
authorized by all necessary action on the part of the Investor, and this
Agreement has been duly executed and delivered by the Investor and, assuming due
authorization, execution and delivery of this Agreement by the Company, this
Agreement constitutes a valid and binding obligation of the Investor,
enforceable against it in accordance with its terms, except to the extent that
the enforcement thereof may be limited by the Enforceability Exceptions.

 

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(b) The execution, delivery and performance of the Registration Rights Agreement
has been duly authorized by all necessary action on the part of the Investor,
and the Registration Rights Agreement, when duly executed and delivered by the
Investor and, assuming due authorization, execution and delivery thereof by the
Company, will constitute a valid and binding obligation of the Investor,
enforceable against it in accordance with its terms, except to the extent that
the enforcement thereof may be limited by the Enforceability Exceptions.

3.5. No Default or Violation. The execution, delivery, and performance of and
compliance with this Agreement and the Registration Rights Agreement and the
issuance and sale of the Shares will not (a) result in any default or violation
of the limited liability company operating agreement of the Investor, (b) result
in any default or violation of any agreement relating to its material
Indebtedness or under any mortgage, deed of trust, security agreement or lease
to which it is a party or in any default or violation of any material judgment,
order or decree of any Governmental Authority, or (c) be in conflict with or
constitute, with or without the passage of time or giving of notice, a default
under any such provision, require any consent or waiver under any such
provision, or result in the creation of any mortgage, pledge, lien, encumbrance,
or charge upon any of the properties or assets of the Investor pursuant to any
such provision, or the suspension, revocation, impairment or forfeiture of any
material permit, license, authorization, or approval applicable to the Investor,
its business or operations, or any of its assets or properties pursuant to any
such provision; except, in the case of clauses (b) and (c), for such defaults,
violations or conflicts that would not reasonably be expected to have a material
adverse effect on the ability of the Investor to consummate the transactions
contemplated hereby.

3.6. Financial Capability. The Investor currently has or at Closing will have
available funds necessary to purchase the Shares at Closing on the terms and
conditions contemplated by this Agreement.

4. Conditions to the Investor’s Obligations at Closing. The obligation of the
Investor to purchase the Shares at the Closing is subject to the fulfillment (or
waiver by the Investor) on or before the Closing of each of the following
conditions:

4.1. Representations and Warranties. (a) The representations and warranties of
the Company contained in Section 2 (other than the representations and
warranties of the Company set forth in Section 2.3 (Authorization; Enforceable
Agreement), Section 2.12 (Valid Issuance of Shares and Common Stock) and
Section 2.13 (Capitalization)) shall be true and correct as of the date hereof
and as of the Closing Date as though made on and as of the Closing Date (other
than such representations and warranties that by their terms speak as of a
certain date, which shall be true and correct as of such certain date) except
where the failure to be so true and correct without giving effect to any
qualifications and limitations as to “materiality” or “Material Adverse Effect”
set forth therein, individually or in the aggregate, would not have a Material
Adverse Effect and (b) the representations and warranties of the Company set
forth in Section 2.3 (Authorization; Enforceable Agreement), Section 2.12 (Valid
Issuance of Shares and Common Stock) and Section 2.13 (Capitalization) shall be
true and correct in all material respects as of the date hereof and as of the
Closing Date as though made on and as of the Closing Date without giving effect
to any qualifications and limitations as to “materiality” or “Material Adverse
Effect” set forth therein.

 

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4.2. Performance. The Company shall have performed and complied in all material
respects with all agreements, obligations, and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.

4.3. Compliance Certificate. The Company shall deliver to the Investor at the
Closing a certificate signed on behalf of the Company by the Chief Executive
Officer or Chief Financial Officer of the Company certifying that the conditions
specified in Sections 4.1 and 4.2 have been fulfilled.

4.4. Certificate of Designations. The Company shall have filed the Certificate
of Designations with the Secretary of State of the State of Delaware, and the
Certificate of Designations shall have become effective as an amendment to the
Company’s Amended and Restated Certificate of Incorporation.

4.5. Antitrust. Any applicable waiting period (including any extension thereof)
under the HSR Act, as applicable to the transactions contemplated by this
Agreement, shall have expired or been terminated.

4.6. Ancillary Agreements. The Company and the Investor shall have entered into
the Registration Rights Agreement.

4.7. Opinion of Company Counsel. The Investor shall have received from Latham &
Watkins LLP, counsel for the Company, an opinion, dated as of the Closing, in
the form attached hereto as Exhibit D.

4.8. Board of Directors. Simultaneous with the Closing, Gregory A. Belinfanti
and Christian Ahrens (collectively, the “New Directors”) shall be appointed to
the Board. The Investor shall have received evidence satisfactory to it of the
taking of such actions.

4.9. Nominating Committee. The Board shall have (a) delegated to the nominating
committee the authority to recommend to the Board the new chief executive
officer of the Company following the departure or resignation of David
Fitzgerald as Acting President and Chief Executive Officer, such recommendation
to require the unanimous vote of the members of the nominating committee, and
(b) amended the nominating committee charter, in form and substance reasonably
satisfactory to the Investor, to reflect such delegation and authority (the “N/C
Charter Amendment”). The Investor shall have received evidence satisfactory to
it of the taking of such actions.

4.10. Payment of Expenses. Simultaneous with the Closing, the Company shall have
paid the reasonable expenses of the Investor in connection with the transactions
contemplated by this Agreement and the Registration Rights Agreement and any
other ancillary documents hereto and thereto, including, without limitation, the
fees and expenses of Dechert LLP, special counsel to the Investor; provided,
that the aggregate amount of all such fees and expenses payable to the Investor
(including with respect to fees and expenses of counsel) by the Company shall
not exceed $500,000.

 

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5. Conditions to the Company’s Obligations at Closing. The obligations of the
Company to the Investor under this Agreement are subject to the fulfillment (or
waiver by the Company) on or before the Closing of each of the following
conditions by the Investor:

5.1. Representations and Warranties. The representations and warranties of the
Investor contained in Section 3 shall be true and correct as of the date hereof
and as of the Closing Date as though made on and as of the Closing Date (other
than representations and warranties that by their terms speak as of a certain
date, which shall continue to be true and correct as of such certain date).

5.2. Performance. The Investor shall have performed and complied in all material
respects with all agreements, obligations, and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.

5.3. Antitrust. Any applicable waiting period (including any extension thereof)
under the HSR Act, as applicable to the transactions contemplated by this
Agreement, shall have expired or been terminated.

6. Covenants. The Company and the Investor hereby covenant and agree, for the
benefit of the other parties hereto and their respective assigns, as follows:

6.1. Efforts. Upon the terms and subject to the conditions set forth in this
Agreement, the parties hereto shall each use their commercially reasonable
efforts to promptly (a) take, or to cause to be taken, all actions, and to do,
or to cause to be done, and to assist and cooperate with the other parties in
doing all things necessary, proper or advisable under applicable Law or
otherwise to consummate and make effective the transactions contemplated by this
Agreement; (b) obtain from any Governmental Authority and/or other third parties
any actions, non-actions, clearances, waivers, consents, approvals, permits or
orders required to be obtained in connection with the authorization, execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated by this Agreement; and (c) execute and deliver any
additional instruments necessary to consummate the transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, the Company
shall use all commercially reasonable efforts to (x) obtain all necessary
permits and qualifications, if any, or secure an exemption therefrom, required
by any state or country prior to the offer and sale of the Shares, and (y) cause
such authorization, approval, permit or qualification to be effective as of the
Closing.

6.2. Antitrust. Without limiting the generality of Section 6.1, promptly
following execution of this Agreement, the Company and the Investor shall use
all commercially reasonable efforts to (a) make an appropriate filing of a
Notification and Report Form pursuant to the HSR Act with respect to the
acquisition of the Shares as promptly as practicable and supply as promptly as
practicable any

 

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additional information and documentary material that may be requested pursuant
to the HSR Act, (b) take all other actions reasonably necessary, proper or
advisable to cause the expiration or termination of the applicable waiting
periods under the HSR Act, as promptly as practicable, (c) keep the other party
hereto informed of any communication received by the Company or the Investor (as
the case may be) from, or given by the Company or the Investor (as the case may
be) to, the Federal Trade Commission (the “FTC”), the Antitrust Division of the
Department of Justice (the “DOJ”) or any other Governmental Authority and of any
communication received or given in connection with any legal, administrative,
arbitral or other proceeding by a private party, in each case regarding the
issuance and sale of the Shares; and (d) permit the other party hereto to review
in advance any communication intended to be given by it to, and consult with it
in advance of any meeting or conference with, the FTC, the DOJ or any such other
Governmental Authority, and to the extent permitted by the FTC, the DOJ or such
other applicable Governmental Authority, give the other party hereto the
opportunity to attend and participate in such meetings and conferences.

6.3. Negative Covenants Prior to Closing.

(a) From the date of this Agreement through the Closing (the “Pre-Closing
Period”), the Company shall not:

(i) Declare, or make payment in respect of, any dividend or other distribution
upon any shares of capital stock of the Company;

(ii) Redeem, repurchase or acquire any capital stock of the Company or any of
its Subsidiaries;

(iii) Amend the Company’s Amended and Restated Certificate of Incorporation or
Amended and Restated By-Laws (other than the filing of the Certificate of
Designations with the Secretary of State of the State of Delaware in accordance
with this Agreement);

(iv) Authorize, issue or reclassify any capital stock, or debt securities
convertible into capital stock, of the Company (other than the authorization and
issuance of the Shares, and the authorization of the shares of Common Stock
underlying the Shares, in accordance with this Agreement); or

(v) agree or commit to do any of the foregoing.

(b) If during the Pre-Closing Period the Company takes any action that would
require any anti-dilution adjustments to be made to the Shares under the
Certificate of Designations, assuming the Shares were issued on the date of this
Agreement, the Company shall make such anti-dilution adjustments to the
conversion rate of the Shares.

6.4. Use of Proceeds. The Company shall apply the net proceeds from the issuance
and sale of the Shares for general corporate purposes, including without
limitation, (a) simultaneously with the Closing, for the repayment in full of
borrowings and accrued

 

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interest outstanding under the Company’s credit agreement dated as of
January 13, 2006, as amended (the “Credit Agreement”), with a syndicate of banks
and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C
Issuer (the “Agent”), as in existence on the date hereof, as specified in a
payoff letter provided to the Investor at least two business days prior to the
Closing, which payoff letter shall indicate (i) the amount necessary to repay
the Credit Agreement in full and (ii) that the Agent has agreed to release all
Liens in respect of the Credit Agreement upon receipt of the amount indicated in
such payoff letter, (b) funding the balance sheet of the Company and (c) payment
of fees and expenses in connection with the transactions contemplated by this
Agreement and the Registration Rights Agreement.

