<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-58675
KEY COMPONENTS, LLC
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(Exact name of Registrant as Specified in its charter)
Delaware 04-3425424
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown NY 10591
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
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(Registrant's Telephone Number, Including Area Code)
KEY COMPONENTS FINANCE CORP.
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(Exact name of Registrant as specified in its charter)
Delaware 14-1805946
------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown NY 10591
----------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/x/ Yes / / No
As of May 12, 2000, all of the membership interests in Key Components, LLC
were owned by Key Components, Inc. and Keyhold, Inc., privately-held New York
corporations. All of the shares of common stock of Key Components Finance Corp.
were owned by Key Components, LLC.
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<PAGE>
KEY COMPONENTS, LLC
Form 10-Q Index
March 31, 2000
Page
Number
------
PART I
Item 1. -- Consolidated Financial Statements:
Balance Sheets................................................ 2
Statements of Income.......................................... 3
Statements of Cash Flows...................................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 3. -- Quantitative and Qualitative Disclosures about Market Risk ... 18
PART II
Item 6. -- Exhibits and Reports on Form 8-K.............................. 19
Signatures .............................................................. 20
1
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Assets: (unaudited)
Current
Cash and cash equivalents $ 6,088 $ 4,171
Accounts receivable, net of allowance for doubtful accounts
of $472 and $511 at March 31, 2000 and December 31, 1999,
respectively 22,291 18,944
Inventories 23,146 22,372
Prepaid expenses and other current assets 1,188 1,140
Net assets of discontinued operations 10,719 14,610
------------------ ------------------
Total current assets 63,432 61,237
Property and equipment, net 19,172 19,038
Goodwill, net 91,535 92,098
Deferred financing costs, net 5,800 5,965
Intangibles, net 1,088 1,251
Other assets 1,024 969
------------------ ------------------
$182,051 $180,558
================== ==================
Liabilities and Member's Equity:
Current
Current portion of long-term debt and other long-term
obligations $ 4,669 $ 4,759
Accounts payable 6,768 6,372
Accrued interest 3,410 1,660
Accrued compensation 4,201 3,881
Accrued expenses and other current liabilities 3,400 3,529
------------------ ------------------
Total current liabilities 22,448 20,201
Long term debt 129,849 131,362
Accrued stock appreciation rights liability 5,839 5,898
Accrued lease costs - long term 577 586
------------------ ------------------
Total liabilities 158,713 158,047
Redeemable member's equity 13,100 13,100
Member's equity 10,238 9,411
------------------ ------------------
$182,051 $180,558
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
----------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Net sales $39,529 $30,835
Cost of goods sold 23,118 19,013
------------------ ------------------
Gross profit 16,411 11,822
Selling, general and administrative expenses 8,063 6,577
------------------ ------------------
Income from operations 8,348 5,245
Other income (expense):
Other income 210 114
Interest expense (3,428) (3,503)
------------------ ------------------
Income before provision for income taxes 5,130 1,856
Provision for income taxes 303 729
------------------ ------------------
Income from continuing operations 4,827 1,127
------------------ ------------------
Loss from discontinued operations:
(Loss) income from operations of the inverter business
(less income taxes of $0 and $31, respectively) (23) 308
Loss on disposal of Heart and Cruising, including
provision of $85 for operating losses during April 2000 (3,055) -
------------------ ------------------
(Loss) income from discontinued operations (3,078) 308
------------------ ------------------
Net Income $ 1,749 $ 1,435
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
--------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,749 $ 1,434
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on discontinued operations 3,078 (308)
Allowance for doubtful accounts (39) 106
Depreciation and amortization 1,910 1,699
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (3,308) (3,853)
Inventories (774) (305)
Prepaid expenses and other assets (103) (243)
Accounts payable 396 1,058
Accrued expenses 1,807 4,301
----------------- ----------------
Net cash provided by continuing operations 4,693 4,197
Net cash provided by discontinued operations 813 631
----------------- ----------------
Net cash provided by operating activities 5,529 4,520
----------------- ----------------
Cash flows from investing activities:
Acquisition of Valley Forge Corporation - (82,441)
Acquisition of G&H Technology, Inc. - (3,900)
Proceeds from sale of Force 10 Marine Company - 1,700
Funding of assets held for sale - (210)
Capital expenditures (1,026) (590)
----------------- ----------------
Net cash used in investing activities (1,026) (85,441)
----------------- ----------------
Cash flows from financing activities:
Payments of long-term debt and capital lease obligations (1,611) (10,598)
Proceeds from debt issued - 82,639
Deferred financing costs (53) (2,158)
Capital contributions - 3,259
Member withdrawals (922) (11)
----------------- ----------------
Net cash (used in) provided by financing activities (2,586) 73,131
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,917 (7,790)
Cash and cash equivalents, beginning of period 4,171 13,119
----------------- ----------------
Cash and cash equivalents, end of period $ 6,088 $ 5,329
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
KEY COMPONENTS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements as of and for the three months ended March
31, 2000 include the financial statements of Key Components, LLC ("KCLLC"), and
its wholly-owned subsidiaries (collectively the "Company"). All significant
intercompany transactions have been eliminated.
The Company is in the business of the manufacture and sale of custom engineered
essential componentry in a diverse array of end use markets. Through its two
business segments, mechanical engineered components and electrical components,
the Company targets its products to original equipment manufacturers. The
Company's mechanical engineered components, whose product offerings consist
primarily of medium security lock products and accessories, flexible shaft and
remote valve control components and turbo-charger actuators, are manufactured by
Hudson Lock, LLC ("Hudson"), ESP Lock Products, LLC ("ESP"), B.W. Elliott
Manufacturing, LLC ("BWE") and Gits Manufacturing, LLC ("Gits"). The Company's
electrical components, whose product offerings include specialty electrical
components including, but not limited to, weather- and corrosion-resistant
wiring devices and battery chargers and high-voltage utility switches, are
manufactured by Marine Industries, LLC ("Marinco"), Atlantic Guest, Inc.
("Guest") and Turner Electric, LLC ("Turner").
The Company also wholly owns two companies and has an interest of approximately
47% of a Dutch enterprise all in the business of manufacturing and selling power
inverters and related instrumentation. In November 1999, the Company had
determined to sell its interests in all three entities and has classified the
net assets of and operations related to these entities as discontinued (Note 2).
Key Components, Inc. ("KCI"), a New York corporation, holds the majority
membership interest in KCLLC. KCI holds no other assets other than its
investment in KCLLC and has no operations. As a result, all transactions of or
obligations related to KCI are reflected in the consolidated financial
statements of KCLLC.
The accompanying unaudited financial statements of the Company contain all
adjustments that are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, the Company believes that the disclosures herein
are adequate to make the information not misleading. The results of operations
for the interim periods are not necessarily indicative of the results for full
years. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1999 included in the Company's Form 10-K.
2. Acquisitions and Dispositions
During the three months ended March 31, 1999, the Company acquired the entities
described below, which were accounted for by the purchase method of accounting.
The results of their operations have been included in the consolidated financial
statements since their respective dates of acquisition.
On January 19, 1999, the Company acquired all of the outstanding shares of
Valley Forge Corporation ("VFC") for a purchase price of approximately $84.0
million (including the issuance of stock appreciation rights of approximately
$1.4 million) and assumed liabilities of approximately $21.7 million. In
conjunction with the acquisition, the Company repaid approximately $8.9 million
of VFC's
5
<PAGE>
outstanding long-term debt out of the approximately $21.7 million of liabilities
assumed as part of the acquisition. VFC manufactured electrical and mechanical
engineered components sold to original equipment manufacturers ("OEM"), dealers,
and distributors. The Company recorded the excess purchase price over net assets
acquired of approximately $52.5 million as goodwill. The Company ascribed a
thirty-five year useful life to this goodwill.
At the time of the acquisition, the Company decided to sell two VFC
subsidiaries, Force 10 Marine Company ("Force 10") and Multiplex Technology,
Inc. ("Multiplex"). In accordance with Emerging Issues Task Force ("EITF")
Bulletin 87-11, the Company recorded the anticipated net proceeds from the sale
of these subsidiaries adjusted for the anticipated net cash outflows during the
holding period (date of acquisition to date of sale) as assets held for sale. In
addition, the net earnings from these subsidiaries during the holding period
were excluded from the operations of the Company, in accordance with EITF 87-11.
Such results and sale proceeds have been included in goodwill. The sale of Force
10 was completed on February 26, 1999 for proceeds before taxes of $1.7 million
in cash. Multiplex was sold on May 28, 1999 for proceeds before taxes of
approximately $4.3 million. The tax liability for the sales of Force 10 and
Multiplex was approximately $144,000.
In November 1999, management of the Company decided to withdraw from the
business of manufacturing and selling power inverters and related
instrumentation by selling its interests in Heart Interface Corporation
("Heart"), Cruising Equipment Company ("Cruising") and Mastervolt International
B.V. ("Mastervolt"), all of which were acquired as part of the VFC acquisition.
In accordance with Accounting Principles Board Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Company recorded the net assets of Heart, Cruising, and
Mastervolt as net assets of discontinued operations and reported the results of
operations as loss from discontinued operations. In April 2000, the Company
consummated the sale of Heart and Cruising. The Company received approximately
$9.0 million in proceeds before any transaction related expenses. Of the $9.0
million of proceeds, $600,000 was placed in escrow in accordance with the
agreement. The Company recorded a loss on disposal of Heart and Cruising of
approximately $3.1 million. To the extent that cash is released from escrow
following the termination of the Company's obligations as defined in the
agreement, such funds will be recorded as a gain at that time.
The Company believes it will sell its interest in Mastervolt for book value,
however no definitive agreement has been signed to date.
The following table summarizes the net assets of the power inverter business as
of March 31, 2000.
(in thousands)
Accounts receivable $ 3,948
Inventory 4,034
Other current assets and prepaid expenses 141
Plant and equipment, net 887
Goodwill, net 4,734
Other intangibles, net 134
Other assets 2
Deferred tax assets 666
Bank overdraft (689)
Accounts payable (1,223)
Accrued wages and related (566)
Accrued expenses (1,173)
Accrued loss on disposal (3,055)
---------------------
Net assets of Heart and Cruising 7,840
Investment in and notes receivable from Mastervolt 2,879
---------------------
$10,719
=====================
The summary of the operations of the power inverter business for the three
months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
(in thousands) March 31,
-----------------------------------
2000 1999
-----------------------------------
<S> <C> <C>
Net sales $ 5,792 $4,241
-----------------------------------
(Loss) income from operations of the inverter business
(less income taxes of $0 and $31, respectively) (23) 308
Loss on disposal of Heart and Cruising, including
provision of $85 for operating losses during April 2000 (3,055) -
-----------------------------------
Net (loss) income of discontinued operations $(3,078) $ 308
===================================
</TABLE>
On February 5, 1999, the Company acquired G&H Technology, Inc. ("G&H") for $4.0
million in cash and the assumption of certain liabilities. The Company recorded
goodwill of approximately $3.0 million in connection with the acquisition. The
Company integrated the G&H acquisition into its flexible shaft product line.
The acquisitions were financed with available Company resources and
approximately $82 million from the Company's $60 million term loan and a $40
million revolving credit facility. The term loan is payable in quarterly
installments through January 19, 2005. Current maturities of long-term debt at
March 31, 2000 included $4.5 million related to the term loan. The revolving
credit facility commitment (of which there were no borrowings outstanding at
March 31, 2000) is for six years. The term loan and revolving credit facility
bear interest at fluctuating interest rates determined by reference to the
agent's base rate plus an applicable margin which will vary from 1.50% to 2.25%.
The revolving credit facility also calls for a fee of 0.50% on the unused
portion of the facility.
7
<PAGE>
3. Inventories
Inventories consist of the following:
(In thousands) March 31, December 31,
2000 1999
---------------- -----------------
Raw materials $11,839 $10,774
Work-in-process 7,256 6,401
Finished goods 4,051 5,197
---------------- -----------------
Total inventory $23,146 $22,372
================ =================
4. Operating Segments
The Company conducts its operations through two businesses, the manufacture and
sale of mechanical engineered components and electrical components. The
mechanical engineered components business manufactures flexible shaft products,
specialty locks and related accessories and turbo charger actuators and related
componentry. The electrical components business produces an array of electrical
componentry items for recreational and industrial applications and switches for
utility companies, which are utilized in industrial markets.
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest, taxes and depreciation and amortization
("EBITDA"). In its calculation of EBITDA certain charges that management
determines as non-recurring are excluded. Segment information for three months
ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
(In thousands) Mechanical
Engineered Electrical
Components Components Total
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Three months ended March 31, 2000:
Net sales from external customers $22,753 $16,776 $39,529
Intersegment net sales 61 - 61
Segment profit - EBITDA 7,337 3,643 10,980
Segment assets 109,006 56,447 165,453
Depreciation and amortization 1,163 499 1,662
Three months ended March 31, 1999:
Net sales from external customers $19,706 $11,129 $30,835
Intersegment net sales 130 - 130
Segment profit - EBITDA 5,839 1,960 7,799
Segment assets 113,218 64,447 177,665
Depreciation and amortization 986 490 1,476
December 31, 1999:
Segment assets $91,037 $71,534 $162,571
</TABLE>
8
<PAGE>
Reconciliation of Selected Segment Information to the Company's Consolidated
Totals:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended March 31,
----------------------------------------------------
2000 1999
------------------------ ------------------------
<S> <C> <C>
Profit or loss:
Total profit from reportable segments $ 10,980 $ 7,799
Reconciling items:
Corporate expenses (487) (521)
Depreciation and amortization (1,910) (1,699)
Interest expense (3,428) (3,503)
Management fee (225) (200)
Non-recurring income (charges) 200 (20)
------------------------ ------------------------
Total consolidated income before taxes $ 5,130 $ 1,856
======================== ========================
March 31, 2000 December 31, 1999
------------------------ ------------------------
Assets:
Total assets for reportable segments $165,453 $162,571
Unallocated amounts:
Corporate assets 5,879 3,377
Net assets of discontinued operations 10,719 14,610
------------------------ ------------------------
Total consolidated assets $182,051 $180,558
======================== ========================
</TABLE>
5. Member's Equity
During the three months ended March 31, 2000, KCI made a withdrawal of
approximately $922,000. KCI used the proceeds to repurchase its common stock
from three shareholders. During the three months ended March 31, 1999, KCI
contributed approximately $3.3 million, which it had raised through the sale
newly issued shares of its common stock. The stock was principally sold to
existing shareholders and management of the Company.
6. Provision for Income Taxes
For the three months ended March 31, 2000, the Company's provision for income
taxes relates primarily to Guest, which was not converted to LLC status during
1999 (Note 7). For the three months ended March 31, 1999 the tax provision
primarily relates to VFC's consolidated taxable income as a C corporation.
Through August 31, 1999, VFC (Note 2) and its subsidiaries were C corporations
and were responsible for paying taxes on their income. Effective August 31,
1999, VFC was merged into KCLLC and most of VFC's subsidiaries, as well as BWE,
Hudson and ESP, were converted to limited liability company ("LLC") status. Upon
election of LLC status by the subsidiaries, the members of KCLLC became
responsible for the taxes due on the income of the Company, apart from the
subsidiaries that remained C corporations. Since KCI is currently an S
corporation, the shareholders of KCI are personally responsible for the income
taxes on the income of KCLLC that is allocated to KCI.
9
<PAGE>
7. Subsequent Event
KCI and its shareholders have entered into an agreement ("Recapitalization
Agreement") with affiliates of Kelso & Company ("Kelso") pursuant to which,
among other things:
o KCI will be recapitalized with Common Stock and Class A Preferred
Stock;
o KCI shareholders will exchange a portion of their KCI Common Stock, and
certain option holders will exercise options and exchange the KCI
Common Stock obtained thereby, for Class A Preferred Stock and
immediately sell such Class A Preferred Stock to Kelso for cash;
o SGC Partners II LLC ("SG"), which owns all of the stock of Keyhold,
Inc. ("Keyhold"), which owns approximately 11.02% of the shares of
KCLLC, will exchange all of the stock of Keyhold for Class A Preferred
Stock and immediately sell such Class A Preferred Stock to Kelso for
cash;
o Holders of the KCI stock appreciation rights ("SAR's") will have the
opportunity to elect to exercise their SAR's subject to their
purchasing KCI common stock with (at their election) either 50% or 75%
of the after-tax proceeds of such exercise. The cost of such exercise
of the SAR's, net of the capital received from such purchase of KCI
common stock, will be funded by cash received on the purchase by Kelso
from KCI of preferred stock, and;
o At the closing, KCI, Kelso and certain shareholders of KCI will enter
into a shareholders agreement ("Shareholders Agreement") and a
registration rights agreement ("Registration Rights Agreement"); and
KCI and Kelso will also enter into an Advisory Agreement pursuant to
which Kelso will be entitled to an annual fee.
The consummation of the transactions contemplated by the Recapitalization
Agreement is subject to the satisfaction or waiver of certain conditions, as
defined in the agreement. The Recapitalization Agreement may be terminated (a)
by agreement of Kelso and a majority of the shareholders of KCI ("Requisite
Sellers"); (b) by Kelso if a breach thereof by KCI, the KCI shareholders or SG
is not cured within 30 days after notice, if KCI's lenders have not consented to
the transaction on or before May 19, 2000, or if the transaction is not
consummated before September 30, 2000; (c) by the Requisite Sellers if a breach
thereof by Kelso is not cured within 30 days after notice, if KCI's lenders have
not consented to the transaction on or before May 19, 2000, or if the
transaction is not consummated before September 30, 2000; or (d) by SG if the
transaction is not consummated before September 30, 2000.
10
<PAGE>
Upon the consummation of the Recapitalization, Kelso will own all of the Class A
Preferred Stock, which will constitute approximately 67.2% of the total equity
of KCI on an as converted and fully diluted basis. The Class A Preferred Stock
is not entitled to vote for the election of directors, is entitled to designate
two members of KCI's seven member Board of Directors, is entitled to certain
approval rights, is convertible into Common Stock at Kelso's option, has a
liquidation preference equal to its purchase price, bears a 1% dividend payable
in kind, and is redeemable at the option of the holder after June 2, 2009.