6.5. Reservation of Common Stock; Issuance of Shares of Common Stock. For as
long as any Shares remain outstanding, the Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized but
unissued Common Stock or shares of Common Stock held in treasury by the Company,
for the purpose of effecting the conversion of the Shares, the full number of
shares of Common Stock then issuable upon the conversion of all Shares (after
giving effect to any anti-dilution adjustments that have theretofore been made)
then outstanding. All shares of Common Stock delivered upon conversion or
repurchase of the Shares shall be newly issued shares or shares held in treasury
by the Company, shall have been duly authorized and validly issued and shall be
fully paid and nonassessable, and shall be free from preemptive rights and free
of any lien or adverse claim.

6.6. Transfer Taxes. The Company shall pay any and all documentary, stamp or
similar issue or transfer tax due on (a) the issue of the Shares at Closing and
(b) the issue of shares of Common Stock upon conversion of the Shares. However,
in the case of conversion of Shares, the Company shall not be required to pay
any tax or duty that may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that of the
Holder of the Shares to be converted, and no such issue or delivery shall be
made unless and until the Person requesting such issue has paid to the Company
the amount of any such tax or duty, or has established to the satisfaction of
the Company that such tax or duty has been paid.

6.7. Listing of Shares. Promptly following such time as shares of the Company’s
Common Stock are listed for trading on any national securities exchange, the
Company shall apply to cause the shares of Common Stock issuable upon conversion
of the Shares to be approved for listing on such national securities exchange,
subject to official notice of issuance.

6.8. Pre-Closing Access; Ongoing Investigations.

(a) During the Pre-Closing Period, subject to applicable Law, the Company shall
grant the Investor, upon reasonable advance notice and during the Company’s
normal business hours, such access to its books, records, properties and such
other information as the Investor may reasonably request, excluding access to
such items or information that is the subject of attorney client privilege.

 

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(b) During the Pre-Closing Period, the Company shall inform the Investor
reasonably promptly of any material developments with respect to any of the
matters set forth on Exhibit 2.5, and, upon the reasonable request of the
Investor from time to time, provide the Investor with an update of the status of
such matters and copies of requested correspondence received from any
Governmental Authority with regards to any such matters, in each case, subject
to the Company’s ability, based on the advice of counsel, to withhold or redact
such correspondence in order to preserve attorney-client privilege, work product
doctrine or any other applicable privilege; provided, that all Company
Confidential Information shall be kept confidential by the Investor (and the
Investor shall cause its Affiliates and representatives to keep such information
confidential), subject to the Confidentiality Exceptions.

6.9. Information Rights/Management Rights. For as long as the Investor
Beneficially Owns 5% or more of the Total Voting Power, the Company shall
provide the Investor with the following information (in each case consistent
with materials otherwise provided to members of the Board):

(a) unaudited monthly (as soon as available and in any event within 30 days of
the end of each month), unaudited quarterly (as soon as available and in any
event within 45 days of the end of each quarter) and audited (by a nationally
recognized accounting firm) annual (as soon as available and in any event within
90 days of the end of each year) financial statements prepared in accordance
with Generally Accepted Accounting Principles, which statements shall include:

(i) the consolidated balance sheets of the Company and its Subsidiaries and the
related consolidated statements of income, stockholders’ equity and cash flows;

(ii) a comparison to the corresponding data for the corresponding periods of the
previous fiscal year and from the Company’s financial plan; and

(iii) a reasonably detailed narrative descriptive report of the operations of
the Company and its Subsidiaries in the form prepared for presentation to the
senior management of the Company for the applicable period and for the period
from the beginning of the then current fiscal year to the end of such period and
a comparison to the corresponding data for the corresponding periods of the
previous fiscal year and any Board-approved revisions thereof;

(b) a copy of the financial plan of the Company in the form approved by the
Board prior to the beginning of each fiscal year and any Board-approved
revisions thereof;

(c) to the extent the Company is required by law or pursuant to the terms of any
outstanding Indebtedness of the Company to prepare such reports, any annual
reports, quarterly reports and other periodic reports pursuant to Section 13 or
15(d) of the Exchange Act actually prepared by the Company as soon as available
(provided, that any such reports shall be deemed to have been provided when such
reports are publicly available via the Commission’s EDGAR system or any
successor to the EDGAR system); and

 

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(d) such other information as the Investor shall reasonably request.

Additionally, (x) the Company shall permit any authorized representatives
designated by the Investor reasonable access to visit and inspect any of the
properties of the Company or any of its Subsidiaries, including its and their
books of account, and to discuss its and their affairs, finances and accounts
with its and their officers, all at such times as the Investor may reasonably
request, and (y) the Investor shall have the right to consult with and advise
the management of the Company and its Subsidiaries, upon reasonable notice at
reasonable times from time to time, on all matters relating to the operation of
the Company and its subsidiaries. All Company Confidential Information received
by the Investor and/or its Affiliates and representatives shall be kept
confidential by the Investor (and the Investor shall cause its Affiliates and
representatives to keep such information confidential), subject to the
Confidentiality Exceptions.

6.10. Distributions. The Company agrees that it shall report all distributions
or deemed distributions with respect to the Shares, whether paid in cash or in
kind or deemed paid pursuant to Section 305 of the Code or otherwise, on IRS
Forms 1099 as required or permitted by the Code. In addition, the Company shall
have the right to withhold on any such distributions to the extent required by
the Code.

6.11. CEO Appointment. The Company agrees to abide by and take no action to
circumvent the effectiveness of the N/C Charter Amendment. The new chief
executive officer of the Company to be appointed by the Board following the
departure or resignation of David Fitzgerald as Acting President and Chief
Executive Officer, must be pre-approved by the nominating committee after the
appointment of a Preferred Director to such committee.

7. Preemptive Rights.

7.1. Certain Definitions.

(a) New Securities. “New Securities” means any shares of capital stock of the
Company, including Common Stock and Preferred Stock, whether authorized or not,
and rights, options, or warrants to purchase said shares of capital stock, and
securities of any type whatsoever that are, or may become, convertible into
capital stock; provided, however, that the term “New Securities” does not
include:

(i) Shares issued pursuant Section 1.1 of this Agreement and securities issued
upon conversion of such Shares;

(ii) securities issued to employees, consultants, officers and directors of the
Company pursuant to an equity compensation plan approved by the Board;

 

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(iii) securities issued upon exercise or conversion of any convertible
securities, options and warrants, provided that the Company shall have complied
with the preemptive right established by this Section 7 with respect to the
initial sale or grant by the Company of such convertible securities, options or
warrants;

(iv) securities issued pursuant to the acquisition of another business entity by
the Company by merger, purchase of substantially all of the assets or shares, or
other reorganization whereby the Company will own equity securities of the
surviving or successor corporation; and

(v) securities issued in a bona fide registered public offering underwritten on
a firm commitment basis by a nationally recognized broker-dealer or pursuant to
a prospectus approved by the applicable functional regulator under the
applicable laws of any foreign jurisdiction;

any such excluded issuance (i) through (v), an “Excluded Issuance.”

(b) Pro Rata Amount. “Pro Rata Amount” means such number of New Securities that
would allow an Eligible Holder to Beneficially Own after such issuance of New
Securities Eligible Shares having the same Total Voting Power as the Eligible
Shares Beneficially Owned by the Eligible Holder immediately prior to such
issuance of New Securities.

7.2. Preemptive Right.

(a) Grant of Preemptive Right. Subject to the terms and conditions contained in
this Section 7, the Company hereby grants to (i) each Person holding Series A
Preferred Stock representing 5% or more of the Total Voting Power and (ii) the
Investor, for so long as the Investor Beneficially Owns 5% or more of the Total
Voting Power (each, an “Eligible Holder”), a preemptive right to purchase such
Eligible Holder’s Pro Rata Amount of any New Securities which the Company may,
from time to time, propose to issue and sell.

(b) Notice of Right. In the event the Company proposes to undertake an issuance
of New Securities, it shall give each Eligible Holder prior written notice of
its intention, describing the type of New Securities and the price and terms
upon which the Company proposes to issue the same. Each Eligible Holder shall
have twenty (20) days from the date of delivery of any such notice to agree to
purchase up to such Eligible Holder’s Pro Rata Amount of such New Securities,
for the price and upon the terms specified in the notice, by delivering written
notice to the Company and stating therein the quantity of New Securities to be
purchased.

(c) Lapse and Reinstatement of Right. The Company shall have sixty (60) days
following the twenty (20) day period described in Section 7.2(b) to sell or
enter into an agreement (pursuant to which the sale of New Securities covered
thereby shall be closed, if at all, within thirty (30) days from the date of
said agreement) to sell the New Securities with respect to which the Eligible
Holders’ preemptive right was not exercised, at a price and upon terms no more
favorable to the purchasers of such securities than

 

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specified in the Company’s notice. In the event the Company has not sold the New
Securities or entered into an agreement to sell the New Securities within said
sixty (60) day period (or sold and issued New Securities in accordance with the
foregoing within thirty (30) days from the date of said agreement), the Company
shall not thereafter issue or sell any such New Securities without first
offering such securities to the Eligible Holders in the manner provided above.

8. Voting.

8.1. Voting Agreement as to Certain Matters. From and after the Closing, in any
election of directors or at any meeting of the stockholders of the Company
called expressly for the removal of directors, the Investor will vote all shares
of Voting Stock that it is entitled to vote, whether now owned or hereafter
acquired (collectively, the “Voting Securities”) as follows:

(a) in favor of any nominee or director designated by the nominating committee
of the Board (provided, that the nominating committee’s designation is
consistent with the terms of the Certificate of Designations and this
Agreement); and

(b) against the removal of any director designated by the nominating committee
of the Board.

8.2. Ability to Vote on All Other Matters. Except as expressly provided in
Section 8.1 and the Certificate of Designations, the Investor will be entitled
to vote all of its Voting Securities in its sole discretion on any other matter
submitted to or acted upon by the stockholders of the Company.

8.3. No Successors in Interest. The provisions of this Section 8 shall not be
binding upon the assigns or transferees of any of the Voting Securities.

8.4. Termination of Voting Agreement. The provisions of this Section 8 shall
terminate upon the earliest to occur of any one of the following events:

(a) the date on which the Investor ceases to Beneficially Own at least 5% of the
Total Voting Power;

(b) the liquidation, dissolution or indefinite cessation of the business
operations of the Company;

(c) the execution by the Company of a general assignment for the benefit of
creditors or the appointment of a receiver or trustee to take possession of the
property and assets of the Company; or

(d) a Change of Control.

 

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9. Restrictions on Transfer. From and after the Closing and until the earlier of
(a) the first anniversary of the Closing or (b) the occurrence of a
Reorganization Event (as such term is defined in the Certificate of
Designations), the Investor will not (i) transfer any Shares to any Person,
other than to its Affiliates (including commonly controlled or managed
investment funds), or (ii) convert any of the Shares into shares of Common Stock
in accordance with the Certificate of Designations.