Current KCI shareholders and key employees will own all of the Common Stock,
which, together with the options held by such persons, will constitute the fully
diluted balance of the equity. The total amount of Class A Preferred Stock to be
purchased by Kelso will be approximately $110,000,000, of which approximately
$4,500,000 will be purchased from KCI and the balance from shareholders and
option holders. The Company will pay up to approximately $9 million of expenses
in connection with the transaction.
11
<PAGE>
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company is a leading manufacturer of custom-engineered essential componentry
for application in a diverse array of end-use products. The Company targets
original equipment manufacturer ("OEM") markets where the Company believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company operates in
two business segments, the manufacture of mechanical engineered components which
produces flexible shaft products, specialty lock products and related
accessories and turbo charger actuators and related componentry. The electrical
components business produces an array of electrical componentry items for
recreational and industrial applications and switches for utility companies,
which are utilized in industrial markets.
Three Months Ended March 31,2000 compared to Three Months Ended March 31, 1999
Net Sales: Net sales increased by approximately $8.7 million, or 28.2%, from
approximately $30.8 million for the three months ended March 31,1999 to
approximately $39.5 million for the three months ended March 31,2000. Net sales
of the mechanical engineered components business increased by approximately $3.0
million, or 15.5%, from approximately $19.7 million for the three months ended
March 31,1999 to approximately $22.7 million for the three months ended March
31, 2000. Net sales of the electrical components business increased by
approximately $5.7 million, or 50.7%, from approximately $11.1 million for the
three months ended March 31,1999 to approximately $16.8 million for the three
months ended March 31, 2000.
The increase in net sales in the mechanical components business is primarily
related to the Company's actuator product line, which was acquired as part of
the VFC acquisition. The three months ended March 31, 2000 reflect the results
of operations for the full period whereas the three months ended March 31, 1999
only reflects the results of operations from January 19, 1999. In addition, the
increase in net sales of the mechanical component business was due to sales
growth in its core markets as well as the integration of the G&H acquisition.
The growth in sales of the electrical components business, which the Company
entered into as a result of the VFC acquisition, is largely due to the inclusion
of the results of operations of this business for the full quarter in 2000
versus the three months ended March 31, 1999 which reflect the results of
operations from January 19, 1999. In addition, the electrical components
business continues to experience growth in product sales designed for industrial
markets.
Gross Profit: Gross profit increased by approximately $4.6 million, or 38.8%,
from approximately $11.8 million for the three months ended March 31,1999 to
approximately $16.4 million for the three months ended March 31,2000. Gross
profit for the mechanical engineered components business increased by
approximately $1.8 million or 24.9% from approximately $7.3 million for the
three months ended March 31,1999 to approximately $9.1 million for the three
months ended March 31, 2000. Gross profit for the electrical components business
increased by approximately $2.7 million or 61.0% from approximately $4.6 million
for the three months ended March 31, 1999 to approximately $7.3 million for the
three months ended March 31, 2000.
Gross profit, as a percentage of net sales, increased 3.2% from 38.3% for the
three months ended March 31, 1999 to 41.5% for the three months ended March 31,
2000. Gross profit, as a percentage of net sales, for the mechanical engineered
components business increased 1.0% from 38.9% for the three months ended March
31, 1999 to 39.9% for the three months ended March 31, 2000. Gross profit, as a
percentage of net sales, for the electrical component business increased 3.6%
from 40.1% for the three months ended March 31, 1999 to 43.7% for the three
months ended March 31, 2000.
12
<PAGE>
The increase in the gross profit and gross profit percentage for the mechanical
components business are primarily related to the inclusion of the actuator
product line for the full quarter in 2000 versus 1999 which only reflects the
results from January 19, 1999. In addition, as a result of the addition of the
acuator product line's Thailand facility, which commenced operations in the
second quarter of 1999, the mechanical components business has experienced an
increase in its gross profit percentage related to lower direct labor costs.
The margins for the electrical components business are generally higher as a
result of the nature of the customer base to which the electrical components
business targets a significant amount of its products. The increase in gross
profit dollars is primarily related to the inclusion of the results of
operations of the electrical components business for the full quarter in 2000
versus 1999, which only reflects the results from January 19, 1999. The increase
in gross profit percentage in the electrical components business is primarily
related to product mix.
Selling, General and Administrative Expenses: SG&A expenses increased by
approximately $1.5 million or 22.6%, from approximately $6.6 million for the
three months ended March 31, 1999 to approximately $8.1 million for the three
months ended March 31, 2000. SG&A expenses for the mechanical components
business increased by approximately $383,000 or 15.4%, from approximately $2.5
million for the three months ended March 31, 1999 to approximately $2.9 million
for the three months ended March 31, 2000. SG&A expenses for the electrical
components business increased by approximately $1.1 million or 36.3%, from
approximately $3.1 million for the three months ended March 31, 1999 to
approximately $4.2 million for the three months ended March 31, 2000.
SG&A, as a percentage of net sales, decreased by 0.9% from 21.3% for the three
months ended March 31, 1999, to 20.4% for the three months ended March 31, 2000.
SG&A, as a percentage of net sales, for the mechanical engineered components
business remained at 12.7% for the three months ended March 31, 2000 and 1999.
SG&A, as a percentage of net sales, for the electrical components business
decreased by 2.6% from 27.6% for the three months ended March 31, 1999, to 25.0%
for the three months ended March 31, 2000. The decrease in the electrical
components business SG&A as a percentage of net sales is primarily related to
the business business' ability to support top line growth on its established
infrastructure. In addition, the electrical components business benefitted from
its formulation of its specialty electric product line through the integration
of Marinco, Guest and certain product lines of Glendinning. The S,G&A expenses
of the electrical components business is generally higher than those of the
mechanical components business as a result of the electrical components business
being required to maintain higher levels of sales and marketing expenses due to
the businesses to which it targets its products.
Income from Operations: Income from operations increased by approximately $3.1
million, or 59.2% from approximately $5.2 million for the three months ended
March 31, 1999 to approximately $8.3 million for the three months ended March
31, 2000. This increase is the sum of the increase in gross profit of
approximately $4.6 million less the increase in SG&A expenses of approximately
$1.5 million for the reasons discussed above.
Interest Expense: Interest expense decreased by approximately $75,000, or 2.1%,
from approximately $3.5 million for the three months ended March 31, 1999 to
approximately $3.4 million for the three months ended March 31, 2000. This
decrease is due to lower levels of outstanding borrowing during the three months
ended March 31, 2000 versus the three months ended March 31, 1999, as a result
of the Company not having any borrowing outstanding under its revolving credit
facility during the current quarter. In addition, through March 31, 2000, the
Company had repaid $6.5 million of principal of the Company's $60 million term
loan. During January 1999, the Company amended its then current borrowing
facilities (see Liquidity and Capital Resources below) in order to finance a
large portion of the VFC acquisition as well as the G&H acquisition.
13
<PAGE>
Provision for Income Taxes: The provision for income taxes decreased by
approximately $426,000, or 58.4% from approximately $729,000 for the three
months ended March 31,1999 to approximately $303,000 for the three months ended
March 31, 2000. This decrease is primarily related to the conversion of most of
the subsidiaries acquired as part of the VFC acquisition to LLC status effective
August 31, 1999. Upon election of LLC status by the subsidiaries, the members of
KCLLC became responsible for the taxes due on the income of the Company, apart
from the subsidiaries that remained C corporations. Through August 31, 1999 VFC
and its subsidiaries were C corporations for tax purposes. As of March 31, 2000
the Company's continuing operations only include a provision for taxes on the
income of one C corporation.
Income from continuing operations: Income from continuing operations increased
by approximately $3.7 million, or 328.3%, from approximately $1.1 million for
the three months ended March 31, 1999 to approximately $4.8 million for the
three months ended March 31, 2000. The increase is primarily the result of an
increase in income from operations of approximately $3.1 million and a decrease
in interest expense and the provision for taxes of approximately $75,000 and
$426,000, respectively, due to the factors discussed above.
Loss from discontinued operations: Loss from discontinued operations increased
by approximately $3.4 million for the three months ended March 31, 2000. In
April 2000, the Company consummated the sale of Heart and Cruising. The Company
received approximately $9.0 million in proceeds before any transaction related
expenses. Of the $9.0 million of proceeds, $600,000 was placed in escrow in
accordance with the agreement. The Company recorded a loss on disposal of Heart
and Cruising of approximately $3.0 million. To the extent that cash is released
from escrow, such funds will be recorded as a gain at that time.
Net Income: Net income increased by approximately $314,000, or 21.8%, from
approximately $1.4 million for the three months ended March 31, 1999 to
approximately $1.7 million for the three months ended March 31, 2000. The
increase is the result of the sum of an increase in income from continuing
operations of approximately $3.7 million and an increase in loss from
discontinued operations of approximately $3.4 million, due to the factors
discussed above.
Liquidity and Capital Resources
The Company has historically generated funds from its operations, and its
working capital requirements generally have not materially fluctuated from
quarter to quarter. The Company's other main source of liquidity is derived from
the Company's term loan and revolving credit facility. In January 1999, the
Company amended its former acquisition and revolving loans with a new
$60-million term loan and a $40-million revolving credit facility. The term loan
is payable in quarterly installments through January 19, 2005. Current
maturities of long-term debt at March 31, 2000 included $4.5 million related to
the term loan. The revolving credit facility commitment (of which there were no
borrowings outstanding at March 31, 2000) is for six years. The term loan and
revolving credit facility bear interest at fluctuating interest rates determined
by reference to the agent's base rate plus an applicable margin which will vary
from 1.50% to 2.25%.
The Company's remaining liquidity demands will be for capital expenditures,
general corporate purposes, and principal and interest payments on its
outstanding debt. The Company's $80 million of senior notes requires semiannual
interest payments on the outstanding principal. The term loan requires quarterly
14
<PAGE>
principal and interest payments. Under its new revolving credit facility, the
Company has the option to lock in a specified interest rate by entering into a
contract, which rolls over at different time intervals, usually within 90 days.
As the underlying contract comes up for renewal, the interest associated with
the contract becomes due. As of March 31, 2000, the Company had no outstanding
commitments for capital expenditures and anticipates further capital
expenditures of approximately $3.0 million for the remainder of fiscal 2000. The
expenditures are needed primarily to maintain its facilities, expand its
production capacity in order to take advantage of profitable market
opportunities, and to further automate its production processes to maximize
profitability. To the extent cash flow from operations is insufficient to cover
the Company's capital expenditures, debt service, and other general
requirements, the Company would seek to utilize its borrowing availability under
its existing revolving credit facility.
In connection with the Company's desire to continue to grow through acquisition
and be a leading supplier of essential componentry, KCI and its shareholders
have entered into an agreement ("Recapitalization Agreement") with affiliates of
Kelso & Company ("Kelso") pursuant to which, among other things:
o KCI will be recapitalized with Common Stock and Class A Preferred
Stock;
o KCI shareholders will exchange a portion of their KCI Common Stock, and
certain option holders will exercise options and exchange the KCI
Common Stock obtained thereby, for Class A Preferred Stock and
immediately sell such Class A Preferred Stock to Kelso for cash;
o SGC Partners II LLC ("SG"), which owns all of the stock of Keyhold,
Inc. ("Keyhold"), which owns approximately 11.02% of the shares of
KCLLC, will exchange all of the stock of Keyhold for Class A Preferred
Stock and immediately sell such Class A Preferred Stock to Kelso for
cash;
o Holders of the KCI stock appreciation rights ("SAR's") will have the
opportunity to elect to exercise their SAR's subject to their
purchasing KCI common stock with (at their election) either 50% or 75%
of their after-tax proceeds of such exercise. The cost of such exercise
of the SAR's, net of the capital received from such purchase of KCI
common stock, will be funded by cash received on the purchase by Kelso
from KCI of preferred stock, and;
o At the closing, KCI, Kelso and certain shareholders of KCI will enter
into a shareholders agreement ("Shareholders Agreement") and a
registration rights agreement ("Registration Rights Agreement"); and
KCI and Kelso will also enter into an Advisory Agreement pursuant to
which Kelso will be entitled to an annual fee.
The consummation of the transactions contemplated by the Recapitalization
Agreement is subject to the satisfaction or waiver of certain conditions, as
defined in the agreement. The Recapitalization Agreement may be terminated (a)
by agreement of Kelso and a majority of the shareholders of KCI ("Requisite
Sellers"); (b) by Kelso if a breach thereof by KCI, the KCI shareholders or SG
is not cured within 30 days after notice, if KCI's lenders have not consented to
the transaction on or before May 19, 2000, or if the transaction is not
consummated before September 30, 2000; (c) by the Requisite Sellers if a breach
thereof by Kelso is not cured within 30 days after notice, if KCI's lenders have
not consented to the transaction on or before May 19, 2000, or if the
transaction is not consummated before September 30, 2000; or (d) by SG if the
transaction is not consummated before September 30, 2000.
15
<PAGE>
Upon the consummation of the Recapitalization, Kelso will own all of the Class A
Preferred Stock, which will constitute approximately 67.2% of the total equity
of KCI on an as converted and fully diluted basis. The Class A Preferred Stock
is not entitled to vote for the election of directors, is entitled to designate
two memebers of KCI's seven member Board of Directors, is entitled to certain
approval rights, is convertible into Common Stock at Kelso's option, has a
liquidation preference equal to its purchase price, bears a 1% dividend payable
in kind, and is redeemable at the option of the holder after June 2, 2009.
Current KCI shareholders and key employees will own all of the Common Stock,
which, together with the options held by such persons, will constitute the fully
diluted balance of the equity. The total amount of Class A Preferred Stock to be
purchased by Kelso will be approximately $110,000,000, of which approximately
$4,500,000 will be purchased from KCI and the balance from shareholders and
option holders. The Company will pay up to approximately $9 million of expenses
in connection with the transaction.
Cash flows provided by operating activities were approximately $5.5 million and
$4.5 million for the three months ended March 31, 2000 and 1999, respectively.
The net increase of $1.0 million over the prior period is the sum of a increase
in cash provided by continuing operations of approximately $827,000 and an
increase in cash provided by operating activities of approximately $182,000. The
increase in cash provided by continuing operations primarily related to an
increase in net income plus non cash charges of approximately $3.4 million
mostly offset by a reduction in the increase in accounts payable and accrued
expenses of approximately $3.1 million. The reduction in the increase in
accounts payable and accrued expenses was primarily due to the Company's level
of accrued interest being consistent during 2000 whereas in 1999 the Company
experienced a significant increase in this accrual related to its recently
amended financing arrangements. As described above, the Company primarily pays
interest on a semi-annual and quarterly basis.
Cash flows used in investing activities were approximately $1.0 and $85.4
million for the three months ended March 31, 2000 and 1999, respectively. The
primary reason for the decrease in investing activities was the acquisitions of
VFC and G&H, completed during the three months ended March 31, 1999. The Company
also sold Force 10 during that same period, which it had acquired as part of
VFC, for $1.7 million in cash. Capital expenditures for the three months ended
March 31, 2000 and 1999 were approximately $1.0 million and $590,000,
respectively.
Cash flows from financing activities used net cash of approximately $2.6 million
during the three months ended March 31, 2000 and provided net cash of $73.1
million for the three months ended March 31, 1999. The $75.7 net decrease is
primarily attributable to proceeds received under the Company's new term loan
and revolving credit facility during the first quarter of 1999. This was offset
by the repayment of approximately $10.6 million of long-term debt and other
long-term obligations, the most significant portion being the repayment of
approximately $8.9 million of VFC's long-term debt, made in conjunction with the
acquisition. In connection with the new debt facilities, the Company incurred
approximately $2.2 million of deferred financing costs during the three months
ended March 31, 1999. The Company also realized proceeds of approximately $3.3
million due to the sale of its capital stock during the three months ended March
31, 1999, whereas in the three months ended March 31, 2000, the Company paid a
capital withdrawal of approximately $922,000. The Company also made payments on
its long-term debt of approximately $1.6 million during the three months ended
March 31, 2000.
In April 2000, the Company received approximately $9.0 million in proceeds
before any transaction related expenses. Of the $9.0 million of proceeds,
$600,000 was placed in escrow in accordance with the agreement. The Company will
use these funds for general corporate purposes.
16
<PAGE>
Management believes that the Company's cash flow from operations, together with
its borrowing availability under its existing credit facilities, will be
adequate to meet its anticipated capital requirements for the foreseeable
future.
New Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has issued FASB Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of Accounting Principles Board Opinion No. 25. This
interpretation clarifies the application of APB No. 25 for certain issues. While
the Company accounts for its stock compensation transactions with its employees
under APB No. 25, this statement is not expected to have a material impact on
the Company's consolidated financial statements. This interpretation is
effective July 1, 2000.
Inflation
Inflation has not been material to the Company's operations for the periods
presented.
Backlog
The Company's backlog of orders as of March 31, 2000 was approximately $29
million. The Company includes in its backlog only those orders for which it has
accepted purchase orders. However, backlog is not necessarily indicative of
future sales. A substantial portion of the Company's sales have a
three-to-eight-week lead time and, therefore, only a small portion of orders, in
relation to the annual sales of the Company, are in backlog at any point in
time. In addition, purchase orders can generally be cancelled at any time
without penalty.
Forward-Looking Statements
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. The forward-looking statements are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. The factors that could cause actual results to differ materially
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) operational risks and insurance, (iii)
environmental liabilities which may arise in the future and not covered by
insurance or indemnity, (iv) the impact of current and future laws and
government regulations, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.
17
<PAGE>
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk
The Company's primary exposure to market risk is related to the variability in
interest rates associated with the Company's outstanding term loan and the
$40-million revolving credit facility. Under both the term loan and the
revolving credit facility, the Company has the option to lock in a certain
interest rate based on either the agent's base rate, which is equivalent to
prime, or LIBOR plus an applicable margin specified in the agreement.
Principally all of the borrowings under the term loan, which had $53.5 million
outstanding as of March 31, 2000, are locked in at approximately 8.9% until July
2000, when the underlying LIBOR contract is up for renewal. The Company had no
borrowings outstanding under its revolving credit facility during the three
months ended March 31, 2000.