10. Standstill.

10.1. From and after the Closing, without the prior consent of the Board, the
Investor hereby agrees that until such time as the earlier to occur of (x) it
ceases to Beneficially Own 5% of the Total Voting Power, and (y) a Pending COC
Event, the Investor shall not, and shall cause its directors, officers,
employees, representatives and Affiliates controlled by (but not under common
control with) the Investor and any other Affiliates that have received Company
Confidential Information, not to, on its behalf, directly or indirectly:

(a) by purchase or otherwise, acquire, agree to acquire or offer to acquire
Voting Stock or direct or indirect rights or options to acquire Voting Stock;

(b) enter into a short of, or trade in, derivative securities representing the
right to vote or economic benefits of Voting Stock or rights or options to
acquire Voting Stock, except to the extent necessary for the Investor to,
directly or indirectly, engage in a collared hedging transaction of the Common
Stock following the conclusion of the period set forth in Section 9;

(c) effect or seek, offer or propose (whether publicly or otherwise) to effect,
or announce any intention to effect or cause or participate in or in any way
knowingly assist, or knowingly facilitate any other Person to effect or seek,
offer or propose (whether publicly or otherwise) to effect or participate in,
(i) any acquisition of any Voting Stock or rights or options to acquire any
Voting Stock, (ii) any tender or exchange offer, merger or other business
combination involving the Company, any of its Subsidiaries or assets of the
Company or its Subsidiaries constituting a significant portion of the
consolidated assets of the Company and its Subsidiaries, or (iii) any
“solicitation” of “proxies” (as such terms are used in the proxy rules of the
Commission) or written consents with respect to any Voting Stock of the Company;

(d) initiate, make or submit any stockholder proposal, whether made pursuant to
Rule 14a-8 under the Exchange Act or otherwise, or, except as expressly
contemplated by this Agreement or the Certificate of Designations, otherwise
seek the election or appointment to, or representation on, or the nomination of
any candidate to, the Board;

(e) deposit any Voting Stock in any voting trust or subject any Voting Stock to
any arrangement or agreement with respect to the voting of any Voting Stock that
is inconsistent with the voting obligations of the Investor hereunder;

 

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(f) except as expressly contemplated by this Agreement or the Certificate of
Designations, otherwise act, alone or in concert with others, to seek
representation on or to control or influence the management, Board or policies
of the Company or its Subsidiaries;

(g) form, join or in any way participate in a “group” (within the meaning of
Section 13(d) of the Exchange Act) with respect to the Company involving any of
the actions items described under clauses (a) through (f) hereof;

(h) knowingly take any action which would or would reasonably be expected to
result in the Company having to make a public announcement regarding any of the
actions described under clauses (a) through (f) hereof; or

(i) otherwise take or cause any action inconsistent with any of the foregoing
provisions of this Section 10.1.

10.2. Notwithstanding the provisions of Section 10.1, if at any time the
percentage of the Total Voting Power Beneficially Owned by the Investor and its
Affiliates (together, the “Investor Parties”) decreases as a result of an
Excluded Issuance, the Investor Parties may acquire in the secondary market such
additional number of shares of Common Stock necessary to maintain the Total
Voting Power of the Company that the Investor Parties Beneficially Owned
immediately prior to such Excluded Issuance (the “Additional Shares”).

10.3. Notwithstanding the provisions of Section 10.1, (I) nothing in this
Agreement shall prohibit or restrict the Investor or its directors, officers,
employees, representatives and Affiliates controlled by (but not under common
control with) the Investor and any other Affiliates that have received Company
Confidential Information, on its behalf, from, directly or indirectly,
(i) acquiring, agreeing to acquire or offering to acquire Voting Stock or direct
or indirect rights or options to acquire Voting Stock (v) pursuant to the
issuance of Shares contemplated by Section 1.1 of this Agreement, (w) pursuant
to the conversion of the Shares in accordance with the Certificate of
Designations, (x) pursuant to any dividends or distributions on such Shares or
Common Stock, (y) pursuant to Section 10.2 or (z) during a Permitted Purchase
Period (provided, however, the Investor Parties shall be prohibited from
purchasing additional shares of Common Stock during a Permitted Purchase Period
if such purchase would result in the Investor Parties Beneficially Owning 25% or
more of the Total Voting Power of the Company), (ii) following the conclusion of
the period set forth in Section 9, consummating, soliciting, offering, seeking
to effect and negotiating with any Person regarding a transfer of the capital
stock of the Company Beneficially Owned by the Investor or its permitted assigns
and transferees, (iii) disclosing the Investor’s intention with respect to the
voting of any Voting Stock Beneficially Owned by it so long as such voting
intention is consistent with the terms of this Agreement, or (iv) from
exercising its rights related to the Preferred Directors in the Certificate of
Designations and this Agreement and the exercise by such Preferred Directors of
their rights and fiduciary duties as directors of the Company; and (II) if the
Board determines to engage in a process that could give rise to a Change of
Control, the Company shall invite and permit the Investor to participate in such
process on the terms and conditions generally made available to the other
participants in such process; provided, however, that if the Investor elects to
participate in such process, the Preferred Directors shall recuse themselves
from any further Board discussions relating to such process.

 

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10.4. For purposes of this Section 10, a “Pending COC Event” means, the earlier
of (a) the date on which the Board (i) publicly recommends that the stockholders
tender their shares to any Person who has publicly announced a tender or
exchange offer which, if consummated, would result in a Change of Control, or
(ii) fails to recommend that stockholders reject such an offer within 10
business days after its public announcement or commencement or otherwise fails
to make a “stop-look-and-listen” communication to the stockholders of the
Company within such time period, (b) the execution by the Company of a
definitive agreement which if consummated will result in a Change of Control, or
(c) the public announcement by the Company that it recommends any transaction
that, if consummated, would result in a Change of Control.

11. Board Matters.

11.1. Definitions. For purposes of this Section 11, the term “Preferred
Director” shall have the meaning set forth in the Certificate of Designations.

11.2. Committees. At any time that the Investor is entitled to elect Preferred
Directors in accordance with Section 9(b) of the Certificate of Designations or
to designate for nomination a director in accordance with Section 11.3 hereof,
one Preferred Director (as selected by the Investor) will be entitled to sit on
each committee of the Board (subject to the selected Preferred Director
satisfying the requirements applicable to directors of companies listed on the
Nasdaq Stock Market, and if the Company becomes listed on any other stock
exchange, the requirements applicable to directors of companies listed on such
stock exchange, and other applicable qualifications under law).

11.3. Board Nomination. At any time that the Investor is not entitled to elect
two Preferred Directors in accordance with Section 9(b) of the Certificate of
Designations, but the Investor Beneficially Owns shares of Common Stock and/or
Shares representing in the aggregate 5% or more of the Total Voting Power of the
Company, then the Company agrees that it shall:

(a) cause the Board to have at least the number of vacancies (either by adopting
a resolution increasing the size of the Board by up to two members or otherwise
as would be required for Preferred Directors in accordance with Section 9(b) of
the Certificate of Designations, as if the Investor Beneficially Owned an
equivalent percentage of Voting Stock in the form of Shares entitled to separate
series voting;

(b) nominate for election to the Board as part of the slate of nominees
recommended by the Board and use its reasonable best efforts to have elected as
members of the Board:

(i) two individuals designated by the Investor until the later of (A) the first
anniversary of the Closing and (B) subject to Section 11.6, the date on which
the Investor ceases to Beneficially Own Voting Stock representing 15% or more of
the Total Voting Power of the Company; or

 

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(ii) one individual designated by the Investor if the Investor Beneficially Owns
Voting Stock representing, subject to Section 11.6, 5% or more but less than 15%
of the Total Voting Power of the Company;

(c) recommend that the Company’s stockholders vote in favor of the persons
designated for nomination by the Investor; and

(d) if, for any reason, a designee of the Investor hereunder is not elected to
the Board by the stockholders, then the Company shall exercise all authority
under applicable Law to cause a different designee of the Investor to be elected
to the Board.

Any director so nominated and elected to the Board shall constitute a “Preferred
Director” for purposes of Section 11.2 hereof. Notwithstanding anything to the
contrary herein, under no circumstances will the Investor be entitled to
nominate to the Board hereunder and/or elect as a series to the Board in
accordance with Section 9(b) of the Certificate of Designations an aggregate
number of directors that exceeds two.

11.4. Board Size. For so long as the Investor is entitled to elect or nominate a
Preferred Director, the Company shall not increase the Board to more than 9
members without the consent of the Investor.

11.5. Vacancies. For so long as the Investor is entitled to elect or nominate a
Preferred Director, in the event that a vacancy is created by the death,
disability, retirement, resignation or removal of any Preferred Director, the
Investor may designate or nominate, as applicable, another individual to be
elected to fill the vacancy created thereby, and the Company hereby agrees to
take, at any time and from time to time, all actions necessary to accomplish the
same.

11.6. Notice of Step-Down of Board Representation. If at any time the percentage
of Voting Stock Beneficially Owned by the Investor decreases as a result of an
Excluded Issuance, such that the level of Board representation of the Investor
would be reduced, the Company shall provide the Investor with written notice
thereof, including the applicable calculations with respect thereto. In the
event that, within 10 business days of receipt of such notice, the Investor
notifies the Company that it intends within 90 days to acquire sufficient
additional Voting Stock in accordance with and to the extent permitted by
Section 10.2 of this Agreement necessary to maintain its then current level of
Board representation, then, until the end of such 90 day period (and thereafter
if the Investor in fact restores its percentage to the extent necessary to
maintain its then current level of Board representation) the Board shall
continue to have the number of Preferred Directors that corresponds to the
percentage of the Total Voting Power of the Company Beneficially Owned by the
Investor prior to such issuance of Voting Stock by the Company.

 

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11.7. Rights of Preferred Directors. Notwithstanding anything to the contrary in
this Agreement, nothing in this Agreement shall restrict the right of each
Preferred Director on the Board or any committee thereof to vote on any matter
as such individual believes appropriate in light of his or her fiduciary duties
as a director or committee member or except as set forth in Section 10.3,
restrict the manner in which a Preferred Director may participate in his or her
capacity as a director in deliberations or discussions at meetings of the Board
or as a member of any committee thereof. The Company agrees that the Preferred
Directors shall be entitled to the same rights, privileges and compensation as
the other members of the Board in their capacity as such, including with respect
to insurance coverage and reimbursement for Board participation and related
expenses. The Company shall maintain, at its own expense, directors’ and
officers’ liability insurance with coverage no less favorable to the directors
than the policies that are in effect on the date hereof.

12. Termination.

12.1. Termination of Agreement Prior to Closing. This Agreement may be
terminated at any time prior to the Closing:

(a) by either the Investor or the Company if the Closing shall not have occurred
by the 120th calendar day following the date of this Agreement; provided,
however, that the right to terminate this Agreement under this Section 12.1
shall not be available to any party whose failure to fulfill any obligation
under this Agreement shall have been the cause of, or shall have resulted in,
the failure of the Closing to occur on or prior to such date;

(b) by either the Investor or the Company in the event that any Governmental
Authority (as defined in Exhibit C hereto) shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise prohibiting
the transactions contemplated by this Agreement and such order, decree, ruling
or other action shall have become final and nonappealable; or

(c) by the mutual written consent of the Investor and the Company.

12.2. Effect of Termination Prior to Closing. In the event of termination of
this Agreement as provided in Section 12.1, this Agreement shall forthwith
become void and there shall be no liability on the part of either party hereto,
except that nothing herein shall relieve either party from liability for any
breach of any covenant or agreement set forth in this Agreement.

13. Indemnification. In addition to the payment of expenses pursuant to
Section 4.10 (Payment of Expenses), the Company (the “Indemnitor”) hereby agrees
to indemnify, pay and hold the Investor and its Affiliates and each of their
respective officers, directors, partners, employees and members (collectively,
the “Indemnified Parties”) harmless from and against any and all costs,
expenses, liabilities, obligations, losses, damages (consequential or
otherwise), penalties, actions, judgments, suits, claims and disbursements of
any kind or nature whatsoever (including the reasonable fees and expenses of
counsel) which may be imposed on, incurred by, or

 

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asserted against such Indemnified Party, in any manner relating to or arising
out of the failure of any of the representations and warranties set forth in
Sections 2.2(a) (Financial Statements), 2.2(b) (Financial Statements), 2.5
(Litigation) and 2.18 (Compliance with Laws) of this Agreement to be true and
correct as of the date of this Agreement (the “Indemnified Liabilities”). Each
Indemnified Party shall give the Indemnitor prompt written notice of any claim
that might give rise to Indemnified Liabilities setting forth a description of
those elements of such claim of which such Indemnified Party has knowledge;
provided, that any delay or failure to give such notice shall not affect the
obligations of the Indemnitor unless (and then solely to the extent) such
Indemnitor is materially prejudiced by such delay or failure. The Indemnitor
shall have the right at any time during which such claim is pending to select
counsel to defend and control the defense thereof and settle any claims for
which they are responsible for indemnification hereunder (provided, that the
Indemnitor will not settle any such claim without (i) the appropriate
Indemnified Party’s prior written consent, which consent shall not be
unreasonably withheld or (ii) obtaining an unconditional release of the
appropriate Indemnified Party from all claims arising out of or in any way
relating to the circumstances involving such claim) so long as in any such event
the Indemnitor shall have stated in a writing delivered to the Indemnified Party
that, as between the Indemnitor and the Indemnified Party, the Indemnitor is
responsible to the Indemnified Party with respect to such claim to the extent
and subject to the limitations set forth herein; provided, that the Indemnitor
shall not be entitled to control the defense of any claim in the event that in
the reasonable opinion of counsel for the Indemnified Party there are one or
more material defenses available to the Indemnified Party which are not
available to the Indemnitor; provided, further that with respect to any claim as
to which the Indemnified Party is controlling the defense, the Indemnitor will
not be liable to any Indemnified Party for any settlement of any claim pursuant
to this Section that is effected without its prior written consent, which
consent shall not be unreasonably withheld, conditioned or delayed. To the
extent that the undertaking to indemnify, pay and hold harmless set forth in the
preceding sentence may be unenforceable because it is violative of any law or
public policy, the Company shall contribute the maximum portion which it is
permitted to pay and satisfy under applicable law to the payment and
satisfaction of all Indemnified Liabilities incurred by the Indemnified Parties
or any of them. The obligations of the Company set forth in this Section shall
survive until the third anniversary of the date of the Closing and, with respect
to any claim for Indemnified Liabilities made prior to the third anniversary of
the Closing, until the final resolution thereof. The indemnity provided in this
Section shall be the sole and exclusive remedy of the Indemnified Parties after
the Closing for any inaccuracy or breach of the representations and warranties
set forth in Sections 2.2(a) (Financial Statements), 2.2(b) (Financial
Statements), 2.5 (Litigation) and 2.18 (Compliance with Laws) of this Agreement.

14. Publicity. On the date hereof, the Company shall issue a press release
substantially in the form of Exhibit E hereto. No other written public release
or written announcement concerning the purchase of the Series A Preferred Stock
contemplated hereby shall be issued by any party without the prior written
consent of the other party (which consent shall not be unreasonably withheld),
except as such release or announcement may be required by law or the rules or
regulations of any securities exchange, in which case the party required to make
the release or announcement shall, to the extent reasonably practicable, allow
the other party reasonable time to

 

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comment on such release or announcement in advance of such issuance. The
provisions of this Section shall not restrict the ability of a party to
summarize or describe the transactions contemplated by this Agreement in any
prospectus or similar offering document so long as the other party is provided a
reasonable opportunity to review such disclosure in advance.

15. Miscellaneous.

15.1. Governing Law. This Agreement shall be governed in all respects by the
laws of the State of New York without regard to choice of laws or conflict of
laws provisions thereof that would require the application of the laws of any
other jurisdiction.

15.2. Submission to Jurisdiction; Venue; Waiver of Trial by Jury. Each of the
parties hereto irrevocably submits to the exclusive jurisdiction of any United
States Federal court sitting in the County of New York, in the State of New
York, over any suit, action or proceeding arising out of or relating to this
Agreement or the transactions contemplated thereby (or, solely to the extent
that no such United States Federal court has jurisdiction over such suit, action
or proceeding, to the exclusive jurisdiction of any New York State court sitting
in the County of New York, in the State of New York, with respect thereto). Each
of the parties irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of venue of any such
suit, action or proceeding brought in such a court and any claim that any such
suit, action or proceeding brought in such a court has been brought in an
inconvenient forum. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS SET FORTH IN THIS SECTION.

15.3. Survival. The representations and warranties of the Company made in this
Agreement shall survive any investigation made by the Investor, and shall
survive the Closing for a period of three years thereafter, and after the third
anniversary of the Closing such representations and warranties shall have no
further force and effect, including in respect of Section 13 hereof (subject to
the second to last sentence of Section 13). All statements of the Company as to
factual matters contained in any certificate or exhibit delivered by or on
behalf of the Company pursuant to this Agreement shall be deemed to be the
representations and warranties of the Company

 

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hereunder as of the date of such certificate or exhibit. The representations and
warranties of the Investor made in this Agreement (other than those set forth in
Section 3.1, which shall survive the Closing for a period of three years
thereafter) shall terminate at the Closing.

15.4. Enforcement of Agreement. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to seek an injunction
or injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Federal court sitting in the County of
New York, in the State of New York (or, solely to the extent that no such
Federal court has jurisdiction over such suit, action or proceeding, in any New
York State court sitting in the County of New York, in the State of New York),
this being in addition to any other remedy to which they are entitled at law or
in equity. Additionally, each party hereto irrevocably waives any defenses based
on adequacy of any other remedy, whether at law or in equity, that might be
asserted as a bar to the remedy of specific performance of any of the terms or
provisions hereof or injunctive relief in any action brought therefor.

15.5. Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto;
provided, however, that the rights of the Investor under this Agreement shall
not be assignable to any Person without the consent of the Company; provided,
further, however, that the Investor shall be permitted, without the consent of
the Company, to assign all or a portion of its rights and obligations to
purchase Shares at the Closing to one or more co-invest vehicles under common
control or management with the Investor, in which case such co-invest vehicle(s)
shall become party to this Agreement by execution of a joinder hereto and each
such co-invest vehicle(s) shall thereafter constitute an “Investor” for all
purposes hereunder as if it were an Investor as of the date hereof, and Schedule
A hereto shall be modified to reflect such assignment of rights and obligations
accordingly; provided, further that any assignment pursuant to the preceding
proviso shall not relieve the Investor of its obligation to purchase Shares at
the Closing until the Closing has occurred and the assignee has funded its
obligation to purchase Shares hereunder.

15.6. No Third Party Beneficiaries. Notwithstanding anything contained in this
Agreement to the contrary, nothing in this Agreement, expressed or implied, is
intended to confer on any Person (other than the parties hereto) any rights,
remedies, obligations or liabilities under or by reason of this Agreement, and
no Person that is not a party to this Agreement (including without limitation
any partner, member, stockholder, director, officer, employee or other
beneficial owner of any party hereto, in its own capacity as such or in bringing
a derivative action on behalf of a party hereto) shall have any standing as a
third party beneficiary with respect to this Agreement or the transactions
contemplated hereby, other than the Indemnified Parties identified in Section 13
hereof and any Eligible Holder solely with respect to Section 7.

 

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15.7. No Personal Liability of Directors, Officers, Owners, Etc. No director,
officer, employee, incorporator, stockholder, managing member, member, general
partner, limited partner, principal or other agent of the Investor or the
Company shall have any liability for any obligations of the Investor under this
Agreement or for any claim based on, in respect of, or by reason of, the
respective obligations of the Investor or the Company hereunder. Each party
hereto hereby waives and releases all such liability. This waiver and release is
a material inducement to each party’s entry into this Agreement.

15.8. Entire Agreement. This Agreement and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement among
the parties with regard to the subjects hereof and thereof and supersede all
prior agreements and understandings between the parties hereto with respect
thereto, including without limitation, the Confidentiality Agreement between the
Company and One Equity Partners III, L.P. (“OEP”) dated July 13, 2009 (the
“Confidentiality Agreement”); provided, that the Confidentiality Agreement shall
not be superseded by this Agreement until the Closing.

15.9. Notices, Etc. Except as otherwise provided in this Agreement, all notices,
requests, claims, demands, waivers and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, return receipt requested, or otherwise
delivered by hand or by messenger, addressed:

 

  (a) if to the Investor, to:

OEP AC Holdings, LLC

c/o One Equity Partners III, L.P.

320 Park Avenue, 18th Floor

New York, New York 10022

Telephone: (212) 277-1500

Attention: Gregory A. Belinfanti and Christian Ahrens

With a copy to:

Dechert LLP

1095 Avenue of the Americas

New York, New York 10036

Telephone: (212) 698-3500

Attention: Derek M. Winokur

(b) if to any other Holder of any Shares, at such address as such Holder shall
have furnished to the Company in writing or, until any such Holder so furnishes
an address to the Company, then to and at the address of the last Holder of such
Shares who has so furnished an address to the Company, and

 

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  (c) if to the Company, to:

ArthroCare Corporation

7500 Rialto Blvd., Building Two

Suite 100

Austin, Texas 78735

Telephone: (512) 391-3900

Attention: Richard Rew

With a copy to:

Latham & Watkins LLP

233 South Wacker Drive, Suite 5800

Chicago, IL 60606

Telephone: (312) 876-7700

Attention: Richard S. Meller

or in any such case to such other address, facsimile number or telephone as a
party may, from time to time, designate in a written notice given in a like
manner. If notice is provided by mail, it shall be deemed to be delivered upon
proper deposit in a mailbox, and if notice is delivered by hand, messenger or
overnight courier service, it shall be deemed to be delivered upon actual
delivery.

15.10. Delays or Omissions. No delay or omission to exercise any right, power,
or remedy accruing to any holder of any Shares upon any breach or default of the
Company under this Agreement shall impair any such right, power, or remedy of
such holder, nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent, or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, or any
waiver on the part of any holder of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing or as provided in this Agreement. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.