The senior notes bear a fixed rate of interest and therefore are not subject to
market risk. The Company does not trade in derivative financial instruments.
<PAGE>
Part II - Other Information
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
10.31 Recapitalization agreement among KELSO
Investment Associates VI, L.P., KEP VI,
LLC, Key Components, Inc., the
shareholders of Key Components, Inc.,
and SGC Partners II, LLC dated May 8,
2000.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS, LLC
Date: May 12, 2000 By: /s/ CLAY B. LIFFLANDER
---------------------------------
Clay B. Lifflander
Chief Executive Officer
Date: May 12, 2000 By: /s/ ROBERT B. KAY
---------------------------------
Robert B. Kay
President
Date: May 12, 2000 By: /s/ KEITH A. MCGOWAN
---------------------------------
Keith A. McGowan
Chief Financial Officer
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS FINANCE CORP.
Date: May 12, 2000 By: /s/ CLAY B. LIFFLANDER
---------------------------------
Clay B. Lifflander
Chief Executive Officer
Date: May 12, 2000 By: /s/ ROBERT B. KAY
---------------------------------
Robert B. Kay
President
Date: May 12, 2000 By: /s/ KEITH A. MCGOWAN
---------------------------------
Keith A. McGowan
Chief Financial Officer
<PAGE>
Exhibit 10.31
RECAPITALIZATION AGREEMENT
AMONG
KELSO INVESTMENT ASSOCIATES VI, L.P.
KEP VI, LLC
KEY COMPONENTS, INC.
THE SHAREHOLDERS OF
KEY COMPONENTS, INC.
AND
SGC PARTNERS II LLC
May 8, 2000
<PAGE>
RECAPITALIZATION AGREEMENT
Agreement entered into as of May 8, 2000, by and among Kelso Investment
Associates VI, L.P., a Delaware limited partnership ("KIA"), KEP VI, LLC, a
Delaware limited liability company ("KEP" and together with KIA, the "Buyers"),
Key Components, Inc., a New York corporation ("KCI"), John S. Dyson, Charles S.
Dyson 1976 Trust, Charles S. Dyson 1968 Trust, Margaret Dyson 1968 Trust, Clay
B. Lifflander, Clay B. Lifflander, custodian for Olivia Lee Lifflander under the
New York U/G/M/A, Clay B. Lifflander, custodian for Hudson Bennett Lifflander
under the New York U/G/M/A, Alan L. Rivera, David H. Bova, George Scherer,
Robert B. Kay, Augustus M. Boucher, Jerome J. Lande, Frank Ahlbin, John Ekegren,
Michael Colecchi, Keith A. McGowan, J. Marty O'Donohue, Cornell University,
Middlesex School, Hudson River Museum of Westchester and Dances Patrelle Inc.
(individually, a "KCI Seller," and collectively, the "KCI Sellers"), and SGC
Partners II LLC, a Delaware limited liability company ("SG"). The Buyers, KCI,
the KCI Sellers and SG are referred to collectively herein as the "Parties."
The KCI Sellers in the aggregate own all of the outstanding capital stock
of KCI. SG owns all of the outstanding capital stock of Keyhold, Inc., a
Delaware corporation ("Keyhold"). KCI and Keyhold own all of the outstanding
shares of Key Components, LLC, a Delaware limited liability company ("KCLLC").
This Agreement contemplates (a) the recapitalization of KCI and the
exchange by each of the KCI Sellers of a portion of his or its KCI Common Shares
(defined below) for KCI Preferred Shares (defined below); (b) the contribution
by SG to KCI of all of SG's Keyhold Shares (defined below) in exchange for KCI
Preferred Shares; (c) the sale by the KCI Sellers and SG to Buyers of all of
their KCI Preferred Shares for cash; and (d) the sale and issuance by KCI of KCI
Preferred Shares to Buyers.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. Definitions.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses, and fees, including without limitation those arising from third party
claims, and including court costs and reasonable attorneys' fees and expenses,
including those enforcing the provisions of Section 8; provided, that when used
with reference to amounts recoverable as the result of any breach of a
representation, warranty or covenant contained in this Agreement, Adverse
Consequences shall not include amounts recoverable solely as lost savings,
incidental damages, indirect damages, special damages or punitive damages.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
<PAGE>
"Allocable Portion" means with respect any KCI Seller that percentage of
the total number of KCI Shares sold by all KCI Sellers hereunder which is sold
by such KCI Seller, except for certain charitable donees where, as set forth on
Schedule A, the donor will bear such charitable donee's Allocable Portion. The
Allocable Portion of each KCI Seller shall be set forth in Schedule A.
"Ancillary Documents" means the Certificate of Amendment to the
Certificate of Incorporation in the form of Exhibit A, the Shareholders
Agreement, the Registration Rights Agreement; the Option Holders Agreements, the
SAR Holders Agreement, the Escrow Agreement and the Advisory Agreement.
"Buyers" has the meaning set forth in the preface above.
"Cash" means cash and cash equivalents, including bank deposits, money
market investments with maturities of less than 30 days and amounts held in
escrow pursuant to the Inverter Group Agreement. Cash excludes cash that relates
to, and would not be held but for, the transactions contemplated by this
Agreement, including the exercise price of Options exercised on the Closing Date
and taxes withheld from Optionees and SAR Holders. Cash does not include amounts
owed to former shareholders of Valley Forge Corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Environmental Claims" refers to any complaint, notice, directive, order,
claim, litigation, investigation, judicial or administrative proceeding,
judgment, letter or other communication from any governmental agency, office or
other authority or any third party to any of KCI and its Subsidiaries or any
Predecessor in Interest involving violations or alleged violations of
Environmental, Health and Safety Requirements or Releases of Hazardous
Materials.
"Environmental, Health, and Safety Requirements" shall mean all applicable
foreign, federal, state and local statutes, regulations, rules, judgments,
orders ordinances and other requirements of law (including common law)
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes, as such requirements are enacted and in effect
on or prior to the Closing Date.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agreement" means the escrow agreement among the KCI Sellers and
the Buyers in the form of Exhibit D-3.
"Estimation Period" shall have the meaning set forth in the Indenture.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Hazardous Materials" means any substance, chemical, compound, product,
pollutant, contaminant or material that is classified or regulated as
"hazardous" or "toxic" pursuant to any
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<PAGE>
Environmental, Health and Safety Requirements, including asbestos,
polychlorinated biphenyls, petroleum products or by-products and
urea-formaldehyde insulation.
"Indebtedness" means the aggregate (without duplication) of (i) the
principal amount of indebtedness for borrowed money; (ii) the principal amount
of obligations evidenced by bonds, debentures, notes or similar instruments;
(iii) capitalized lease obligations, determined in accordance with GAAP
consistently applied; and (iv) the amount of any guarantees of Indebtedness of
third parties; provided, that in determining Indebtedness of KCI and its
Subsidiaries at May 31, 2000, Indebtedness shall include the amount, if any,
that would be payable under the note described in ss.5(g) if the Tax Amounts for
the taxable period ending on the Closing Date were equal to (x) the estimated
taxable income of KCI for such period times (y) the Tax Percentage (as defined
in the Indenture).
"Indenture" means the Indenture, dated as of May 28, 1998, as amended,
among KCLLC, Key Components Finance Corp. and United States Trust Company of New
York, as Trustee.
"Intellectual Property" means United States and foreign trademarks,
service marks, trade names, trade dress, domain names, copyrights, and similar
rights, including registrations and applications to register or renew the
registration of any of the foregoing, United States and foreign letters patent
and patent applications, and inventions, processes, designs, formulas, trade
secrets, know-how, ideas, manufacturing and production processes and techniques,
technical data, confidential information, software, firmware, mask works and
other semiconductor chip rights and applications, registrations and renewals
thereof, and all similar intellectual property rights, tangible embodiments of
any of the foregoing (in any medium including electronic media), and licenses of
any of the foregoing.
"Inverter Group Agreement" means the Stock Purchase Agreement, dated as of
February 24, 2000, among Trace Holdings LLC, KCLLC and KCLLC Holdings, Inc.
"Keyhold" means Keyhold, Inc., a Delaware corporation.
"Keyhold Share" means a share of capital stock of Keyhold.
"Knowledge of the KCI Sellers" means the actual knowledge of Clay B.
Lifflander, Robert B. Kay, Alan L. Rivera or Keith A. McGowan, after inquiry of
the Presidents of each of the Subsidiaries of KCI, or the actual knowledge after
reasonable inquiry of the Presidents of each of the Subsidiaries of KCI.
"KCI" has the meaning set forth in the preface above.
"KCI Common Share" means a share of the common stock, par value $.001, of
KCI.
"KCI Preferred Share" means a share of the preferred stock of KCI issued
pursuant to ss.2A(a).
"KCI Sellers" has the meaning set forth in the preface above.
"KCI Share" means a KCI Common Share or a KCI Preferred Share.
"KCLLC" has the meaning set forth in the preface above.
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<PAGE>
"KCLLC Share" means a share of equity, regardless of class, of KCLLC.
"Material Adverse Effect" means any change in or effect on KCI or any of
its Subsidiaries or any of their businesses or operations that is or could
reasonably be expected to be materially adverse to (i) the business, operations,
properties, assets, liabilities, financial condition or results of operations of
KCI and its Subsidiaries taken as a whole or (ii) the ability of the Parties to
perform their material obligations under this Agreement or any of the Ancillary
Documents.
"Net Debt" means the excess of Indebtedness over the sum of (a) Cash, (b)
any amounts described in ss.10(l) paid on or before May 31, 2000 and (c) bank
fees, consent fees and other extraordinary expenses paid on or before May 31,
2000 that relate to, and would not have been paid or incurred but for, the
transactions contemplated by this Agreement, including up to $500,000 in bonuses
payable to management contingent upon the consummation of the transactions
contemplated hereby.
"Net Debt Decrease" means the amount by which $118,900,000 exceeds the Net
Debt of KCI and its Subsidiaries at May 31, 2000, as finally determined pursuant
to ss.2(f), provided, that the amount of Net Debt Decrease shall not exceed
$7,000,000, and provided, further, that not more than $3,500,000 of the Net Debt
Decrease shall be attributable to cash derived in the Ordinary Course of
Business and not more than $3,500,000 of the Net Debt Decrease shall be
attributable to extraordinary events and then if and only to the extent Buyers
and the Requisite Sellers agree that such extraordinary event should impact Net
Debt Decrease.
"Net Debt Increase" means the amount by which the Net Debt of KCI and its
Subsidiaries at May 31, 2000 as finally determined pursuant to ss.2(f) exceeds
$118,900,000, provided, that the amount of Net Debt Increase shall not exceed
$6,800,000.
"Optionee Agreement" means an agreement between an Optionee and KCI in the
form of Exhibit E. .
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
"Permitted Quarterly Tax Distribution" shall have the meaning set forth in
the Indenture.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Quarterly Tax Distributions" shall have the meaning set forth in the
Indenture.
"Release" means any spilling, leaking, pumping, emitting, emptying,
discharging, injecting, escaping, dumping, or disposing.
"Requisite KCI Sellers" means KCI Sellers holding a majority in interest
of KCI Common Shares as set forth in Schedule A.
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<PAGE>
"Registration Rights Agreement" means the agreement in the form of Exhibit
D-2.
"SAR Holder Agreement" means an agreement between an SAR Holder and KCI in
the form of Exhibit F.
"Security Interest" means any mortgage, pledge, escrow, lien, claim,
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and payable or
for taxes that the taxpayer is contesting in good faith through appropriate
proceedings, (c) purchase money liens and liens securing rental payments under
capital lease arrangements.
"Sellers" means the KCI Sellers and SG.
"Shareholders Agreement" means the agreement in the form of Exhibit D-1.
"Subsidiary" means any corporation or other entity (i) with respect to
which a specified Person (or a Subsidiary thereof) owns directly or indirectly a
majority of the common stock or other ownership interests or has the power to
vote or direct the voting of sufficient securities to elect a majority of the
directors or other governing body.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement in relation to Taxes, including any schedule or
amendment thereto.
"Tax Amount" shall have the meaning set forth in the Indenture.
"Taxes" means all income, gross income, gross receipts, sales, use,
transfer, franchise, profits, withholding, payroll, employment, excise, property
and windfall profits taxes, and all other taxes and similar governmental
charges, together with any interest and any penalties, additions to tax or
additional amounts applicable thereto.
"True-Up Amount" shall have the meaning set forth in the Indenture.
The following additional terms are defined in the indicated Section:
Term Definition
---- ----------
Acquisition or Divestiture Agreement ss.4(n)
Adjustment Date ss.2(f)
Base Tax Indemnity ss.8(b)(iv)
Closing ss.2A(e)
Closing Date ss.2A(e)
Contracts ss.4(n)
Disclosure Schedule ss.4
Draft Net Debt Statement ss.2A(f)
Employee ss.4(r)
Employee Agreement ss.4(r)
Exchange ss.2(b)
Exchange Act ss.4(g)
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<PAGE>
Financial Statements ss.4(g)
General Adverse Consequences ss.8(b)(i)
General Indemnity Deductible ss.8(b)(i)
Indemnified Party ss.8(d)
Indemnifying Party ss.8(d)
KCI Contracts ss.4(n)
Legal Requirements ss.4(i)
Most Recent Financial Statements ss.4(g)
Most Recent Fiscal Month End ss.4(g)
Most Recent Fiscal Year End ss.4(g)
Optionee ss.2A(h)
Options ss.2A(h)
Purchase Price ss.2A(b)
Recapitalization ss.2(a)
SAR ss.2A(h)
SAR Holder ss.2A(h)
Securities Act ss.4(g)
SEC Documents ss.4(g)
SG Documents ss.3A(d)(i)
SG Payment ss.2A(c)
Third Party Claim ss.8(d)
2. Preliminary Transactions.
(a) Recapitalization. Immediately prior to the Closing:
(i) KCI shall file with the Secretary of State of the State of New
York a Certificate of Amendment of Certificate of Incorporation in the form of
Exhibit A hereto, pursuant to which KCI shall be authorized to issue 1,100,000
KCI Preferred Shares; and
(ii) Each of the KCI Sellers shall exchange (the "Recapitalization")
the number of KCI Common Shares so indicated on Schedule A hereto for an equal
number of KCI Preferred Shares.
(b) Exchange of Keyhold Shares. Immediately prior to the Closing:
(i) SG shall sell, assign, transfer and deliver to KCI all of the
issued and outstanding Keyhold Shares, and KCI in exchange therefor (the
"Exchange") shall issue and deliver to SG, 137,931 KCI Preferred Shares.
2A. Purchase and Sale of Company Shares.
(a) Basic Transaction.
(i) On and subject to the terms and conditions of this Agreement,
the Buyers jointly and severally agree to purchase from each of the KCI Sellers,
and each of the KCI Sellers agrees to sell to the Buyers, all of his or its KCI
Preferred Shares for the consideration specified below in this ss.2. Schedule A
attached hereto sets forth the number of KCI Preferred Shares held by each of
the Sellers immediately after the consummation of the Recapitalization and the
Exchange and immediately before the purchase and sale pursuant to this ss.2.
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(ii) On and subject to the terms and conditions of this Agreement,
the Buyers jointly and severally agree to purchase from SG, and SG agrees to
sell to the Buyers, all of SG's KCI Preferred Shares for the consideration
specified below in this ss.2.
(iii) On and subject to the terms and conditions of this Agreement,
the Buyers jointly and severally agree to purchase from KCI, and KCI agrees to
issue and sell the Buyers, the number of KCI Preferred Shares indicated on
Schedule A hereto.
(b) Purchase Price. The purchase price for each KCI Share ("Purchase
Price") shall be $114.82, subject to adjustment as provided in ss.2(g), below.
(c) Payments at Closing. On and subject to the terms and conditions
of this Agreement, Buyers agree to pay to each of the KCI Sellers, SG and KCI at
the Closing by wire transfer or delivery of other immediately available funds
the consideration set forth above for the KCI Preferred Shares.
(d) The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing" ) shall take place at the offices of RubinBaum,
LLP, 30 Rockefeller Plaza, New York, New York 10112 commencing at 9:00 a.m.
local time on May 15, 2000 or such other date as the Buyer and the Requisite KCI
Sellers may mutually determine (the "Closing Date").
(e) Deliveries at the Closing. At the Closing, (w) the KCI Sellers,
SG and KCI will deliver to the Buyers the various certificates, instruments, and
documents referred to in ss.7(a) below, (x) the Buyers will deliver to the KCI
Sellers, SG and KCI the various certificates, instruments, and documents
referred to in ss.7(b) below, (y) each of the KCI Sellers, SG and KCI will
deliver to the Buyers stock certificates representing the number of KCI
Preferred Shares set forth on Schedule A, in the case of the KCI Sellers and SG
endorsed in blank or accompanied by duly executed assignment documents, and (z)
the Buyers will deliver to the KCI Sellers, SG and KCI the consideration
specified in ss.2(c), above.
(f) Determination of Net Debt at May 31, 2000. Not later than June
15, 2000, KCI shall prepare and deliver to the Buyers a statement ("Draft Net
Debt Statement") setting forth the Net Debt of KCI and its Subsidiaries at May
31, 2000. If the Buyers have any objections to the Draft Net Debt Statement,
they will deliver a statement describing their objections to the KCI Sellers
within 10 days after receiving the Draft Net Debt Statement. The Purchasers and
the Requisite KCI Sellers will use reasonable efforts to resolve any such
objections themselves. If they do not obtain a final resolution within 5 days
after the KCI Sellers have received the statement of objections, however, the
Buyers and the Requisite KCI Sellers will select an accounting firm mutually
acceptable to them to resolve any remaining objections. If the Buyer and the
Requisite KCI Sellers are unable to agree on the choice of an accounting firm,
they will select a nationally-recognized accounting firm by lot (after excluding
their respective regular outside accounting firms). The determination of any
accounting firm so selected will be set forth in writing and will be conclusive
and binding upon the Parties and not subject to appeal. The fees and expenses of
such accounting firm will be paid by KCI. The date on which the Net Debt of KCI
and its Subsidiaries at May 31, 2000 is finally determined is referred to as the
"Adjustment Date."
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(g) Adjustment of Purchase Price. The Purchase Price shall be
adjusted as set forth in Schedule B based on the amount of Net Debt Decrease or
Net Debt Increase, provided, however, that the Purchase Price as so adjusted
shall not be less than $110.
(h) Options and SARs.
(i) Except as set forth on Schedule A, all outstanding stock options
("Options") shall remain outstanding in accordance with their terms. Schedule A
sets forth the number of Options which will be exercised by KCI Sellers on the
Closing. Each holder of an Option ("Optionee") that has executed this Agreement
as a KCI Seller agrees to exercise such Options as to the number of KCI Common
Shares set forth on Schedule A, to pay the related Option Withholding Taxes (as
defined on Schedule A), to exchange such KCI Common Shares for KCI Preferred
Shares in the Recapitalization, to sell such KCI Preferred Shares pursuant to
ss.2, to become a party to the Escrow Agreement and to deposit with the escrow
agent thereunder the property described therein and to become a party to the
Shareholders Agreement and the Registration Rights Agreement. As soon as
practicable after the date hereof KCI will approach Optionees who are not KCI
Sellers and request that they agree to become parties to the Shareholders
Agreement and Registration Rights Agreement.
(ii) KCI shall grant each holder ("SAR Holder") of stock
appreciation rights ("SARs") the right to surrender all of his SARs in exchange
for a cash payment equal to the amount that would be payable upon exercise of
such SARs, provided that such SAR Holder purchases from KCI at the Closing at
the Purchase Price (as adjusted pursuant to ss.2(g)) that number of newly issued
KCI Common Shares as shall equal the quotient of (A) either (1) 50% or (2) 75%,
as determined by such SAR Holder at the time of exercise, of 55% of the amount
of such cash payment (without regard to taxes required to be withheld therefrom)
divided by (B) the Purchase Price (prior to adjustment pursuant to ss.2(g)).
Such right shall be exercisable on the Closing by the execution and delivery of
an SAR Holders Agreement prior to the Closing. Net payments to be made to such
SAR Holders shall be determined pursuant to Schedule A and Schedule B and made
within ten (10) days after the Adjustment Date.
3. Representations and Warranties Concerning the Transaction.
(a) Representations and Warranties of the KCI Sellers. Each of the
KCI Sellers represents and warrants to the Buyers and SG that the statements
contained in this ss.3(a) are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this ss.3(a)) with respect to himself or itself.
(i) Authorization of Transaction. The KCI Seller has full power and
authority to execute and deliver this Agreement and the Ancillary Documents to
which it is a party and to perform his or its obligations hereunder and
thereunder. This Agreement has been duly executed and delivered and constitutes
the valid and legally binding obligation of the KCI Seller, enforceable in
accordance with its terms and conditions. The KCI Seller need not give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement. If the KCI Seller is an entity or a
trust, such KCI Seller is validly existing and the execution, delivery and
performance by such KCI Seller of this Agreement have been duly authorized.
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(ii) Noncontravention. Neither the execution and the delivery of
this Agreement and the Ancillary Documents to which such KCI Seller is a party,
nor the consummation of the transactions contemplated hereby and thereby, will
(A) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency or court to which the KCI Seller is subject or any provision
of its organizational documents, if any, or (B) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or other
arrangement to which the KCI Seller is a party or by which he or it is bound or
to which any of his or its assets is subject, or (C) result in the creation or
imposition of any Security Interest on the KCI Preferred Shares or any assets of
any of KCI and its Subsidiaries.
(iii) Brokers' Fees. The KCI Seller has no liability or obligation
to pay any fees or commissions to any broker, finder, or agent with respect to
the transactions contemplated by this Agreement for which the Buyers or any of
KCI and its Subsidiaries could become liable or obligated.
(iv) KCI Shares. The KCI Seller holds of record and owns
beneficially, and immediately after the consummation of the Recapitalization the
KCI Seller will hold of record and own beneficially, the number of KCI Common
Shares and KCI Preferred shares, respectively, set forth next to his or its name
on Schedule A, free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws), taxes,
Security Interests, options, warrants, purchase rights, contracts, commitments,
equities, claims, and demands. Except as set forth on ss.4(b) of the Disclosure
Schedule, the KCI Seller is not a party to any agreement, whether written or
oral, relative to its equity interests in KCI or its Subsidiaries, including,
without limitation, any option, warrant, purchase right, or other contract or
commitment that could require the KCI Seller to sell, transfer, or otherwise
dispose of any capital stock of KCI (other than this Agreement) or any voting
trust, proxy, or other agreement or understanding with respect to the voting of
any capital stock of KCI.
(b) Representations and Warranties of the Buyers. The Buyers jointly
and severally represent and warrant to the KCI Sellers and SG that the
statements contained in this ss.3(b) are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this ss.3(a)).
(i) Organization of the Buyers. Each of the Buyers is a
limited partnership duly organized, validly existing, and in good standing under
the laws of the jurisdiction of its incorporation.
(ii) Authorization of Transaction. Each of the Buyers has full
power and authority (including full limited partnership power and authority) to
execute and deliver this Agreement, the Shareholders Agreement and the
Registration Rights Agreement and to perform its obligations hereunder and
thereunder. This Agreement has been duly authorized, executed and delivered and
constitutes the valid and legally binding obligation of the Buyers, enforceable
in accordance with its terms and conditions. The Buyers need not give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order to consummate the transactions
contemplated by this Agreement.
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(iii) Noncontravention, Neither the execution and the delivery
of this Agreement, the Shareholders Agreement and the Registration Rights
Agreement, nor the consummation of the transactions contemplated hereby and
thereby, will (A) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which either Buyer is subject or
any provision of its limited partnership agreement or (B) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license, instrument, or
other arrangement to which either Buyer is a party or by which it is bound or to
which any of its assets is subject.
(iv) Brokers' Fees. Neither Buyer has any liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which any KCI
Seller could become liable or obligated.
(v) Investment. The Buyers are not acquiring KCI Shares with a
present view to any sale or distribution thereof within the meaning of the
Securities Act.
(vi) Financing. The Buyers have funds (or have available
commitments from creditworthy financial institutions to provide funds) required
to pay the Purchase Price and consummate the transactions contemplated hereby.
(vii) Disclaimer of other Representations and Warranties of
SG. The Buyers acknowledge and agree that SG is not making, and has not made,
any representations or warranties, express or implied, in respect of any of KCI
and its Subsidiaries or any of their respective businesses, operations, assets
or liabilities, and that neither Buyer may make any claim against SG or any of
its Affiliates in respect of any of (x) KCI and its Subsidiaries or any of their
respective businesses, operations, assets or liabilities or (y) any breach of
any representation, warranty, covenant or agreement of any of the Parties (other
than SG).
3A. Representations and Warranties of SG
SG represents and warrants to KCI, the KCI Sellers and the Buyers
that the statements contained in this ss.3A are correct and complete as of the
date of this Agreement and will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were substituted for the
date of this Agreement throughout this ss.3A).
(a) Authorization of Transaction. Each of SG and Keyhold is duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its organization. SG has full power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
has been duly authorized, executed and delivered constitutes the valid and
legally binding obligation of SG, enforceable against SG in accordance with its
terms and conditions. SG need not give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order to consummate the transactions contemplated by this Agreement.
(b) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(A) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any
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government, governmental agency, or court to which SG or Keyhold is subject, (B)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which SG or Keyhold is a party or by which
either of them is bound or to which any of his or its assets is subject, or (C)
result in the creation or imposition of any Security Interest on SG's Keyhold
Shares, Keyhold's KCLLC Shares or any assets of SG or Keyhold.
(c) Brokers' Fees. Neither SG nor Keyhold has any liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which the Buyers
could become liable or obligated.
(d) Keyhold Shares and KCI Shares
(i) The entire authorized capital stock of Keyhold consists of 1,000
Keyhold Shares, of which 100 Keyhold Shares are issued and outstanding and no
Keyhold Shares are held in treasury. All of the issued and outstanding Keyhold
Shares have been duly authorized, are validly issued, fully paid, and
nonassessable. SG holds of record and owns beneficially 100 Keyhold Shares, and
immediately after the consummation of the Exchange will hold of record and own
beneficially 137,931 KCI Preferred shares, in each case free and clear of any
restrictions on transfer (other than any restrictions under the Securities Act
and state securities laws), taxes, Security Interests, options, warrants,
purchase rights, contracts, commitments, equities, claims and demands. SG is not
a party to any option, warrant, purchase right, or other contract or commitment
that could require SG to sell, transfer, or otherwise dispose of any capital
stock of Keyhold (other than this Agreement and the agreements referred to in
ss.7(a)(xi) (the "SG Documents"). Except for the SG Documents, SG is not a party
to any agreement, whether written or oral, relative to its equity interests in
KCI or its Subsidiaries, including any voting trust, proxy, or other agreement
or understanding with respect to the voting of any capital stock of KCI. Except
as set forth in the SG Documents, there are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion rights,
exchange rights, or other contracts or commitments that could require Keyhold to
issue, sell, or otherwise cause to become outstanding any of its capital stock.
There are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Keyhold.
(ii) Keyhold holds of record and owns beneficially 137,931 KCLLC
Shares, free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws), Security
Interests, options, warrants, purchase rights, contracts, commitments, equities,
claims, and demands (other than in each case those set forth in the SG
Documents). Except for the SG Documents, Keyhold is not a party to any
agreement, whether written or oral, relative to its equity interests in KCI or
its Subsidiaries, including any option, warrant, purchase right, or other
contract or commitment that could require Keyhold to sell, transfer, or
otherwise dispose of any of KCLLC Shares or any voting trust, proxy, or other
agreement or understanding with respect to the voting of KCLLC Shares.
(e) Business of Keyhold. Keyhold was organized on August 10, 1999
and has never engaged in any business or activity, other than the purchase and
holding of KCLLC Shares. Keyhold is not and has never been a party to, bound by
or subject to any agreement except the SG Documents. Keyhold has no liabilities
of any kind, known or unknown, whether
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asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become due,
except for liability for Taxes arising out of its ownership of KCLLC Shares.
(f) The first taxable year of Keyhold will end July 31, 2000. Except
with respect to Delaware corporate franchise tax, as of the date hereof, Keyhold
has never filed any Tax Returns or paid any Taxes to any Tax authorities.
Keyhold is not currently the beneficiary of any extension of time within which
to file any Tax Return. SG will cause Keyhold promptly to pay to the appropriate
Tax authorities all amounts paid by KCLLC to it for such purpose and to file all
Tax Returns required to be filed where the due date (with valid extensions) is
on or before the Closing Date, provided, however, that SG does not undertake to
cause Keyhold to file any Tax Return requiring information concerning KCLLC so
long as KCLLC shall not have furnished Keyhold with all such required
information. All such Tax Returns shall be consistent in every material respect
with information furnished to Keyhold by KCLLC for such purpose. Keyhold has not
waived any statute of limitations in respect of Taxes or agreed to any extension
of time with respect to a Tax assessment or deficiency. There is no material
dispute or claim concerning any Tax liability of Keyhold either (A) claimed or
raised by any authority in writing to Keyhold or (B) as to which SG has
Knowledge based upon personal contact with any agent of such authority. Keyhold
is not a party to any Tax allocation or sharing agreement. Keyhold has no
liability for the Taxes of any Person under Reg. ss.1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract, or otherwise.
4. Representations and Warranties Concerning KCI and Its Subsidiaries. The
KCI Sellers represent and warrant to the Buyers that the statements contained in
this ss.4 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
ss.4), except as set forth in the disclosure schedule delivered by the KCI
Sellers to the Buyers on the date hereof (the "Disclosure Schedule").
(a) Organization, Qualification, and Corporate Power. Each of KCI
and its Subsidiaries is a corporation or limited liability company duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation or organization. Each of KCI and its
Subsidiaries is duly authorized to conduct business and is in good standing
under the laws of each jurisdiction where such qualification is required, except
where the lack of such qualification would not have a Material Adverse Effect.
Each of KCI and its Subsidiaries has full corporate or limited liability company
power and authority to carry on the businesses in which it is engaged and to own
and use the assets and properties owned and used by it. ss.4(a) of the
Disclosure Schedule lists the directors and officers of each of KCI and its
Subsidiaries. KCI has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement has been duly
executed and delivered and subject to approval of the shareholders of KCI has
been authorized and constitutes the valid and legally binding obligation of KCI,
enforceable in accordance with its terms and conditions. KCI need not give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
(b) Capitalization. The entire authorized capital stock of KCI
consists of 5,000,000 KCI Common Shares, of which 1,098,776.78 KCI Common Shares
are issued and outstanding and 16,428 are held in treasury. All of the issued
and outstanding KCI Common Shares have been duly authorized, are validly issued,
fully paid, and nonassessable, and are held of record by the respective KCI
Sellers as set forth in Schedule A. ss.4(b) of the Disclosure Schedule sets
forth all outstanding or
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authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments that could require
KCI to issue, sell, or otherwise cause to become outstanding or repurchase or
redeem any of its capital stock and all outstanding or authorized stock
appreciation, phantom stock, profit participation, or similar rights with
respect to KCI. There are no contracts, commitments or agreements relating to
the registration of the KCI Shares. Schedule A indicates for each KCI Seller the
number of KCI Common Shares to be exchanged for KCI Preferred Shares in the
Recapitalization. When issued in the Recapitalization and the Exchange in
accordance herewith, all of the outstanding KCI Preferred Shares will be duly
authorized, validly issued, fully paid and nonassessable. All KCI Common Shares
issuable upon conversion of the KCI Preferred Shares will, when issued, be duly
authorized, validly issued, fully paid and nonassessable.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement and the Ancillary Documents to which KCI is a party, nor the
consummation of the transactions contemplated hereby and thereby, will breach,
conflict with, or result in any violation of or default (with or without notice
or lapse of time or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to the loss of any benefit
under, or result in the creation or imposition of any Security Interest of any
nature whatsoever upon any of the properties or assets of KCI or any of its
Subsidiaries under, (i) any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of KCI and its Subsidiaries is
subject or any provision of the charter, bylaws or other organic document of any
of KCI and its Subsidiaries or (ii) any agreement, contract, lease, license,
instrument, or other arrangement to which any of KCI and its Subsidiaries is a
party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest upon any of its assets),
except in the case of clause (ii) where the violation, conflict, breach,
default, acceleration, termination, modification, cancellation, failure to give
notice, or Security Interest would not have a Material Adverse Effect. None of
KCI and its Subsidiaries needs to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency or any third party in order for the Parties to consummate the
transactions contemplated by this Agreement or the Ancillary Documents, except
where the failure to give notice, to file, or to obtain any authorization,
consent, or approval would not have a Material Adverse Effect.
(d) Brokers' Fees. None of KCI and its Subsidiaries has any
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement.
(e) Title to Assets. KCI and its Subsidiaries have good title to, or
a valid leasehold interest in, the properties and assets used by them, shown on
the Most Recent Financial Statements or acquired after the date thereof, free
and clear of all Security Interests, except for properties and assets disposed
of in the Ordinary Course of Business since the date of the Most Recent
Financial Statements. Such properties and assets, constitute all of the material
properties, interests, assets and rights held for use or used in connection with
the business and operations of KCI and its Subsidiaries and constitute all those
necessary to continue to operate the business of KCI and its Subsidiaries
consistent with current and historical practice and as presently contemplated to
be conducted.
(f) Subsidiaries. ss.4(f) of the Disclosure Schedule sets forth for
each Subsidiary of KCI (i) its name and jurisdiction of incorporation or
organization, (ii) the number of shares of authorized capital stock or other
ownership interest of each class, (iii) the number of issued and outstanding
shares of each class of its capital stock or other ownership interest, the names
of the
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holders thereof, and the number of shares held by each such holder, and (iv) the
number of shares of its capital stock or other ownership interest held in
treasury. All of the issued and outstanding shares of capital stock or other
ownership interest of each Subsidiary of KCI have been duly authorized and are
validly issued, fully paid, and nonassessable. One of KCI and its Subsidiaries
holds of record and owns beneficially all of the outstanding shares or other
ownership interest of each Subsidiary of KCI. One of KCI and its Subsidiaries
holds of record and owns beneficially all of the outstanding shares or other
ownership interest of each Subsidiary of KCI, free and clear of any restrictions
on transfer (other than restrictions under the Securities Act and state
securities laws), taxes, Security Interests, options, warrants, purchase rights,
contracts, commitments, equities, claims, and demands. There are no outstanding
or authorized options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments that could
require any of KCI and its Subsidiaries to sell, transfer, or otherwise dispose
of any capital stock or other ownership interest of any of its Subsidiaries or
that could require any Subsidiary of KCI to issue, sell, or otherwise cause to
become outstanding any of its own capital stock or other ownership interest.
There are no outstanding stock appreciation, phantom stock, profit
participation, or similar rights with respect to any Subsidiary of KCI. There
are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock or other ownership interest of any
Subsidiary of KCI. None of KCI and its Subsidiaries controls directly or
indirectly or has any direct or indirect equity or other similar participation
in any corporation, partnership, trust, joint venture, limited liability company
or other business association which is not a Subsidiary of KCI. None of KCI or
its Subsidiaries has any funding obligation in respect of Mastervolt
International B.V.
(g) Financial Statements; SEC Documents
(i)The Company has delivered to the Buyer the following financial
statements (collectively the "Financial Statements"): (i) audited consolidated
balance sheets and statements of income, changes in stockholders' equity, and
cash flow as of and for the fiscal years ended December 31, 1997 and December
31, 1998 of KCI and its Subsidiaries and as of and for the fiscal year ended
December 31, 1999 for KCLLC and its Subsidiaries (the "Most Recent Fiscal Year
End"); and (ii) unaudited consolidated balance sheets and statements of income,
changes in stockholders' equity, and cash flow (the "Most Recent Financial
Statements") as of and for the two months ended March 31, 2000 (the "Most Recent
Fiscal Month End") for KCLLC and its Subsidiaries. The Financial Statements
(including the notes thereto) have been prepared in accordance with the books
and records of KCI and its Subsidiaries and in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby and present fairly in
all material respects the financial condition of KCI and its Subsidiaries as of
such dates and the results of operations of KCI and its Subsidiaries for such
periods; provided, however, that the Most Recent Financial Statements are
subject to normal year-end adjustments and lack footnotes and other presentation
items.