15.11. Expenses. The Company and the Investor shall bear their own expenses and
legal fees incurred on their behalf with respect to this Agreement and the
transactions contemplated hereby, except as otherwise provided in Section 4.11
of this Agreement.

15.12. Amendments and Waivers. Any provision of this Agreement may be waived
only by a written instrument signed by the party so waiving such covenant or
other provision, and this Agreement may be amended only by a written instrument
duly executed by both the Company and the Investor; provided, however, that
following the Closing, Section 7 may be waived only by each Eligible Holder as
to itself, or amended only by a writing duly executed by the Company and the
holders of a majority of the Eligible Shares.

 

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15.13. Counterparts. This Agreement may be executed in any number of
counterparts and signatures may be delivered by facsimile or in electronic
format (i.e., “PDF”), each of which may be executed by less than all parties,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.

15.14. Severability. If any provision of this Agreement becomes or is declared
by a court of competent jurisdiction to be illegal, unenforceable, or void,
portions of such provision, or such provision in its entirety, to the extent
necessary, shall be severed from this Agreement and the balance of this
Agreement shall be enforceable in accordance with its terms.

15.15. Permitted Activities. For the avoidance of doubt, the provisions of this
Agreement shall not prohibit activities of any subsidiaries or Affiliates of OEP
in the ordinary course of their respective businesses (“permitted activities”);
provided, that (a) appropriate “information barriers” are established between
individuals who are working on behalf of OEP and its representatives to whom
Company Confidential Information is disclosed hereunder and those individuals
who engage in permitted activities, which information barriers will prevent
Company Confidential Information from being disclosed to such individuals,
(b) such permitted activities are conducted only in accordance with the policies
and procedures governing such information barriers and with applicable law, and
(c) the individuals engaging in permitted activities are not acting at the
direction of OEP or any of its representatives to whom Company Confidential
Information has been disclosed hereunder.

15.16. Titles and Subtitles. The titles and subtitles used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

 

ARTHROCARE CORPORATION By:  

/s/    David Fitzgerald

Name:   David Fitzgerald Title:   Acting President and Chief Executive Officer
OEP AC HOLDINGS, LLC By:  

/s/    Christian Ahrens

Name:   Christian Ahrens Title:   Vice President and Treasurer

SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT

--------------------------------------------------------------------------------

SCHEDULE A

SCHEDULE OF INVESTORS

 

Investor

   Number of Shares    Aggregate Purchase
Price

OEP AC Holdings, LLC

   75,000    $ 75,000,000.00

Total

   75,000    $ 75,000,000.00

--------------------------------------------------------------------------------

EXHIBIT A

FORM OF CERTIFICATE OF DESIGNATIONS

 

A-1

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EXHIBIT B

FORM OF REGISTRATION RIGHTS AGREEMENT

 

B-1

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EXHIBIT C

DEFINITIONS

The following terms shall have the respective meanings for all purposes of the
Agreement:

“Acquisition Transaction” means (a) a merger, joint venture, partnership,
consolidation, dissolution, liquidation, tender offer, recapitalization,
reorganization, share exchange, business combination or similar transaction
involving the Company or (b) any other direct or indirect acquisition involving
50% or more of the total voting power of the Company, or all or substantially
all of the consolidated total assets (including equity securities of its
Subsidiaries) of the Company.

“Affiliate” shall mean any Person controlling, controlled by or under common
control with any other Person; and with respect to an individual, “Affiliate”
shall also mean any other individual related to such individual by blood or
marriage. For purposes of this definition, “control” (including “controlled by”
and “under common control with”) means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of securities, partnership or other
ownership interests, by contract or otherwise.

“Capital Lease Obligations” shall mean the obligations of the Company and its
Subsidiaries on a consolidated basis to pay rent or other amounts under a lease
of (or other agreement conveying the right to use) real and/or personal Property
which obligations are required to be classified and accounted for as a capital
lease on a consolidated balance sheet of the Company and its Subsidiaries under
Generally Accepted Accounting Principles (including Statement of Financial
Accounting Standards No. 13 of the Financial Accounting Standards Board, as
amended) and, for purposes of this Agreement, the amount of such obligations
shall be the capitalized amount thereof, determined in accordance with Generally
Accepted Accounting Principles (including such Statement No. 13).

A “Change of Control” shall be deemed to have occurred (a) if any Person or
group shall acquire beneficial ownership of more than 50% of the Voting Stock
issued and outstanding, (b) upon consummation of a merger or consolidation of
the Company into or with another Person in which the stockholders of the Company
immediately prior to the consummation of such transaction (including a series of
related transactions) shall own less than 50% of the voting securities (or have
the right to appoint less than 50% of the members of the board of directors) of
the surviving Person (or the parent of the surviving Person where the surviving
Person is wholly owned by the parent Person) immediately following the
consummation of such transaction (including a series of related transactions),
(c) upon the consummation of, in one or a series of related transactions, the
sale, transfer or lease (but not including a lease by pledge or mortgage to a
bona fide lender of the Company) of all or substantially all of the assets of
the Company to another Person, or (d) if a majority of the members of the Board
are not Continuing Directors. “Continuing Directors” means, as of any date

 

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of determination, any member of the Board who: (i) was a member of the Board on
the date hereof; or (ii) was nominated for election or elected to the Board with
the approval of a majority of the Continuing Directors who were members of the
Board at the time of such nomination or election.

“Code” shall mean the Internal Revenue Code of 1986, as amended, as now or
hereafter in effect, together with all regulations, rulings and interpretations
thereof or thereunder by the Internal Revenue Service.

“Company Confidential Information” means any confidential or proprietary
information concerning the Company and each of its Subsidiaries, unless such
information can be shown to have been (a) in the possession of the Investor at
the time of its disclosure, (b) in the public domain or otherwise generally
known to the applicable industry (either prior to or after the furnishing of
such information hereunder) through no fault of the Investor, (c) later acquired
by the Investor from another source if such source is not under an obligation to
another party to keep such information confidential or (d) is independently
developed by the Investor without reference to such information.

“Company IPR” means all Intellectual Property Rights owned, in whole or part, by
the Company and each of its Subsidiaries. For the avoidance of doubt, Company
IPR does not include Intellectual Property Rights licensed in from a third
party.

“Confidentiality Exceptions” shall mean, in the event that any Person shall
receive a request to disclose all or any part of the Company Confidential
Information by an order, interrogatory, subpoena or civil investigative demand
in connection with any legal, judicial, regulatory, legislative or similar
process, such Person shall (i) promptly notify the Company of the existence,
terms and circumstances surrounding such a request; (ii) consult with the
Company (to the extent permitted by law) on the advisability of taking legally
available steps to resist or narrow such request and exercise such Person’s
commercially reasonable efforts to pursue any such steps at the Company’s
request and expense; and (iii) if, based on the advice of such Person’s legal
counsel, disclosure of such information is legally required, disclose only such
portion of the Company Confidential Information which is legally required to be
disclosed and, at the Company’s request and expense, exercise such Person’s
commercially reasonable efforts to obtain an order or other reliable assurance
that confidential treatment will be accorded to such portion of the disclosed
information which the Company so designates.

“Contingent Obligations” shall mean, as to any Person, without duplication, any
obligation of such Person guaranteeing or intended to guarantee the payment or
performance of any Indebtedness, leases, dividends or other obligations
(collectively “primary obligations”) of any other Person (the “primary obligor”)
in any manner, whether directly or indirectly, including without limitation, any
obligation of the Person for whom Contingent Obligations is being determined,
whether or not contingent, (a) to purchase any such primary obligation or other
property constituting direct or indirect security therefor, (b) assume or
contingently agree to become or be secondarily liable in respect of any such
primary obligation, (c) to advance or supply funds (i) for the purchase or
payment of

 

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any such primary obligation or (ii) to maintain working capital or equity
capital for the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (d) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation, or (e) otherwise to assure or hold harmless the owner of such
primary obligation against loss in respect thereof; provided, however, that the
term “Contingent Obligations” shall not include (x) endorsements of checks or
other negotiable instruments in the ordinary course of business, (y) performance
or payment guarantees by the Company of any Indebtedness of any of its
Subsidiaries of the type permitted under the Company’s Credit Agreement, and
(z) the obligations and liabilities of guarantors under the Company’s credit
facilities outstanding on the date hereof. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum anticipated liability in
respect thereof (assuming the Person for whom Contingent Obligations is being
determined is required to perform thereunder).

“Eligible Shares” shall mean collectively, the Shares, the shares of Common
Stock issuable upon conversion of the Shares, any New Securities acquired
pursuant to Section 7 of the Agreement, and, with respect to the Investor only,
any Additional Shares acquired pursuant to Section 10.2 of this Agreement and
any shares of Common Stock acquired during a Permitted Purchase Period.

“Environmental Claim” shall mean any third party (including any Governmental
Authority) action, lawsuit, claim or proceeding (including claims or proceedings
at common law) which seeks to impose or alleges liability for (a) preservation,
protection, conservation, pollution, contamination of, or releases or threatened
releases of Hazardous Substances or the migration thereof into the air, surface
water, ground water, land, building or structure or the clean-up, abatement,
removal, remediation or monitoring of such pollution, contamination or Hazardous
Substances; (b) generation, recycling, reclamation, handling, treatment,
storage, disposal or transportation of Hazardous Substances or solid waste (as
defined under the Resource Conservation and Recovery Act and its regulations, as
amended from time to time); (c) exposure to Hazardous Substances; (d) the safety
or health of employees or other Persons in connection with any of the activities
specified in any other subclause of this definition; or (e) the manufacture,
processing, distribution in commerce, presence or use of Hazardous Substances.
An “Environmental Claim” includes a common law action, as well as a proceeding
to issue, modify or terminate an Environmental Permit, or to adopt or amend a
regulation to the extent that the Company or its Subsidiaries are parties to
such a proceeding and such a proceeding attempts to redress violations of the
applicable permit, license, or regulation as alleged by any Governmental
Authority or third party or any representative or agent thereof.

“Environmental Liabilities” shall mean all liabilities arising from any
Environmental Claim, Environmental Permit or Requirement of Environmental Law
under any theory of recovery, at law or in equity, and whether based on
negligence, strict liability or otherwise, including: remedial, removal,
response, abatement, restoration (including natural resources) investigative, or
monitoring

 

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liabilities (including any post-remedial, removal, response, abatement,
restoration (including natural resources damages) or investigative monitoring),
personal injury and damage to property, natural resources or injuries to
persons, and any other related costs, expenses, losses, damages, penalties,
fines, liabilities and obligations, and all costs and expenses necessary to
cause the issuance, re-issuance or renewal of any Environmental Permit including
attorney’s fees and court costs. Environmental Liability shall mean any one of
them.

“Environmental Permit” shall mean any permit, license, approval or other
authorization under any applicable law, regulation and other requirement of the
United States or of any state, municipality or other subdivision thereof or of
any foreign jurisdiction relating to pollution or protection of health or the
environment, including laws, regulations or other requirements relating to
emissions, discharges, releases or threatened releases (including the migration
thereof) of pollutants, contaminants or Hazardous Substances or toxic materials
or wastes into ambient air, surface water, ground water, land, building or
structures or otherwise relating to the manufacture, processing, distribution,
recycling, presence, use, treatment, storage, disposal, transport, or handling
of, wastes, pollutants, contaminants or Hazardous Substances.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and all rules, regulations, rulings and
interpretations adopted by the Internal Revenue Service or the Department of
Labor thereunder.

“ERISA Affiliate” means any entity that is considered a single employer with the
Company under Section 414 of the Code.

“Generally Accepted Accounting Principles” shall mean, as to a particular
Person, those principles and practices (a) which are recognized as such by the
Financial Accounting Standards Board or successor organization, (b) which are
applied for all periods after the date hereof in a manner consistent with the
manner in which such principles and practices were applied to the most recent
audited financial statements of the relevant Person furnished to the Investor
and the Holders, and (c) which are consistently applied for all periods after
the date hereof so as to reflect properly the financial condition, and results
of operations and changes in financial position, of such Person.

“Governmental Authority” shall mean any foreign governmental authority, the
United States of America, any state of the United States and any political
subdivision of any of the foregoing, and any agency, instrumentality,
department, commission, board, bureau, central bank, authority, court or other
tribunal, in each case whether executive, legislative, judicial, regulatory or
administrative, having jurisdiction over the Investor, any of the Holders or the
Company, any of the Company’s Subsidiaries or their respective Property.

“Hazardous Substance” shall mean any hazardous or toxic waste, substance or
product or material defined or regulated by any applicable law, rule, regulation
or order described in the definition of “Requirements of Environmental Law,”
including solid waste (as defined under the Resource Conservation and Recover
Act of 1976 or its regulations, as amended), petroleum and any fraction thereof,
and any radioactive materials and waste.

 

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“Hedging Agreements” shall mean any transaction (including an agreement with
respect thereto) now or hereafter existing which is a rate swap, basis swap,
forward rate transaction, commodity swap, commodity option, equity or equity
index swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap transaction, floor transaction, collar
transaction, forward transaction, currency swap transaction, cross-currency rate
swap transaction, currency option or any other similar transaction (including
any option with respect to any of these transactions) or any combination
thereof, whether linked to one or more interest rates, foreign currencies,
commodity prices, equity prices or other financial measures.

“Incidental Liens” shall mean (a) Liens for taxes, assessments, levies or other
governmental charges (but not Liens for clean up expenses arising pursuant to
Requirements of Environmental Law) not yet due (subject to applicable grace
periods) or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of the Company in accordance with Generally Accepted Accounting
Principles; (b) carriers’, warehousemen’s, mechanics’, landlords’, vendors’,
materialmen’s, repairmen’s, sureties’ or other like Liens (other than Liens for
clean up expenses arising pursuant to Requirements of Environmental Law) arising
in the ordinary course of business (or deposits to obtain the release of any
such Lien) and securing amounts not yet due or which are being contested in good
faith and by appropriate proceedings if, in the case of such contested Liens,
adequate reserves with respect thereto are maintained on the books of the
Company in accordance with Generally Accepted Accounting Principles; (c) pledges
or deposits in connection with workers’ compensation, unemployment insurance and
other social security legislation; (d) easements, rights-of-way, covenants,
reservations, exceptions, encroachments, zoning and similar restrictions and
other similar encumbrances or title defects incurred in the ordinary course of
business which, in the aggregate, are not substantial in amount, and which do
not in any case singly or in the aggregate materially detract from the value or
usefulness of the property subject thereto or materially interfere with the
ordinary conduct of the business of the Company and its Subsidiaries, taken as a
whole; (e) bankers’ liens arising by operation of law; (f) Liens arising
pursuant to any order of attachment, distraint or similar legal process arising
in connection with any court proceeding the payment of which is covered in full
(subject to customary deductibles) by insurance; (g) inchoate Liens arising
under ERISA to secure contingent liabilities of the Company; and (h) rights of
lessees and sublessees in assets leased by the Company or any Subsidiary not
prohibited elsewhere herein.

“Indebtedness” shall mean, as to any Person, without duplication: (a) all
indebtedness (including principal, interest, fees and charges) of such Person
for borrowed money or for the deferred purchase price of Property or services;
(b) any other indebtedness which is evidenced by a promissory note, bond,
debenture or similar instrument; (c) any obligation under or in respect of
outstanding letters of credit, acceptances and similar obligations created for
the account of such Person; (d) all Capital Lease Obligations of such Person;
(e) all indebtedness, liabilities, and obligations secured by any Lien on any
Property owned by such Person even though such

 

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Person has not assumed or has not otherwise become liable for the payment of any
such indebtedness, liabilities or obligations secured by such Lien; (f) any
obligation under or in respect of Hedging Agreements and (g) all Contingent
Obligations and Synthetic Indebtedness of such Person.

“Intellectual Property Rights” means any and all intellectual property and other
similar proprietary rights in any jurisdiction, whether registered or
unregistered, including all rights and interests pertaining to or deriving from:
(a) patents and patent applications, reexaminations, extensions and counterparts
claiming priority therefrom (collectively, “Patents”); inventions, invention
disclosures, discoveries and improvements, whether or not patentable;
(b) computer software and firmware, including data files, source code, object
code and software-related specifications and documentation (collectively
“Software”); (c) works of authorship (“Copyrights”); (d) trade secrets
(including, those trade secrets defined in the Uniform Trade Secrets Act and
under corresponding foreign statutory Law and common law), business, technical
and know-how information, non-public information, and confidential information
and rights to limit the use or disclosure thereof by any Person (collectively
“Trade Secrets”); (e) trademarks, trade names, service marks, certification
marks, service names, brands, trade dress and logos and the goodwill associated
therewith (collectively, “Trademarks”); (f) proprietary databases and data
compilations and all documentation relating to the foregoing, including manuals,
memoranda and records; and (g) domain names; including in each case any
registrations of, applications to register, and renewals and extensions of, any
of the foregoing with or by any Governmental Authority.

“Knowledge” of the Company shall mean the actual knowledge of any of the
following individuals: David Fitzgerald (acting President and Chief Executive
Officer), Todd Newton (Chief Financial Officer), Jim Pacek (Senior Vice
President, Strategic Business Units), Brian Simmons (Chief Accounting Officer),
Richard Rew (General Counsel), and Brian Szymczak (Intellectual Property
Counsel).

“Lien” shall mean any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based on
common law, constitutional provision, statute or contract, and shall include
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions, leases and other title exceptions.

“Material Adverse Effect” means any change, circumstance, development,
occurrence, event or effect (each, a “Company Effect”) that, when considered
either individually or together with all other Company Effects, is or would
reasonably be expected to be materially adverse to (a) the business, properties,
assets, liabilities, consolidated results of operations or financial condition
of the Company and its Subsidiaries, taken as a whole or (b) the ability of the
Company to consummate the transactions contemplated hereby and by the
Registration Rights Agreement; provided that any such Company Effect resulting
or arising from or relating to any of the following matters shall not be
considered when determining whether a Material Adverse Effect has occurred or
would reasonably be expected to occur:

(i) any change, circumstance, development, occurrence, event or effect generally
affecting the businesses or industries in which the Company and its Subsidiaries
operate;

 

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(ii) any conditions affecting the United States general economy or the general
economy in any geographic area in which the Company or its Subsidiaries operate
or developments or changes therein or generally the financial and securities
markets and credit markets in the United States;

(iii) political conditions, including acts of war (whether or not declared),
armed hostilities and terrorism, or developments or changes therein;

(iv) any conditions after the date hereof resulting from natural disasters;

(v) changes after the date hereof in any Laws or Generally Accepted Accounting
Principles;

(vi) any action taken or omitted to be taken by or at the written request or
with the written consent of the Investor;

(vii) any announcement of this Agreement or the transactions contemplated
hereby, in each case, solely to the extent due to such announcement;

(viii) changes after the date hereof in the market price or trading volume of
Common Stock or any other equity, equity-related or debt securities of the
Company or its Affiliates (it being understood that the underlying
circumstances, events or reasons giving rise to any such change can be taken
into account in determining whether a Material Adverse Effect has occurred or
would reasonably be expected to occur);

(ix) any failure to meet any internal or public projections, forecasts,
estimates or guidance for any period (it being understood that the underlying
circumstances, events or reasons giving rise to any such failure can be taken
into account in determining whether a Material Adverse Effect has occurred or
would reasonably be expected to occur); or

(x) any Company Effect arising out of or resulting from any legal claims or
other proceedings made by any of the Company’s stockholders (on their own behalf
or on behalf of the Company) arising out of or related to this Agreement;

provided, however, that Company Effects set forth in clauses (i), (ii), (iii),
(iv) and (v) above may be taken into account in determining whether there has
been or is a Material Adverse Effect if and only to the extent such Company
Effects have a disproportionate impact on the Company and its Subsidiaries,
taken as a whole, relative to other medical device companies operating in the
United States.

 

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“Permitted Purchase Period” shall mean any period commencing immediately
following the third consecutive trading day on which the closing trading price
or consolidated closing bid price, as applicable, of a share of Common Stock was
less than the Trigger Price and ending immediately following the next trading
day on which the closing trading price of a share of Common Stock exceeds the
Trigger Price.

“Person” shall mean any individual, corporation, trust, unincorporated
organization, Governmental Authority or any other form of entity.

“Plan” shall mean (i) any “employee pension benefit plan” (as defined in
Section 3(2)(A) of ERISA), and (ii) all other retirement, supplemental
retirement, stock purchase, stock ownership, stock option, deferred
compensation, excess benefit, profit sharing, bonus, incentive, severance,
termination, change in control, paid time off, welfare or other employee fringe
benefit plan, program or arrangement, maintained, contributed to, or required to
be contributed to by the Company or any ERISA Affiliate or under which the
Company or any ERISA Affiliate has any liability.

“Property” shall mean any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.

“Requirements of Environmental Law” shall mean all requirements imposed by any
Law (including The Resource Conservation and Recovery Act, The Comprehensive
Environmental Response, Compensation, and Liability Act, the Clean Water Act,
the Clean Air Act, and any state analogues of any of the foregoing), rule,
regulation, or order of any Governmental Authority which relate to (i) noise;
(ii) pollution, protection or clean-up of the air, surface water, ground water
or land; (iii) solid, gaseous or liquid waste or Hazard Substance generation,
recycling, reclamation, release, threatened release (or the migration thereof),
treatment, storage, disposal or transportation; (iv) exposure of Persons or
property to Hazardous Substances; (v) the safety or health of employees or other
Persons or (vi) the manufacture, presence, processing, distribution in commerce,
use, discharge, releases, threatened releases (or the migration thereof),
emissions or storage of Hazardous Substances into the environment. Requirement
of Environmental Law shall mean any one of them.

“Subsidiary” of any Person shall mean any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which)
(a) such Person or a subsidiary of such Person is a general partner or (b) more
than fifty percent (50%) of (i) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency), (ii) the interest in the capital or profits of
such partnership, joint venture or limited liability company or (iii) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such Person, by such Person and one or more of
its other Subsidiaries or by one or more of such Person’s other Subsidiaries.