(ii) Since January 19, 1999, KCLLC has filed with the SEC all forms,
reports, schedules, statements and other documents required to be filed by it
with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Securities Act of 1933, as amended (the "Securities Act"),
and the SEC's rules and regulations thereunder (collectively, the "SEC
Documents"). The SEC Documents, including any financial statements or schedules
included therein, at the time filed (or, if amended, at the time of such amended
filing), or in the case of registration, statements on their respective
effective dates, (i) complied as to form in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the case
may be, and the applicable rules and regulations of the SEC thereunder and (ii)
did not at the time filed (or, if
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amended, at the time of such amended filing and, in the case of registration
statements, at the time of effectiveness), contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
(iii) Except as set forth on the Most Recent Financial Statements,
or on ss.4(g) of the Disclosure Schedules, KCI and its Subsidiaries do not have
any liabilities or obligations of any nature (whether accrued, absolute,
contingent, unasserted or otherwise and whether due or to become due), except
for liabilities and obligations incurred in the Ordinary Course of Business, or
which, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.
(h) Events Subsequent to Most Recent Fiscal Year End. Since the Most
Recent Fiscal Year End, KCI has conducted its affairs only in the Ordinary
Course of Business and there has not been, occurred or arisen any event,
condition or state of facts of any character that individually or in the
aggregate would be reasonably likely to have a Material Adverse Effect, whether
or not arising in the Ordinary Course of Business. Without limiting the
generality of the foregoing, since that date:
(i) none of KCI and its Subsidiaries has sold, leased,
transferred, or assigned any material assets, tangible or
intangible, outside the Ordinary Course of Business;
(ii) none of KCI and its Subsidiaries has entered into any
material agreement, contract, lease, or license outside the Ordinary
Course of Business;
(iii) no party (including any of KCI and its Subsidiaries) has
accelerated, terminated, made material modifications to, or canceled
or failed to use reasonable business efforts to renew any material
agreement, contract, lease, or license to which any of KCI and its
Subsidiaries is a party or by which any of them is bound, nor has
KCI or any of its Subsidiaries waived, released or assigned any
material rights or claims thereunder;
(iv) none of KCI and its Subsidiaries has had imposed any
Security Interest upon any of its assets, tangible or intangible;
(v) none of KCI and its Subsidiaries has made any
material capital expenditures outside the Ordinary Course of
Business or in excess of $100,000;
(vi) none of KCI and its Subsidiaries has made any material
capital investment in, or any material loan to, any other Person
outside the Ordinary Course of Business or in excess of $100,000;
(vii) none of KCI and its Subsidiaries has granted any license
or sublicense of any material rights under or with respect to any
Intellectual Property;
(viii) there has been no change made or authorized in the
charter or bylaws or other organizational document of any of KCI
and its Subsidiaries;
(ix) none of KCI and its Subsidiaries has issued, sold, or
otherwise disposed of, or acquired, split, combined or reclassified,
any of its capital stock, or granted any
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options, warrants, or other rights to purchase or obtain (including
upon conversion, exchange, or exercise) any of its capital stock;
(x) except for permitted Quarterly Tax Distributions and True
Up Amounts, none of KCI and its Subsidiaries has declared, set
aside, or paid any dividend or made any distribution with respect to
its capital stock (whether in cash or in kind) or redeemed,
purchased, or otherwise acquired any of its capital stock;
(xi) none of KCI and its Subsidiaries has experienced any
material damage, destruction, or loss (whether or not covered by
insurance) to its property;
(xiii) none of KCI and its Subsidiaries has made any loan to,
or entered into any other transaction with, any of its directors,
officers, and employees outside the Ordinary Course of Business or
in excess of $100,000;
(xiv) none of KCI and its Subsidiaries has entered into any
employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or
agreement;
(xv) none of KCI and its Subsidiaries has granted any increase
in the base compensation of any of its directors, officers, and
employees in excess of $100,000 in the aggregate;
(xvi) none of KCI and its Subsidiaries has adopted, amended,
modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of
any of its directors, officers, and employees (or taken any such
action with respect to any other Employee Benefit Plan);
(xvii) none of KCI and its Subsidiaries has made any
other material change in employment terms for any of its
directors, officers, and employees;
(xviii) none of KCI and its Subsidiaries has changed any
method of accounting or accounting practice, except for any such
change required by GAAP or SEC rules and regulations;
(xix) none of KCI and its Subsidiaries has entered into any
transaction, contract or arrangement with an Affiliate (other than
KCI or any of its Subsidiaries), except transactions pursuant to
contracts disclosed in ss.4(u) of the Disclosure Schedule;
(xx) none of KCI and its Subsidiaries has released any third
party from or waived or consented to the nonperformance of any
material obligation, except in the Ordinary Course of Business; and
(xxi) none of KCI and its Subsidiaries has committed to
any of the foregoing.
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(i) Legal Compliance. Each of KCI and its Subsidiaries has complied
with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof), and
any filing requirements relating thereto, including laws and regulations
relating to all building, fire, zoning, setback, and subdivision laws
(collectively, "Legal Requirements"), and no written notices of violation of any
Legal Requirements have been received, except where the failure to comply would
not have a Material Adverse Effect. KCI and each of its Subsidiaries have
obtained each permit, license and other authorization or approval necessary for
each of them to own, lease or use any of their properties or assets, except for
such licenses, certificates, permits and rights the absence of which would not
individually or in the aggregate have a Material Adverse Effect (each, a
"Permit"). Each such Permit currently is in full force and effect. To the
Knowledge of the KCI Sellers, no default or violation, or event which with the
passage of time or giving of notice or both would become a default or violation,
has occurred in the due observance of any such Permit.
(j) Tax Matters.
(i) Each of KCI and its Subsidiaries has duly and timely filed
all Tax Returns that it was required to file. All such Tax Returns were
correct and complete in all material respects. All Taxes which are or may
become payable by any of KCI and its Subsidiaries (whether or not shown on
any Tax Return) have been duly and timely paid. None of KCI and its
Subsidiaries currently is the beneficiary of any extension of time within
which to file any Tax Return. Each of KCI and each of its Subsidiaries has
duly and timely withheld all taxes required to be withheld by it and such
withheld taxes have been either duly and timely paid to the proper taxing
authority or properly set aside in accounts for such purpose and will be
duly and timely paid to the proper taxing authority.
(ii) There is no material dispute or claim concerning any Tax
liability of any of KCI and its Subsidiaries either (A) claimed or raised
by any authority in writing or (B) as to which any of the KCI Sellers has
Knowledge based upon personal contact with any agent of such authority. No
Taxes of any of KCI or any of its Subsidiaries are currently under audit
by any taxing authority.
(iii) KCI has delivered to the Buyers correct and complete
copies of all federal income Tax Returns, examination reports, and
statements of deficiencies assessed against, or agreed to by any of KCI
and its Subsidiaries since December 31, 1995. None of KCI and its
Subsidiaries has waived any statute of limitations in respect of Taxes or
agreed to any extension of time with respect to a Tax assessment or
deficiency. ss.4(j)(iii) of the Disclosure Schedule sets forth all taxable
years of each of KCI and each of its Subsidiaries which remain open for
federal income Tax purposes.
(iv) None of KCI and its Subsidiaries has filed a consent
under Code ss.341(f) concerning collapsible corporations. None of KCI and
its Subsidiaries has made any material payments, is obligated to make any
material payments, or is a party to any agreement that under certain
circumstances could obligate it to make any material payments that will
not be deductible under Code ss.280G. None of KCI and its Subsidiaries has
been a United States real property holding corporation within the meaning
of Code ss.897(c)(2) during the applicable period specified in Code
ss.897(c)(1)(A)(ii). None of KCI and its Subsidiaries is a party to any
Tax allocation or sharing agreement. None of KCI and its Subsidiaries has
any liability for the
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Taxes of any Person (other than any of KCI and its Subsidiaries) under
Reg. ss.1.1502-6 (or any similar provision of state, local, or foreign
law), as a transferee or successor, by contract, or otherwise.
(v) The unpaid Taxes of KCI and its Subsidiaries (A) did not,
as of the Most Recent Fiscal Month End, exceed by any material amount the
reserve for Tax liability (rather than any reserve for deferred taxes
established to reflect timing differences between book and tax income) set
forth on the face of the Most Recent Financial Statements (rather than in
any notes thereto) and (B) will not exceed by any material amount that
reserve as adjusted for operations and transactions through the Closing
Date in accordance with the past custom and practice of KCI and its
Subsidiaries in filing their Tax Returns.
(vi) For each taxable year since the formation of KCI, KCI has
maintained a valid election under Section 1362(a) of the Code (as well as
the equivalent provisions, if any, of all applicable state or local Tax
statutes) to be treated as an "S corporation." KCLLC (i) is treated as a
partnership for federal, state and local income Tax purposes and (ii) is
not (nor has it ever been) treated as a "publicly traded partnership" or
otherwise taxable as a corporation for any federal, state or local income
Tax purposes.
(k) Real Property.
(i) ss.4(k)(i) of the Disclosure Schedule lists the address and
owner of all real property that any of KCI and its Subsidiaries owns. With
respect to each such parcel of owned real property:
(A) the identified owner has good and marketable title to the
parcel of real property, free and clear of any Security Interest,
easement, covenant, or other restriction, except for (i)
installments of special assessments not yet delinquent, (ii)
recorded easements, covenants, and other restrictions, and utility
easements, and (iii) building and zoning restrictions, which in the
case of (i), (ii) and (iii) would not have a Material Adverse
Effect;
(B) there are no leases, subleases, licenses, concessions, or
other agreements granting to any party or parties the right of use
or occupancy of any portion of the parcel of real property; and
(C) there are no outstanding options or rights of first
refusal to purchase the parcel of real property, or any portion
thereof or interest therein.
(ii) ss.4(k)(ii) of the Disclosure Schedule lists all real property
leased, subleased or licensed to (or otherwise occupied by, except for the
owned real property) any of KCI and its Subsidiaries. The KCI Sellers have
delivered to the Buyers correct and complete copies of the leases,
subleases and licenses listed in ss.4(k)(ii) of the Disclosure Schedule
(as amended to date). To the Knowledge of the KCI Sellers, each lease,
sublease or license listed in ss.4(k)(ii) of the Disclosure Schedule is
legal, valid, binding, enforceable in accordance with its terms and in
full force and effect. There exists no default, or any event which upon
the giving of notice or the passage of time, or both, would give rise to
any default, in the performance by KCI or the applicable Subsidiary (or to
the Knowledge of the KCI Sellers, the lessor
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thereunder), of any of its obligations under any lease, sublease or
license, except for such defaults that would not have a Material Adverse
Effect.
(l) Intellectual Property.
(i) KCI and its Subsidiaries own or have rights to use the
Intellectual Property currently used in their businesses for the purposes
for which such Intellectual Property is currently used, except where the
failure to have such rights would not have a Material Adverse Effect. None
of KCI and its Subsidiaries has interfered with, infringed upon,
misappropriated, or violated any material Intellectual Property rights of
third parties in any material respect, and none of KCI and its
Subsidiaries has ever received, or to the Knowledge of the KCI Sellers
been threatened with, any written charge, complaint, claim, demand, or
notice alleging any such interference, infringement, misappropriation or
that any payment is due from KCI or any of its Subsidiaries with respect
to any Intellectual Property. To the Knowledge of the KCI Sellers, no
third party has interfered with, infringed upon, misappropriated, or
violated any material Intellectual Property rights of any of KCI and its
Subsidiaries in any material respect.
(ii) ss.4(l)(ii) of the Disclosure Schedule identifies each patent
or registration which has been issued to any of KCI and its Subsidiaries
with respect to any of its Intellectual Property, identifies each pending
patent application or application for registration which any of KCI and
its Subsidiaries has made with respect to any of its Intellectual
Property, and identifies each material license, agreement, or other
permission which any of KCI and its Subsidiaries has granted to any third
party with respect to any of its Intellectual Property (together with any
exceptions). The KCI Sellers have delivered to the Buyers correct and
complete copies of all such patents, registrations, applications,
licenses, agreements, and permissions (as amended to date). ss.4(l)(ii) of
the Disclosure Schedule also identifies all other Intellectual Property
owned by any of KCI and its Subsidiaries other than Intellectual Property
which is licensed from a third party. With respect to each item of
Intellectual Property required to be identified in ss.4(l)(ii) of the
Disclosure Schedule:
(A) KCI and its Subsidiaries possess all right, title, and
interest in and to the item, free and clear of any Security
Interest, license, or other restriction;
(B) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge;
(C) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the Knowledge
of the KCI Sellers, is threatened which challenges the legality,
validity, enforceability, use, or ownership of the item; and
(D) none of KCI and its Subsidiaries has ever agreed to
indemnify any Person for or against any interference, infringement,
misappropriation, or other conflict with respect to the item.
(iii) ss.4(l)(iii) of the Disclosure Schedule identifies each
material item of Intellectual Property that any of KCI and its
Subsidiaries uses pursuant to license, sublicense, agreement
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or permission. Except for off the shelf software used pursuant to
shrink-wrap licenses, KCI has delivered to the Buyers correct and complete
copies of all such licenses, sublicenses, agreements, and permissions (as
amended to date). With respect to each such item of Intellectual Property
identified pursuant to the first sentence of this subdivision (iii):
(A) the license, sublicense, agreement, or permission covering
the item is legal, valid, binding, enforceable, and in full force
and effect in all material respects;
(B) none of KCI and its Subsidiaries, and to the Knowledge of
KCI Sellers no other party to the license, sublicense, agreement, or
permission, is in material breach or default, and no event has
occurred which with notice or lapse of time would constitute a
material breach or default or permit termination, modification, or
acceleration thereunder;
(C) no party to the license, sublicense, agreement, or
permission has repudiated any material provision thereof; and
(D) none of KCI and its Subsidiaries has granted any
sublicense or similar right with respect to the license, sublicense,
agreement, or permission.
(iv) The trademarks and tradenames that are listed on ss.4(l)(ii) of
the Disclosure Schedule have been duly registered with, filed in or issued
by, as the case may be, the United States Patent and Trademark Office or
other filing offices, domestic or foreign, to the extent reasonably
necessary or desirable to ensure protection under any applicable law, and
such registrations, filings, issuances and other actions remain in full
force and effect, in each case, to the extent material to the business or
operations of KCI and its Subsidiaries taken as a whole. KCI and its
Subsidiaries have taken all actions reasonably necessary in the relevant
jurisdictions to ensure full protection of its Intellectual Property
(including maintaining the secrecy of all confidential Intellectual
Property) under any applicable law.
(v) All software owned by KCI or any Subsidiary, firmware and
hardware and, to the Knowledge of the KCI Sellers, the material software
used in the business or operations of KCI and its Subsidiaries taken as a
whole that contains or calls on a calendar function, including but not
limited to any function that is indexed to a computer processing unit
clock, provides specific dates or calculates spans of dates, is able to
record, store, process and provide true and accurate dates and
calculations for dates and spans of dates (including leap year
calculations) including and following January 1, 2000, except where the
inability to do so would not have a Material Adverse Effect.
(m) Tangible Assets. To the Knowledge of the KCI Sellers, the
buildings, machinery, equipment, and other tangible assets that KCI and its
Subsidiaries use on a regular basis are in all material respects in good
operating condition and repair, ordinary wear and tear excepted.
(n) Contracts. ss.4(n) of the Disclosure Schedule lists all written
and oral contracts and other written agreements, arrangements and understandings
("Contracts") to which any of KCI and its Subsidiaries is a party (i) the
performance of which will involve consideration in excess of $100,000; (ii)
which restrict KCI or any of its Subsidiaries from engaging in any line of
business in any geographic area or competing with any person or entity or
restricting the ability of KCI or any of its
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Subsidiaries from acquiring equity securities of any Person; (iii) which are
employment, consulting or severance contracts applicable to any employee,
officer, director, consultant or stockholder of any of KCI and it Subsidiaries,
other than which by its terms KCI or any of its Subsidiaries may terminate on
not more than 60 days' notice without liability; (iv) which are acquisition,
disposition, joint venture or similar agreements either not entered into in the
Ordinary Course of Business or which include a continuing or contingent payment
or indemnity obligation (any such payment or indemnity obligation being
separately identified on the Disclosure Schedules) (each, an "Acquisition or
Divestiture Agreement"); (v) is an evidence of any indebtedness for borrowed
money of KCI or any of its Subsidiaries, including without limitation, any note,
bond, mortgage, deed of trust, credit agreement, loan agreement, security
agreement, or indenture; (vi) which is an intercompany agreement, including
without limitation, any tax sharing, expense sharing, employee leasing or other
similar agreement; (vii) which is a contract with any governmental entity, or
(viii) which is a management, administrative services or data processing
Contract (the Contracts in clause (i)-(viii), collectively, the "KCI
Contracts"). Except as set forth on ss.4(n) of the Disclosure Schedules, there
are no continuing or contingent payment obligations under any Acquisition or
Divestiture Agreement, and there are no outstanding indemnity claims under any
Acquisition or Divestiture Agreement. KCI has made available to Buyer true and
complete copies of all Acquisition or Divestiture Agreements entered into since
April 1, 1992, together with all disclosure schedules thereto. KCI has delivered
to the Buyers a correct and complete copy of each KCI Contract (as amended to
date). With respect to each KCI Contract: (A) the KCI Contract is legal, valid,
binding, enforceable, and in full force and effect in all material respects; (B)
none of KCI and its Subsidiaries is, and to the Knowledge of the KCI Sellers, no
other party is, in material breach or default, and no event has occurred which
with notice or lapse of time would constitute a material breach or default, or
permit termination, modification, or acceleration, under the KCI Contract; and
(C) none of KCI and its Subsidiaries has, and to the Knowledge of the KCI
Sellers, no other party has, repudiated any material provision thereof.