 

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“Synthetic Indebtedness” shall mean the monetary obligation of a Person under
(a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an
agreement for the use or possession of property creating obligations that do not
appear on the balance sheet of such Person (excluding operating leases) but
which upon the insolvency or bankruptcy of such Person, to the extent
functioning as debt for borrowed money, would be characterized as the
indebtedness of such Person (without regard to accounting treatment).

“Tax Returns” shall means all returns, declarations, reports, forms, estimates,
information returns and statements required to be filed in respect of any Taxes
with a taxing authority (including any schedules thereto or amendments thereof).

“Taxes” shall mean all federal, state, county, local, foreign and other taxes
(including, without limitation, income, profits, premium, estimated, excise,
sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital
levy, production, transfer, withholding, employment, unemployment compensation,
payroll-related and property taxes, import duties and other governmental charges
and assessments), whether or not measured in whole or in part by net income, and
including deficiencies, interest, additions to tax or interest and penalties
with respect thereto.

“Total Voting Power” means the total number of votes that may be cast in the
election of directors of the Company if all Voting Stock treated as outstanding
pursuant to the final two sentences of this definition were present and voted at
a meeting held for such purpose. The percentage of the Total Voting Power
Beneficially Owned by any Person is the percentage of the Total Voting Power
that is represented by the total number of votes that may be cast in the
election of directors of the Company by Voting Stock (or Eligible Shares, as
applicable) Beneficially Owned by such Person. In calculating such percentage,
the Voting Stock (or Eligible Shares, as applicable) Beneficially Owned by any
Person that are not outstanding but are subject to issuance upon exercise or
exchange of rights of conversion or any options, warrants or other rights
Beneficially Owned by such Person shall be deemed to be outstanding for the
purpose of computing the percentage of the Total Voting Power represented by
Voting Stock (or Eligible Shares, as applicable) Beneficially Owned by such
Person, but shall not be deemed to be outstanding for the purpose of computing
the percentage of the Total Voting Power represented by Voting Stock
Beneficially Owned by any other Person. Any Person shall be deemed to
“Beneficially Own,” to have “Beneficial Ownership” of, or to be “Beneficially
Owning” any securities (which securities shall also be deemed “Beneficially
Owned” by such Person) that such Person is deemed to “beneficially own” within
the meaning of Rules 13d-3 and 13d-5 under the Exchange Act as in effect on the
date of this Agreement; provided that any Person shall be deemed to Beneficially
Own any securities that such Person has the right to acquire, whether or not
such right is exercisable immediately.

“Trigger Price” shall mean $13 per share, subject to adjustment in accordance
with the anti-dilution provisions of the Certificate of Designations.

 

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“Voting Stock” means capital stock of the Company of the class or classes
pursuant to which the holders thereof have the general voting power under
ordinary circumstances to elect one or more Board members of the Company
(irrespective of whether or not at the time capital stock of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency).

 

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EXHIBIT D

FORM OF OPINION OF LATHAM & WATKINS LLP

SPECIAL COUNSEL TO THE COMPANY

1. The Company is a corporation under the Delaware General Corporation Law (the
“DGCL”), with corporate power and authority to enter into the Securities
Purchase Agreement and the Registration Rights Agreement and to perform its
obligations thereunder. With your consent, based solely on certificates from
public officials, we confirm that the Company is validly existing and in good
standing under the laws of the State of Delaware.

2. The execution, delivery and performance of the Securities Purchase Agreement
and the Registration Rights Agreement have been duly authorized by all necessary
corporate action of the Company, and the Securities Purchase Agreement and the
Registration Rights Agreement have been duly executed and delivered by the
Company.

3. The Securities Purchase Agreement and the Registration Rights Agreement each
constitutes a legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.

4. The filing of the Certificate of Designations with the Secretary of State of
the State of Delaware has been duly authorized by all necessary corporate action
of the Company, and the Certificate of Designations has been filed with the
Secretary of State of the State of Delaware in accordance with the DGCL.

5. The execution and delivery by the Company of the Securities Purchase
Agreement and the Registration Rights Agreement and the issuance and sale of the
Shares by the Company to you pursuant to the Securities Purchase Agreement do
not on the date hereof:

(a) violate the Governing Documents1;

(b) result in a breach of or a default under any of the Material Agreements
listed on Annex I hereto[, except that the opinion expressed in this paragraph
solely with respect to the [—] Material Agreement[s] set forth on Annex I hereto
is qualified as to our knowledge];

 

1 “Governing Documents” means the Articles of Incorporation of the Company, the
Bylaws of the Company, and the Certificate of Designations.

 

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(c) violate any federal or New York statute, rule or regulation applicable to
the Company or the DGCL; or

(d) require any consents, approvals, or authorizations to be obtained by the
Company from, or any registrations, declarations or filings to be made by the
Company with, any governmental authority under any federal or New York statute,
rule or regulation applicable to the Company or the DGCL on or prior to the date
hereof that have not been obtained or made other than (i) such as may be
required under state securities or blue sky laws (as to which we express no
opinion) and (ii) the filing of any registration statement with the Securities
and Exchange Commission contemplated by the Securities Purchase Agreement and
the Registration Rights Agreement and the declaration of such registration
statement as being effective by the Securities and Exchange Commission.

6. The Shares to be issued and sold by the Company pursuant to the Securities
Purchase Agreement have been duly authorized by all necessary corporate action
of the Company, and, when issued to and paid for by you in accordance with the
terms of the Securities Purchase Agreement, will be validly issued, fully paid
and nonassessable and free of preemptive rights arising from the Governing
Documents. The shares of the Company’s Common Stock initially issuable upon due
conversion of the Shares have been authorized and reserved for issuance upon
conversion of the Shares by all necessary corporate action of the Company and
the shares of the Company’s Common Stock issuable upon due conversion of the
Shares in accordance with their terms and the terms of the Governing Documents,
would, if so issued today be validly issued, fully paid and nonassessable and
free of preemptive rights arising from the Governing Documents.

7. The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, par value $0.001 per share and 5,000,000 shares of Preferred
Stock, par value $0.001 per share.

8. Assuming the representations and warranties of the parties thereto in the
Securities Purchase Agreement are true and assuming compliance by the parties
thereto with their respective covenants and agreements set forth therein, no
registration of the Shares under the Securities Act of 1933, as amended, is
required for the purchase of the Shares by you in the manner contemplated by the
Securities Purchase Agreement. We express no opinion, however, as to when or
under what circumstances any Shares initially purchased by you may be reoffered
or resold.

9. The Company is not, and immediately after giving effect to the sale of the
Shares in accordance with the Securities Purchase Agreement and the application
of the net proceeds in accordance with the Securities Purchase Agreement will
not be, required to be registered as an “investment company” within the meaning
of the Investment Company Act of 1940, as amended.

 

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EXHIBIT E

FORM OF PRESS RELEASE

Filed as Exhibit 99.1 to the Current Report on Form 8-K filed with the
Securities and Exchange

Commission on August     , 2009

CONTACTS:

ArthroCare Corp.

Corinne Ervin

512-391-3907

Joele Frank, Wilkinson Brimmer Katcher

Andrea Priest / Jennifer Friedman

212-355-4449

ARTHROCARE ANNOUNCES AGREEMENT

WITH ONE EQUITY PARTNERS FOR $75 MILLION INVESTMENT

Portion of Funds to be Used to Repay Existing Indebtedness

AUSTIN, TEXAS – August 17, 2009 – ArthroCare Corp. (Pink Sheets: ARTC.PK) today
announced that it has entered into an agreement with One Equity Partners (OEP),
the global private equity investment arm of JPMorgan Chase & Co., whereby OEP
will purchase $75 million of newly-issued ArthroCare Series A Convertible
Preferred Stock. ArthroCare intends to use the proceeds to repay the Company’s
existing Credit Agreement and expects to use the remaining portion for general
corporate purposes.

David Fitzgerald, ArthroCare’s Acting President and Chief Executive Officer,
said, “We are pleased to have the support of a prestigious investor such as One
Equity Partners. This investment attests to the strength of our underlying
business. This financing will provide ArthroCare with the resources to repay our
debt and also give us additional financial flexibility to continue pursuing our
plans. We look forward to working with One Equity Partners to create long term
shareholder value.”

Dick Cashin, Managing Partner of One Equity Partners, said, “We are excited to
be partnering with ArthroCare, a leader and innovator in the medical device
industry with a strong product portfolio. We are impressed by the strength of
ArthroCare’s management team and product portfolio, and we look forward to
supporting the Company in its next phase of growth.”

Under the terms of the agreement, OEP will purchase $75 million of newly-issued
ArthroCare Series A Convertible Preferred Stock, which will be convertible into
shares of ArthroCare common stock at $15.00 per share, a premium over the
closing price of the

 

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Company’s common stock on August [14], 2009 [and the 30-day trading average]. In
connection with its investment, Chris Ahrens and Greg Belinfanti, both Partners
of OEP will join ArthroCare’s Board of Directors. Cumulative dividends on the
ArthroCare preferred stock will be payable-in-kind at an annual rate of 3.0% for
five years after the preferred stock is issued, after which, if not converted to
common shares, OEP may elect to require ArthroCare to redeem the preferred stock
for cash. ArthroCare continues to use its best efforts to become current in its
periodic reporting with the Securities and Exchange Commission (SEC) and has
agreed, thereafter, to file with the SEC a registration statement on Form S-1 to
register the resale of the common stock underlying the newly-issued securities.
Additional information regarding the OEP investment is included in the current
report on Form 8-K that ArthroCare is filing with the SEC.

ABOUT ARTHROCARE

[Founded in 1993, ArthroCare Corp. is a highly innovative, multi-business
medical device company that develops, manufactures and markets minimally
invasive surgical products. With these products, ArthroCare targets a
multi-billion dollar market opportunity across several medical specialties,
significantly improving existing surgical procedures and enabling new, minimally
invasive procedures. Many of ArthroCare’s products are based on its patented
Coblation technology, which uses low-temperature radiofrequency energy to gently
and precisely dissolve rather than burn soft tissue — minimizing damage to
healthy tissue. Used in more than four million surgeries worldwide,
Coblation-based devices have been developed and marketed for sports medicine;
spine/neurologic; ear, nose and throat (ENT); cosmetic; urologic and gynecologic
procedures. ArthroCare also has added a number of novel technologies to its
portfolio, including Opus Medical sports medicine, Parallax spine and Applied
Therapeutics ENT products, to complement Coblation within key indications.]

ABOUT ONE EQUITY PARTNERS

Established in 2001, One Equity Partners manages $8 billion of investments and
commitments for JPMorgan Chase & Co. in direct private equity transactions. One
Equity Partners has invested in over 30 companies in a variety of industries
including defense, chemicals, healthcare, technology and manufacturing. One
Equity Partners’ investment professionals are located across North America,
Europe and Asia, with offices in New York, Chicago, Menlo Park, Frankfurt and
Hong Kong. Visit http://www.oneequity.com/ for more information.