(o) Powers of Attorney. To the Knowledge of the KCI Sellers, there
are no outstanding powers of attorney executed on behalf of any of KCI and its
Subsidiaries.
(p) Litigation. ss.4(p) of the Disclosure Schedule sets forth each
instance in which any of KCI and its Subsidiaries (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a
party to, or to the Knowledge of the KCI Sellers, threatened to be made a party
to, any action, claim, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial, administrative agency, department or
instrumentality of any federal, state, local, or foreign jurisdiction, except
where the injunction, judgment, order, decree, ruling, action, claim, suit,
proceeding, hearing, or investigation would not have a Material Adverse Effect.
To the Knowledge of the KCI Sellers, there is no reasonable basis for any such
action, suit, claim, proceeding, hearing or investigation.
(q) Employee Benefits.
(i) Generally. ss.4(q) of the Disclosure Schedule contains a true
and complete list of each plan, program, policy, practice, contract, agreement
or other arrangement providing for compensation, severance, termination pay,
performance awards, stock or stock-related awards, fringe benefits or other
employee benefits of any kind, including each "employee benefit plan" within the
meaning of Section 3(3) of ERISA ("Employee Plan") that is maintained,
contributed to, or required to be contributed to, for the benefit of any current
or former employee, officer, independent contractor, agent or consultant working
for KCI and its Subsidiaries ("Employee"), and each management,
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employment, severance or consulting agreement or contract between the Seller and
any Employee ("Employee Agreement"). The KCI Sellers have provided to the Buyers
prior to the Closing true and complete copies of all documents, if any,
embodying each Employee Plan and Employee Agreement, including all amendments
thereto; the three most recent annual reports filed (Form 5500 Series with
applicable schedules) with respect to each Employee Plan required under ERISA;
the most recent summary plan description, if any, with respect to each Employee
Plan required under ERISA; and the most recent favorable determination letter
from the IRS, if applicable, with respect to each Employee Plan.
(ii) Qualified Plans. Each Employee Plan that is intended to be
qualified under the Code has received a determination letter from the Internal
Revenue Service to the effect that such Employee Plan and related trust are
qualified and exempt from Federal income taxes under Sections 401(a) and 501(a),
respectively; no such determination letter has been revoked, nor to the
Knowledge of the KCI Sellers, has revocation been threatened. To the Knowledge
of the KCI Sellers, nothing has occurred or is expected to occur that would
adversely affect the qualified status of such Employee Plan or any related trust
subsequent to the issuance of such determination letter.
(iii) Compliance. Each of KCI and its Subsidiaries has performed in
all material respects all obligations required to be performed under each
Employee Plan, and each Employee Plan has been established and maintained in all
material respects in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA or the Code. No Employee Plan is a defined benefit plan within
the meaning of Section 3(35) of ERISA, nor a multiemployer plan within the
meaning of Section 3(37) of ERISA, and the none of KCI or its Subsidiaries has
any liability with respect to any such plan as a result of having been treated
as part of a "single employer" within the meaning of Section 414(b), (c), (m),
(n) and (o) of the Code, nor is there any basis for such liability being
imposed. There are no investigations, claims, suits, or proceedings pending, or,
to the Knowledge of the KCI Sellers, threatened or anticipated (other than
routine claims for benefits) against any Employee Plan or the assets of any
Employee Plan, and to the Knowledge of the KCI Sellers, there are no facts that
could give rise to any material liability in the event of any such
investigation, claim, suit or proceeding. All premiums required by any Employee
Plan have been paid thereunder; all outstanding indebtedness for services
performed or accrued vacation, holiday pay, earned commissions, accrued bonuses
or other benefits owed to any Employee been paid when due or accrued on the
books of KCI and its Subsidiaries; all contributions due to and payments from,
the Employee Plans that may have been required to be made have been made. No
"prohibited transaction" within the meaning of Section 4975 of the Code or
Section 406 of ERISA has occurred with respect to any Employee Plan.
(iv) No Post-Employment Obligations. None of KCI and its
Subsidiaries maintain or contribute to any Employee Plan which provides, or has
any liability to provide, life insurance, medical or other employee welfare
benefits (other than severance and accrued vacation and holiday pay) to any
Employee upon his or her retirement or termination of employment, except as may
be required by statute.
(v) COBRA. Each "group health plan" within the meaning of Section
4980B(g)(2) of the Code maintained by KCI and its Subsidiaries has been
administered in good faith in compliance with the continuation coverage
requirements contained in the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"), as set forth at Section 4980B of the Code and any
regulations promulgated or proposed thereunder.
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(vi) Effect of Transaction. Except as set forth on ss.4(q) of the
Disclosure Schedule, the execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or when taken together
with any additional or subsequent events) constitute an event under any Employee
Plan or Employee Agreement that will or may result in any payment, upon a change
in control or otherwise, whether of severance, accrued vacation, or otherwise,
acceleration, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee. No payment or benefit which will or may
be made by the Seller or any of its Affiliates with respect to any Employee as a
result of the transactions contemplated hereby will be characterized as an
"excess parachute payment" within the meaning of Section 280G(b)(1) of the Code.
(vii) Employment Matters. KCI and its Subsidiaries (i) are in
compliance with all applicable federal and state laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours, in each case, with respect to Employees, except where the
failure to be in compliance would not, singly or in the aggregate, have a
material adverse effect on KCI and its Subsidiaries taken as a whole; (ii) have
withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to Employees; (iii) are not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) (other than routine payments to be made in the normal
course of business and consistent with past practice) are not liable for any
payment to any trust or other fund or to any governmental or administrative
authority, with respect to unemployment compensation benefits, Social Security
or other benefits for Employees.
(viii) Deferred Benefit Plans. With respect to any defined benefit
plan of KCI and its Subsidiaries, there has been no failure to make any
contribution or pay any amount due as required by Section 412 of the Internal
Revenue Code, Section 302 of ERISA or the terms of such defined benefit plan,
and there has been no request for or receipt of any funding waiver from the
Internal Revenue Service. Neither KCI nor any entity with which it either is or
would be considered a "single employer" has incurred or reasonably expects to
incur any Liabilities under Title IV of ERISA with respect to any such defined
benefit plan. No "reportable event," within the meaning of Section 4043(b) of
ERISA, has occurred with respect to any such defined benefit plan. As of
December 31, 1998, no such defined benefit plan had any amount of "unfunded
benefit liability," within the meaning of Section 4001(a)(18) of ERISA, and
termination of any such defined benefit plan has not resulted and will not
result in any liability to KCI or any of its Subsidiaries or any entity with
which either is or would be considered a "single employer."
(r) Environmental, Health, and Safety Matters.
(i) KCI and its Subsidiaries are currently and have at all times
been in material compliance with Environmental, Health, and Safety Requirements,
and are in possession of, and in material compliance with, all permits,
authorizations and consents, or applications therefor, required pursuant to all
applicable Environmental, Health and Safety Requirements.
(ii) KCI and its Subsidiaries have not received any written notice,
report or other information regarding any actual or alleged violation of
Environmental, Health, and Safety Requirements, or any liabilities or potential
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise),
including any investigatory, remedial or corrective obligations, relating to
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KCI or its Subsidiaries or their facilities arising under Environmental, Health,
and Safety Requirements.
(iii) This ss.4(r) contains the sole and exclusive representations
and warranties of the Seller with respect to any environmental, health, or
safety matters, including without limitation any arising under any
Environmental, Health, and Safety Requirements.
(iv) None of KCI and its Subsidiaries, nor to the Knowledge of the
KCI Sellers, any other Person has caused or taken any action that will result
in, and none of KCI and its Subsidiaries is subject to, any material liability
or obligation relating to (x) the environmental conditions on, under, or about
the properties or assets currently or formerly owned, leased, operated or used
by KCI and its Subsidiaries or any predecessor in interest or (y) the past or
present use, management, handling, transport, treatment, generation, storage,
disposal, discharge, emission, or Release of any Hazardous Materials.
(v) No Environmental Claims have been asserted against any of KCI
and its Subsidiaries, or, to the Knowledge of the KCI Sellers, any predecessor
in interest, nor do the KCI Sellers have Knowledge of any threatened or pending
Environmental Claim.
(vi) None of KCI and its Subsidiaries has entered into any
contractual or other obligation (including indemnification obligation) with any
governmental authority or other Person pursuant to which any thereof assumed
responsibility for, either directly or indirectly, the remediation of any
condition arising from or relating to a Release or threatened release of
Hazardous Materials.
(vii) KCI has provided to Buyer all environmental studies, reports,
investigations, and notices of violations in its or its Subsidiaries' or its or
their representative's possession, custody or control relating to properties or
assets currently or formerly owned, leased, operated or used by any of KCI and
its Subsidiaries.
(s) Employees. To the Knowledge of KCI Sellers, no executive, key
employee, or significant group of employees plans to terminate employment with
any of KCI and its Subsidiaries during the next 12 months. None of KCI and its
Subsidiaries is a party to or bound by any collective bargaining agreement, nor
has any of them experienced any strike or material grievance, claim of unfair
labor practices, or other collective bargaining dispute within the past three
years. None of KCI and its Subsidiaries has committed any material unfair labor
practice. None of the KCI Sellers has any Knowledge of any organizational effort
presently being made or threatened by or on behalf of any labor union with
respect to employees of any of KCI and its Subsidiaries. None of KCI and its
Subsidiaries has any employees based outside the United States.
(t) Disclaimer of other Representations and Warranties. Except as
expressly set forth in ss.3 and this ss.4, the KCI Sellers make no
representation or warranty, express or implied, at law or in equity, in respect
of any of KCI and its Subsidiaries or any of their respective assets,
liabilities or operations, including with respect to merchantability or fitness
for any particular purpose, and any such other representations or warranties are
hereby expressly disclaimed.
(u) Certain Business Relationships. None of KCI and its Subsidiaries
has been involved in any material business arrangement or relationship with any
of the KCI Sellers or SG or their respective Affiliates (other than KCI and
Keyhold and their respective Subsidiaries) within the
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past 12 months, and none of the KCI Sellers and SG and their respective
Affiliates (other than KCI and Keyhold and their respective Subsidiaries) owns
any material asset, tangible or intangible, which is used in the business of any
of KCI and its Subsidiaries.
(v) Insurance. ss.4(v) of the Disclosure Schedule sets forth the
following information with respect to each material insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) with respect to which any of the KCI
and its Subsidiaries is a party, a named insured, or otherwise the beneficiary
of coverage:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder, and
the name of each covered insured;
(iii) the policy number and the period of coverage;
(iv) the scope (including an indication of whether the coverage is
on a claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and operate) of
coverage; and
(v) a description of any retroactive premium adjustments or
other material loss-sharing arrangements.
With respect to each such insurance policy: (A) the policy is legal, valid,
binding, enforceable, and in full force and effect in all material respects; (B)
neither any of KCI and its Subsidiaries nor any other party to the policy is in
material breach or default (including with respect to the payment of premiums or
the giving of notices), and no event has occurred which, with notice or the
lapse of time, would constitute such a material breach or default, or permit
termination, modification, or acceleration, under the policy; and (C) no party
to the policy has repudiated any material provision thereof.
5. Pre-Closing Covenants. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
(a) General. Each of the Parties will use his or its reasonable best
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in ss.7 below).
(b) Notices and Consents. The KCI Sellers will, and will cause KCI
and its Subsidiaries to, give any notices to third parties and use commercially
reasonable efforts to obtain any third party consents that the Buyers reasonably
may request in connection with the matters referred to in ss.4(c) above. Each of
the Parties (other than SG) will (and the KCI Sellers will cause each of KCI and
its Subsidiaries to) give any notices to, make any filings with, and use its
reasonable commercial efforts to obtain any authorizations, consents, and
approvals of governments and governmental agencies in connection with the
matters referred to in ss.3(a)(ii), ss.3(b)(ii) and ss.4(c) above.
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(c) Operation of Business. The KCI Sellers will not cause or permit
any of KCI and its Subsidiaries to engage in any practice, take any action, or
enter into any transaction outside the Ordinary Course of Business. Without
limiting the generality of the foregoing, the KCI Sellers will not cause or
permit any of KCI and its Subsidiaries to accelerate the collection of
receivables or postpone the payment of liabilities or the making of capital
expenditures outside the Ordinary Course of Business, or to declare, set aside,
or pay any dividend or make any distribution with respect to its capital stock
(other than pursuant to ss.5(g)) or redeem, purchase, or otherwise acquire any
of its capital stock otherwise engage in any practice, take any action, or enter
into any transaction of the sort described in ss.4(h) above. The KCI Sellers
shall not cause or permit any of KCI and its Subsidiaries to (i) merge or
consolidate with any other person or (except in the Ordinary Course of Business
after notice to Buyer or except pursuant to pending Acquisition or Divestiture
Contracts set forth on ss.4(n) of the Disclosure Schedule), acquire a material
amount of assets of any other person or dispose of a material amount of assets
of KCI or any of its Subsidiaries, (ii) enter into any contract not in the
Ordinary Course of Business involving total consideration of $100,000 or more
with a term longer than one year which is not terminable by KCI or any of its
Subsidiaries without penalty upon no more than 30 days' prior notice; (iii)
settle any material Tax audit or Tax proceeding, make or change any material Tax
election or Tax accounting method or file amended Tax Returns unless required by
law or such settlement results in a refund to KCI and in each case KCI notifies
the Buyers at least five days prior to the date any such action is taken; or
(iv) incur any material indebtedness except in the Ordinary Course of Business
pursuant to existing credit facilities or arrangements; or (v) make any payment
(whether in cash or in property) to any Affiliate except pursuant to any
agreement disclosed in ss.4(u) of the Disclosure Schedule.
(d) Preservation of Business. The KCI Sellers will cause each of KCI
and its Subsidiaries to keep its business and properties substantially intact,
including its present operations, physical facilities, working conditions, and
relationships with lessors, licensors, suppliers, customers, and employees.
(e) Full Access. Each of the KCI Sellers and SG will permit, the KCI
Sellers will cause each of KCI and its Subsidiaries to permit and SG will cause
Keyhold to permit, representatives of the Buyers to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of KCI and its Subsidiaries, to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to each of KCI and its Subsidiaries and Keyhold, as applicable.
Within 45 days after the end of each month and 60 days after the end of each
fiscal quarter ending after February 29, 2000, KCI shall deliver to Buyers
unaudited consolidated balance sheets and statements of income, changes of
stockholders' equity and cash flow prepared in accordance with GAAP applied on a
basis consistent with the Financial Statements.
(f) Exclusivity. None of the KCI Sellers will (and the KCI Sellers
will not cause or permit any of KCI and its Subsidiaries to) (i) solicit,
initiate, or encourage the submission of any proposal or offer from any Person
relating to the acquisition of all or substantially all of the capital stock or
assets of any of KCI and its Subsidiaries (including any acquisition structured
as a merger, consolidation, or share exchange) or (ii) participate in any
discussions or negotiations regarding, furnish any information with respect to,
assist or participate in, or facilitate in any other manner any effort or
attempt by any Person to do or seek any of the foregoing. None of the KCI
Sellers will vote their KCI Shares in favor of any such acquisition whether
structured as a merger, consolidation, or share exchange or otherwise.
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(g) Tax Distributions. On or prior to the Closing Date, KCI shall
distribute to the KCI Sellers (i) their respective shares of all Permitted
Quarterly Tax Distributions attributable to the taxable year ending on the
Closing Date received by it from KCLLC and (ii) a note with a contingent
principal amount equal to the excess, if any, of (A) the actual Tax Amounts as
finally determined with respect to all the taxable periods ending on or before
the Closing Date over (B) any Permitted Quarterly Tax Distributions or True Up
Amounts theretofore distributed to the KCI Sellers.
(h) Notice of Developments. The KCI Sellers will give prompt written
notice to the Buyer of any material adverse development causing or reasonably
likely to cause a breach of any of the representations and warranties in ss.4
above. Each Party will give prompt written notice to the others of any material
adverse development causing or reasonably likely to cause a breach of any of his
or its own representations and warranties in ss.3 and ss.3A above.
6. Post-Closing Covenants. The Parties agree as follows with respect to
the period following the Closing.
(a) General. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under ss.8
below).
(b) Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving any of KCI and its Subsidiaries, each of the other
Parties shall cooperate with him or it and his or its counsel in the defense or
contest, make available their personnel, and provide such testimony and access
to their books and records as shall be necessary in connection with the defense
or contest, all at the sole cost and expense of the contesting or defending
Party (unless the contesting or defending Party is entitled to indemnification
therefor under ss.8 below).
(c) Transition. None of the KCI Sellers or SG will take any action
that is designed or intended to have the effect of discouraging any lessor,
licensor, customer, supplier, or other business associate of any of KCI and its
Subsidiaries from maintaining the same business relationships with KCI and its
Subsidiaries after the Closing as it maintained with KCI and its Subsidiaries
prior to the Closing.
(d) Tax Distributions. The KCI Sellers shall repay to KCI their
respective shares of True Up Amounts attributable to periods ending on or before
the Closing Date due to KCLLC under the Indenture. For all purposes of this
Agreement, the determination of Permitted Quarterly Tax Distributions and
True-Up Amounts shall be made on the same basis, including the same accounting
and tax principles, as the basis on which such determinations were made prior to
the date hereof.
7. Conditions to Obligation to Close.
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(a) Conditions to Obligation of the Buyers. The obligation of the
Buyers to consummate the transactions to be performed by them in connection with
the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in ss.3(a),
ss.3A and ss.4 above shall be true and correct in all material
respects at and as of the Closing Date;
(ii) KCI and SG shall have performed and complied with all of
their respective covenants hereunder in all material respects
through the Closing;
(iii) there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any
of the transactions contemplated by this Agreement or any of the
Ancillary Documents;
(iv) KCI and SG each shall have delivered to the Buyers a
certificate to the effect that each of the conditions applicable to
each of them specified above in ss.7(a)(i)-(iii) is satisfied in all
respects;
(v) the lenders under the Amended and Restated Credit and
Guaranty Agreement, dated as of January 19, 1999, among KCLLC, as
Borrower, certain of its Subsidiaries, as Guarantors, Certain
Financial Institutions, as Lenders, and Societe Generale, as Agent,
as amended as of January 26, 1999, August 31, 1999 and December 6,
1999, shall have consented to the transactions contemplated hereby
and by the Ancillary Documents;
(vi) the Buyers shall have received from counsel to the KCI
Sellers an opinion in form and substance reasonably satisfactory to
Buyers, addressed to the Buyers, and dated as of the Closing Date;
(vii) the Buyers shall have received from counsel to SG an
opinion in form and substance reasonably satisfactory to the Buyers,
addressed to the Buyers, and dated as of the Closing Date;
(viii) Since the date of this Agreement, there shall not have
occurred or be continuing any event, condition or set of
circumstances which, individually or in the aggregate, has had or is
reasonably likely to result in a Material Adverse Effect;
(ix) The Buyer shall have received a certificate, reasonably
satisfactory to the Buyer and in the form required by Section 1445
of the Code and the regulations thereunder, to the effect that each
of KCI and Keyhold is not a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code;
(x) the Recapitalization and the Exchange shall have
been consummated in accordance with their respective terms;
(xi) the Share Purchase Agreement, dated August 12, 1999,
among KCLLC, KCI, SG and Keyhold, the Shareholders Agreement, dated
as of September 1, 1999, among KCLLC, KCI, certain of the KCI
Sellers, SG and Keyhold, the Registration Rights Agreement, dated as
of September 1, 1999, among KCLLC, KCI, SG and
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Keyhold, the Advance Consent Agreement, dated February 2, 2000,
among KCLLC, KCI, SG and Keyhold and any rights of SG under the
Amended and Restated Limited Liability Company Agreement of KCLLC,
dated as of September 1, 1999, shall have been terminated;
(xii) the relevant parties shall have entered into the
Shareholders Agreement substantially in the form of Exhibit C-1, the
Registration Rights Agreement substantially in the form of Exhibit
C-2 and the Escrow Agreement substantially in the form of Exhibit
C-3;
(xiii) The designee of SG shall have resigned from, and two
designees of the Buyers shall have been elected to, the Board of
Directors of KCI, and one designee of the Buyers shall have been
elected to the Finance Committee thereof;
(xiv) KCI shall have entered into the Advisory Agreement
substantially in the form of Exhibit D-1 , Kelso & Company and
Millbrook Capital Management, Inc. shall have entered into a letter
agreement substantially in the form of Exhibit D-2, and KCI shall
have paid to Kelso a fee in the amount of $3 million;
(xv) the Bylaws of KCI shall have been amended and restated in
form reasonably satisfactory to the Buyers and Requisite Sellers as
may be required to give effect to the Shareholders Agreement;
(xvi) Optionees holding at least 75% of the outstanding
Options shall have agreed to become parties to the Shareholders
Agreement and the Registration Rights Agreement and Optionees who
are KCI Sellers shall have entered into Optionee Agreements
substantially in the form of Exhibit E;
(xvii) SAR Holders holding at least 75% of the outstanding
SARs shall have entered into SAR Agreements substantially in the
form of Exhibit F after having received disclosure documents
reasonably satisfactory to the Buyers and the Requisite Sellers;
(xviii) the Net Debt of KCI and its Subsidiaries as of April
30, 2000 shall not have been more than $120,500,000, and Buyers
shall have received a certificate signed by the Chief Financial
Officer of KCI to such effect;
(xix) all shareholders agreements between any Optionee or
shareholder of KCI on the one hand and KCI or its principal
shareholder on the other hand shall have been terminated, except as
the Buyer and the Requisite Sellers may otherwise agree; and
(xx) all actions to be taken by KCI, the KCI Sellers and SG in
connection with consummation of the transactions contemplated hereby
and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be
reasonably satisfactory in form and substance to the Buyers.
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The Buyers may waive any condition specified in this ss.7(a) if they execute a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the KCI Sellers and SG. The
obligation of the KCI Sellers and SG to consummate the transactions to be
performed by them in connection with the Closing is subject to satisfaction of
the following conditions:
(i) the representations and warranties set forth inss.3(b)
above shall be true and correct in all material respects at and
as of the Closing Date;
(ii) the Buyers shall have performed and complied with all of
their covenants hereunder in all material respects through the
Closing;
(iii) there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any
of the transactions contemplated by this Agreement;
(iv) the Buyers shall have delivered to the KCI Sellers and to
SG a certificate to the effect that each of the conditions specified
above in ss.7(b)(i)-(iii) is satisfied in all respects;
(v) The lenders under the Amended and Restated Credit and
Guaranty Agreement, dated as of January 19, 1999, among KCLLC, as
Borrower, certain of its Subsidiaries, as Guarantors, Certain
Financial Institutions, as Lenders, and Societe Generale, as Agent,
as amended as of January 26, 1999, August 31, 1999 and December 6,
1999, shall have consented to the transactions contemplated hereby
and by the Ancillary Documents;
(vi) the KCI Sellers and SG shall have received from counsel
to the Buyers an opinion in form and substance reasonably
satisfactory to the KCI Sellers and SG, addressed to the KCI Sellers
and SG and dated as of the Closing Date;
(vii) all actions to be taken by the Buyers in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Requisite KCI Sellers and
SG.
The Requisite KCI Sellers and SG may waive any condition specified in this
ss.7(b) if they execute a writing so stating at or prior to the Closing.
8. Remedies for Breaches of This Agreement.
(a) Survival of Representations and Warranties.
All of the representations and warranties of the KCI Sellers
contained in ss.4 (other than ss.ss.4(b), (j), (q) and (r) above) shall survive
the Closing hereunder and continue in full force and effect for a period of 18
months after the Closing. All of the representations and warranties contained in
ss.4(r) shall survive the Closing hereunder and continue in full force and
effect for a period of 5 years
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after the Closing. All of the representations and warranties contained in
ss.ss.4(j) and (q) shall survive the Closing hereunder and continue in full
force and effect thereafter until the 30th day after the expiration of the
applicable statute of limitations. All of the representations and warranties of
the Parties contained in ss.4(b), ss.3 and ss.3A above shall survive the Closing
and continue in full force and effect forever thereafter (subject to any
applicable statutes of limitations).
(b) Indemnification Provisions for Benefit of the Buyers.
(i) (A) In the event any of the KCI Sellers breaches any of
their representations, warranties, and covenants contained herein
(other than the covenants in ss.2A(a) and the representations and
warranties in ss.3(a), ss.4(b) or ss.4(j)), provided that the Buyers
make a written claim for indemnification against the KCI Sellers
pursuant to ss.10(h) below within any applicable survival period set
forth in ss.8(a), then each of the KCI Sellers severally agrees to
indemnify the Buyers from and against his or its Allocable Portion
of any Adverse Consequences the Buyers shall suffer through and
after the date of the claim for indemnification caused by the
breach, and (B) each of the KCI Sellers severally agrees to
indemnify the Buyers from and against his or its Allocable Portion
of any Adverse Consequences the Buyers shall suffer through and
after the date of any claim for indemnification caused by any of the
pending or threatened litigations disclosed in ss.4(p) of the
Disclosure Schedule or any of the matters identified in ss.4(r) of
the Disclosure Schedule; provided, however, that the KCI Sellers
shall not have any obligation to indemnify the Buyers from and
against any Adverse Consequences described in clauses (A) or (B),
above ("General Adverse Consequences"), until the Buyers have
suffered General Adverse Consequences in excess of a deductible
("General Indemnity Deductible") equal to $2 million, after which
point each of the KCI Sellers will be obligated to indemnify the
Buyers from and against only its Allocable Portion of Adverse
Consequences in excess of the $2 million aggregate General Indemnity
Deductible until the total amount of General Adverse Consequences in
excess of such $2 million exceeds $8 million minus any amounts paid
by the KCI Sellers to the Buyers pursuant to ss.8(b)(iv) in excess
of the Base Tax Indemnity (after which point the KCI Sellers will
have no obligation to indemnify the Buyers from and against further
General Adverse Consequences); provided, further, that nothing in
this Agreement shall limit in any way any Party's remedies in
respect of fraud; provided, further, that in each case in which a
breach of any representation or warranty creates entitlement to
indemnification under this ss.8, the amount of Adverse Consequences
shall be determined without taking into account any qualification as
to materiality or Material Adverse Effect contained in any such
representation or warranty.
(ii) In the event any of the KCI Sellers breaches any of his
or its covenants in ss.2A(a) above or any of his or its
representations and warranties in ss.3(a) or ss.4(b) above, and
provided that the Buyers make a written claim for indemnification
against the KCI Seller pursuant to ss.10(h) below within the
survival period set forth in ss.8(a) above, then the KCI Seller
agrees to indemnify the Buyers from and against (A) the entirety of
any Adverse Consequences the Buyers shall suffer through and after
the date of the claim for indemnification in the case of breaches of
any of his or its covenants in ss.2A(a) above or any of his or its
representations and warranties in ss.3(a) above and (B) his or its
Allocable Share of Adverse Consequences the Buyers shall
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suffer through and after the date of the claim for indemnification
in the case of breaches of any of his or its representations and
warranties in ss.4(b) above.
(iii) In the event SG breaches any of its covenants in
ss.2A(a) above or any of its covenants, representations and
warranties in ss.3A above, and provided that the Buyers make a
written claim for indemnification against SG pursuant to ss.10(h)
below within the survival period set forth in ss.8(a) above, then SG
agrees to indemnify the Buyers from and against the entirety of any
Adverse Consequences the Buyers shall suffer through and after the
date of the claim for indemnification.
(iv) Provided that the Buyers make a written claim for
indemnification pursuant to ss.10(h) below by the 30th day after the
expiration of the applicable statute of limitations, then each of
the KCI Sellers severally agrees to indemnify the Buyers from and
against his or its Allocable Share of the entirety of any Adverse
Consequences ("Tax Adverse Consequences") the Buyers may suffer
arising out of or resulting from (A) any breaches of the
representations and warranties in ss.4(j) above, (B) any liability
of KCI or any of its Subsidiaries for Taxes (including the Taxes of
any other person) with respect to any taxable period (or portion
thereof) ending on or before the Closing Date and (C) any liability
Keyhold incurs for penalties and interest arising out of the failure
to duly and timely pay any Taxes or file any Tax Returns required to
have been paid or filed on or before the Closing Date, except for
penalties and interest attributable to a breach by SG of any
covenant, representation or warranty in ss.3A; provided, however,
that after the KCI Sellers have indemnified the Buyers from and
against $3.5 million ("Base Tax Indemnity") of Tax Adverse
Consequences, each of the KCI Sellers will be obligated to indemnify
the Buyers from and against only its Allocable Portion of Tax
Adverse Consequences in excess of the $3.5 million Base Tax
Indemnity until the total amount of Tax Adverse Consequences in
excess of such $3.5 million exceeds $8 million minus any amounts
paid by the KCI Sellers to the Buyers pursuant to ss.8(b)(i) (after
which point the KCI Sellers will have no obligation to indemnify the
Buyers pursuant to this ss.8(b)(iv)).
(c) Indemnification Provisions for Benefit of the KCI Sellers and
SG. In the event either of the Buyers breaches any of its representations,
warranties, and covenants contained herein, provided that any of the KCI Sellers
and SG makes a written claim for indemnification against the Buyers pursuant to
ss.10(h) below within such survival period set forth above, then the Buyers
jointly and severally agree to indemnify each of the KCI Sellers and SG from and
against the entirety of any Adverse Consequences the KCI Sellers and SG shall
suffer through and after the date of the claim for indemnification.
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may give rise
to a claim for indemnification against any other Party (the "Indemnifying
Party") under this ss.8, then the Indemnified Party shall promptly notify each
Indemnifying Party thereof in writing; provided, however, that no delay on the
part of the Indemnified Party in notifying any Indemnifying Party shall relieve
the Indemnifying Party from any obligation hereunder unless (and then solely to
the extent) the Indemnifying Party thereby is prejudiced.
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(ii) Any Indemnifying Party will have the right to assume the
defense of the Third Party Claim with counsel of his or its choice reasonably
satisfactory to the Indemnified Party at any time within 15 days after the
Indemnified Party has given notice of the Third Party Claim; provided, however,
that the Indemnifying Party must conduct the defense of the Third Party Claim
actively and diligently thereafter in order to preserve its rights in this
regard; and provided further that the Indemnified Party may retain separate
co-counsel at its sole cost and expense and participate in the defense of the
Third Party Claim.
(iii) So long as the Indemnifying Party has assumed and is
conducting the defense of the Third Party Claim in accordance with ss.8(d)(ii)
above, (A) the Indemnifying Party will not consent to the entry of any judgment
or enter into any settlement with respect to the Third Party Claim without the
prior written consent of the Indemnified Party (not to be withheld unreasonably)
unless the judgment or proposed settlement involves only the payment of money
damages by one or more of the Indemnifying Parties and does not impose an
injunction or other equitable relief upon the Indemnified Party and (B) the
Indemnified Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld unreasonably).
(iv) In the event none of the Indemnifying Parties assumes and
conducts the defense of the Third Party Claim in accordance with ss.8(d)(ii)
above, however, (A) the Indemnified Party may defend against, and consent to the
entry of any judgment or enter into any settlement with respect to, the Third
Party Claim, provided, however, that (A) the Indemnified Party will not consent
to the entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the Indemnifying Party
(not to be withheld unreasonably) unless the judgment or proposed settlement
involves only the payment of money damages by one or more of the Indemnified
Parties, (B) the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim
without the prior written consent of the Indemnified Party (not to be withheld
unreasonably) and (C) the Indemnifying Parties will remain responsible for any
Adverse Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party Claim to the
fullest extent provided in this ss.8.
(e) Determination of Adverse Consequences. The Parties shall make
appropriate adjustments for insurance coverage in determining Adverse
Consequences for purposes of this ss.8. All indemnification payments under this
ss.8 shall be deemed adjustments to the Purchase Price.
(f) Exclusive Remedy; Valuation of Collateral.
(i) The Buyers, the KCI Sellers and SG acknowledge and agree that after
the Closing the foregoing indemnification provisions in this ss.8 shall be the
exclusive remedy of the Buyers, the KCI Sellers and SG with respect to KCI, its
Subsidiaries, Keyhold and the transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, the Buyers, the KCI Sellers
and SG hereby waive any statutory, equitable, or common law rights or remedies
relating to any environmental matters against each other, including without
limitation any such matters arising under any Environmental, Health, and Safety
Requirements and including without limitation any arising under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). Each of the KCI Sellers hereby agrees that he or it will not make
any claim for indemnification against any of KCI and its Subsidiaries by reason
of the fact that he or it was a director, officer, employee, or agent of
-33-
<PAGE>
any such entity or was serving at the request of any such entity as a partner,
trustee, director, officer, employee, or agent of another entity (whether such
claim is for judgments, damages, penalties, fines, costs, amounts paid in
settlement, losses, expenses, or otherwise and whether such claim is pursuant to
any statute, charter document, bylaw, agreement, or otherwise) with respect to
any action, suit, proceeding, complaint, claim, or demand brought by the Buyers
against such KCI Seller (whether such action, suit, proceeding, complaint,
claim, or demand is pursuant to this Agreement, applicable law, or otherwise).
Subject to consummation of the transactions contemplated by this Agreement, SG
hereby waives any claims it may have against KCI or any of its Subsidiaries and
acknowledges that the payments to be received by SG pursuant to this Agreement
shall be in full satisfaction of any such claims.
(ii) The sole recourse of the Buyers in respect of the obligations of the
KCI Sellers under ss.8(b)(i) shall be to the KCI Common Shares (or the proceeds
from the sale thereof or securities received in exchange therefor; for purposes
of the following provisions of this ss.8(f)(ii), the term "KCI Common Shares"
means KCI Common Shares or such other securities, as the case may be) held under
the Escrow Agreement during the term of the Escrow Agreement, and thereafter to
KCI Common Shares held by the KCI Sellers, provided, that each KCI Seller shall
have the right to cause such indemnification obligations to be satisfied either
by (x) the transfer to Buyers of KCI Common Shares having a value (determined as
provided below) equal to the amount of the indemnification obligation, or (y)
the payment of cash. Until December 31, 2000 the value of such KCI Common Shares
shall be deemed to be equal to the Purchase Price. Thereafter, the value of such
KCI Common Shares shall be the fair market value of such KCI Common Shares. The
fair market value of the KCI Shares shall be determined by agreement between the
Buyers and the Requisite KCI Sellers, or if they cannot agree within 10 days
after the need for agreement has arisen, by appraisal conducted in accordance
with ss.8(f)(iii).
(iii) If the value of the KCI Common Shares to be transferred in
satisfaction of the KCI Sellers' indemnification obligation is to be determined
by appraisal, then the fair market value of the KCI Shares shall be determined
in accordance with Section 4.2(a) and (b) of the Shareholders Agreement,
provided, that at the election of the Requisite KCI Sellers, fair market value
shall not be so determined, and Buyers and the Requisite KCI Sellers shall
mutually agree on the selection of an investment banking firm to determine the
fair market value of such KCI Common Shares. If they are unable to agree on the
selection of an investment banking firm, then such firm shall be selected, at
the request of either the Requisite KCI Sellers or the Buyers, by the President
of the American Arbitration Association. The investment banking firm shall
determine the fair market value of the KCI Common Shares by (x) determining the
fair market value of the entire equity interests (common and preferred) in KCI
and its Subsidiaries, taken as a whole, using customary enterprise valuation
methodologies, (y) assuming that the KCI Preferred Shares have been converted in
accordance with their terms; and (z) ignoring liquidity, minority and other
discounts. The fees and expenses of the investment banking firm shall be paid
one-half by the KCI Sellers and one-half by KCI.