FORWARD-LOOKING STATEMENTS

The information provided herein includes forward-looking statements within the
meaning of Section 21E of the Exchange Act. Statements that are not historical
facts are forward-looking statements. Forward-looking statements are based on
beliefs and assumptions by management and on information currently available to
management. Forward-looking statements speak only as of the date they are made,
and the Company undertakes no obligation to update any of them publicly in light
of new information or future events. Additional factors that could cause actual
results to differ materially from those contained in any forward-looking
statement

 

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include, without limitation: the likelihood of fulfilling the closing conditions
in the Securities Purchase Agreement for the Series A Convertible Preferred
Stock, including but not limited to the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Act; the ability of the
Company to fulfill its obligations with respect to the rights of the holders of
the Series A Convertible Preferred Stock, including but not limited to the
redemption rights and registration rights of the holders of the Series A
Convertible Preferred Stock; the resolution of litigation pending against the
Company including the arbitration between Gyrus Group, PLC, Ethicon, Inc. and
ArthroCare, and the covenant in the forbearance agreement between the Company
and its lenders (the “Forbearance Agreement”) restricting the Company from
making any cash payments with respect to the award in such arbitration; other
pending litigation; the ability of the Company to fulfill its obligations under
the Forbearance Agreement, including but not limited to the payment of the
Forbearance Fee (defined in the Forbearance Agreement) and the payment of
principal and interest under the Credit Agreement; the termination of all the
lenders’ commitments and letters of credit under the Credit Agreement; the
ability of the Company to provide the financial statements required to be
delivered pursuant to the Credit Agreement prior to the Forbearance Effective
Date (defined in the Forbearance Agreement); unanticipated accounting issues or
audit issues regarding the financial data for the periods being restated in the
Company’s previously announced restatement; the ability of the Company and its
independent registered public accounting firm to confirm information or data
identified in the review of the Company’s internal controls and the review of
insurance billing and healthcare fraud-and-abuse compliance practices being
conducted under the supervision of the Audit Committee of the Board of Directors
(the reviews of internal controls and insurance reimbursement practices are
collectively referred to herein as the “Review”); the likelihood that
deficiencies in the Company’s internal controls constitute material weaknesses
in the Company’s internal control over financial reporting; unanticipated issues
regarding the Reviews that prevent or delay the Company’s independent registered
public auditing firm from relying upon the Reviews or that require additional
efforts, documentation, procedures, review or investigation; the Company’s
ability to design or improve internal controls to address issues detected in the
Reviews or by management in its reassessment of the Company’s internal controls;
the impact upon the Company’s operations of the Reviews, legal compliance
matters or internal controls, improvement and remediation; difficulties in
controlling expenses, including costs of the Reviews, legal compliance matters
or internal controls review, improvement and remediation; the Company’s ability
to become current in its SEC periodic reporting requirements; the outcome of
pending litigation and the anticipated arbitration proceeding; the results of
the investigations being conducted by the SEC and the United States Attorneys’
offices in Florida and North Carolina; the impact on the Company of additional
civil and criminal investigations by state and federal agencies and civil suits
by private third parties involving the Company’s financial reporting and its
previously announced restatement and its insurance billing and healthcare
fraud-and-abuse compliance practices; general business, economic and political
conditions; competitive developments in the medical devices market; changes in
applicable legislative or regulatory requirements; the Company’s ability to
effectively and successfully implement its financial and strategic alternatives,
as well as business strategies, and manage the risks in its business; and the
reactions of the marketplace to the foregoing.

 

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EXHIBIT 2.5

LITIGATION

Patent Litigation:

On November 14, 2007, the Company brought a lawsuit against Gyrus Medical Inc.,
Gyrus ENT L.L.C. and Gyrus ACMI Inc., Case No. 1:07-CV-00729-SLR in the United
States District Court for the District of Delaware, in which the Company seeks
monetary damages and equitable relief for claims of patent infringement relating
to U.S. Patent No. 5,697,882 (the “’882 Patent). In the lawsuit, the Company
alleges that the use of Gyrus’s “PlasmaCision” and “PlasmaKinetic” products and
systems infringes the ’882 Patent. Gyrus seeks invalidation of the Company’s
patent based on alleged inequitable conduct and alleged prior art. This
litigation is currently pending and the case has been set for trial beginning on
November 2, 2009.

On May 5, 2008, Gyrus Medical Ltd. and Gyrus Group PLC commenced an arbitration
proceeding against the Company. In its arbitration notice, Gyrus alleged that,
under the Settlement Agreement dated June 28, 1999 among the Company, Gyrus
Medical Ltd., and Ethicon, Inc. and certain Ethicon affiliates (collectively,
“Ethicon”), the Company had made “material changes” to certain of its
arthroscopy products — the Super TurboVac 90, the UltraVac, the Super MultiVac
50, the TurboVac 90XL and the MultiVac XL — and that those products infringed
two Gyrus patents. Shortly thereafter, on June 12, 2008, Ethicon and DePuy
Mitek, Inc. joined the arbitration (Gyrus, Ethicon and DePuy Mitek collectively,
the “Claimants”). The Company filed a counterclaim in the arbitration for breach
of the Settlement Agreement, alleging that Ethicon had not paid certain
royalties when due under the Settlement Agreement.

On June 10, 2009, the arbitration panel issued its interim decision and
award. The panel ruled in favor of the Claimants on all issues, including the
patent infringement and breach of contract claims, and against the Company on
its breach of contract counterclaim. The panel awarded the Claimants (i) $11.7
million for royalties on the patents due from April 2001 through February 2009,
including pre-judgment interest of 10% through July 15, 2009; (ii) a 6.5%
royalty for all sales of the infringing products starting from March 1, 2009;
and (iii) reasonable attorneys’ fees and costs, including the costs of the
arbitration. The interim decision is attached as Exhibit B to the Petition
referenced below and attached hereto.

Gyrus and Ethicon submitted a fee request to the Company in the amount of $4.5
million. The Company objected to the amount of this request and the parties
informed the panel that they have failed to reach agreement on an attorneys fees
amount and the panel has requested that both sides submit additional information
to the Panel so that it can issue a ruling on this dispute.

 

2.5-1

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The Company has since filed a Petition to vacate or modify the Arbitration Award
and to stay the award. This petition was filed in the U.S. District Court for
the Northern District of California. The petition is attached hereto.

Securities Litigation – Class Action and Derivative Suits:

On April 4, 2008, a securities fraud class action lawsuit was filed in Federal
court in the Southern District of Florida against the Company and certain of its
former executive officers alleging improper revenue recognition practices by the
Company and the improper reporting of such revenue in Commission filings and
press releases (McIlvaine v. ArthroCare).

On July 25, 2008, a securities fraud class action lawsuit was filed in Federal
court in the Western District of Texas against the Company, a former director
and certain of its current and former executive officers alleging improper
revenue recognition practices by the Company and the improper reporting of such
revenue in Commission filings and press releases (Strong v. ArthroCare).

On August 7, 2008, a derivative action was filed in Federal court in the
Southern District of Florida against the Company and its then directors alleging
breach of fiduciary duty based on the Company’s improper revenue recognition and
its improper reporting of such revenue in Commission filings and press releases
(Weil v. Baker).

On October 20, 2008, a derivative action was filed in Texas State District Court
against the Company, its then directors and certain of its current and former
executive officers alleging breach of fiduciary duty and unjust enrichment based
on the Company’s improper revenue recognition and its improper reporting of such
revenue in Commission filings and press releases (Bocklet v. Baker). A stay has
been granted in this action until October 1, 2009.

On March 4, 2009, a derivative action was filed in Federal court in the Western
District of Texas against the Company’s current directors, a former director,
certain of its current and former executive officers and other employees and
PriceWaterhouseCoopers, LLP alleging (i) disgorgement under Section 304 of the
Sarbanes-Oxley Act; (ii) violations of Section 10(b) of the Exchange Act;
(iii) breach of fiduciary duty; (iv) abuse of control; (v) gross mismanagement
of the Company; (vi) waste of corporate assets; and (vii) unjust enrichment
(King v. Baker). A joint motion to consolidate and motion to stay was filed on
July 2, 2009.

On April 29, 2009, a derivative action was filed in Federal court in the
Southern District of Florida against the Company’s current directors and a
former director alleging breach of fiduciary duty based on the Company’s
improper revenue recognition and its improper reporting of such revenue in
Commission filings and press releases (Barron v. Baker).

 

2.5-2

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As of the date hereof, the aforementioned cases have been consolidated into the
following:

(i) In Re ArthroCare Corporation Securities Litigation, Case
No. 1:08-cv-00574-SS (consolidated), U.S. District Court, Western District of
Texas. In this action, Plaintiffs allege violations of Sections 10(b) and 20(a)
of the Exchange Act and Rule 10b-5 promulgated thereunder in a putative
securities class action on behalf of certain purchasers of Company stock.
Plaintiffs allege that the Company and certain officers and directors violated
federal securities laws by issuing false and misleading financial statements and
making material misrepresentations regarding the Company’s internal controls,
business, and financial results. Additionally, certain shareholders have alleged
derivative claims on behalf of the Company that directors and officers of the
Company breached their fiduciary duties to shareholders based on similar acts.
The cases have been consolidated, and the Plaintiffs have been ordered to file
an Amended Consolidated Complaint.

(ii) In Re ArthroCare Corporation Derivative Litigation, Case No. D-1-GN-08-3484
(consolidated), Travis County District Court. In this action, certain
shareholders of the Company have alleged derivative claims on behalf of the
Company that directors and officers of the Company breached their fiduciary
duties to shareholders by failing to maintain adequate financial controls over
revenue recognition, allowing improper financial reporting, disseminating false
financial statements, and engaging in insider trading. The case has been stayed
until October 1, 2009 based on the consolidated federal securities and
derivative case.

Insurance-related Private Third-Party Claims:

The Company has been approached by The Allstate Corporation (“Allstate”) seeking
a monetary settlement of potential claims resulting from the former
reimbursement practices of the Company and certain of its subsidiaries relating
to the settlements of personal injury accident cases obtained from automotive
insurance providers. As of the date hereof, no settlement arrangement has been
reached.

SEC Investigation:

On July 24, 2008, the Company received a letter from the U.S. Securities and
Exchange Commission Division of Enforcement (“SEC”) stating that the SEC was
conducting an informal inquiry into accounting matters related to ArthroCare
Corporation arising out of the Company’s announced restatement of financial
results. On February 9, 2009, the SEC issued a formal order of investigation.

 

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DOJ Investigation:

The United States Department of Justice (“DOJ”) is investigating certain
activities of the Company including its past sales, accounting, and billing
procedures in relation to, primarily, the operation of the Company’s spine
division. The DOJ is also reviewing the Company’s relationship with the
Company’s subsidiary called DiscoCare, which was acquired in December of 2007,
and its billing practices. The DOJ has requested the production of documents and
other information in relation to this investigation.

[*]

 

[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.

 

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