9. Termination.
(a) Termination of Agreement. Certain of the Parties may terminate
this Agreement as provided below:
(i) the Buyers and the Requisite KCI Sellers may
terminate this Agreement by mutual written consent at any time
prior to the Closing;
-34-
<PAGE>
(ii) the Buyers may terminate this Agreement by giving written
notice to the Requisite KCI Sellers at any time prior to the Closing
(A) in the event any of KCI, the KCI Sellers or SG has breached any
material representation, warranty, or covenant contained in this
Agreement in any material respect, the Buyers have notified the
Requisite KCI Sellers or SG, as applicable, of the breach, and the
breach, if curable, has continued without cure for a period of 30
days after the notice of breach, (B) if the condition set forth in
ss.7(a)(v) shall not have been satisfied on or before May 19, 2000
and the Buyers have given notice of termination within four weeks
thereafter, or (C) if the Closing shall not have occurred on or
before September 30, 2000 by reason of the failure of any condition
precedent under ss.7(a) hereof (unless the failure results primarily
from the Buyers themselves breaching any representation, warranty,
or covenant contained in this Agreement); and
(iii) the Requisite KCI Sellers, or pursuant to clause (C),
below SG, may terminate this Agreement by giving written notice to
the Buyers at any time prior to the Closing (A) in the event the
Buyers have breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, the
Requisite KCI Sellers have notified the Buyers of the breach, and
the breach, if curable, has continued without cure for a period of
30 days after the notice of breach or (B) if the condition set forth
in ss.7(b)(v) shall not have been satisfied on or before May 19,
2000 and the Requisite Sellers have given notice of termination
within four weeks thereafter, or (C) if the Closing shall not have
occurred on or before September 30, 2000 by reason of the failure of
any condition precedent under ss.7(b) hereof (unless the failure
results primarily from any of KCI, the KCI Sellers or SG themselves
breaching any representation, warranty, or covenant contained in
this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to ss.9(a) above, all rights and obligations of the Parties hereunder
shall terminate without any liability of any Party to any other Party (except
for any liability of any Party then in breach).
10. Miscellaneous.
(a) (i) The covenants of each of the KCI Sellers in ss.2A(a) above
concerning the sale of his or its KCI Preferred Shares to the Buyers
and the representations and warranties of each of the KCI Sellers in
ss.3(a) above concerning the transaction are several obligations.
This means that the particular KCI Seller making the representation,
warranty, or covenant will be solely responsible to the extent
provided in ss.8 above for any Adverse Consequences the Buyers may
suffer as a result of any breach thereof.
(ii) The remainder of the representations, warranties, and
covenants of the KCI Sellers in this Agreement are joint obligations
of the KCI Sellers. This means that each KCI Seller will be
responsible to the extent provided in ss.8 above for his or its
Allocable Portion of any Adverse Consequences the Buyers may suffer
as a result of any breach thereof.
-35-
<PAGE>
(b) Press Releases and Public Announcements. No Party shall issue
any press release or make any public announcement relating to the subject matter
of this Agreement prior to the Closing without the prior written approval of the
Buyers and the Requisite KCI Sellers and, if SG or any of its Affiliates is
referred to in such press release, SG; provided, however, that any Party may
make any public disclosure it believes in good faith is required by applicable
law or any listing or trading agreement concerning its publicly-traded
securities (in which case the disclosing Party will use its reasonable best
efforts to advise the other Parties prior to making the disclosure).
(c) No Third-Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
(d) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement by or among the KCI Sellers
and SG, on the one hand, and Buyers, on the other hand, with respect to the
subject matter hereof, and supersedes any prior understandings, agreements, or
representations by or among the KCI Sellers and SG, on the one hand, and Buyers,
on the other hand, written or oral, to the extent they have related in any way
to the subject matter hereof. The Confidentiality Agreement, executed on behalf
of KCI on January 14, 2000, between KCI and Buyers shall remain in full force
and effect, provided that the transactions contemplated hereby and by the
Ancillary Documents shall not be deemed to violate any provision thereof.
(e) Effectiveness, Succession and Assignment. This Agreement shall
become effective when signed by the Buyers, SG and KCI Sellers holding at least
90% of the KCI Common Shares outstanding on the date hereof. This Agreement
shall be binding upon and inure to the benefit of the Parties named herein and
their respective successors and permitted assigns. No Party may assign either
this Agreement or any of his or its rights, interests, or obligations hereunder
without the prior written approval of the Buyers and the Requisite KCI Sellers.
Notwithstanding the preceding sentence, Buyers may assign their rights and
obligations in respect of up to 10% KCI Preferred Shares to individuals
affiliated with or designated by Kelso & Company, provided that such assignment
shall not relieve Buyers of their obligations hereunder, and provided further
that any rights or remedies shall be exercised only in accordance with the vote
or consent of holders of a majority of the KCI Preferred Shares purchased
hereunder.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the KCI Sellers:
Key Components, Inc.
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<PAGE>
200 White Plains Road
Tarrytown, New York 10591
Attn: Alan L. Rivera
Fax: (914) 332-1441
Copy to:
RubinBaum, LLP
30 Rockefeller Plaza
New York, New York 10112
Attn: Michael J. Emont
Fax: (212) 698-7825
If to SG:
SGC Partners II LLC
c/o SG Capital Partners LLC
15th Floor
1221 Avenue of the Americas
New York, New York 10021
Attn: Christopher M. Neenan
Fax: (212) 278-5454
Copy to:
Covington & Burling
1330 Avenue of the Americas
New York, New York 10019
Attn: Scott F. Smith
Fax: (212) 841-1010
If to the Buyers:
Kelso Investment Associates VI, L.P.
KEP VI, LLC
c/o Kelso & Company
24th Floor
320 Park Avenue
New York, New York 10022
Attn: James J. Connors, II, Esq.
Fax: (212) 751-3939
Copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attn: Margaret Andrews Davenport
-37-
<PAGE>
Fax: (212 909-6836
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
(i) Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of New York without giving
effect to any choice or conflict of law provision or rule (whether of the State
of New York or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York.
(j) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyers, the Requisite KCI Sellers and SG, except that any amendment that only
affects the rights and obligations of the Buyers and the KCI Sellers shall be
valid if in writing and signed by the Buyers and the Requisite KCI Sellers. No
waiver by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
(k) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) Expenses. Each of the Buyers, SG, KCI, and KCI's Subsidiaries
will bear its own costs and expenses (including legal fees and expenses)
incurred in connection with this Agreement and the transactions contemplated
hereby, provided that if the Closing occurs, then KCLLC will bear all of the
Buyers' costs and expenses (including all of their legal fees and expenses).
KCLLC will bear all of the KCI Sellers' costs and expenses (including all of
their legal fees and expenses) incurred in connection with this Agreement and
the transactions contemplated hereby (other than any income Tax on any gain
resulting from the sale of KCI Shares hereunder and any transfer, stamp or
similar Taxes imposed in connection with the transfer of the KCI Shares under
this Agreement, which shall be borne in each case by the KCI Sellers.)
(m) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
-38-
<PAGE>
(n) Incorporation of Exhibits, Annexes, and Schedules. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
[The remainder of this page is intentionally blank.]
-39-
<PAGE>
[signature pages to Recapitalization Agreement]
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
date first above written.
KEY COMPONENTS, INC.
By:
-------------------------
Name:
Title:
KELSO INVESTMENT ASSOCIATES VI, L.P.
By: Kelso GP VI, LLC
Its General Partner
By:
---------------------------
Managing Member
KEP VI, LLC
By:
-------------------------
Managing Member
SGC Partners II LLC
By:
-------------------------
Name:
Title:
-----------------------------
John S. Dyson
Charles S. Dyson 1976 Trust
By:
-------------------------
John S. Dyson, Trustee
and By:
-------------------------
-40-
<PAGE>
Clay B. Lifflander, Trustee
Charles S. Dyson 1968 Trust
By:
-------------------------
John S. Dyson, Trustee
and By:
-------------------------
Clay B. Lifflander, Trustee
Margaret Dyson 1968 Trust
By:
-------------------------
John S. Dyson, Trustee
and By:
-------------------------
Clay B. Lifflander, Trustee
- -----------------------------
Clay B. Lifflander
- -------------------------------
Clay B. Lifflander,
custodian for Olivia Lee Lifflander
under the New York U/G/M/A
- -------------------------------
Clay B. Lifflander,
custodian for Hudson Bennet Lifflander
under the New York U/G/M/A
- -------------------------------
Alan L. Rivera
- -------------------------------
Frank Ahlbin
- -------------------------------
-41-
<PAGE>
August Boucher
- -------------------------------
David H. Bova
- -------------------------------
Michael Colecchi
- -------------------------------
John Ekegren
- -------------------------------
Robert B. Kay
- -------------------------------
Jerome J. Lande
- -------------------------------
Keith A. McGowan
- -------------------------------
J. Marty O'Donohue
- -------------------------------
George Scherer
Cornell University
By:
----------------------------
Middlesex School
By:
----------------------------
Hudson River Museum of Westchester
By:
----------------------------
Dances Patrelle Inc.
By:
----------------------------
-42-
<PAGE>
Schedule A
The number of KCI Shares to be purchased and sold pursuant to this
Recapitalization Agreement shall be determined in accordance with the following
procedure. The Tables referred to below that are attached hereto set forth a
numerical example assuming all SAR Holders elect a 50% Rollover and all
Optionees who are potential KCI Sellers become parties to this Agreement. Two
business days before the Closing KCI will deliver to the Buyers, and KCI and the
Buyers will work together to finalize, a revised Schedule A reflecting the
number of SARs which will be cashed out at Closing and the number of KCI Common
Shares that each SAR Holder has elected to purchase and the Optionees who
actually became parties to this Agreement.
On the Closing Date:
Step 1: Determine the number of KCI Common Shares to be purchased by SAR
Holders pursuant to the election set forth in ss.2(h)(ii) and the related net
cash outflow.
Table 1 sets forth for each SAR Holder that elected ("Electing SAR Holder")
to surrender his SARs and roll over a portion of his estimated after-tax
proceeds (a) the number of SARs; (b) the strike price; (c) the aggregate excess
of the Purchase Price (prior to adjustment) over the strike price ("SAR
Spread"); (d) the related agreed-upon withholding tax obligation (45% of the SAR
Spread) ("SAR Withholding Taxes"); (e) the amount ("Rollover") equal to the
elected percentage (i.e., 50% or 75%) of 55% of the SAR Spread; (f) the largest
whole number of KCI Common Shares purchasable with the Rollover (i.e., the
quotient, rounded down, of the Rollover divided by $114.82 ("SAR Shares"); (g)
the remainder ("Remainder") from column (f); (h) the net cash payable to each
Electing SAR Holder (the SAR Spread minus SAR Withholding Taxes, minus the
Rollover and plus the Remainder (the "Net SAR Payment"); and (i) Net SAR Outflow
(Net SAR Payment plus SAR Withholding Taxes).
Step 2: Determine the cash proceeds to KCI upon the exercise of the Options
pursuant to ss.2(h)(i) and the related net cash outflow.
Table 2 sets forth for each Optionee (a) the number of Options to be
exercised if such Optionee becomes a party to this Agreement (reference
ss.2(h)(i) of the Agreement); (b) the exercise price ("Exercise Price"); (c) the
amount includible in his gross income upon exercise ("Option Spread"); and (d)
the related agreed-upon withholding tax obligation of KCI (45% of the Option
Spread) ("Option Withholding Taxes"). The aggregate Exercise Prices for all
Optionees is referred to as the "Net Option Inflow."
Step 3: Determine the difference between the Net SAR Outflow and the Net
Option Inflow ("Total Cash Shortfall" or "Total Cash Surplus", as the case may
be).
Step 4: Determine the number of KCI Preferred Shares to be purchased from
each of the Parties other than the Buyers.
The total number of KCI Preferred Shares to be purchased by Buyers at the
Closing is 918,065.24 (the "Closing Date Tranche"). The Closing Date Tranche is
allocated as follows:
First, the Buyers will purchase from KCI the number of KCI Preferred Shares
equal to the quotient, rounded up, of the Total Cash Shortfall divided by
$114.82 (reference to ss.2A(a)(iii) of the Agreement).
Second, the Buyers will purchase 137,931 KCI Preferred Shares from SG.
Third, the Buyers will purchase up to 20,533 KCI Preferred Shares from the
Optionees.
-43-
<PAGE>
Fourth, the Buyers will purchase the remainder ("KCI Sellers Aggregate
Allocation") of the Closing Date Tranche from the KCI Sellers in the amounts set
forth in Table 3, below.
Table 3 sets forth (a) the number of KCI Shares owned ("Number of Shares
Owned") by each KCI Seller (other than pursuant to exercise of Options pursuant
to ss.2(h)(i)); (b) for each KCI Seller ("Management Sellers") except Cornell
University and Middlesex School (collectively, the "Dyson Charitable Donees"),
Hudson River Museum of Westchester and Dances Patrelle Inc. (collectively, the
"Lifflander Charitable Donees"), Charles S. Dyson 1976 Trust, Charles S. Dyson
1968 Trust, Margaret Dyson 1968 Trust (collectively, the "Dyson Trusts"), John
Dyson, Clay Lifflander, Clay L. Lifflander, custodian for Olivia Lee Lifflander
under New York U/G/M/A, Clay B. Lifflander, custodian for Hudson Bennett
Lifflander under New York U/G/M/A, Alan L. Rivera and David H. Bova, 50% of the
Number of Shares Owned; (c) for John Dyson, each of the Dyson Trusts and Clay B.
Lifflander, Clay B. Lifflander, custodian for Olivia Lee Lifflander under New
York U/G/M/A, Clay B. Lifflander, custodian for Hudson Bennett Lifflander under
New York U/G/M/A, Alan L. Rivera and David H. Bova (collectively, the "Capital
Sellers"), the ratio ("Capital Sellers Ratio") of the Number of Shares Owned by
each (for this purpose John Dyson is deemed to own the KCI Shares owned by the
Dyson Charitable Donees and Clay B. Lifflander is deemed to own the KCI Shares
owned by the Lifflander Charitable Donees) to the aggregate Number of Shares
Owned by all of the Capital Sellers; and (d) the Shares To Be Sold, which shall
equal (i) for each of the KCI Management Sellers, the amount in column (b); (ii)
for each of the Capital Sellers, the product of his or its Capital Sellers Ratio
multiplied by the excess of the Closing Date Tranche over the total number of
shares allocated under subdivisions First, Second and Third of this Step 4 and
the immediately preceding clause (i), except that for John Dyson and Clay
Lifflander such product shall be reduced by the Number of Shares Owned by the
Dyson Charitable Donees and the Lifflander Charitable Donees, respectively; and
(iii) for each of the Dyson Charitable Donees and the Lifflander Charitable
Donees, the Number of Shares Owned. Each of the KCI Sellers will exchange his or
its Shares to be Sold for an equal number of KCI Preferred Shares in the
Recapitalization (reference to ss.2A(a)(i) of the Agreement).
Table 4 sets forth the Allocable Share of each KCI Seller. John Dyson shall
bear the Allocable Portion of the Dyson Charitable Donees and Clay B. Lifflander
will bear the Allocable Portion of the Lifflander Charitable Donees.
-44-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 1065418
<NAME> Key Components, LLC
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999 JAN-01-1999
<PERIOD-END> MAR-31-2000 DEC-31-1999 MAR-31-1999
<CASH> 6,088 4,171 0
<SECURITIES> 0 0 0
<RECEIVABLES> 22,763 19,455 0
<ALLOWANCES> 472 (511) 0
<INVENTORY> 23,146 22,372 0
<CURRENT-ASSETS> 63,432 61,237 0
<PP&E> 27,105 26,380 0
<DEPRECIATION> (7,933) (7,342) 0
<TOTAL-ASSETS> 182,051 180,558 0
<CURRENT-LIABILITIES> 22,448 20,201 0
<BONDS> 80,000 80,000 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 10,238 9,411 0
<TOTAL-LIABILITY-AND-EQUITY> 182,051 180,558 0
<SALES> 39,529 0 30,835
<TOTAL-REVENUES> 39,529 0 30,835
<CGS> 23,118 0 19,013
<TOTAL-COSTS> 31,118 0 25,484
<OTHER-EXPENSES> (210) 0 (114)
<LOSS-PROVISION> 0 0 106
<INTEREST-EXPENSE> 3,428 0 3,503
<INCOME-PRETAX> 5,130 0 1,856
<INCOME-TAX> 303 0 729
<INCOME-CONTINUING> 4,827 0 1,127
<DISCONTINUED> (3,078) 0 308
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,749 0 1,435
<EPS-BASIC> 0 0 0
<EPS-DILUTED> 0 0 0
<FN>
No EPS for the Company has been calculated as its common stock is privately held
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 1065419
<NAME> KEY COMPONENTS FINANCE CORP.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999 JAN-01-1999
<PERIOD-END> MAR-31-2000 DEC-31-1999 MAR-31-1999
<CASH> 6,088 4,171 0
<SECURITIES> 0 0 0
<RECEIVABLES> 22,763 19,455 0
<ALLOWANCES> 472 (511) 0
<INVENTORY> 23,146 22,372 0
<CURRENT-ASSETS> 63,432 61,237 0
<PP&E> 27,105 26,380 0
<DEPRECIATION> (7,933) (7,342) 0
<TOTAL-ASSETS> 182,051 180,558 0
<CURRENT-LIABILITIES> 22,448 20,201 0
<BONDS> 80,000 80,000 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 10,238 9,411 0
<TOTAL-LIABILITY-AND-EQUITY> 182,051 180,558 0
<SALES> 39,529 0 30,835
<TOTAL-REVENUES> 39,529 0 30,835
<CGS> 23,118 0 19,013
<TOTAL-COSTS> 31,118 0 25,484
<OTHER-EXPENSES> (210) 0 (114)
<LOSS-PROVISION> 0 0 106
<INTEREST-EXPENSE> 3,428 0 3,503
<INCOME-PRETAX> 5,130 0 1,856
<INCOME-TAX> 303 0 729
<INCOME-CONTINUING> 4,827 0 1,127
<DISCONTINUED> (3,078) 0 308
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,749 0 1,435
<EPS-BASIC> 0 0 0
<EPS-DILUTED> 0 0 0
<FN>
No EPS for the Company has been calculated as its common stock is privately held
</FN>
</TABLE>
